Earnings Call Transcript
W. P. Carey Inc. (WPC)
Earnings Call Transcript - WPC Q4 2020
Operator, Operator
Hello, and welcome to W. P. Carey's fourth quarter and Full Year 2020 Earnings Call. My name is Diego, and I will be your operator today. All lines have been placed on mute to prevent any background noise. Please note that today's event is being recorded. After today's prepared remarks, we will be taking questions via the phone line. Instructions on how to do so will be given at the appropriate time. I will now turn today's program over to Peter Sands, Head of Investor Relations. Mr. Sands, please go ahead.
Peter Sands, Head of Investor Relations
Good morning everyone. Thank you for joining us this morning for our 2020 fourth 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 one 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. 2020 was a year unlike any other in W. P. Carey's almost 50-year history. Throughout the economic upheaval produced by the worst global pandemic in over a century, our portfolio has proven itself to be exceptionally resilient. After stalling midyear, market activity continues to accelerate. And as we look ahead to 2021, we're extremely focused on increasing our investment volume, supported by substantial liquidity, proven access to capital, and a robust near-term pipeline. On today's call, I'll briefly recap 2020, including our recent investment activity, what we're currently seeing in the transaction market, and how we're building on the deal momentum we saw in the fourth quarter. After that, I'll hand it over to Toni Sanzone, our CFO, who will briefly review our results, key aspects of our portfolio and balance sheet, as well as our 2021 guidance. Toni and I are joined this morning by our President, John Park; and our Head of Asset Management, Brooks Gordon, who are available to take questions later in the call. Given the enormous impact that the pandemic has had on our daily lives, I'd like to start by acknowledging our employees and say how proud I am of the way our entire team has adapted and continues to perform to the highest standards. I'd also like to mention a recent ESG accomplishment that we're very proud of. In January, W. P. Carey had the honor of being one of just a few REITs added to the 2021 Bloomberg Gender-Equality Index, which recognizes companies showing leadership in advancing women in the workplace and a commitment to transparency in gender reporting. In recapping 2020, I'll start with our balance sheet positioning and capital markets activity, which support our ability to increase our investment volume in 2021. One of the first significant steps we took in 2020 was to renew our credit facility. Strong demand in the bank market for our credit allowed us to increase its size and improve our pricing, duration, and other terms. Maintaining ample liquidity ensures we have the flexibility to raise capital when market conditions are favorable rather than out of necessity. So when equity markets moved sharply lower from late February to late March and volatility reached extreme levels, we remained extremely well positioned with a $1.8 billion revolving credit facility that was almost entirely undrawn, very limited near-term mortgage maturities, and no bonds maturing until 2023. Once equity markets stabilized, regaining much of their initial losses, we took the opportunity to further enhance our balance sheet with a forward equity offering in June, locking in our ability to match fund acquisitions accretively with well-priced equity. And in October, we successfully completed a senior unsecured notes offering. Strong demand allowed us to significantly upsize the deal and issue U.S. bonds at our tightest ever spread to the benchmark 10-year treasury rate, which, at the time, was also the lowest coupon rate ever for a 10-year net lease bond. Our balance sheet strength was coupled with superior portfolio performance. Since the start of the pandemic, we've reported our rent collections on a monthly basis, which were consistently in the high 90% range for the second half of 2020, ranking among the best in the net lease sector as well as REITs generally. This is a direct result of our approach to net lease investing, characterized by deep credit underwriting focused on mission-critical properties leased to large tenants operating in recession-resistant industries. It also reflects the protections built into our leases and the effectiveness of our asset management team. During the initial stages of the pandemic, the transaction market slowed significantly in both the U.S. and Europe. We also paused external acquisitions as we focused on preserving financial flexibility. Market activity soon rebounded, however, and by the third quarter, our pipeline returned to pre-pandemic levels, and we ended the year with renewed momentum, closing just over half of our 2020 external acquisitions during the fourth quarter. Turning now to our fourth quarter investments activity in more detail, we completed investments totaling $310 million during the quarter, with a weighted average cap rate of 6.4% and a weighted average lease term of 21 years. This activity brought our total investment volume for 2020 to $826 million at a weighted average cap rate of 6.5% and a weighted average lease term of 20 years, helping maintain an overall portfolio weighted average lease term of 10.6 years. The majority of our 2020 acquisitions were sale-leasebacks, which generally allow us to negotiate better contractual lease terms compared to secondary market deals. To give context to the 6.5% average cap rate on our 2020 investments, it's important to also consider the attractive embedded growth we achieved in the large majority of our deals. About three-quarters of our 2020 deal volume had fixed rent increases, with a weighted average increase of 2.4% annually, with the remaining 25% having rent increases tied to inflation. I'll touch upon two of our fourth quarter transactions in more detail, both of which were in industries that have performed well during the pandemic. In early November, we announced the roughly $100 million sale-leaseback of a 27-property supermarket portfolio located in