W. P. Carey Inc. (WPC) Earnings Call Transcript & Summary

Hello, everyone, and good morning. We appreciate you being with us for the earnings call covering our first quarter of 2020. Prior to starting, please note that certain remarks on this call are not historical facts and might be considered forward-looking statements. The factors that could lead to actual results differing materially from what W. P. Carey anticipates are described in our SEC filings. A replay of this conference call will be accessible online through the investor relations portion of our site, wpcarey.com, and it will remain archived there for roughly 1 year. Copies of our investor presentations and other relevant materials can also be found there. Having said that, I will now turn the call over to Jason Fox, our Chief Executive Officer.

Hello, everyone, and thanks for being with us today. I trust that all of you, along with those you care about, remain safe and healthy as we navigate this difficult period. My comments this morning will center on three subjects. To start, I want to briefly address the steps we have taken regarding COVID-19. Next, I will go over the current state of our business, which will include a look at how our April rent collections came in. And finally, I will wrap up by sharing a few thoughts on what has our greatest attention going forward. Following that, I will turn things over to Toni Sanzone, our CFO, who is going to quickly go through our first quarter results and portfolio activity, plus how strong our balance sheet and liquidity position are. As this morning's press release indicated, we have pulled our prior 2020 AFFO guidance because of the unclear economic picture. Toni is going to walk through how we currently see different pieces of our earnings for the rest of the year. Before I move into my prepared comments, I want to point out that the 8-K we furnished this morning alongside our earnings release and supplemental disclosure also contained slides providing a COVID-19 update, and a good deal of that material is what we will be covering on this call. As always, joining Toni and me are our President, John Park, and our Head of Asset Management, Brooks Gordon, and they are available to field your questions. Our response to COVID-19 got underway in late February, when we began acting to put the health and safety of our employees first and to make sure our whole workforce had the technology and resources needed to work remotely. By mid-March, every employee across our four offices — New York, Dallas, London, and Amsterdam — had fully shifted to working remotely. That went smoothly, since we had already relocated our core systems, among them our financial, telecommunication, and conferencing systems, to the cloud. Technology is obviously an essential piece, but our employees are the ones who have truly made the difference. I could not be more proud of how our whole team has adjusted to the present circumstances without missing a step in our day-to-day operations; moments like this really bring out the caliber of our people and the culture of excellence we have built at W. P. Carey. Before I go through our April rent collections, I believe it is worth providing some background by quickly revisiting how we approach net lease investing. Although our aim is to produce appealing long-term risk-adjusted returns, we place just as much emphasis on protecting against downside, which includes rigorous credit underwriting and pursuing mission-critical assets. We likewise adopt a long-term perspective, assessing every new investment not just by how we expect a tenant to fare when times are good, but also by how that tenant will fare when times are tough. While we consider tenants just below investment grade to offer the most attractive balance of risk and reward, we concentrate on large companies, since they tend to be better positioned to endure downturns. Bigger businesses can tap into liquidity more easily, and if things get really bad, they're more apt to reorganize and keep running key properties, unlike smaller firms, which tend to wind down. A total of 97% of our Annualized Base Rent, or ABR, derives from tenants whose own revenue or that of their parent exceeds $100 million yearly, or else from government bodies. Public companies make up most of our tenant base as well, while those backed by private equity account for under 20% of ABR. Another key point: W. P. Carey has weathered numerous business cycles, through which we've refined the safeguards embedded in our leases and established the infrastructure needed to handle lease expirations, credit troubles among tenants, and reorganizations effectively, all supported by our hands-on asset management strategy. Naturally, we've long held that diversification across the board serves net lease best. It doesn't just widen the pool of possibilities for outside expansion — it also shields us from having too much tied to one kind of asset or sector, which matters more now than it ever has given today's conditions. We've maintained a longstanding position of being underweight in retail, too, and lately have steered our investments toward warehouse and industrial properties. Given all that, where do things stand for our business right now, especially regarding April rent collection? On the whole, we brought in 95% of April rents, spread widely across different property categories, retail included. The main outliers were fitness, theater, and restaurants — together only 2% of our ABR — from which we got just a tiny fraction of April rents. Auto dealerships paid 100% of their April rents, and they make up 3.4% of ABR, though we acknowledge that stay-at-home orders have created short-term strain on those operations, which might persist into the medium term, especially if we enter a recession. Roughly two-thirds of our retail property ABR stems from either do-it-yourself retailers or from grocery, convenience, and wholesale stores — operations we see as well-suited to succeed both in today's climate and over the longer horizon. Warehouse, industrial, and self-storage assets together make up slightly more than half our portfolio. April rent collection hit 93% for warehouse and was even higher for industrial. In the same vein, self-storage, a category that's been doing well, saw a 100% April rent collection rate. April rent collections give us reason for optimism, but I want to stress that we remain wary about the uncertainty that lies ahead. We anticipate May rent collections might come in somewhat lower on the whole, and notably weaker in retail, mirroring the effects that regional lockdowns will probably have on economic activity and consumer confidence. Europe stands out as a distinct element of our approach, so I'll offer a bit of extra detail on it briefly. Broadly speaking, our European properties have matched the performance of those in the U.S. while adding further diversification. Our biggest property categories in Europe consist of do-it-yourself retail, grocery, automotive dealerships, and government credit, a number of which rank among our top 10 tenants. Within Europe, our biggest exposure by country is Germany, and it has managed to contain the effects of the pandemic via extensive testing and public discipline. It ranks among the earliest nations in the region to start loosening lockdown restrictions. Our do-it-yourself retail properties are mostly German credits. In Spain, the April rent collection figure came in at 100%, and our exposure to that country stems mainly from our government office portfolio with the State of Andalusia. Going forward, two main priorities guide our attention. The first is engaging proactively with tenants so that rent payments keep coming in. The second concerns how we position our balance sheet, making sure we hold plenty of liquidity and flexibility across a variety of scenarios, from enduring a prolonged economic slump to seizing new opportunities for capital allocation. Tenants accounting for roughly 25% of ABR have asked for some kind of rent relief, and we anticipate that figure might rise as time passes. We don't apply a single uniform template when talking with tenants. No two situations match, and given how thoroughly diversified our tenant base is, sizable chunks of it need no help whatsoever. Even so, certain broad groupings exist among those tenants seeking rent relief. The first group: those capable of paying who can access capital ought to pay, and we anticipate that they will.

