W. P. Carey Inc. (WPC) Q4 2020 Earnings Call Transcript

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W. P. Carey Inc. (WPC 1.22%)
Q4 2020 Earnings Call
Feb 12, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

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. [Operator Instructions]

I will now turn today's program over to Peter Sands, Head of Investor Relations. Mr. Sands. Please go ahead.

Peter Sands -- Institutional 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 E. Fox -- Chief Executive Officer, Board Member

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 mid year, 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 momentum [Phonetic] 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 the pandemic has had in 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 adopted 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 market 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 US 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-resilient 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, transaction markets slowed significantly in both the US 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 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, in 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 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, Advance Auto Parts, which is one of our largest investment-grade tenants, now sits just outside the Top 10.

The other transactional highlight is a further example of the 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 hedging 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 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 buyback 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 on our original investment, to approximately $300 million, 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 and 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 should Lineage go public over the next few years.

Turning to the market environment and pipeline. After slowing dramatically mid year, transaction volume in the US 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 US. 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 an economic recovery. Cap rates are likely to remain low in both regions and will possibly be tempered by the prospect of inflation and ultimately higher interest rates. In the US, while the potential 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 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 -- Managing Director, Chief Financial Officer

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 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 schedule rent payments during the fourth quarter, which along with back rent recoveries led to the improvement in this metric. And over time as the impacts of COVID are resolved, 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 rolldown 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 feet 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 leased 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 a 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 and 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 US 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 continue 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 US 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've 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 [Phonetic] bring 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.

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 6.2 times. 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 6 times. 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 investment 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 toward 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 lockdown. 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 in 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 US and Europe, the strength of our near-term pipeline in combination with the 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.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Thank you and our first question comes from Frank Lee with BMO. Please state your question.

Frank Lee -- BMO -- Analyst

Hi. Morning everyone. It looks like occupancy dipped a bit in the quarter. Can you talk about what drove this and your expectation for occupancy in '21?

Jason E. Fox -- Chief Executive Officer, Board Member

[Multiple Speakers], Brooks?

Brooks G. Gordon -- Managing Director, Head of Asset Management

Yeah, 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 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 -- BMO -- Analyst

Okay, thanks. And then second question I have is on the recent promotion of Chris to Head of European investments. It sounds like it 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 E. Fox -- Chief Executive Officer, Board Member

Yeah, Chris has been with us for, I think, probably about 10 years now and he has 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, yeah, 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 bit 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.

Frank Lee -- BMO -- Analyst

Okay, great. Thanks Jason.

Jason E. Fox -- Chief Executive Officer, Board Member

Welcome.

Operator

Thank you. Our next question comes from Greg McGinniss with Scotiabank. Please state your question.

Greg McGinniss -- Scotiabank -- Analyst

Hey, good morning.

Jason E. Fox -- Chief Executive Officer, Board Member

Good morning, Greg.

Greg McGinniss -- Scotiabank -- Analyst

Jason, there's been -- obviously you mentioned this in the opening remarks, but there is this increasing focus on inflation risk from investors and within net lease, I believe, W.P. Carey has one of, if not the highest exposure to leases with uncapped CPI-based rent bumps. I'm just looking at like the last year or so of acquisitions and it doesn't seem like you were putting those uncapped bumps into leases, but that may just be language choice as they 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 work?

Jason E. Fox -- Chief Executive Officer, Board Member

Right. Sure. The 75% of fixed increases, that is a little bit higher than what we've done in the past and sometimes it comes down to negotiations. I mean we do like having a portion of our leases anchored with fixed increases. I think right now, it's maybe about a third of them are fixed increases with about two-thirds of our total ABR indexed to inflation. Regarding that two-thirds, about 40% -- a little over 40% of that is uncapped with the remaining 20% to 25% having some kind of cap and floor. To get to your last question, the CPI base typically has some kind of cap and floor. In some cases it might even have a multiple of CPI capped at some level.

