W. P. Carey Inc. REIT

Hello, and welcome to WP Carey's second 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. And now I will turn the 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 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 FCC 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 pass the call over to our Chief Executive Officer, Jason Fox.

Thank you, Peter, and good morning, everyone. Having proved the resilience of our portfolio throughout the pandemic, the first half of 2021 has been characterised by an acceleration in growth driven primarily by record deal volume, enabling us to further increase our investment expectations for the year and raise our AFFO guidance. We continue to see a high level of deal activity, with several hundred million dollars of deals currently in our pipeline. And with inflation taking center stage with investors, WBCary is well positioned to generate additional upside, with 60% of our AVR coming from leases that have rents tied to CPI. I'll focus my remarks this morning on these two growth drivers, the creative investments and the rent escalations embedded in our leases, after which I'll hand the call over to our CFO, Tony Sanzone, who will focus on our results, guidance, and balance sheet. And as usual, we're joined by our President, John Park, and our Head of Asset Management, Brooks Gordon. Starting with our growth through acquisitions, for the second quarter, investment volume was $780 million. driven primarily by the completion of 11 acquisitions. Our net lease investments had a weighted average cap rate of 5.6%, reflecting the mix and quality of the assets we acquired amid a competitive market environment. For example, about 40% of our second quarter investment volume was in Class A warehouse, including a $195 million investment in a newly constructed logistics facility in the UK, which is expected to receive a BREEAM Very Good Environmental rating and is net leased to Jaguar Land Rover for a 30-year term. Also, about 40% of our second quarter investment volume came from Europe, where cap rates tend to be lower, although spreads remain attractive given our ability to issue Euro-denominated debt, which is currently over 100 basis points cheaper than where we can issue U.S. bonds. A differentiating factor from other net lease REITs is our ability to achieve attractive rent increases over long lease terms. In recent years, We believe we've been originating leases that are among the longest in the net lease sector. Our second quarter investments had a weighted average lease term of 21 years with increases averaging 2.2% for those with either fixed rent increases or floors. The profile of our investments results in an average yield that's meaningfully more attractive than peers who are originating shorter term leases with lower or even no rent increases. Initial going and cap rates taken in isolation do not tell the whole story of the prolonged accretion we achieve. For example, a lease with a 6% going in cap rate and 2.5% annual rent increases over a 20-year term has an average annual yield of over 7.5%. Turning now to our growth through rent escalations and how we're positioned for inflation. 99.5% of our AVR comes from leases with built-in rent growth, which includes 60% from leases tied to inflation. The majority of that, representing 37% of total ABR, comes from leases tied to uncapped CPI, which is split roughly 60-40 between Europe and the U.S. 23% of our ABR comes from leases tied to CPI that have floors and or caps, where the average floor is approximately 1.5% on an annualized basis, and the average cap is approximately 3%. And lastly, Leases with fixed rent bumps represent 35% of ADR and have average annualized increases of around 2%. Because inflation generally flows through to rents with a lag, we expect our contractual same-store rent growth to increase about 100 basis points, from 1.5% to about 2.5% over the next 12 months. Based on current economic forecasts, holding all other factors constant, this assumes inflation over the remainder of 2021 about 3.5% in the U.S. and averaging 2.75% across Europe, which then stabilizes in 2022 to around 2% in both regions. Of course, if actual inflation runs higher than currently predicted, we would expect our contractual same-store growth to ultimately be above 2.5%. While this gives a sense of the impact of inflation on our rent growth about a year from now, the impact on ABR is of course cumulative, and the effect of compounding can be powerful over longer timeframes. Turning now to the internal and external factors contributing to the sustainability of our increased investment activity. With $1 billion of investments completed in the first half of the year, $122 million of capital investment projects scheduled to complete in the second half of the year, and the several hundred million dollars of deals in our pipeline, we expect 2021 to be a record year for deal volume. We also expect to maintain a high volume of deals through a combination of factors. From an internal perspective, with the simplification of the company largely complete, we're now singularly focused on investing for our balance sheet and feel we're benefiting from deeper relationships and market expertise, as well as from a more streamlined investment process. From a macro perspective, sale leasebacks continue to gain popularity with corporations as part of an overall trend of leasing rather than owning real estate. And M&A activity has picked up, driving net lease deal flow as companies seek to optimize their balance sheets and private equity firms monetize assets to drive returns. We also benefit from the scale of our portfolio, with about 30% of our second quarter investment volume coming from follow-on deals, originated through our existing tenant and sponsor relationships. While our diversified approach ultimately provides a vast and deep addressable market over two continents, from a top-down perspective, Our core focus remains on industrial and warehouse assets, which comprised about 70% of our second quarter deal volume. Within these sectors, we've recently expanded into attractive subsectors, like R&D and lab space, and industries like food processing and production, which are all well-suited for sale leasebacks. We've also been investing in essential retail properties in Europe, especially stores with strong unit-level performance. completing investments in grocery portfolios in Spain and France over the last nine months. In addition to our core focus, we create incremental deal volume and growth through more opportunistic investments. A very recent example of our ability to put additional money to work in this way is the construction loan we entered into during the second quarter related to a retail complex currently under development on the Las Vegas Strip. We funded an initial $85 million draw in June, and expect to find additional draws over the next 12 to 18 months, up to $225 million. The drawn amounts earn 6% interest, and upon completion, there's the option to convert part of the loan into ownership of net lease retail assets at an extremely desirable location at very attractive cap rates. In closing, given all these factors, coupled with the cost of capital that allows us to consistently make accretive investments, we're confident that we can maintain a strong pace of investments in the second half of the year, and we've raised the investment volume in our 2021 guidance to reflect that. Lastly, while the worst of the COVID pandemic seems to be behind us, the recent surge in Delta variant case numbers serves as an important reminder that in addition to investment volume, underwriting and portfolio quality still matter, and that the proven performance of our portfolio continues to differentiate WP Carey from other net lease REITs. And with that, I'll pass the call over to Toni.