W. P. Carey Inc. (NYSE:WPC) Q1 2024 Earnings Call Transcript May 1, 2024
W. P. Carey Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and welcome to W. P. Carey’s First Quarter 2024 Earnings Conference Call. My name is Diego, and I will be your operator today. [Operator Instructions]. I will now turn today’s program over to Peter Sands, Head of Investor Relations. Mr. Sands, please go ahead.
Peter Sands: Good morning, everyone, and thank you for joining us this morning for our 2024 First Quarter Earnings Call. Before we begin, I would like to remind everyone that some of the statements made on this call are not historic facts and may be deemed forward-looking statements. Factors that could cause actual results to differ materially from W. P. Carey’s expectations are provided in our SEC filings. An online replay of this conference call will be made available in the Investor Relations section of our website at wpcarey.com, where it will be archived for approximately 1 year and where you can also find copies of our investor presentations and other related materials. And with that, I’ll hand the call over to our Chief Executive Officer, Jason Fox.
Jason Fox: Thank you, Peter, and good morning, everyone. Today, I’ll focus my remarks on our recent investment activity and the current strength of our pipeline as well as touch upon how we’re positioned in our outlook. As usual, I’m joined by our CFO, Toni Sanzone, will cover our first quarter results and balance sheet as well as our recent asset management activities. We have John Park, our President; and Brooks Gordon, our Head of Asset Management on the call to take questions. Starting with investment activity. Year-to-date, we’ve completed investments totaling $375 million, the vast majority of which were industrial properties. This comprises $280 million of investments closed during the first quarter and a $94 million acquisition completed in early April of an approximately 1.2 million square foot distribution facility, the Rickenbacker International Airport, just outside of Columbus, Ohio.
I’m pleased to say that in Europe, we’ve seen bid-ask spreads come in significantly, creating more opportunities in the region compared to last year. Year-to-date, about 70% of our investment volume has been in Europe. Our European presence also gives us a cost of debt advantage, given our ability to issue euro-denominated bonds. Currently, that advantage has moved closer to where we’ve seen it historically at rates around 150 basis points tighter than where we could issue U.S. bonds. With high-yield debt and other financing alternatives remaining very expensive, sale leasebacks continue to be an attractive source of capital and comprise the largest portion of our investments year-to-date. A key advantage of sale leasebacks is our ability to directly negotiate the lease structure, including rent escalations.
As a result, we’re uniquely positioned within the net lease sector with 99.6% of ABR generated by leases with built-in rent growth, which is currently just over 3% on a contractual same-store basis. Given the strength of our rent growth over long lease terms, we believe it’s important to look both at initial cap rates and average yields relative to our cost of capital. Our investments year-to-date had a weighted average going in cash cap rate of approximately 7.4%, providing initial accretion and average yields around 9%, reflecting rent growth over the life of the leases. For average yield, we’re assuming 2% inflation in line with the Fed and ECB targets, although that may prove to be conservative with inflation running at over 2% for some time now, which is generally expected to continue.
While we will continue investing across a range of cap rates, for the full year, we expect to target initial cap rates averaging in the mid-7s and average yields over the life of the leases in the 9s. We currently have a strong pipeline totaling over $500 million of investments, including about $300 million at advanced stages that we expect to close over the next few months. Additionally, we have $66 million of capital investments and commitments scheduled for completion in 2024. All told, that gives us clear visibility into over $700 million of investments so far in 2024 for deals that are either completed or viewed as imminent. And we have several hundred million dollars of other identified deals in the pipeline with longer time lines to close.
So we’re making good progress towards the $1.5 billion to $2 billion of investment volume in our guidance. The significant liquidity we’ve built up gives us a distinct advantage executing on those transactions. Essentially, prefunding our deal pipeline at a time when the outlook for interest rates has become increasingly uncertain and net lease REITs generally have an unfavorable cost of equity. During the first quarter, we added to our liquidity primarily through the State of Andalusia and U-Haul dispositions. Toni will get into the specifics. But the main point I want to make is that even after funding new investments, we ended the first quarter with just over $1 billion in cash, and we’re minimally drawn on our $2 billion revolver. While both are available to fund investments or repay near-term debt maturities, our strong bias over the short term remains to deploy that capital into new investments.
