W. P. Carey Inc. (WPC) Q3 2020 Earnings Report, Transcript and Summary

Hello, and welcome to W. P. Carey's Third Quarter 2020 Earnings Conference Call. My name is Brock, and I will be your operator today. [Operator Instructions]. I will now turn today's program over to Peter Sands, Director of Institutional Investor Relations. Mr. Sands, please go ahead.

Good morning, everyone. Thank you for joining us today for our 2020 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.

Thank you, Peter, and good morning, everyone. I hope everyone remains safe and well during this period in which we've grown accustomed to working remotely and managing through the COVID-19 pandemic. I'm pleased to say that we resumed external acquisition activity during the third quarter. And through a combination of ample liquidity and an advantaged cost of capital, we're very well positioned to execute on our growing pipeline of investment opportunities. We've reinstated formal guidance, which our CFO, Toni Sanzone, will review, along with our third quarter results as well as touching upon aspects of our portfolio and balance sheet. Toni and I are joined today by John Park, our President; and Brooks Gordon, our Head of Asset Management, who are here to take questions later in the call. The third quarter posed another stress test for net lease REITS, during which our portfolio has continued to show remarkable resilience and consistency with rent collections that remain among the best in the net lease peer group as well as the broader REIT sector. Overall, we collected 98% of rents due during the third quarter. Our collections again showed consistent strength across each of the 3 months across our core property types, including retail, for which we collected 100% of third quarter rents, and across the U.S. and European portfolios. Furthermore, to date, all of our top 10 tenants have remained 100% current on rent throughout the pandemic. And I'm pleased to say the overall strength of our collections has continued in the fourth quarter with a 99% collection rate for rent due in October. This is a testament to our underwriting process, focused on deep credit underwriting and mission-critical assets as well as the expertise of our investments and asset management teams. W. P. Carey's portfolio generates rental income that is more reliable, and therefore, more valuable than that of REITs with weaker or more variable collections. The downside protection this provides is a differentiating factor that we believe the market is currently undervalued, especially in the present environment, given the recent surge in case numbers and potential for new lockdown measures. Turning to our recent investment activity. Although transaction activity paused following the first wave of COVID, significantly slowing our deal volume over the summer, we focused on rebuilding our pipeline, which is translating into deal closings. During the third quarter, we completed investments totaling $112 million, comprising the origination of 2 industrial sale-leasebacks in the U.S. and the completion of a warehouse expansion project for one of our grocery tenants in Europe. Specifically, in September, we completed the $44 million sale-leaseback of 2 state-of-the-art food manufacturing facilities in the Midwest. The tenant is a leading manufacturer of a wide variety of pretzels and related snacks, including well-known food brands. Facilities are highly critical, comprising the tenant's entire manufacturing footprint, in which the tenant has made significant capital investments into equipment to support growing demand for its products. They're master leased on a triple-net basis for 25 years with fixed annual rent escalations. Also in September, we completed a $40 million sale-leaseback of a light manufacturing facility net leased to Weber Grills, the global leader in barbecue grills and accessories. The facility comprises Weber's primary North American manufacturing footprint, into which it has made significant capital investments. It's strategically located near Weber's global distribution center as well as being close to the I-90 freeway in Chicago's O'Hare International Airport. It's triple