W. P. Carey Inc. (NYSE:WPC) Q4 2023 Earnings Call Transcript

W. P. Carey Inc. (NYSE:WPC) Q4 2023 Earnings Call Transcript February 9, 2024

W. P. Carey Inc. misses on earnings expectations. Reported EPS is $0.00066 EPS, expectations were $1.21. W. P. Carey Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello. And welcome to W. P. Carey’s Fourth Quarter and Full Year 2023 Earnings Conference Call. My name is Daryl, 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. Mr. Sands, please go ahead.

Peter Sands: 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 to differ materially from W. P. 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 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.

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. Toni Sanzone, our CFO, will focus on some of the details of our 2023 financial results in our 2024 guidance, both of which reflect the impacts of successfully executing on the office exit strategy we announced in September. Toni 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 lapping 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 continue to move higher for most of the year, reaching a peak in October. Their leasebacks, however, remain 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 4 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 invest in, including critical operating properties backed by 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 continue 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.

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Q&A Session

Investment volume for the fourth 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 to suits in order to achieve the strong rent escalations, long lease terms and robust protections we’re able to get through restructuring.

Looking ahead, I’m pleased to say that in recent months, the outlook for the transaction environment has improved, both in the U.S. and Europe. Today, we’re able to transact at cap rates well into the 7s, providing an attractive spread to our cost of capital. We’re also seeing some pent-up supply from sellers and expect to pick up 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 in 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 7s and ramp bumps over long lease-term 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 proud of our employees, 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 generate AFFO growth. And with that, I’ll pass the call over to Toni.

Toni Sanzone : Thank you, Jason, and good morning, everyone. This morning, we reported AFFO per diluted share of $1.19 for the 2023 fourth quarter and $5.18 for the full year, which were 7.8% and 2.1% lower versus the prior year periods, respectively, driven by our exit from office assets, including the spin-off of NLOP in early November. During the fourth quarter, we sold 17 properties for gross proceeds of $266 million including the sale of 7 properties for $132 million under our Office Sale program, bringing total dispositions for the year to $462 million. Our fourth quarter disposition activity also included the sale of five Marriott Hotel operating properties for $84 million. We’ve now sold 8 of the 12 Marriott Hotels that converted from net lease to operating properties in January of 2023, and we expect to sell one additional Marriott Hotel this year.

The remaining three will be held for redevelopment over the next few years, but will continue as operating properties throughout 2024. In January of this year, I’m pleased to say we completed the sale of our largest office asset, State of Andalusia portfolio for approximately $360 million. This, along with the sale of another office asset in January, brings gross proceeds under the Office Sales program in 2024 to $388 million and the total to date to $608 million. Looking ahead to 2024, our guidance assumes office sales totaling between $550 million and $600 million including the $388 million already completed with the remaining sales under the program weighted to the first half of the year. Our disposition guidance also includes the sale of the U-Haul net lease self-storage portfolio through the exercise of its purchase option for approximately $465 million.

We expect to receive the proceeds in tranches during the first quarter and have collected the full first quarter of rent on the portfolio totaling $9.7 million. Ordinary course dispositions in 2024 are expected to total between $150 million and $350 million, which includes the Marriott operating hotel I mentioned earlier. During 2023, our net lease portfolio continued to benefit from the high proportion of rents generated from leases with increases tied to inflation, even as inflation remained well below its 2022 peak both in the U.S. and Europe. This is reflected in the 4.1% year-over-year contractual same rent growth we reported for the fourth quarter. Based on current inflation forecasts, we expect our contractual same-store rent growth to be close 3% for the 2024 first quarter and moderate to an average in the mid to high 2s for the full year.

Comprehensive same-store rent growth was 2.3% year-over-year for the fourth quarter driven lower by the lease expiration on a large warehouse property, which previously generated ABR of $6.2 million. This vacancy also reduced our net lease portfolio occupancy to 98.1% at year-end. As we work to re-tenant the property over the near-term. We are currently in active negotiations to re-lease the property at or potentially slightly above the prior in place rent, although our guidance assumes downtime on the property for most of 2024. While our historical with rent loss has been relatively negligible, our outlook for 2024 reflects our expectations on two specific assets which we’re closely monitoring. First, we are proactively working with one of our top 10 tenants, Hellweg, a do it yourself retailer in Europe to restructure and extend its leases as it works to improve its financial position.

Although this is a developing situation, our guidance currently assumes a rent abatement on this portfolio for the first quarter totaling $7.5 million and a reduction in annual rent going forward from approximately $30 million of ABR to an estimated $26 million. Second, the tenant of four cold storage and fruit packing facilities we own in Central Valley, California, which produces $5.2 million of ABR, has been operating in bankruptcy. While the tenant is current on rent through the end of February, we expect our lease to be rejected. Our guidance therefore assumes no additional rents from this tenant in 2024 as we work through a resolution and carry the properties vacant. In aggregate, our guidance assumes these two tenant situations have an estimated $0.07 impact on our 2024 AFFO through a combination of lost rent and carrying costs partly offset by lower income taxes.