Q3 2024 WP Carey Inc Earnings Call

ToniAnn Sanzone

Thank you, Jason, and good morning, everyone. AFFO for the 2024 third quarter totaled $1.18 per share, with a $0.01 increase over the second quarter, primarily reflecting the accretive impact of net investment activity and rent growth being mostly offset by the net impact of higher interest rates.
We remain on track to fall within our full year AFFO guidance range. We’ve narrowed the range to between $4.65 and $4.71, which maintains the midpoint and reflects the net impact of additional dividend income from Lineage, being offset by lower anticipated other lease-related income and the tuning of transaction closings pushing later in the year.
We’re also affirming (inaudible) that investment volume will fall between [$1.25, $0.75] billion for the year. As Jason noted, we see a path to being in the top half of that range, depending on the ultimate timing of deal closings which would support 2025 growth, but not contribute meaningfully to 2024 AFFO given the large majority of deals in our pipeline are expected to close towards the end of the year.
During the third quarter, we disposed of seven properties for gross proceeds of $82 million. For the full year, we expect to complete dispositions totaling between $1.3 billion and $1.4 billion, slightly raising the bottom end of the range. As a reminder, 2024 is an unusually high year for disposition volume given the execution of the office sale program and the exercise of the U-Haul purchase option.
Turning to our portfolio, starting with same-store rent growth. Contractual same-store rent growth for the third quarter was 2.8% year-over-year, which is also where we expect the full year average to be.
Over the longer term, we expect contractual same-store growth to trend around a mid-2% range. Comprehensive same-store rent growth was 20 basis points year-over-year and is expected to be marginally positive for the full year as the second half of the year improves from the impact of the Hellweg lease structure and the rent downtime during the build-out period ahead of the Samsung warehouse lease. As a reminder, rent on the Samsung warehouse commences in the first quarter of 2025.
Historically, our comprehensive same-store growth has averaged about 100 basis points lower than contractual since comprehensive reflects the impact of vacancies, leasing, restructures and rent collections. As Jason mentioned, for the remainder of 2024, our guidance continues to assume no significant rent disruptions. Our fourth quarter results are expected to benefit from rent recoveries received in October totaling approximately $0.04 of AFFO, which have been previously factored into our guidance.
Turning to re-leasing. Our overall re-leasing spreads continue to trend positively during the third quarter in part due to the completion of our office exit, recapturing 103% of the prior rents overall, including positive re-leasing spreads on industrial, retail and self-storage and adding 7.2 years of incremental weighted average lease term.
Releasing activity impacted 2.9% of ABR, which is significantly above what is typical for a quarter, driven by the transaction we entered into with Extra Space, which I want to take a moment to review. The transaction comprised converted 16 operating self-storage properties to net leases, buying out the remaining 10% joint venture interest in some of these properties and resetting the rents and lease terms on our existing Extra Space net lease portfolio.
At the beginning of September, we converted 12 self-storage operating properties to net leases with a 25-year term with another four properties that will convert to net leases in 2025. Once completed, we will have converted approximately 20% of this year’s annualized operating storage NOI into long-term net lease revenue with an investment-grade tenant. Furthermore, in connection with the transaction, we amended our existing portfolio of 27 Extra Space net lease properties, resetting the rents higher and extending the term over 5 years to 25 years.
Overall, given where initial rents were set relative to operating NOI, the transaction is expected to have no meaningful impact on our 2024 AFFO. As of the end of the quarter, Extra Space was our largest tenant with 39 properties on 25-year net leases, generating $36 million or 2.7% of ABR.
The weighted average lease term across our entire net lease portfolio ended the quarter at 12.2 years and occupancy remained high at 98.8%. Other lease-related income was $7.7 million for the third quarter bringing this line item to $19 million through the first nine months of the year. Based on the current visibility we have through to the end of the year, our guidance assumes we receive no further payments that would meaningfully impact this line item.