Northern Spain and the Balearic Islands with Eroski, which is one of the largest supermarket chains in Spain and an existing tenant of W.P. Carey. The portfolio is primarily located in dense residential neighborhoods with limited local competition. Strict planning laws and licensing requirements create significant barriers for new entrants, thereby increasing the inherent value of these proven sites. The portfolio is triple-net leased under three 20-year master leases with rent increases tied to Spanish CPI. As we look to accelerate our external growth, this transaction exemplifies our ability to make substantial investments into areas like essential retail, especially in Europe where there's less competition. From an ESG perspective, I'm pleased to say this transaction was also an opportunity to expand our investment in a tenant committed to sustainability through a variety of initiatives, including minimizing the environmental impact of its logistics and transportation operations. In combination with the existing warehouse and retail properties in our portfolio that are net leased to Eroski, it now comprises 1.6% of total ABR, placing it among our top 10 tenant list. As a result, Advanced Auto Parts, which is one of our largest investment-grade tenants now sits just outside the top 10. The other transaction I'll highlight is a further example of a follow-on investment with an existing tenant in an off-market transaction. In December, we completed a $23 million investment in a distribution facility in Utah, net leased to Orgill, the world's largest independent hardware distributor. The modern facility serves as a key distribution center strategically located along Interstate 15. We also committed to an additional investment of approximately $20 million for a 430,000 square foot expansion, which is scheduled for completion in 2022. The facility is triple net leased with fixed increases for a 20-year term that resets upon completion of the expansion. Warehouse and industrial properties comprised about two-thirds of our fourth quarter investment volume and three-quarters of our total investment volume for 2020, resulting in those categories edging higher to represent a combined 47% of total ABR at year-end. During the fourth quarter, we also capitalized on a very unique and attractive opportunity to increase our investment in the privately held equity of Lineage Logistics, the world's largest temperature-controlled industrial REIT. We've been investing in the cold storage industry for over 20 years, a business we long ago recognized as having the potential to transform the way perishable food is distributed. In connection with several sale-leasebacks with Lineage, we made our first investment in its equity in 2011 within CPA 17, which had an original cost basis totaling $28 million. It is currently marked at $195 million based on Lineage's most recent equity raise. While we remain long-term holders of net lease cold storage assets, Lineage's desire to buy back certain properties allowed us to opportunistically enter into what was essentially an asset swap with them during the fourth quarter, exchanging two cold storage facilities for an additional approximately $95 million equity stake in the Company. This brought the total value of our equity investment in Lineage, including the mark in our original investment to approximately $300 million, the large majority of which was established at a significantly lower basis. In addition, Lineage recently paid its first dividend, which Toni will discuss in the context of our 2021 guidance. Given Lineage's rapid growth, along with the trading multiples of its publicly traded REIT peers, we expect our investment to further increase in value, thereby creating additional value for W.P. Carey's shareholders, which can be harvested if Lineage goes public over the next few years. Turning to the market environment and pipeline. After slowing dramatically midyear, transaction volume in the U.S. accelerated during the second half of 2020 as investors came off the sidelines on the back of vaccine developments and a favorable interest rate backdrop. Cap rate compression continued, particularly for industrial and essential retail properties, driven by a flight to quality and historically low interest rates. In Europe, initial expectations of pent-up demand for sale-leasebacks in the second half of the year did not materialize, in part due to the alternatives that government programs provided. 2021 has started with a different tone, however, and we're seeing increased interest in sale-leasebacks by companies, which is also the case in the U.S. And while there is also no shortage of capital chasing deals in Europe, especially for food, retail, and industrial, we remain competitive there, which is reflected in both our recent deal closings and growing pipeline. Looking ahead, we expect market activity in both regions to accelerate in 2021, supported by low interest rates and increased economic activity on the back of government stimulus, as well as hopes that the vaccine rollout will boost economic recovery. Cap rates are likely to remain low in both regions, although possibly tempered by the prospect of inflation and ultimately higher interest rates. In the U.S., while the potential for repeal of 1031 tax-free exchanges has garnered a great deal of interest and could affect overall market activity, it's not a critical part of our business, and we don't expect it to impact our deal flow. As I mentioned, the transaction momentum we saw in the fourth quarter has extended into 2021. Year-to-date, we've completed investments totaling $203 million, comprising three acquisitions and two completed capital investment projects. We currently have an additional $102 million of capital projects scheduled for completion this year. And we also have a very active near-term pipeline with over $300 million of investments that are at an advanced stage, including deals where we have a purchase agreement in place. Given that we're still in February, we're confident in our ability to meaningfully increase our investment volume relative to recent years. And with that, I'll hand the call over to Toni.
