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

Hello, everybody, and welcome to this morning's call covering our results for the third quarter of 2021. I want to start by noting that certain remarks we make today aren't historical facts and might be considered forward-looking statements. You can find, in our SEC filings, the factors that could lead actual outcomes to differ materially from what W. P. Carey expects. A web replay of today's conference call will be posted in the investor relations area of wpcarey.com, kept there for around one year, and that same location also has our investor presentations along with other related materials. Having said that, I'll now hand things over to Jason Fox, our Chief Executive Officer.

Thanks, Peter, and good morning to all of you. I'm happy to report that our results for the third quarter keep us on track for robust AFFO growth compared with a year ago; strong deal momentum continued through the quarter, and with 2021 on course to become a record year for investment volume, we have already exceeded our full year investment volume for every prior year and opened a new phase of growth driven externally for W. P. Carey. We're also moving into a stretch of greater growth generated internally; as inflation has picked up in recent months and is broadly expected to persist longer than first thought, W. P. Carey is positioned in a way no one else is to gain from it. During the third quarter, higher inflation helped our same-store growth, particularly for leases linked to uncapped CPI; even so, this is only the beginning, since most of the effect will show up across the coming few quarters. As a result, we think W. P. Carey today provides one of the strongest blends of external and internal growth available in the net lease sector, backed by a robust near-term pipeline, plenty of liquidity, and ongoing access to attractively priced capital, while also offering an appealing dividend yield. This morning, my remarks will center on these elements of our growth, and Toni Sanzone, our CFO, will walk you through the specifics of our quarterly results, guidance, and balance sheet positioning. Our President, John Park, and our Head of Asset Management, Brooks Gordon, are here with Toni and me and are ready to answer questions. Let's begin with growth via acquisitions. In the third quarter, we finished roughly $200 million of investments, mostly in Class A warehouse properties located in the U.S., at a weighted average initial cap rate of 6.2%, which lifted our total deal volume for the year's first nine months to $1.2 billion at a weighted average initial cap rate of 5.9% and a weighted average lease term of 19 years, among the longest for new investments anywhere in the net lease sector. Our capacity to structure these deals with long lease terms and solid rent increases, averaging over 2% for those featuring either fixed rent increases or floors, produces an average annual yield of over 7%, a measure that in our view better reflects the extended accretion we're delivering. It's also considerably more attractive than what most of our net lease peers achieve, since they tend to invest in shorter-term leases with lower bumps or none at all; beyond opening a new phase of externally driven growth, we're likewise entering a stretch of greater internally driven growth with one of the net lease portfolios best positioned for inflation. A major advantage of our emphasis on originating sale leasebacks is that we can negotiate the lease structure directly, rent bumps included. Because of that, we built a portfolio in which 60% of ABR has rent increases tied to inflation. Through many years when inflation was low, leases with fixed rent increases drove our rent growth. Since inflation has been accelerating lately, we anticipate that CPI-linked leases will fuel rent increases and significantly exceed the 2.3% typical fixed rent increase recorded in Q3. During the third quarter, inflation started passing through into rents, though only across a fairly modest share of our holdings. For CPI-linked leases that underwent their