W. P. Carey Inc. REIT

Hello, and welcome to WP Carey's third quarter 2024 earnings conference call. My name is Diego, 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 2004 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 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 wpcarey.com, where it will be archived for approximately one year, where you can also find copies of our investor presentations and other related materials. And with that, I will hand the call over to our Chief Executive Officer, Jason Fox.

Thank you, Peter, and good morning, everyone. This morning, I'll briefly cover several topics, starting with the transaction environment, the investment volume we've completed to date, and the strength of our deal pipeline. I'll also cover tenant credit, including an update on some of our top tenants. I'm joined by Tony Sanzone, our CFO, who will cover the details of our third quarter results, guidance, and balance sheet, as well as Brooks Gordon, our head of asset management, who will take questions. Starting with the transaction environment, Since the end of summer, we've seen a solid increase in overall transaction activity and have been getting greater traction on deals, keeping us very much on track to achieve the midpoint of our full year investment volume guidance. During the third quarter, we completed $167 million of new investments, reflecting the slowdown in activity we often see in late summer. Since then, however, we've closed an additional $231 million of investments which brings our year-to-date deal volume to approximately $1 billion. While the transaction market does appear to have opened up more, we've also seen an incremental increase in competition, along with lingering expectations from sellers that rates will move lower than where they've been for most of 2024. So we're also seeing some signs of pressure on cap rates, notwithstanding the very recent upward movement in interest rates. We continue to see deals averaging in the mid-7s compared to earlier in the year when we were generally seeing deals averaging in the high 7s. Year-to-date, our closed investments reflect a 7.6% weighted average going in cap rate and an average yield above 9% when factoring in our rent bumps, although we continue to evaluate deals across a range of cap rates given our diversified approach. I'm pleased to say our pipeline is currently very active with identified deals totaling over $500 million. compared to the two prior quarters for executing or evaluating more deals in both North America and Europe, although the large majority of our identified pipeline is currently in North America. Given the visibility we have today, we're confident that we're on track to achieve the $1.5 billion midpoint of our full-year investment volume guidance. And depending on the ultimate timing of deal closings, we see a path to being in the top half of our $1.25 to $1.75 billion range. We're encouraged by the current strength of our pipeline, and regardless of which side of year-end the deals ultimately close, they'll positively contribute to our AFFO growth in 2025. Average cap rates and average yields for the identified deals in our pipeline are relatively consistent with what we've closed year-to-date, so we don't expect to see a meaningful change in our overall weighted average cap rate for the full year. The majority of the deals we've closed this year are consistent with those we've done in the past, with a focus on industrial and warehouse assets. We're also looking to generate additional deal volume in U.S. retail through our dedicated team focused on that asset class. U.S. retail is clearly one of the biggest pieces of the net lease market, and we believe that we can drive incremental deal volume in that area with investments that fit our return profile and underwriting requirements. Adding more retail to our portfolio will help us further diversify and, importantly, increase the pool of investment opportunities available to us. We have the advantage of currently not having a particularly large exposure to U.S. retail tenants or concepts, and we're noticing that retailers and developers are increasingly looking to expand their buyer pool in an effort to diversify away from current landlords, something we're well-placed to take advantage of. In addition to that, we expect retail to be an area of the net lease market where a greater proportion of deals are in the form of acquiring existing leases, which generally benefit from shorter timelines to close than sale leasebacks, adding predictability to our deal timing. Turning now to our capital needs, an important point I'd like to highlight is that we don't need to raise equity or need to go above our long-term target ranges for leverage to fund our pipeline of investments this year and potentially all of next year. At the end of the third quarter, we had a little over $800 million of cash on our balance sheet and expect to generate additional disposition proceeds during the fourth quarter. We also have a $2 billion revolver that's minimally drawn, and we're still below our long-term leverage targets, particularly our net debt to EBITDA target of mid to high five times. Looking ahead to next year, while retained cash flow and regular dispositions will fund a portion of our 2025 investments in any scenario, there are a number of other capital sources we can access without