Toni Sanzone, CFO
Thank you, Jason, and good morning, everyone. For the fourth quarter, we generated AFFO of $1.20 per diluted share, driven mainly by the continued strength in our rent collections and lower property expenses as compared to the third quarter. For the full year 2020, AFFO was $4.74 per diluted share. The pandemic-related impact on AFFO was limited to about $0.20 per share for the year, driven primarily by uncollected or deferred rent and increased property expenses, as well as lower income from other non-core assets in the portfolio. Since the start of the pandemic, our rent collections have consistently been among the best in the REIT sector, with 99% collections for rent due in the fourth quarter and 98% for January. Over the last nine months of 2020, since the pandemic took hold, we've collected approximately 98% of contractual rents due. Substantially all uncollected and deferred rents have been excluded from AFFO and are largely comprised of two components. First, as part of a broader lease restructure, which we detailed on prior calls, we deferred six months of rent for a tenant in exchange for an extended lease term and improved rent escalations, and the tenant has now resumed scheduled rent payments, including the deferred portion. Second, and as expected, the bulk of our remaining uncollected rents are from tenants in the restaurant, fitness, and theaters category, which represented just 1.3% of the portfolio's ABR at year-end. Comprehensive same-store rent growth, which is based on pro-rata rental income included in AFFO, rebounded from negative 1.7% for the third quarter to positive 0.1% for the fourth quarter. Certain tenants, including the tenant I just mentioned, resumed scheduled rent payments during the fourth quarter, which along with back rent recoveries, led to the improvement in this metric. Over time, as the impact of COVID resolves, we would expect comprehensive same-store rent growth to become significantly more positive. For the fourth quarter, contractual same-store rent growth, which reflects the average rent increase written into our leases, was 1.5% year-over-year, in line with the third quarter. At the end of the year, 62% of ABR came from leases tied to inflation and 33% came from leases with fixed rent increases. As such, if we do see inflation move higher going forward, we will be well-positioned for incremental same-store rent growth. Turning to our asset management activities. During the fourth quarter, we completed four renewals or extensions covering just 0.6% of ABR, on which we recaptured 64% of the prior rent and added 4.8 years of incremental weighted average lease term. Included in this activity was the short-term lease extension on an office property, resulting in a rent roll-down representing less than 0.2% of ABR. Within the other category, we extended the lease on a technical training facility, recapturing 100% of the rent with eight years of incremental lease term. Looking at renewals and extensions on a trailing eight-quarter basis, which covers 11.7% of ABR, we've recaptured over 95% of the prior rent and added 7.2 years of incremental lease term while spending just $1.41 per square foot on tenant improvements and leasing commissions. From a disposition perspective, the fourth quarter was relatively active as we exited 14 properties for total proceeds of $202 million at a weighted average cap rate of about 6% for occupied properties. This brought total dispositions for the full year to $381 million, comprising net lease dispositions of $266 million and the sale of an operating hotel in Miami for $115 million completed at the start of 2020. Included in our fourth quarter activity was the opportunistic sale of two cold storage facilities to Lineage Logistics that Jason discussed. In exchange, we received an additional equity interest in Lineage with the value of approximately $95 million. While our disposition proceeds include the Lineage assets, the additional equity investment in Lineage was excluded from our investment volume for the year. As a result of our investment in asset management activities, we ended the year with 1,243 properties, covering approximately 144 million square feet, net leased to 350 tenants and with an occupancy rate that remained high at 98.5%. Our portfolio continues to be very well diversified by property type, tenant industry, and geographic location, with 61% of ABR coming from properties across the U.S. and 37% from properties in Europe, predominantly in Northern and Western Europe. And our top 10 concentration remained among the lowest in the net lease peer group at 22%. Moving now to our capital markets activity and balance sheet. During 2020, we continued to successfully access the capital markets, raising over $850 million in well-priced long-term and permanent capital. Early in the fourth quarter, we issued $500 million of 10-year U.S. bonds at a 2.4% coupon. And during the second and third quarters, we issued $200 million of equity under the equity forward agreements we put in place in June. We have the ability to issue an additional 2.5 million shares for approximately $163 million of proceeds under our equity forward agreements and currently expect to deploy those remaining proceeds in the near-term to fund our investment activity. We have continued to benefit from the ability to replace higher-cost mortgage debt with lower-cost unsecured debt. During the fourth quarter, we repaid $90 million of mortgages at a weighted average interest rate of 5.4%, bringing total mortgage repayments for 2020 to $294 million at a weighted average interest rate of 5.1%, and then income bringing an additional $50 million of ABR. At the end of 2020, our weighted average interest rate was 2.9%, down from 3.2% at the end of 2019, driving a 10% or $23 million reduction in interest expense year-over-year. Our secured debt as a percentage of gross assets was 7% at year-end compared to 10% at the end of 2019. We continue to look for new opportunities to replace higher-cost debt, including both mortgages and bonds with lower-cost unsecured debt, which has a number of benefits, including mitigating refinancing risk, extending our weighted average maturity, and taking advantage of historically low rates that would generate meaningful future interest savings. In terms of our key leverage metrics, we ended 2020 with debt to gross assets of 42%, which remains well within our target