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

Hello, everybody, and thanks for being with us today on this 2025 Q1 earnings call. Prior to starting, I want to remind all of you that certain comments shared during this session are not historical in nature and might be considered forward-looking. Details regarding factors that could lead to actual outcomes differing materially from what W. P. Carey anticipates can be found in the documents we file with the SEC. A web replay of this call will be accessible through the Investor Relations portion of wpcarey.com, where it will remain archived for roughly 1 year, and where copies of our investor presentations along with other related materials are also available. Now, I'll turn things over to Jason Fox, our Chief Executive Officer.

Thank you, Peter, and good morning to all of you. When we began this year, we expected ambiguity, and the ambiguity regarding tariffs obviously emerged as the dominant subject during Q1. Up to now, though, that ambiguity hasn't produced any direct consequences for our operations; we've kept right on carrying out the strategy we laid out earlier for 2025. We kicked off the year with healthy investment volume, and we have solid visibility into further transactions closing in the near term. We're also still at ease with our capacity to fund fresh investments accretively during this year, including all the way to the top of our guidance range, without any need to tap the capital markets. Although the possible consequences of tariffs are generating considerable ambiguity across the wider economy and the capital markets, up to now, we have not observed any direct consequences for how our portfolio performs, either in rent collections or in re-leasing. Our view remains that our projection of possible rent loss stemming from tenant credit events, which is built into our guidance, will prove adequate, even should tariffs squeeze tenant margins later in the year. Notwithstanding the ambiguity regarding tariffs, we have by now settled the matter involving 2 of our largest tenants that had been facing credit troubles, as described in our recent business update press release. On the whole, we stay cautious about the climate, yet we're at ease with the assumptions incorporated into our guidance, and we likewise perceive a route to the top of our AFFO and investment volume guidance ranges; this morning, I'll concentrate on a few subjects, our recent investment activity together with an update on our sources of capital for funding those transactions, further perspective regarding tariffs, and an update on tenant credit. After that, Toni Sanzone, our CFO, will go over our results and guidance, and Brooks Gordon, who leads Asset Management for us, is with us to field questions. Beginning with our investment activity. So far this year, we've closed roughly $450 million of investments at an initial weighted average cap rate of 7.4%, which includes the $275 million closed during Q1. Notably, with rent escalation structures averaging within the mid- to high 2% range, the average yield across the life of the leases is above 9%. We additionally hold several hundred million dollars of investments in our pipeline at advanced stages, most of which should close within the next couple of months; beyond that, we presently have 8 capital projects amounting to $117 million set to be completed during this year; thus, 4 months into the year, we possess clear visibility into roughly $570 million of deals for 2025 along with a robust near-term pipeline. It's worth pointing out that the market for net lease real estate, which typically features long lease terms, is less affected by near-term swings in market rents and leasing velocity than shorter-term multi-tenant properties are. Consequently, up to now, we've encountered minimal disruption in net lease transaction activity. Also, we expect that sale-leaseback deals will keep accelerating, since those can serve as highly appealing alternative capital sources for corporations and sponsor-backed firms when markets are volatile. As the top player in sale leasebacks, which usually make up a big share of what we