W. P. Carey Inc.
Q4 2019 Earnings Call Transcript

Published: 21 Feb 2020

[Operator:]

Hello, and welcome to W. P. Carey's Fourth Quarter 2019 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, Director of Institutional Investor Relations. Mr. Sands, please go ahead.

[Peter Sands:]

Good morning, everyone. Thank you for joining us today for our 2019 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 with that, I will hand the call over to our Chief Executive Officer, Jason Fox.

[Jason Fox:]

Thank you, Peter, and good morning, everyone. Today. I will start by briefly reviewing some of the highlights of 2019, before focusing my remarks on a selection of our recent investments in the context of the market environment.Toni Sanzone, our CFO will cover our 2019 results, our 2020 guidance and our balance sheet positioning, including the further flexibility we have gained with the renewal and upsizing of our credit facility. We are joined by our President John Park and our Head of Asset Management, Brooks Gordon who are available to take questions.During 2019 we executed on a variety of important initiatives. Coming into the year, we were focused on fortifying the benefits associated with our merger with CPA

[Toni Sanzone:]

Good morning everyone. As Jason said, we are very pleased with the progress we made on several fronts in 2019 and believe we are well positioned for the year ahead given our current outlook.Starting with our results. As a reminder, our 2019 results reflect the full-year impact of the merger with CPA 17 which significantly improved the composition of our earnings with 95% of total AFFO generated by our core real estate business.As our investment management fee stream decline overtime, we are actively replacing them with more highly valued and steady real estate cash flows. We were pleased to generate 8% year over year growth in real estate, AFFO per share while at the same time significantly the leveraging and strengthening our balance sheet.Total AFFO for the fourth quarter was a $1.28 per share bringing full-year AFFO to $5 per share, a decrease of 7.2% driven by the expected decline in investment management earnings. AFFO from real estate total the $1.21 per share for the quarter and $4.74 per share for the full-year an increase of 8% over the prior year.Driven by substantially higher lease revenues from the properties we acquired in the CPA

[Operator:]

Thank you. [Operator Instructions]. Our first question comes from Sheila McGrath with Evercore. Please proceed.

[Sheila McGrath:]

I guess I was wondering, if you could give us insights on the same-store NOI for self storage, which was particularly strong. Are all those properties leased properties, just what was driving that growth participation in the leases?

[Brooks Gordon:]

This is Brooks. The vast majority are net leased in the Extra Space transaction. We have 10, that are currently operating properties and another nine that are scheduled to be added to the Extra Space lease, and the same-store performance is really just embedded in that portfolio. Those are in markets that have seen a good rent growth.So for example, in the 10 that we have retain as operating properties for example, doesn’t seem very good growth north of 10% NOI growth and on the net lease those are subject to a long-term rent growth formula where there is a fixed component and a variable component based on revenue growth. Also just New hall has a bump in there as well, and that is a big piece of the puzzle.

[Sheila McGrath:]

Oh, that is right. And then on the leasing spread on industrial being negative, was there one deal that was doing skiing - that. Just a little color on the leasing spreads in industrial.

[Brooks Gordon:]

Yes. That is very much just driven by that one workout that Toni mentioned in her opening remarks. So, if you backed that out, leasing spreads were quite strong this quarter, kind of in 112% range, but that one workout transaction on four industrial properties really drove that.

[Sheila McGrath:]

Okay. And last question, if you could just comment on tenant watch lists, how that is tracking and if there is any notable tenants you want to call out for us to be mindful of?

[Brooks Gordon:]

Sure. Our credit quality is quite good right now, heightened watch list is under 2% of ABR. In terms of any concentrations, there aren't really any industry trends in there. It is just a mix. Again, we closely monitor all tenants and are quite cautious and willing to downgrade on to our watch list quite proactively. So, we think that is a safe ways to look at and one we feel pretty good about. So, no real concentrations or particularly notable ones.

[Sheila McGrath:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from Greg McGinnis with Scotiabank. Please proceed.

[Greg McGinniss:]

Hey, good morning.

[Jason Fox:]

Good morning Greg.

[Greg McGinniss:]

Toni I was just hoping you could help us think about for the acquisition guidance, kind of what the underwriting assumptions on there? Whether it is cap rates or investment spreads?

