W. P. Carey Inc. REIT

Hello and welcome to WP Carey's first quarter 2021 earnings conference call. My name is Jessie 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 today's program over to Peter Sands, head of investor relations. Mr. Sands, please go ahead.

Good morning, everyone. Thank you for joining us this morning for our 2021 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 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 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 pass the call over to our chief executive officer, Jason Fox.

Thank you, Peter, and good morning, everyone. I'm pleased to report that many of the positive trends we saw in the fourth quarter of 2020 have continued into 2021. We've had a very strong start to the year on several fronts. First, we've already on pace to exceed our initial expectations for investment volume in 2021. And our near-term pipeline is as strong, perhaps even stronger, than it's ever been, with over $500 million of active deals at an advanced stage, much of which we expect to close during the second quarter. Second, we've delivered industry-leading rent collections throughout the pandemic and continue to have high confidence in how our portfolio will will perform going forward, especially in a macro environment where the U.S. and global economies are expected to improve as COVID cases decline and business activity rebounds. Third, we executed on two significant bond issuances during the first quarter, highlighting our access to very attractively priced capital, locking in record low coupons in both the U.S. and Europe, and refinancing the majority of near-term debt maturities with our next meaningful maturity now scheduled in 2024. In the past week, we were also placed on positive outlook by Moody's, which reflects the positive trajectory of our business and balance sheet and gives us confidence that we will continue to have access to attractively priced capital going forward. Fourth, we raised equity through our ATM, creatively funding our recent investment activity and modestly delivering compared to where we ended the fourth quarter. We also still have equity proceeds available through the equity forward we raised in 2020, So plenty of flexibility in how we fund our investment activity over the remainder of the year. The combination of closed investments, our active pipeline, strong portfolio performance, and raising capital at attractive spreads on new investments has allowed us to raise our AFFO guidance for 2021. Tony Sanzone, our CFO, discussed our guidance raise along with our results for the quarter and balance sheet activity. Tony and I are joined this morning by John Park, our president, and Brooks Gordon, our head of asset management. During the first quarter, we completed $214 million of investments, comprising $149 million of acquisitions and $65 million of completed capital projects. Our first quarter investments had a weighted average initial cap rate of 6.6%, and like virtually all of our investments, provide built-in rent growth, averaging 2.25% for those with fixed increases, which occur over long lease terms, averaging 23 years. Reflecting our diversified approach, our first quarter investments spanned most of our core property types, though the bulk of our deals continued to be in industrial and warehouse, which currently comprise about half of our portfolio on an ADR basis. I'll touch upon a few of the more notable deals from the first quarter. In February, we completed the $75 million sale leaseback of two packing, production, and distribution facilities, net lease to Prima Wawona, the leading vertically integrated grower, packer, and shipper of seasonal high-value summer fruit in the U.S. If you like peaches, there's a roughly one in three chance the last one you ate is processed in these facilities. The properties are strategically located in proximity to the tenants' farmland in California's Central Valley and represent the majority of its storage, processing, and distribution operations. a significant portion of which is cold storage. The tenant has invested significantly in the facilities, underscoring their criticality, and their triple net lease under a master lease for a 25-year term with fixed annual rent increases. During the quarter, we also completed the $52 million build-to-suit of a new industrial R&D facility in Germany, net lease to American Axle, which is a global Tier 1 supplier of automotive components and systems. including electric drive technologies. The facility is strategically located in a prime industrial park near the Frankfurt Airport and triple net lease for a 20-year term with rent increases tied to German CPI. Since quarter end, we've completed three additional acquisitions totaling $186 million, the majority of which relates to our second significant investment over the last six months in grocery retail. Specifically, in early April, We closed the $119 million sale leaseback of three hypermarket properties located in southern and central France, which rank among the tenants' top performing sites. Their triple net lease to Casino, one of the largest food retailers in the world. From an ESG perspective, this was also an opportunity to invest in a tenant committed to transitioning to renewable energy. The properties are on a long-term master lease with rent increases tied to French CPI. Including the transactions we completed in April, our investment volume year-to-date totals $400 million. In addition to accretive acquisitions, a meaningful contributor to our future growth comes from the rent increases built into our leases, a significant portion of which is tied to inflation. Given renewed expectations for higher inflation, I'll take a moment to provide a little extra detail on our rent escalations. 