Non-operating income during the third quarter was $13.7 million, comprising $9.9 million of interest income, $2.1 million in dividends from our equity stake in Lineage, and $1.6 million from realized gains on currency hedges. Within this line item, interest income increased over the second quarter driven primarily by the timing of our bond refinancing this year and the resulting cash on our balance sheet. Excess cash currently earns interest at an average rate slightly below 5% in the US, mostly offsetting the interest expense incurred on the US dollar bonds we issued in June until it’s deployed.
Lineage dividend comprises the cash dividend it declared during the third quarter, which was prorated for the period from its IPO in July to the end of the quarter. Our AFFO guidance assumes a fourth quarter dividend of approximately $2.9 million in line with the latest annualized dividend rate disclosed by lineage on the 5.5 million shares we own.
For modeling purposes, please note that we recognize Lineage dividend in the quarter they are declared. In fourth quarter, we currently expect nonoperating income to reset lower to around $10 million, reflecting lower interest income as rates decline, and we deploy the remaining excess cash into new investments.
Operating property NOI totaled $20.7 million for the third quarter, down $1.1 million from the second quarter, driven priorly by the conversion of self-storage operating properties to net leases that I just discussed, along with the disposition of a Marriott operating hotel, which closed at the end of the second quarter.
Operating self-storage NOI growth over the prior year period on a same-store basis and excluding the assets converted to net leases, was negative 4.1% for the third quarter, which showed some incremental improvement compared to earlier in the year. We currently expect NOI from operating properties to total about $80 million for 2024 and factoring in the storage assets we converted to net leases.
Moving to expenses. Interest expense totaled $72.5 million for the third quarter with the increase over the second quarter, primarily reflecting the full quarter impact of the $1.1 billion of bonds we refinanced during the first half of the year. Overall, the weighted average interest rate on our debt was 3.4% for the third quarter compared to 3.1% for the second quarter.
G&A expense totaled $22.7 million for the third quarter. We slightly lowered the top end of the range on our expectations for full year G&A and currently anticipate that it will fall between $98 million and $100 million. Non-reimbursed property expenses for the third quarter totaled $11 million, with the decline from the second quarter primarily reflecting reduced carrying costs on vacant properties, given the sales of three of the four vacant Prima Wawona facilities and Samsung’s assumption of carrying costs during the build-out period on that warehouse property. We currently expect the fourth quarter to be in line with the third quarter.
Tax expense on an AFFO basis totaled $10.6 million, which primarily relates to foreign taxes on rents from our European portfolio. This represents a return to a more normalized quarterly run rate compared to the second quarter, which was lowered through certain onetime benefits associated with the settlement of tax-related matters.
Moving now to our capital markets activity and balance sheet positioning. Having refinanced just over $1 billion of maturing bonds during the first half of the year and given the significant liquidity we’ve built up, we did not need to raise any capital during the third quarter. Our debt maturity profile remains very manageable with no further bonds maturing in 2024 and one 450 million bond in 2025. Similarly, we have no material mortgage debt due in fourth quarter of this year and about $240 million due in 2025.
We ended the third quarter with total liquidity of approximately $2.6 billion, including being minimally drawn on our $2 billion revolver and a cash position of just over $800 million. As Jason discussed, we have sufficient liquidity, including expected disposition proceeds and retained operating cash flow to fund the investments in our pipeline during the fourth quarter and into 2025 without the need to issue equity.
Leverage ended the third quarter at similar levels to those during the first half of the year. Debt to gross assets was 41.1%, which remained well within our target range of low to mid-40s and net debt-to-EBITDA was 5.4 times, which remained below the end of our target range of mid- to high 5 times, although we continue to expect it to trend back into that range during the fourth quarter. as we deploy further capital into new investments.
Lastly, regarding our credit facility, I wanted to briefly mention that during the quarter, we executed a sustainability-linked amendment, which may allow us to benefit from slightly lower interest rates and fees on the facility and related term loans if certain emissions reduction targets are met.
And with that, I’ll hand the call back to the operator for questions.

