Q1 2020 Earnings Call
Hello, and welcome to W.P. Carey's.
First quarter 2020 earnings Conference call. My name is Diego and I'll be your operator today.
All lines have been placed on mute to prevent any background noise. Please note that today's event is being recorded.
After today's prepared remarks, we'll be taking questions via the phone line.
Structure, so how to do so would be given at the appropriate time.
I will now turn the program over to Peter Sands director of in institutional Investor Relations Mr. Sands.
Please go ahead.
Good morning, everyone. Thank you for joining us today for all 2021st quarter earnings Cool.
Again, I would like to remind everyone that some of the statements made on the school and office talk facts and may be deemed forward looking statements.
That could cause actual results.
Clearly W.P. Carey's expectations.
Why did you see colleagues.
An online replay of this call from school will be made available in the Investor Relations section of our website at W.P. Carey Dot com, where it will be archived for approximately one year and where you can also find copies of our investor presentations and other related materials.
And with that I'll hand, the call either to our Chief Executive Officer textbooks.
Good morning, everyone.
Thank you for joining us on this call.
Everyone in their loved ones are safe and well it'd be all move through these challenging times.
Good day.
My remarks on three main topics first.
I'll briefly touch upon the actions we take in response to cope with Nike.
Second.
Review, where our business stands today, including insight into our April rent collections and third.
Include for some comments on what we're most focused on as we look ahead.
After that I'll handover to Tony Sands Young our CFO will briefly review our first quarter results in portfolio activity.
It's wells the strength of our balance sheet and liquidity position.
As noted in this mornings press release, we withdrawn our previous 2028 AFFO guidance given the uncertain economic outlook. However, Tony will discuss our current views on various aspects of our earnings for the remainder of the year.
Before I jump into my prepared remarks I'd like to also note that the 8-K, we furnished this morning with our earnings release and supplemental disclosure also included slides with Cobiz Nike uptick.
Much of which will cover on this call.
As usual, Tony and I are joined by our President Jon Clark.
Head of acid management groups Gordon we're here to take your questions.
Our Kogan 19 response began in late February we started taking steps to prioritize the health and safety of our employees. It confirmed that our entire workforce at the technology and resources required to work remotely.
I did March we fully transitioned all employees in our four offices, New York, Dallas, London, Amsterdam working remotely.
That proved to be a smooth transition I think previously moved our core systems, including our financial.
Communication copper seeing systems to the cloud.
Knowledge, it's clearly a critical component.
But it's our employees if it really made a difference I'm immensely proud of the way our entire team has adapted to the current situation without skipping a beat in our day to day operations. It's times like this it really highlight the caliber of our people and the culture of excellence, we've cultivated W.P. Carey.
Before reviewing our eight for rent collections I think it's important to give some context I briefly revisiting our approach to net leasing basket.
Well, we seek to generate attractive long term risk adjusted returns, we're equally focused on downside protection, including deep credit underwriting and targeting mission critical assets.
We also take a long term approach evaluating each new investment based not only on how we think attended will perform during times of expansion.
But also on how they will perform during times of distress.
Well, we view tenants just below investment grade that's providing the most attractive risk reward trade off we focus on large companies, which are generally better equipped whether downturns.
Large companies have better access to liquidity and in a worst case scenario are more likely to restructure and continue to operate and critical properties as opposed to small companies, which are more likely to liquidate.
97% of our annualized gates ranch, where hbr comes from tenants today, where their parent company generate over $100 million and annual revenue for our government entities.
The majority of our tenants are also public companies, the private equity backed tenants representing less than 20%.
We are.
It's also important note that W.P. Carey has experienced multiple business cycles over which we've honed to protections built into our leases and couldn't be placed the infrastructure to effectively manage end of lease outcomes and it credit issues and restructurings complemented by our proactive approach to asset management.
And of course, we've always believed that a well diversified approach is desperate athletes.
Not only does it provide a wider opportunity set for external growth. It protects us from overexposure to a single appetite or industry, something it's proving to be more important than ever in the current environment.
We've also had a longstanding underweight position in retail and in recent years have focused our investments in warehouse in industrial assets.
So with that context, where does her business stands today in particular, our people rent collection.