scheduled adjustments in the quarter, rents rose by an average of 3.3%. The great majority of inflation-indexed leases that didn't adjust in Q3 are set to adjust within the coming nine months, which would contribute roughly 100 basis points to same-store rent growth under present inflation projections — lifting it from roughly 1.5% to roughly 2.5%. Stronger same-store growth carries particular value when investment spreads are anticipated to keep tightening. Should inflation prove higher or more persistent than what's presently expected, we'd anticipate seeing further upside. Now on to the market backdrop and our pipeline. In the quarter, we observed a continuation of numerous dynamics that have shaped the transaction market over recent quarters, with cap rates continuing to compress in both the U.S. and Europe, mostly propelled by private capital. Warehouse and industrial assets remain highly desirable in both regions, and logistics properties in Europe have changed hands at notably tight cap rates. Although these patterns appear likely to persist, elevated M&A activity is generating a consistent stream of deals, partly due to the appealing valuation arbitrage available to private equity investors between the multiples at which they can buy businesses and real estate values. More generally, M&A activity is anticipated to stay at record levels, which benefits the availability of sale leaseback opportunities. From a top-down standpoint, we remain focused mainly on warehouse and industrial assets, which represent roughly three-quarters of our deal volume as of the close of Q3. We raised the ABR generated from these property types by 40 basis points to 48.7%, while the share of ABR coming from office properties has kept shrinking. Thus far in Q4, we've closed an extra $41 million industrial investment, and we anticipate sustaining a robust pace of activity through year-end, including $100 million of capital investments and commitments slated to close in Q4. Our pipeline stays strong and features several larger portfolio deals moving toward closings near year-end; this is captured in our investment volume guidance range, which we're keeping at $1.5 billion-$2 billion. Based on how many deals materialize and when they ultimately close, it could push us to the upper end. Finally, a quick note on our recent green bond offering. We're pleased to have successfully wrapped up our first green bond issuance earlier this month, with proceeds directed toward new and existing eligible green projects. This represented a significant achievement that showed our dedication to ESG, and we should point out that among the net lease peer group, our ESG profile ranks among the strongest. No other net lease REIT had ever delivered an annual ESG report to the market before us, and we have kept doing so starting in 2019. Among net lease REITs, we were the second to bring a green bond to market, and the first within the U.S. to do it. Execution pleased us greatly, with a 10-year bond offering for a net lease REIT priced at one of the narrowest spreads on record. It additionally gave us the chance to broaden our investor base further by bringing in ESG-focused investors, which we anticipate will keep serving as a capital source for W. P. Carey as we buy more eligible buildings and pursue chances to redevelop properties we already own so their sustainable attributes improve. To wrap up, our attention stays on generating value for investors via accretive investment opportunities as well as the rent growth embedded in our leases, which provides possible extra upside should higher inflation persist. We anticipate that our recent level of investment activity will carry on through 2022. Consequently, we think W. P. Carey presently delivers one of the finest blends of external and internal growth anywhere in the net lease sector, along with one of the most attractive dividend yields, approximately 5.5%, underpinned by our dependable cash flows, a robust pipeline, abundant liquidity, and ongoing ability to obtain capital at favorable pricing. Having said that, I'll hand the call to Toni.