Operator

(Operator Instructions) Michael Goldsmith, UBS.

Michael Goldsmith

My first question is on the decision to go into retail a little bit farther. So it sounds like you move out of office, now you’re moving into retail. Like how do you think about just the mix of your portfolio going forward? Is there a certain capital, how much exposure, you launched to retail? And just kind of talk through like the framework that you’re thinking about for kind of where the portfolio looks like going forward.

Jason Fox

Yes. Sure, Michael. So retail currently makes up about 25% of the portfolio, the bulk of that, probably close to three-quarters of that is in Europe. So we’ve invested in the US before, but it’s been more opportunistic as opposed to a core focus of ours. And we’ve been ramping up the US retailer with several dedicated investment officers. They have lots of experience acquiring retail net lease and importantly, have lots of deep relationships with tenants and the brokerage community as well.
Given our size and reputation, we think it makes a lot of sense I think also at this point in time. There are some fewer competitors, given some of the consolidation over the last couple of years. And as I mentioned earlier, conversations with developers and brokers and tenants, they’ve all indicated that we’d be a welcome participant to help diversify some of their their capital partner. So we think it’s a good time to lean in.
Year-to-date, we’ve done — I think it’s about 15%, so a little lighter than maybe we would target, and that’s both in the US and Europe. Our pipeline is a little bit more. It makes up about 40% total retail does. And again, that’s split between the US and Europe, although I think the bulk of the pipeline is in the US, and it will ebb and flow.
I think over time, maybe I’d like to see 30%, 40% of our annual deal volume be in retail and maybe much of that would be in the US. But we’re big right now, and as I mentioned, 25% of our portfolio is retail. Over 60% is industrial. So it would take a pretty significant over allocation to really move that needle a lot, but we’re comfortable going higher than the 25% we are right now, and I could see that ultimately getting to over 30%, but that will probably take some time.
And in terms of the approach, I would say it’s not going to be a lot different from what we do in other property types. We’re going to look across the sector. There’s certainly some that we’d be more focused on and others that we won’t do at all. But I think we’re going to look for deals with long lease terms and the types of yields and IRRs that kind of fit overall what we’ve been doing. And underwriting the tenants will be obviously important, unit level economics, site coverage, things like that. That’s what we’ll be looking at.
So far, we’ve done some deals in car washes that was probably earlier in the year, some fitness, some experience at retail. We’re looking at dollar stores and discount retail, C-store, some automotive service, maybe some additional experience your retail as well. potentially grocery or probably more likely in Europe than the US, but rise open. But that’s kind of the general approach. And like I said, I think this is a good time to lean in.

Michael Goldsmith

Got it. And just as a follow-up question, just on True Value. Can you kind of walk through the expectations or the range of outcomes as you see for 2025? And then also, do you have any exposure to American Tire, which recently filed for bankruptcy.

Jason Fox

Yes. So on True Value, I mean, it’s — we’re right in the middle of the bankruptcy process, and we’re getting updates daily for that matter. We think that process will work through maybe over the next couple of days or a couple of weeks, but it’s very fluid, which is why it’s a little bit more difficult to kind of pinpoint our expectations for next year. I think we outlined some of the broad parameters. But Brooks, do you want to add any color to that?

Brooks Gordon

Sure. Yes. I would echo that. It’s premature to predict really a specific outcome for 2025. The parties are currently negotiating the details of how the sale to Do It Best should proceed. We’re optimistic they’ll get there, but I have to caution that bankruptcy is fluid and it’s not finalized. So it’s a sale perceived as planned.
We expect to be able to require all of the buildings for a transition period. Hard to predict the exact timing of that, but that could extend well into 2025, substantially muting any impacts to next year. Long term, our view is they’ll require a subset of our buildings. They’re still working through finalizing their plans on that.
In any outcome, we expect they’re going to require our buildings in the near term to execute whichever path is decided. And in parallel to all of that, we’re proactively working with brokers on all these assets. We expect a lot better clarity in the coming weeks and towards the end of this year.

Operator

Mitch Germain, Citizens JMP.

Mitch Germain

Jason, just with regards to the retail deals, obviously, they tend to be a little bit smaller in size. So is the thought around that doing more portfolios there?

Jason Fox

Yes. I think mainly it’s going to be portfolio transactions. I think where we’ve seen some interesting deal flow is takeouts for developers. So some of the retailers that are well capitalized, and they’re looking to expand.
I think the developers, given just the volatility in the rate markets probably have a little less appetite to hold on to their portfolios longer or hold on the portfolios and sell them one by one into the 1031 market. I think clearly, they can get tighter cap rates and good execution if they go that route, but that add some risk given the volatility.
So I think you’re right. I think it’s going to be mainly portfolios. But I think our team is is prepared to kind of roll up their sleeves and dig in and perhaps doing some one-off deals can lead to tenant relationships that — or developer relationships that can expand into larger transactions.

Mitch Germain

Got you. And maybe just some consideration around your discussion around credit reserve next year versus this year. I think it’s — I think, 100 versus 50 basis points. So maybe just discuss kind of what your overall thinking is regarding making that commentary?

Jason Fox

Yes. Look, there’s — in this environment, there have been some operational headwinds in certain sectors. I think particularly sectors where there’s been some pull forward of demand during COVID and now. We’re seeing a bit of a void resulting from pullbacks from customers. I think inflation and higher prices have also impacted consumer demand and at the same time margins for a lot of companies. And there’s also businesses that are still being impacted by the lack of housing mobility.
So the 100 basis points, that’s a number that it’s obviously early to provide that for (inaudible). We don’t have visibility into anything specific that would be included in that number, but we think directionally, it’s a big round number, and it makes sense for us to start at that level and then adjusted up or down, depending on what we see.
And I think importantly, we mentioned this earlier, that True Value is not included in that number. I think Brooks at least gave color, not obviously specific outcomes or even estimates for what that could mean for next year. So the plan would be to update that once we have a little bit more clarity, so we can make an estimate there as well.