net leased for 15 years with fixed annual rent escalations. That same month, we also completed a $28 million capital project for a 300,000-square-foot warehouse expansion near Lisbon in Portugal with our existing tenant, Sonae, which is one of the country's largest food retailers. This is a good example of our ability to do follow-on deals with existing tenants, something we identified at the time of the original acquisition in 2018. The expansion was added to the original lease, which has been extended by 10 years to a new 20-year lease term. Property includes a 4,000 megawatt solar roof installation and has been approved for its LEED Gold rating. Our third quarter investments had a weighted average going in cash cap rate of 6.5%, providing a good spread to our cost of capital, and a weighted average lease term of 21 years, helping maintain an overall portfolio weighted average lease term of 10.6 years. These investments brought total investment volume for the first 9 months of the year to $516 million. Since quarter end, we've completed an additional $51 million investment, bringing us to $567 million of investments at a weighted average cap rate of 6.6% for the year-to-date period through today. Moving to the market environment. In the U.S., cap rates have continued to compress particularly for industrial assets or those with tenants in pandemic-resistant industries. Given strong demand and low interest rates, which are expected to remain low despite expectations of further government stimulus, it's not been uncommon for these sorts of assets to trade at cap rates lower than pre-COVID levels. In Europe, it's been a similar story and made an even lower interest rate backdrop and government programs that have provided capital alternatives. Capital markets in both regions have reopened and been accessed by corporations contributing to the downward pressure on cap rates. Sale-leasebacks, however, remain a viable alternative for corporations to unlock existing capital tied up in real estate and allow us to generate incremental yield relative to secondary net lease asset trades. We remain competitive from a cost of capital perspective, able to do higher quality deals at tighter cap rates on an accretive basis. Ample liquidity and the ability to provide certainty of close continue to give us an advantage, especially as corporations seek to complete deals ahead of year-end, which often translates into our fourth quarter being the most productive of the year for deal closings. Turning briefly to our recent capital markets activity and some closing comments on our pipeline. The equity forward we completed in June, along with the U.S. bond deal we completed earlier this month, exemplify just how much progress we've made in recent years in this area. Both deals received strong support from institutional investors, including traditional REIT-focused institutions, resulting in beneficial pricing. The equity forward gives us significant flexibility, locking in our ability to match fund of deals in our pipeline with equity issued at a predetermined price. Strong demand for the bonds we issued in early October enabled us to significantly upsize the deal, raising $500 million in senior unsecured notes and issue bonds at our tightest ever spread to the benchmark 10-year treasury rate. We also believe that at 2.4%, it was the lowest ever coupon rate for a 10-year net lease bond. Despite the tight cap rate environment, strong demand for our capital has ensured a cost of capital that supports accretive investment activity. Deal activity has rebounded since the end of the summer, and our pipeline has continued to build, returning to pre-pandemic levels. We're further along with a variety of industrial opportunities in the U.S., although we're also seeing pockets of opportunity beyond industrial, with Europe historically offering better retail fundamentals. With ample liquidity, we're confident in our ability to execute on our robust pipeline. And given where we are in the year, we have good visibility to transactions likely to close before year-end, which is reflected in our guidance assumptions. And with that, I'll hand the call over to Toni.