Thanks, Jason, and good morning to all of you. Through the third quarter, we kept moving nicely toward the guidance we set for the full year, and our numbers reflect lease revenues that are climbing at a steady pace alongside interest expense that keeps falling. In the quarter, total AFFO came in at $1.24 per diluted share, with real estate AFFO of $1.21 powering that figure, which works out to 8% growth compared with a year earlier. The momentum in investment volume that we built through the first six months of the year carried into quarter three, and that lines up with the new external growth chapter Jason described. It also highlights what our portfolio is made of, since rent collections have stayed solid and rent escalations are providing a growing lift. For 2021, we continue to expect a record level of investment volume, in the range of $1.5 billion to $2 billion. Given that, our full year AFFO guidance range remains unchanged at $4.94-$5.02 per share, and within that, real estate AFFO is projected at $4.82 to $4.90 per share, which works out to over 5% annual growth at the midpoint. Turning now to same-store rent growth. Contractual same-store rent growth, the measure capturing rent growth written into our leases, reached 1.6% year-over-year, which is 10 basis points above the second quarter; that said, as Jason explained, elevated inflation has only begun to work its way into rents. Inside that metric, same-store growth from leases linked to uncapped CPI came in 50 basis points above the second quarter figure. Comprehensive same-store rent growth, calculated from pro-rata rental income included in AFFO, rose 90 basis points versus the second quarter, reaching 2.9%, mostly a reflection of COVID-related recoveries and restructurings across the past twelve months, plus the favorable effects of inflation on rents. Now turning to some of our other important portfolio figures: occupancy improved by 40 basis points during the quarter, reaching 98.4%. At quarter's end, our weighted average lease term stood at 10.6 years, and our top 10 concentration was 20.5% — among the lowest levels seen in the net lease sector. Third-quarter dispositions totaled $30 million, bringing dispositions for the first nine months of the year to approximately $130 million. Based on our present visibility into the timing of certain sales, we continue to expect full year disposition activity to fall within the range of $150 million to $250 million. Moving on to capital markets activity and the balance sheet. So far this year, we've demonstrated that we can readily secure debt and equity at appealing rates. We issued close to $2.2 billion in long-term and permanent capital. That funding backs our faster investment pace, lets us replace pricier mortgage debt with cheaper unsecured debt, further boosts our credit standing, and reflects our commitment to ESG. During Q3, we closed out equity forward agreements on 2 million shares, which brought in $147 million in net proceeds. Because that took place right around the end of the quarter, the complete effect will appear in our fourth-quarter diluted share count. In August, we wrapped up our second equity forward for the year. We priced a public offering of 5.2 million shares, and the underwriter's over-allotment option was fully exercised, which allowed us to match fund acquisitions with approximately $400 million in equity at a gross price of $78 per share. At present, we have the ability to settle the remaining 7.2 million shares under forward sale agreements, which would generate anticipated net proceeds of roughly $540 million. Turning to debt capital: as Jason noted, we're proud to be one of the first net lease REITs to issue green bonds. Back in October, we closed our first-ever green bond, raising $350 million. The coupon came in at 2.45%, with a 10-year maturity. Net proceeds of an equivalent amount are going to be directed toward eligible green projects, following our green financing framework — you can find a copy of it on our website. Already, about 70% of those proceeds have been assigned to green investments we currently hold. We were able to increase the size of the deal and price it at the narrowest spread we've ever achieved on a bond denominated in U.S. dollars. That says two things: there's solid backing for our credit, and we're seeing extra demand thanks to our capacity to bring in investors focused on ESG. So far this year, through today, we have issued unsecured notes worth $1.4 billion in total, carrying a weighted average interest rate of roughly 1.7%, and that figure includes the green bond we issued after the quarter ended. During that same year-to-date stretch, we have prepaid debt — both secured and unsecured — amounting to $1.3 billion, at a weighted average interest rate of 3.5%; this includes approximately $300 million of secured mortgage debt that came after quarter end and carried a weighted average interest rate of 4.4%. When you put our green bond issuance together with the mortgage repayments that happened after quarter end, our weighted average debt maturity stretches out from 5.3 years to 5.7 years, and secured debt as a percentage of gross assets drops from 4.2% to below 3%. There aren't any bonds coming due for us before 2024, and Moody's still has us at a positive outlook. The numbers on our balance sheet are holding up well — when the third quarter closed, debt to gross assets came in at 40.4%, which is still toward the bottom of the mid- to low-40s% range we aim for. Net debt to EBITDA stood at 5.9x when the third quarter ended, which likewise sits inside our target band of mid- to high-5x, and it would be considerably lower once you count the money coming from shares that will be settled under equity forward agreements still outstanding. We anticipate that money from our equity forwards that are still outstanding will mostly go toward funding new investments, but even so, those proceeds give us more room to maneuver when it comes to balance sheet management. Our ratio for cash interest coverage keeps moving in a favorable direction, finishing the quarter at 5.7 x — one of the best figures among net lease peers — and it has been climbing consistently as our weighted average cost of debt has gone down thanks to debt refinancings. As the third quarter wrapped up, our weighted average interest rate was 2.6%. Compared with 3% in the same period a year ago, that represents a significant decline, reflecting both how our cost of debt continues to improve and the considerable interest savings we are realizing versus twelve months prior. Our liquidity is in very good shape as well — we finished the third quarter with roughly $2.2 billion in total liquidity. That figure takes in $1.5 billion of availability under our revolving credit facility, along with cash on hand and net proceeds accessible through equity forward agreements. This leaves us nicely set up to keep working through our deal pipeline and to tap the capital markets when attractive opportunities arise. So, to wrap things up, the third quarter results make us happy — that covers the ground we covered toward our full year guidance and how quickly our investment activity has been moving. With our robust pipeline and same-store growth that leads the sector, we're set up to continue generating stronger growth, whether that arrives through external means or from within the business, and everything depends on how solid and adaptable our balance sheet is. That said, I'll hand things back to the operator now so we can move on to Q&A.