Operator

John Kilichowski, Wells Fargo.

This is [Cheryl] on behalf of John Kilichowski. One on US versus European transactions. We came into the year with two-thirds US and one-third Europe, followed by a slowdown in European focused activity in last quarter. So how do you think seller expectations have changed since then? And how do you see spreads trending in Europe versus the US.

Jason Fox

Yes, sure. Yes. So year-to-date activity, we’re roughly split two-thirds US, one-third Europe, which is in line with kind of the broader portfolio targets. Europe makes up a little kind of a lower allocation for the pipeline, it’s about one-quarter of the pipeline right now. So it’s lagging North America a little bit. I wouldn’t say significantly, but it is lagging some.
We have seen activities levels pick up after a summer that was even slower than what’s typical for Europe. But we do like the backdrop. I think borrowing costs are in euros, probably 100 to 150 basis points inside of where we could borrow in the US.
Cap rates are not a lot different. Obviously, Europe is a broad market, and I think there’s a range of cap rates depending on the country and certainly the specific deal. But I think on average, maybe European cap rates are a little bit inside of the US. But what that means is that I think our expectation is we’ll see attractive opportunities in Europe to have wider spreads, and we hope to add to our pipeline. And we’re seeing it built. It’s hard to predict much past the end of the year, but I think it’s a good market for us in one that will (inaudible) capital.

And then one on American Tire. I think they recently filed Chapter 11. Just curious to know how much exposure do you have there?

Jason Fox

Yes, sure. And I think Michael asked that and I failed to answer. It’s very small. It’s less than 20 basis points, I think probably closer to 15 basis points of ABR in two properties.
Brooks, I don’t know if you want to give a little bit of color. I mean it’s kind of a non-event for us given the circumstance, but why don’t you provide a little bit of background?

Brooks Gordon

Sure. Yes, I apologize. I forgot to respond to that in the prior response. Yes, it’s two buildings, one of which is very tiny. The other one is about 270,000 square foot warehouse. It’s fully utilized. It’s in the Charlotte, MSA, good quality building, but again, very, very small actual rent exposure for us.

Operator

Anthony Paolone, J.P. Morgan.

Anthony Paolone

So just want to go back to the internal growth brackets for 2025. I think Toni mentioned usually the starting point is about 2%, and you’ll typically lose a point. And so the 100 basis points, Jason, that you called out, is that on top of the typical one? And so you’re looking at flat before True Value or I guess I’m just — I’ve gotten lost a little bit in that construct.

Jason Fox

That’s part of the number. Again, it excludes True Value, but it’s part of I think historically, we’ve talked about that over the last number of years, our same-store growth — contractual same-store growth has been maybe around 300 basis points or 3%.
And I think a long-term average is we’ve had about 100 basis point spread between the contractual and the comprehensive and built within that 100 basis point spread includes credit. It could be credit. It could be vacancies, it could be re-leasing. I think if you look at, again, over a long period of time, probably about half of that has been credit.
So that number is a little bit lighter. I think it’s a big round number as a placeholder for right now. And as I mentioned, we’ll dial that in once we have a little bit more visibility into next year, and we get closer to some potential outcomes, but it’s really a placeholder right now.

Anthony Paolone

Okay. So again, just to make sure I understand, 3 is the historic contractual type level. Usually, you lose a point for a variety of reasons, but maybe that’s a little bit bigger next year because the bad debt piece of that, you’re starting points a full point as opposed to maybe it being half of that 1 previously.

Jason Fox

That’s right. I think that’s a good way to look at it.

Anthony Paolone

Okay. And then, I mean, just on the growth point, as we all kind of, I think, focus a lot on ’25 at this point, it seems like you got a lot of confidence in returning to growth next year. I mean, maybe does that basically all come down to at this point, the deal pipeline and accretive investments? Or fewer dispositions that may be dilutive like you had in this year, just maybe some of the other brackets around your confidence in growth in ’25 would be helpful.