Thank you, Jason. Good morning, everyone. This morning, we reported total AFFO of $1.15 per diluted share for the third quarter with 97% or $1.12 per share coming from our Real Estate segment. We continue to grow lease revenues through net acquisition activity and the escalations built into our leases while also recognizing improved rent collections of 98% for the third quarter, up from 96% for the second quarter. While the impact of uncollected rents has been de minimis relative to our overall portfolio, I'll spend a minute breaking down how that is reflected in earnings. In terms of revenue recognition, we've taken the same approach I outlined last quarter, in line with accounting guidance and taking a conservative view on collectibility. As a result, our third quarter AFFO includes only about $1 million of uncollected rent, which we expect to fully collect over the next 6 months. Approximately $5.7 million of uncollected rental income net of recoveries was not included in AFFO during the third quarter, down from $8.5 million in the second quarter as certain tenants resumed paying rent. About half or $2.8 million of uncollected rent for the quarter related to 1 deferral agreement, which we entered into and discussed last quarter as part of a broader lease restructure. That was a 6-month deferral payable over 5 years, and the tenant has resumed rent payments in the fourth quarter, including the deferred portion. The remainder of the rent we did not recognize during the third quarter largely comprised rents due from fitness centers, theaters and restaurants, some of which have resumed paying reduced rent, but will remain on a cash basis for AFFO purposes for the foreseeable future. Turning to leasing activity. We completed seven lease renewals or extensions across a variety of property types during the third quarter, representing just under 1% of ABR on which we recaptured 95% of the prior rent and added 7.3 years of incremental weighted average lease term. Given the quarter-to-quarter variability inherent in this metric, internally, we continue to focus on it over the trailing 8 quarters. Over which timeframe, we've recaptured 97% of the prior rent and added 7.3 years of incremental lease term while spending only $1.42 per square foot on tenant improvements and leasing commissions. Contractual same-store rent growth, which is measured based on ABR on a constant currency basis and reflects year-over-year rent growth built into our leases, was 1.6% for the third quarter. The decline in this metric compared to the second quarter primarily reflects a periodic rent increase rolling out of the calculation for our largest tenant, U-Haul. Comprehensive same-store rent growth, which we added to our disclosure earlier this year, is based on pro rata rental income included in AFFO taking into account any leasing activity, vacancies, restructurings, rent deferrals or abatements, and therefore, fully reflects the impact of the pandemic on earnings year-over-year. For the third quarter, this metric improved to negative 1.7%, up from negative 2.6% for the second quarter, driven primarily by tenants resuming scheduled rent payments as well as the recovery of back rent from certain tenants. Turning briefly to expenses. Property expense has ticked up slightly over the last 2 quarters, driven by the accrual of real estate taxes on properties where we believe there is a heightened risk of tenants not paying those expenses directly. Our approach to accruing property expense is aligned with our evaluation of our tenant's ability to pay rent and has resulted in an additional accrual of $2.4 million during the third quarter and $4 million year-to-date. G&A expense totaled $19.4 million for the third quarter, and we remain on track for it to be between $76 million and $79 million for the full year. Moving now to our capital markets activity and balance sheet. We continue to manage our balance sheet from a position of strength, allowing us to opportunistically access both equity and debt capital at pricing that enables us to invest accretively. Towards the end of the third quarter, we raised $100 million in net proceeds from the issuance of approximately 1.5 million shares under the equity forward agreements we put in place in June. Because those shares were issued at the very end of the quarter, the impact on diluted share count will be reflected starting in the fourth quarter. In total, we've now settled 2.95 million shares under the equity forwards, raising $200 million, leaving us the ability to issue an additional 2.5 million shares or approximately $166 million in equity. During the third quarter, we repaid mortgage debt totaling $192 million, which had a weighted average interest rate of 5.1%. This further reduced secured debt as a percentage of gross assets to 8% at quarter end compared to 12% a year ago and unencumbered an additional $30 million of ABR in the process. Our balance sheet metrics remained strong, ending the third quarter with debt to gross assets at 40.6%, essentially flat to the prior quarter and at the low end of our target range. Net debt-to-EBITDA was 6.1x at the end of the quarter, a slight increase from the second quarter. Factoring in the remaining shares we can issue under our equity forward agreements would bring net debt-to-EBITDA below 6x. We ended the third quarter with $1.9 billion of total liquidity, including $1.6 billion of availability on our credit facility, cash on hand and the approximately $166 million of proceeds available under equity forward agreements I noted earlier. And as Jason mentioned, we further enhanced our positioning early in the fourth quarter with a successful issuance of $500 million of 10-year U.S. bonds and an annual coupon rate of 2.4%, well below the interest rate on the mortgage debt we repaid during the third quarter as well as our overall weighted average interest rate of 3% at quarter end. This, in conjunction with an advantaged cost of capital, gives us a clear path to accretively execute on our investment pipeline through the end of the year. Turning now to our 2020 guidance. Based on the visibility we have into the remainder of this year, we've reinstated formal 2020 AFFO guidance with a range of $4.65 to $4.75 per share, including real estate AFFO of between $4.51 and $4.61 per share. As Jason discussed, year-to-date investments through today totaled $567 million, and our full-year guidance assumes total investment volume of between $750 million and $1 billion based on the current visibility into our pipeline. For the dispositions, based on what's been completed year-to-date and our expectations for the fourth quarter, we're assuming total dispositions for 2020 of between $300 million and $350 million. In closing, I'm pleased to say that our third quarter results reflect another quarter of consistently strong rent collections, something our portfolio has produced since the start of the pandemic, demonstrating the reliability of our earnings and positioning us to perform well should the recent spike in case numbers cause further economic disruption. Given ample liquidity and advantaged cost of capital and increased deal activity, we're also confident in our ability to generate growth by executing on the accretive investment opportunities in our pipeline. And with that, I'll turn the call back to the operator for questions.

