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

Everyone, so a few minutes past the hour here. So we're going to go ahead and get started. First of all, thank you all for joining us today to learn more about W. P. Carey, which many of you might know, owns a $15 billion net lease portfolio, that's highly diversified not just across geographies but also is the most highly diversified of its peers across various net lease property types. For those of you who don't know me, my name is Spenser Allaway, and I hand the net lease, gaming and storage coverage at Green Street Advisors. Joining us today, we're fortunate to have with us Jason Fox, Chief Executive Officer; Jeremiah Gregory, Head of Capital Markets and Strategy; and Peter Sands, Head of Institutional Investor Relations. So before we go ahead and get started, I'm going to turn it over to Jason, so he can share a brief overview of the company.

Great. Thank you, Spenser, and thanks, everyone, for joining us. Can I just confirm that you can hear me and you understand? So you can't hear me?

I can hear you. It's just a little choppy.

Hopefully, you can hear me well enough. But thank you for joining us. So in W. P. Carey, we're approaching our 50-year history investing in net lease. So we've [ been here a long ] time. We've only been a REIT since 2014. So we're new to the space in some regards at the same time. But let me just give you a quick overview in the context of what investors are most focused on today, I mean, diversification, rent collections and how it's impacted that and our balance sheet positioning. As Spenser mentioned, we're one of the most diversified net lease REITs across property types, geographies and tenant industries. We've always believed that a well-diversified approach is the best way to invest in net lease. It provides wider opportunity set for external growth. But more importantly, at a time like right now, it does provide downside protection in real estate substantial exposure to really any single property type or industry. So we've also had a long-standing underweight stance with regards to retail. And in recent years, we've been really allocating new capital more towards warehouse and industrial investments. And really, that diversification and specifically the underwork in retail has resulted and is reflected in the very strong April and May rent collections. This morning, we issued our updated COVID-19 presentation with updated collection rates for April to 96% and also provide the collection rate for May, which came in very consistent to April at 95%. Our investment approach has always been to seek attractive long-term risk-adjusted returns that are a combination of both built-in rent escalations and accretive acquisitions. We've also focused on asset protection, and that includes deep credit underwriting as well as focusing and targeting mission-critical assets, which tend to perform much better in times of disruption like we're in now. So this long-term approach and how we value new investment, this is not based only on performance in a strong economy, but it also is evident in times of distress like we're in now. I think it's been our view that tenants just below investment-grade provide better and more attractive risk return trade-offs. But we've also had a keen focus on large companies in disarray and have strong bias towards that in our portfolio. Large companies are better equipped to weather downturns with better access to liquidity. In worst-case scenario they tend to restructure and continue to operate, especially on critical properties as opposed to smaller companies, that don't have access to liquidity and in many cases, they may choose to liquidate. So in our portfolio, 97% of our ABR comes from tenants where they or their parent company generate over $100 million in revenue. This is very different than many of our peers. Also most of our tenants are public companies. [ We only get paid ] less [ 20% of them ] are [indiscernible]. So a long history of knowing and structuring net lease transactions, it has really puts us in a great position relative to our peers generally overall in the current economic environment. Balance sheet is also in great shape. I think we'll probably get to that in some of Spenser's questions. So with that, Spenser, why don't I turn it back to you to take over question and to moderate the call as well.

Yes, absolutely. So I think that the audio line is just a little choppy there on Jason's line. So just as a recap, perhaps for anything that might have been missed. So as Jason was saying, so W.P. Carey has stood out in the net lease space for its superior rent collection, both in April and then again have provided an update this morning on May. So April rent collection was roughly 95% of total rent obligation. Sector leading, which was, as Jason alluded to, largely a by-product of the fact that the company has such low retail exposure, which has just been disproportionately hit in the COVID environment and then with diversification and really superior underwriting that has been done in office and industrial, high investment grade tenants. The rent collection has been much more superior in those property types, certainly contributed to W.P. Carey's really impressive total returns since COVID fears really spiked in late February. So sector-leading total returns, sector-leading rent collection, which we think, like Green Street Advisors, will continue to be the case on the rent collection front in the months to come. So extremely great track record. If -- hopefully, Jason, the audio will be a little bit better here, but maybe we're just going to shift gears to capital allocation now that he's touched on portfolio diversity and how the portfolio has held up in COVID. So W.P. Carey has kind of stated in the last earnings call that they haven't intended to grow too much in the current environment, just being cautious, given the transaction that's a little -- it's a little choppy, obviously, given the environment. Liquidity is paramount right now. And it's very difficult to get deals underwritten. So if your cost of capital, Jason, continues to improve, how do you foresee your outlook on capital allocation and deal volume changing in the back half of the year?