Overall, we collected 95% April rents, which was broad based across property types, including retail.
The notable exception for fitness theater in restaurants, which represent just 2% of our HDR and for which we received only a very minimal amount of people rats.
We received 100% of equal rents from auto dealerships, which represent 3.4% of 80 are recognized stay at home orders have put near term pressures on those businesses, which may continue over the medium term, particularly in a recessionary environment.
About two thirds of our retail property HDR come either from June yourself retailers for from grocery convenience and wholesale stores.
Businesses that we view as well positioned to perform in the current environment and over the long run.
Warehouse industrial and self storage assets in aggregate comprised just over half of our portfolio.
Equal rent collection for warehouse was 93% needed stronger for industrial.
Similarly, self storage, which has been forming wells in asset class hadn't ecobank collection rate of 100%.
We're encouraged by our April recollections I want to emphasize if you're cautious about the uncertainty yet we expect may rent collections could be somewhat lower overall, and particularly lower within retail, reflecting the impacts that regional lockdowns are likely to have an economic activity and consumer confidence.
Europe is a differentiated part of our strategy she'll briefly provide some added color on overall, our European assets have performed in line, but those in the U.S., while providing additional diversification.
Our largest property types in Europe comprised you yourself retail grocery automotive dealerships and government credit several of which our top 10 tenants.
Germany is our largest country exposure in Europe, it's been able to limit the impact to the pandemic through widespread testing and public discipline has been among the first countries in the region to begin easing lockdown measures.
Our do it yourself retail assets are primarily German credits.
April then collection rate for Spain was 100% with a geographic exposure to Spain coming primarily from our government office portfolio with the state of Andrew the steel.
Looking ahead, we're focused on two key priorities first.
We're actively working with our tenants to ensure we continue to collect rent payments.
Second our balance sheet positioning assuring that we have ample liquidity and flexibility for a range of scenarios ranging from weathering the extended economic downturn to taking advantage of new capital allocation opportunities.
Tenants, representing about 25% of HDR have requested some form of rapidly, which we expect could tick up overtime.
We're not taking a one size fits all approach dependent discussions each situation is different because our tenant base and so well diversified there are significant portions that required no assistance at all.
That said there are some general categories for those tenants that have requested rapidly.
First Ken is that can pay it has access to capital should pet we expect them to do so.
A large majority of tenants requesting relief fall into this category and our expectation is that without any action on our part he will continue to pay right. He situations may also yield opportunities to work with tenants on broader lease restructuring it will create substantial long term value.
Second.
He will be short term deferrals for tenants, who is access to liquidity has been temporarily disrupted. These are typically short term in nature with pay that required within a year.
And there will of course be some kind of two businesses have been more severely impacted many of whom are part of the 5%. We did not April rat.
We are working with these tenants to find mutually acceptable solutions focusing on structures that protect our position, while providing a pass through their parents distress.
We expect this to be a small lists and we're very well positioned with critical assets good collateral and a seasoned team with expect extensive restructuring experience.
Regarding our other priority our balance sheet.
Made important progress in recent years to improve our balance sheet, which puts us in a position of strength. Despite the dislocation we are seeing into capital markets.
We've been under long term trajectory to reduce secured debt increased balance sheet flexibility in 2018. In 2019. We also took the opportunity to reduce leverage through our merger with SCPA 17, and over $800 million of additional equity issuance for new acquisitions and mortgage debt prepayments.
We're very comfortable with our liquidity, especially having just closed a new credit facility in February.
The facility matures and 2025 improved pricing to LIBOR, plus 85 basis points on our revolver.
Added $300 million in term loans and upsize, our revolver to $1.8 billion of which nearly $1.6 billion is currently available.
As a result of refinancing activity in recent years, we have limited near term maturities only about $110 million a debt maturing in 2020 and approximately $240 million in 2021, we have no bonds maturing until 2023.
Based on the initial performance of our tenants and the conservative positioning of our balance sheet. We are confident we will continue to have sufficient liquidity and importantly flexibility as we navigate the challenging environment ahead.
While we don't need any additional capital at this time, we will continue to monitor closely our balance sheet and as always we'll evaluate opportunities to further strengthen it.
