W. P. Carey Inc. ($WPC)

[Audio Gap] did allow us to raise our full year investment volume guidance, about $250 million at the midpoint. So we're now at $1.5 billion to $2 billion is the assumption for deal volume for this year. So that was 1 of the drivers. I think the other main driver is the more favorable outlook that we have for our estimated or maybe it's better assumed rent loss that's embedded into our guidance. We've taken the tactic where we've assume a cushion on credit loss to start the year, 1 that I may view as being conservative with the idea being that it can accommodate a wide range of scenarios that are entirely visible at the beginning of the year. And then as we have more visibility into the year and see actual outcomes, we can refine that range, which is what we did. So we lowered it from $10 million to $15 million to $8 million to $12 million, which is about 50 to 75 basis points of ABR. And again, we think that, that can accommodate a wide range of scenarios for this year and 1 could be conservative as well. I think if you look at us historically, we've been in the 30 to 50 basis point range for credit loss as a percentage of ABR. And I think there's certainly a pathway where we could be back in that range at the end of this year, like we were last year. So in the press release announcing the $400 million transaction with Garden Core, you also noted that you currently have visibility into about $1.5 billion of investment volume, which already puts you at the low end of your full year guidance of $1.5 billion to $2 billion. Can you talk a little bit about the Garden Core acquisition as well as the momentum you're seeing in the transaction environment and where you're seeing the most compelling opportunities both in terms of property type, whether it be industrial, warehouse, retail as well as region.

Yes, sure. For those that follow us know that many, if not most of the transactions we complete our sale leasebacks, where we're buying corporate-owned real estate from companies and leasing back to them over long periods of time. And and the sale-leaseback is a source of capital. Sometimes that's directed with companies. Sometimes that's in conjunction with larger transactions. This particular deal that we closed in May, it was a $400 million sale leaseback for $43 million manufacturing properties spread across the eastern half of the U.S. and it was done with a company called Gardencor, which is 1 of the largest U.S. manufacturers of kind of lawn and garden consumables. I think bagged mulch bag soil line products and other rocks that you may find that Lowe's or Home Depot or Walmart for that matter, high-quality company, very strong tenant base has been around for a long time, either the #1 or #2 market share in their product lines that I mentioned earlier. -- triple net lease, 20-year term. I think importantly, -- this deal was done in conjunction with the carve-out of this business from a much larger company than a private equity firm specifically capital purchased. We were a big source of their acquisition financing, which in those scenarios, our counterparty, our partner on this deal, they're most focused on execution. So I think that's reflected in pricing and structure. So a good transaction for us, $400 million is going to be 1 of our top tenants now and you think about it as production lines plus laydown yards or iOS, industrial outdoor source space is kind of the format of these properties. In terms of the deal volume that you mentioned, we had talked about being with that transaction, $1.1 billion of deals completed year-to-date with visibility into another $400 million about half of that are construction projects, build-to-suits or expansions that we're doing within our portfolio that will deliver this year. The other half is called kind of the pipeline and I would say, advanced stage pipeline where much of that will close over the the coming weeks or the next month or 2 as well. So I think the trajectory is good. You mentioned our guidance range of $1.5 billion to $2 billion. We obviously have visibility to the lower end of that range. I think to the extent we continue to see opportunities that make sense for us, the top end of that guidance range is probably in play, but I think it's difficult to predict at this point. We don't have really visibility into what we're going to transact in the second half of the year and particularly the fourth quarter, which tends to be the largest for us. I mean I'm happy to go into some details on kind of what we've been buying and and what the pipeline looks like. predominantly is industrial, that's -- it's a mix of both manufacturing and warehouse. That's kind of reflected in the deals we closed in Q1, about 60% of them were in that category, in about 3/4 of that were warehouse properties. I think once you add in the $400 million Garden Core portfolio that equates to about 3/4 of our year-to-date deal volume is in the industrial space, which has always been a core part our investment target we picking up.