needing to raise equity until 2026. For example, we have two student housing operating properties and a sizable portfolio of self-storage operating assets from previous mergers with our managed funds. We believe those assets would sell for cap rates well inside of where we're investing in net lease, and as a source of funding, would therefore be accretive to AFFO, as well as helping further simplify our earnings profile going forward. Furthermore, we have the ability to generate additional capital when a permanent refinancing of our Las Vegas construction loan occurs. And our capital needs could be further reduced next year if we get back any proceeds from our lineage investment, which is currently yielding below 3%. Before handing the call over to Tony, I would like to talk about tenant credit, starting with three top 25 tenants that we're focused on from a credit perspective. Helvig, Harside, and most recently, True Value. which in aggregate account for 4.7% of our ABR. Helvig remains current on rent as it executes its turnaround plan, although it still faces a challenging demand environment. Should there be additional weakness in its business in 2025, we're confident that our stores have good underlying demand. Other operators have expressed concrete interest in our stores at rents that are broadly in line with current rents in the event we need to re-tenant any properties. We're also exploring the disposition of several properties to further reduce our exposure in the near term. While we fully support Helvig and the actions they're taking to improve their business, the interest in our portfolio from other operators gives us comfort that we'll be able to proactively mitigate any future rent disruption. For Hearthside, there have been no meaningful developments, and given the highly critical nature of the properties we own, we continue to expect no rent disruption, even in the event of a restructuring although we continue to closely monitor the situation. A few weeks ago, we filed an 8K stating that True Value had filed for Chapter 11 bankruptcy. True Value is a wholesale hardware distributor, and it's important to note that the independent retail stores it sells to were not part of the bankruptcy filing. Along with its bankruptcy announcement, True Value announced its sale to Do It Best, a larger member-owned hardware cooperative. We own a national portfolio of eight warehouses and one paint manufacturing facility, net lease to True Value, which generate 1.4% of our ABR. True Value remains current on rent, having paid substantially all rent owed through the end of the year. We therefore don't expect any meaningful impact on our fourth quarter or full year AFFO for 2024. Looking ahead to 2025, it's too early for us to say specifically how the situation will play out as True Value and its secured lenders are currently in bankruptcy court and engaged in active negotiations on the path forward. In the coming days or weeks, we expect the parties and the court to determine whether the proposed sale to Do It Best should proceed, in which case we believe Do It Best is likely to require some portion of our buildings, while also needing a transition period to vacate buildings that are not part of its long-term plan. Absent an agreement with secured lenders, it's possible that the proposed sale could instead convert to being a liquidation, which could result in our leases being rejected and a faster process. Although even then, true value may still require the use of our properties for a period of time in liquidation. While it's too soon to have any degree of certainty over which scenario will play out, we're already actively working with brokers and options to re-tenant or dispose of the properties, with a focus on mitigating the potential disruption to our earnings. Once we have clarity on the bankruptcy proceedings, and the likely outcomes for our properties, including better visibility into the timing and specific cash flow impacts, we will of course update the market. Stepping back for 2024, we do not expect any additional lost rent from these or other tenants with credit concerns. Looking ahead to 2025, while it's too soon to give formal guidance, our preliminary view is that rent loss from credit events within our portfolio, net of recoveries, could total approximately 100 basis points. excluding the potential impact of true value, given the uncertainty of that situation. We view this as the most useful information in the current environment, providing a direct estimate of total potential rent loss, which we will continue to refine as new information becomes available. In closing, notwithstanding the potential impacts of tenant credit issues, there are several factors that should help support our growth next year. Having a strong finish in 2024 for investment volume will flow through to our 2025 earnings. We will continue to generate sector-leading rent growth from leases, despite the weaker tailwind from inflation compared to recent years. We will get a full year of rent from our warehouse asset in Chicago that was recently leased to the U.S. Logistics Division of Samsung. We will get a full year of dividends from our lineage investment, and we expect to continue putting capital to work next year without needing to issue new equity, funding investments through accretive asset sales. And with that, I will turn the call over to Tony.