Most tenants asking for help fit that first group, and we figure that if we do nothing at all, they'll keep paying their rent; those cases might also open doors to broader lease restructurings with tenants, which would build meaningful value over a longer horizon. Next, some tenants will get short-term deferrals because their access to liquidity has been interrupted for the time being. Usually these are brief arrangements, with repayment due inside a year. Naturally, a handful of tenants will have suffered more serious damage to their businesses, and a good number of them are among the 5% that missed April rent. With those tenants, we're seeking solutions both sides can accept, centered on structures that safeguard our position while giving them a route through the distress they face now. We anticipate that list will be short, and our position is strong, thanks to critical assets, solid collateral, and a veteran team with deep restructuring experience. On our other priority, the balance sheet, we've achieved meaningful progress over recent years to strengthen it, which leaves us strong even with the dislocation showing up in the capital markets; our long-term path has been to lower secured debt and raise balance sheet flexibility; during 2018 and 2019, we likewise seized the chance to cut leverage via our merger with CPA:17 and more than $800 million of extra equity issued for new acquisitions and mortgage debt through prepayments. Our liquidity leaves us quite comfortable, particularly since we just closed a new credit facility in February. That facility comes due in 2025, and we brought pricing down to LIBOR plus 85 basis points on our revolver. We layered in $300 million of term loans and grew our revolver to $1.8 billion, with almost $1.6 billion of that available right now. Thanks to our financing work in recent years, near-term maturities are limited to just about $110 million of debt coming due in 2020 and roughly $240 million in 2021. No bonds come due before 2023. Given how our tenants have performed so far and how conservatively our balance sheet is positioned, we're confident we'll keep enough liquidity and, just as important, flexibility as we steer through the difficult environment that lies ahead. We don't require any extra capital right now, yet we'll keep watching our balance sheet intently and, as we always do, weigh chances to make it even stronger. To wrap up, I'd point out that when it comes to allocating capital, some of our finest opportunities have historically appeared during downturns and stretches of market stress. We remain in touch with brokers and prospective sellers, and we're sharply focused on new opportunities reaching the market and the prices they carry. Even though the capital markets have swung around, we think compelling opportunities and investments may emerge that still make economic sense for us. Deal markets have stayed fairly quiet while sellers weigh their choices and, often, decide to hold off rolling out new deals until they gain more stability. A number of the strongest prospects we're looking at right now involve tenants already in place, where we see potential for adding value by offering short-term rent relief that's connected to longer-term gains in lease economics and structure. Given all the uncertainty in front of us, we're taking a careful approach. We're dedicated to keeping our balance sheet safe and flexible, and every capital allocation choice we make gets weighed with that in mind. With that, I'll pass the call to Toni.