Jason Fox

Yes, sure. I mean that — yes, those are the big moving parts. Certainly, the deal volume. I think importantly, we’ve emphasized this that we have enough liquidity currently with the $800 million of cash, mostly undrawn revolver. I think in total it’s about $2.6 billion of liquidity. Certainly, to fund with the cash the remainder of this year’s deal volume in into 2025.
And then as we look to 2025 and how to fund deals, we’ve talked about our operating properties. Student housing assets that we own and the bigger portfolio is the self-storage. We think we can fund our typical annual deal volume, which we’re clearly not giving any guidance on that right now. For the entire 2025, we don’t like our equity price. So it’s not dependent on issuing equity at these levels, certainly.
On top of that, we have the contractual rent increases, which are substantial, they tend to be sector leading. We also have a full year brand from Samsung lease that we’ve talked about before and also full year dividends from lineage. So all that will also provide additional growth from the existing portfolio.
You mentioned the the delta between contractual and comprehensive. So certainly that’s part of the building block right there. But those are the big moving parts, and it’s hard to provide full details. Obviously, we don’t have an outcome for True Value at this point, but I think we’re set up well for growth, assuming we can mitigate those losses. I think we can.

Anthony Paolone

Okay. And if I could just ask one question on the XR and self-storage side. Was there a certain magic to doing the number of properties that you did? Was there a desire on either side to do more or less, and just — which we expect from here on that front?

Jason Fox

Yes. Look, it’s a good question. I mean, we’ve been talking about the optionality we have within the storage portfolio now. We didn’t think we’d be selling all the assets. We didn’t think we’d be converting all the assets. And given all the cash that we’ve been sitting on this year, we thought it made sense to maybe take a sub portfolio and put it under net lease. A little bit of a a dollar cost averaging type strategy, not doing it all at once and doing sub-portfolios. So we thought that was the right thing to do at this time.
But we also I think next year would more than likely lean more into asset sales, obviously, depending on deal activity and other alternative sources of capital, but that’s looking like a pretty good one right now. So I think that’s probably the likely path at least for 2025 at this point in time. It was about what we just did was about 20% of the operating portfolio. So a good sized chunk, but certainly not the majority of anything overly substantial.

Operator

Jim Kammert, Evercore.

Jim Kammert

Don’t kill me, I still — I’m following up on Tony’s line of questioning because if I use page 26 and 27 to supplement really just trying to better understand your sort of preliminary expectation for organic growth next year. If I’m not mistaken, about 53%, no about — yes, 53% of the overall rent is CPI linked another 43% or so is 2% contractual. Are you saying that perhaps your overall top line was about 2% next year before credit issues?

Jason Fox

Toni, I’ll let you dig into the details, but it’s probably a little bit higher than that. I think it all depends on where inflation settles at. Go ahead Toni, I’ll let you kind of give some of the details.

ToniAnn Sanzone

Yes. I think just based on our current views on both the US and European CPI, we do see stabilization in the low to mid-2% range for us. throughout all of next year on a long-term basis. So really kind of factoring that in with really what’s been a higher fixed increase lately as we’ve kind of seen we’ve gotten better execution on fixed bumps through kind of the inflationary environment as well. So I think the mid-2% range is really that top line that we’re looking at.

Jim Kammert

Okay. That makes more sense because otherwise. And then just thinking about some of the earlier comments, Jason, you’re saying maybe a tilt towards a little bit more retail, obviously, a gradual approach. But what would be the representative sort of escalators that you would want to seek on retail investments compared to what I think are — if I’m not mistaken, fairly style 3% type annual escalators on the industrial side. how do you compensate for that? Or can you get that type of organic growth do you think on transactions on the retail side?

Jason Fox

Yes, it’s a good question, Jim, and something that we do think about. Think, at least over the last, call it, five years, maybe even a little bit longer than that, we have been able to negotiate more meaningful rent increases in our industrial deals, both manufacturing and the warehouse assets. It’s probably averaged for a number of years now in and around 3%.
I think what’s more typical on retail is probably something closer to 2% and then certainly, there are some concepts or tenants that are even lower than that. They might be 1% to 1.5% a year, maybe it’s every five years, but it’s going to be a different bump structure.
And it’s probably something that’s worth highlighting about, not all cap rates, not all going in cap rates are equal. I think what we’ve been able to achieve this year and in years past, but this year, kind of the mid-7%s cap rate with bumps that have been averaging around 3% for the fixed increases and those that have CPI increases. A lot of them have caps, but those caps are over 4% now. So I think that going in cap rates are important to look at.
But I think as you’re correctly focused on, the bumps are really impactful as well, and that’s something that we’ll look at as we look at retail deals, maybe get a little bit more accretion on some of those deals in the first year, but the ongoing accretion will be slightly less than what our typical portfolio or typical investments have been.

Operator

Greg McGinniss, Scotiabank.