Over the longer term, the unique additional internal sources of capital available to us, including our equity stake in Lineage, and our operating self-storage portfolio continue to be meaningful differentiators to other Nestle’s REITs, giving us a longer investment runway should the capital markets remain challenging over an extended period of time as well as additional flexibility in how and when we access the capital markets. Lastly, as we near the completion of our strategy to exit the office assets in our portfolio, it’s a good time to review where we stand, including the near-term impacts to earnings versus how we are positioning the company for higher long-term growth. Given the office assets we spun off or sold along with the exercise of the U-Haul purchase option, 2024 AFFO won’t be comparable to prior periods, but instead sets a new baseline AFFO from which to grow going forward without the headwinds associated with deteriorating office fundamentals and without any purchase options on significant assets ahead of us.
To a lesser extent, 2024 AFFO has also been impacted by certain tenant matters. We’ve made good progress working through them and do not expect any additional downside to that currently embedded in our guidance. Toni will review the specifics here, too. But in summary, the Hellweg restructuring was completed on the terms we expected and the tenant is current on rent and on track with its turnaround plans. The Prima Wawona lease on cold storage and packing facilities was rejected as we talked about last quarter. In April, we successfully sold one of the facilities. We expect to complete the sale of a second smaller property over the next few weeks, and we’re actively working on the other two. In addition, we completed the re-tenanting of the large vacant warehouse property we spoke about last quarter, both at a higher rent compared to the prior lease and to a stronger credit tenant, which was an excellent outcome.
Since our last call, we’ve made some additional tenant disclosures, including details showing that 85% of our ABR comes from tenants where they or their parent company generate over $500 million in annual revenue or our government entities. As a reminder, our investment approach is to invest in mission-critical properties favoring large companies. During the tougher periods of the economic cycle, large companies generally have better access to liquidity and are far more likely to continue operating in critical properties in the event of a restructuring compared to small companies, which have a higher risk of liquidation. We’ve also expanded the top tenant disclosure in our supplemental to show our 25 largest tenants, which are generally very large companies, including investment grade and strong sub-investment grade credits.
Within those top 25 tenants, we’re closely monitoring Hearthside, which is the largest contract food manufacturer in North America, with around $4 billion in annual revenue and provides critical production capacity for a number of well-known and long-tenured blue-chip customers. While has experienced some credit deterioration, we do not expect any disruption to our rents, even in the event of a restructuring, given the highly critical nature of the properties we own, which comprise the large majority of Hearthside’s 2 largest divisions, all of which was central to our original investment thesis on this portfolio. In closing, with the completion of our office exit strategy this year and resolution of some recent tenant issues, we expect to end 2024 with an even stronger portfolio.
We’re making good progress towards our investment volume guidance, including a robust pipeline, which we’re extremely well positioned to execute on given the liquidity we’ve amassed. The full impact of deploying that capital will flow through next year, which, along with the strength of our rent escalations, gives us confidence that we will see a significant uptick in year-over-year growth in 2025. And as that growth is reflected in our cost of capital, we believe we will be well positioned to drive total shareholder returns over the long term in the low double digits through a combination of earnings growth and our dividend yield. And with that, I’ll pass the call over to Toni.
Toni Sanzone: Thank you, Jason, and good morning, everyone. AFFO for the first quarter totaled $1.14 per share, with the decline from prior periods, primarily reflecting the execution of our office exit strategy as well as the impact of a 3-month rent abatement under the Hellweg lease restructuring, which had about a $0.03 per share impact on our first quarter AFFO. Given our investment activity year-to-date, coupled with the strength of our pipeline, we remain on track to generate full year AFFO in line with the midpoint of our guidance range. We completed the large majority of our anticipated 2024 disposition activity during the first quarter, including 72 properties sold under our Office Sale Program for gross proceeds totaling $411 million, leaving us with just 7 office assets, representing 1.3% of ABR remaining to sell under the program.
During the quarter, we also completed the disposition of our U-Haul portfolio under its purchase option for gross proceeds of $464 million and sold 3 additional assets totaling $15 million, bringing total dispositions in the first quarter to approximately $890 million. First quarter re-leasing activity included the completion of the Hellweg lease structure, which resulted in a 14.6% rent reduction commencing on April 1, bringing its ABR to $25.2 million. The lease term was also extended by 7 years, and we provided a rent abatement for the first quarter. Excluding Hellweg, re-leasing activity resulted in overall rent recapture of 107% and added 3.4 years of incremental weighted average lease term on 40 basis points of ABR. As Jason mentioned, Prima Wawona rejected our lease in April, and we disposed of one of the assets in that portfolio for gross proceeds of $9 million.
