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

Hello, everybody, and thanks for being with us on this earnings call for the second quarter of 2025. Prior to getting started, I want to remind all of you that certain remarks we make today do not represent historical facts and might be considered forward-looking statements. The factors that may lead actual outcomes to differ materially from what W. P. Carey anticipates are laid out in the filings we make with the SEC. A web-based replay of this conference call is going to be posted in the Investor Relations portion of our site, wpcarey.com, where it will remain available for roughly 1 year, and where you can likewise locate copies of the investor presentations we've prepared along with other associated materials. With that said, I'll hand things over to Jason Fox, our Chief Executive Officer.

Thanks, Peter, and good morning to all of you. The results for our second quarter underscore an exceptionally robust first six months of the year, running ahead of what we originally anticipated across a number of dimensions. Because of that, we are lifting our projection for full year AFFO growth to 4.5% at the midpoint of our updated guidance range. So far, we have closed more than $1 billion in new investments, with initial cap rates averaging in the mid-7s, mostly featuring fixed rent escalations nearing 3%. Our progress on asset sales has been outstanding, including the initial tranche of self-storage operating properties, which we executed at appealing pricing and at a meaningful spread relative to where we are putting the proceeds back to work. Although we have not required capital markets access this year to meet our investment objectives, earlier in July we took the opportunity to issue bonds that boost our liquidity and further reinforce our balance sheet. Though uncertainty persists regarding the broader economy, up to now we have not seen any unexpected interruptions in our business, whether tenant credit events or tariffs. As a result, we are lowering our reserve for estimated potential rent loss. This morning, I will walk through our progress across the first half of the year and our confidence in keeping up that momentum. Toni Sanzone, our CFO, will concentrate on our results and the guidance increase, and will also address certain aspects of our portfolio and balance sheet. Toni and I are joined by Brooks Gordon, our Head of Asset Management, to field questions. Beginning with investments. Backed by favorable market conditions, we sustained a strong pace of investment volume through the first half of the year, extending the higher level of activity we reached in the fourth quarter of 2024. Year-to-date, we have finished over $1 billion of investments, including the roughly $550 million of deals we closed in the second quarter at an initial weighted average cap rate of 7.5% and a weighted average lease term of 19 years. When you factor in rent escalations across those long lease terms, that works out to an average yield in the mid-9% range, which we think ranks among the highest average yields in the net lease sector and offers a highly attractive spread to our cost of capital. We have already closed approximately $230 million of investments in the third quarter, and our pipeline remains robust. Several hundred million dollars of deals are at advanced stages, some of which we expect to close within the next few weeks. So at just past the halfway mark of the year, we have exceeded our initial expectations and are consequently raising our investment guidance, which Toni will go through in detail. Looking forward, we believe there is still potential to land toward the top end of the new range, but the transaction environment remains favorable in the second half of the year, and we have a strong fourth quarter for deal closings as is often the case; we have also continued to build out our pipeline of capital projects, which includes build-to-suits, expansions and redevelopments, areas of investment where we have always been relatively active. Right now, we've got close to $300 million in projects that are moving forward and set to wrap up across roughly the next 18 months, and those add to our pipeline while helping to back future growth. When it comes to property type, essentially every investment we made in the second quarter was warehouse and industrial, and that category also accounts for the overwhelming share of what we've invested year-to-date, plus most of our pipeline. Our internal growth remains well supported, both by rent escalations tied to inflation and by our capacity to craft leases featuring appealing fixed rent bumps, which have come in at an average of 2.8% across our investments year-to-date. On geography, the U.S. is where our second quarter investments were focused, and there we keep finding and assessing plenty of compelling opportunities, particularly in industrial. Over in Europe, investment spreads have generally stayed wider, and that region makes up the bulk of the deal volume we've closed thus far in the third quarter, along with a meaningful chunk of our near-term pipeline. Still, we expect to keep seeing and closing deals that are attractively priced and structured in both regions through the rest of the year. Now to our sources of capital. Alongside our first half investments, we've made solid headway on our funding strategy, the one we laid out at the beginning of the year, which centers on accretive sales of noncore assets. We just sold an initial tranche of 15 self-storage operating properties for $175 million at a sub-6% cap rate. Ten of those properties closed in the second quarter for $112 million, and the rest of the sales wrapped up in July. At present, we have 2 additional storage portfolios, totaling 17 properties, under contract, with closings anticipated in August, which keeps us on track with our initial projections for storage sales this year and ahead of our original expectations on disposition cap rates. We're still confident that this year we'll hit well over 100 basis points of spread between our overall asset sales and our new investments, with the potential to get closer to 150 basis points by year-end. Given the higher investment volume we anticipate, we're also lifting our expectations for full year dispositions, which could involve additional tranches of storage assets. Even if investment volume comes in above the top of our guidance range, we're confident we can fund it through dispositions that deliver strong accretion and AFFO growth. While we think we're generating attractive spreads to our spot cost of capital, which stays top of mind as we assess new deals, those spreads look especially attractive once we factor in the average yields over the life of the leases and when we consider our actual source of funding, which is noncore dispositions at tight cap rates. Moving on to our portfolio. With broader economic uncertainty in the backdrop, we entered the year holding an appropriately conservative view on the possibility of credit events within our portfolio. Seven months in, we're cutting our estimate of potential rent loss by $5 million. A portion of the amount we've set aside for rent still comes from the prudence we're applying to Hellweg, and that company is up to date on what it owes us, yet it's still working through its restructuring efforts. Our approach of bringing in new tenants and divesting Hellweg locations has advanced nicely, which has cut our exposure further and keeps us positioned to drop it from our ten largest tenants during this year and from our 25 biggest the following year. Although there's been a bit of movement lately on trade policy in the U.S., particularly regarding Europe, plenty of matters are still without resolution; even so, we keep seeing no direct effects within our portfolio, and we have confidence that the reserve we hold for rent is enough to absorb whatever might arise across the back half of the year. Even so, we'll keep watching for any additional shifts. Having said that, I'll stop here and turn things over to Toni so she can go through our results and guidance.

