W. P. Carey Inc. REIT

Hello and welcome to WP Cary's fourth quarter and full year 2022 earnings conference call. My name is Donna 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 2022 Fourth 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 Jason Fox, Chief Executive Officer.

Thank you, Peter, and good morning, everyone. 2023 marks several anniversaries for WPKerry. It was 50 years ago that Bill Carey founded the company. 25 years ago that we became a public company. It was also 25 years ago that we began investing in Europe, where we pioneered sale leasebacks. The company has evolved considerably over the last 50 years, the most recent development being our exit from the non-traded REIT business, culminating in our merger with CPA18. The completion of our transition to a pure play, net lease REIT in 2022 reflects our focus on real estate AFFO growth, driven by accretive investments and rent escalations. And despite the challenging market backdrop in 2022, we generated real estate AFFO growth of 6.3% per share for the year. This morning, I'll focus my remarks on our recent investment activity in Outlook, and Tony Sanzone, our CFO, will cover our results, the 2023 guidance we announced this morning, and our balance sheet positioning. We also have our president, John Park, and our head of asset management, Brooks Gordon, on the line to take questions. Starting with externally driven growth, over the course of 2022, the U.S. 10-year treasury rate rose over 200 basis points, while cap rates lagged well behind as sellers were slow to adjust their expectations. Buyers fought to preserve spread, with transactions often taking longer to negotiate and close, especially sale leasebacks tied to corporate M&A. Overall, our investment volume for the year totaled $1.4 billion at a weighted average cap rate of 6.3% and a weighted average lease term of 20 years. In addition to the more than $2 billion of real estate, we added at a cap rate in the mid-sixes through the CPA 18 merger. With interest rates moving another leg higher in October, we actively exerted our pricing power during the fourth quarter, requiring higher yields and willing to be patient as cap rates began to move. creating opportunities to transact at more attractive spreads. As a result, I'm pleased to say we executed investments at meaningfully higher cap rates during the fourth quarter, although on an investment volume that was lighter than we anticipated, totaling $159 million. Overall, these investments blended to a weighted average cap rate of 6.8%, primarily reflecting warehouse and industrial investments, with going-in cap rates in the high sixes and into the sevens. While interest rates have fallen somewhat since the fourth quarter, the large majority of the investment opportunities we are evaluating today also have cap rates in the high sixes and into the sevens, resulting in investment spreads that are considerably more attractive than they were for most of 2022 and at levels where we are comfortable transacting. Looking ahead, we are well positioned to take advantage of the current market environment. Our diversified approach gives us the ability to invest across property types, both in the U.S. and Europe, and ensures we have the widest possible funnel of opportunities with companies across a variety of industries. And while we currently see more actionable opportunities in the U.S., where cap rates have adjusted more quickly, we do expect cap rates in Europe to catch up with higher interest rates. Furthermore, the environment for sale-leasebacks is as favorable as we've ever seen it, as high-yield debt and leveraged loans remain very expensive. Companies are increasingly exploring alternative sources of capital, including sale-leasebacks. Private equity firms that we previously never saw use sale leasebacks are now looking at it as a source of capital, enabling us to develop new sponsor relationships. We expect these market conditions to continue for the foreseeable future, and that we will be the major beneficiary of the increased deal flow as the market leader in sale leasebacks. And of course, the strength of our balance sheet, including significant liquidity, gives us a competitive advantage with sellers who remain concerned about execution risk. Our competitive position is especially compelling compared to bidders who rely on asset-level debt, which has either become prohibitively expensive or unavailable, particularly for tenants just below investment grade that we target. Currently, we have a strong near-term pipeline with over $500 million of investments at advanced stages or under letters of intent. This, in conjunction with about $156 million of capital investments or commitments scheduled to complete in 2023, and the deals we've closed year-to-date, gives us visibility into at least $700 million of deal volume a little over a month into the year. Overall, given what we're seeing today, we expect to close meaningfully higher investment volume in 2023, totaling roughly $2 billion at higher cap rates, wider spreads. Moving to our capital markets activities. Despite sharply higher interest rates and a turbulent capital markets backer up throughout much of 2022, our stock price held up extremely well. We ended the year as one of the top performing REITs. The relative strength of our stock has enabled us to raise well-priced equity capital, and we currently have about $560 million of equity available for settlement under forward sale agreements, raised at an average price of about $84 per share. On the debt side, we were one of a relatively small group of REITs to issue attractively priced debt in 2022. With our inaugural €350 million private placement bond offering in September, at an interest rate in the mid threes. And I'm pleased to say that the improvement in our credit profile was recognized by the raging agencies, with Moody's upgrading us to BAA1 in September, followed by S&P upgrading us to BBB Plus a few weeks ago. These upgrades incrementally improved both our access to debt and cost of debt, which is currently among the best priced in the net lease sector. Our ability to raise well-priced capital in 2022 in conjunction with our revolving credit facility has ensured we've entered 2023 exceptionally well-positioned with more than enough dry powder to execute on our near-term pipeline on a leveraged neutral basis. Given where this capital was raised, we were very comfortable with our ability to deploy it accretively through the deals currently in our pipeline and into new investments given that transaction cap rates appear to be stabilizing around current levels. We were also comfortable with our ability to continue investing accretively at tighter cap rates than our current targets if we see interesting opportunities given where we expect to be able to raise capital in 2023. Lastly, I want to touch briefly upon the quality of our portfolio, amid concerns about inflation and the potential for at least a mild recession. We remain uniquely positioned within net lease, with best-in-class rent growth and proven resiliency. We own a well-diversified portfolio of critical real estate leased to large companies on long-term leases, the weighted average lease term of just under 11 years. It also remains healthy, occupancy at 98.8%, fourth quarter rent collections of over 99%, and a benign watch list. Before I hand over to Tony, I'd like to take this opportunity to thank our employees, past and present, who've helped shape WP Carey over the past 50 years into the company it is today. All of the milestones we're celebrating this year and the solid results we've achieved would not be possible without our dedicated and talented team. and I'm proud that we've been included in the Bloomberg Gender Equality Index for the third year in a row, one of only a handful of REITs selected this year, highlighting our longstanding commitment to gender equality in an inclusive culture. And with that, I'll pass the call over to Toni.