invest in, we'd hold a clear edge when bidding on new investments. In the same way, should mortgage lenders become stricter about their lending standards, real estate private equity firms and other rivals relying on asset-level debt would find themselves less able to compete. To sum up, we think we'll stay on track or better than expected for the first half of the year. And after we gain clearer insight into how deal activity will probably unfold across the rest of the year, we foresee a route to lifting our projections for full year investment volume. That said, we're aware that the overall pace of new deal launches could potentially decelerate given today's uncertain environment. That leads me to how we fund ourselves. We still hold the view that we enjoy among the lowest cost of debt within the net lease industry, thanks to our combination of U.S. dollar and euro-denominated debt. Toni will go through the specifics, but in the quarter, we refinanced our euro term loan, locking its interest rate under 3% via an interest rate swap. We have no significant additional debt maturities coming in 2025, and when the quarter ended, we had drawn only a minimal amount on our $2 billion revolver. Our next bond maturity is the Eurobond coming due in April 2026 and our next U.S. bond maturity won't arrive until October of 2026. Turning to equity, we're advancing on our strategy to finance our investments this year, mainly via sales of non-core assets. In the first quarter, we disposed of assets worth roughly $130 million and are gaining traction on further dispositions. Beyond that, we're presently in the market with a sizable portfolio of operating self-storage assets that accounts for around half of our total self-storage operating NOI. Though it's too soon to predict the precise result, we've received considerable interest from self-storage buyers, and we're weighing multiple options to maximize value, from a number of smaller portfolio sales to one single buyer. We anticipate deal timing landing in the second half of the year; and if there are multiple buyers, deals might close at varying times. We stay confident that we'll produce at least 100 basis points of spread this year between our asset sales and new investments; naturally, we'll aim to exceed that, but for now, we're keeping that assumption in our guidance model. More broadly, we feel our investment spreads are undervalued by the market, since the conversation tends to focus on going-in cap rates while ignoring rent growth across the life of the lease. If we take our capacity to fund a portion of deal activity using European debt and add in the rent increases that lead our sector, we still feel confident in our capacity to drive growth via new investments, and our attention stays fixed on deploying capital during this year. Now, shifting to how we see tariffs. Although it's premature to say what effect tariffs might have on our business in this year, we'd point to a few things. Our portfolio was constructed to endure downturns and stretches of economic softness; we concentrate on putting money into large companies, since they have more liquidity and better access to capital and are much more capable of riding out economic downturns than smaller firms. Roughly three-quarters of our ABR is derived from tenants whose yearly revenues exceed $500 million. We hold critical real estate with solid leases, and when a tenant's business gets restructured, often we see no interruption at all in rents. A possible misunderstanding regarding our international portfolio is that it by nature carries bigger risks from tariffs' direct consequences than a portfolio entirely within the U.S. In fact, most of our European tenants mostly serve their own domestic markets, selling locally rather than shipping goods to the U.S., particularly in sectors such as grocery, home improvement and car dealerships, which make up the majority of the European tenants among our top 25. Industrial and warehouse properties have likewise been a key area of attention when weighing how tariffs affect the real estate sector, especially the possible consequences for re-leasing and for demand for space.