Okay. Great. I'll get a little closer to the microphone. We see some retail in Canada, which we're happy to talk about as well. And I'd say the pipeline looking forward is going to be more weighted towards industrial as well. And in terms of geography, I think those that follow us know that we are diversified across geographies as well with a platform based in Europe. About 1/3 of our ABR is based in Europe. And so that's a source of good deal volume for us. Europe continues to show good opportunities for us, especially over the last year. We've seen it ramp up. I think year-to-date, about 1/3 of the deals have been Europe. The pipeline is probably closer to half right now. So activities are increasing there. One of the big benefits of targeting Europe is our borrowing costs are quite low there relative to the U.S., yet cap rates are in the similar ZIP code. So we're generating wider spreads there which flow through to earnings growth for us. So speaking of different geographies, a meaningful proportion of your 1Q investment volume was in Canada through the Go Auto acquisition. Can you talk to your history and the opportunity for investing in that market and how deals and cap rates there compared to the U.S. and Europe? .

Yes, sure. So we've been investing in Canada for probably several decades at this point in time. I wouldn't say it was in scale for most of that period of time. Many of the deals we had done in Canada were part of multi-country sale leasebacks where there is a portion of the deal was based in the U.S. and some of it was in Canada. Many of those were U.S.-based companies. And I would say the bulk of those deals were U.S. dollar denominated both the U.S. piece as well as the Canadian piece in these were U.S.-based companies. Over the last couple of years, we've had more focus there. We have a person on our -- a Canadian on our investment team that spends a decent amount of time sourcing deals north of the border. We did a large deal with a company called Apotex A couple of years ago, the largest generic drug producer in Canada. And then most recently, we did a a large car dealership portfolio called Go Auto with high-quality real estate, very strong locations, a concentration in the greater Vancouver market, which is going to be between that and Toronto the 2 strongest markets within Canada. These deals were Canadian dollar denominated these were Canadian companies. So it allows us to to add some Canadian denominated debt into our balance sheet as well. But I think overall, you asked about cap rates. I think cap rates are similar to the U.S., maybe slightly tighter. Our borrowing costs are are better there or cheaper. So we are able to generate wider spreads.

You answer my next question, so I'll move along. So you've previously mentioned capital projects becoming a larger proportion of your investment volume. -- particularly given the launch of your carry tenant solutions platform, what percentage of annual deal volume do you see that becoming in '27.

Yes. carried tenant solution is something that we've been placing more emphasis on recently, and that is really the catalyst to rebrand something that we've done for a long time. We've been doing build-to-suits and expansions within our portfolio and redevelopments for that matter for the better part of a couple of decades. Typically, we typically have, call it, $200 million on average that would deliver per year. I think this new emphasis on this, where we are kind of systemizing and doing a more kind of holistic approach to our tenants and others that can bring opportunities to us. The tenant reps, corporations that may be growing more systematic outreach that we think can generate more of this. One of the benefits of scale, and we're 1 of the larger net lease companies is we have a dedicated project management team on staff that oversees these type of projects, very capable, and we think that these construction projects are some of the best deals we can do. I think build-to-suits and expansions, effectively leases in place, but there's also opportunities to work with our tenants on buildings that may be in very strong locations with buildings that are showing some obsolescence and we can redevelop those into 8 buildings and strong locations. We think there's opportunities to do that as well. So if you think about it, if we've done $200 million of this on average historically, could we see a pathway to doing maybe 300 or 350 per year, which is added to the deal volume. I think that's kind of the goal ultimately.

Now maybe back to some of your early comments on the investment volume guidance. Given the strong pace on investments year-to-date, is there a potential for further raise in that volume guidance?