range of mid- to low-40s. Net debt-to-EBITDA was 6.2x. Factoring in the remaining shares we expect to issue under our equity forward agreements, net debt-to-EBITDA would be close to the top end of our target range at 6x. We ended the fourth quarter with just $82 million drawn on our $1.8 billion revolving credit facility, which in combination with cash on hand and remaining proceeds available under equity forward agreements provides $2.1 billion of total liquidity. As a result, we've entered 2021 very well positioned with ample liquidity to execute on our investment pipeline and significant flexibility on when we access capital markets. Turning now to 2021 guidance we announced this morning. For the full year, we expect to generate total AFFO of between $4.79 and $4.93 per share, including real estate AFFO of between $4.66 and $4.80 per share. Our guidance assumes investment volume of between $1 billion and $1.5 billion, including capital investment projects we expect to complete during the year. Regarding the timing of investments in 2021, as Jason mentioned, we've already completed $203 million of investments so far this year, including capital investment projects. We currently have an additional $102 million of capital projects scheduled to complete in 2021, and we expect to add more as the year progresses. The expected completion dates for current projects are provided in our supplemental. Our guidance also assumes additional investments not currently in our pipeline are more weighted towards the end of the year. Disposition activity for the year is expected to fall between $250 million and $350 million. We expect the portfolio to remain resilient while we continue to navigate the disruption caused by the pandemic. Our current guidance assumes rent disruption continues to track at about the same level as we've been experiencing with the possibility of some variation in either direction, depending on the severity and duration of lockdowns. Our 2021 AFFO guidance includes $9.5 million of cash dividends generated from other real estate investments. This amount includes the dividend we received in January on our equity investment in Lineage Logistics, which we expect to be the only distribution we received from Lineage this year. It also includes dividends we expect to receive on our preferred stock and Watermark Lodging Trust, the surviving entity from our previously managed lodging funds. Our investment management fees and earnings are expected to continue to represent approximately 3% of our total AFFO in 2021. On the expense side, we expect total G&A of between $79 million and $83 million, an increase primarily reflecting the elimination of reimbursements previously received through the management and transition services agreements with Watermark Lodging Trust. As I previously mentioned, we continue to look for opportunities to further strengthen our balance sheet, which includes accessing the capital markets opportunistically and identifying debt prepayments where it makes sense. Our current guidance range does not assume any incremental debt prepayment activity outside of repaying maturing mortgages. In closing, while we're pleased with the consistently high rent collections we've generated since the start of the pandemic, our focus remains on external growth. With market activity accelerating, both in the U.S. and Europe, the strength of our near-term pipeline in combination with substantial liquidity, proven access to capital, and a supportive cost of capital gives us confidence in our ability to deliver significantly higher investment volume in 2021. And with that, I'll hand the call back to the operator for questions.
Operator, Operator
Thank you. At this time, we will take questions. Thank you, and our first question comes from Frank Lee with BMO. Please state your question.
Frank Lee, Analyst
It looks like occupancy dipped a bit in the quarter. Can you talk about what drove this and your expectation for occupancy in '21?
Brooks Gordon, Head of Asset Management
Frank, it's Brooks. Yes. Occupancy did tick down slightly. It's really a couple of retail locations and a warehouse coming off lease. In terms of expectations, in the current vacancy, we would expect that to be roughly split between dispositions and releasing. But we would expect that vacancy rate to remain very low around that kind of 1% to 2% range, so that should stay pretty consistent.
Frank Lee, Analyst
Okay. And then the second question I have is on the recent promotion of Chris to Head of European investments. It sounds like this could be a newly created position. Just curious if you’re seeing an increase in investment opportunities over in Europe, and if we could see a higher percentage of your investments allocated to this region going forward given the new head?
Jason Fox, CEO
Yes. Chris has been with us for, I think, probably about 10 years now, and he's been leading transactions over there for quite some time. So it is a new title that we've given this year, and he'll still report back across the pond to Gino. But to your question, yes, I mean, we are seeing a pickup in Europe. I think 2020 was a little slow. We started off the year with a deal in Europe, and we ended the year with the Eroski deal that we talked about earlier, but not much in between. And we've seen things pick up a little more in Europe. And again, it's one of the benefits of being diversified across asset classes and industries, but also geographies where we have an opportunity to provide incremental growth by doing deals in different regions, and we hope that continues to pick up.
Operator, Operator
Thank you. Our next question comes from Greg McGinniss with Scotiabank. Please state your question.
Greg McGinniss, Analyst
Jason, there's still obviously, and you mentioned this in the opening remarks, but there's this increasing focus on inflation risk from investors. And within that lease, I believe W.P. Carey has one of, if not the highest exposure to leases with uncapped CPI-based rent bumps. And I'm just looking at the last year or so of acquisitions, and it doesn't seem like you've been putting those uncapped bumps into leases, though that may just be language choice as to how you talk about the bumps. Is there any reason you've been focused on this kind of 75% fixed bumps this past year? Is that just the standard? And then could you also explain how the just CPI-based versus uncapped CPI rent bumps were?
