Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- AFFO per share increased to $1.17 for the second quarter, with expectations for further increases in the second half of the year.
- Successfully completed the office sale program, generating total gross proceeds just under $800 million.
- Raised over $1 billion of new unsecured debt through bond issuances in both Europe and the US at attractive yields.
- Liquidity position is at an all-time high with an almost entirely undrawn $2 billion revolver and over $1 billion in cash.
- Achieved favorable rent escalations with about 60% of the investment volume tied to inflation and 40% with fixed rent bumps averaging approximately 3% annually.
Negative Points
- Lowered expectations for full-year investment volume, impacting full-year AFFO guidance.
- Two significant deals totaling over $300 million fell out of the near-term pipeline due to unresolved issues during diligence.
- Comprehensive same-store rent growth was negative 40 basis points year-over-year.
- Operating self-storage NOI declined 4.2% through the first six months and is expected to decline by 5% to 6% for the full year.
- Increased competition in the US and Europe is putting downward pressure on cap rates.
Q & A Highlights
Q: My question is on the two deals falling out of the pipeline. Can you talk a little bit about what are the factors that you had -- you interested in them? And then what were the kind of critical issues that made it kind of fall out of the pipeline? Just trying to better understand the dynamics around the transaction environment and some of the risks or other factors that may influence the ability to get deals done.
A: Yes, sure. Yes. And clearly, that's the biggest change from where we were in June, when we last talked about pipeline and guidance and the biggest impact on modifying our range. So those two deals were originally over $300 million combined. I think for the larger of the two deals, we uncovered what I would call a critical issue in the late stages of diligence. The owner was unaware of it, and it couldn't be timely resolved. So something like this happens, I would call it, rare and they're out of our control. I would say it's most unusual for it to happen when we have deals that are this far along. So certainly, we're disappointed that they didn't get over the finish line and now we're in the process of replenishing our pipeline with new opportunities. But I don't think it's a read through into anything structurally wrong with the transaction markets. These be viewed as, again, unusual for this kind of stage of the transaction and I had to call them isolated.
Q: As you sit here today, right, you've made a lot of progress on the dispositions, whether it's office or some of the other categories and now the acquisition volume guidance has been taken down. But is this kind of like a -- like does the strategy now shift to the offense in terms of finding deals, being aggressive with deals and just kind of putting that capital that you have to work?
A: Yes, absolutely. I think it's -- that's how we would characterize it. We've done some of the heavy lifting on the strategic front with the office spin last year. That is -- the office sale program is done at this point. And obviously, the U-Haul transaction is a big capital source, but it was also a drag to sell off a portfolio that large. And now we've also repaid our two bond maturities this year and reset our interest expense. So yes, we're in a good position now. We're certainly on the offense in terms of looking for new opportunities. We're in a very strong liquidity position which -- that will help us lean into deals. And so now we need to see the transaction activity pick up. And where we are right now kind of late summer, this is the summer law. It's especially pronounced in Europe. So we don't have as much visibility into the transaction markets and kind of the dynamics of that right now, but we'll know more at the end of summer in September and certainly October, what the end of the year looks like.
Q: You noted that there have been fewer willing sellers just as folks are kind of waiting for interest rate cuts. But can you just provide some color on how competition for deals has trended in both US and Europe? And where do you expect to see more competition in the second half of the year?
A: Yes. So yes, I think transaction markets have been a bit muted recently. I think we can attribute that maybe to some pausing happened around expectations of Fed rate cuts. We've seen competition, I would say, incrementally pick up both in the US and Europe, probably a little bit more so in the US, I think that's putting some downward pressure on cap rates. And again, maybe that's a little bit more in the US than in Europe, although I will expect maybe a little bit of that in Europe as well, especially given the borrowing costs have gone. So yes, I think more competition will push cap rates down. We can lean into pricing that a little bit. We mentioned that we're sitting on a lot of liquidity, while that does earn 5% in cash. We're motivated to put that to work, and we can certainly generate some accretion relative to cash, but also relative to where we can kind of issue capital right now. So competition is there, it always has been and I expect it will pick up a little bit once cost of capital kind of resets with where the Fed ends up.
Q: So I guess, Jason, I just want to make sure I understand some of the comments about -- it sounds like some of the sellers are waiting for rates to come down, and you mentioned maybe even being able to lean into price a bit. So you talked about cap rates, mid-7s, I guess, even up into the 8 range. Should we think about those going forward as being lower, like maybe low 7s or in order to get things to clear? I mean how should we think about that?
A: Yes. It's a good question, and it's certainly dynamic. I mean right now, we're broadly targeting cap rates -- cash cap rates in the 7s, which given our bump structures, would typically equate to an average yield in the 9s. So that kind of pricing works for us. I think while we're sitting on and as much liquidity as we are right now, I think for the right deal, we can probably dip below that range, especially we tend to transact across a broad range of cap rates. So there'll be some higher in that range as well. But I think we're comfortable for the right asset, especially ones that have higher growth embedded in the leases to get a little bit more aggressive than maybe the 7.7 average cash cap rate that reported this quarter or year-to-date, I should say.
Q: Yes. Hi, everybody. Thanks. So for deal volumes, you're roughly halfway to the low end of the guide as of the end of the second quarter. Then, you obviously said third quarter has a lull, sellers are waiting. There's more competition. So I guess I'm wondering why not take down the guide more? I guess what gives you confidence in hitting the midpoint of this range, just given what you've closed year-to-date?
A: Yes, sure. Yes. So maybe I'll just recap quickly. So we're roughly at, I would say, $700 million of deal volume after you factor in the remaining capital projects that are expected to close this year. It's probably like $40 million or so. And then we have a pipeline that I'd call over $200 million. There are various stages. I think we expect the majority of that, probably at least half of that, to close in August and September. So that gives us visibility into, I would say, close to $1 billion of investments right now, at least that's where we're at right now. And that's certainly lower than where we'd like to be. And I think we know that it's mainly because of those two deals that I mentioned earlier that dropped out of our pipeline. So yes, there's some work to do with the second half of the year. We are sitting on a ton of liquidity. We do have a
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