Can everyone hear me? I understand that I was pretty choppy during the intro. Is that better Spenser? I'm trying to dial in at the same time.

It's a little better. We can make out what you're saying.

Yes.

And Jeremiah, if you're able to speak -- if people can hear you better...

Yes. Jason, why don't I -- Jason -- does it sound clear if I speak, Spenser?

Exactly. Yes. Yes.

So Jason, if you want to try and dial back in, I can -- I'll handle the capital allocation question here.

Sure.

So in any case, I think, Spenser your question was regarding how we may think about capital allocation going forward, if our cost of capital continues to improve. And I think there's really a couple of aspects to it. I think on the earnings call, we outlined that from a capital allocation perspective, we were somewhat cautious in this environment, given just the uncertainty going forward about rent collections, maybe the uncertainty in terms of choppiness in the capital markets. I think what we've demonstrated is now 2 months of, we would say, strong, maybe very strong rent collections, best-in-class for net lease, we really don't have concerns about our ability to generate -- continue generating cash flow, relatively stable cash flow going forward and continuing to be able to cover all of our expenses. As we've also noted, the balance sheet is in a strong position with a brand-new revolving credit facility we just put in place in February. It's not due until 2025. It's substantially undrawn. It's a $1.8 billion facility. So we have plenty of liquidity. And so I think looking forward, while we do have -- continue to be mindful of the uncertainty in the broader economic environment, I think that we also think that there could be opportunities. And we certainly are looking for those opportunities as sellers come to market, sellers come off the sidelines maybe. But for now, I think for -- sorry, I just heard some feedback. For now, I think our focus is really a combination of maintaining the balance sheet strength and then looking for opportunities that are maybe a little bit different than pre-COVID. So I think we'd be looking for pricing, maybe that's a 50 to 100 basis point change in pricing from pre-COVID levels. I think a lot of sellers are either electing to pull back right now or just looking for the same pricing -- sorry, it looks like my audio is muted. Can you still hear me?

I can hear you, yes.

Okay. So looking for pricing that would maybe be a little bit different than pre-COVID pricing and maybe reflecting the fact that spreads have widened out a bit, cost of capital has moved a bit. But overall, I think our cost of capital is still at a level where we could certainly run the business as we have historically. If you look at where our bond spreads are, they're really not -- the bond spreads are wider, but the base rates are significantly lower, meaning our all-in cost of debt is not that different from where we've issued 10-year debt in the past. Our equity is certainly lower than it was over the last year or so, but it's still at a level where we could issue equity accretively to do the deals we've done historically. But I think, like I said, I think we'd be looking for opportunities maybe that are slightly repriced. And right now, you see a lot of sellers who are still maybe holding out for pre-COVID pricing.

Okay. That's really helpful color. And we've talked a lot about the company's diversification geographically between U.S. and Europe. As you guys do look for opportunities to deploy capital to the extent that your cost of capital does continue to improve, do you guys have a preference as to where you choose to deploy that capital between the U.S. and Europe? Or does it really come down to some of the things that you were just highlighting, spreads obviously being very important.

Yes. So I would say that not necessarily a strong preference between the U.S. and Europe. And really, we haven't seen significant differences in our rent collections between U.S. and Europe or necessarily large thematic differences in terms of what the investment opportunities would be. I think maybe heading into the sort of pre-COVID period, we perhaps had some slightly larger opportunities that we're farther down the road within Europe and maybe would have expected 2020 to be a year that might have had a little more European investment activity than 2019, which was heavily weighted towards the U.S. But I don't think -- right now, we're seeing large thematic difference between U.S. and Europe opportunities. Maybe on the margin, some of these European countries are opening up a little bit earlier than the U.S. Maybe they've -- in some cases, they've had a little bit less impact from COVID. And so maybe there's a bit -- maybe a bit more activity that could unlock there sooner or earlier than the U.S. But I don't think we would say that's a dramatically large theme. I think, really -- I think it will be more consistent with what we've done historically, which is continuing to have opportunities both here and in Northern and Western Europe and continue to seek out those opportunities and have a mix of investments.

Spenser, this is Jason. I think I'm back on, and the moderator has unmuted me. The only thing I'll add to that is...

That's excellent. You're back.

Can you hear me okay now?

Excellent. Yes.

Yes.