In closing I will note that from a capital allocation perspective, we've historically seen some of our best opportunities during downturns and periods of market stress.
We're seeing engage with brokers and potential sellers and we're very focused on new opportunities that come to market and how they're priced.
Although the capital markets have been volatile, we believe there could be compelling opportunities and investments that continue to pencil out for us the transaction markets have been relatively quiet sellers evaluate their options and in many cases, the let's wait on watching new deals until they see more stability.
Some of the best opportunities were current evaluating our with existing tenants or we see value add potential to provide near term rent relief tied to longer term improvements to lease economics at structure.
But there's so much uncertainty ahead, we're being cautious we're committed to preserving the safety and flexibility of our balance sheet it'd be evaluate all capital allocation decisions through that lens and with that I'll hand, the call over to Tony.
Good morning, everyone.
Before I begin I'd like to Echo, Jason spots and hope that everyone in their families are safe and well I'd also like to recognize all of our employees for their excellent work. During this difficult time, especially those who worked tirelessly over the past several weeks in support of our quarter close and earnings process.
I'm going to start with a brief review of our first quarter results in portfolio activity before moving onto our current outlook and finishing with a review of our balance sheet and liquidity.
Looking at the first quarter, we reported strong quarterly results with total a AFFO coming in at $1.25 per share.
Our real estate segment generated a AFFO of $1.21 per share for the quarter, representing 7% year over year gross.
Driven primarily by the accretive impact of net acquisitions and rent increases in addition to lower interest expense due primarily to the significant mortgage debt prepayments we made in 2019.
These factors more than offset the dilution associated with strengthening and deleveraging our balance sheet, resulting from the shares we issued through our ATM program last year.
97% of our total first quarter, a AFFO per share, which generated from real estate as we continue our exit from investment management, which was further advanced through the recently completed merger between the CW I lodging funds that we previously managed to form watermark lodging Trust.
Investments during the first quarter totaled $256 million at a weighted average cap rate of 6.5%.
First quarter investment activity was comprised of three acquisitions for $189 million.
In addition to the completion of three capital investment projects at a cost of $67 million.
We currently expect to close an additional $193 million of capital investment projects over the remainder of the year, which would bring total 2020 investment volume to $449 million.
During the first quarter, we disposed of four properties for gross proceeds of $116 million.
Almost all of which came from the sale of an operating hotel in Miami completed back in January.
We now have one remaining operating hotel in our portfolio, which is not a material contributor toray SFL.
For the first quarter the same store rent growth, we've historically reported which represents the average contractual rent increase written into our leases was 1.8% and as noted in our supplemental as contractual same store growth.
Taking into account the impact of leasing activity vacancies and restructurings year over year same store rent growth with 80 basis points, which we refer to as comprehensive same store growth.
You can see we've added this disclosure to our supplemental information in response to investor interest in this metric.
Given the timing of the cobot 19 outbreak and the related business disruption there was very minimal impact on our first quarter results in portfolio metrics.
As such we collected substantially all cash rent due from tenants for the month of March.
At the ended the first quarter, we recorded noncash impairment charges totaling $19 million as we wrote down the carrying value of properties leased to two small tenants to their respective fair values.
During the first quarter, we also recognize noncash impairment charges totaling $47 million to reduce the carrying value of our equity investments in the CW I funds to their estimated fair values as a result of the impact of the pandemic on the lodging industry.
Moving on to our outlook for the remainder of 2020.
As we announced this morning, given the significant economic uncertainty arising from cobot 19, including the duration and severity of measure to contain the virus. We have withdrawn our previously issued 2020 guidance.
As Jason discussed, we're actively monitoring our tenant collections and the overall health of our portfolio on a daily basis.
Well to date, we've had very positive outcomes and collecting 95% of our April rent do we expect rent relief discussions to continue with possible outcome falling into various categories, including full collection of past due amounts rent deferrals lease for structures as well as some tenant defaults.
Also expect to evaluate potential rent deferrals granted under the accounting model for revenue recognition on a case by case basis.
And we'll recognize rental revenue when we conclude that the amounts or probable of collection based upon our assessment of a number of criteria, most notably tenant credit worthiness and risk of solvency amongst others.