Broadly speaking, the tenants in our warehouses aren't located at big ports or logistics centers, so they wouldn't have obvious ties to global supply chains. Since our leases run long — only 1.3% of ABR comes due this year and 2.9% the following year — the pressure on leasing and occupancy that traditional REITs may be feeling won't hit our portfolio as hard. On top of that, if the onshoring movement keeps going, we believe greater need for domestic manufacturing capacity could boost both the worth and significance of our industrial holdings; in fact, we've recently heard from tenants asking about and discussing expansions, which shows this is becoming more of a priority. The last point — and maybe the biggest one — I'd like to make about tariffs is that today's ambiguity around their size and schedule doesn't alter the projected rent loss baked into our 2025 guidance, which accounts for multiple scenarios, among them ones where we saw extra unanticipated credit events during the year. So our confidence in the AFFO growth figure we've provided remains strong, and we still see room to raise it as visibility into the rest of the year improves. Before turning things over to Toni, I'd like to briefly update everyone on the large tenants we've been watching from a credit standpoint — specifically True Value, now known as Do It Best, along with Hearthside and Hellweg. So far, matters with Do It Best and Hearthside have unfolded the way we expected, and they were built into our original guidance and addressed in our latest business update. Hellweg's situation is also mostly the same as what we shared in our recent press release. Rent is still being paid, though the company keeps confronting a difficult operating backdrop, among them soft German consumer spending and a fiercely competitive do-it-yourself sector. Hellweg is still engaging with its main stakeholders, landlords and lenders among them, to shore up its liquidity further, and those talks remain underway. Meanwhile, we're working to shrink our exposure, having signed agreements at the end of March to take back 12 stores, roughly 1/3 of our total exposure, with 7 stores terminated by September of this year and another 5 stores by September of next year. We anticipate re-leasing the majority of those locations at rents matching what they currently pay, and selling off the remainder. In both cases, with minimal downtime; those moves ought to strengthen Hellweg's liquidity while giving us a clear path to remove Hellweg from our top 10 tenants. Finally, apart from the 12 stores we're taking back, we recently disposed of one occupied Hellweg store in our portfolio and have another 3 under binding contracts, which trims our Hellweg exposure further in the near term. I'll stop there and pass it to Toni for our results and guidance.

