W. P. Carey Inc. REIT

Hello and welcome to WP Carey's second quarter 2020 earnings conference call. My name is Victor 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 Relations, Mr. Sands, please go ahead.

Good morning, everyone. Thank you for joining us today for our 2020 second 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 WP 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 wpcary.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.

Thank you, Peter. And good morning, everyone. I hope everyone is remaining safe and well. as we continue to face the challenges of COVID-19. Today, I'll focus my remarks on several important topics, our recent portfolio performance amid the pandemic, our recent investment activity, what we're seeing in the transaction environment, and how we position the company for growth while maintaining strong performance. And after that, our CFO, Tony Sanzone, will review our second quarter results, which reflect our strong collections and our continued move out of the managed funds business. as well as touching upon our recent leasing activity and some of the specifics on our balance sheet and liquidity position. We're joined today by John Park, our president, and Brooks Gordon, our head of asset management, who are available to take questions when we get to that part of the call. The 2020 second quarter bore the impact of the pandemic over the entire period, which has been a stress test on net lease portfolios. I'm pleased to say our collections remains consistently strong throughout the quarter, ranking as one of the best in the net lease peer group, as well as being among the strongest collections in the broader REIT sector, a reflection of several key elements of our approach. When owning single-tenant assets on a very long-term leases, often for over 20 years, unexpected events or significant market changes will occur. Our diversified approach ensures that 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 and respond to challenges and changes in the business environment. By focusing 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 our rent collections reflect. MetLease is rightfully viewed as a relatively steady business, and we believe providing better downside protection and lower volatility in our cash flows is an important characteristic of the returns we generate for our shareholders. Our approach has clearly produced 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, and self-storage assets in aggregate comprise about half of our portfolio. For the second quarter, our rent collection rate was 94% for warehouse, 98% for industrial, and for self-storage, it was 100%. Office, which comprises just under a quarter of our AVR, performed comparably, with rent collections at 99%. For retail, in which we've maintained a longstanding underweight position, representing just 17% of AVR, we collected 98% of second quarter rents. We've limited our investments in retail and disposed of retail assets, especially in areas most affected by the threat from e-commerce. Most of our retail is in Europe, where there is a lower supply, and we focused on asset classes like do-it-yourself and grocery, which had performed well. The minor exception to our strong portfolio performance continued to be fitness centers, theaters, and restaurants, for which we received 37% of second quarter rents, although these represent just 2% of our AVR. I'm pleased to report that the strength in our rent collections has continued into the third quarter, with an overall 98% collection rate so far for rent due in July. With deferrals remaining extremely low, we've been able to take a tailored approach to each situation, in contrast to the broad actions required by many other net lease REITs that are dealing with widespread issues. This has afforded us considerable flexibility, allowing us to opportunistically work with tenants on lease restructurings that create value. During the second quarter, we entered into one such restructuring with a significant tenant. While the tenant was current on its rent and expected to remain that way, in return for a six-month deferral with the deferred rent spread over the following five years, we gained two years of additional lease term and improved the rent bumps by adding 50 basis points to its annual increases, along with gaining the right of first refusal on all future sale leasebacks. We will continue to look for these opportunities where we can help strong tenants preserve 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 percent and a weighted average lease term of 23 years. The largest of the warehouse investments was a $66 million build-a-sue project completed in June for a Class A distribution facility in Knoxville, Tennessee, net leased to Fresenius, the leading provider of dialysis clinics and equipment globally, which carries an investment grade rating from Moody's. The facility is the tenant's largest distribution center in the U.S., sporting its newest and largest production facility. The lease has a 20-year term and fixed annual rent increases. Also in June, we completed the build-to-suit of a $74 million state-of-the-art industrial food production facility in San Antonio, Texas, for one of our existing tenants, Cuisine Solutions, which is the world's largest manufacturer and distributor of sous vide prepared food products. The property is highly critical to the tenant's operations, supporting its future growth plans, and net leased for a 25-year term with fixed annual rent increases. This is also a good example of how value can be created through follow-on transactions, as we were able to put both the recently completed build-a-suit and the existing property under a master lease, adding 13 years of term for the existing property and raising its annual rent increases. These investments brought our first half investment volume to $404 million at a weighted average cap rate of 6.5% and enhanced portfolio quality with a weighted average lease term of 19 years. Our proactive approach to asset management, in conjunction with the investments we've made, extended the weighted average lease term of 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 percent. Understandably, market activity slowed in both the U.S. and Europe during the second quarter, with investors sidelined amid a great deal of uncertainty. and sellers dealing with the near-term impacts of the pandemic on their business operations. Many sellers, unless facing an urgent need, naturally prefer to wait until market stabilized. During the initial stages of 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 remained competitive, especially within warehouse and industrial, which investors have generally been more willing to underwrite. relative to retail and office. High-quality deals backed by strong tenant credits continue to attract capital. This, coupled with continued high expectations among sellers, saw deal closings at cap rates comparable to, or at times tighter than, where similar assets were trading before the pandemic took hold. Recently, buyers and sellers started to come off the sidelines, and we are seeing more deal flow. So we expect U.S. deal activity to pick up in the second half of the year. In Europe, many countries are on the reopening path and employees are returning to the workplace, albeit amid some nervousness. With concerns more aimed at public transportation than workplace safety, regional cities are reopening at a faster pace. Early indications also point to Europe being better positioned than the U.S. to emerge from the economic impacts of the pandemic. Investors in Europe are also returning. Inquiries to brokers from corporations looking to explore their options appear to have picked up and expectations are high that the current green shoots of activity bode well for the second half of the year. Many companies have met their liquidity needs through short-term government stimulus packages, and we anticipate demand for long-term capital through sale leasebacks will return more meaningfully as these programs begin to roll off. Looking ahead, while we remain mindful of the continued uncertainty surrounding the pandemic and its impact on economic activity, in contrast to many other net lease REITs, we're very well positioned to perform in a variety of economic environments and resume putting money to work in the near term. In our almost 50-year history, WP Carey has experienced multiple business cycles. We've honed protections built into our leases and put in place the infrastructure to effectively manage end of lease outcomes, tenant 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 engage with 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 we completed in June, locking in a cost of capital that will support a creative 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, favoring large companies with access to liquidity and industries resilient to an economic downturn. Our recent conversations with CFOs shows the pandemic has made them more aware than ever of the benefits of accessing long-term capital through sale leasebacks. The successful completion of our recent forward equity issuance reflects the confidence we have in our ability to access a wide range of accretive investment opportunities. Those opportunities may come from industries that have performed well through the pandemic, which continue to trade on similar terms to those we've 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. We're actively building our pipeline and expect to close a number of deals in the second half of the year. And with that, I'll hand the call over to Tony.