Jason Fox, CEO
The 75% of fixed increases is slightly higher than our historical trends, and it often depends on negotiations. We prefer to have a portion of our leases tied to fixed increases. Currently, around a third of our leases have fixed increases, while approximately two-thirds of our total ABR is indexed to inflation. Of that two-thirds, a little over 40% is uncapped, with the remaining 20% to 25% featuring some cap and floor. Generally, CPI-based leases tend to have some form of cap and floor, and in some instances, they may have a multiple of CPI capped at a certain level. The specifics of those caps and floors can vary by region, but typically, floors range from about 1% to 2%, and caps are likely between 3% to 4%, sometimes even higher. It's important to highlight that most of our CPI leases are uncapped. Therefore, given any inflation, we would expect our performance on same-store metrics to remain strong relative to our peers, potentially leading to positive outcomes. Additionally, this setup provides a valuable hedge against long-term cash flows.
Greg McGinniss, Analyst
And just to clarify one point there. On the uncapped CPI, are there floors in there as well?
Jason Fox, CEO
In some cases, there may be floors, but uncapped. By definition, we don't have limits on the upside. Virtually all of the CPI should mention, and I don't think that you're suggesting it's going to go in this direction, but there is an implied floor of zero percent in virtually all of the CPI leases.
Greg McGinniss, Analyst
Okay. And just next question for me. Toni, for the guidance, given the strong performance in Q4, we expect a level of 2021 investments. We were a bit surprised by the bottom end of the guidance range. Now if you beat my estimate, which is great but if you also abate me on Q4. So I'm just kind of curious, what are the assumptions that could actually drive you to the bottom of the range in '21?
Toni Sanzone, CFO
Yes. Obviously, the range is there for a reason. The biggest movement for us would be around acquisition volume timing. It certainly could move. We typically have a heavier fourth quarter. As Jason noted, we do have a lot of activity going on right now. So any kind of movement bringing that forward from the end of the year would move us to the top end. Any movement kind of shifting things out to the back end of the year from what we're seeing right now would move us kind of to below the midpoint. I think the other big factor really is around collections in this environment. So we continue to feel good about our portfolio and how it's performing. I think the range within our guidance is generally the collections we've been seeing, 98% to 99%. Any variation kind of below that amount would certainly have an impact that would drive us below the midpoint.
Greg McGinniss, Analyst
Okay. So it really is just a more conservative view than at the bottom end of the range than what you're actually seeing today?
Toni Sanzone, CFO
Exactly.
Greg McGinniss, Analyst
Okay. And then just a final question on the acquisitions, Jason, I'm not sure if you mentioned this or not, but you talked about some of the compression that you're seeing. Have you guys talked about kind of the expectation on acquisition cap rates are in '21?
Jason Fox, CEO
Yes. I mean, certainly, cap rates have continued to trend down. I mean if you look at industrial properties, specifically, and that's where we're focusing with a lot of our new investments. I mean we're back or probably well inside of pre-COVID levels at this point, maybe even by 50 to 100 basis points. This is the broader market, of course. We're probably flat to maybe where we were in the fourth quarter. But we've talked previously, I mean, we look at deals across a wide range of cap rates, and we think we can do accretive transactions into the low 5s and maybe even sub-5% cap rates, depending on the rent increases that are embedded in the lease. These would be for higher-quality logistics properties, maybe like the Fresenius deal or the Orgill deal that we closed last year, both of which were warehouses. But we also still have a good pipeline of deals with cap rates into the 6s and even in the 7s. And these are our typical sale-leasebacks where we can drive some incremental yield through how we source these transactions and the structuring. We also look at a lot of deals within the industrial asset class, but maybe outside core logistics, such as light manufacturing. We've been doing some food production facilities which are highly critical and nondiscretionary products being produced. We mentioned cold storage, some R&D, all property types that we've had success targeting and ones where we think we can generate some incremental yield. We mentioned earlier that our 2020 weighted average cap rate, I think, was around 6.5%. I think we'd be probably in that zip code for 2021, perhaps trending slightly lower given where the markets are, but also depending on the mix of the types of properties that we acquire. I think lastly, cap rates don't always tell the whole story. Unlike maybe many of our peers, our leases have meaningful contractual rent increases. So headline cap rates for us are going to produce higher spreads to our cost of capital potentially given the built-in bumps.
Operator, Operator
Our next question comes from John Massocca with Ladenburg Thalmann. Please state your question.
John Massocca, Analyst
So I know it was a relatively small percentage of the portfolio, but leasing spreads were negative this quarter and they were negative basically throughout 2020. Was that something you think at least in the back half of the year was driven at all by pandemic dynamics? Or is there something specific with some of the near-term lease expirations that could have caused this and could maybe continue as going into a more normal leasing environment?
Jason Fox, CEO
Brooks, do you want to touch on that?
Brooks Gordon, Head of Asset Management
Sure. So in the fourth quarter, those are pretty anecdotal outcomes. I think I'll note a few topics there. One is that a very small portion of the whole, as Toni mentioned, about 0.6% of ABR. And the majority of that was two deals. One was an office building, which you mentioned in her remarks, where we had expected a vacancy and what we did is really just negotiated a holdover lease about 18 months holdover. So that's pretty anecdotal; I don't think it's indicative of the portfolio overall. The other was a 24-hour fitness property, where we restructured that lease as part of the bankruptcy. Important to note that that rent does bump up quite quickly back to around 85% of its prior contract. So look, both of those are certainly roll downs, no doubt about it, but pretty small with respect to the whole. And then I'll also note, kind of on a trailing basis, we've recovered about 95% of expiring rent with very low TIs added, about eight years of term. So Q4 is certainly not positive outcomes on those two leases, but I don't think it's indicative of a broader trend or really COVID-related.