Appreciate it, Jason. Now, on the earnings side — for the first quarter, AFFO per share landed at $1.17, a 2.6% increase over the prior-year period. Between those Q1 results and what April has shown us, the year has gotten off to a solid start, and we're not just on pace — we're actually running ahead of our earlier expectations. Our AFFO guidance range of $4.82 to $4.92 per share has been reaffirmed. We continue to monitor and navigate current market conditions, and we remain cautiously optimistic that a path exists for us to exceed the 3.6% growth embedded in that guidance. Like Jason mentioned, we've got solid momentum when it comes to deals, and our guidance still assumes investment volume somewhere between $1 billion and $1.5 billion. In the quarter, we disposed of 9 assets, bringing in total proceeds of $130 million. We still anticipate that dispositions for the year will land somewhere between $500 million to $1 billion, and we expect a big majority of those to be opportunistic sales of non-core assets, which includes operating self-storage properties; we're still confident we can bring in proceeds from selling these assets at cap rates that let us accretively fund investment activity even beyond the top end of our guidance range. On this quarter's call, contractual same-store rent growth landed at 2.4% against the prior-year period, and we expect it to hold at about that pace through the full year. As a quick refresher, about half of our contractual rent increases are tied to CPI, which leaves us well positioned now that inflation is picking up due to tariffs — although the lift to lease revenues would matter more in the following year and beyond. Comprehensive same-store growth for the quarter reached 4.5% versus last year, aided partly by the Hellweg rent abatement in last year's first quarter, along with the commencement this year of recurring cash rent from our warehouse leased to Samsung. Historically, our overall same-store figure has typically landed roughly 100 basis points below the contractual number. With that said, according to our present projections, we're tracking to do better than that across the entire year. During the quarter, leasing efforts produced 16 renewals or extensions, representing 1.8% of portfolio ABR, and that continued moving favorably — we recovered 103% of previous rents and gained 6.2 years of additional weighted average lease term. Our AFFO guidance continues to factor in an estimated $15 million to $20 million for possible rent loss associated with tenant credit events. At this point, what we can see clearly is the rent loss we've already identified, and that makes up roughly one-third of the overall figure we're estimating — that includes the vacancy period for the Hellweg locations we are reclaiming. The remainder of the reserve is there because of how unpredictable the current macroeconomic backdrop is. Our view remains that the amount we've set aside for possible rent loss will prove sufficient, and it could even turn out to be on the cautious side, regardless of whether tariffs start weighing on tenants later in the year. As for other income tied to leases, that totaled $3.1 million in Q1, and we expect it to increase as we move through the year. Looking at what we can see right now, our expectation for other lease-related income across the entire year stays at $20 million to $25 million, which matches the level it has held at in recent years. Turning to expenses, G&A as well as income tax expense typically come in higher during the first quarter because of timing, and we anticipate them returning to a more stable run rate starting in the second quarter. Across the full year, our expectation remains that these expenses will align with the initial guidance expectations we laid out in our earnings release. During Q1, NOI from operating properties totaled $16.6 million. That figure breaks down as $13.6 million generated by our 78 operating self-storage properties, along with $3 million combined from the 4 hotels and student housing assets we still hold. Excluding the effect of dispositions we anticipate making, our operating property portfolio would be projected to deliver operating NOI in the range of $70 million to $75 million for 2025. That said, as noted earlier, a large share of the dispositions planned for this year are anticipated to involve sales of self-storage operating assets, and our guidance assumes those occur during the back half of the year. As soon as we have a better handle on when those asset sales will happen, we'll update our operating NOI projections accordingly. For Q1, nonoperating income totaled $7.9 million, which breaks down as a $2.8 million dividend tied to our equity stake in Lineage, plus $2.6 million in interest income and $2.6 million in realized gains from currency hedges. Our guidance bakes in the assumption that the Lineage dividend holds steady at its present level for the remainder of the year. Come Q2, interest income will fall to a nominal amount — typically less than $1 million each quarter — because our excess cash has now been fully deployed. Sure, here's a version that sounds like natural spoken English with light editing: Because the U.S. dollar has weakened, we now expect smaller foreign currency gains from our hedging program. Still, it's worth keeping in mind that a stronger euro and pound give a boost to our European cash flows — and therefore to AFFO — which offsets any reduction from currency hedging. All told, for the full year we currently anticipate nonoperating income somewhere in the low to mid-$20 million range. Let's turn to the balance sheet and leverage. Our balance sheet is still in a very strong position, with plenty of liquidity and very few debt maturities coming up in the near term. After we repaid the $450 million bond that matured in the first quarter, we put all of the excess cash we'd been holding on our balance sheet at year-end fully to work. When the first quarter came to a close, our liquidity stood at nearly $2 billion, and that figure was mostly made up of what we can draw on our credit facility. As for the debt we still have to pay off during 2025, it amounts to under $140 million in mortgage debt, and we don't face another bond coming due until April 2026. As we mentioned before, right after Q1 finished, we refinanced our EUR 500 million term loan. That extended the due date by 3 additional years, moving it to 2029, and we have the ability to push it out as much as 1 more year beyond that. In connection with that refinancing, we entered into an interest rate swap, which secured a favorable all-in rate of 2.8% through the end of 2027. That really shows what we gain from being able to tap euro-denominated debt and several pools of capital. For the first quarter, our total weighted average cost of debt stayed cheap at 3.2%, and we presently anticipate it holding near that mark for the rest of the year, helped by how well we pulled off the term loan. We closed the quarter with our main leverage measures sitting comfortably inside our target ranges: debt-to-gross assets came in at 41%, while net debt to adjusted EBITDA was 5.8x. Given how solid our balance sheet is, plus our capacity to bring in proceeds by selling non-core assets, we're in a strong spot to fund this year's acquisition volume accretively with no equity capital raise required. One administrative item: this week we anticipate filing a registration statement that refreshes our current shelf registration before it lapses in May, and that filing will also renew our existing ATM program. Finally, in the first quarter we declared a dividend of $0.89 per share, which annualizes to $3.56 — a 2.9% bump versus the previous year. Our AFFO per share covers that dividend quite comfortably, with an anticipated yearly payout ratio of 73%; so with that, I'll pass the call back to Jason.