Thanks, Jason. Let's begin with earnings. For the second quarter, AFFO per share came in at $1.28. That's an increase of $0.11, or 9.4%, over the same period a year ago, and it was fueled by accretive investment activity as well as rent growth that leads our sector. Looking at it versus the first quarter, the rise in AFFO per share largely stemmed from net investment activity and rent escalations, plus some timing effects, including higher expenses during the first quarter and greater other lease-related income in the second quarter. With our strong results for the first half and good visibility into the second half of the year, we've lifted our full year AFFO guidance range to $4.87 to $4.95 per share, implying 4.5% year-over-year growth at the midpoint. As we laid out in the earnings release, this revised outlook reflects higher expected investment volume of $1.4 billion to $1.8 billion, funded mostly by higher expected dispositions of $900 million to $1.3 billion. As Jason mentioned, we still expect to fund our investments accretively using proceeds from dispositions of operating and noncore assets, producing spreads that average well above 100 basis points. Contractual same-store rent growth in the second quarter was 2.3% year-over-year, made up of CPI-linked rent escalations that averaged 2.6% for the quarter, while fixed rent increases averaged 2.1%. For the full year, we anticipate contractual same-store rent growth averaging in the mid-2% range, which aligns with our longer-term expectations as well, assuming inflation stays around where it is now. Comprehensive same-store rent growth for the quarter was 4% year-over-year, reflecting rent collections, including recovery of some past due rent this quarter, along with leasing activity and vacancies. In the past, our comprehensive same-store growth has usually tracked roughly 100 basis points under contractual; however, based on current estimates, we expect it to track in line with or slightly above contractual for the full year. Our portfolio keeps performing well, with no significant new tenant credit events in the quarter. Because of that, we've reduced the potential rent loss assumption built into our AFFO guidance to $10 million to $15 million, down from the $15 million to $20 million we previously estimated. Within that range, we currently have visibility into identified rent loss of roughly $4 million to $5 million, or 1/3 at the current midpoint, which includes downtime on the Hellweg stores we're taking back; we continue to believe the remainder of our rent loss assumption should conservatively cover any additional tenant issues in the back half of the year. Other lease-related income was $9.6 million for the second quarter, bringing the first half total to $12.8 million. Although the timing of these payments can fluctuate quarter-to-quarter, we still expect other lease-related income to total $20 million to $25 million for the full year, unchanged from our prior estimate. Turning briefly to our operating properties. If we factor in the self-storage assets divested in Q2, along with those either already disposed of or anticipated to be disposed of during Q3, our projection for operating property NOI in 2025 lands somewhere in the range of $55 million to $60 million, and that figure encompasses the 4 hotels and 2 student housing properties we hold. Should we complete further sales of operating assets during this year, we will keep refreshing that projection accordingly. Turning to expenses and nonoperating income: at the six-month mark, we have fine-tuned the assumptions behind our expense guidance, nudging down what we expect for G&A, which should come in somewhere between $99 million and $102 million across the full year. As we noted on the prior call, G&A typically peaks in Q1 because of timing, while Q2 better reflects the run rate going forward for the rest of the year. Non-reimbursed property expenses should land somewhere in the range of $50 million to $54 million across the full year, and we anticipate the quarters still ahead will track Q2. Tax expense calculated on an AFFO basis, which mostly captures foreign taxes tied to our European holdings, should now come in somewhere between $42 million and $46 million across the full year. Our projections for non-reimbursed property expenses as well as income tax expense have each edged up a bit, partly because the euro has strengthened. Nonoperating income should come to roughly $20 million across the full year, mostly from the quarterly dividend tied to our equity interest in Lineage, which came to $2.8 million this quarter and is presumed to hold at that amount through the rest of the year. FX hedging gains should be minimal over the balance of the year, reflecting the euro's strengthening against the U.S. dollar. Keep in mind that even with reduced realized FX hedging gains and somewhat higher expenses, a stronger euro works in favor of our European cash flows and thus AFFO, with that upside mainly arriving as increased lease revenue. Now shifting to the balance sheet: we remain proactive in managing it, which leaves us in a solid position with substantial liquidity and near-term debt maturities that are quite manageable. During July, we took an opportunistic step and issued $400 million in 5-year U.S. bonds, securing outstanding execution at a coupon rate of 4.65%. Our weighted average cost of debt overall is still low, at 3.1%, and should remain near that mark through the rest of the year. We closed Q2 with roughly $1.7 billion in liquidity, mostly consisting of what is available under our credit facility. When the quarter closed, we had roughly $660 million outstanding on our revolver, and in early July we applied part of what we raised from the bond offering to reduce that balance, which gives us more flexibility as we make new investments through the rest of the year; under $50 million of mortgage debt comes due across the remainder of 2025, and no bond maturity arrives before April 2026, so we retain considerable latitude regarding how and when we tap the capital markets. At quarter's end, our main leverage measures sat inside our target ranges, with debt to gross assets at 43.2% and net debt to adjusted EBITDA at 5.8x; we still anticipate that both of these leverage measures will stay inside our target ranges. Finally, our dividend keeps growing. In the second quarter, we declared a dividend of $0.90 per share, or $3.60 annualized, which is a 3.4% increase versus the prior year. Our earnings growth supports that dividend well, with our year-to-date payout ratio at approximately 73% of AFFO per share. With that, I'll pass the call back to Jason.