Greg McGinniss

Yes. So Jason, I think one of the more interesting aspect of the W. P. Carey story has been the ability to source and close on unique sale leasebacks with industrial operators. Has there been any change to the competitive landscape that’s making sourcing enough opportunities with that group of assets or tenants less tenable? Or is the goal just trying to find more deals to source in general, requiring need to strike out more into retail territory?
We’re just trying to better understand this pivot when some of your public competition has taken — sorry, just a little a little bit more on the question. Some of your competition over the last few years has taken the opposite approach and going towards industrial. And if you could touch on the achievable cap rates, I know we talked on escalators, that would be appreciated as well.

Jason Fox

Yes, sure. It’s more the latter. It’s not because we’re seeing limited opportunities in the industrial sale leaseback segment. I think competition does ebb and flow there. I think over the last number of years, when our competition it’s probably more just because there’s not that many industrial REITs that focus on — industrial net lease REITs to focus on retail or on industrial.
The competition has more been from private equity. I think they’ve been mainly on the sidelines given there inability to find mortgage financing or at pricing levels that make deals work. So there’s probably some incremental competition that comes back into that space as the kind of asset-level capital market comes back, and that’s slowly happening. And — but that’s really it.
It’s more about expanding the opportunity set we’re focused on growth. We’re a large net lease REIT. And so we want to expand our opportunity set. Clearly, retail US retail is the biggest part of the net lease market. And we think with some focus, we can take some market share and help drive deal volume.
In terms of cap rates, I think it ranges for the concepts. It ranges for the location and the quality and the credit. I think we all know that maybe the main answer is it depends. But what we’ve seen is it’s generally within our target cap rate range, which is in the 7%s. And I think that that’s where we’re going to focus within that market.

Greg McGinniss

Okay. And then looking at the current $500 million pipeline you talked about. Are those deals you basically approved from your standpoint, you’re going through final negotiations? Or how should we be thinking about the likelihood, timing and maybe cap rates on those as well whether these deals are —

Jason Fox

Yes, it’s a range. I mentioned earlier that I think that most — certainly many, but probably most of that will close before year-end. And I say it’s over $500 million. So we do have some cushion to kind of bridge where we currently had in terms of deal volume yet to the midpoint. A lot of those are sale-leasebacks, which typically are signing close type deals where you’re negotiating lease and the important elements of a purchase agreement. And so there’s always some moving parts that happen on those. But also a good portion of these are existing leases. And so those — you have a little bit more visibility into timing.
And I think maybe the main point is we do have a level of confidence that we’re going to get to that, but there always are some unknowns. Look, if something doesn’t close in December, it probably closes in January, so the real impact on 2025 earnings is probably minimal, but we’re focused on putting as much capital and putting deal on the table for the remainder of the year as we can.

Operator

John Kim, BMO Capital Markets.

John Kim

I wanted to ask about the storage assets that were converted if you can provide some color on how you determine the ABR of those assets and maybe compare it to the NOI that they achieved? And also what the fixed annual rent escalators are in their portfolio.

Jason Fox

Yes, sure. On the escalators, we’re not disclosing the details. I would say that the fixed component is in line with what we’ve done historically. It’s not at the 3% level that we’ve done more recently on industrial, but it’s in line with kind of our portfolio, so call it, greater than 2%, but it’s not at 3% level. And then there is the percentage rent so that we can still participate in much of the upside from the growth if that happens. And obviously, we have downside protection to the extent there’s any more negative years.
In terms of how we set the ABR, I mean the goal is to have these mainly earnings neutral off the bat. So we are looking at doing effectively a [10] coverage. And there’s some nuance to that, where you assume an effective management fee that’s typically paid when you go from owning an operating asset to a net lease portfolio, we no longer have CapEx exposure. So there is some adjustment for what the right CapEx assumption is, and that just moves the geography tiny bit. But it’s generally the goal is to do it at a [10]. And there’s probably a little bit of cushion in there on top of that. So call it a little bit above 10, but that’s kind of the goal.

John Kim

And Jason, can you remind us, do you have any other operating assets managed by Extra Space? And how comfortable do you feel expanding that relationship if you do?

Jason Fox

Yes. Extra Space has always been our largest operator. Historically, it’s been about maybe two-thirds or maybe 60% or so. I don’t have the updated stat now that we’ve converted some of the Extra Space managed properties to net lease, it’s still going to be the majority, but the split will come down.

ToniAnn Sanzone

Littler over 50%.

Jason Fox

Okay, a little over 50%, yes, so it has come down some.

John Kim

You mentioned a couple of times on this call that you’re going to have the full year dividend of lineage. Should we take from that, that your inclines to hold your position for all 2025.