Hello, everyone. I want to begin by sharing Jason's sentiment and wishing safety and good health to all of you and those close to you. I also want to acknowledge each of our team members for the outstanding effort they've put in throughout this challenging period, particularly those who have been working around the clock for the last several weeks to help with our quarter close and the earnings process. Let me begin with a quick rundown of what happened in Q1, along with portfolio activity, then I'll shift to how we see things looking forward, and wrap up by going over our balance sheet and liquidity position. Turning to Q1, the results we posted were solid, with total AFFO reaching $1.25 per share. From our real estate segment, AFFO for the quarter came to $1.21 per share, which marks 7% growth compared to the same period last year, largely fueled by the positive effect of net acquisitions and rent increases, plus reduced interest expense stemming mostly from the sizable mortgage debt prepayments we completed in 2019. Those benefits exceeded the dilution caused by our efforts to strengthen and de-lever the balance sheet through shares issued under our ATM program during the prior year. Real estate accounted for 97% of total first quarter AFFO per share as we keep progressing on our exit from investment management, which moved further ahead thanks to the recently finalized merger of the CWI Lodging Funds we used to manage, creating Watermark Lodging Trust. First quarter investments reached $256 million at a weighted average cap rate of 6.5%. Activity for the quarter consisted of three acquisitions totaling $189 million, along with three capital investment projects completed at a cost of $67 million. Looking ahead, we anticipate closing another $193 million in capital investment projects during the rest of the year, which would push total 2020 investment volume up to $449 million. In Q1, we sold four properties, generating gross proceeds of $116 million, with nearly all of that amount coming from the January completion of an operating hotel sale in Miami. At this point, we hold just one operating hotel in our portfolio, and it doesn't meaningfully contribute to our AFFO. For Q1, same-store rent growth as we've traditionally reported it — reflecting the average contractual rent increase built into our leases — came to 1.8%, and it appears in our supplemental as contractual same-store growth. Once leasing activity, vacancies, and restructurings are factored in, same-store rent growth on a year-over-year basis was 80 basis points, which we call comprehensive same-store growth. As you can see, we've included this disclosure in our supplemental information because investors expressed interest in this metric. Because of when the COVID-19 outbreak occurred and the business disruption that followed, the effect on our Q1 results and portfolio metrics was very minimal. Consequently, we've collected essentially all cash rent owed by tenants for March. When the first quarter came to a close, we booked non-cash impairment charges of $19 million in total, writing down to fair value the carrying amount of properties leased to two small tenants. In that same quarter, we also recorded $47 million in non-cash impairment charges to lower the carrying value of our equity investments in the CWI funds down to their estimated fair values, which stemmed from how the pandemic affected the lodging industry. Now turning to what we expect for the rest of 2020. This morning we announced that because of the considerable economic uncertainty caused by COVID-19, including how long the virus-containment measures last and how severe they are, our 2020 guidance issued earlier has been withdrawn. As Jason mentioned, we're closely tracking tenant collections and the health of our portfolio as a whole every single day. Although so far the results have been very encouraging, with 95% of our April rent due collected, we anticipate that conversations about rent relief will keep going, and the outcomes could land in a range of categories, such as collecting past due amounts in full, deferring rent, restructuring leases, and even some tenants defaulting. On top of that, we expect to look at any potential rent deferrals granted under the revenue recognition accounting model individually, one by one. Once we determine that collection is probable, based on our evaluation of several criteria—chief among them a tenant's credit worthiness and solvency risk, among other things—we will recognize rental revenue. Where we don't consider collection probable, no revenue will be recorded under GAAP, and that revenue won't show up in our AFFO until we actually receive the cash rent. Where we do determine collection is probable, revenue will be recorded for both GAAP and AFFO, and the associated receivables will keep being assessed for collectibility. This analysis brings in more uncertainty about when we'll get the rental revenue we expect and about the total effect on earnings for the rest of the year. Since the conditions affecting our tenants' operations are shifting so quickly, at this point we cannot estimate what the financial impact on our rent collections will be, how long this disruption will last, or what shape any recovery in tenant rents might take. Running the business efficiently stays a constant priority for us throughout the company. Since COVID-19 first hit, we've put in place several cost-cutting steps, mainly aimed at discretionary spending. Because of that, we now anticipate lowering our cash G&A expense by roughly 5% compared with what we previously expected. We'll keep watching our spending, keeping in mind both the near-term and the longer-term picture. Let's shift to our balance sheet and liquidity. As Jason said, our balance sheet sits in a strong position to handle this environment's uncertainty, with plenty of liquidity available, while we stay prudent when it comes to allocating capital. The mortgage debt maturing over the coming two years is a very manageable amount. Our closest bond maturity doesn't arrive until 2023. When it comes to liquidity, the other capital requirements we have over the short term are quite small; we still anticipate that our earnings will exceed what we pay out in dividends. On the investment side, we're hitting the pause button as we keep an eye on the broader economy; we do expect to keep funding the capital investment projects that are currently active. A lot of those projects involve expansions or renovations alongside tenants we already have, and nearly all of our capital investment projects are already underway. The capital that still needs funding comes to $143 million in 2020, plus another $80 million committed for 2021. In light of today's conditions, we aren't counting on any disposition proceeds in 2020, though we might move forward with certain asset sales should we find execution and pricing appealing. Looking at leverage, we finished the quarter at 41% debt to gross assets and 5.6 times net debt to adjusted EBITDA. Our targets remain debt to gross assets in the low to mid 40% range and net debt to adjusted EBITDA in the mid to high five times. At the leverage levels we have now, we think there's a degree of capacity to withstand downside scenarios, even should rent collections worsen relative to April results or should assets take impairments in the near term, and our covenants offer considerable room as well. To wrap up, although April rent collections give us encouragement, we remain cautious regarding the future effects of this pandemic unlike anything we've seen, and we're working proactively alongside our tenants to keep rent payment disruptions to a minimum. Thanks to the strength of our balance sheet and the diversification across our portfolio, we believe we're well-positioned for a variety of market environments going forward. With that, I'll hand the call back to the operator for questions.

