Q2 2020 WP Carey Inc Earnings Call

Hello, and welcome to W.P., Carey's second quarter 2020, <unk> earnings Conference call.

My name is Victor and I'll be your operator today.

All lines have been placed on mute to prevent any background.

Please note that today's event is being recorded.

After todays prepared remarks, we'll be taking questions via the phone line.

Instructions on how to do so we'll be given at the appropriate.

I will now turn the program over the Peter Sands Director of institutional Relations Mr. Sam. Please go ahead.

Good morning, everyone. Thank you for joining us today brought 2022nd quarter earnings cool.

<unk> again, I would like to remind everyone that some other statements made on the school and not to start facts and maybe deemed forward looking statements factors that could cause actual results to differ materially from W.P. Carey's expectations provided in our S. You see colleagues.

An online replay of this conference call will be made available in the Investor Relations section of our website.

P. Carey Dot com.

Will be archived for approximately one year and where you can also find copies of our investor presentations and other related materials.

With that I'll hand, the call I've got to our Chief Executive Officer checks the box.

Thank you Peter and good morning, everyone Hope everyone is remaining states as well as we continue to face the challenges of Koby 19.

Today I'll focus my remarks on several important topics a.

Our recent portfolio performance independent.

Our recent investment activity.

What we're seeing in the transaction environment.

I'll be positioned the company for growth, while maintaining strong performance.

After that our CFO, Tony Standalone will review, our second quarter results reflect our strong collections and our continued move out of the managed funds business as well as touching upon a recent leasing activity some of the specifics on our balance sheet and liquidity position.

We're joined today by Jon Parker President.

And Brooks Gordon.

Hi, Good management, where they'll take question when we get to that part of the call.

The 2022nd quarter 40 impacted a pandemic over the entire curious.

She has been a stress test net lease portfolio.

I'm pleased to say our collections remains consistently strong throughout the quarter ranking is one of the best and then at least peer group as well as being among the strongest collections in the broader reach sector reflection of several key elements of our approach.

But only a single tenant assets on a very long term leases locking for over 20 years unexpected events, where significant market changes will occur.

Our diversified approach ensures the issues within a particular asset type or industry will not have an outsized impact on our performance.

Also our disciplined investment process has always been focused on deep credit underwriting and mission critical assets.

We've made important decisions over the past five decades to focus on companies industries and real estate that we believe can withstand dislocations in the market.

Respond to challenges and changes in this environment.

That's focused on long term risk adjusted returns rather than near term growth at any cost over the long run we've generated strong total returns for our shareholders, while maintaining exceptional downside protection, which are recollections reflect.

That leases rightfully viewed as a relatively steady business and we believe providing better downside protection and lower volatility in our cash flows.

Important characteristic of the returns we generate for our shareholders.

Our approach is clearly produce more durable rental streams, giving rise to higher quality and therefore more valuable revenues and earnings.

This approach coupled with our focus on maintaining a strong and flexible balance sheet has put us in a very advantaged position today.

Overall, we collected 96% of rent due during the second quarter.

Importantly collections were consistently strong across each of the three months across our core property types and across our U.S. and European portfolios.

Warehouse industrial self storage assets in aggregate comprised about half of our portfolio.

For the second quarter, My recollection rate was 94% per warehouse, 98% for industrial and for self storage it was 100%.

This which comprises just under a quarter of or HDR perform comparably with recollections at 99%.

Retail in which we maintained a longstanding underweight position, representing just 17% of DDR, we collected 98% of second quarter rats.

Limited our investments in retail and disposed to retail assets, especially in areas most affected by the threat from E Commerce.

Most of our retails in Europe, where there was just lower supply and be focused on asset classes like do it yourself and grocery which as far as well.

The minor exceptions to our strong portfolio performance continued to be fitness centers theaters and restaurants for which we received 37% of second quarter rats. Although these represent just 2% over 80 are.

I'm pleased to report that the strength that I read collections has continued into the third quarter with an overall, 98% collection rates so far for rent due in July.

But deferrals remaining extremely low we've been able to take a tailored approach to each situation. In contrast to the brought actions required by many other net lease rights that are dealing with widespread issues.

[laughter] afforded us considerable flexibility, allowing us to opportunistically work with tenants on lease restructuring that create value.

