Earnings Call Transcript
W. P. Carey Inc. (WPC)
Earnings Call Transcript - WPC Q3 2022
Operator, Operator
Hello and welcome to the W. P. Carey Third Quarter 2022 Financial Results Conference Call and Webcast. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Peter Sands, Director of Institutional Investor Relations. Peter, please go ahead.
Peter Sands, Director of Institutional Investor Relations
Good morning, everyone. Thank you for joining us this morning for our 2022 third quarter earnings call. Before we begin, I would like to remind everyone that some of the statements made on this call are not historic facts and may be deemed forward-looking statements. Factors that could cause actual results to differ materially from W. P. Carey's expectations are provided in our SEC filings. An online replay of this conference call will be made available in the Investor Relations section of our website at wpcarey.com, where it will be archived for approximately 1 year and where you can also find copies of our investor presentations and other related materials. And with that, I'll hand the call over to our Chief Executive Officer, Jason Fox.
Jason Fox, CEO
Thank you, Peter, and good morning, everyone. I'm pleased to say we generated strong third quarter results across several areas of our business, raising our expectations for full year AFFO per share with real estate AFFO per share on track for year-over-year growth of just over 6%. Despite the unsettled market backdrop, we're in a position of strength, armed with significant liquidity and the ability to invest across property types over 2 continents, ready to capitalize on attractive opportunities as they arise. The critical question is when is the right time to utilize our dry powder. Accordingly, I'll focus my remarks this morning on our recent investment activity and how we're approaching new opportunities in the current climate, which is evolving quickly. But before I do that, I would outline 3 key reasons why W. P. Carey remains uniquely positioned within net lease. First, in a more challenging investment environment, we have the ability to drive higher AFFO growth through our best-in-class contractual same-store rent growth, which reached 3.4% for the third quarter. As current inflation flows through to rents, we expect our contractual same-store rent growth to move even higher in 2023 to between 4% and 4.5% and to continue seeing the benefits into 2024. Second, we've raised well-priced capital and have an exceptionally strong liquidity position. So far in 2022, we've raised approximately $1 billion of permanent and long-term capital at attractive prices. We currently have approximately $650 million of untapped equity forwards raised at a stock price averaging in the 80s, and we raised debt capital priced in the mid-3s through our recent private placement Eurobond issuance. Furthermore, our recent upgrade by Moody's to BAA 1 should enhance pricing on our bonds. And with over $2 billion of total liquidity, we're confident in our ability to continue investing in appropriately priced opportunities. Third, we're benefiting from our recently completed merger with CPA:18, which resulted in better accretion than we initially anticipated, with gains from high-quality real estate AFFO more than offsetting the loss of investment management earnings. CPA:18 net lease assets are well aligned with our existing portfolio, and we expect to realize additional benefits from its sizable operating self-storage portfolio. Given strong self-storage fundamentals, these assets incrementally provide a tailwind to our growth. And as we look to maximize value, we have several options for them, including converting to net lease, selling at attractive cap rates as a source of capital or continuing to hold some portion of them. Moving now to our recent investment activity and the market backdrop. During the third quarter, we completed investments totaling $475 million, bringing our deal volume to $1.3 billion year-to-date, which, of course, excludes the more than $2 billion of assets we added through our merger. Within our diversified approach, we've remained primarily focused on warehouse and industrial, which comprised about 80% of our third quarter acquisitions. And while we continue to explore a good number of opportunities in both regions during the quarter, the large majority of our investment volume was in the U.S., driven by a sizable industrial sale leaseback. Overall, our third quarter investments had a weighted average cap rate of 6.3%, including completed capital projects. And for external acquisitions, it was 6.4%, about 50 basis points wider than the average cap rate on our 2021 investments. Keep in mind, we were able to fund our third quarter acquisitions with debt capital raised at interest rates in the mid-3s through our recent private placement Eurobond and equity raised at a stock price in the mid-80s. The significant majority of our third quarter investment volume closed earlier in the period and made a generally lower cap rate environment. Over the full period, we transacted at a range of cap rates, including up into the 7s. Since then, bond yields have moved higher and equities have come under further pressure, although some sellers have been stubbornly slow to react to current market conditions. Sellers holding on to lower cap rate expectations, however, are not getting traction on new deals. Buyers have also stepped back, reducing competition for deals with lenders and risk-off mode and leveraged buyers largely sidelined given the dramatic increase in their cost of capital or inability to secure asset-level debt. Recently, however, deal pricing has become incrementally more interesting, and we believe market conditions are turning in our favor. We're actively exerting our pricing power and new deals, demanding higher yields, which we're beginning to achieve. With a strong balance sheet and significant dry powder from equity that's already been raised, we're able to provide