W. P. Carey Inc. REIT

Hello and welcome to WP Carey's first quarter 2020 earnings conference call. My name is Diego and I will 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 will be taking questions via the phone line. Instructions on how to do so will be given at the appropriate time. I will now turn the program over to Peter Sands. Director of Institutional Investor Relations. Mr. Sands, please go ahead.

Good morning, everyone. Thank you for joining us today for our 2020 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 that differ materially from WP Carey's expectations 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 WPKerry.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 over to our Chief Executive Officer, Jason Fox.

Good morning, everyone, and thank you for joining us on this call. I hope everyone and their loved ones are safe and well as we all move through these challenging times. Today, I'll focus my remarks on three main topics. First, I'll briefly touch upon the actions we've taken in response to COVID-19. Second, I'll review where our business stands today, including insight into our April rent collections. And third, I'll conclude with some comments on what we're most focused on as we look ahead. After that, hand over to Tony Sanzone, our CFO, who will briefly review our first quarter results and portfolio activity, as well as the strength of our balance sheet and liquidity position. As noted in this morning's press release, we've withdrawn our previous 2020 AFFO guidance, given the uncertain economic outlook.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 8K we furnished this morning with our earnings release and supplemental disclosure also included slides with the COVID-19 update, much of which we'll cover on this call. As usual, Tony and I are joined by our President, John Park, and our Head of Asset Management, Brooks Gordon, who are here to take your questions. Our COVID-19 response began in late February, and we started taking steps to prioritize the health and safety of our employees, and to confirm that our entire workforce had the technology and resources required to work remotely. By mid-March, we fully transitioned all employees in our four offices, New York, Dallas, London, and Amsterdam, to working remotely. That proved to be a smooth transition, having previously moved our core systems, including our financial, telecommunication, and conferencing systems to the cloud. Technology is clearly a critical component, but it's our employees that have really made the 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 that really highlight the caliber of our people and the culture of excellence we've cultivated at WP Carey. Before reviewing our APA rent collections, I think it's important to give some context by briefly revisiting our approach to net lease investing While we seek to generate attractive long-term risk-adjusted returns, we are 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 a tenant will perform during times of expansion, but also on how they will perform during times of distress. we view tenants just below investment grade as providing the most attractive risk reward trade-off we focus on large companies which are generally better equipped for other downturns large companies have better access to liquidity and in a worst case scenario are more likely to restructure and continue to operate in critical properties as opposed to small companies which are more likely to liquidate 97 of our annualized based rent or avr comes from tenants where they or their parent company, generate over $100 million in annual revenue for our government entities. The majority of our tenants are also public companies, with private equity-backed tenants representing less than 20% of AVR. It's also important to note that WP Carey has experienced multiple business cycles over which we've honed the protections built into our leases and put in place the infrastructure to effectively manage end-of-lease outcomes, tenant credit issues, and restructurants, complemented by our proactive approach to asset management. And of course, we've always believed that a well-diversified approach is best for NetLease. Not only does it provide a wider opportunity set for external growth, it protects us from overexposure to a single asset type or industry, something that'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 and industrial assets. So with that context, where does our business stand today, in particular our April rent collection? Overall, we collected 95% of April rents, which was broad-based across property types, including retail. The notable exceptions were fitness, theater, and restaurants, which represent just 2% of our AVR, and for which we received only a very minimal amount of April rents. We received 100% of April rents from auto dealerships, which represent 3.4% of ADR, but 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 ADR comes either from do-it-yourself retailers or 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 comprise just over half of our portfolio. The April rent collection for warehouse was 93%, and even stronger for industrial. Similarly, self-storage, which has been forming well as an asset class, had an April rent collection rate of 100%. We're encouraged by our April rent collections but I want to emphasize that we are cautious about the uncertainty ahead. 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 on economic activity and consumer confidence. Europe is a differentiated part of our strategy, so I'll briefly provide some added color on it. Overall, our European assets have performed in line with those in the U.S., while providing additional diversification. Our largest property types in Europe comprise do-it-yourself retail, grocery, automotive dealerships, and government credit, several of which are top 10 tenants. Germany is our largest country exposure in Europe. It's been able to limit the impact of the pandemic through widespread testing and public discipline. It 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 rent collection rate for Spain was 100%, with our geographic exposure to Spain coming primarily from our government office portfolio with the state of Andalusia. Looking ahead, we're focused on two key priorities. First, proactively working with our tenants to ensure we continue to collect rent payments. Second, our balance sheet positioning, ensuring that we have ample liquidity and flexibility for a range of scenarios. ranging from weathering an extended economic downturn to taking advantage of new capital allocation opportunities. Tenants representing about 25% of ABR have requested some form of rent relief, which we expect could tick up over time. We are not taking a one-size-fits-all approach to tenant discussions. Each situation is different, and because our tenant base is so well diversified, there are significant portions that require no assistance at all. That said, there are some general categories for those tenants that have requested rent relief. First, tenants that can pay and have access to capital should pay, and we expect them to do so. The large majority of tenants requesting relief fall into this category, and our expectation is that without any action on our part, they will continue to pay rent. These situations may also yield opportunities to work with tenants on broader lease restructurings that will create substantial longer-term value. there will be short-term deferrals for tenants whose access to liquidity has been temporarily disrupted. These are typically short-term in nature with payback required within a year. And there will, of course, be some tenants whose businesses have been more severely impacted, many of whom are part of the 5% who did not pay April rent. We are working with these tenants to find mutually acceptable solutions, focusing on structures that protect our position while providing a path through their current distress. We expect this to be a small list, and we're very well positioned with critical assets, good collateral, and a seasoned team with extensive restructuring experience. Regarding our other priority, our balance sheet, we've 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 in the capital markets. We've been on a long-term trajectory to reduce secured debt and increase balance sheet flexibility. In 2018 and 2019, We also took the opportunity to reduce leverage through our merger with CPA 17 and over $800 million of additional equity issuance for new acquisitions and mortgage debt prepayments. We are very comfortable with our liquidity, especially having just closed a new credit facility in February. The facility matures in 2025 and we improved pricing to LIBOR plus 85 basis points on our revolver. We added $300 million in term loans and upsize our revolver to $1.8 billion of which results of our financing activity in recent years, we have limited near-term maturities to only about $110 million of debt maturing in 2020 and approximately $240 million in 2021. And we have no bonds maturing until 2023. Based on the initial performance of our tenants and the conservative position 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'll 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 staying engaged with brokers and potential sellers, and we're very focused on new opportunities that come to market, and how they are 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 as sellers evaluate their options, and in many cases elect to wait on launching new deals until they see more stability. Some of the best opportunities we're currently evaluating are with existing tenants, where we see value-add potential to provide near-term rent relief tied to longer-term improvements to lease economics and structure. But with so much uncertainty ahead, we're being cautious. We're committed to preserving the safety and flexibility of our balance sheet, and we evaluate all capital allocation decisions through that lens. And with that, I'll hand the call over to Toni.