Appreciate that, Toni. Halfway through the year now, and we feel good about the momentum built up right across our business. Both our pipeline and our investment activity are holding up well, and our funding strategy is proceeding as planned — we've posted really solid results on dispositions and are putting those proceeds back to work at attractive spreads. With disciplined execution, steady tenant credit, and no meaningful effects tied to tariffs that we can identify, we're set up nicely for the back half of the year, and we still expect to land at the top end of the updated guidance ranges we gave for investments as well as earnings. The revised AFFO guidance we provided shows growth that marks a sizable jump compared with where we've been in recent years. Along with a dividend yield that's stayed well covered and in the mid- to high 5% range, we think we're firmly on the path toward a double-digit total shareholder return in 2025. On top of that, we're confident the base we've established this year leaves us positioned to sustain that growth rate over the years ahead and to keep creating long-term value for shareholders. That wraps up what we had prepared. I'll turn it back over to the operator so we can take questions.

For a second quarter in a row, your comprehensive income came in quite a bit higher than contractual. And Toni, you pointed out that normally, it sits 100 basis points under. So in the back half of the year, are you looking for it to return to that historical level, 100 basis points under? Or would it land lower given how strongly this year has performed?

Thanks, John. Yes, on a full year basis, I'd say we expect that to normalize somewhat in the back half of the year. There are a few things driving that. First, thinking about how we've characterized our rent loss reserve, we have roughly $12.5 million at the midpoint in the revised range within that assumption. So far, we haven't seen any real disruption in the first half of the year. So our guidance assumption and comprehensive same-store, I'll assume that the $12.5 million gets taken in the third and fourth quarters, that could prove conservative, and we could outperform that. So that's something we're watching as well. And then I'd just note that maybe the first half of the year was also affected by some of the tailwinds tied to some of the headwinds we had in the portfolio last year. So it's a little uneven between the first half and the second half, but there could be some upside relative to the full year estimate that I described, which would track probably just north of the contractual in the mid-2% range.