Hi there, and good morning. Frank is here with me on this call.

Morning to you, Jeremy.

Hi, Jason. I wanted to ask a bit more about why you decided to withdraw guidance. I understand the need for caution, clearly. It's probably fairly simple to justify neither purchasing nor disposing of anything through the remainder of the year. Rent collections are solid, and there's considerable backing from industrial, warehouse, and office. I mean, on their own, each of those categories is showing sufficient strength to justify keeping some benchmarks. Your leases have long average terms. I'm simply curious how much of this reflects excessive prudence because of conditions versus being prompted by a particular danger you perceive emerging that might be making you uneasy.

No, that's correct. I mean, April rent collections have us feeling upbeat. We're positive about our portfolio, like you said. The balance sheet sits well. The truth is there's simply an excess of uncertainty at present. Our visibility isn't sufficient regarding how the world economy will be affected to genuinely project through the remainder of the year. My guess is there's likely a decent possibility we'd reinstate it at the following earnings, though I believe there will be more to share as we keep assessing conditions both inside our portfolio and across the wider economy.

Yeah, no, that's fair. Regarding the 25% deferrals you mentioned, at this stage, what's the benchmark for how much of those you anticipate potentially granting? You brought up the possible lease restructuring within that group. Are those following the blend-and-extend approach, or what's being considered? Any insight on the repayments for the deferrals you're talking about?

Yeah. Let me hand it over to Brooks for that question. Go ahead, Brooks.