Yes. I mean, similar to the commentary I had around tenant credit in our assumptions for guidance around credit loss. We take a similar approach to deal volume. We started the year with a -- with -- I'm sorry, with $1.25 billion to $1.75 billion, a number that still supported an earnings growth that was in the low 4s, which we think was attractive relative to many of our peers with the idea that as we saw or had more visibility into our transaction pipeline and closed deals that we would adjust that volume as we've gone and we have. We've increased it to $1.5 billion to $2 billion, as I mentioned earlier, of about $250 million at the midpoint. I think that we are trending towards the top end of the guidance without providing any full updates, but there is -- we're kind of ahead of pace from where we started the year. And this is a similar approach we took to last year. I think last year, we completed $2.1 billion for the year at very attractive cap rates and very attractive spreads to our funding cost, and we would expect to do something similar this year.

Could you talk about the geographical construction of what those numbers would be in terms of just the guidance range as you look at the low and the high end, if you think about the U.S., Canada.

Yes. I mean we're agnostic to where we're investing. I think overall, within our portfolio, we have targets to be roughly split 2/3 North America with the bulk of that being in the U.S. and the remaining 1/3 in Europe. But I think in any given quarter, we're giving here it really is dependent on opportunities. I think this year, maybe coincidentally, the pipeline plus the deals that have closed are roughly in that 2/3, 1/3 split, 2/3 North America 1/3 in Europe. But we are seeing good opportunities in Europe. And I think there's better spread opportunities there. So to the extent there's more deals there, we can overweight at this point in time towards Europe relative to our your portfolio allocation. I think we'd be open to that. And then also kind of going back to an earlier comment you made on tenant credit. Your portfolio appears to have continued to perform so far this year.

And on your last earnings call, you lowered your rent loss assumption to $8 million to $12 million from $10 million to $15 million. What were the main factors enabling you to bring this down?

I mean it's -- I think it's quite simple. We have better visibility into more of the year. And I've talked about the range of scenarios that we think that our initial guidance could accommodate. Those have tightened. We think that there are a narrow group of scenarios that could lead to credit loss. We're seeing a macro environment that certainly has headlines on a day-to-day basis and swings in oil prices that flows through to the indices and in rates. But I think overall within our portfolio, if you think about how we're constructed, we generally have large companies, 80-plus percent of our ABRs with companies that have more than $0.5 billion of sales. Large companies tend to be absorbed some of the impacts of either higher inflation or increased energy costs. I think the thing to watch and this is what we read about all the time is the consumer. And how stretched the consumer is getting from oil prices and other increases. We don't have a lot of exposure to consumer-oriented businesses in the U.S., certainly relative to many of our U.S. retail peers, where whether it's cash bit dining or family entertainment or other areas like that, our exposure is more towards larger industrial companies that we think can absorb changes in economic conditions. And I think that's reflected in our credit loss assumptions.

Does lowering your Helbig exposure factor into this?

Yes. I mean, certainly, I mean, again, those who have followed us for a couple of years have heard us talk about Helbig on a regular basis. They're large DIY retailer in Germany that we restructured 2.5 years ago, and we continue to update the market on their health and our exposure to them. The goal here has primarily been to continue to decrease our exposure. We've taken them out of our top 10 list through asset sales as well as proactive lease terminations. We think they'll be out of our top 25 by the end of this quarter. in all likelihood out of our top 50 by the end of this year. And where we've been successful terminating some leases, we have alternative DIY or home improvement operators, you can think of a Lowe's or a Home Depot in Germany, that can replace them. And we've done that at or around the same rents that Helen has been paying. So these are good real estate to the extent we can diversify our exposure away from Helix, I think that's a positive, and we've been doing that. And look, I think that's 1 of the drivers here of lowering our guidance. We started the year kind of assuming a wide range of scenarios with Holigen they continue to pay us rent, which is a good thing, and Cornerstone was mentioned on the earnings call as well. Anything to note there? Yes. Cornerstone, I mean, in the -- the goal is to provide as much transparency as we can around credit events within our portfolio. Cornerstone is a large building supply company, about $5 billion in sales. They are not a top-25 tenant. They're probably somewhere in our top 50. We have about 60 basis points of our lease to them. The message that we talked about is that they are overlevered. We can expect a restructuring in all likelihood at some point this year, we think, and we wanted to deliver the message that we own critical operating assets for the company. It's a large company, they will restructure, and we think they need our properties, which means they continue to pay our rent with really no disruption. And that's kind of the bottom line here is some distress on the balance sheet side, but no impact to our rents. And maybe that's a theme. I mean we think about in how we structure transactions, really focusing on downside protection. It's not often that we have credit events, but we think about structured deals as if we could. One of the main things that we look for are critical the critical nature of assets that we own relative to the company's overall operations and we have critical operating assets and there are restructurings we tend to fare quite well, which we will hear.