Brooks, I don't know if you have any data on what those caps and floors look like. It will vary by region, of course, but I would say somewhere between maybe 1% to 2% on floors and on caps, it's probably somewhere in the 3% to 4% range, sometimes higher, but it is an important to note, most of our CPI leases are uncapped. So to the extent, there is inflation, I think you'd expect us to continue with our performance on same-store relative to our peers and there could be some good upside of course and it's also a nice hedge built into what otherwise are long-duration cash flows.

Greg McGinniss -- Scotiabank -- Analyst

Just to clarify one point there, on the uncapped CPI, there are floors in there as well?

Jason E. Fox -- Chief Executive Officer, Board Member

In some cases there may be floors, but uncapped, by definition, you don't have limits on the upside and virtually all of the CPI, I should mention -- and I don't think that you're suggesting it's going to go in this direction, but there is a implied floor of 0% in virtually all of the CPI leases.

Greg McGinniss -- Scotiabank -- Analyst

Right, OK. And just next question for me, Toni, for the guidance, given the strong performance in Q4 and the expected level of 2021 investments, we were a bit surprised by the bottom end of the guidance range. It could beat my estimate, which is great, but also beyond 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 -- Managing Director, Chief Financial Officer

Yeah, 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 just below the midpoint.

And 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 -- Scotiabank -- Analyst

Okay. So, it really is just a more -- it's a more conservative view then at the bottom end of the range than what we are actually seeing today?

Toni Sanzone -- Managing Director, Chief Financial Officer

Exactly.

Greg McGinniss -- Scotiabank -- 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 E. Fox -- Chief Executive Officer, Board Member

Yeah, I mean, certainly cap rates have continued to trend down. I mean, if you look at industrial properties specifically, and that's what 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 basis points 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 that 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 in the structuring and then 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 non-discretionary 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 those built-in bumps.

Greg McGinniss -- Scotiabank -- Analyst

Fair point. Thank you, Jason. Appreciate the color.

Jason E. Fox -- Chief Executive Officer, Board Member

Yup, You're welcome.

Operator

Our next question comes from John Massocca with Ladenburg Thalmann. Please state your question.

John Massocca -- Ladenburg Thalmann -- Analyst

Good morning.

Jason E. Fox -- Chief Executive Officer, Board Member

Good morning, John.

John Massocca -- Ladenburg Thalmann -- Analyst

So, I know it's 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 expiration's that could have caused this and could maybe continue as -- begin to a more normal leasing environment.

Jason E. Fox -- Chief Executive Officer, Board Member

Brooks, you want to touch on that.

Brooks G. Gordon -- Managing Director, Head of Asset Management

Sure. So, in the fourth quarter -- this is pretty anecdotal outcome. 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 she mentioned in her remarks where we had expected vacancy and what we did is really just negotiated at holdover lease, about 18 month holdover, so you know that's pretty anecdotal. I don't think it's kind of 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 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. 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, certainly not positive outcomes on those two leases, but I don't think it's indicative of broader trend or really COVID related.

John Massocca -- Ladenburg Thalmann -- Analyst

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 releasing or is the outlook on what's expiring kind of may be COVID resistant?

Jason E. Fox -- Chief Executive Officer, Board Member

Yeah, I mean, I think you raise 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's plan.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. And then, I'm 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 balance sheet and ones that flowed through the equity method investments?

Toni Sanzone -- Managing Director, Chief Financial Officer

Sure. The impairments that ran through on the consolidated properties, all pretty small. I think in total -- I'll just pull that up here. We had one property that had a bankruptcy just after quarter end, so early in January and we marked that value down. That was really the bulk of it. The other items in there were relatively small. On the equity investment side, we share -- we jointly own a property with CPA:18 and picked up $8 million impairment as a result of marking that. Again, that's more of a result of the accounting treatment for equity investments versus the on-balance sheet assets. So, I think, we kind of got tripped up under a model where we don't look at on discounted cash flows and that really still has no AFFO impact, but it did run through this period at about $8 million.

John Massocca -- Ladenburg Thalmann -- 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 E. Fox -- Chief Executive Officer, Board Member

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 Axle or AAM. So we have about, as I mentioned earlier, about $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 would 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 then 15% to 20% of our annual deal volume this year. We'll probably be a little bit lower than that based on just the current dynamics, but I think going forward, there is no reason to expect it wouldn't be in that range.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay, that's very helpful. And that's it from me. Thank you very much.