Thanks. Morning, everyone. Could you give us a brief run through of ABR on a quarter-over-quarter basis? Given the same-store growth along with the acquisitions, I figured it would have risen, at minimum by some amount, yet it appears there wasn't any significant roll down in the releases or anything of that nature. Any insight you can offer on that.

Alright, absolutely. Appreciate that, Brad. When you ask this, are you thinking more about the way inflation is working its way across things, or is it really tied to the ABR figures specifically? My guess is it's the second one. If it happens to be the first, Toni is able to speak to that. On the inflation side, I can step in.

Right, it's really about the ABR. It was 12.20 in the prior quarter and 12.20 this quarter as well, so I'm simply wondering why there wasn't a larger increase.

Toni, do you want to take that?

Right. No, I'd say most of what's happening with ABR definitely stems from acquisition activity, and to a lesser degree from same-store growth. You know, I'm not really sure what piece you're not seeing; we did dispose of a few vacant properties, so some vacancy existed from this point last year until now, and that's flowing through the year-over-year ABR. I, you know, I don't believe anything else significant is driving that beyond acquisition activity and same-store growth.

Okay. Got it. Any update on the process with CPA:18?

Right, I believe the sole thing that's new is that CPA:18 made some kind of disclosure, perhaps 2 months ago, stating basically that the fund is looking at liquidity alternatives, and we, in our role as advisor, have put forward a range of options, among them a possible merger with us; this really is only the beginning of that process and honestly it's not a surprise given that CPA:18's liquidity guidelines under its prospectus are coming up, as you know, early next year. Beyond that, there truly isn't anything, you know, fresh to report. In the end, this will be a process overseen by, you know, its independent directors, and they will also have, you know, final discretion.

Okay. Thank you.

Yep.

Thanks. I'd like to discuss the situation you're observing across Europe. In the past you've said the sale-leaseback market over there was robust, yet my sense is that nothing sourced from that region showed up this quarter. Should we anticipate something coming through the pipeline out of Europe in Q4?

Yes, absolutely. So far this year, roughly 30% of our deal volume has come from Europe. Sale-leasebacks account for a big chunk of that. I'm thinking of a few sizable transactions we've discussed before, such as the Casino grocery deal in France and the JLR deal — the Jaguar Land Rover transaction in the U.K. Bear in mind that over in Europe things tend to decelerate in summer, since many folks take vacation in July and August; a bit of a slowdown in those months isn't unusual; activity has since strengthened. I'd say right around half of what remains in our pipeline for the rest of the year sits in Europe. My expectation is that you'll watch that activity accelerate as we approach year-end.

Excellent. That's all I had. Thanks very much.

All right, happy to help.

Hey, good morning.

Morning.

During the quarter just ended, Realty Income made public its transaction involving Carrefour over in Spain. I mean, we're aware that you were also completing grocery transactions in Spain toward the close of last year, and that brings up a couple of things I want to ask. One, I understand that the subject of Realty Income moving into Europe has come up before, but might this transaction signal the beginning of additional direct rivalry that you could be encountering with them? And two, were you also evaluating those properties, or is it possible that your prior relationship with Carrefour has caused you to steer clear?