Okay. Perfect. The only thing I'll add to that is -- to pre-COVID, and I didn't hear everything that Jeremiah has said, but pre-COVID, we did have some really interesting opportunities in Europe that we had been looking at, more so than the U.S. where the pipeline has shifted back compared to last year, where most of what we had done was in the U.S. So if that's any indication, perhaps we'll see some more deals sooner in Europe, including for the reasons that Jeremiah mentioned that perhaps the economies in Europe are starting to reopen a little bit sooner than the various states here in the U.S.

Great. Going back to the -- you're highly diversified by portfolio. One of the key differentiators between you and some of your peers is you guys have pretty significant office exposure. Can you maybe just -- and you've had actually quite excellent rent collection from that segment of the portfolio. Can you maybe just walk us through the investment thesis there and the type of diligent underwriting you do that makes you comfortable with the exposure that you have?

Yes, sure. I mean, we are focused on diversification. That said, over the last number of years, we have shifted our focus a little bit more towards industrial and warehouse and less towards office, and we've always maintained an underweight position in retail. We've also had self-storage, which is -- 2 of our top 10 tenants are in the self-storage business. These are net leased portfolios to the self-storage operators, both U-Haul and Extra Space. Office has actually come down. So if you look at our allocation from, say, 5 years ago, we've come down from what was in the low 30s, down to where we are right now, which is about 23%. I would imagine that trajectory would continue in that direction. But as you've said, we do want to do office deals and I think the criteria with regard to office. The underwriting is -- I mean we always do deep underwriting both in the credit and the real estate. But in office, we tend to look for a little bit stronger tenants and our portfolio would suggest that we have done that. The credit ratings within our office portfolio are higher than the average for the rest. We also have higher asset stores related to our office assets, which means that they tend to be higher quality and better located. And that makes sense. Because we have crew in the office portfolio. Over the last number of years, what we've sold has generally been weaker assets relative to what we've held on to. And the portfolio that we have now we think is -- there's a number of really good properties there. Of course, in the underwriting, we do take a conservative approach, especially to lease end scenarios. Office, it's hard to make the criticality argument. So we do assume that in many cases, we overweight a nonrenewal scenario in a reversion to a market tenant. So we better understand how properties can multi-tenant. And we really focus on investments on assets that are set up ahead of time to multitenants. So you don't have increased loss factors or higher base building or reconfiguration requirements. And we also understand that there's a lot of CapEx and downtime and carrying costs associated with office. The typical things that you would expect one to underwrite when they're looking at office, and we tend to be, I would say, realistic, perhaps conservative if you think about us relative to competitors when we look at our lease and underwriting expectations.

Excellent. And maybe we could just go back to your May rent update just because the dialogue was a little choppy, not to rehash everything, but perhaps you could just provide kind of a brief overview. Now that we have April and May kind of under our belts heading into June. You guys have had sector-leading rent collection. How has your outlook for the balance of '20 changed now that you have May under our belts? And then also, when do you anticipate that you might be able to reinstate guidance?

Yes. Sure. So April and May collections have been strong. I think they're leading the sector. They've both also been very consistent. And if you think back to our April call, we only had 1 month to go on. We were more in the thick of COVID at the time. I think there's reasons to be a little bit more optimistic given that many states are reopening, and we've seen new cases in hospitalizations and deaths in some of the larger markets like New York decrease. And you couple that with another strong collection data in May, I think our posture has shifted from one of caution in April, where we wanted to have more time to get better visibility into both our portfolio and the broader economy, I think that's shifting into one where we do want to look for opportunity. Our investment team has been actively engaging with brokers and other deal sources, evaluating opportunities. I think the issue is, and Jeremiah alluded to this, that we really haven't seen enough of a cap rate correction to justify making investments at this point in time. There are a few transactions that are happening. But by and large, there's too big of a bid-ask spread between buyers and sellers. In fact, I think many of the sellers are still focused on pre-COVID expectations. And we understand that. We had a couple of properties that were in the market to be sold. And we haven't changed our expectations. These are assets that we don't need to sell. They're more opportunistic. And if we can achieve a certain level of pricing, we will sell them. If we can't we'll hold them. And it looks like that they probably won't sell because of this bid-ask spread that I've mentioned. So we probably will hold on to them. And we're observing that in the broader market as well. Now that said, Jeremiah, I also mentioned, it's probably 50 to 100 basis points is what we're expecting to change over time. Credit spreads have moved in the credit market. So we would expect cap rates to follow at some point in time. And as we've also mentioned, that's probably going to be more focused in industrial. I would expect the second half of the year, you'll see some more activity out of us.

And I know, Jeremiah, actually, he touched on your current balance sheet positioning. You guys are comfortable with that. But how do your current leverage -- how does your current leverage position perhaps compare with your longer-term targets? And also how are you thinking about your dividends in the current environment?

