W. P. Carey Inc. REIT

Hello, and welcome to WP Carey's third quarter 2021 earnings conference call. My name is Brock, and I'll 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'll 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 Third 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 RICC 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. I'm pleased to say our third quarter results keep us on pace to deliver strong year-over-year AFFO growth. We continue to see strong deal momentum during the quarter, with 2021 set to be a record year for investment volume, having already surpassed our full-year investment volume for all prior years, and establishing a new phase of externally driven growth for WP Carey. We're also entering a period of higher internally driven growth, with inflation taking up in recent months, and generally expected to last longer than originally anticipated, WP Cary is uniquely positioned to benefit. Higher inflation had a positive impact on our same-store growth during the third quarter, especially for leases tied to uncapped CPI. However, it is really just the start with the bulk of the impact occurring over the next few quarters. Consequently, we believe WP Cary currently offers one of the best combinations of external and internal growth across the net lease sector. supported by the strength of our near-term pipeline, ample liquidity, and continued access to well-priced capital, in addition to providing an attractive dividend yield. This morning, I'll focus my remarks on these aspects of our growth, and Tony Sanzone, our CFO, will take you through the details of our results for the quarter, guidance, and balance sheet positioning. Tony and I are joined by our President, John Park, and our Head of Asset Management, Brooks Gordon, who are available to take questions. Starting with growth through acquisitions. During the third quarter, we completed about $200 million of investments, primarily into Class A warehouse properties in the U.S. At a weighted average initial cap rate of 6.2%, bringing our total deal volume for the first nine months of the year to $1.2 billion. At a weighted average initial cap rate of 5.9%, and a weighted average lease term of 19 years, among the longest for new investments across the net lease sector. Our ability to structure these deals with long lease terms and strong rent increases, averaging over 2% for those with either fixed rent increases or floors, translates to an average annual yield of over 7%, a metric that we believe better captures the prolonged accretion we're achieving. It's also meaningfully more attractive than that of most of our net lease peers, who tend to be investing in shorter-term leases, lower, or even no bumps. In addition to entering a new phase of externally driven growth, we're also entering a period of higher internally driven growth with one of the best positioned net lease portfolios for inflation. One of the key benefits of our focus on originating sale leasebacks is our ability to directly negotiate the lease structure, including the rent bumps. As a result, we constructed a portfolio in which 60% of ABR has rent increases tied to inflation. During many years of low inflation, Our rent growth was driven by leases with fixed rent increases, but with inflation picking up in recent months, we expect leases tied to inflation to drive rent growth and strongly outpace the 2.3% average fixed rent bump we saw for the third quarter. Inflation began to flow through to rents during the third quarter, although on a relatively small portion of our portfolio. Leases with CPI-linked rent increases that went through scheduled rent adjustments during the quarter experienced rent increases averaging 3.3%. The vast majority of CPI-linked leases that did not bump during the third quarter are scheduled to do so over the next nine months, adding about 100 basis points to our same-store rent growth based on current inflation forecasts, taking it from about 1.5% to about 2.5%. Higher same-store growth is especially valuable in an environment where investment spreads are expected to continue to compress. And if inflation runs higher or for longer than currently anticipated, we would expect to see additional upside. Turning to the market environment and our pipeline. During the quarter, we saw a continuation of many of the dynamics that have driven the transaction market in recent quarters, with continued cap rate compression both in the U.S. and Europe, largely fueled by private capital. Warehouse and industrial remains sought after asset classes in both regions, and logistics assets have traded at especially tight cap rates in Europe. While these trends look set to continue, heightened M&A activity is spurring a steady flow of deals, in part driven by the attractive valuation arbitrage that exists for private equity investors between the multiples they can acquire businesses at and real estate values. More broadly, M&A activity is expected to continue at record levels, which is positive for the supply of sale leaseback opportunities. From a top-down perspective, we continue to focus predominantly on warehouse and industrial assets. which comprised about three-quarters of our deal volume through the end of the third quarter, moving the ABR we generate from these property types 40 basis points higher to 48.7%, while the proportion of ABR we generate from office properties has continued to decline. So far in the fourth quarter, we've completed an additional $41 million industrial investment, and we expect to maintain a strong pace of activity into year-end, including $100 million of capital investments and commitments scheduled for completion during the fourth quarter. Our pipeline remains strong and includes a handful of larger portfolio deals that are working towards closings around year end. This is reflected in our investment volume guidance range, which we're maintaining at $1.5 to $2 billion. And depending on the number of deals that come to fruition and their eventual timing, it could take us to the top end. Lastly, I want to briefly mention our recent green bond offering. We're proud to have successfully completed our inaugural green bond issuance earlier this month, with the proceeds allocated to new and existing eligible green projects. This was a major milestone demonstrating our commitment to ESG, and we would note that we have one of the best ESG profiles in the net lease peer group. We were the first net lease REIT to provide an annual ESG report to the market, which we've been publishing since 2019. We're the second net lease REIT to issue a green bond, and the first to do so in the U.S. We were very pleased with the execution, achieving one of the tightest ever spreads for a net lease REIT on a 10-year bond offering. It also allowed us to further diversify our investor base to include ESG-focused investors, which we hope will continue to be a source of capital for W.D. Carey as we acquire more eligible buildings and seek opportunities to redevelop existing properties to enhance their sustainable characteristics. In closing, we remain focused on creating value for our investors through both the creative investment opportunities and the rent growth built into our leases, offering potential additional upside from sustained higher inflation. We expect our recent pace of investment activity to continue in 2022, and as a result, we believe WB Carey currently offers one of the best combinations of external and internal growth across the net lease sector, plus one of the most compelling dividend yields at around 5.5%, supported by our stable cash flows, the strength of our pipeline, ample liquidity, and continued access to well-priced capital. And with that, I'll pass the call over to Toni.