W. P. Carey Inc. REIT

Hello, and welcome to WP Carey's second quarter 2022 earnings conference call. My name is Kevin, 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. Instructions on how to do so will be given at the appropriate time. It's now my pleasure to turn the call 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 2022 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 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.

Thank you, Peter, and good morning, everyone. During the second quarter, we continued to successfully navigate a dynamic market backdrop, performing strongly on a number of fronts, same-store rent growth reaching a new high and raising our expectations for the deal volume we can achieve this year. In an environment where investors are concerned about inflation, rising rates, and potential for recession, we believe we're uniquely positioned among our net lease peers to continue growing. The outperformance of our stock has enabled us to raise additional forward equity, ensuring we have ample capital to deploy to new investments, raise at stock prices that help offset some of the spread compression caused by sharply higher interest rates. And with cap rates moving higher, we're optimistic about our ability to continue investing accretively in the second half of the year. We also continue to offer downside protection with one of the healthiest balance sheets in the net lease sector, a diversified approach, and a roughly 5% dividend yield supported by high-quality cash flows and best-in-class rent collections throughout COVID. I'm joined this morning by Tony Sanzone, our CFO, and together we'll cover these topics in addition to our earnings and updated guidance. which includes the impacts of our merger with CPA18, closing just a few days from now. John Park, our president, and Brooks Gordon, our head of asset management, are also here to take questions. I'll start with our acquisition of CPA18. Earlier this week, we announced that CPA18 shareholders approved our proposed merger, which is scheduled to close on Monday, August 1st. This acquisition adds about $2 billion of high-quality real estate to our portfolio at a cap rate in the mid-sixes, after planned asset sales, the vast majority of which have now been completed. In addition to being well aligned with our existing portfolio with no integration risk and minimal balance sheet impact, the transaction concludes our exit from enhancing the quality of our cash flows. I'm pleased to say that we ended up to the high side of our original estimates for accretion from the merger through a combination of several factors, including stronger NOI growth from its portfolio of operating self-storage properties. Moving to our internal growth, with close to 60% of rents coming from leases tied to inflation, we continue to generate sector-leading rent growth, a result of our longstanding focus on sale leasebacks, where we are able to directly negotiate lease structures. During the second quarter, about 15% of our inflation-based AVR went through scheduled rent increases, with an average increase of 5.6%. Within this, leases with uncapped CPI rent bumps saw rent increases averaging just under 7%. And CPI base leases, which had rent bumps tied to CPI, but with caps, saw rent increases approaching 4%. This resulted in our overall contractual same-store growth increasing to 3% during the second quarter, which we believe is the highest in the net lease sector. Based on current forecasts for inflation, we anticipate that our overall contractual same-store growth will further increase to about 3.5% in the second half of the year, and closer to 4% in early 2023, with the potential to move higher if inflation remains at recent levels. In addition to the assets we're adding through the CPA18 merger, we've also made excellent progress towards the investment volume embedded in our original guidance, completing about $1.1 billion of investments year-to-date, including $478 million in investments during the second quarter and just over $300 million in July. Within our diversified approach, we remain primarily focused on warehouse and industrial properties, which comprise over 80% of our second quarter deal volume. On a regional basis, our second quarter investments were split roughly two thirds to one third between the US and Europe. And we continue to generate strong deal flow from existing tenant and sponsor relationships, representing close to 80% of our second quarter deal volume. While our pipeline remains fluid, We continue to see plenty of opportunities and feel good about where we are at this point in the year. In total, given the transactions we've completed so far, those that we have in our pipeline at advanced stages and capital projects or commitments scheduled to complete in 2022, we have good visibility into investment volume approaching $1.5 billion, with five months of the year remaining, including the fourth quarter, which is typically the strongest quarter as sellers seek to complete transactions ahead of year end. Turning now to the transaction market backdrop, which continued to evolve during the second quarter and can fairly be characterized as remaining in an adjustment period in response to sharply higher interest rates, as sellers' expectations on cap rates catch up with those of buyers across property types and regions. Broadly speaking, to the types of investments we target, we've observed market cap rates move roughly 50 to 100 basis points higher year to date, with the bulk of that movement occurring since the end of the first quarter. The $1.1 billion of investments we've completed year to date had a weighted average cap rate of about 6.1%, which includes investments closed at tighter cap rates earlier in the year. While we executed deals across a wide range of cap rates, generally, we went from making investments with going in cap rates in the fives during the first quarter to making investments with cap rates in the mid-sixes during the second quarter. And we see potential for cap rates to further increase during the second half of the year. Of course, we are not solely focused on initial cap rates. Importantly, our investment spreads are also benefiting from higher growth on newly originated deals. Releases with rent escalations tied to CPI were projecting a relatively high growth rate in the first year or two, benefiting our unlevered IRRs or average yields. Fixed rent bumps on new deals have also been getting gradually higher. The combination of higher rent growth and a more favorable cost of equity means we won't need to see as much cap rate movement compared to most of our net lease peers in order to get back to the spreads we were achieving last year. In terms of our ability to win deals, our established approach continues to work, providing certainty of close to sellers given the moderate use of leverage in our underwriting and ample liquidity. In fact, we've strengthened our competitive position now that the higher levered buyers, including private equity real estate funds and other buyers relying on CMBS, have largely moved to the sidelines given dramatic increases in their cost of capital or the unavailability of asset level debt. This is in marked contrast to the last few years, when sellers would largely overlook the execution risks associated with such buyers, allowing them to win deals on pricing that was only a few basis points tighter than traditional REITs. In terms of the types of transactions we're focused on, stale leasebacks continue to comprise the large majority of our investments during the second quarter. Corporate owner users of real estate contemplating sale-leasebacks typically have a use of proceeds, which supports deal flow during both times of economic expansion, often in conjunction with M&A activity, and during times of economic contraction, when alternative sources of capital, such as high-yield debt, are considerably more expensive or less available. This is especially the case for tenants just below investment grade, which is the segment of the sale-leaseback market we target. Turning now to our capital position, Having issued over $300 million of equity forwards through our ATM program during the second quarter at an average price close to $84 per share, we're in an exceptionally strong position. In conjunction with previously issued equity forwards that remain undrawn, we currently have enough equity capital available to fund over a billion dollars of investments on a leveraged neutral basis. Our ability to execute on our 2022 investment volume will therefore largely be driven by what happens in the broader economy and net lease transaction markets. particularly cap rates, rather than our ability to access the capital markets. The forward equity sold during the second quarter also factors into our ability to maintain adequate investment spreads, with our stock price improving since earlier in the year and relative to where it was during 2021. And because we are conservatively levered, our cost of equity has a larger impact on our overall cost of capital than our cost of debt does. The improvement in our stock price has therefore helped offset some of the increase in our borrowing costs. In closing, Despite investors' concerns about the slowing global economy and potential for a recession, the factors I've discussed this morning give us confidence in our ability to navigate the second half of the year. In addition to higher internal growth, we expect to continue finding interesting new investment opportunities at increasingly wider cap rates, armed with ample liquidity and an advantaged cost of equity. We also continue to believe we're better positioned than any other net lease REIT for inflation protection and have one of the safest REIT portfolios, with proven stability in our cash flows. And with that, I'll pass the call over to Tony.