W. P. Carey Inc. REIT

Hello, and welcome to WP Carey's third quarter 2023 earnings conference call. My name is John, 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 will be taking questions via the phone line. Instructions on how to do so will be given at the appropriate time. And I will now turn today's program over to Peter Sands, head of investor relations. Thank you, Mr. Sands. Please go ahead.

Good morning everyone and thank you for joining us this morning for our 2023 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 that 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, 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 hand the call over to our Chief Executive Officer, Jason Fox.

Thank you, Peter, and good morning, everyone. On this earnings call, in addition to discussing our third quarter results, We want to take the opportunity to provide an update on our recently announced strategic plan to exit office, including the progress we've made over the last six weeks and how we would be better positioned for growth going forward. I'll also discuss how the significant amount of liquidity coming back to us puts us in an exceptionally strong capital position and touch upon what we're seeing in the transaction market and how we're approaching new investment opportunities as a result. I'm joined this morning by our CFO, Tony Sanzone, will review the third quarter and our expectations for the remainder of 2023, as well as our preliminary expectations for 2024 AFFO and the resetting of our dividend to reflect our strategic exit from office. John Park, our president, and Brooks Gordon, our head of asset management, are also on the call to take questions. Starting with our strategic exit from office, which accelerates the approach we've been taking over the last eight years or so to reduce our office exposure, and will effectively take it down to zero over the next few months. I'm pleased to say that on November 1st, we completed the spinoff of Net Lease Office Properties, which we'll refer to as NLOP on this call. As a result, assets representing about two-thirds of our office ABR are now owned by NLOP. WP Carey has no ownership interest in NLOP, and as a separate publicly traded company, NLOP will make its own public disclosures including updates on its progress with asset sales. We're also making good progress selling the office assets that remain on our balance sheet, which we are referring to at the Office Sale Program. So far, we've completed sales of four office assets under this program, totaling $143 million in gross proceeds, including the Telthonica assets sold during the third quarter. And we have signed contracts on another roughly $500 million. This includes our largest office asset, net lease to the Spanish government, which remains on track to close in January and is sailed back to the tenant for approximately $350 million. In total, we have closed or have transactions in place on over 90% of assets in the program based on gross proceeds, giving us confidence that the vast majority of on-balance sheet office sales will be completed by early 2024. We're pleased with the progress we've made to date particularly given the remaining 10%, which we are actively working on selling, represents less than 1% of our total ABR. As a result, by early 2024, we will have a higher quality portfolio with some of the strongest metrics in the net lease sector. Just over 60% of ABR will come from warehouse and industrial assets. The weighted average lease term will remain over 11 years on a portfolio maintaining strong geographic diversification. with over half of ABR generated by assets with rent escalations tied to inflation. We will continue to have among the strongest aims to our rent growth in our peer group, both from CPI-linked leases and higher fixed rent escalations. Proactively exiting our office exposure over a short period of time also ensures we won't face a drag on our earnings over multiple years, or the risks associated with large lease expirations and increased vacancies driven by declining demand for office. Our view is that the leasing market, financing market, and investment sales market for the office sector will all remain under pressure, and that office assets will see worse outcomes going forward than they've seen in the past, which will be particularly impactful on a single-tenant office portfolio with a declining weighted average lease term. These factors all contributed to our conviction in addressing office more proactively, while it still has a reasonable amount of lease term remaining. and to provide investors a cleaner and clearer path for earnings growth on our core portfolio. As I look ahead, WP Carry will be better positioned for growth. The quality of our cash flows will be enhanced through better end-of-lease outcomes, including fewer vacancies, higher overall releasing spreads, reduced downtimes in carrying costs, and lower CapEx requirements. Exiting office will also enable our sector-leading internal growth to have a greater impact on our overall AFFO growth. In addition, the significant amount of capital that has and will continue to come back to us over the next several months uniquely positions us within the net lease space. In aggregate, the combination of settling our equity forwards, the cash distribution received at execution of the spinoff, asset sales under the office sale program, along with the upcoming exercise of the U-Haul purchase option and other dispositions is expected to generate around $2 billion of liquidity. We will also start retaining more cash as a result of resetting our dividend. Based on our revised investment volume expectations for the remainder of 2023 and our current assumptions for 2024, we don't expect to need to issue new capital in the near term. It could potentially go to the end of 2024 without having to access the capital markets if they remain unfavorable, even if we temporarily repaid our 2024 debt maturities with cash. The significant pool of dry powder we have gives us a meaningful competitive advantage on new deals, especially versus net lease peers that may become capital constrained if they're unable to access the capital markets or their cost of capital remains too high. Looking further ahead, we have additional sources of capital, such as our investment in lineage logistics and potential operating property sales, which could provide even more of a runway to fund accretive investments should capital market conditions remain unattractive over an extended period of time. Turning now to the transaction environment and how we're approaching new investments as a result. The current environment for sale leasebacks continues to be one of the most interesting I've seen in my career. High-yield debt and other financing alternatives are constrained and generally very expensive, making sale leasebacks the most attractive source of capital. In addition, the capital market backdrop remains volatile, creating uncertainty over the pool of buyers able to raise and deploy capital accretively. Competition has thinned out, especially from buyers using mortgage financing. We are seeing less capital chasing deals. Coming out of summer, we had a substantial pipeline with around $500 million of new investments at various stages of execution, and at cap rates generally in the low to mid-sevenths. After steadily rising over the summer, interest rates moved sharply higher in late September, bringing deal pricing even more into focus. We began more actively exerting our pricing power, pushing cap rates higher to better reflect the current capital market environment. Specifically, we repriced most of our live deals to cap rates in the mid to high sevens and even into the eights, providing unleveraged returns in the high single digits and into the low double digits. Deals are therefore taking longer to negotiate and close as sellers either adjust to or are unwilling to accept higher pricing. That translated to a very slow third quarter, with investment volume totaling just $40 million and lower expectations for overall 2023 investment volume. Looking ahead, we have a strong bias towards deploying capital into new investments, although we are taking a balanced approach, recognizing that macro factors, including the trajectory of interest rates, also matter. For sale leasebacks in particular, where sellers are motivated to transact through a specific use of proceeds and face a lack of attractive alternatives, We believe pricing will adjust quicker than in other parts of the net lease market. As transaction cap rates gradually move higher, we will allocate capital when we see appropriately priced opportunities. We will continue to press for higher cap rates, knowing we're exceptionally well positioned to deploy more capital as sellers adjust their expectations. And for the types of transactions we focus on, we will be competing against a shrinking pool of buyers who can raise and deploy capital. Currently, our pipeline stands at over $400 million, with many deals back on track and heading towards closing, most of which we expect to close around year-end. Additionally, we have a handful of large portfolio deals at relatively early stages. And with that, I'll pass the call over to Tony.