[Operator Instructions]. Our first question today comes from Greg McGinniss of Scotiabank.

With just a couple of months left in the year, just curious what could drive you to the top or bottom end of the guidance range? Is there any potential tenant fallout built into that assumption? Or is it really just based on the acquisition number?

Yes, I think in terms of downside, Greg, there's nothing specific that we're concerned about at this point. But again, timing of transactions, uncertainty around the current environment, that's really all that's baked into the downside.

Okay. And then regarding the potential 4Q transactions, if those expected acquisitions do not end up closing this quarter, is it more likely that those deals are being pushed into early '21? Or that they may not be completed at all?

Yes. It's probably a combination of the two, Greg. I mean, we have a number of transactions that are pretty far along, and I don't think it will be more of a timing issue. But we do feel good about the pipeline right now. And if there are deals that could straddle near the end of the year, those would be then included in next year's deal volume. And really, the bottom line is, whether they closed on December 31 or January 1, not really impact our 2021 numbers any differently. Maybe that's the basis of your question, is will these deals continue to provide growth for next year. And I think generally speaking, the answer is probably yes.

Okay. And then just a final question. On the warehouse rent collection, which remained at 94% this quarter, is that driven by any tenants in particular, the risk of losing that permanently? Or is that just the deferral agreement that you alluded to before?

Brooks, do you want to take that one?

Sure. Yes, correct. It's really that one larger opportunistic deferral, which we discussed on last quarter's earnings call, and they've resumed paying rent per the lease. So we expect that to tick back up.

The next question is from Emmanuel Korchman - I'm sorry, I have Chris Lucas of Capital One Securities.

Just a couple of quick ones. Can you remind us on the Marriott lease, what types of Marriotts are in that lease? And I'm assuming you're still getting the rent, but I'm just curious as to the type of properties that are in that pool.

Right. This is Brooks. Correct. We're - Marriott has remained current throughout coronavirus period. These are Courtyard Marriotts, and they are open but certainly operating at a lower occupancy as you expect.

Okay. And then just on the couple of leases done during the quarter were down double digits. Can you give some background as to sort of what those discussions were like?

Sure. There was two, I think, you're really referring to. One is in the industrial side. That was a long-term blend and extend transaction on a 2-property lease with properties in Kentucky and Tennessee. Your typical blend-and-extend type transaction there created enormous amount of long-term value, but certainly had a slight rent reduction in the immediate term. And the other was a similar type deal on an automotive training school in Sacramento. Again, both, we think, create substantial intrinsic value, but did require kind of an upfront reduction in exchange for long-term lease extension.

Okay. And then the last question for me. Toni, just in terms of your capacity to issue eurobonds at this point, are you fully matched at this point? Or is there still an opportunity to do another long-term institutional deal?

Yes, I mean, I think we continue to kind of look at our leverage levels, both as it relates to the overall level but as well as kind of, as you mentioned, on a match-funding basis. And I think with the acquisition pipeline, there is some activity that we see building in Europe. So with that there, I think Europe always remains a possibility for us in terms of where we could access the capital markets. But again, we're sort of mindful of the overall leverage levels at this point.

The next question is from Emmanuel Korchman of Citi.

Jason, just as we look at your pipeline, maybe beyond just the next couple of months into '21, just how big is that sort of total pipeline? And I realize that you're going to be hesitant to give guidance for next year, but are volumes going to be similar to sort of what we expected going into '20? And then also mix between the U.S. and Europe - and Europe there?

Yes. I mean, we have good momentum right now. We mentioned the $567 million we've done year-to-date, and there are several imminent closings that would bring us near the bottom end of the reinstated guidance range that Toni mentioned earlier. And beyond that, we feel really good about our pipeline as we head into the end of the year. I think there's visibility into a number of deals that could get us into the top half of our guidance range for this year. 2021, it's difficult to really project out much further than the next couple of months. But I think that we do have good momentum. And I think there's a couple of things to keep in mind, at least for 2020. One, the range that we've reinstated, $750 million to $1 billion, that's - we expect to fall within that range, of course. And that, despite the fact that our investment activity was on pause for close to 6 months of the year because of the pandemic. I think also in 2021, what we do have visibility into is about $170 million of build-to-suits and expansions that are currently under construction and expected to deliver and begin paying rent during 2021. So - and I think we'll add to that amount, maybe with a build-to-suit or 2 that could reasonably complete next year as well. And then you think about our diversified model, that gives us the wider opportunity set. And as Toni mentioned in her script, we have been able to pre-fund deals with our equity forward. And the recent bond offering that we did with really attractive rates gives us a pretty good cost of capital to compete. So if the deal opportunities are there, we feel really good about 2021 and how we're positioned. But it's difficult to predict, as you can imagine, much further along than a couple of months. Really anything that's 2021, outside of those expansions really aren't in our pipeline at this point in time.