certainty to closed sellers amid a smaller pool of active buyers. Deal timing remains uncertain, however, with sellers acclimating to higher cap rates at different speeds, although we believe sale-leaseback sellers, which have a use of proceeds, are likely to do so more quickly. We also expect the types of investments we focus on, namely larger deals, sale leasebacks and warehouse and industrial properties, to see greater cap rate movements than commodity retail. We've tempered our expectations for investment volume for the remainder of this year, but I would note that the current market conditions make it particularly challenging to predict investment activity over the near term. With the deals in our pipeline today, we feel comfortable with the bottom half of the range. Our ability to move into the top half will largely be governed by sellers' willingness to transact at reasonable pricing, which has the potential to push deals into 2023, setting us up for higher investment activity next year at wider spreads. In summary, W. P. Carey is ideally positioned for the current environment, having raised well-priced capital and sitting on over $2 billion of liquidity, and we're poised to capitalize on appropriately priced opportunities as they arise. We're able to exert pricing power amid a smaller pool of buyers and sellers are beginning to acclimate to higher cap rates. Until cap rates more broadly align with funding costs, however, the capital we've raised at attractive prices will allow us to continue investing in the best opportunities, and we'll continue benefiting from our sector-leading inflation-driven rent growth. And to the extent we enter a recession in 2023, we have one of the safest REIT portfolios with proven stability in our cash flows across economic cycles. And with that, I'll hand the call over to Toni Sanzone, our CFO, to review our results, guidance and balance sheet, after which we'll take questions, along with our Head of Asset Management, Brooks Gordon.
Toni Sanzone, CFO
Thank you, Jason, and good morning, everyone. We had a strong third quarter, reporting total AFFO of $1.36 per share, up $0.12 or 9.7% from the year-ago quarter and derived almost entirely from our real estate segment, which generated AFFO of $1.34 per share. Our results reflect the accretive impact of our net investment activity and sector-leading same-store rent growth as well as the contribution from the net lease and operating real estate acquired in our merger with CPA:18. As a reminder, that transaction closed on August 1, and therefore, our third quarter results do not yet capture a full quarter of earnings from the assets acquired. Through our merger with CPA:18, we acquired 41 net lease properties, adding about $77 million of annualized base rent or ABR. We also acquired 67 operating properties, the vast majority of which comprise a high-quality self-storage portfolio, which is not reflected in our ABR or any of our core net lease or same-store metrics, but serves to further improve our overall diversification and incrementally adds to our organic growth. As a result, today, we have a portfolio of 84 operating self-storage properties, which are generating annualized operating NOI of approximately $70 million for 2022, which is essentially the baseline for future NOI growth. Additional details on this portfolio can be found on a new page we've added to our supplemental. I also want to remind everyone that in January 2023, 12 of the Marriott hotels we own that are currently net leased will convert to operating properties. We expect their annualized NOI contribution to be roughly in line with the lease revenue they are currently generating, resulting in no material change to AFFO. Turning now to our same-store rent growth and asset management activities. W. P. Carey continues to offer the highest level of inflation protection within the net lease sector, with 55% of ABR generated from leases with rent increases tied to inflation. During the third quarter, overall contractual same-store rent growth increased to a record 3.4% year-over-year, the highest in our net lease peer group. Given the timing lag on which our inflation-based leases escalate, we expect our fourth quarter same-store growth to track at a similar level to the third quarter before increasing to between 4% and 4.5% during the first quarter and trending at or around 4% for the remainder of 2023. Even if inflation starts to moderate, the lag effect in our leases will continue to produce elevated levels of same-store rent growth well into 2024. Comprehensive same-store rent growth for the third quarter, which is based on pro-rata net lease rent included in our AFFO, was 1.5% year-over-year, reflecting the impact of elevated rent recoveries in the prior year period. Also during the current year period, we proactively terminated our lease with an office property tenant in order to redevelop it into higher-yielding lab space, for which we already have a new lease signed up. In connection with the termination, we received a payment totaling $4.2 million, which will mitigate a large portion of the rental downtime and carrying costs during the redevelopment period, further improving our overall outcome on this asset. We had an active quarter for leasing activity with 10 renewals or extensions overall recapturing 108% of the prior rents and adding just over 10 years of weighted average lease term. Disposition activity during the third quarter comprised 3 properties for gross proceeds of $57 million, bringing total disposition proceeds through the end of September to $176 million. For the full year, we currently expect to complete dispositions totaling between $200 million and $300 million. Given the current environment in Europe, I want to highlight a couple of important points about our European portfolio. Amid the region's current spike in energy prices, our European assets have continued to perform well. And to date, we've not experienced any defaults or nonpayments