[Jason Fox:]

Hey Greg, this is Jason. I will take that. I'm sure. So in our guidance, we talked about acquisition range of 750 to a billion and a quarter of new investments. I think embedded in that, we have seen some cap rate compression over the year both in the U.S. and Europe. If you look at our Q1 deals to-date the $200 million we referenced earlier across five investments, both new investments as well as capital projects, those blended to around a 6.5% cap rate.Hard to predict the full-year of where the markets will go and where the opportunities will arise. But I think that is probably a good run rate for you to think about on the year. It is come down a little bit from the mid to high sixes that we were for a blended cap rate in 2019 and I think that is reflection of two things.One is we have seen continued yield compression, but I think equally important, we are kind of broadening the types of deals that we look at. We are still focused on what we have traditionally done, which is sale leasebacks, critical operating properties where we generated above market yields.But we are also adding higher quality real estate, that may trade at lower cap rates, may have higher embedded growth or better releasing outcomes at the end of the terms. You the Stanley Black & Decker would be a good example of that. So, I think those two components really are kind of driving the slight cap rate compression at least how we are seeing the year unfolding.

[Greg McGinniss:]

Thanks. And then, I know you talked about this a bit previously, so I apologize if this was covered, but on the capital investment side where you are looking to deliver almost a quarter billion of projects in 2020. Do you see this as a reasonable expectation for deliveries going forward? Just kind of curious what you see as the - how deep is this pipeline within the current portfolio of potential investment projects and then what is the process for sourcing more?

[Jason Fox:]

I will start, I will see if Brooks wants to add some color. Yes, so 2018, 2019, we about 10% to 15% of our deal volume with these capital investment and development projects that also include build to suits by the way.This year you heard the numbers that we just talked about, we expect that to double in the 2019 numbers we are expecting about $240 million of investments that are scheduled to complete this year. Again, both build to suits and expansions. Some of those have already completed two to date.We also have another $130 million in our supplemental that are expected to complete in 2021. So hard to predict as always, but I think a good run rate is probably in that 20% to 30% range. It is become a big focus of our investment management team.We have the skill set to identify and attending relationships. We also have a sizable pool of assets, and particularly, the industrial assets that tend to lend themselves quite well to expansions.I mean as we have talked in the past, we are putting more money to work, but we are also putting money to work at higher yields. We are extending lease terms when we are doing expansions. It is higher quality real estate, and we are also adding criticality of the portfolio given that we are building or expanding to a tenant's current specs and needs.So, a lot of positives that come out of that type of investment. And I think you will continue to see a focus and, and hopefully a growing portion of our annual deal volume.

[Greg McGinniss:]

Great. Thank you.

[Operator:]

Thank you. Our next question comes from Jeremy Metz with BMO. Please proceed.

[Jeremy Metz:]

Hey guys, good morning. Question for Jason or maybe Brooks here. But I was hoping we can get any sort of update on the Pendragon situation if you are having any discussions there about potentially restructuring those leases and that is something we need to keep an eye out for possible here in 2020. And just as a follow on the Pendragon property count went down and sounded 69 now, but I didn't see a sale listed on the disposition page. So, any color on that would be great as well.

[Brooks Gordon:]

Sure. This is Brooks. I will take that. On that specific question, we just went direct with a tenant that was formerly the subtenant. So, we still own the property. But, that was a good outcome for going direct with a sub tenant that was already in place.And then with respect to Pendragon more broadly, we think the company has made a lot of progress, especially in the second half. A lot of their actions are bearing fruit. Those include hiring a very well-regarded new CEO, substantially reducing costs, but really the biggest driver of their turnaround and the biggest cause for some of their challenges was just way too much inventory, and they drastically reduced that by close to 30% and are in much better place.I think that is in the context of a very conservative balance sheet, certainly industry headwinds, and their competitors share of those headwinds, but we don't view this as a default risk. We have over 10 years of weighted-average lease term. There is no intention to restructure that deal, nor do we foresee a need to. So, you know, we think the company is in a good place now. Certainly industry headwinds, but they are well-positioned on recovery.

[Jeremy Metz:]

That is helpful. And then, Toni, I appreciate the added color you gave on the same-store. You mentioned that including vacancies and credit loss, it would have had about 100 basis impact. Not sure if you have interested in what that would have been in terms of impact for the full-year. How much of that was credit loss versus vacancy, and just as you think about credit loss in 2020 any sort of color on what you are forecasting here, even if just relative 2020 verse 2019.

[Brooks Gordon:]

So, this is Brooks. In terms of credit losses. We make assumptions that are baked into our guidance. I don't have the specific percentage right in front of me. But in any given year we are always assuming some portion of credit loss. Our expectations, historically that we actually perform better than that.You know I will say with respect to the drag on same-store, 100 basis points is a good a placeholder and we intend to disclose more of that going forward. I think our real world experience in recent years has been somewhat better than that. And so, we do think that is a good placeholder for the moment and you will see more disclosure from us on that in the future.

