W. P. Carey Inc. REIT

Hello, and welcome to WP Carey's fourth quarter and full year 2023 earnings conference call. My name is Daryl, 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, and thank you for joining us this morning for our 2023 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 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 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. Today, I'll briefly recap 2023, talk about how we're positioned for the year ahead. With significant capital ready to deploy, and an improving transaction market outlook. Tony Sanzone, our CFO, will focus on some of the details of our 2023 financial results and our 2024 guidance, both of which reflect the impacts of successfully executing on the office exit strategy we announced in September. Tony will also cover certain tenant-specific impacts we expect in 2024, which our guidance also reflects. John Park, our president, and Brooks Gordon, our head of asset management, are also on the call to take questions. Starting with external growth, the 2023 transaction backdrop was largely a continuation of the one that existed in 2022, with cap rates lacking rising interest rates. Preserving investment spreads without resorting to investing in riskier assets therefore remained a high priority for us. In the U.S., interest rates continued to move higher for most of the year, reaching a peak in October. The leasebacks, however, remained an attractive source of capital for companies, as high-yield debt and other financing alternatives became very expensive. In April, we completed our single largest ever investment with the Apotex Sale Leaseback on a portfolio of four pharmaceutical R&D and advanced manufacturing campuses. That was a new industrial subsector for us, but shares many of the key characteristics with other industrial assets we invest in, including critical operating properties backed by a tenant business with reliable cash flows on a long-term lease with attractive rent bumps. We've also expanded our focus to include more U.S. retail and now have investment officers dedicated to that sector. As a result, we completed a handful of retail transactions in 2023 across various subsectors and are exploring others both in the U.S. and Europe, focusing on those we believe we can achieve terms and structures consistent with those we get on our other property types. In Europe, a steep rise in interest rates resulted in wide bid-ask spreads, and a pronounced slowdown in transaction activity throughout 2023. We continued to find pockets of opportunity, however, and in November, completed a $157 million cross-border sale leaseback of 11 manufacturing facilities in Italy, Spain, and Germany with Fedrigoni, which is a global manufacturer of specialty papers for premium packaging and labeling. Investment volume for the first quarter totaled $346 million, at a weighted average cap rate of 7.7%, which brought overall investment volume for 2023 to $1.3 billion at a weighted average cap rate of 7.6%. Single-tenant industrial and warehouse assets represented about three-quarters of our full-year investment volume, and given the execution of our exit from office, now makes up a larger majority of our portfolio. Industrial and warehouse are very broad categories, however, comprised of many subsectors, providing both a wide investment opportunity set and added diversification. Sale leasebacks, which have the advantage of enabling us to structure the lease terms, represented close to 90% of our 2023 investment volume. Going forward, we will continue to focus on originating investments through a sale leasebacks and build-a-suits in order to achieve the strong rent escalations, long lease terms, and robust protections we're able to get through lease structuring. Looking ahead, I'm pleased to say that in recent months, the outlook for the transaction environment has improved, both in the US and Europe. Today, we're able to transact at cap rates well into the sevens, providing an attractive spread to our cost of capital. We're also seeing some pent-up supply from sellers and expect a pickup in corporate M&A, which often creates sale-leaseback opportunities. If market conditions play out as we expect, we believe we're very well positioned for higher investment volume in 2024. While it's still early, Five weeks into the year, we've completed investments totaling $177 million and have over $100 million of capital investments and commitments scheduled to complete in 2024, in addition to an acquisition pipeline that continues to build. One aspect of our positioning for 2024 that I want to highlight is our substantial liquidity position. At the end of 2023, we had over $600 million of cash on our balance sheet. Since then, We've paid down some debt and funded some acquisitions with our cash, including paying down our credit facility with proceeds from the Spanish government disposition. After the sale of the U-Haul portfolio for approximately $465 million, our cash balance will be close to $1 billion. With the additional cash we expect to generate from remaining office asset sales, plus free cash flow after paying our dividend, we could have close to $1.5 billion of cash to invest in 2024. We will also continue to have our $2 billion revolver to fund deals or address debt maturities in the short term. And as we've discussed in the past, we have some unique additional internal sources of capital over the longer term, including our equity stake and lineage logistics, which we currently have marked at approximately $400 million. We view our cash position and internal sources of liquidity as meaningful differentiating factors compared to many other net lease REITs. We don't need to raise new capital to fund investments. We have a lot of flexibility on how we approach any new capital markets issuance this year. Our equity multiple has improved since we announced our office exit and benefited from the broader rally in REIT equities since the Fed signaled the end of its tightening cycle, notwithstanding some weaker performance in recent weeks. The liquidity of our stock has also benefited from our recent addition to the S&P 400 index. So far in 2024, bond markets have generally been supportive of new reissuance with rates coming off their 2023 highs and spreads compressing. Despite the substantial capital we've built up, we remain mindful of our overall cost of capital and achieving appropriate returns on our investments. Deals with going in cap rates in the sevens and rump bumps over long lease terms that take their unlevered returns into the eights and nines provide an attractive spread, even if funded with newly issued capital. They are therefore also deals we're very comfortable executing with the liquidity we have on hand, so we continue to have a strong bias to deploy cash into new investments. Lastly, I want to briefly discuss the progress we've made with the office exit strategy we announced in September, laying out an ambitious plan to proactively exit our office exposure over an accelerated timeframe. We're successfully and efficiently executing on that plan, and I could not be prouder of our employees and the dedication and hard work they've shown. both in the lead up to the announcement and in the time since. In addition to the 59 properties that were spun off into NLOP in November, to date, we've sold 79 of the 87 properties under the office sale program, the largest component of which was the State of Andalusia portfolio sale we completed in January, all of which has reduced our exposure to office to just 2.7% of ABR. We're actively working on transactions to sell the remaining properties and expect to reduce our office exposure to a negligible amount over the coming months. Exiting office over a short space of time has reset the baseline from which we will grow AFFO, without the headwinds associated with owning office assets. Since our announcement, office fundamentals have remained under pressure, while our multiple has expanded, reinforcing our conviction in the strategy and benefiting our cost of equity, making us more competitive on deals. We're able to achieve wider investment spreads, thereby enhancing our ability to generate AFFO growth. And with that, I'll pass the call over to Toni.