nor received any inbound communications from tenants that their operations are at risk due to high energy costs. We monitor the situation very closely as those risks could change, but our portfolio and tenant base have proven very resilient across business cycles and throughout the stress test of COVID as well as the more recent challenges stemming from the war in Ukraine. And regarding currency movements, our dual approach to currency hedging has been remarkably effective in mitigating our risk to the strengthening U.S. dollar: first, overweighting our debt in foreign currencies, primarily the euro, serves as a natural hedge, generating foreign denominated interest expense, which reduces our net cash flow exposure; second, we further reduced the net exposure through low-cost contractual cash flow hedges, typically locking in rates on a laddered approach 4 to 5 years out. Realized gains on our cash flow hedges totaled $8.7 million for the third quarter and $18 million year-to-date, which appear in the nonoperating income line on our income statement and flow through to our AFFO, materially offsetting the impact of the strengthening dollar. After taking into account hedging, the net impact of foreign currency movements is expected to result in about a 1% decline in our 2022 AFFO per share as compared to our initial guidance at the start of the year. And we would expect our hedging strategy to provide the same level of protection into next year, assuming currency rates remain at or around their current levels. Of course, to the extent the euro or British pound strengthened concurrent levels, higher foreign currency cash flows would be partly offset by lower realized hedging gains, resulting in potential upside to our AFFO. Moving now to our balance sheet and capital markets activity. As Jason discussed, we remain in a very strong capital position, further bolstered by the debt and equity we raised during the third quarter and our continued ability to access various forms of capital. On the debt side, we are among only a handful of REITs that successfully executed debt capital market issuances during the quarter, with an inaugural private placement bond offering in which we issued EUR 350 million of senior unsecured notes over 2 tranches at a weighted average coupon of 3.58% and a weighted average term of 8.7 years. I'm pleased to say we priced the 2 tranches at 165 and 182 basis points over the 7- and 10-year euro benchmark rates, respectively. This offering was well executed, locking in additional attractively priced debt capital that supports continued growth through accretive investments. On the equity capital side, we settled a portion of our outstanding equity forwards during the quarter, generating close to $100 million in proceeds. This occurred towards the end of the quarter and will, therefore, be fully reflected in our fourth quarter diluted share count. We also further strengthened our balance sheet positioning, selling an additional 1.9 million shares in the form of equity forwards through our ATM program, locking in the ability to fund future investments with an additional roughly $160 million of equity raised at an average price over $86 per share. In conjunction with the unsettled portion of previously sold equity forwards, we, therefore, have approximately $650 million of dry powder currently available to us from unsettled equity forwards, raised at an average price around $83 per share. From a liquidity standpoint, we ended the third quarter with about $460 million drawn on our $1.8 billion revolving credit facility, which, in conjunction with our undrawn equity forwards, maintains an exceptionally strong liquidity position, totaling over $2 billion. Looking to our next significant debt maturities, we have about $400 million of mortgages due in 2023 and no bonds maturing until 2024, which we view as very manageable. Our leverage metrics remain very healthy. At quarter end, debt to gross assets was 40%, which is at the low end of our target range of mid- to low 40s. Similarly, net debt-to-EBITDA was 5.6x, well within our target range of mid- to high 5x. And cash interest coverage of 6.7x continues to be among the strongest in the net lease peer group. In conjunction with the merger, we assumed approximately $795 million of mortgage debt which had a weighted average interest rate of 4.5%. Overall, our debt outstanding had a weighted average interest rate of 3% at quarter end, reflecting the well-timed debt refinancings we've completed in recent years. Our recent ratings upgrade by Moody's incrementally benefits our borrowing costs, including the spreads on our revolving credit facility, which represents the vast majority of our floating rate debt. Moving now to guidance. We're pleased to announce that we've increased our AFFO guidance by $0.02 per share at the midpoint, implying year-over-year growth of 5% on total AFFO per share and just over 6% on real estate AFFO per share. The increase is driven by a number of factors, including strong portfolio performance and lease-related outcomes as well as the successful execution of our third quarter debt issuance. We also narrowed our AFFO guidance range and for the full year, we expect total AFFO of between $5.25 and $5.31 per share, including real estate AFFO of between $5.16 and $5.22 per share. We're revising our investment volume range to between $1.5 billion and $2 billion, reflecting a transaction environment in which cap rates are slowly adjusting to higher funding costs, as Jason discussed. Of course, given where we are in the year, investments closed during the fourth quarter will not meaningfully impact our full year 2022 AFFO per share. In closing, we continue to see positive momentum in our business, with sector-leading rent growth and a balance sheet that puts us in the best possible position for externally driven growth as cap rates begin to move higher and spreads widen. And with that, I'll hand the call back to the operator for questions.
