Hello, and welcome to W. P. Carey's First Quarter 2021 Earnings Conference Call. My name is Jesse 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. [Operator Instructions] I will now turn today's program over to Peter Sands, Head of Investor Relations. Mr. Sands, please go ahead.

Good morning everyone. Thank you for joining us this morning for our 2021 first 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 pass the call over to our Chief Executive Officer, Jason Fox.

Thank you, Peter, and good morning everyone. I'm pleased to report that many of the positive trends we saw in the fourth quarter of 2020 have continued into 2021. We've had a very strong start to the year on several fronts. First, we're already on pace to exceed our initial expectations for investment volume in 2021 and our near-term pipelines are strong perhaps even stronger than it's ever been with over $500 million of active deals at an advanced stage much of which we expect to close during the second quarter. Second, we delivered industry-leading rent collections throughout the pandemic and continue to have high confidence in how our portfolio will perform going forward, especially in a macro environment where the US and global economies are expected to improve as COVID cases decline and business activity rebounds. Third, we executed on two significant bond issuances during the first quarter, highlighting our access to very attractively-priced capital, locking in record low coupons in both the US and Europe and refinancing the majority of near-term debt maturities with our next meaningful maturity now scheduled in 2024. In the past week, we were also placed on positive outlook by Moody's which reflects the positive trajectory of our business and balance sheet and gives us confidence that we will continue to have access to attractively-priced capital going forward. Fourth, we raised equity through our ATM accretively funding our recent investment activity and modestly delevering compared to where we ended the fourth quarter. We also still have equity proceeds available through the equity forward we raised in 2020. So plenty of flexibility in how we fund our investment activity over the remainder of the year. The combination of closed investments, our active pipeline, strong portfolio performance and raising capital at attractive spreads on new investments…

Thank you, Jason and good morning everyone. This morning we reported AFFO of $1.22 per diluted share and real estate AFFO of $1.19 per share. We had a strong first quarter on all fronts, with our investment activity and debt re-financings positioning us well to raise our earnings expectations for the remainder of the year. And as Jason mentioned, we have over $500 million of active deals in our near-term pipeline. Our portfolio continues to perform consistently well, as it has since the start of the pandemic, with first quarter rent collections at 98% of ABR. The number of tenants with rent disruption remains very small and manageable, with no new themes to report. During the first quarter, we had one retail tenant in Europe, partially pay rent as a result of a temporary lockdown. And we excluded the unpaid portion totaling $2.9 million from AFFO, in line with our continued conservative approach to revenue recognition. We're actively pursuing this rent and would only recognize it in revenue and AFFO, once there is more certainty of collection. As a reminder, we had no significant rent receivable from 2020, and minimal rent deferrals. The few deferrals we did have were part of broader lease restructures, where the deferred rent amount is now reflected in current ABR and the tenants have resumed paying rent. Overall, our collection rate remains very strong and on track with our expectations for the year, with April collections in line with the first quarter. As such, going forward, we will be reporting rent collections on a quarterly basis. Turning to same-store rent growth, comprehensive same-store rent growth which is based on pro rata rental income, included in AFFO was negative 0.6% year-over-year, in part reflecting the fact that the prior period was pre-COVID. As we've previously noted,…

Thank you. [Operator Instructions] Our first question is coming from the line of Harsh Hemnani with Green Street. Please proceed with your question.

Thank you. I just wanted to ask in light of yesterday's deal of Realty Income acquiring VEREIT, do you feel like the competitive landscape will change with Realty Income entering continental Europe and whether that will make it more difficult or competitive for you to get deals there?

Hey, good morning. Yes. I don't think it really changes anything. This is -- certainly, they're now a larger net lease REIT, but they've been making progress moving towards Europe, the UK first and based on what we read that they say Europe next. And it's a big market over there. It's as large if not larger than the United States, and is actually a higher percentage of owner-occupied real estate so the sale-leaseback market is even deeper. Generally, we don't compete directly with them in the US. There's probably a little bit more overlap what we do in Europe, but I don't think this changes things. And if anything I'll say that anything that brings attention to the net lease space maybe in particular a diversified model within the net lease space and one that includes geographic diversification, I think that's a positive from my point of view.

Thank you. And then another one for me. Can you talk about the occupancy declines on a sequential basis in the past two quarters? What is driving this? And then can you talk about what you're expecting going forward? I know you don't provide guidance on this but just your outlook would be helpful.

Yes. Brooks, you want to take that one?