Jason Fox

Well, it’s a good question. I mean the — we’ve talked about this before, where now that they’re public, the pre-IPO investors are subject to a lockout that or lockup, I should say that is — has an outside date of three years from the time they went public, so call it, close to three years still. Any distributions we get during that three-year period will be at the sponsor’s discretion. So we don’t have good visibility into that. We don’t know what their other capital needs are. And so for now, I think that’s our assumption that we won’t get any capital back next year.
Although I will say, looking at the base case, maybe a good way to do it is is kind of think about it being — coming back over that three-year period equally. In the meantime, we will get to 3% or just below 3% dividend yield. And if we do get it back, I think you can think about reinvestment into net lease that’s going to be 7%-plus. So a lot of accretion there. But for modeling purposes, I don’t think we’ve given any guidance on that yet, we’ll do that in February. But either way, it’s about $0.01 a quarter, I think, Toni, right, is what the current run rate is?

ToniAnn Sanzone

Yes. Next year’s contribution is about $0.05.

Jason Fox

Yes. Yes. So a little over $0.01 a quarter in our AFFO is just how that would work?

Operator

Smedes Rose, Citi.

Nic Joseph

It’s Nic Joseph here for Smedes. Just one question, you mentioned acquiring more of these existing leases. Just curious how kind of those leases compare to the leases at W. P. Carey rights? Are there any kind of key terms that are important that we need to keep an eye out for, just given this kind of pivot more into retail.

Jason Fox

Yes. I mean, look, it’s going to depend. I don’t think they’re all quite the same. I would say, generally speaking, they’re probably not quite as comprehensive as our leases. We’ve been doing this for a long time, and we feel like we have the ability to do that.
So look, that’s the benefit of doing a sale leaseback. We can dictate terms and that includes a lot of the individual provisions, lease length, the bump structures, specific covenants or requirements at the corporate level. those are the benefits.
But what we found is they do take longer to close. They can be unpredictable, especially when a sale leaseback is done in conjunction with a broader transaction like an M&A deal or recap of the company. So there’s a lot of benefits between the sale leaseback, but there’s also some downsides, and there’s real benefits to the existing leases where we can shorten the time lines.
And I would say typically to maybe 30 to 60 days. And there’s no lease negotiations so there’s less complexity in the deal, we can move through more quickly. But I don’t — we’re not going to take material on more risk.
I think on the margin, some will have less protections and will have to rely more on the underlying real estate. And I think you can do that on retail deals. And it’s more of a kind of a comprehensive view of the deal on how much change or difference in a lease that we’re willing to accept.

Operator

Brad Heffern, RBC.

Brad Heffern

It seems like there have been a number of credit issues recently for companies that were not on the watch list. Can you just give an update on where the watch list stands now, and if you’re considering expanding the definition?

Jason Fox

Yes, sure. Let me start, and I’ll pass it over to Brooks. Yes, so last quarter, we discussed a number in the 5s, and now that we have True Value on it and a few smaller tenants that have gone on, plus a couple that have come off. So it’s directionally increased currently in the 6s, which — that’s a number that has some meaning, but I think it’s important for the market that they don’t view credit in a way that’s purely binary. It doesn’t mean that a tenant not on the watch list means no risk. It’s more of a spectrum.
And so on top of that, there’s probably a couple of additional percentage points for these type of tenants, all outside the top 25 right now, ones that they were closely tracking, but don’t view that they have risen to the level of any kind of imminent default. So those gray areas certainly exist.
And obviously, we’ve experienced those over the last year. And that’s why we think it makes it difficult to translate, wash listen to earnings into an earnings impact. So I think there’s more we can do to be helpful to investors.
I think just two things particularly that we’re thinking about, number one, we want to be more proactive on giving commentary around big tenants, those within our top 25 that may be experiencing some risk of default or facing some kind of rent disruption in the near term. We understand that investors are particularly sensitive to the tenants who could have the biggest impact on earnings. So I think that’s what we’re going to do more around our top 25, similar to what I just did with Hellweg, Hearthside, and True Value during the prepared remarks. So we’ll do that on a regular basis.
And I think number two, and this is also something we just talked about. We want to provide you with an estimate of actual expected rent loss. It’s clearly an estimate. It’s a forecast that we have, and that would cover our estimate for expected outcomes across the whole portfolio. And we think that should be more useful to investors and could be maybe the best tool that we can provide that helps look forward on how the portfolio can be impacted over the next year. That’s the 100 basis points we talked about earlier. (inaudible) To the processor, maybe that covers it. Let’s just any follow-ups.

Brad Heffern

Okay. Got it. And then on Hellweg, the commentary in the prepared remarks, it sounded like the company is still struggling even with the rent cut. I guess, did I interpret that correctly? And then is there any fruit that you’re seeing from the turnaround plan? And how far along is that?