Jason Fox, CEO
And then maybe looking forward, I know 2024 is kind of its own beast, but as you think about 2021 and 2022, I mean, are there potential COVID-related impacts to re-leasing? Or is the outlook of what's expiring kind of maybe COVID-resistant?
Brooks Gordon, Head of Asset Management
Yes. I mean, I think you raised a good point that our near-term expiries are quite low. In 2021, it's less than 2%. Over the next three years, it's less than 10%. We don't really see a lot of COVID-specific impact. Each deal is different. We think this lease expiration outlook for the near-term is very much kind of business as usual. Certainly, time will tell and each deal is different, and we're working very hard on all of those. But as of now, we're not seeing acute COVID-related changes in our tenant plan.
John Massocca, Analyst
Okay. And then sorry if I missed this in the prepared remarks, but can you provide a little more color on the impairments recognized during the quarter, both on the balance sheet and ones that flowed through the equity method investments?
Toni Sanzone, CFO
The impairments recognized on the consolidated properties were relatively minor overall. We had one property that faced bankruptcy shortly after the quarter ended, which led to a value adjustment. That accounted for most of the impairments. The other impairments were also minor. On the equity investment side, we co-own a property with CPA 18 and incurred an $8 million impairment due to this valuation adjustment. This situation stems more from the accounting practices associated with equity investments rather than the direct on-balance sheet assets. We found ourselves in a situation where we were not considering undiscounted cash flows, which has no effect on adjusted funds from operations, but it did impact this reporting period by about $8 million.
John Massocca, Analyst
Okay. And then one last one on the kind of acquisitions and investment side of things. How should we think about the capital investment projects as a proportion of investment spend this year? Could that amount increase in terms of deliveries in 2020? Or do you think that's pretty set?
Jason Fox, CEO
Yes. We've, I mean, it's in our supplemental. We actually just closed one out during the first month of January with a property in Germany, the American actor AAM. So we have about, as I mentioned earlier, $100 million of capital projects scheduled to complete in 2021. We do have some build-to-suits in our pipeline. It's unclear when construction we complete, and that's the point in time that we do add them to our investment volume. There might be something that could deliver in Q4 of this year, pending some of those deals. But we do expect to continue to add both expansions from our internal portfolio as well as build-to-suits externally to provide growth going forward. I think historically, it's maybe been 15% to 20% of our annual deal volume. This year will probably be a little bit lower than that based on just the current dynamics. But I think going forward, there's no reason to expect it wouldn't be in that range.
Operator, Operator
Our next question comes from Joshua Dennerlein with Bank of America. Please state your question.
Joshua Dennerlein, Analyst
I wanted to follow up on Toni's comment regarding the distribution received from Lineage. Could you clarify whether that was in 2020 or 2021? Also, I recall a statement indicating that this would be the only distribution expected. Is there any guidance or information about the possibility of another distribution?
Toni Sanzone, CFO
No, that was in 2021. A little over $6 million, it is in our guidance, and we don't currently expect anything additional as we sit here right now.
Joshua Dennerlein, Analyst
Okay. So if they pay other ones, it can be a source of upside to your guidance?
Toni Sanzone, CFO
They could. I think we are really looking at that maybe on more of an annual basis. They are a REIT, so we think the distribution requirement is probably just after year-end. But I think that's based on our current expectations.
Operator, Operator
Our next question comes from Chris Lucas with Capital One Securities. Please state your question.
Chris Lucas, Analyst
Toni, I got some remedial accounting questions for you. So just on that Lineage distribution, you will account for that in the period in which it's received and not prorated over the course of the year, correct?
Toni Sanzone, CFO
That's correct. You'll see that all in the first quarter.
Chris Lucas, Analyst
Okay. And then going back to the impairment comments you made related to the CPA 18, just the difference. I understand the treatment on impairments related to consolidated assets on the equity accounting. What is the difference there between the two? Is there a time frame that's put imposed? Or is there a time frame that you've changed as it relates to the ownership of that asset?
Toni Sanzone, CFO
No. I mean, it's other than temporary impairment model. So it doesn't really have the same look at cash flows as it does for a held asset long-term on balance sheet. I would say there's nothing specific there. We really run kind of probabilities of renewal that run through the models in a different way, and I think that's really what triggers it on the equity investment.
Chris Lucas, Analyst
Okay. My last question pertains to accounting topics, specifically regarding foreign exchange issues. For many years, the dollar-euro relationship remained stable, but it has significantly deteriorated over the past year. This is evident in the U.S. dollar-denominated bond debt related to euro-denominated bonds. How does this impact the AFFO numbers? Additionally, how do you plan to address this? Considering you have a maturity in January 2023, should we assume that it will simply be refinanced in euro-denominated bonds, without concern for the value differences over time?