Operator, Operator
Our first question today is coming from R.J. Milligan from Raymond James.
Richard Milligan, Analyst
My first question is for Toni. You guys did $1.36 of AFFO in 3Q and guidance for 4Q implies about $1.24 to $1.30. I think you mentioned that you weren't getting full credit for 3Q acquisitions, which would imply a higher AFFO in 4Q, but you also mentioned some benefit from lease term fees, higher share count. I was just wondering if you could maybe give us some more clarity on the pieces that walk you down to the $1.28 at the midpoint for 4Q.
Toni Sanzone, CFO
Certainly. There are several factors at play here, including both recurring items and some that are more one-time occurrences. First, we have discussed interest rates, which we expect to impact our variable rate debt in the fourth quarter. This primarily pertains to our credit facility, and we anticipate that the rise in base rates will reflect in our fourth quarter results. Our credit facilities include term loan balances in euros and pounds, which previously had negative base rates. As a result, we are now seeing an increase in those base rates, which is projected to affect the fourth quarter by approximately $0.02. Additionally, we have noted the effect of our foreign exchange hedging strategy. We expect a decline of about $0.01 in relation to foreign exchange impact when comparing quarter-over-quarter, based on current rates and expectations for the remainder of the year. There are also some one-time factors to consider as we transition from Q3 to Q4, including a foreign tax adjustment that we are anticipating for the fourth quarter. This could potentially be delayed past year-end, and if we receive a favorable outcome, it might not occur at all. If that happens, it could lead us to surpass the midpoint and approach the upper end of our guidance. Additionally, there were recoveries in Q3 related to accrued interest on a loan receivable, along with a few smaller items, all of which have contributed to the quarter-over-quarter changes. These are some of the key factors influencing our guidance.
Richard Milligan, Analyst
That's helpful. And then I guess a bigger picture question for Jason. There's a wide range of acquisitions in 4Q implied by guidance, and I think in your opening comments, you said that you're comfortable at the low end but could do more. And I'm just curious, sitting here with only 2 months left in the quarter, what would have to happen for you guys to hit sort of the midpoint or the higher end of that implied guidance range for 4Q?
Jason Fox, CEO
Yes. Sure, R.J. Look, it's a difficult market to predict right now. It's really where we are and our best guess on where we might end up on deal volume for the end of the year. Transaction activity is actually quite robust as active or perhaps even more active than a typical end of the year period. I think the big question and what remains to be seen is how many of those transactions that are out in the market are part of a price discovery process as not many are getting done, they're kind of getting repriced and kicked down the road a little bit. We do have several hundred million dollars of deals that we're actively pursuing, many of which I would characterize as relationship deals. So we feel we're the best positioned as the buyer who can meet timing and underwriting requirements, but there still are gaps in pricing expectations, and we're not sure if we'll get to a point where we transact by year-end. And we're very focused on making sure that we're achieving appropriate yields and returns given the current levels in the debt markets. So maybe the big picture answer is investment volume is really going to depend a lot on sellers' expectations, their willingness to transact at what we view as reasonable pricing, and we'll have to factor in any changes to our cost of capital as well.
Richard Milligan, Analyst
That's helpful. Is there any specific category, either U.S. versus international or property type, where you're noticing the most cap rate movements? You mentioned expecting a bit more activity in sale leasebacks, but I'm interested to know where else you're seeing some expansion.