Jason Fox

Yes, Brooks, do you want to give some color?

Brooks Gordon

Sure. I think the main takeaway is it’s — there’s not a huge update on their progress. I mean I think they’re still working through a turnaround. I think they’re taking the right actions, especially around creating incremental liquidity containing costs. They were able to push out maturities out to 2027. So those are all positive steps.
I think our commentary is just meant to be balanced that we’re still watching it very closely, that we have confidence in the underlying portfolio and demand at rents in line with our current rents. So that’s really the main uptake there. They still are facing headwinds in the environment, but I think they’re taking the right actions to achieve their turnaround.

Operator

Joshua Dennerlein, Bank of America.

This is [Farow] Grant on behalf of Josh Dennerlein. I just had a quick question in terms of guidance. I know last quarter, you had mentioned a $0.03 to $0.04 AFFO being assumed for recoveries of other tenants as well as the lineage dividend not being included in the guidance numbers. And during your opening remarks, I know you mentioned that now guidance does include Lineage with other related lease incomes and transaction timing. I was just wondering if you could kind of review maybe the offsetting factors of increase from Lineage, maybe decrease in from transaction timings and an update on the related incomes.

Jason Fox

Toni, you want to take that?

ToniAnn Sanzone

I’ve got that. Yes, the Lineage dividends add out $0.02 of AFFO for Q3 and Q4. And really, the offsets there are both driven by timing, both in terms of our investment activity, expected to close a little later in the year as well as a reduction in our estimate for other lease-related income in Q4, so on this side of the year.
Again, those timings, it’s always a little challenged to predict that, but those will reach about $0.01 each of the offsetting impact of the $0.02 increase for Lineage. And there’s really been no change on the the rent contingency side, we kind of — I mentioned in my remarks, we did collect the recovery that you mentioned in October. So there’s really investment to guidance for that.

Operator

(Operator Instructions) Spenser Allaway, Green Street.

Spenser Allaway

Can you just talk about what assets have been included in the increased disposition guidance and strategic rationale. Does that include any of the Hellweg assets? I know you mentioned are being considered for sale?

Jason Fox

Brooks, do you want to take that?

Brooks Gordon

Sure. No major changes for this year. I think we’re just effectively reaffirming the range. We may have one asset that closes on this side of the year versus next and that accounts for a slight increase in that range for this year. We are evaluating a handful of Hellweg properties that would fall into 2025. And so we haven’t guided on that amount yet, but those wouldn’t be in 2024. Those would be kind of early in 2025.

Jason Fox

I think we pulled up the bottom end a little bit. So I think the midpoint probably went up by $50 million. Maybe that’s what you’re referring to Spencer. So pretty minimal. I mean it’s more just about having, as Brook said, visibility into. What will close this side of the end of the calendar year.

Spenser Allaway

Yes. No, the timing makes sense. And then a few times you guys have mentioned the increased competition you’re seeing. I was just hoping maybe you could just elaborate that — elaborate on that just a little bit. Is that in both the US and European geographies? And are there any notable trends in terms of interest levels and the bidding tents across the various property types or industries you guys are underwriting?

Jason Fox

Yes, it’s more in the US, I would say, and I think a lot of it is starting to see some of the private equity funds who maybe we’ve competed with more directly over the years, kind of creep back in the market. I think it’s partly driven by some new funds that have been raised, and it’s partly driven by maybe the asset level financing market starting to become a little bit more liquid. I think that’s the main commentary. Again, that would apply to the US industrial market where we’ve enjoyed, I would say, less broad competition.
I think the US retail — I mean, in some ways, there’s a little bit less competition for certain tenants or certain property types. I think we’ve seen a lot of REITs have commentary around their exposure to a lot of the names. I think a lot of the big growth tenants are the top tenants on many of our peers. So maybe that’s an area where there could be some opportunity because there’s a bit of a void in the buyers for those reasons.
Europe, it’s always been thinly. The competition has been thinner. Nothing, I would say, notable or meaningful in terms of increased competition. I think what we’re waiting on is for activity continue to increase. We’ve seen that coming out of the summer. There’s more activity coming into the year-end, but we’d still like to see levels get back to a more run rate that’s — that allows us to put more money to work there.

Operator

And at this time, I am not showing any further questions. I’ll now hand the call back to Mr. Sands.

Peter Sands

Thanks, Diego, and thank you to everyone on the line for your interest in W. P. Carey. If you have additional questions, please call Investor Relations directly on (212) 492-1110. That concludes today’s call.

Operator

All parties can now disconnect.