All right, and then my follow-up concerns your self-storage operating portfolio. You gave us some detail regarding the income. However, what I'm curious about is this: the first tranche has been sold, and some assets were transitioned. Should we anticipate additional transitions into the triple-net lease structure? And regarding whoever purchased that first tranche — from what's being reported, that party doesn't operate those assets. Could such a buyer step in and terminate the third-party management contracts?

Yeah, absolutely. So on the first part, we've got a fair amount of latitude regarding what happens with the piece of our operating self-storage portfolio that remains. As you mentioned, during the prior year we placed a sub-portfolio into a net lease arrangement with Extra Space. That had always been the intention for a certain share of the portfolio. We felt the moment was appropriate. Then in the current year, it's evident we're offloading a sizable chunk of it, and we believe that's the optimal method to finance fresh investments. So as we look ahead, whatever we end up doing with what's left of the portfolio is going to hinge on deal volume during the back half of this year and into the following year, on what capital requirements we have, and on what alternative funding sources are available. That said, my expectation is that we could push toward additional sales in the back half of this year, given how strong execution has been. At the same time, I believe we could also shift a certain share of it into net lease, and most likely it will end up being some mix of both approaches. Either way, my sense is that roughly twelve months from now, we'll no longer be in the operating storage business, though we retain several choices about what to do in the interim. Then, on the portfolio we actually disposed of, yeah, based on how those contracts are structured, the management agreements can generally be terminated with thirty days' notice. So you don't face many obstacles when you're selling assets to another operator.

Toni, I’m simply attempting to get a clearer picture regarding the AFFO guidance. What it appears to suggest is that results in the back half of the year will come in below what we saw during Q2. So other than the reduced lease termination income and, I suppose, the possible Hellweg credit event, is there anything else expected to act as a headwind?

Can someone mute that individual? I don’t know whether that’s...

Yes, apologies — this is the associate speaking.

Right, Greg, let me try to draw attention to something. You brought up again those 2 items that I believe deserve consideration as we move into the back half; so looking at the second quarter compared with what we expect for the rest of the year, the biggest factor behind the second quarter coming in high is likely that other lease-related income. It may be worth pointing out that we left our full year guidance for that unchanged. This is mostly a matter of timing, and payments of this kind really can't be projected as a steady run rate from one quarter to the next; however, if you spread the remaining portion of our full year guidance across the back half, that works out to roughly $0.03 in the third quarter and $0.03 in the fourth quarter. Then, regarding the rent reserve, as I said when answering the comprehensive income question, the $12.5 million reserve is expected to be entirely recorded in the third and fourth quarters. That gives you approximately another $0.03 in each of those quarters too. So I'd say those are the real anomalies. Beyond that, we do anticipate growing our AFFO. There's definitely a scenario in which we might outperform, since we wouldn't need the entire rent contingency we've talked about. And once more, as pipeline investments keep expanding, that growth will carry through into the third and fourth quarters as well.

All right, that's quite useful. Jason, I wanted to ask whether you might discuss the fact that a number of the deals you acquire aren't exactly household brands that all of us know. When it comes to the creditworthiness of the tenants involved in those sale-leasebacks, or the ones whose expansions you're funding, or whatever the situation may be, how do you reach a point of confidence regarding those deals and that credit quality, given the difficulties that have arisen during the past year involving particular tenants?

Yeah, absolutely. What I'd say is that sub-investment-grade tenants have always been our target. In our view, that represents the sweet spot when it comes to net lease investing, and our usual emphasis tends to be on sizable firms whose real estate is operationally critical; so that's nothing new. Honestly, not much has shifted in how we go about it. Our attention would be on value, on criticality, on underwriting the tenant's credit. That's an area where we excel. We've been doing it for quite a while; we believe our ability to underwrite and structure around risk is very strong, and that forms part of the model. So really, it spans a variety of credits. I mean — but one theme we've brought up previously, I think, is that even though it sits just under investment grade, the size of these companies truly matters a great deal.

Also, could something currently be occurring that draws additional businesses of this type into the market? Or is it simply that you're completing a greater number of transactions because you now possess the ability to do so?