During the second quarter, we entered into one such restructuring, but the significant tenant.

Well the tenant was current on its ran an expected to remain that way in return, Chris six month deferral with a deferred rent spread over the following five years. We gained two years of additional lease term and improve the rent bumps by adding 50 basis points to its annual increases.

Along with getting the right of first refusal on all future sale lease backs.

We will continue to look for these opportunities where we can help strong thats preserved capital over the short term and create long term value for our shareholders.

Turning now to investments.

During the quarter, we completed three capital investment projects at a total cost of $148 million, comprising two warehouses and one industrial facility at a weighted average cap rate of 6.5% in a weighted average lease term of 23 years.

The largest or the warehouse investments with 66 million dollar build to suit project completed in June per class a distribution facility in Knoxville, Tennessee that leads to for Sandy is the leading provider of dialysis clinics in equipment globally, which carries an investment grade rating from Moodys.

The facility at the tenants largest distribution center in the U.S. supporting its newest and largest production facility. The least had a 20 year term.

Fixed annual rent increases.

Also in June we completed the build to suit 74 million dollar state of the art industrial food production facility, San Antonio, Texas for one of our existing tenants cuisine solutions, which is the world's largest manufacturer and distributor of sue the prepared food products. The property is highly critical to the tenants operations supporting its fuel.

Your growth plans and that lease for a 25 year term with fixed annual rent increases.

There's also a good example of how value can be cradle to follow on transactions as we were able to quit both the recently completed build to suit and the existing property under a master lease, adding 13 years of term pretty existing property and raising its annual rent increases.

These investments brought her first half investment volume to $404 million at a weighted average cap rate of 6.5% enhanced portfolio quality with a weighted average lease term of 19 years, our proactive approach the asset management in conjunction with the investments we've made extended the weighted average lease term or the portfolio.

To 10.7 years compared to 10.4 years 12 months ago. Despite the passage of time.

We also maintained very high occupancy ending the quarter at 98.9%.

Understandably market activity slowed in both the U.S. in Europe during the second quarter with Investor sideline amid a great deal that certainty and sellers dealing with the near term impact pandemic on their business operations.

Many sellers and less facing an urgent need naturally prefer to wait until market stabilized during the initial stages. The pandemic. We also paused external acquisitions as we focused on preserving financial flexibility.

In the U.S.. Despite the decline in deal closings pricing remain competitive, especially within warehouse and industrial which investors have generally been more willing to underwrite relative to retail and office.

Hi quality deals backed by strong tenant credit continue to attract capital. This coupled with continued high expectations. Among sellers. So deal closings at rate cap rates comparable to where at times tighter than for similar assets were trading before the pandemic chuckle.

Recently buyers and sellers started to come off the sidelines, we're seeing more deal flow. So we expect U.S. deal activity to pick up in the second half the year.

In Europe, many countries around the reopening path and employees are returning to the workplace al Dia and made some nervousness that concerns more aimed at public transportation and workplace safety regional cities are reopening at a faster pace.

Early indications also putting to Europe being better position in the U.S. between merge from the economic impacts of the pandemic.

Investors in Europe are also returning.

Inquiries to brokers for corporations looking to explore other options appear to have picked up and expectations are high that the current green shoots that activity bode well for the second half the year. Many companies have met their liquidity needs to short term government stimulus packages and we anticipate demand for long term capital through sale lease backs.

Well return more meaningfully as these programs begin to roll off.

Looking ahead.

Well, we remain mindful of the continued uncertainty surrounding dependent it and its impact on economic activity. In contrast, and many other net lease rights were very well positioned to perform in a variety of economic environments and resumed putting money to work in the near term.

Almost 50 year history, W.P. Carey has experienced multiple different cycles, we've honed protections built into our leases and put in place. The infrastructure just effectively manage end of lease outcomes kind of credit issues and restructurings through our experienced asset management team. We've been encouraged by the strong performance of our portfolio.

During the first half of 2020, and we have great confidence that our team will continue to proactively engaged for tenants stay ahead of any issues and ensure optimal outcomes.

We entered the second quarter with substantial liquidity, primarily through our $1.8 billion revolving credit facility, which remains almost entirely undrawn.