In cases, where we do not believe collection is probable we will not record revenue in accordance with gap and such revenue will not be reflected in our AFFO until cash rent is received.
In cases, where we do conclude collection is probable we will record revenue for both GAAP and AFFO with the related receivables continuing to be evaluated for collectability.
This analysis, introducing additional uncertainty regarding the timing of rental revenue, we expect to receive and the overall impact on earnings over the remainder of the year.
Given the circumstances impacting our tenants businesses are evolving rapidly we're not currently in a position to estimate the financial impact on our recollections, nor the duration of disruption or the form of any recovery.
That tenant rents may take.
Operational efficiency remains a continuous focus for us across the business.
We've instituted a number of cost savings measures since the start of the covert 19 crisis predominantly focused on discretionary spending.
As such we currently expect to reduce our cash DNA expense by about 5% from previous expectations and we'll continue to monitor our spending with the appropriate view on both our short term and longer term outlook.
Moving to our balance sheet and liquidity as Jason discussed our balance sheet is well positioned to navigate the uncertainty of this environment with ample access liquidity, while we take a prudent approach on capital allocation.
Weve, a very manageable amount of mortgage debt coming due over the next two years and our nearest bond maturity is not until 2023.
In terms of liquidity.
The capital needs in the near term a minimal and we continue to expect that our earnings will more than covered our dividend.
For investment volume, we're taking a pause while we monitor the overall economic environment.
We expect to continue to fund our active capital investment projects.
Many of these projects are expansions or renovations with existing tenants and substantially all of our capital investment projects are already in process.
The remaining capital to fund is $143 million in 2020 with an additional $80 million committed in 2021.
Given the current environment, we're not relying on any disposition proceeds and 2020, but could pursue certain asset sales, if we believe execution and pricing are attractive.
From a leverage perspective, we ended the quarter with debt to gross assets, a 41% and net debt to adjusted EBITDA of 5.6 times.
We continue to target debt to gross assets in the low to mid 40% range and net debt to adjusted EBITDA in the mid to high five times.
And our current leverage levels. We believe there are some capacity to absorb downside scenarios, even if rent collections deteriorate from April results or if assets are impaired in the near term and there are substantial capacity in our covenants as well.
In closing, while we are encouraged by our April right collections, we continue to be cautious about the future impact of this unprecedented pandemic Anna proactively working with our tenants to minimize disruptions to rent payments.
Given our balance sheet strength and the diversification within our portfolio. We believe we are well positioned for where range of market environments ahead.
With that I'll turn the call back to the operator for questions.
Thank you.
At this time it will take questions.
If he would like to ask a question simply press Star then the number one on your telephone keypad. If you would like to withdraw your question Press Star then the number two.
[laughter].
Our first question comes from Jeremy Metz with BMO. Please state your question.
Hey, good morning, I'm, obviously, there's a frame guarantee here.
Hey, Jason I was just opened again this is through your coal guidance.
A little bit I guess being cautious here obviously.
But you know its arguably a pretty good andre not buying or selling anything for the rest of the year.
You have the strong rent collection and a lot of support from industrial and warehouse in all says I mean separately those sectors are all synchronoss to keep some guide posts in place somebody got the long average lease or so I'm. Just wondering how much is yours really being overly cautious given the environment versus driven by some specific Rick.
This years, he really no.
Maybe have you nervous.
No you're right I mean, we're encouraged by ran collections.
We feel good about our portfolio as you mentioned the balance sheets in good position, but it's really there's just too much uncertainty right now they're just really you don't have enough visibility into what the impact on the global economy is gonna be to really forecast for the rest of the year.
Yes, I would I would think that there's probably a reasonable chance at our next earnings we would reissued but I think.
More to come on that as we.
Continuing to evaluate what's happening within our portfolio as well as the broader economy.
No.
Yeah, No that's for and then.
On the 25% deferrals, but you know there at this point you know what's the baseline for how much you, though you expect apostrophe Grant and then you mentioned the potential restructuring.
Within that bucket you know are those along the blend and extend or watch being contemplated.
You know any color on there the repayments for the 30 froze you're just doesn't [noise].
Yes, let me pass it over to Brooks shifted to take that question could address.
Sure. Thanks, So as Jason said, roughly 25% a little under 25%.