So, that deal did come across our radar. There are, I believe, a few factors behind why it didn't suit us, though I'd rather not go into those specifics. More generally, when it comes to Realty Income, you might be expanding further into continental Europe rather than staying in the U.K. alone. Across Europe as a whole, competition is thinner. Truly pan-European REITs basically don't exist. So even as Realty Income moves into Europe, the level of competition remains far lower than what we encounter in the U.S. Another point worth making is that it's a sizable market over there. Roughly $4 trillion to $5 trillion of owner-occupied corporate real estate is the estimate, and certain reports, I believe, put it as high as $8 trillion. That represents our adjustable sale-leaseback market. It's a large market. Don't forget that we've built an established platform there for more than 20 years, completing transactions and cultivating relationships and a platform in London, and in Amsterdam too. We'll stay active. As for Realty Income, sure, they'll bring a bit of added competition; however, I'd argue there are benefits in how investors perceive things that could actually outweigh that added competition. Europe, in my view, is mostly seen as a competitive edge for us, yet it's also something U.S.-based investors know less well. If Realty Income's growing ownership of European assets makes investors more at ease with Europe, I'd call that a positive for us. Ultimately, it's a large market. Usually we aren't operating in the same lanes as them. Maybe we'll overlap somewhat more in Europe, but if they keep looking a bit more like W. P. Carey, I don't see that as a negative for us or for our multiple.

All right, that's reasonable. Thanks. Regarding the increase in rents, I appreciate what you said at the start about the discussions around rent growth. I was simply hoping you might say a bit more about it. Has the sort of escalator built into leases shifted significantly as time has passed, or perhaps throughout this stretch of inflation? What are the reasons a lease might use a fixed structure versus one tied to CPI? Is it purely the credit quality underneath, or are there additional considerations?

Yes. I mean, obviously, the simplicity with which we're able to work out increases tied to inflation does, you know, shift around, you know, based on what's happening in the market and what, you know, the wider perspective on inflation happens to be. I think it's, you know, likely obvious to everyone that negotiating leases tied to CPI is somewhat harder at present, you know, than it was for us previously. I think perhaps a few key points deserve mention. First, you know, like we've stated, we continue to believe we're the net lease REIT that's positioned best when it comes to inflation. You know, 60% of our ABR across a $20 billion asset base carries CPI increases. That's genuinely going to fuel same-store growth, as we discussed earlier in this period of higher inflation. Yeah, everybody's paying attention to it currently, but we're glad this is something we've concentrated on for many years. We've consistently maintained that having inflation protection is sensible, even during a low inflation setting where we found ourselves for, you know, perhaps the 10 years before. We're glad to accept that trade-off back then to reap the advantages now, and that's going to begin showing up in the numbers. Regarding how it's, you know, what we're observing in the market at present, deal volume so far this year, it leans more toward fixed increases, as you'd anticipate. Perhaps roughly a third are tied to inflation and two-thirds are fixed. We're fine with that. We enjoy having, you know, fixed increases that deliver a solid foundation, you know, no matter what happens with inflation. Our pipeline, however, remains robust. I think at this moment heading toward the close of the year, you know, it's likely over 50% of our deals, perhaps near two-thirds of our deals in our pipeline are inflation based. Part of this stems from there being more Europe in our pipeline than there was earlier in the year, and it's more typical for inflation, you know, to be incorporated into increases in Europe.

All right. So regarding that possible pipeline, can you provide some indication of how big the portfolio investments being reviewed are? And also, is it necessary to complete every deal currently being negotiated in order to reach the top end of the guidance range? What are the chances that a few of these deals get pushed into Q1?

Yes. That pipeline keeps growing. Like with any pipeline, you've got transactions sitting at different points. A portion of them should wrap up within the next few weeks; on others, well, there's remaining work, so they might stretch out, you know, nearer to December's end, and a few could even slip over into January. Honestly, it's tough to tell exactly where we stand at this moment, particularly given that most of what we're doing goes through sale-leasebacks; the range is something we feel confident about. Should a few of the bigger deals we're working on come together, then I'd say there's likely a compelling chance to reach that range's upper end. My sense is it will hinge on, you know, where certain of these land and how things move along with some of the transactions.

Great. Thank you so much.

Yep, you're welcome.

Yeah. Good morning, everyone. Jason-

Good morning, Josh.

So I suppose what I'm really wondering about is this. You mentioned that when you're building in the escalations for your underwriting, most deals these days seem to be leaning toward the fixed side. How does CPI enter into that underwriting process for you? For instance, are you assuming some sort of floor or step-up down the road if CPI can be captured? What I'm getting at, I think, is whether you'd accept a reduced cap rate in exchange for that.