Release Date: October 30, 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) has seen a solid increase in transaction activity since the end of summer, with a year-to-date deal volume of approximately $1 billion.
- The company has a strong and active pipeline, with identified deals totaling over $500 million, primarily in North America.
- W.P. Carey Inc (WPC) does not need to raise equity or exceed its long-term leverage targets to fund pipeline investments this year and potentially all of next year.
- The company has a diversified approach, focusing on industrial and warehouse assets, and is looking to increase its US retail portfolio to further diversify and expand investment opportunities.
- W.P. Carey Inc (WPC) has significant liquidity, with over $800 million in cash and a $2 billion revolver that is minimally drawn, providing flexibility for future investments.
Negative Points
- There is increased competition in the transaction market, along with lingering seller expectations that interest rates will decrease, putting pressure on cap rates.
- The company is facing potential tenant credit issues, with three top tenants (Hellweg, Hearthside, and True Value) accounting for 4.7% of ABR, posing a risk of rent disruption.
- True Value's Chapter 11 bankruptcy filing introduces uncertainty, as the outcome of the sale to Do It Best or potential liquidation could impact W.P. Carey Inc (WPC)'s leases.
- The company expects potential rent loss from credit issues in 2025, estimating a net impact of approximately 100 basis points, excluding the uncertain situation with True Value.
- W.P. Carey Inc (WPC) is experiencing operational headwinds in certain sectors, with inflation and higher prices impacting consumer demand and margins for some tenants.
Q & A Highlights
Q: Can you explain the decision to increase exposure to retail and how it affects your portfolio mix?
A: Jason Fox, CEO, explained that retail currently makes up about 25% of the portfolio, mostly in Europe. The company is ramping up U.S. retail investments with a dedicated team. They aim to diversify and increase deal volume, targeting 30-40% of annual deal volume in retail, primarily in the U.S., while maintaining a diversified approach across sectors.
Q: What are the expectations for True Value's bankruptcy and its impact on 2025?
A: Jason Fox, CEO, noted that the situation is fluid, with negotiations ongoing. Brooks Gordon, Head of Asset Management, added that they expect True Value to require their buildings for a transition period, potentially muting impacts in 2025. They are also exploring re-tenanting or disposing of properties to mitigate disruption.
Q: How do you view the competitive landscape for industrial sale-leasebacks, and why the pivot to retail?
A: Jason Fox, CEO, stated that competition in industrial sale-leasebacks ebbs and flows, with private equity being a significant competitor. The pivot to retail is to expand the opportunity set and drive growth, as U.S. retail is a large part of the net lease market. They aim to capture market share and increase deal volume.
Q: Can you provide an update on the credit watch list and any changes in its definition?
A: Jason Fox, CEO, mentioned that the watch list has increased to the 6% range, including True Value and a few smaller tenants. They plan to provide more proactive commentary on top 25 tenants facing potential rent disruption and offer estimates of expected rent loss to help investors understand potential impacts.
Q: How do you determine the ABR for converted storage assets, and what are the rent escalators?
A: Jason Fox, CEO, explained that the goal is to set ABR at a 1.0 coverage ratio, aiming for earnings neutrality. The fixed rent escalators are in line with historical averages, greater than 2% but not at the 3% level seen in recent industrial deals. They also include percentage rent to capture upside.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