Maybe our requested rent relief I mean that includes tenants that didn't pay in April.
Of those tenants, we expect about two thirds can and will remain current and then the balance roughly 10% of total FBR.
May require some near term deferral, but it's very hard to predict exactly when and exactly how many of those.
But deferrals in this case are typically three to six months.
Payback roughly within a year.
I mean, we do expect eventually collect the majority of that deferred rent and again I think it's important to note that each situation is very different so work that's very much a tenant specific approach and then with respect to your question on some of the restructures, we're being we're being very cautious with those but there will be some opportunities where we saw choose [laughter] with.
Tenants that otherwise would pay where we may talk to down about broader leads restructures and then that typically would.
Relate to lease term and rent bumps, but.
But we're going to be very selective with dose.
Alright, Thanks, I think for in casual.
Yeah, Hi, guys within your capital investment project pipeline have any the tenants approached you about potentially holding offered due mainly aren't getting any environment I just want to get a sense of how visible pipeline. Thanks.
It looks really take that one as well.
Sure. So on the capital projects were not experiencing any material delays or or any.
Hesitancy from the tenants and as Tony mentioned, we fully intend to complete those projects as planned and all our are continuing.
As we would expect.
Thanks <unk>.
Okay. Thank you.
Our next question comes from Manny Korchman with Citi. Please state your question.
Hey, Jason or what are the call you talked about.
Perhaps.
Sort of adding value add projects in those cases, where there was a near term rapidly for class or at least that's the way I understood. It can you help us sort of freight tie the two thoughts together, putting more capital into projects, where you have a tenant that.
Weaker now I guess is the way I'm thinking about it and then sort of your thought process. There is setting up that asset to re tenant is it I'm actually shortening the term rather than one thing the terms or how should we think about those two concepts.
Yeah, as Bruce mentioned I think each one of the meal that differently, but I think it's it's important to emphasize here yeah. Those type of deals are with tenants that we think can in would pay otherwise it's more that if there is opportunities for us to provide.
I'm kind of short term relief to them again, when they could say otherwise, but it may be beneficial to them that may create an opportunity for us really increase you know the long term intrinsic value that asset, it's probably mainly through lease extensions and perhaps higher hired bumps, perhaps there's some provisions in leases. We can we can modify if it's too our benefit but these are.
I would Cds are more offensive deals than defensive in you know again, you know those tenants, we would expect to pay otherwise and we would allow you know at our discretion, whether or not we want to do some modifications to create more long term value and if you guys did ethics.
Yeah, I would just further clarify you know when we when we consider kind of investing capital in the situations. It's really in the form of providing some short term.
Rent relief.
But these are really the ones, where it may benefit the tenant in a short run, but there they don't really needed, but they're just kind of looking to build some more flexibility.
On their side and so it's not necessarily that we're investing new dollars. It's just we're considering those.
Deferred rent as in many ways, a new investment for us in our mindset.
Got it and I know well underwrite those through the same lens, we would any investment.
Look at you know Unlevered ire ours on on what that rent relief and an increase in value could.
You could eventually become.
Right.
And then it's probably way too early to be thinking about it but I'll ask it anyway in terms of justice. The sale leaseback market have you heard anything there that could change positive or negative or what types of tenants might start looking at data as a source of capital.
Yeah, you know it's still early I think that's you're generally speaking investment activity really globally has slowed.
Thank you.
Great Stena for example, they really haven't moved all that much I think it'll take some time for sellers to adjust their expectations in I think that will be the case with sale leasebacks is well, we'll take a little bit of time, but I think absolutely. We should see a you know increasing as opportunities I think we'll see a shift of companies.
Looking to to raise capital through sale leaseback, especially if the price per persist you longer than maybe under there. Your base case models and I think you know you think back to the last economic crisis. We just some of our best opportunities to be similar best deals during that point in time I'm in many of those were sale.
Just back so.
More to come on that perhaps in the second half of the year, but I would expect us to see.
Increased opportunity and and pre gifting opportunity said, though.
Right. Thanks, everyone.
Thank you. Our next question comes from Atlantic Dennis with Scotia Bank. Please state your question.
Hey, good morning.