Great. And then just looking at disclosure of collections between 3Q and October. It looks like the ABR and the fitness restaurant in that segment actually came down from 2% to 1%. Maybe that's rounding. Is there a tenant that might have come out of that? Is there something else there that would change your exposure to that segment, even though collections have gotten better?

Yes. Brooks, do you want to talk about that?

Sure. Certainly, the area of weakness in our collections is really in that one category. That category did come down a little bit. Primarily, that's 2 things. One, we had several gyms that were rejected in the 24-hour fitness bankruptcy. And then also the restructure of several theater leases. So a bit of a combination of those 2 things. But that combined really doesn't have a material impact on the overall collection [indiscernible] either.

The next question is from Anthony Paolone of JPMorgan.

You all talked about for a bit now the pipeline being skewed to industrial, but you'd also mentioned some other areas in your diversified model. What else is coming up that seems interesting for you all in the pipeline?

Yes. I mean we are still biased towards industrial, and I would look at that more as our core focus. Anything that we do in office, I would probably more characterize as opportunistic. And we'd require longer lease terms and stronger credits and generally underwrite those more conservatively, especially for lease end scenarios. So less likely office, but I think that it's something that we would still consider in the right situation. Retail is more likely to be in Europe. We think there is better supply fundamentals and pricing dynamics there, and of course, less competition as well, given if you don't have any retail dedicated net lease REITs in Europe. So we can typically generate wider spreads there in addition to pushing that structure in lease term, et cetera. So I think you'll continue to see us do more in industrial. That's been the bulk of what we've done this year-to-date. It's the bulk of what's in our pipeline. But we are diversified, and that's a good benefit where it gives us more pathways to grow.

Okay. And then looking at your major tenant roster, your Marriott and U-Haul, both with less than four years left. Like, what would those situations look like today? Or how would you think about just like a mark-to-market on those two?

Brooks, do you want to talk about that?

Sure. So I'll take those two. U-Haul, as we've discussed before, they have a purchase option in April of 2024. And so we do expect them to exercise that purchase option. From Marriott, we have two tranches of that lease. We have regular dialogue with Marriott regarding these lease expirations. It's really too early to tell. I think what we do like is that we have some term there to really get past the COVID period before we're really entering into lease end outcomes. So both of those are certainly larger lease expirations, but both have pretty solid lease end outcome built in.

Okay. And then just last question, I think, it's for Toni, just as a clarifying item. You mentioned some property tax accruals, and I don't know if I caught it all correctly. But just trying to understand, like, if I think about 3Q and an impact from COVID, it sounds like you were impacted by the additional accrual and also maybe some reserves or noncollections. Like, what was the combined, I guess?

Yes, I think that's a good point. It really is the aggregation of the 2 that we're focused on. And I think I mentioned it was about $5.5 million of lost or uncollected rent that flowed - or did not flow through AFFO. And add to that, I'd consider it about a $2 million increase in our expenses for the quarter. So all in there, that NOI on our leases is about $7 million.

Okay. And we should think about those - that as being, you'll continue to do that until that situation with those tenants change?

Yes. I think it is similar to how we look at the tenants from the revenue standpoint. If we see them pay the rent, obviously - or sorry, pay the taxes, we get to reverse that. But we are taking kind of a conservative view in accruing it until we kind of see some improvement there.

The next question is from Spenser Allaway of Green Street.

Just going back to external growth. I know you guys have already provided guidance and a lot of color here. But just perhaps higher level, how do you guys think about trying to balance your preferred property-type exposure and external growth? Because if we look at where you focus your acquisition efforts, you guys have targeted industrial, and you said you've got a bias here. But you also mentioned that this net lease product type has certainly seen cap rate compression. There's a lot of capital chasing these deals. So just curious how you guys balance that given the outsized emphasis on external growth in this sector in particular?