Sure. Vacancy did tick up slightly. It's a few properties, I think, five over that period that have come off lease. Not really any trends in there pretty anecdotal. We do expect occupancy will tick back up to in the 99% range. Over the course of this year, there's a lot of activity in process active deals on roughly 30% of that vacant square footage and good prospects on the balance. So that will go up and down in any given quarter, but we would expect it to remain in that 99% range in the long run.

Okay. Thank you.

You’re welcome.

Thank you. Our next question is coming from the line of Joshua Dennerlein with Bank of America. Please proceed with your question.

Yes. Hey, guys. Hope everyone’s well.

Hey, Good morning, Josh.

A question on the inflation front. What inflation metric are your leases based on? And then maybe what's the lag between when we see inflation and how that hits your P&L?

Sorry, Josh, I didn't hear the very first part. You said what's the metrics?

Yes, the inflation metric like is it a core CPI, CPI or some other metric?

Yes. It depends on the region clearly. Brooks, do you have the details on kind of driving into the type of CPI?

Sure. Yes as Jason said it's really a mixed bag. But on balance the majority are on a headline basis. In Europe, there's a bit more diversity in terms of country-specific or whether it's more of a producer measure or not. But on the whole, it's largely a headline type metric. And then from a timing perspective, CPI itself has a bit of a lag just inherently as actual price increases flow through the year-over-year metric. From our lease perspective it really just depends on when the actual bump occurs. The frequency of our bumps is it's generally annually. It's on a weighted average basis I think about 1.5 years. So it will flow through our revenues for sure, but there is a bit of a lag there.

Okay. Interesting. Cool. And then on the...

And then Josh as I think you know we do have close to 2/3 of our leases tied to CPI which is why you're asking the question of course. So we think there could be some real upside in our same-stores going forward.

Yes, I know. And it's nice that it's probably the headline inflation too. It seems like it's a kind of a little bit more juice than core. So nice work. And then on the -- press upon the euro debt issuance below 1%. Do you think you'll kind of continue to kind of increase your leverage in Europe to kind of continue to enhance your spreads, or is there some kind of governor that you would limit yourself to over there?

Yes. I think it's more of a hedging mechanism certainly. But Toni why don't you dig into some of the details?

Yes. We certainly do look to kind of increase and over-lever in Europe to protect ourselves on the foreign currency side. I don't expect that we would take that up significantly higher than where we are from a leverage perspective. I think we'll by and large keep the balance. And where we stand now, I don't think we're looking to find a mix to really artificially create any arbitrage there.

Thanks guys. Appreciate it.

Thanks Josh.

Our next question comes from Sheila McGrath with Evercore. Please proceed with your question.

Yes, good morning. Jason you mentioned new opportunities emerging in manufacturing. In general is pricing of these assets are they at a meaningful yield premium to more traditional warehouses? And just some more color on how you're sourcing these opportunities. Are they widely marketed or relationship-driven?

Yes. I mean the -- I'll take the first part of the question first. Certainly the headlines that we all read about for logistics assets when we hear about them trading in the 4s or even sub-4s on occasion. And a lot of that is driven by the type of real estate at the location, but also the fact that these are shorter-term leases in many cases multi-tenant and there's a real mark-to-market opportunity when those leases expire, so that the stabilized yields might be meaningfully higher. What we're behind are stabilized assets. So the zip code in which our cap rates would range for logistics themselves are probably more in the low 5s and up into the 6s depending on a number of factors. You talked about sourcing. Much of what we do are sale-leasebacks so there's inherently a more limited universe of buyers that participate in that market. So we think we do have some pricing power in addition to the benefits that we get on structuring and underwriting given that our tenant is also our counterparty on the sale. Digging a little deeper, we do see that industrial is a really deep and diverse sector. It's not just logistics assets as you pointed out. There's also manufacturing particularly light manufacturing that we do a meaningful amount in food production, cold storage we've talked about, R&D all property types we've had success targeting and properties that tend to have a meaningful yield premium just given the fewer buyers targeting those assets. Generally for cap rates, I would say our targets are from 5% to 7% and we've averaged in the mid-6s over the last 18 months maybe a little longer. And I think that will continue going forward. Perhaps it dips down a little bit depending on the mix of assets and what we see trending in the market. But we feel pretty good about our ability to find these deals in many cases off-market and in some cases very limited marketing given the structuring of the transaction.

Okay great. And one more question for me. You do have lower investment-grade revenues versus your peers and that might be some of the reason that you traded lower multiple. Can you just outline for us how you don't necessarily think your strategy is more risky, despite this differentiation either like over historic context on collection losses or underwriting losses? Just to give people the perception of the risk inherent in your strategy?