Jason E. Fox -- Chief Executive Officer, Board Member

Great, thanks John.

Operator

Thanks. Our next question comes from Joshua Dennerlein with Bank of America. Please state your question.

Joshua Dennerlein -- Bank of America -- Analyst

Yeah. Hey, good morning guys.

Jason E. Fox -- Chief Executive Officer, Board Member

Good morning, Josh.

Joshua Dennerlein -- Bank of America -- Analyst

Just wanted to follow up on Toni's comment about that distribution you received from Lineage. Was that -- sorry, was that in 2020 or 2021. And then, I think there was a comment, that's the only one you would expect. So I was wondering if there was anything in guidance related to another one?

Toni Sanzone -- Managing Director, Chief Financial Officer

Nope, 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 -- Bank of America -- Analyst

Okay. So, they'd pay other ones. It can be a source of upside to your guidance, is that...

Toni Sanzone -- Managing Director, Chief Financial Officer

They could, I think where we are really looking at that, maybe on more of an annual basis. They are REIT, so we think the distribution requirement is probably just after year-end, but I think that's based on our current expectation.

Joshua Dennerlein -- Bank of America -- Analyst

Okay. Okay, interesting. That's it for me. Appreciate it guys.

Jason E. Fox -- Chief Executive Officer, Board Member

Thanks, Josh.

Operator

Our next question comes from Chris Lucas with CapitalOne Securities. Please state your question.

Chris Lucas -- CapitalOne Securities -- Analyst

Good morning, everybody. Hey, 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 pro-rate it over the full course of the year, correct?

Toni Sanzone -- Managing Director, Chief Financial Officer

That's correct. You'll see that all in the first quarter.

Chris Lucas -- CapitalOne Securities -- Analyst

Okay. And then going back to the impairment comments you made related to the CPA:18, just the difference. I understand that the treatment on impairments related to consolidated assets on the equity accounting, what is -- what is the difference there between the two. Is there a timeframe that's imposed or is there a timeframe that you changed as it relates to the ownership of that asset?

Toni Sanzone -- Managing Director, Chief Financial Officer

I mean, it's really just -- it's another 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 is nothing specific there. Really one 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 investments.

Chris Lucas -- CapitalOne Securities -- Analyst

Okay. And then, the last question for me on these remedial accounting topics relates to the foreign exchange issues. So for many years, really the dollar-euro relationship was pretty tight, didn't really move, but it's certainly deteriorated considerably over the last year and it shows up in the US dollar denominated bond -- debt outstanding that are euro-denominated bonds. How is all of that flow through to the AFFO numbers and how do you guys think about sort of dealing with the legacy or the January 23 maturity, should we just be assuming that just gets refi'd and euro-denominated. We don't have to worry about the sort of value differences over a period of time?

Toni Sanzone -- Managing Director, Chief Financial Officer

Yeah, 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.

Chris Lucas -- CapitalOne Securities -- Analyst

Okay, thank you. Sure. Thank you. That's all I have this morning.

Jason E. Fox -- Chief Executive Officer, Board Member

Great, thanks Chris.

Operator

Our next question comes from Todd Stender with Wells Fargo. Please state your question.

Todd Stender -- Wells Fargo -- Analyst

Hi, thanks. 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 E. Fox -- Chief Executive Officer, Board Member

Yeah, I mean, I think our expectation is that we're going to be doing 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 or follow-on deals with their portfolio companies and you're right. There's correlation with M&A and I think 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 and that's a similar structure in many ways, a couple of those build-to-suits might be more structured as takeout 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 that we get out of sale leasebacks.

Todd Stender -- Wells Fargo -- Analyst

Thanks. 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 in making your investments and potentially long term with company headquarters and such?