Jeremiah, do you want to touch on balance sheet? And I could talk dividend?

Yes, absolutely. I mean the metrics, Spenser, are -- if we go back to what we discussed on our earnings call in the first quarter, we were just in the low 40s, just above 40% on debt-to-gross assets. We were in the mid-5 on net debt-to-EBITDA. I'd say where we're at today is probably not too dissimilar from where we were at, at the end of the quarter. Those are within the ranges and maybe even slightly to the low end of our ranges. We've articulated mid- to low 40s on debt-to-gross assets as a long-term target and mid- to high 5s on net debt to EBITDA. So I think that gives us certainly some flexibility going forward here. I think we'd be very comfortable continuing to operate at these levels and even believe that there's a little bit of headroom for us to -- if need be, we could tick slightly higher and still feel comfortable. But I think in this environment, we're certainly going to keep a close eye on that and don't have any expectations or specific plans to lever up. I think if we kind of see investment opportunities out there, we'd certainly, as always, be looking to match fund that with new capital markets activity.

And then dividend, we've had good collections thus far. And so there's no reason to think that we shouldn't expect our cash flows to continue to be sufficient to cover our dividend and support our dividend. I think, more generally, dividends should track our long-term view on cash flows and earnings. I don't think that will change.

Okay. We just have a few minutes left. So just kind of a broader question, just kind of open it up to you guys. Do you think there's anything really material that you think the investment community either misunderstands about your story or perhaps isn't giving you full credit for?

Well, for years, we've been fighting the uphill battle about diversification and why that's the right way to invest in net lease. I think we've seen more and more reception to that way of investing. And in fact, it's repeated to us more often than it had been in the past. That's the right way to do it. I think some of our peers have followed suit. Obviously, realty income is notable in there, in their mission to diversify both geographically and other asset classes as well. But I still think there's room to go there. I think that net lease has historically been a retail-focused sector within the real estate and within the REIT industry. And I think we've seen some of that in the equity performance, where net lease has underperformed other sectors because of the view that it's more retail focused. And while we've outperformed, I think that the delta should be more than it has been. And I think if there's one thing that comes out of COVID-19 related to diversification, I think we're going to see this could be a catalyst in a change for how investors look at the way to invest in net lease and the benefits of diversification.

If that ends up being the case, that raises an interesting question. Do you think that beyond realty income or perhaps including them, do you think that you'll end up seeing more competition from peers in Europe as other net lease REITs essentially pursue a more diversified strategy?

It's possible. Let's take Europe, specifically. I mean Europe, for a U.S. company to enter Europe, there's a lot of institutional knowledge that you need to develop to do it successfully. We've been in there for over 20 years now, I think 22 years we're in. And we made our mistakes early on. And at this point, we understand all the local markets, the local cultures, how to get deals done, the structuring differences between certain countries. It's not easy to do. But to the extent others diversify into Europe and it shines a brighter light on the value diversification and the vast market opportunity that Europe offers, I don't think it will be a bad thing. I mean, Europe is a large continent with a higher percentage of real estate owner-occupied, which means a bigger market opportunity for sale leasebacks. So I think there's enough supply to go around, but we'll see how easily others can enter the European market.

Okay. Yes. No, it's an interesting point you bring about the -- bring up about the tuition cost of moving abroad. I know when I first ramped up and initiated on your company, I remember meeting with you guys, and you had mentioned that you have offices in Europe with employees who speak like 5 or 6 different languages to facilitate businesses with the different countries in which you engage. So yes, it certainly does not go without notice.

Yes. And it's important to have a presence over there. I mean maybe 10, 11 years ago, we opened up an Amsterdam office. It now has about 40 people. It's about 1/4 of our total employees, maybe 1/5 of our total employees. I mean that makes sense. We have about 1/3 of our total assets in ABR generated from Europe. And these are Europeans who, again, understand the culture, the dynamics, the tax environment and all that matters. And most importantly, they're close to the assets. And that's important when you're -- when a part of the business model includes proactive asset management.

Okay. Okay. I think we are just about out of time. Thank you, Jason, for hosting this. Do we have any other final remarks before we sign off?

No. I think it's just -- going to emphasize again that we do believe in diversification, and it's resulted in great April and May collections, and we feel good about our portfolio. And the fact that this could act as a catalyst to change how people look at net lease, and we think that's a good thing.

Absolutely. Okay. Perfect.

Okay. Thank you, Spenser. We appreciate it. Thanks, everyone, for joining us.

Okay. Take care. Bye.