Toni Sanzone, CFO
Yes. Let me start with the first part of your question. I think at the highest level, strengthening of the euro has a positive impact on our cash flows, obviously, that are denominated in euro. Our cash flow strategy really does look to mitigate that risk to a fairly de minimis amount. So even a 10% swing in the FX next year wouldn't result in more than a $0.05 change in our full year AFFO, so we really do look to mitigate the downside risk there, and we do that, obviously, to your point, through the natural hedges. So we are over hedged in euro on the balance sheet side. So with the bond that you referenced maturing there, I think you would look to us continuing to replace that with incremental euro debt to maintain that level of relationship.
Operator, Operator
Our next question comes from Todd Stender with Wells Fargo. Please state your question.
Todd Stender, Analyst
So investment guidance for this year suggests a pretty good move higher. Is it too much to assume that the bulk of that are sale-leaseback opportunities? When we kind of think about coming out of the pandemic, we're looking at like a pretty good M&A environment? Or does that assume you play more in the auction market than you have in the past? Maybe just some color there.
Jason Fox, CEO
No. I mean, I think our expectation is that we're going to be doing a meaningful portion of that, probably the vast majority, as sale leasebacks. We have great relationships with our tenant base for follow-on deals within the brokerage community, we source deals through private equity sponsors, in many cases, are follow-on deals with their portfolio companies. And you're right, there's correlation with M&A. And I think that, that's part of the reason why we have and would expect to continue to see some uptick in sale leasebacks. We're also seeing build-to-suits out, and that's a similar structure in many ways; a couple of those build-to-suits might be more structured as takeouts upon completion. So not technically a sale leaseback, but I think that you'll see a lot of the deal flow that comes in will have the same benefits if we get out to sale leasebacks.
Todd Stender, Analyst
And just maybe hear your general thoughts or appetite for a single-tenant office with the work from home trend, kind of at an inflection point. How do you guys think about making your investments in potentially long-term with company headquarters and such?
Jason Fox, CEO
Yes, we've maintained a reduced exposure to office properties for quite some time, and that trend has been consistent. Looking back over the past four to five years, our percentage of annual base rent was slightly above 30%. Currently, it has dropped to the low 20s, and I anticipate that this decline will continue, partly because we are prioritizing industrial investments. However, I believe we will still occasionally make investments in office properties. I would describe our approach as opportunistic, focusing on longer lease terms and stronger credit tenants. We typically evaluate these investments conservatively, particularly in current market conditions. For these reasons, our competitiveness remains limited due to our underwriting standards. Therefore, I don't expect significant changes in our office investment strategy as a result of the pandemic; we will likely continue to have a lower allocation in this area.
Todd Stender, Analyst
Okay. And probably last for Toni. Can you share your thoughts on how you're planning your budget and capital raising for 2021? If I understood correctly from your prepared remarks, it seemed like leverage might increase a bit towards the higher end of your range due to acquisitions.
Toni Sanzone, CFO
Yes, I believe we are currently at the upper limit of our leverage range, slightly exceeding it if we exclude the forward proceeds we have. We aim to reduce this over time, while still targeting a net debt-to-EBITDA ratio in the mid- to high-5x range. Regarding our capital issuance strategy, we prefer to manage our balance sheet from a strong position and maintain significant flexibility. As I mentioned earlier, the remaining proceeds from our forward are approximately $163 million. Given the deal volume ahead of us, we anticipate deploying that amount early in the year. Moving forward, it seems reasonable to expect that we will keep our leverage neutral compared to our current position, with a long-term goal of reducing it.
Operator, Operator
Our next question comes from Harsh Hemnani with Green Street. Please state your question.
Harsh Hemnani, Analyst
You spoke a little bit about the disposition and I was just hoping you could touch on the AMC theater that was sold in the quarter. Was that lease current on rent? And then can you share anything around the cap rate does?
Jason Fox, CEO
Brooks, do you want to touch on that?
Brooks Gordon, Head of Asset Management
Sure. We sold one AMC theater, which had an expiring lease. So it had, I think, a month remaining on it or thereabouts. So, it wasn't really a lease sale. We don't comment specifically on cap rates, but that was a sale for repurchasing another use. In this case, a church was the user buying the property from us.
Harsh Hemnani, Analyst
That's really helpful. And then you also mentioned that cap rates for both grocery and industrial are coming down in Europe. Can you touch a little bit about what you're seeing on the grocery side, both in Europe and in the U.S.?
Jason Fox, CEO
We recently completed the Eroski transaction in the fourth quarter, which we discussed in detail earlier. This deal is a continuation with a tenant we have a long-standing relationship with. It is now among our top 10, and we are looking to pursue more grocery opportunities. We are particularly interested in the U.S. as well, but our focus is likely to be on portfolio deals where we can achieve critical mass and set up master leases for long-term stability. The fundamentals in the U.S. are not as favorable as in Europe. The market in the U.S. is somewhat oversupplied and has fewer barriers for new development compared to Europe. Additionally, there is significant competition in the U.S. for the same deals. We tend to see better economics with less competition in Europe, leading to better spreads, especially given the current low borrowing costs. Therefore, we anticipate doing more deals, with a tendency to focus on Europe for the reasons stated, though we also aim to identify good opportunities in the U.S.