Yes. It's a good question, and that's kind of the challenge that I think all of us are faced with in the current environment. I mean, I think across the board, not just industrial, cap rates have come in and there's more competition. I think there's a lot of capital to be deployed given the pause in deal activity for most investors in the first half of the year. I mean generally speaking, I think most of what we're buying are through sale-leasebacks, where we can dictate structure in terms and especially generate some incremental pricing that works for us. But we also have the cost of capital that allows us to invest at a relatively wide range. And we talked previously about this. We'll do deals in the low 5s and maybe even in certain circumstances deals that are sub 5s, depending on the rent increases embedded in the leases. These would be for higher-quality assets like the Fresenius warehouse that we announced in the second quarter or the Stanley Black & Decker distribution center outside of Charlotte that we've talked previously about. So our pipeline includes some of those deals. And again, our cost of capital can support those types of assets where we can get some longer terms. I mean, the deals that are trading at the tightest cap rates, and cap rates is just one component of how we look at deals. Certainly, the unlevered IRR is more important. But the skinniest cap rates in industrial are going to be shorter-term leases and those that have real mark-to-market opportunities. So that's what you're hearing - that's what's happening when you're hearing about 4 caps and sub caps on properties. There's a lot of growth built in. So we can still buy these longer-term leases that may not be as interesting to pure industrial buyers who are focused on these big mark-to-market opportunities. Of course, we're also - I mentioned sale-leasebacks, we're also going to do our traditional sale-leasebacks where timing of closing, complexity of the deal will also add to our pricing power. And we hope to continue to do deals in the 6s, maybe even the 7s as well. The weighted average cap rate for the year is then kind of mid-6s. That probably comes down a little bit, but I still think that we can blend out to something in that neighborhood for the year.

Okay. And then maybe just shifting gears to your disposition activity in the quarter. Just curious if the divestments that you made were more decision to exit certain regions or were they more tenant or industry specific?

Brooks, do you want to take that?

Yes. So these are really - each one is very much its own story, but the largest one in the quarter was an opportunistic exit of an industrial property in Germany. And so there's really not a geographic or industry theme in our disposition plan this year.

The next question is from John Massocca of Ladenburg Thalmann.

Maybe starting off on the balance sheet, what may be is the kind of run rate opportunity for mortgage debt kind of prepayment just beyond the scheduled repayments you have here?

Yes. Obviously, that's been a big part of our balance sheet management over the last couple of years, bringing the secured debt down to the 8% level where we are now. As you mentioned, kind of limited opportunity in terms of - I think we have roughly $170 million due between now and the end of next year. But it is something that we look at as we're kind of seeing positive pricing in the markets there. So I would say it's not off the table, but it is something that we're looking at and evaluating with our other uses of capital, which primarily now are funding our investment activity. That is our priority.

And structurally, can you start maybe paying off some of the 2022 notes? I don't think that really changed kind of quarter-over-quarter. You're able to kind of dig into some of the 2021 maturities, but...

Yes. I mean you're right. I think 2022, we do look at it kind of from a price point standpoint and see economically what the cost might be to that. And we'll weigh that with the other opportunities we have for deploying capital. Obviously, we've been the beneficiary of significant interest savings as a result of paying that stuff down early. So we'll continue to look at it. I don't think there's as significant an opportunity as we've seen in the past couple of years, but there is some still out there that we potentially could bring forward.

Okay. And then maybe bigger picture on the investment front. I know you've talked about cap rate compression in the industrial space a little bit already. But is there other kind of levers you can pull to maybe keep those yields higher, whether it be expanding kind of the geographic reach, maybe more focus on manufacturing, just things other than sale-leasebacks?

Yes. I mean, John, the diversified approach does give us those opportunities where we can allocate capital. We're seeing the best opportunities at the best yields relative to the risk. I think one area that's a bit unique to us that we've been taking advantage of substantially over the last bunch of years is really what we call internal investments. These are going to be expansions of our existing properties, follow-on sale-leasebacks or build-to-suits with our existing tenant base. I think we've done maybe $240 million of that this year. I mentioned earlier the $170 million that's in our pipeline. Those tend to be at higher cap rates because they're a bit of a captive, especially the expansion. They're a bit of a captive investment for us where it's either us or the tenant that's going to put the money into the expansion of one our buildings. And because of that, we can drive pricing and structure. So I think you'll continue to see more of that. But generally speaking, I think that the diversified model will allow us to explore lots of opportunities than we had experienced across a number of different asset classes and geographies, of course. So it does give us a path to continue to grow and continue to generate track yields and spreads.