Jason E. Fox -- Chief Executive Officer, Board Member

Yeah. We've been underweight office for quite some time and it's trended that way. If you look back maybe four years or five years, our percentage of ABR was a little north of 30%. At this point, it's down in the low 20s and I would expect that trajectory to continue that way, partly as we continue to overweight industrial, but also I think office is something that you will do on occasion. I think it's going to probably characterized more as opportunistic, where we will require longer lease terms, stronger credits, we generally underwrite those conservatively, especially recent scenarios. I think for a lot of those reasons we're not generally competitive given our underwriting. So I don't think you'll see much change there because of the pandemic. We will kind of remain underweight.

Todd Stender -- Wells Fargo -- Analyst

Okay. And probably the last one for Toni. Can you maybe just -- I just want to hear your thoughts and how you're budgeting capital raising for 2021. If I heard you right in your prepared remarks, it sounded like leverage might tick up a little bit toward the high end of your range just with acquisitions.

Toni Sanzone -- Managing Director, Chief Financial Officer

Yeah, I think from a leverage perspective, we are at the top end of our range right now, just over it, if you don't kind of count the forward proceeds that we have there. I think we're looking to bring that down over time, but we still continue to target the mid-to-high 5 times on a net debt-to-EBITDA basis. In terms of when and how we issue capital, we like to manage the balance sheet from a position of strength and have a fair amount of flexibility. I mentioned in my remarks, the remaining proceeds on our forward is about $163 million and with the deal volume we have in front of us, I think we'd expect to deploy that pretty early in the year. Beyond that, I think you can expect it's reasonable to think that we would maintain leverage neutral to where we are now with a longer-term desire to bring that back down.

Todd Stender -- Wells Fargo -- Analyst

That's helpful. Thank you.

Operator

Thank you. Our next question comes from Harsh Hemnani with Green Street. Please state your question.

Harsh Hemnani -- Green Street -- Analyst

Hey, Good morning.

Jason E. Fox -- Chief Executive Officer, Board Member

Good morning.

Harsh Hemnani -- Green Street -- Analyst

You spoke a little bit about the dispositions 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 there?

Jason E. Fox -- Chief Executive Officer, Board Member

Brooks, you want to touch on that?

Brooks G. Gordon -- Managing Director, Head of Asset Management

Sure. Yeah, 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 we'd say. We don't comment specifically on cap rates, but that was a sale for repurposing as another use, in this case, a church was the user buying the property from us.

Harsh Hemnani -- Green Street -- Analyst

That's really helpful. Thank you. 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 US?

Jason E. Fox -- Chief Executive Officer, Board Member

Yeah, sure. We just did the Eroski transaction in the fourth quarter that we went through in some detail earlier. And that's a follow on deal with a tenant that we've had a long-term relationship. It's now -- as we mentioned, it's in our Top 10. And we'd like to do more grocery, I think -- in the US, we are interested as well. I think, we're probably more focused on doing portfolio deals where we can get critical mass and structure on master leases to provide some more long-term protection. In the US, I think the fundamentals are probably not quite as favorable as they are in Europe, US tends to be a little bit more oversupplied with less barriers for new development compared to Europe. There's also lots of competition in the US chasing the same deal. So, I think that we have better economics with less competition and we generate better spreads given the low cost to borrow. So, I think that we would expect to look to do more deals. They are probably going to be more biased toward Europe for those reasons I mentioned, but we hope to find some good opportunities in the US as well.

Harsh Hemnani -- Green Street -- Analyst

That's great. Thank you.

Operator

Thank you. Our next question comes from Manny Korchman with Citi. Please state your question.

Emmanuel Korchman -- Citi -- Analyst

Hey, good morning everyone.

Jason E. Fox -- Chief Executive Officer, Board Member

Good morning, Manny.

Emmanuel Korchman -- Citi -- Analyst

Just to maybe flip 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 that's a space that everyone's sort of increasingly looking at, probably because cap rates have compressed elsewhere so much?