[Jeremy Metz:]

And now 100 basis points that is both mix of credit loss and vacancy impact, right? So, should we think about that half-and-half or is there any sort of rough ballpark.

[Brooks Gordon:]

Yes. I think the rough ballpark I think half-and-half is probably a good assumption, you know for example that workout that I just mentioned and Toni mentioned certainly plays into that number.

[Jeremy Metz:]

Great. Thanks guys.

[Operator:]

Thank you. Our next question comes from Emmanuel Korchman with Citi. Please proceed.

[Emmanuel Korchman:]

Hey, good morning everyone.

[Jason Fox:]

Good morning.

[Emmanuel Korchman:]

Just maybe once for Toni. Does dispositions, can you talk about the timing and expect yield from those throughout the year.

[Toni Sanzone:]

For the upcoming year or what we have experienced?

[Emmanuel Korchman:]

For the upcoming year.

[Toni Sanzone:]

Sure. I mean I think the timing is well spread at this point in time. I don't really see any significant waiting. I mean, I think the pipeline is, it is something we actively work on. Brooks, can you give some color on the, just the breakdown of how we are looking at that?

[Brooks Gordon:]

Yes, so obviously we have announced, one transaction which was already closed, which was the operating hotel. the disposition pipeline. It is pretty evenly spread over the year, but historically that has tended to slip closer towards the end of the year, but we do expect it to be pretty well spread out from a deal makeup perspective, 40% of that expected disposition volume is what we call non-core.Again, the vast majority of that being that operating hotel and minimal vacant assets sales kind of about 5% to 7% of that with the balance kind of roughly split between residual risk management and opportunistic sales it is about 60% international, 40% U.S. and pretty evenly split across property types.

[Emmanuel Korchman:]

Great, thanks. And Jason going back to a comment you made. You said that you are sort of maybe broadening the types of properties you looked at. You pointed out the Stanley Black & Decker deal. Does that then put you in a situation where you are competing with a different competitive set of other investors and how do you think that your cost to capital on your sort of operating advantages versus theirs, when you are operating in different asset category?

[Jason Fox:]

Yes, I mean on the margin, there probably are some different competitors that will compete against, especially as you get into higher quality, more in-fill or Tier 1 markets. You know I think where we differentiate ourselves in a lot of those deals is our ability to execute.The focus is still going to be on sale leasebacks, we can drive some yield relative to what the market typically bears you know to the extent there is complexity on print structuring that will play well into us.But our cost of capital has gotten stronger and we can do deals like the Stanley Black & Decker deal that is a kind of well below a 6% cap rate instilled January sufficient spread to our cost to capital.You know we are not going to win all those deals of course, but we do have very good relationships within the net lease community. You think we will get first look and last look at a lot of these and that is an advantage to us as well.So, again, we look at that as more incremental to our deal volume. We are going to continue to focus and do lots of deals in the traditional space where we can generate, cap rates of North of 6% and even North of 7% in some circumstances.

[Emmanuel Korchman:]

Great. Thank you.

[Jason Fox:]

You are welcome.

[Operator:]

Thank you. [Operator instructions] We do have an additional question from Sheila McGrath with Evercore. Please proceed.

[Sheila McGrath:]

Yes, Jason, I saw an article in Cranes that you guys were thinking about doing something new in Chicago maybe redeveloper expanded a building at Clinton Street. I was wondering if you could just give us some information on that opportunity?

[Jason Fox:]

Yes, sure. I mean, it is a great asset that we have owned for a while. I will let Brooks gives some color on, on what our possibilities are for that asset.

[Brooks Gordon:]

Sure. So it is an office asset in the West Loop in Chicago. It has a way below market rent and the tenant doesn't have any renewal options. So, we have a excellent opportunity to push economics there. We also own a parking lot directly adjacent. And so, the article I believe you are mentioning , references the planned expansion that we are working on for that site. It is early days, but it is a very, very good opportunity with an extremely attractive site. And so, hopefully you will hear more about that soon.

[Sheila McGrath:]

Okay, great. And that is currently not in the investment in the supplemental correct?

[Brooks Gordon:]

No. It is not.

[Sheila McGrath:]

Okay. Thank you.

[Operator:]

Thank you. At this time, I'm not showing any further questions. I will now hand the call back to Mr. Sands.

[Peter Sands:]

Great. Thank you. Thank you for your interest in W. P. Carey. If you have additional questions, please call investor relations on 212-492-1110. That concludes today's call. You may now disconnect.