Operator, Operator
Our next question comes from Manny Korchman with Citi. Please state your question.
Manny Korchman, Analyst
Maybe put back to the sale-leaseback conversation that we've had. Just how widely marketed are those deals? We've heard from others publicly and privately, that's a space that everyone's sort of increasing and looking at probably because cap rates have compressed elsewhere so much.
Jason Fox, CEO
Yes, I believe you bring up a valid point. The competition is increasing slightly, but we still see ourselves as having a significant advantage in that area. While the competition is growing, the pool of potential buyers remains much smaller compared to the overall net lease market. Many of the deals tend to be selectively marketed, where execution remains the top priority. Of course, pricing is important, but it becomes irrelevant if there are no deals that successfully close. We believe we still have an edge in this regard. For example, the recent Eroski deal was an entirely off-market transaction. We are not aware of other parties having discussions with the company, which can be attributed to our strong reputation in Europe. Additionally, the tenant was existing, and we've had successful execution with numerous sale leasebacks with them before. Your point is certainly acknowledged, as there may be more participants in the sale leaseback market now than there were five years ago.
Manny Korchman, Analyst
Great. And regarding the Lineage sale or swap, did they have an option to purchase those buildings, or was it something that you approached them about? Additionally, do any of your other tenants currently have options to buy?
Jason Fox, CEO
That was not an option. They approached us. I think as many people know, they are now a REIT. So, they have some motivation to own more of their properties than to lease them. We've done a number of sale leasebacks with Lineage, especially early when the Company was just being formed. So that was something that they approached us. And really, we've had conversations with them for several years now. I mean, it felt like this was the right time to do it given that they were aggressively valued from the disposition side. But also, we really see a lot of value in increasing our investment in a long-growing company. I mean, for starters, we're very bullish on cold storage, and we've been so for quite some time, maybe dating back over 20 years when we first began acquiring temperature-controlled warehouses. We're even more bullish on Lineage. I mean number one market share globally, probably by a wide margin, great management team, top-notch sponsorship in Bayrob, and have really proven their ability to grow. So, it was more opportunistic than anything else. And your second question about options. We've talked about U-Haul before. That is something that they have an option at the end of the 20-year lease term in 2024. Occasionally, there are options and leases. I think most of them are structured as a greater of fair market value and some amount greater than our original purchase price. So, we can capture the upside in most cases in those scenarios. The U-Haul is a little different. It was a fixed price based on the original purchase price, grown by inflation over the 20-year period. So, that's the meaningful one that's in our portfolio. And we've talked about that before.
Operator, Operator
Next question comes from Chris Lucas with Capital One Securities. Please state your question.
Chris Lucas, Analyst
Jason, just another quick one for me. You're seeing, I guess, the junk bond market just has rallied and you're seeing issuers able to do deals sub-3% on 10-year unsecured bonds. Does that is that a positive or a negative to the sale leaseback market? Or does it not really matter?
Jason Fox, CEO
No, it's a good question. I mean, certainly, that capital is competitive to sale leasebacks. I think really companies can fund their capital needs through a number of options. One, of course, is to say leaseback, where they can unlock any capital that's tied up in their real estate. So, it's probably competitive in some ways. But I also say that the lowest rate environment we're in right now, which is what's driving the high-yield markets lower. Maybe it's more impactful on say leasebacks, where companies can really lock in historically low interest rates or low rental rates for a 20-plus-year period. And really the other merits of a sale-leaseback still apply. It's permanent capital, no debt that needs to be repaid. And in our opinion, companies should optimize their balance sheet, and that does not include owning real estate. Our cost of capital is set up to own a diversified portfolio of real estate. Corporates are better off unlocking that capital and reinvesting it into their core business and generating the more appropriate return for their shareholders outlay.
Operator, Operator
Next question comes from John Massocca with Ladenburg Thalmann. Please state your question.
John Massocca, Analyst
Just a quick follow-up on leverage. With regards to target leverage, as you think about optimal levels, is that pro forma outstanding forward offerings or kind of just direct in-place equity levels?
Toni Sanzone, CFO
Yes. I think we think about it both ways, but from an in-place long-term basis, we don't really factor in forwards on an ongoing basis. I think we do look at it at a point in time and then over the long term. So, we continue to look at net debt-to-EBITDA in the mid- to high-5x. I think we've mentioned that the forward brings us down to about 6x. We'd like to be below that level longer term, but aren't really factoring in forwards in terms of how we manage that.
Operator, Operator
Thank you. At this time, I'm not showing any further questions. I'll now hand the call back to Mr. Sands.
Peter Sands, Head of Investor Relations
Great. Thank you, and thank you, everyone, for your interest in W. P. Carey. If you have additional questions, please call Investor Relations directly on (212) 492-1110. And that concludes today's call. You may now disconnect.
Operator, Operator
Thank you. This concludes today's call. All parties may disconnect. Have a great day.