Release Date: May 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- W.P. Carey Inc (WPC, Financial) completed investments totaling $375 million year-to-date, primarily in industrial properties, demonstrating strong investment activity.
- Approximately 70% of W.P. Carey Inc (WPC)'s investment volume has been in Europe, benefiting from more favorable bid-ask spreads and cost of debt advantages due to the ability to issue Euro-denominated bonds.
- The company has a robust investment pipeline with over $500 million in investments, including about $300 million at advanced stages, indicating potential for future growth.
- W.P. Carey Inc (WPC) maintains strong liquidity with over $1 billion in cash and minimal draw on a $2 billion revolver, providing flexibility in funding investments and handling market uncertainties.
- The company is nearing the completion of its strategy to exit office assets, which is expected to position W.P. Carey Inc (WPC) for higher long-term growth by eliminating headwinds from deteriorating office fundamentals.
Negative Points
- AFFO for the first quarter reflected a decline due to the execution of the office exit strategy and a 3-month rent abatement under the Hellweg lease restructuring.
- Certain tenant issues, such as the Hellweg restructuring and the Prima Wawona lease rejection, have impacted earnings, although these are being actively managed.
- The company noted a tenant, Hearthside, which could potentially go through restructuring, adding an element of risk to future rent collections despite the critical nature of the leased properties.
- Comprehensive same-store rent growth was reported as negative 30 basis points year-over-year, primarily due to the Hellweg rent abatement.
- While W.P. Carey Inc (WPC) has a strong liquidity position, the uncertain outlook for interest rates and the unfavorable cost of equity for net lease REITs pose challenges for capital market activities.
Q & A Highlights
Q: Just trying to gain some sense on the capital market strategy. I think, Toni, you said some planned notes offerings in Europe and U.S. this year. So does it looks like you'll refi the July notes and then maybe try to prefund the February. Is that the way to think about it in the back part of the year?
A: Yes. I think we have those maturities in our line of sight. And as we said, we've seen some positive movement in rates in Europe. So there's some interesting opportunities. I think we still feel good about where the balance sheet sits now and don't necessarily have to hit the capital markets, but we would look to refinance those with bonds likely over the latter part of the year.
Q: Jason, could you just clarify a little bit more about your comments on Hearthside? Is it technically on your watch list? And I presume they're current on rent?
A: Yes, yes. So yes, we mentioned Hearthside. They're a levered company, and we talk about them because we think they could go through restructuring at some point, which is why we brought it up in the context of our top 25 disclosure. Very large company. They provide critical production capacity to their customer base. And importantly, we own highly, highly critical real estate to the company's operations. So for that reason, we feel very good about our position. They are current on rent right now. But even in the event of a balance sheet restructure, we don't expect any disruption in rents. We did add it to our watch list to be proactive. We're talking about it to be transparent, but we do expect them to continue to pay rent for the foreseeable future.
Q: Maybe, Toni, can you give us a sense as to where you think comprehensive revenue growth will shake out this year? And what all you've included in it on the credit side, either that you've discussed already or just maybe you didn't talk about?
A: Sure. Yes. Right now, I think we mentioned comprehensive is about negative 30 basis points in the first quarter. That really has the front weighting of the Hellweg abatement built into it. And as we mentioned, we have Prima running vacant for the rest of the year, assuming we don't sell those assets. So that's all baked into it. In addition to that, we have about 70 basis points rent contingency, which we've not yet used at this point in the year. We do expect, in total, when you kind of look at all 4 quarters together, we run around flat, potentially slightly positive if we don't use that rent contingency.
Q: Jason, just on that cap rate color that you just gave mid- to high 7s, how does that look from a U.S. versus Europe standpoint?
A: Yes. It's -- I mean, it's a good question. In the U.S., we started to see cap rates stabilize at the beginning of the year now that interest rates become a little bit more volatile and looking more like the Fed is going to kind of push rate cuts into the back half of the year, if at all if that matter. So there could be a little bit of room for cap rate expansion in the U.S. I think the big difference right now is the changes that we've seen in Europe. It's been very dynamic over there. For the better part of the last 12 to 18 months, I think the transaction markets were relatively frozen over there. Rates had spiked, which we've seen that now reverse course. And I mentioned earlier that our cost to borrow in euros is now back to what I would call historical averages relative to where we can borrow in the U.S., about 150 basis point spread. So yes, I think that what we've seen is that we can get a little bit more aggressive or tighter on cap rates in Europe and what we've been looking at and maybe relative to the U.S. And for that reason, we've seen more activity over there. It's been about 70% of our year-to-date deal volume has been in Europe and our pipeline is probably 50-50. But the cap rates, they do range. I mean range by country, property-type deal. Germany, for instance, is probably at the tighter end of the range that we're targeting and countries like Italy might be on the higher end of the range. And again, it's always important to include or factor in the rent increases when we're talking about cap rates. When we are doing cap rates -- initial cap rates in the 7s with bumps that have been averaging around 3% for us, that puts average yields over the life of the lease well into the 9s and that's a pretty interesting yield relative to cost of capital right now.
Q: Just thinking about the cap rate seems to have moved down a little bit quarter-over-quarter, and it seems that it's going to stabilize there in the mid-7s for the rest of the year. Coupled with that acquisition, volume has been a bit slow to start off for the year, and your cost of equity hasn't been what it used to be. Given that backdrop, have you evaluated returning some of the capital in the form of a special dividend or a share buyback that you're getting back through these dispositions instead of deploying them and maybe an uncertain capital market environment?
A: Yes. Maybe I'll tackle the last point first and then kind of address some of the points you made in the first half of your question. I mean, look, we're always considering options when it comes to how we allocate or deploy capital, including buybacks or distributions, however, you do it to return capital. But right now, the best opportunity is still allocating capital to new investments. I mean we can achieve cap rates, the year-to-date, we're kind of mid-7s. Depending on where rates go and the allocation between Europe and U.S., I would say mid- to high 7s. But hard to predict exactly what the cap rates look like, but we think they will generate some interesting spreads, regardless -- especially since we're sitting on significant cash right now. And so where we can issue either equity or debt in the markets right now is important, and that certainly factors into how we price deals. But right now, we are sitting on a lot of cash, that's earning 5%. So we're generating really good day 1 accretion, maybe significant accretion when you think about the 5%. That's not a hurdle for us by any stretch. But even if we were to issue new capital where we're trading now, we think that we can generate interesting spreads, especially because we're not totally focused on just going in cap rate. We've mentioned it several times today, but the embedded increases built into our leases is really important. When you factor, call it,
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