Thank you, Toni. To wrap up, our feelings about the year's start are quite positive, and so is our satisfaction with the headway being made on carrying out the plans we laid out during the last call. Relative to the original investment expectations we shared, we're running a bit ahead, and the non-core dispositions we flagged are being actively pursued; as a result, our confidence remains intact that investments can be funded accretively all the way to the upper end of our guidance absent any need to tap the equity markets. That said, a variety of possible outcomes involving tariffs could still unfold. Across the majority of those outcomes, we think this uncertainty was already baked into our initial guidance. Affirming our growth expectations feels very comfortable to us, and we foresee an opportunity to lift guidance going forward as clarity improves regarding how tariffs, tenant credit and the transaction environment shake out over the year. That brings our prepared remarks to a close. I'll now return the call to the operator so questions can be taken.

Jason, as you're aware, there are several hundred million dollars' worth of deals sitting in the pipeline. Could you give us a bit of color on cap rates, how it breaks down between retail and industrial, and between the U.S. and Europe?

Yes, absolutely. As is always the case, our cap rates fall within a band, and at times that band can be fairly wide, since a number of factors come into play. At present, we're still aiming at deals in the 7s on average, and we'll likely steer toward mid-7s, which is the level we finished at last year; so that's where we stood in the first quarter, and it's approximately where our price — our existing pipeline is priced too. So that's — and I'd say it's broadly the same for both the U.S. and Europe. Naturally, in Europe you can see an even broader band of cap rates, depending on which countries are involved. But broadly speaking, I believe they stay fairly consistent inside that band, and when you consider Europe, clearly our cost of debt there is far lower, probably 150 to 175 basis points inside of what we could borrow in U.S. dollars. So we're witnessing some rather appealing spreads in Europe. As far as the pipeline goes, I'd say deals completed so far have been mostly weighted toward North America, but the pipeline is perhaps 50 to 50, maybe somewhat more tilted toward Europe. So we're beginning to see activity levels tick up a bit more over there. And regarding property type, I'd say it's perhaps in line with how we've allocated in the past. It's going to be mainly industrial and warehouse, particularly year-to-date. The retail side is somewhat light at the moment, but I'd anticipate that picking up some as the year goes on. So a fairly typical year, with many of the deals being sale leasebacks, which is usually a theme for us. So nothing surprising there.

All right; and regarding the dispositions, those are assisting in financing the acquisitions. I just want to confirm I got this right. You mentioned it comes in at 100 basis points beneath the cap rate on the acquisitions? Is that accurate?

Correct, that is approximately what we are projecting at present, and more or less what we have incorporated into the assumptions behind our guidance. Our expectation is to outperform that figure. Given what we can see on terms right now, that number is likely a solid one to rely on.

I wanted to ask — you made it sound like there's a decent possibility you could pursue acquisitions beyond the upper limit of what you're currently projecting. If that does happen, to pay for it, might you consider offloading additional self-storage operating assets? Or perhaps just your overall thinking on how you'd finance anything past what's in guidance right now?

Yeah, absolutely. We've discussed this in the past. I'd say the set of disposition options we have could cover funding that pushes us right at, to, or perhaps even past the ceiling of our investment guidance; so there's a lot of flexibility in how we approach that. Even if we move past that point, I believe we can tilt even further into storage. We've mentioned how much storage we're currently selling that's essentially assumed in the midpoint — roughly 50% of our portfolio. So looking at additional storage is definitely something we could do. We also have other longer-dated capital sources, like the Lineage equity stake, though we don't anticipate having access to that anytime soon. Perhaps closer in would be the construction loan in Las Vegas — around $250 million, $260 million. And clearly, we also generate a decent amount of free cash flow; so I think we're in a comfortable spot to keep funding deals without tapping the equity markets during this year, even if we keep exceeding expectations on the investment front.

I also wanted to ask — you gave us a thorough view regarding cutting back total exposure to Hellweg. I believe it runs roughly 18 months until it's finished. Should it become necessary, could you speed that up in case Hellweg deteriorates faster than what you might be anticipating? Or, I suppose, how much flexibility exists there?

Yes, absolutely. Brooks, would you like to handle that?

Absolutely. Right, so like you said, there's a defined route for us to bring that exposure down across this year and on into the next one. My expectation is that it gets trimmed by about 50% during that span. So we're going to look at a handful of other dispositions. On a broader level, as we've mentioned on earlier calls, we're quite far along with any possible contingencies too; so if there's a way for us to reclaim additional stores, we have interest in those locations at rents comparable to what's already in place. There'd be a bit of downtime, as we talked about and Toni brought up, but our guidance and our credit loss reserve already account for that entirely. So there are additional levers available to us, and we'll keep assessing them. Still, as things stand, we have a solid route, and we're carrying out that route to bring that exposure down in a proactive way.

You've got operations in the U.S. and Canada — sorry, the U.S. and Europe — and I realize you've addressed tariffs quite a bit during today's call. So could you perhaps walk us through how your exposure differs between America and Europe, and what role tariffs might play this time around? Would that be more of a boost for your European holdings? Or would it act more as a drag? I'm simply attempting to grasp the portfolio and how — how your tenants are performing in this sort of post-tariff environment?