Beyond those 2 tenants, are there any others that we should be aware of?

No. I mean beyond that, you'd have to go down to 20 to 25 basis points in terms of scale. So it's kind of de minimis. We have a portfolio of 1,700 properties over 400 tenants. So there's always going to be some tenants that we're looking at. Our bearing the business is taking risk, but there's nothing of scale or of significance that would be impactful to earnings. And certainly, nothing that's not well covered by this credit loss assumption built into our guidance.

Maybe if we could pivot to the internal growth of the business, W. P. Carey has a high proportion of leases with rent bumps side to inflation. And given the potential inflationary impact of the IREN conflict is having on energy prices, can you just remind us how your portfolio is positioned from a rent growth standpoint?

Yes, about half, maybe slightly above half of our portfolio by ABR has rents, leases indexed to inflation. So I think we have -- what I would view as positive exposure to inflation. It's probably a little bit higher proportion of our European ABR has inflation. It's more customary in those markets to structure deals with inflation-based increases. So I think the point is, to the extent we see higher inflation and it's correlated with higher interest rates, which typically is, we do have some offsets to anything that may flow on the interest rate side. I think that's a bit unique to us. And when we don't have inflation increases, we do have strong fixed increases that typically average in the mid-2s. And this is 1 area that I think is quite unique to WP Carey, a big portion of our growth of our earnings growth is generated through same-store internal growth as we put it, which is a bit different than many, if not most, of our net lease peers who are more maybe exclusively are certainly more weighted towards growing through external investments, which you have less control over.

I look at internal growth, that portion of our earnings growth is being more certain with more visibility and therefore, higher quality and having inflation as well as our fixed increase is a big part of that. Are you still able to get inflation-linked bumps on your new investments? And how should we think about that mix going forward?

Yes. In Europe, as I mentioned, it's more customary. So I think those are part of the transactions. I would say what has changed. And again, we're structuring sale leaseback. So there's -- all the elements are certainly the economics of a transaction are part of the negotiation and the bumps are a big part of that. And so yes, I think in Europe, we still are getting CPI where there is more of a negotiation that might be around institution caps into the equation. And I think when we're open and willing to to include a cap in our CPI lease, we tend to get floors as well. Think about caps in the 4% to 5% range and floors in the 1% to 2% range. So we feel well protected. I may argue over a 20-year lease. -- that 2% floor may come into play more often than the 5% cap. So we think, all in all, these are still strong leases and even with caps, they are -- they give good inflation protection. I think the U.S., it's been it's less customary and so it's more of a negotiation. We still are getting deals. In fact, the GoAto deal in Canada, that was a CPI base increase there. And again, when we're not getting CPI, it's flowing through to higher fixed rent increases. Historically, if you kind of look back 5 to 10 years ago, most new deals with fixed increases were more -- were probably in and around 2% on average. More recently, it's been 2.5% to 3.5%. Some of that is the environment -- some of that is the increased focus on industrial assets where market rents tend to have grow at a higher pace and our pumps tend to reflect that. Now just pivoting to the balance sheet. Based on the capital you've raised thus far, you've effectively pre-funded your investments for 2026. How are you thinking about funding going forward.