Jason E. Fox -- Chief Executive Officer, Board Member

Yeah, I think it's a good point. There -- it's becoming incrementally more competitive, but we still feel like we have a real advantage in that space, incrementally more competitive, but it's -- it's still not as many. It's a much smaller universe of buyers compared to the broader net lease market. A lot of the deals will be limitedly marketed where execution is still kind of the highest priority. And obviously, pricing is important as well, but pricing doesn't matter if there's no deal that closes. So, I think we still have an advantage there. A lot of the deals we've done recently, for instance, the Eroski deal, that was a purely off-market deal. We're not aware that others have had any conversations with the Company. A lot of that is because of our reputation in Europe, but in that case also, it was a existing tenant and we've had good execution with a number of sale leasebacks with them in the past. But I think your point is well taken. There are perhaps more players in the sale leaseback market than there have been, say, five years ago.

Emmanuel Korchman -- Citi -- Analyst

Great, thanks. And then in terms of the Lineage sale or swap, was that -- did they have an option to buy those buildings or was that something they approached you on and do any of the other tenants have options to buy a couple of them?

Jason E. Fox -- Chief Executive Officer, Board Member

That was not an option, that was a -- 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 Lineage, the operating company. I mean, for starters, we're very bullish 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 and we're even more bullish Lineage. I mean Number 1 market share globally, probably by a wide margin, great management team, top-notch sponsorship in [Indecipherable] and they've 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 in leases. I think most of them are structured as a greater fair market value and some amount greater than our original purchase price, so we can capture the upside in most cases in those scenarios. 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.

Emmanuel Korchman -- Citi -- Analyst

Thanks, Jason.

Jason E. Fox -- Chief Executive Officer, Board Member

Yep, you're welcome.

Operator

Our next question comes from Chris Lucas with CapitalOne Securities. Please state your question.

Chris Lucas -- CapitalOne Securities -- Analyst

Hey, Jason, just another quick one from 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. Is that a positive or a negative to the sale leaseback market or does it not really matter?

Jason E. Fox -- Chief Executive Officer, Board Member

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 the sale leaseback where they can unlock any capital that's tied up in the real estate. So, it's probably competitive in some ways, but I also say that the low interest rate environment we're in right now, which is what's driving the high-yield markets lower, maybe it's more impactful on sale leasebacks where companies can really lock in historically low interest rates or low rental rates for 20 plus year periods. And really, the other merits of a sale leaseback still apply, its permanent capital, no debt 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 set up to own a diversified portfolio of real estate, corporates are better off unlocking net capital and reinvesting it into their core business and generate more appropriate return for their shareholders that way.

Chris Lucas -- CapitalOne Securities -- Analyst

Okay, great. Thank you.

Jason E. Fox -- Chief Executive Officer, Board Member

Welcome.

Operator

Thank you. [Operator Instructions] Our next question comes from John Massocca with Ladenburg Thalmann. Please state your question.

John Massocca -- Ladenburg Thalmann -- Analyst

How is it going? Just a quick follow-up on leverage. With regards to target leverage, as you think about optimal level, is that pro forma outstanding forward offerings or kind of just direct in place equity levels?

Toni Sanzone -- Managing Director, Chief Financial Officer

Yeah, 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 5 times. I think we've mentioned that forward brings us down to about 6 times. We'd like to be below that level longer term, but aren't really factoring in forwards in terms of how we manage that.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay that's it from me. Thank you very much.

Jason E. Fox -- Chief Executive Officer, Board Member

Great. Thanks, John.

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 -- Institutional Investor Relations

All right, thank you. 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 Closing Remarks]

Duration: 57 minutes

Call participants:

Peter Sands -- Institutional Investor Relations

Jason E. Fox -- Chief Executive Officer, Board Member

Toni Sanzone -- Managing Director, Chief Financial Officer

Brooks G. Gordon -- Managing Director, Head of Asset Management

Frank Lee -- BMO -- Analyst

Greg McGinniss -- Scotiabank -- Analyst

John Massocca -- Ladenburg Thalmann -- Analyst

Joshua Dennerlein -- Bank of America -- Analyst

Chris Lucas -- CapitalOne Securities -- Analyst

Todd Stender -- Wells Fargo -- Analyst

Harsh Hemnani -- Green Street -- Analyst

Emmanuel Korchman -- Citi -- Analyst

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