Jason Fox, CEO
Yes, we are focusing on sale leasebacks, which has been a consistent theme for us. This strategy gives us a bit more pricing power because there are fewer competitors in that space. Many of the past competitors are now more leveraged or comprised of private equity buyers relying on asset-level debt, and they are mostly out of the market. We continue to see expansion in sale leasebacks. These transactions are driven by specific uses of proceeds, which makes them less sensitive to rising interest rates since there is a need for capital. We are also observing movements in Europe, where some open-ended funds are facing liquidity issues, potentially creating opportunities. If that happens, it may lead to more motivated sellers. Regarding the lower end of the market, particularly in U.S. retail, we are actively monitoring that sector. While it is a major component of net lease, cap rates in that area have remained relatively stable. Lease rates may have adjusted, but not to the extent we are witnessing in industrial sale leasebacks.
Operator, Operator
Next question today is coming from John Kim from BMO Capital Markets.
John Kim, Analyst
Jason, you mentioned you have several options with your storage assets. They provided a nice boost to performance this quarter. Of course, that could always reverse in future quarters. But given your history with these assets, are you more inclined to retain them as operating assets? Or has your view changed at all since you acquired assets outright?
Jason Fox, CEO
Yes. No new update on our plans for the operating self-storage assets. We do have a long history of owning them and operating them. We've been in that space since 2004 in many ways. So we still have a lot of options with these. We could continue to own them. We could convert to net lease like we've previously done with some of the assets. We could even sell some at attractive prices and reinvest in net lease if we think that's the way to optimize value or it could be some combination of the 3. It's on the table. All, I think, are very good alternatives, we'll be patient with whatever path we choose. And yes, in the meantime, while same-store growth is probably not going to be what it was in '22, next year, but we still think there will be attractive NOI growth, certainly relative to net lease.
John Kim, Analyst
And with the Courtyard by Marriott assets, are you more inclined to either convert those to a net lease structure or sell them? In other words, not retain them as operating assets?
Jason Fox, CEO
Yes. I think that's fair. Brooks, do you want to kind of give a little bit of color around Marriott?
Brooks Gordon, Head of Asset Management
Sure. And as Toni mentioned, the outcome for the 12 Courtyards that expired in January of '23, those will convert to operating hotels. That will be a seamless transition. Marriott will continue to operate and manage those. And as Toni mentioned, the underlying economics are expected to be roughly in line with the net lease economics, so no real earnings impact. From a disposition perspective, there are 3 of those assets which we view as having really attractive upside redevelopment opportunities. So we'll likely retain those while we investigate those opportunities further. The balance, so 9 assets, we'll likely exit those over at the appropriate time. So those aren't likely to be long-term holds.
John Kim, Analyst
Okay. One last question for me. You mentioned an office lease termination conversion to lab space. Could you provide more details about the location of the asset, the capital expenditure, and the development yields you anticipate?
Brooks Gordon, Head of Asset Management
Sure. This appears on our CapEx table as unchanged labs in Pleasanton, California. It's an excellent location right next to the train stop and has some room for expansion on the site. We received a termination payment from the previous tenant and simultaneously entered into a long-term lease with unchanged labs, which is a fast-growing medical research toolmaker. The rent will be about 15% to 20% higher than the previous rent, with much better long-term increases and very high criticality. We are pleased with this outcome, as it creates significant value for that asset.
Operator, Operator
Your next question is coming from Anthony Paolone from JPMorgan.
Anthony Paolone, Analyst
Great. Toni, thanks for the items and discussing the transition from the third to fourth quarter. As we consider 2023, should we expect the run rate to be closer to $1.36 or the $1.26 indicated by the midpoint for the fourth quarter?
Toni Sanzone, CFO
Yes. I think I'm trying to give kind of some color there as it gets into the end of the year. I think we're a little too soon for us to be getting into next year's guidance at this point, and we're hesitant really to kind of look at any 1 quarter. There's always kind of a handful of volatility due to varying items and recoveries as we've talked about, at least termination and otherwise. So I wouldn't suggest that there's a good run rate in there for you to extrapolate from Q4. But I think we'll look to give more guidance on the fourth quarter earnings call. I would suspect that we'll continue to see same-store growth. That's the one item that we have kind of a clear picture on in terms of more certainty given where we are right now and the time lag and how things flow through to our leases. So we highlighted those comments in my remarks there, but we would continue to see that trend upwards above the 4% to 4.5% range. And that's probably the only assumption at this point that we can give you some level of clarity on without getting into any more detail on guidance.
Anthony Paolone, Analyst
Okay. I understand. And then, Jason, as you guys just do more sale leasebacks than anything else, you mentioned a lot of the sellers have a use of proceeds. So just wondering like what other financing alternatives are they more willing to act on more quickly when they think about either selling the real estate? Or they're more willing to go get debt because the credit markets seem like those are pretty straightforward in how those have moved? And so I guess what's the hesitancy to maybe go to real estate route and drag their feet on deals? And are there other elements of the sale leaseback that can get folks over the hump like proceeds and stuff since you can control some of those things?