During the quarter, we took the opportunity to further enhance our balance sheet positioning through the forward equity offering be completed in June locking in a cost of capital that will support accretive investment activity.

As always we're focused on deals offering attractive long term risk adjusted returns, but also mindful of downside protection investing in critical properties with strong tenant credit they bring large companies with access to liquidity in industries resilient to an economic downturn.

Our recent conversations with see oppose shows depend Dennis has made them more aware than ever the benefits of accessing long term capital pre sale leasebacks.

The successful completion of our recent forward equity issuance reflects the confidence we have and our ability to access a wide range of it accretive investment opportunities.

There's opportunities, making from industries that it performed well through the pandemic, which continued to trade on similar terms there will be closed in recent years or from industries, where the challenges posed by the pandemic have reduced competition for deals leading to more favorable pricing.

New investment activity has returned to being our highest priority for actively building our pipeline and expect to close a number of deals in the second half a year and with that I'll hand, the call over to county.

Good morning, everyone.

I'll start with a review of our second quarter results in portfolio activity and in the absence of formal guidance I'll provide some insight on areas, where we have better visibility on our outlook for the remainder of the year.

We reported total assets out of $1.14 per diluted share for the second quarter with 97% coming from our real estate segment.

Comparisons to the prior year period continue to reflect the ongoing roll off of investment management fee streams, given the substantial progress we've made towards exiting that business.

Within our real estate segment second quarter lease revenues increased compared to the prior year period benefiting from that acquisition activity and contractual rent increases as well as the transaction we entered into last year to convert self storage assets to net leases.

These increases more than offset the impact of lease restructurings and uncollected rents during the second quarter.

Lease termination in other income declined to $1.9 million in the second quarter down significantly from both the prior quarter and the prior year, resulting from higher than usual lease related settlements in the prior period.

Well this line item can fluctuate from quarter to quarter. We currently expect to see a further decrease over the back half of the year.

As Jason mentioned today, our portfolio has remained resilient throughout the pandemic collecting 96% of total rent due during the second quarter and that continues to trend positively with 98% collected for July.

In line with the accounting guidance and a conservative analysis of tenant rent collectibility, our second quarter lease revenue and a AFFO include only about $500000 of uncollected rent.

Which we expect to fully collecting 2020 under short term deferred <unk> agreement.

We've not recognized in second quarter after FFO $8.5 million, a contractual rental income mode for the period.

Approximately 30% of this unrecognized rent is under executed deferral agreement.

The large majority being the longer term restructuring with a significant tenant that Jason discussed.

Which will be included in future if it though when the cashes collect it.

The other roughly 70% largely comprises rents due from our fitness centers movie theaters and restaurants and would only be recognized if collected.

For leasing activity, we completed three lease extensions on warehouse properties, representing 1.3% a baby are for which we recaptured 95% of the prior rent and added four years of incremental weighted average lease term.

Given the inherent variability in this metric from quarter to quarter internally, we look at it over the trailing eight quarters.

Over which timeframe, we recaptured 97% of the prior rent and on a weighted average basis added 7.3 years of incremental lease term.

Well spending only $1.57 per square foot on tenant improvements and leasing Commission.

Contractual same store rent growth was 1.9% year over year and as measured based on hbr to represent the rent increases built into our leases.

Comprehensive same store rent growth is measured based on pro rata rental income included in a AFFO to take into account the impact of leasing activity vacancies restructurings rent deferrals entertainment.

For the second quarter. This metric was negative 2.6%, reflecting the full impact of rent collections and deferrals on earnings.

We would expect this metric to normalize over time and they show considerable improvement in quarters, where we begin collecting deferred rent that have not yet been recognized.

Turning to investment activity is Jason discussed during the quarter, we completed three capital investment projects at a total of cost of $148 million.

All of which occurred at the end of June so had minimal impact on second quarter lease revenues.

Total investment volume for the first half of the year was $404 million and we currently expect to complete three capital projects totaling $42 million in the back half of the year, which would bring us to about $450 million of indefinite volume for 2020 before taking into account new external investments in the second half.

Total dispositions through the first half were $116 million as we had no dispositions during the second quarter.

We currently expect disposition activity to be lower relative to prior years.

