“At a high level, year-over-year AFFO growth was driven primarily by higher real-estate revenues from new acquisitions and solid same-store growth keeping the very high percentage of ABR generated from leases with either fixed rent bumps or increases to high inflation. This positions us well for further inflation, which has been running at or above 2% in the U.S. over the last year and at a similar level in Europe for the last few months.” So said W.P. Carey Inc. CEO, Jason Fox, on the REIT’s recent Q3 earnings call.
According to Fox, in the U.S., while cap rates may be bottoming out in the phase of rising rates deal activity remains strong. “Peak pricing coupled with rising rates is motivating corporate considering sale lease back to assets. So we are still seeing opportunities this sufficient spread to our cost to capital without having to compromise on deal terms.”
While 10 rates have moved back above 3%, they remain low relative to historic levels, he said, “and we believe the more sustained level of higher rates is needed before it has a meaningful impact on cap rates.”
In Europe, he explains that activity levels also remain high given continued capital inflows, certain offshore investors with relatively low return expectations have been prominent buyers, putting additional pressure on cap rates in core markets. “Although we remain disciplined and continue to see interesting opportunities elsewhere.”
As for cap rates, he says that cap rates are generally under pressure across asset types, but the regions low interest rate environment continues to provide sufficient spreads. “Interest rates will heavily move higher, albeit be at slowing if capital inflows will likely keep cap rates low for some time.”
Despite this market backdrop, he says that the firm has completed total investment volume of $296 million during the third quarter, consisting of four acquisitions for $260 million and three completed capital investment projects at a total cost of $37 million.
“This brings total investment volume for the first nine months of the year to $692 million. In aggregate, our year-to-date transaction volume was completed at a weighted average cap rate of approximately 7% and weighted average lease term of 20 years.”