Jason Fox, CEO
Yes, those are all important questions. The current landscape is making this opportunity particularly intriguing. When considering alternatives to a sale leaseback, options typically include issuing equity, adding some capital if it’s a private company, or tapping into the debt markets. Many of the companies we focus on are just below investment grade, often rated BB. This sector has seen significant movement in high-yield debt, more so than in investment-grade bonds and cap rates. This situation provides us with some pricing power. Companies are contemplating these alternatives. Additionally, we have ways to enhance the appeal of deals, such as through master leases or attractive terms for sellers, and we can concentrate on proceeds as well. However, our primary focus remains on market rents and the structuring of these agreements. While there may be limitations, we currently see a compelling set of opportunities, and we expect this trend to continue into 2023.
Operator, Operator
Our next question is coming from Spenser Allaway from Green Street.
Spenser Allaway, Analyst
Thanks for the commentary you provided on tenant health as it relates to the European energy cost. So I understand you guys don't have any concern at this moment, and it sounds like there hasn't been any explicit communication by tenants on the topic. But was hoping you could maybe just comment broadly on rent coverage and whether you've seen any changes in recent months?
Jason Fox, CEO
Brooks, do you want to take that?
Brooks Gordon, Head of Asset Management
Sure. So as Toni mentioned, we have thus far not seen any specific impact coming out of Europe, specifically around the energy cost spikes. And I think it's important to note that the majority of our European ABR comes from really kind of essential businesses, food retail, DIY, government, finance, telecom, energy. And so the impacts are really most directly felt as you'd expect in more of the manufacturing-type operations. Those have the highest power usage, for example. And to put that in context, in Europe, our manufacturing assets only represent about 3% of our global total ABR. And among that, the kind of heavier manufacturing is really only around 1% of ABR. So it's a reasonably contained exposure. And that said, when we underwrite these industry types of industrial manufacturing assets, we're typically going in with coverages in the high single or double-digit type coverage. It's very different than sort of a retail coverage. Elsewhere in Europe, the impact would be much less direct, certainly some pressure on margins. But thus far, the impacts have been largely passed on to customers. So we really do fall back on our fundamentals of long leases with big companies. They have the scale to adapt and critical real estate and diversification. So we think we're set up pretty well to absorb these challenges and thus far, we have done so.
Spenser Allaway, Analyst
Okay. Great. That's really helpful color. And then maybe just circling back to cap rates for a second. At a high level, we've heard that European cap rates have been slower to adjust that have moved in the ballpark of about 100 basis points, I think, since the lows we've seen in '21. Just curious, is that kind of range? Is that consistent with what you guys have observed thus far in '22?
Jason Fox, CEO
Yes, that seems reasonable. They have made adjustments, which is a significant change. However, considering how much the cost of debt has shifted in Europe, it may not yet be balanced. More generally, we discussed cap rates earlier this year, especially in July. From the beginning of the year until the last earnings call, we observed a movement of about 50 to 100 basis points. Since mid-September, coinciding with sharper increases in base rates and debt spreads, we've likely seen another rise of 25 to 50 basis points across both the U.S. and Europe. However, it appears that Europe is lagging somewhat, especially in relation to the extent of the cost of debt increases there.
Operator, Operator
Next question is coming from Nick Joseph from Citi.
Nicholas Joseph, Analyst
I'm curious if you're seeing any changes in your negotiations on sale-leaseback lease terms, just given higher CPI. Is there a pushback on including that in new lease?
Jason Fox, CEO
In terms of lease terms with CPI, is that the question?
Nicholas Joseph, Analyst
Yes. Given the current CPI, is there more resistance when signing a new lease to include a CPI adjustment later?
Jason Fox, CEO
Yes. It’s not affecting the length of the leases we can sign. We are mainly acquiring these through sale leasebacks where we have control over the terms. In Q3, our weighted average lease term for new deals was around 20 years, and for the year, it’s slightly above 20 years. Regarding CPI, there is some variation between the U.S. and Europe. In Europe, CPI-linked leases are more common, and uncapped leases were typical before the recent inflation increase. Now, CPI caps and floors are becoming more common in discussions, but it remains a standard practice that we focus on. In the U.S., fixed leases are still the norm, but we are pushing for changes in sale leasebacks, achieving them perhaps less frequently than before. Inflation is affecting not just the CPI increases but also the fixed increases in our regular deals. Historically, these have been around 2%, but we are now seeing fixed increases in the 2% to 3% range, with many at the higher end and some even exceeding that. So, we’re noticing these changes across various aspects.