Brooks did you congrats to provide some detail regarding the tenant in the string of property types, where you're seeing the deferral requests.
That wraps churn so yeah.
From a a region perspective.
The request a roughly 60 40, a U.S. to Europe, so slightly higher overall request for it in Europe first U.S., but we're pretty closely in line.
You know we expect that.
Potentially because of a higher retail concentration in Europe, but you know important to note that most of those did indeed pay rent.
And it's concentrated in DIY and grocery our retail portfolio.
No the property type front.
About 40% of requests were from a retail or experiential properties and so you know there was only represent about 20% of our overall portfolio. So that implies up a much higher rate of requests in those property types.
And then the same goes for industry that retail and experience Joel.
Really was overweight from a retail promote a request perspective, but that's the primary trend we're seeing.
Okay. Thanks, and then.
Jason I'm, just curious if there any country specific government programs are policies that have either helped her hindered rent collections that may have a bigger impact and Matt.
Brooks you want to address that.
Sure. So Europe each country is certainly taking a different approach to.
Reopening and I will add that they are somewhat ahead of the U.S. in time and their pandemic and in many of those businesses, whether retail or for example to be a major auto manufacturers are in the process of reopening.
Each country has a little bit of a different approach to aid to its tenants. So that's a little bit granular to get into explicit detail country by country.
But in certain cases for example, the UK yeah, there's a fair bit of relief in place to help pay wages. So broadly similar in concept to the U.S. and you know I think important to note that we're certainly not counting on or underwriting and even that relief as necessary for our tends to pay rent.
But it is certainly helping in certain certain pockets.
Great. Thank you.
Thank you.
Just a reminder to ask a question press star followed by one on your telephone keypad.
Our next question comes from Joshua Dennerlein with Bank of America. Please state your question.
Hey, good morning, guys Orange I'm, just curious on that the 5% or Greg that wasn't paid was that it like a few tenants who didnt pay the full amount or wasn't about some tenants paid like less than the whole now, but they still page summary.
Groups, you want to you want to handle that.
Sure so of the 5% or not paying.
You can really kind of break it into three buckets. So.
So I've got 5% you know about 30% relates to effectively accounts payable disruption at the tenant.
Those are have been sorted out and are coming in and you know I'll note that much of that was in Europe, and so that that will and kind of pads are those other today. After we print to be slides brought Europe inline with the U.S. and will will boost our.
April collection rate a little bit.
Got to 96%.
And so that's that's just kinda logistical disruption and about half of the.
5% will turn into short term deferrals as I described.
And then the balance out 20% comes from one or two tenants, who didnt pay but clearly can and we are in discussions with them and pursuing that for full payment and expect to do so.
Okay, Yeah, I think Josh. It's also important to note that you know, we mentioned that about 2% of our he'd yards only 2% Arabia our is in.
You know that part of the retail markets have been most impacted fitness facilities theaters in restaurants.
Almost all of that was not paid so that's a big part of the right there.
And I think has as Brooks said, you know what happens with those over time I think will change too.
Yeah, I'd, just say, yeah, I guess with that.
The number going up to 96 is about half from those those three property types.
[laughter].
And then Oh, I noticed Oh actually maybe a follow up on the accounts payable destruction.
The more color you could brought on that what was it just.
Like checks in the mail kinda got slowed down to the virus people running around.
Any color would be awesome.
More or less I think you pretty much nailed it and you know we certainly can't see on the other side, what exactly is going on but it's been paid and and there was no request for relief. It's just a.
Some of late.
Okay. Okay interesting and then I noticed I guess the warehouse property type it looks like it was excluded the fitness theaters and restaurants. It was the lowest percent paid at 93%.
Any color there on any why it was lower or is it just more tenants with disruption.
It's really about same answer I believe it or not and those those payments that trickled in really after we print and slides are are are primarily warehouse.
Okay Awesome I'll leave it there thanks guys.
Okay. Thanks, Josh.
At this time I'm not showing any further questions I'll now hand, the call back to Mr. Sands.
Thank you everyone for joining a sincere interest and W.P. Carey if you have additional questions. Peter Please call Investor relations directly onto one to four nine to one 110 that concludes today's call you may now disconnect.
Thank you have a good day everyone.