Absolutely. Thank you. Like Jason mentioned, approximately 25% — just shy of 25% — of ABR came in asking for rent relief, and that figure counts tenants who failed to make their April payment. Among that group, we anticipate that around two-thirds possess the ability and intention to stay current. The remainder — approximately 10% of total ABR — might need some short-term deferral, though predicting precisely when and precisely how many is extremely difficult. In these situations, deferrals generally run three to six months, with repayment occurring mostly inside a year. Our expectation is that we will ultimately recover most of that deferred rent. Once more, I believe it's worth emphasizing that no two situations look alike, so our approach is highly tenant-specific. Regarding your question about certain restructures, we are proceeding with great caution there, but some opportunities will arise, where we decide to pursue them, involving tenants who would otherwise pay, with whom we might discuss wider lease restructures. That usually concerns lease duration and rent increases. We intend to be extremely selective about those.

Okay, thanks. And thank you too, Frank.

Yeah, hello everyone. Regarding the pipeline of capital investment projects you have, has any tenant come to you about possibly pausing or pushing back things because of the conditions right now? I'm just trying to understand how much visibility there is into that pipeline. Thanks.

Hey, Brooks, do you want to handle that one too?

Yes, regarding the capital projects, we aren't seeing any significant delays or any reluctance coming from the tenants. Like Toni said, it's completely our plan to finish those projects according to schedule. Everything is proceeding just as we would anticipate.

Thanks. Cheers.

Okay. Thank you.

Hi. Jason, during the earlier portion of this call, you mentioned possibly bringing in value-add projects in situations where tenants had asked for short-term rent relief — or at least that was my takeaway. Could you help us connect those two ideas, meaning directing additional capital toward properties whose tenant is currently weaker, which is how I'm framing it, and walk us through your reasoning? Is the goal to position that asset for re-tenanting? Does it actually reduce the term instead of extending it? What's the right way for us to think about those two concepts?

Like Brooks said, I believe every situation will differ somewhat. One thing worth stressing here: those kinds of deals involve tenants we believe are able and willing to pay anyway. The point is more that when chances arise for us to give them some form of near-term relief — again, in cases where they could pay regardless, yet it might help them — that can open the door for us to substantially boost the long-term intrinsic value of that asset. This likely happens mostly via lease extensions and possibly larger bumps. There may also be certain lease provisions we can adjust when doing so works in our favor. I'd characterize these as offensive rather than defensive deals. Once more, those tenants are ones we'd anticipate paying anyway, and it's our choice, at our discretion, whether we modify anything to build more long-term value. Brooks, anything you'd like to add?

Right. Let me add a bit more clarity here. When we think about putting capital to work in these cases, what it actually looks like is giving some temporary help with rent. Those are the situations where the tenant might come out ahead near term, yet they don't truly require that help — they're simply trying to create additional wiggle room for themselves. It isn't really that we're putting fresh money in; instead, we're viewing those unpaid rents as, in a lot of ways, a brand-new investment from our perspective.

Understood.

Every one of those will get underwritten the way we'd approach any investment. We'll examine unlevered IRRs based on what that rent relief, along with the eventual gain in value, might turn into.

All right, it's likely far too soon to be considering this, but I'll pose the question regardless. When it comes to the sale-leaseback sector specifically, have you picked up on anything that might shift things for better or worse, or which kinds of tenants could begin viewing that avenue as a way to raise capital?

Yes, it's still early days. Broadly speaking, I'd say investment activity across the globe has genuinely decelerated. Take cap rates, for instance — they honestly haven't shifted very much at all. Sellers will need a bit of time to recalibrate what they expect. That same dynamic probably applies to sale leasebacks too; it'll require some time. Without a doubt, we ought to witness a rise in such opportunities. I believe we'll observe more companies turning to sale leaseback as a means of raising capital, particularly should the crisis drag on beyond what their base case models assume. If you recall the previous economic downturn, some of our finest opportunities came about then — we closed some of our strongest deals during that period. A large number of those involved sale leaseback. There may be more on this later in the second half of the year. My expectation is that we'll encounter growing opportunity, and quite compelling opportunities at that.

OK, thanks, all.

Hi there, good morning, Brooks.