Nicholas Joseph, Analyst
That's helpful. And then you walked through the difference in the same-store ABR and the comprehensive same-store revenue. Would you expect those to converge going forward and into 2023? Or is there still some noise that could keep the delta between the two?
Toni Sanzone, CFO
Yes. I think the noise that we would expect to see there is really still driven by some of the timing of recoveries, rent recoveries that are coming through and when the disruption happened. So we saw some recovery in 2021, which kind of the baseline for the comparison of this year. And we've continued to see some recoveries happen this year. So it really will vary from quarter-to-quarter depending on which period we saw any sense of disruption in which period we had the recovery come in. So in large part, I think we do expect to see the contractual continue to drive the overall comprehensive same-store growth, but there will be some variability there.
Operator, Operator
Your next question is coming from Brad Heffern from RBC Capital Markets.
Bradley Heffern, Analyst
It sounded like you were more focused on the U.S. this quarter, and part of that is the pricing moving faster in the U.S. I'm curious, is there also a component of that that's related to either the attractiveness of the assets that you're seeing in Europe or just the general economic backdrop over there?
Jason Fox, CEO
I think it's more of the economic backdrop and the type of spreads we're targeting. There are deals we're pursuing over there. I think that there's still maybe a little bit bigger gap between sellers' expectations and where we think deals should be priced based on where debt costs have gone and more generally, our cost of capital. So it's not the quality or the types of deals we're seeing; I think it's more against sellers' expectations.
Toni Sanzone, CFO
Yes, no material drivers from...
Brooks Gordon, Head of Asset Management
Toni, I...
Toni Sanzone, CFO
Do you have the detail on that, Brooks?
Brooks Gordon, Head of Asset Management
Sure. I would characterize this all just kind of normal course election. Most of that's been subsequently collected. So I wouldn't point to any real trends there.
Operator, Operator
Thank you. Next question today is coming from Greg McGinniss from Scotiabank.
Greg McGinniss, Analyst
Just trying to get a better understanding for how much the transaction market has softened compared to prior quarters. So Jason, what are you seeing regarding total investment opportunities? And if you could talk about the impact from companies with maybe fewer of their own investment options during a more challenging economic environment that are looking for sale leasebacks? Or how much of the market is made up of sellers that have just not adjusted their cap rate expectations?
Jason Fox, CEO
Yes. And I think some of this is the last point you made there. I mean the transaction activity is quite strong. And we're looking and reviewing lots of deals on a weekly basis, lots of deals that are getting increasingly more interesting. These are sale-leasebacks. These are, in some cases, in Europe, some distressed sellers. These are portfolio transactions from some U.S. funds as well. So it's kind of a wide range of deals, I would say, predominantly sale-leasebacks though. But I think to your last point, I'm not sure the percentage of deals that are transacting relative to quarters or years past is probably significantly lower at this point in time. I think there's still a meaningful price discovery process that's ongoing. And it's clear where debt costs have gone, and I think many sellers are still reluctant to lock in higher pricing, but they're getting there because the alternatives are perhaps more expensive, especially when you consider sale leasebacks. And I think there's just a lot of uncertainty whether costs continue to move up and now might be a better time than the future to lock in. So hard to predict, not great visibility, but there is a lot of activities, just a matter of how much of that flows through to actual transactions.
Bradley Heffern, Analyst
Right. Okay. That's fair. And then maybe as another way to frame out what you're seeing regarding market cap rates. I mean how do you view your current cost of capital? And what are you actually targeting on cap rates for acquisitions? Maybe just to simplify assuming that underlying credit is similar to what you already own?