We’re currently working through resolutions on the other 3, 1 of which is close to being sold. We collected rent on the portfolio for the full first quarter, and our guidance continues to assume no additional rent on these assets in 2024 as we work through a resolution and carry the property vacant. Occupancy at the end of the first quarter increased 100 basis points to 99.1%, primarily reflecting the lease-up of a 1.6 million square foot warehouse property just outside Chicago. As Jason noted, we achieved a great outcome on this asset, signing a lease with the U.S. Logistics division of Samsung for a 10.5-year term with attractive fixed rent escalations. The initial ABR of $6.4 million represents 102% of the prior in-place rent, with cash rent beginning in the first quarter of 2025.
Turning to same-store rent growth. For the 2024 first quarter, contractual same-store rent growth was 3.1% year-over-year, which is expected to moderate in average around 2.7% for the full year. Comprehensive same-store rent growth was negative 30 basis points year-over-year as reported, largely reflecting the abatement of Hellweg’s first quarter rent. Excluding this abatement, first quarter comprehensive same-store would have grown at just over 2% year-over-year. On a full year basis, we expect comprehensive same-store to be relatively flat, inclusive of the Hellweg impact. Other lease related income was lower for the first quarter at $2.2 million. And based on current negotiations, lease-related settlements and recoveries are expected to run higher over the remaining 3 quarters of the year, with our current guidance assuming a total for the full year in the low to mid-$20 million range.
G&A expense totaled $27.9 million for the first quarter, which we do not view as a run rate since first quarter G&A typically runs higher than the rest of the year due to the timing of certain payroll-related items. So for the full year, we continue to expect G&A to be between $100 million and $103 million. Non-operating income during the first quarter was $15.5 million, which includes $9.4 million of interest income on cash, $3.1 million of realized gains on currency hedges and the $3 million Lineage annual dividend we received in January. During the first quarter, cash earned interest income at a rate averaging around 5%, although we expect the amount of interest income to decline over the remaining quarters of the year, as we deploy cash into new investments.
For the full year, we expect nonoperating income to total between $35 million and $39 million. Moving now to our balance sheet. Our liquidity position increased during the first quarter, driven by proceeds from the Office Sale Program and U-Haul dispositions. We ended the quarter with liquidity totaling approximately $2.8 billion, including $1.7 billion of availability under our revolver, close to $800 million in cash and $284 million of 1031 exchange proceeds, which are presented as restricted cash within other assets on our balance sheet. We continue to have a robust liquidity position, noting that very early in the second quarter, we repaid our USD 500 million bonds at maturity using cash on hand. Our debt maturity schedule for 2024 remains very manageable with EUR 500 million denominated bonds maturing in July, along with some incremental mortgage debt coming due.
Given the substantial cash we’ve built up, our revolver balance remained relatively low, reducing our exposure to floating rate debt. Our weighted average interest rate, therefore, remained at 3.2% for the first quarter and is expected to average in the low to mid-3% range for the rest of 2024. With ample capital to fund our pipeline, we continue to have a great deal of flexibility on how we approach the capital markets in 2024. We have a strong preference to deploy our current liquidity into new investments and expect to see some appropriate windows of opportunity to execute bond deals this year, both in Europe and the U.S. We ended the first quarter with debt to gross assets of 40.9% and net debt to EBITDA of 5.3x, which is inclusive of 1031 exchange proceeds.
While net debt to EBITDA was below the low end of our target range of mid- to high 5x, we expect it to trend back into that range over the back half of the year as we deploy capital into new investments. Lastly, on the sustainability front, I’m pleased to say we’ve enrolled more than half of our portfolio in our electricity usage reporting program, a key step in making further progress towards quantifying and reducing our carbon footprint. We continue to incorporate green lease provisions in our leases and currently have 1/4 of our portfolio under leases that contain green lease provisions. We look forward to sharing further detail regarding our ESG objectives and progress in our sixth annual ESG report, which we’re planning to publish later this month.
In closing, our first quarter AFFO and investment activity year-to-date keep us on track with our expectations for the full year. Deal activity has picked up. And given the capital we’ve amassed and additional liquidity available to us, we’re well positioned to execute on a strong pipeline of deals. Within the portfolio, we’ve made good progress resolving some near-term tenant issues, and we’re close to completing our office exit strategy. We believe all those factors, in conjunction with the strength of the rent growth built into our portfolio, position us for long-term growth. And with that, I’ll hand the call back to the operator for questions.
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