Yeah. Well, honestly, conditions seem pretty robust and favorable at the moment. Plenty of possibilities exist. Part of this, I believe, stems from what appears to be a fairly steady interest rate backdrop; that's likely held for a number of quarters by now, and that's consistently a crucial element behind a rise in deal-making activity. That holds true even with shifting anticipations across the year regarding tariffs. When you examine treasury yields, for the bulk of this year they've largely stayed confined within a range in the low to mid-4s, going all the way back to Q4 of the prior year. That generates steadiness. Activity in transactions rises, in my view, yet since spreads have tightened, we're capitalizing on that. Our first half has been genuinely robust; we're running ahead of what we originally anticipated, plus a solid, healthy pipeline. So part of this comes from the market. Yet much of it reflects who we are as an organization; we've done this across many years; we hold numerous relationships, and in a setting where perhaps there's steadiness, though an overarching unpredictability remains, I believe execution truly matters, and we'll perform rather well whenever we're vying for deals. Our forte is execution; so I'd say it's genuinely a blend of every one of those factors, though on the whole, it's a favorable climate for us at present.

During your opening comments, you briefly addressed this, though there's been plenty in recent news coverage regarding the trade talks and tariffs between the U.S. and the EU. In our prior quarter's earnings call, you indicated that no real effect had shown up in your figures, and it sounds like that's still the case now. I'm wondering whether you've checked in with your operators, and whether they've begun sharing any views about what they're picking up from the government, and whether they expect it to matter for their operations at all, or whether there might be some favorable dynamics we haven't factored in.

Yeah. Look, I'd say uncertainty remains a persistent backdrop. That said, up to now, we don't believe a significant effect has made its way into the broader economy, generally speaking. Tariffs have dominated headlines, sure, but they haven't actually been put into place. And given how businesses have been working to build up inventory ahead of time, nothing has really rippled through the economy yet at this moment, and the same holds for our portfolio. No effects observed, not much said by our tenants, and it hasn't touched investment activity either. There are likely grounds to believe that because the tariffs currently under discussion are somewhat more moderate in nature, that's why significant consequences wouldn't arise, at minimum for us and for our tenants' capacity to keep paying rent down the road. Still, this is definitely something we continue to watch, and we'll find out how it all shakes out.

Understood. Then, regarding the opportunity set — it seemed as though you pointed out during the opening remarks that better spreads were being offered in Europe. What I'd like to know is what mainly causes that.

When it comes to better spreads. Well, I'd say the largest factor is what it costs to borrow over in Europe; our borrowing there can likely be done at 125 to 150 basis points within the level at which U.S. bonds could be issued by us, while cap rates sit in a comparable zip code, perhaps somewhat tighter depending on which country. And across Europe, cap rates vary quite a bit because markets differ; the largest factor, though, is that borrowing in euros costs us less than borrowing in U.S. dollars does. This has come up before, yet in our view it's something that occasionally gets missed or is at least not fully appreciated regarding our model — namely, that very cheap capital in Europe is available to us.

For the first question, it's really about where the opportunities are. If we stay on Europe, what kind of opportunity set are you seeing both there and in the U.S.? You touched somewhat on spreads and cap rates, but across the quarter, acquisitions were mostly in the U.S. rather than Europe. So I'm just trying to understand how that opportunity set might look going forward. And was it somewhat a matter of timing, where you ended up leaning a bit more U.S. than Europe?

Yeah. I mean, listen, we have been finding some very attractive opportunities in Europe, particularly within the industrial sector and particularly by way of sale leasebacks. So as you pointed out, or as I mentioned earlier, roughly 3/4 of the deals we've done year-to-date have been in North America. The pipeline is coming together somewhat differently. At this moment, as we look ahead, I'd say it's likely a 50 to 50 split between North America and Europe. So more activity is beginning to show up. Our pipeline sits within Europe. Deals there tend to take somewhat longer to close; so perhaps our visibility into the timing there is a bit lower, but things are picking up there, and I would expect the second half of the year to be more active over there. Maybe we wind up with something closer to a 2/3, 1/3 split between the 2, though it will vary quarter-to-quarter for sure.

And then for a follow-up, perhaps something along the same lines, except about how retail and industrial break down. Obviously, plenty of industrial is getting done in the pipeline, yet also, similar to early in the year, you said a bit more — you discussed wanting to accomplish more on the retail side. So does that come down to timing? Is it the opportunities? Or has the strategy shifted in any way? I'm just attempting to gauge any preference between industrial and retail, since the quarter did appear rather industrial heavy.