99% of our ABR is generated by leases with some form of built-in rent increases. 61% of ABR comes from leases tied to inflation. So if you enter a period of sustained inflation, we remain very well positioned for it to flow through as incremental rent growth. Of our leases with rent increases tied to inflation, the majority, representing 38% of total ABR, is based on uncapped CPI, with the largest category being those tied to US CPI. The other 23% of ABR that's tied to inflation includes leases with floors and or caps, which we refer to as CPI-based. Within this category, the average floor is around 1.5% on an annualized basis, and the average cap is approximately 3%. In an inflationary environment, if our 3% caps become relevant, it would likely mean that we would be achieving substantially higher same-store rent growth than we are today. For now, however, the floors continue to be more relevant than the caps, as drivers of annual growth in our leases. Finally, 35% of ABR is generated from leases with fixed rent increases, where the average increase is approximately 2% on an annualized basis. Rent increases generally occur annually, so over time will flow through to rents. Given the profile of our rent escalations, we believe we are one of the best positioned net lease REITs for inflation. Turning to how we're positioned in the current environment, in the U.S., With economic indicators trending positive on the back of a vaccine-led recovery, we're seeing strong deal flow across almost all property types, the exception being office, where sellers seem to be taking a wait-and-see approach, given the significant rise of work from home during the pandemic. Industrial assets continue to be aggressively pursued by a wide range of buyers, but it remains a very deep and diverse sector, and we continue to find plenty of accretive opportunities, as our recent transaction momentum demonstrates. underpinned by our cost of capital. As the manufacturing sector continues to gather strength in the U.S., it should support growing interest in sale leasebacks as a means of freeing up capital to be redeployed in companies' core businesses. In Europe, while competition also remains strong for industrial assets, our significantly lower cost of debt in the region results in spreads that are generally 50 to 100 basis points wider than for comparable assets in the U.S. particularly grocery, has proven to be a resilient sector during the pandemic and has seen further cap rate compression, especially in the U.S., driven by a flight to quality. We generally prefer retail in Europe where there is lower retail square footage per capita, higher barriers to entry, and less competition. As our recent sizable investments in retail grocery illustrate, we have good access to deals in this sector, successfully executing on top performing stores. The recent market theme in Europe has been the record amounts of real estate being sold by companies as they look to shore up their COVID-impacted balance sheets. As the market leader for sale leaseback transactions in the region, this is a positive trend that expands our addressable market, and we're confident in our ability to capture our share of deals. Before I conclude my remarks, I want to briefly touch on spreads and our ability to continue generating growth, even in an environment where cap rates remain tight. Our cost of debt has become increasingly efficient in recent years. In Europe, we issued nine-year bonds during the first quarter with a coupon below 1%. And in the U.S., we issued 12-year bonds with a coupon in the low twos. In addition, our investments continue to have attractive built-in growth, and we originate leases that tend to be the longest in the net lease sector. We believe it's important for investors to understand not only the day-one accretion from our going-in cash cap rates, but also the average yield we are achieving over lease terms of 20 years or more with strong annual rent bumps. For an investment with an initial cap rate in the mid-sixes, the average yield over 20 years with 2% annual rent bumps is approximately 8%. In closing, through a combination of the deals we've closed to date, the capital projects and commitments scheduled to complete this year, and a near-term pipeline that's the strongest we've seen in many years, We're on track for a record year for deal volume, supported by a favorable cost of capital, substantial liquidity, and the flexibility to access capital markets opportunistically. And with that, I'll pass the call over to Tony.