Yes, absolutely. Europe isn't a drag. That much I'm confident about. I mean, we've come across certain remarks suggesting that it might introduce additional risk into our portfolio. But as I said earlier, most — perhaps even the overwhelming majority — of our tenants across Europe mainly conduct business within their own borders. They sell to their home markets, then; they aren't shipping goods to America, and they truly aren't reliant on goods coming in from America either; so sectors such as grocery, DIY, and car dealerships make up the greater part of our European tenant base. Might it be a boost? Difficult to determine. Broadly, I'd say we're happy with our European portfolio, though it remains somewhat shielded or perhaps set apart from developments here in America.

Understood. Then, just to follow up — I'm aware you've mentioned the 3 item — the 3 major names on the watch list; yet has anything notable been added or taken off that list? I know the 3 that have come up kind of did so fairly fast. So, just, have you observed any effect from tariffs or, kind of, credit problems stemming from the tariffs, anything in particular you're keeping an eye on?

Yes. I mean, generally, when it comes to the portfolio side, tariffs are, of course, generating a great deal of uncertainty, and we're hearing companies discuss cutting costs and perhaps delaying decisions on new capital spending, but we haven't seen any direct effects tied to tariffs on how our portfolio has performed. As for, maybe, a wider view of the watch list, Brooks, I don't know whether you'd like to say something about that.

I'd just like to say again, the best way to look at this is through the lens of the credit loss reserve guidance we've provided. In our view, that's the most effective instrument for genuinely modeling credit risk. That being said, the watch list has dropped quite a bit, since 2 of the large tenants — Do It Best and Hearthside — came off it. Still, once more, our focus should really stay on that guidance for the credit loss reserve.

Possibly returning to what was asked earlier for Toni and Brooks. I value the thorough assumptions you provided, yet regarding that projected rental income shortfall of $15 million to $20 million within the outlook, is that figure also factoring in costs tied to empty properties? And what is your assumption concerning capital for repositioning? Or is it likely that the majority of these properties end up being divested?

Toni, would you like to begin, and perhaps Brooks could address the latter portion?

Yeah. When it comes to credit loss, what we're giving you is really at the top line revenue level. That said, I'd note that our property expense assumption does include a factor accounting for some downtime in that area too. So that has already been taken into consideration; it simply sits apart from the $15 million to $20 range we gave.

Right, and I want to add that the downtime, as Toni said, is already factored into what we analyzed. It should be fairly moderate. As for capital expenditures, that's somewhat to be determined on a store-by-store basis, and they don't require much capital. What's involved is paving and some cosmetic work on facades, so the repositioning doesn't come with large capital expenditure amounts. Fit out will be handled by the tenants themselves.

I was curious — I believe we saw a slight dip in occupancy between 4Q and 1Q, and it looked like you covered quite a few of the credit items, and that didn't appear tied to it. So I just wanted to ask what caused that?

Yes. Occupancy came down somewhat. A few names came off the vacancy list, plus a small number of additions, largely because of 2 European warehouses where we completed partial renewals with the tenant, who remained in roughly 70% of the 2 buildings. So now we're working to backfill those spaces. That accounted for essentially the net addition. I'd also mention that for most of the vacancy that currently exists, we have deals in progress. So across the year, we anticipate making steady, fairly efficient progress reducing it.

All right. And following up on that point, when we think ahead — perhaps over the coming 18 months, or across '26 — are there significant scheduled move-outs we should factor in, separate from the watch list credit situations? Just the ones we already know about?

Yeah. So to begin with, I'd say it's worth flagging that the total volume of expiring leases across the coming several years is fairly modest. That's the broader picture. There's a single warehouse — pardon me, two warehouse assets in Europe in July where we anticipate a nonrenewal. That represents roughly 50 bps of ABR during the back half of the year. It's completely reflected in our guidance; and we don't — our guidance assumes no lease-up this year at those buildings. That said, we are actively marketing them and anticipate getting them leased up later on. But just so it's clear, that's not — lease-up isn't baked into the guidance.