W. P. Carey Inc. REIT

Hello and welcome to WP Carey's first quarter 2023 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 2023 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 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.

Thanks, Peter, and good morning, everyone. I'm pleased to say we've made a strong start to the year through our investment activity. We've also continued to generate the highest contractual rent growth in the net lease sector. We expect to average around 4% for 2023, even with inflation coming off its peak, and to remain elevated in 2024. This morning, I'll briefly review our recent investment and capital raising activities. And Tony Sanzone, our CFO, will cover the details of our results, guidance, and balance sheet positioning. John Park, our president, Brooks Gordon, our head of asset management, are also on the call to take questions. Starting with external growth. Investment volume year-to-date totals $743 million, comprising $178 million closed during the first quarter and $566 million so far in the second quarter. Our investments year-to-date were completed at a weighted average cap rate of 7.2% and a weighted average lease term of 21 years. In line with our core focus, virtually all were industrial sale leasebacks, including three industrial portfolios, each over $50 million. in addition, of course, to the Apitex transaction, as the single largest driver at $468 million. Apitex was a sizable sale-leaseback, so I'll briefly recap that transaction, which is an excellent example of our ability to partner with private equity sponsors, utilizing sale-leasebacks as part of the capital stack in corporate acquisitions. It also demonstrates our ability to source and execute large deals, as well as the competitive advantage we have by being able to fund transactions especially large ones, entirely with our own balance sheet. In fact, we believe very few of the net lease buyers we compete against could close a transaction of this size, and even fewer without using asset-level debt, something that is generally uneconomical or unavailable in the current environment. Pennant is a global pharmaceutical company and the largest generic drug manufacturer in Canada. The portfolio comprises 11 properties, over four pharmaceutical R&D companies, and advanced manufacturing campuses, primarily located in attractive infill locations in Toronto, where vacancy rates for industrial real estate are in the low single digits. And the facilities are mission critical to the tenant's business, representing the vast majority of its global operations. This was an accretive transaction in line with others we've executed this year and structured as a triple net master lease with rent payable in U.S. dollars and 3% fixed rent escalations over a 20-year term. The transaction closed concurrently with the private equity buyout of Apotex, and it was funded on March 31st, but closed on April 3rd. Given the timing, Apotex did not therefore appear in our first quarter supplemental portfolio metrics. However, on a pro forma basis, it ranks as our third largest tenant, representing just over 2% of ABR. And along with another industrial portfolio investment we've completed so far in the second quarter, increases our overall exposure to warehouse and industrial to approximately 53% of AVR. Turning to the investment environment, in the U.S., the backdrop largely remains the same as it was on our last earnings call in February, with cap rates on our investments year-to-date averaging about 40 basis points higher compared to the investments we closed during the fourth quarter. Within the opportunity set we target, we've continued to see the best opportunities in industrial, where cap rates have increased the most. In Europe, we've seen a pickup in longer-range opportunities since the fourth quarter, driven by higher interest rates. In many respects, the current transaction backdrop in Europe is similar to that in the U.S. at the start of the fourth quarter of last year, and we expect it to follow a similar trajectory, providing a growing number of interesting opportunities as the year progresses, driven by the increasing competitiveness of sale leasebacks versus sellers funding alternatives. The large majority of the investment opportunities we're evaluating in both regions continue to span a range of cap rates in the mid to high sixes and up into the sevens. Cap rates in this range continue to provide a comfortable spread to our cost of capital, and we're confident in our ability to execute given the strength of our balance sheet. However, if capital markets remain unsettled or borrowing costs move higher, we would expect to see additional upward pressure on cap rates in the second half of the year. While corporate M&A has slowed, we are seeing an increase in the proportion of transactions where sellers are considering sale leasebacks, including corporate refinancings. The overall environment for sale leasebacks remains favorable, with high-yield debt and leveraged loans continuing to be expensive, driving more and more companies and private equity sponsors to explore sale leasebacks. And as the market leader in this type of transaction, we expect to remain the major beneficiary of that trend. We also continue to have a competitive advantage with sellers concerned about execution risk, given the strength of our balance sheet and ability to close deals without relying on asset-level debt, which is particularly relevant for the tenants just below investment grade that we target. Overall, the investment environment remains constructive, and we're on track to close meaningfully higher investment volume relative to last year. We have an active pipeline, including several hundred million dollars of investments at various stages, with a handful of early-stage opportunities in Europe. Our internal growth also remains very strong, given the high proportion of leases with rent escalations tied to inflation. Even though there is evidence that inflation is beginning to cool, the inherent lag on which it flows through to rents keep our contractual same-store rent growth at around 4% in 2023 and over 3% in 2024. Keep in mind, this is based on projections of inflation returning to around 2% by the end of next year. So to the extent inflation remains above 2%, our same-store rent growth will also remain elevated. Moving to capital raising, we continue to utilize our access to a variety of capital sources. Tony will cover the details, but at a high level, first quarter activity was driven by equity capital raising, ending the quarter with significant forward equity available to settle, issued at prices well above current levels. Earlier this week, we completed a 500 million euro three-year term loan with the potential to go up to 750 million euro through its accordion feature. We therefore continue to have capital to put to work and remain well-positioned to fund the investment volume embedded in our guidance. Lastly, with the odds of a recession in the second half of this year increasing, I want to reiterate that we have a well-diversified portfolio of critical real estate leased to large companies on long-term leases. Our portfolio has proven resiliency with the stability of our cash flows demonstrated over numerous economic cycles and throughout the COVID stress test. Occupancy remains very high, as do rent collections, and we have a benign watch list with no particular themes in terms of tenant industry or property type. In addition to downside protection, we also pay a well-covered growing dividend currently yielding around 6%. In closing, we're pleased with the progress we're making in 2023, which sets us apart from most other net lease REITs in the current environment, particularly the strength of our investment volume, supported by a well-positioned balance sheet and access to various forms of capital, as well as the sector-leading rent growth we're achieving. And with that, I'll pass the call over to Toni.