Given the current market environment, and our strong liquidity position, we're approaching asset sales opportunistically, if we believe execution in pricing are attractive.

Moving onto expenses.

Interest expense totaled $52 million for the second quarter.

Presenting a 13% year over year decline, reflecting interest savings from the significant mortgage debt prepayments we made in 2019.

At quarter end, our weighted average cost of debt was 3.2% down from 3.5% from the prior year period.

Total DNA expenses further declined year over year as we continue to focus on operational efficiencies across the business.

Well, we do expect DNA to trend higher over the next two quarters due primarily the noncash straight line rent associated with the lease on a new headquarter space. We continue to expect total DNA expense to be between 76, an $80 million.

Turning briefly to our investment management segment.

Investment management revenues declined 50% year over year Wood segment, a if AFFO totaling $6.2 million or four cents per diluted share for the second quarter.

I think the merger and management internalization of the CW why lodging funds completed in April.

Oh remaining fee streams from the managed programs are outlined in our supplemental report and are expected to be relatively consistent over the coming quarters.

As a result, and the CW I transaction during the second quarter, we recognized a noncash snack gain of approximately $33 million within equity earnings upon redeeming our special GP interest in those funds, which is excluded from an AFFO.

Oh remaining interest in the combined entity are comprised of our common and preferred equity from which we do not currently expect to recognize dividends in a AFFO for the remainder of the year.

With the completion of the CW I transaction and discontinuation of income streams related to those funds, we view our evolution to a pure play net lease rate is substantially complete.

For purposes of segment reporting beginning with the second quarter, all DNA expenses other than those directly reimbursed by the managed funds are included in our real estate segment.

Moving to our capital markets activity and balance sheet.

Our balance sheet remains very well positioned with ample access to liquidity and very limited near term commitments.

We further strengthened our balance sheet during the second quarter through the equity forward transaction, we successfully executed in June.

Given strong support from institutional investors. It included the full exercise of the underwriters' overallotment option and was executed at a gross price at $70 per share generating gross proceeds of $382 million.

The forward agreements allow us to issue a total of just under 5.5 million shares over 18 month.

At the end of June we elected to issue approximately 1.5 million of the 5.5 million shares for net proceeds of $100 million.

At quarter end, we had total liquidity of $2.2 billion, including cash on hand available capacity on our 1.8 billion dollar credit facility and the remaining shares available to issue under our equity forward agreements.

This ensures we are very well positioned to pursue new investments and allows us to continue to access capital markets Opportunistically.

We ended the quarter with debt to gross assets, a 41%, which is at the low end of our leverage target range.

Net debt to adjusted EBITDA was six times at quarter end, an uptick from previous quarters, reflecting the impact of uncollected rent during the second quarter.

Assuming the full settlement and issuance of remaining shares under our equity forward agreements net debt to adjusted EBITDA would be within our target range.

In closing our second quarter results reflect our consistently strong rent collections over the past few months, which has continued into July as well as the continued improvement in the quality of our earnings.

Strong rent collections were also reflected in the stability of our dividend, which we raised to an annualized dividend rate of $4.17 per share during the second quarter.

From a balance sheet perspective, we further strengthened our position ensuring we're both poised to take advantage of new investment opportunities and if necessary navigate additional uncertainty surrounding the ongoing economic impacts as pandemic.

With that I'll turn the call back to the operator for questions.

Thank you.

At this time, we'll take your questions.

If you 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.

One moment, please while we now poll for questions.

Our first question comes from Emmanuel Korchman with Citi. Please proceed with your question.

Hey, good morning, everyone, Jason maybe maybe start with you just as you look at the back half the year I think you talked about your your motivation or ability to to increase volumes what asset types are you targeting especially given your conversation about the fact that industrials and such such high demand and.

Maybe bigger risks to sort of the other not least sectors.

Yeah, I mean, you're right our portfolio teladoc well our balance sheet. Some great shape. So we do expect to get back in Austin, It's in the second half the year.

The pipeline is building nicely.

Yeah, We mentioned we've done about $400 million of deals mostly these capital improvement projects that have delivered this year with another cost 40, you go for the years I'm going forward, you know I think that.