Okay. And then digging into the comprehensive same-store growth a little bit, the warehouse, the negative increase there, how much of that was tied to, if any, to the deferral agreement that was talked about earlier on the call and was talked about last quarter? And if that's excluded, maybe what was that same-store pro rata rental growth for just warehouse?

I don't know if I have that metric specifically in front of me. But I think you are right in that, that is the bulk of the total in terms of what we see as the downside, again, given kind of the collections and deferrals were not that impactful outside of that 1 deferral agreement.

But those would flow through same store? I think you answered that earlier, but...

Yes, that is correct.

That was really - the bulk of it was that 1 transaction from a comprehensive same-store perspective.

The next question is from Sheila McGrath of Evercore.

Jason, there's been a lot of discussion about bringing manufacturing back to the U.S., particularly for medicines and PP&E. I'm just wondering if you're seeing any new build-to-suit manufacturing opportunities? And given cap rates and warehouses are so low, would you entertain skewing a little bit more capital towards manufacturing?

Yes. Manufacturing has always been a core part of our investment thesis. And we tend to get longer leases. They tend to be highly critical assets. The disruption of moving from a manufacturing plan, shutting down lines tends to be very expensive and again, disruptive to supply chain. So it's a great investment for us. We fared very well there. I don't think there's anything specific that we're working on right now that has to do with reshoring. Certainly, if there are those opportunities, we would very much welcome them that - the build-to-suits that we're doing right now and the sale-leasebacks provided capital, some of these companies probably support some of that, but nothing specific. I think generally, the reshoring or onshoring trend, that's going to be a positive for our industrial portfolio, which makes it almost half of our ABR at this point in time. So if it happens, I think that's a positive, and we could see some tailwinds from that.

Okay, great. And then on the acquisition environment, a lot of companies have the choice to go access low interest rate debt capital. Just curious what's driving the increasing acquisition pipeline? Are improving M&A prospects, a positive for W.P. Carey in this regard?

Yes. You're right. We do compete with corporations' alternative sources of capital and that could be debt and could be equity for that matter. And there is correlation with M&A. So I think a lot of the deals we've been seeing, there's been some M&A, either some - previously to our deal or concurrent to our deal, in which case, it's just another way to capitalize the company. I mean our argument is that the debt, maybe you get a 3, 5, 7 year terms on bank debt. And in this low straight environment, companies are better off locking in these long-term rental rates at historically low pricing. And that's a pretty interesting option, and I think that's resonating with a lot of companies.

Okay. Great. And last question on the fitness and restaurants component are such a small part of your portfolio. Just wondering how you're thinking about that. Once you stabilize those situations, do you think you'll exit those assets? Or are you considering just disposing them in the near term?

Will you take that one, Brooks?

Yes, this is Brooks. I mean, yes, it's certainly not a core part of our investment thesis or our portfolio. So I think over time, we'll be working that down. It's certainly not an optimal time to exit those at this moment. But when the time is right, we will kind of look to trim that further.

[Operator Instructions]. Our next question is from Frank Lee of BMO.

With the elections just around the corner, just want to get a sense of how active you are in the 1031 market? And what are your thoughts on the potential impact to the industry if this is eliminated?

Yes. We're not overly active in that market. I think that we will do 1031s just to preserve some flexibility around our gains. But generally speaking, we're pretty comfortable with how we manage taxable gains throughout the year, and it generally doesn't impact our distributions. There's other ways to manage that. I think from an investment standpoint, we typically don't play in that space. I think it probably impacts the amount of trade that happen in the retail market, especially the smaller assets, where people can trade in and out of things relatively liquidity. So not all of it impactful to our business model, Frank.

Okay. And then can you provide an update on your watch list? How is it currently looking? And how does it compare historically?

Brooks, do you want to take that one?

Sure. So the watch list currently is about 4% of total ABR. So that's pretty consistent with during the whole COVID period. It's roughly double where it was kind of pre-COVID. Note that 75% of that is current on rent. And absent some concentrations, again in that gyms, theaters space, there's not a whole lot of industry concentration. It's really kind of anecdotal, but certainly a little bit higher than it was pre-COVID, but manageable and something we watch very closely.

At this time, I am not showing any further questions. Thank you for your interest in W. P. Carey. If you have additional questions, please call Investor Relations at 212-492-1110. That concludes today's call. You may now disconnect.