Jason Fox, CEO
Yes, sure. I mean, look, there's various ways to look at cost of capital for us. For instance, taking into account the equity forwards that we raised this year or in our ability to issue debt by swapping into euros, maybe factoring in bank debt and some free cash flow that we generate. I mean that could put our cost of capital in the 5s, say. And on the other hand, if we look at cost of capital exclusively with our current equity trading price and assuming we can only do 10-year bonds through direct issuances either in the U.S. or Europe. And maybe not account for any free cash flow or bank debt. That probably puts our cost of capital clearly in the 6s and higher or lower in the 6s. It's more dependent on where we're trading on any given day. So a lot of ways to look at it, but maybe what's more important is our view and expectation around putting capital to work, and this goes to your question. I think our perspective is that when we are looking at deals now we want them to reflect the wider pricing that we're seeing in the debt markets today. So we would expect cap rates to continue moving wider for any deals that we're targeting or executing in the near term. When we think about spreads, we're really looking at spreads to our cost of capital versus the average yields or unlevered IRRs, given the bumps that are built into our leases. So right now, we're targeting cap rates. I would say the range has moved up from 5% to 7% in the past to 6% to 8% now. And I would expect us to be probably more likely in the midpoint of that range in the high 6s and into 7s. And that would generate average yields after factoring in rent somewhere clearly in the 8s and maybe higher inflation-based leases. So that's kind of the zip code we're thinking about, but there's a lot of moving parts here. And on the margin, we do have a very well-priced equity forwards to use. And to the extent there's some interesting deals with higher quality that we can lean into. Maybe there's a reason to get a little bit more aggressive. But I think generally, we're going to be focused on that kind of midpoint of that range I mentioned.
Toni Sanzone, CFO
Yes. In 2022, the collection rate has remained close to 100%. We have not experienced any significant impact on our numbers this year, with less than 50 basis points on ABR, if that. Looking ahead to next year, we will continue to assess the portfolio as we prepare guidance, starting the year with a more conservative outlook. We will adjust our approach throughout the year based on tenant payments. Overall, our experience has been positive, and our portfolio is performing well. Therefore, I don't anticipate any major changes in our assumptions as we move into next year.
Operator, Operator
Our next question is from Chris Lucas from Capital One Securities.
Christopher Lucas, Analyst
Jason, just kind of a quick recap on CPA:18. I think when the deal was announced, you talked about the $2.4 billion transaction net to the company was going to be $2 million you're, I think, at $2.2 billion of added assets, and I know there were some office dispositions planned as part of that. Are those dispositions still planned? Or are you complete with those? Or where do you stand?
Jason Fox, CEO
Brooks, could you provide some insight on that?
Brooks Gordon, Head of Asset Management
Sure. We've closed the majority of that. There's still 1 or 2 items we're working on. Some of that may slip into 2023, but it's largely stabilized at this point from the perspective of what we wanted to transact on. The biggest piece of that was our student housing assets in CPA:18, which have all been sold to Brookfield, the European student housing. We continue to own one student housing property in the U.S. in Austin, a very high-quality property. We'll evaluate options for that at the right time as well.
Christopher Lucas, Analyst
Toni, then so as a follow-up, did that sort of hold over asset making meaningful contribution to sort of third quarter results?
Toni Sanzone, CFO
No, I would say we, by and large, had that all factored in, and I don't think there's been any material movement from disposition flipping that has kind of shifted, as I say, within the range of where we are. Obviously, we moved up and narrowed our range at the end of the year, but I don't think there was a material impact from those dispositions.
Christopher Lucas, Analyst
Okay. And then last question for me, Toni, sticking with you, on the mortgages that are maturing next year, how should we be thinking about the timing? And how should we be thinking about how you're looking at refinancing them? And is there a split between domestic and nondomestic currencies?
Toni Sanzone, CFO
In terms of the mortgage debt, I think we continue to take the view that we will replace secured debt with unsecured borrowings, and that hasn't changed for us. So we'll look at the timing in the markets around us in terms of how and when we take that out, but I would expect that we'll continue to pay those at maturity, which occurs over the course of the majority of next year. That number in total is pretty insignificant in the grand scheme of the size of our balance sheet at just about $400-plus million of maturities into next year. So I think it's pretty manageable, and we have a lot of optionality in terms of how we would do that. With the liquidity we have on our credit facility, it gives us some time and some flexibility in terms of where we want to access the markets. In terms of the split between U.S. and Europe. I don't have that in front of me, but I think it's probably similar to the overall portfolio breakdown as well. And again, we'll look at kind of the markets where we are in Europe and where that is relative to the U.S. market and see where the best opportunities are for us.
Operator, Operator
We have reached the conclusion of our question-and-answer session. I would like to hand it back to management for any final comments or closing remarks.
Peter Sands, Director of Institutional Investor Relations
Great. Thank you, everyone, for your interest in W. P. Carey this morning. If you have additional questions, please call Investor Relations directly on 212-92-1110. And that concludes today's call. You may now disconnect.