Ah you know the pipelines little bit more weighted towards the U.S. right now Europe is showing some more clear signs of recovery. So I think we've stepped out to pick up as the year ago Sports. We are more focused on industrial despite the soft if those are receiving more capital flows in probably more compression factor.

The highest quality of the industrial assets are probably at this point pricing at tighter levels than they were pre coated.

So it just shows some demand in that space, especially high quality tenants as well with respect to qualities. So we'll give you more focused on sale leasebacks, you, that's where we can.

You know acquire industrial assets I think the complexities involved with sourcing in structuring sale leasebacks will help us generate some incremental yield.

It also helps us better underwrite these deals as well still lease backs you tend to get you're more and better access to senior management. Since the company itself is your counter cargo in the deal. So that's our preference, especially in times of uncertainty right now and I think you'll see see some more or less now.

No other asset classes like office and retail I think we'll be more opportunistic there I mean, probably a little bit more conservative in our underwriting, especially on with Nissan scenarios is no those tend not to be as critical.

But you know, we do believe and diversification so I think you'll see us.

Continue to look at you know look across the asset class spectrum.

Great and then Tony one for you just as you sat there in June saying, yeah, we'd like to improve our capital position how do we do that what made you do a larger forward rather than doing either ATM at the time.

And you know getting that hundred million that you guys using a quarter and then sort of.

Assuming are hoping that the market would would recover as you need more capital versus doing that forward equity deal.

Yeah. They are many I think the a equity forward gives us a few advantages it locks in our cost of equity capital and we can fund deal the creatively at that level and also gives us some flexibility to match fund our capital needs and our investment opportunities really kind of depending on the timing of when they so I went over the course of the year.

So we did take the opportunity to draw down 100 million from that forward to fund the completion of two of our projects towards the end of June.

Thank you.

Thanks Manny.

Thank you.

Next question comes from frankly with BMO. Please proceed with your question.

Hi, Good morning, Jason and the pass you talked about potentially moving down the risks current man acquiring Laurent like cap rate assets given your cost of capital just want to get your current thoughts on this and that this scenario is still on the table.

Yes, certainly I mean, we've some.

No given our diversification we can really you know consider a wide range of asset types or geographies for that matter and also that kind of plays into a fairly wide range in cap rates I'm at the same Todd's you know I think that we still believe we can do accretive investments in the mid to low side.

This would be for higher quality and most likely logistics properties like the percentage deal that we just announced or the Stanley Black <unk> Decker deal.

We did at the end of last year.

Yeah, I think there's still a a certainly an interest media buys to do some more goes higher quality deals even if its tighter spreads against sale leasebacks allows to get in those that we think it's incrementally higher yields.

But we're still looking at deals in the mid sixes in three to seven standards. The yeah. These maybe you're more of our typical sale leasebacks, where again, we can drive some incremental yield through sourcing and structuring. Its yeah. Maybe this is focused on sub investment grade credit as well, we can use ours, our underwriting expertise to help.

Differentiate yourselves and and you make make that's on certain credits and tenants.

Okay, and then just wanted to follow up on your comment on focusing on industrial acquisitions, and you talked about the higher increasing competition, you're saying for this asset class.

Hi, this is compared with a competition you're seeing a prior to coded and are you seeing any changes to the buyer pool.

Hello.

Total, but I think industry was still the most sought after asset class and it had experienced the most cap rate compression. So so that really hasn't changed in terms of a buyer pool I think some of it depends on U.S. <unk> versus Europe.

I think that there are some haven't happened to us in a lot of the industrial it reads, obviously have done quite well in terms of collections like we have he is like being diversified. So you know we tend not to compete against the industrial reached their more focused on.

In many cases multi tenant industrial assets in other cases at their single kind of they tend to be short term leases generally so they can have the mark to market opportunities, we still prefer to do the longer term net leases it fits our model stability and predictability in our cash flows.

So you're not a lot of change.

On on who does players are given that that asset class is generally held up fairly.

Fairly well.

Thank you.

As a reminder to our audience. If you would like to ask your question. Please press star one on your telephone keypad.

Our next question comes from Emmanuel Korchman with Citi. Please proceed with your question.

Hey, just a quick follow up to sort of the questions.

I will discuss did a lot of companies have talked about sort of more safety stock and building out there the warehousing part of what they do does that change your approach or your underwriting or your conversations with any of these companies were previously.