Yes, Tim, do you want to talk through that?

Yes. I mean like you said, we've kind of addressed most of our needs this year already. We did a large bond raise and an equity raise in the first quarter -- so we're in a good position and really most of our needs are addressed, but just to talk it through. In terms of the equity, we're sitting as of the end of the first quarter, on approximately $650 million of forward equity. And so that we believe can take us through the rest of this year in terms of the -- our guidance range on investments or even through the high end of our guidance range. In addition to the equity, we also have free cash flow and a handful of dispositions, which we can talk about, if that's helpful. In terms of debt, we would expect to continue to fund our debt capital needs with the mix of U.S. dollar and euro-denominated unsecured debt. All else equal, we have a bias when a refinancing comes up. We're just going to keep it in the same currency. So the only additional maturity we have this year is at USD 350 million maturity that's in October, that's a very small amount of refinancing for us. We have almost fully undrawn $2 billion revolver, so there's no question about the liquidity to take out that bond maturity, but I think in all likelihood we'll find a window of opportunity here sometime in the second half of the year to do another bond issuance and take that out in USD.

Could you talk more about dispositions as a lever here?

Yes. I mean, like I said, we do have a guidance range of $250 million to $750 million for potential dispositions. I think that range is intentionally wide. We were Part of what we are signaling to the market is that we have the flexibility if we feel like there's good opportunities to do more dispositions and to have that be a source of capital. I think where we sit today with the forward equity we've raised with the bond issuance we've already done I think we're more likely to be in the lower half of that range. If you see us going into the higher half of the range, I think it just means that there's really just great opportunities for dispositions that we want to take advantage of. And all of that will just serve to, I think, further kind of bolster our position or extend the runway that we have to make investments on a leverage-neutral basis into 2027, perhaps well into.

Are there any assets in particular that you're thinking of or subsets that we can think of on the disposition front?

Yes, it's really the story on the disposition side. I mean, those of you who follow us know that in recent years, we've gone through some larger programs we addressed. We got out of office and we're selling some office several years ago. Last year, a part of our story was liquidating the operating self-storage assets we have on the balance sheet. So the headline is that there's no major disposition program like some of these ones we've done in the past, nothing that we're looking at this year and really nothing that we could see in the foreseeable future targeting. So the dispositions we do today, they're more one-off dispositions, single assets. There are still a handful of one-off assets that we think can be good accretive sources of capital and also I guess, even though they're small, serve a bit of a strategic purpose. This year, we did sell. We have 1 asset left in Asia. This was a legacy investment we made when we were in the fund management business or and looking at assets in that region. So this is our last asset in Asia. It was in Japan. We sold it. So it was only $30 million or $40 million, simplifies our story a bit. it was an accretive source of capital. We have a single student housing asset left. That's 1 that we'll target for disposition. Again, it's probably a $40 million or $50 million assets. So none of these assets by themselves are meaningful, but that would be as well and again, help with the story. And then we have several hotel operating assets. For those of you, again, who have followed us, we had a net lease with Marriott very long-term lease, and that lease matured recently. One, it matured, those assets converted effectively to assets that were managed by Marriott instead of lease to Marriott. So we now own the hotels. Marriott manages these are core brand. So we've sold most of those. We have 3 left. Those are redevelopment opportunities for us. One that we may do ourselves, the other 2 probably to sell to developers. So I guess it's all to say the main point, there's no major kind of programmatic asset disposition going on anymore, but there are kind of one-off deals that we think are -- make sense to sell and that we think will be a good source of capital.

And maybe if we could just wrap up with valuation here. At the end of your last earnings call, you mentioned that you continue to execute and expect your stock multiple to expand further. What is the case for further expansion of WPC's multiple.