You hadn't really looked at those locations as a maybe as mission critical but that you know backup inventory stock seems to at least in this prices have become critical.

Yeah, I think that's a good point I think there's also some some you know conversations happening about onshoring of manufacturing as well for some of those same reasons to have more control over supply chain and I think we'll get beneficiary of that your anywhere that that that there's a change in demand it'd be on real estate, we're going to be a beneficiary.

Whether its warehousing for some backup supply words onshoring of the manufacturing space.

Thank you could see some some tailwinds certainly when it comes to releasing but the same time in our model is long term debt leases that are stable. So perhaps if rents continue to grow because of this increased demand. It's also going to provide further downside protection you know upon these three boes per lease expiration.

Thanks, just.

Yes.

Thank you.

Our next question comes from Spencer Alloway with Green Street Advisors. Please proceed with your question.

Yeah. Thank you and then I talked about deal flow picking out subsequent to quarter and can you just provide a little bit more color on how we deal volume that's trying to read between the U.S. and Europe.

Yeah sure.

Yeah, we've seen certainly have picked up over the last that would say four to six weeks in both the U.S. and Europe, but currently deal activities are more weighted towards the U.S. pipeline is right now perhaps counterintuitive since Europe has been a little ahead of the U.S. earlier infections and now.

Perhaps clear signs of earlier recoveries and Reopenings.

But it's also the slow part of of the year for Europe, as well, where you activity tends to.

So down considerably in July and August so, while we're seeing a little bit more activity in the U.S. right now I think once we hit September in the back half back quarter over the year I think we'll see some interesting opportunities in Europe and that'll be a positive for us obviously, it's going to it helps your widened our funnel, but there's also generally.

Yes competition in Europe for the types of assets that we buy and we're also still living will generate new wider spreads in Europe. So.

So more U.S. now, but I think we'll see a that moderate some you know as we get to the entity or in your it reopens.

Okay, and then I understand there's obviously a lot of unknown. So regarding you know the ongoing patent that Matt, but just curious if you guys kind of approach closer to about you know you're at 98% I run club Chen from July and here you know your fast approaching it looks to be I returned to normal in terms of rent collection, what do you guys need to see.

And you know to get comfortable perhaps reinstating guidance.

Yeah, and it's a good question, let me something that we think about certainly because I rent correct collections have been strong.

Formed here very well thus far.

But we just have the sense that there's just a lot of uncertainty out there.

Companies going back to work, perhaps schools reopening across the country, it's just hard to predict what's going to happen.

I think we just want to see some broader stability before you know we kind of change our view on guidance you just seems premature right now to reinstate anything.

Yeah, I see more to come on the next earnings call will give an update at that point done.

Okay, and maybe just one more if I may and.

Again this is Brent collection being so high and you know I'm just curious how are conversations going with tenant sell or you know what is general sentiment our tenants comfortable on liquidity positions. Ah you know just curious if he still had any conversation around potential for deferrals or anything like that.

There's a need for that on behalf of your tenants.

Yeah sure grip Brooks you want to.

And with that.

Sure you know credit quality as you've said, it's held up quite well in the face coated.

And you know that there's a lot of things, causing that one of which is that.

Our tenants are generally large and size of about 97% have revenues in excess of 100 million and what that's allowed them to do it have a fair bit more breathing room and access to capital.

So I would say the conversations with tenants have shrunk in number substantially you know we have a few tenants, which we would characterize as requesting relief and virtually all of that is really just I'm switching frequency from quarter to lead a monthly payments and all of them are current and we're expecting to remain so so that's really a key.

Cash flow management tool and.

Other than that those conversations have had really dissipate itself a little bit of cash flow management conversations with tenants, but you know that.

The focus is really as we've said in a fitness clubs in theaters and restaurants category, which is pretty small for us.

Thank you.

Thanks Spencer Thank you.

At this time I'm not showing any further questions I'll now hand, the call back over to Mr. Sam.

Right. Thank you everyone for your interest in W.P. Carey, if you have additional questions Nazis cool investor relations directly on to one to four nine to one one ones you about that concludes today. It's cool you may now disconnect.

Great. Thanks, everyone.

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