Yes. I mean, look, I appreciate the question as always, because you probably won't have any CE up here, everything they're fairly valuated I'll fall into that category. I mean, look, I think our story is quite interesting right now, if you kind of look at over the last number of years at this point in time, in particular. We've had a number of strategic initiatives over the last, call it, years during the time that I've been in the seat, we've wound down our fund management business and many of those funds were net leased that we acquired under our balance sheet. Jeremy mentioned that we exited office through a spin and asset sale program 3 years ago at this point in time and most recently, we sold down operating storage assets, very strong business, but maybe not necessarily 1 that fits perfectly within the net lease portfolio. And those were very attractive dispositions kind of in and around 6 caps that allowed us to reinvest in that lease. So where we sit today, if you look -- let me go back 1 year, 2025, is the first base year in which we've had a clean story after all these strategic initiatives -- and I think the results speak for themselves. We put up a record deal volume, which was over $2 billion earnings growth at just under 6%. And I think we're set up very well to continue that progress into 2026. Investment activity is strong. We mentioned where we are deal volume to date. We've mentioned raising our guidance there. We're very well positioned from a funding perspective. Jeremy had just gone through this. We think we can fund through the top end of our deal volume without having to get into the capital markets at all. I think we can maintain an opportunistic stance, but we're well funded to fund any needs or foreseeable needs for this year. And then our portfolio continues to perform, both from a credit perspective, with continuing lowered assumptions around credit loss and, of course, the same-store growth within our portfolio. a meaningful component of our growth that many of our peers don't have. So when you kind of combine those factors there, I think we have a a profile that we think can generate mid-single-digit earnings growth on a go-forward basis, we combined with a dividend yield that's in and around that gets you to a low double-digit total shareholder return before any multiple expansion that we think is going to be attractive to net lease investors. And of course, in net lease, once you get the cost of capital and you get into this flywheel spinning and you're -- into the algorithm, you can really grow and we have a long history of acquiring and structuring net lease assets, and we think we're really well suited for growth going forward. And we have about a minute left if there's any questions from the audience. Yes. You have Yes. Go ahead, your mine.

Yes, we target mid- to high 5s on net debt to EBITDA. That's why we also look at debt to gross assets, call it, low 40s. So we've been operating in that zone, really for a long period of time. That's probably been our target for the last 5 to 10 years, and we expect to stay there. If there's any bias, it's maybe to the lower end. We think REITs in general get the best cost of capital by running conservative balance sheet, but we think the target is appropriate conservative for our profile. Yes, maybe first in the front and second behind. .

I appreciate the contain terms of the bad debt moustache. Europe specifically, you're there to going out granthigher oil prices than higher gas prices. We're seeing it nests it on average to turn in terms of the overall coverage for .

Yes, nothing discernible or thematic. I mean we mentioned that we generally focus on large companies -- and some of that may be impacting their margins and kind of the equity values of these companies but not their ability to pay rent at this point in time. When you think about it, we went through a case study of this a couple of years ago when Russia made the Ukraine, and we saw a spike in energy prices and gas prices, in particular at that point in time. And I think we made through that scenario relatively unscaled relative to those pressures. One more question in the back.

Janet markets nor funding a lower cost of capital. No. We've -- as Jeremy mentioned, we exited the Japanese market. We had 1 asset, legacy asset from 15 years ago that we finally sold. So we're out of the business and focused on Europe and North America. .

Just thinking about it the corporate funding. Yes, the short answer is we wouldn't do that. I mean when we do go into these other debt markets, it's reflecting the business platforms that we have there. So we're not just sort of going around the those markets and blend into lower cost of debt, and we can even overweight in those currencies. -- that's part of our hedging approach. But we wouldn't go to Japanese yen without having a business there. We have no expectation. We just exited, so we don't expect.

Well, Jason, Jeremy, thank you very much for joining us and telling us the W.P. Carey story, and thank you all for coming.

Yes. Thanks, everyone.