Yes sure. I mean we do have perhaps a little bit lower investment-grade rents compared to some of our peers. It still stands around 30% so it's a meaningful portion and obviously those cash flows are quite strong. And where we do focus the reason why it's 30% and not higher perhaps is because we do focus in the just-below investment-grade credit spectrum, an area that we think is -- there's much less capital flow. It requires more underwriting expertise where our deal team can really differentiate themselves, the long history of deep credit underwriting and structuring capabilities that I think really provides a competitive advantage for us. And, of course, we're also going to get some incremental better yields there. We also get better structuring. We get longer lease terms. We get better bumps. We get -- occasionally get covenants there. And it doesn't necessarily lead to any difference in performance. I think, our collections throughout the pandemic reflects that from the very beginning. We were in the mid-90s trended quickly as we got into summer to the high 90s and we remain in that area. And it's mainly because when we're targeting sub-investment grade, we're also focusing on larger companies, companies with balance sheets that can withstand some economic disruption. They have access to institutional capital. And we think that's really the sweet spot for investing in that lease.

Thank you. One quick question for Toni. On the non-operating income you said no more Lineage distributions. Is that the case also for Watermark so that line item goes to zero?

That's our assumption right now. The Watermark preferred their quarterly payments they can pay it quarterly or annually. We're currently assuming we just collected the last four quarters that we don't see anything else for the rest of this year in guidance.

Okay. Thank you.

Thanks, Sheila.

Thank you. Our next question comes from the line of Manny Korchman with Citi. Please proceed with your question.

Hi. Good morning, everyone. Jason, you talked about a pipeline I think of $500 million with most expected to close in 2Q. Can you just give us a rough breakdown of the types of properties within that near-term pipeline?

Yes, sure. I'll just recap quickly what we've done for the year so far. I mean we feel like we've had great momentum coming out of Q2 and the beginning -- of Q4 and the beginning of Q1. It's about $400 million of deals completed another $130 million of capital project. These are under-construction properties that are fully leased that we expect to complete in 2021 and therefore commence rent. So there's about $530 million locked in. And then yes, I did reference I would call it over $500 million of deals in advance stages and much of that we think will close in the second quarter and the pipeline continues to build as well. Year-to-date just to give you some comparison, year-to-date it's about what we've closed is about 55% industrial, I think 30% retail which is predominantly in Europe. The split between US and Europe is about 50-50. It's -- call it 55-45 US to Europe. And then the pipeline is trending more towards industrial. It's 80-plus percent industrial at this point in time. The remaining amount is really retail. And again it's slightly higher weighted towards the US call it 60-40, but that pipeline is changing and building so the components of that will change as well. And of course it's -- what we've done year-to-date is almost entirely sale-leasebacks, build-to-suits or expansions of our existing portfolio. I think all but one transaction at this point year-to-date falls in those categories. So we're still having a lot of success sourcing through those channels and putting meaningful amount of dollars to work.

Great. And then if we look at your overall pipeline for the year you, obviously, increased your acquisition guidance. How have you changed your pricing expectations on that increased pipeline if at all?

Well I mean given our diversified approach we really target a wide range of cap rates. I'd say generally speaking we've talked about this before probably it's from 5% to 7% with some outliers above and below those ranges depending on the specific details of a particular transaction. Year-to-date, I think, we're at mid-6 cap rate. I do think that probably trends down a little bit maybe into the low to mid-6s. But a lot of it will depend on the mix of properties in particular, Europe. Cap rates might be a little bit lower in Europe call it 50 basis points lower. But our borrowing costs are still at least 50 basis points probably more like 100 basis points cheaper there. So we're still generating better spreads despite the lower cap rates. I think the other thing to note is that, we talk about going-in cap rates, but I think you really got to factor in the bump structure that we have. And I mentioned that at the beginning of the call, that our leases have meaningful bumps and the going-in cap rates maybe are less relevant. And the average yield or unlevered IRR in many cases it's more important in how we look at deals and how we evaluate their spread to our cost of capital.

Thanks, Jason.

Yeah. Welcome, Manny.

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

Hi. Good morning. In regards to the pipeline, I guess just transactions in general have you changed your internal approach, or are there some external factors that may be contributing to the improved pipeline? And does this potentially point to a longer-term trend of increasing investment expectations in future years?

Yes. It's a good question Greg. We've gotten that question in some individual meetings as well and I think there's a couple of things to talk about here. And we understand the perception because the last number of years we've hovered around the $1 billion mark. So it's probably helpful just to provide some context here on why maybe that's not a good run rate for us and it's something higher. If you look back over the last number of years, there are some macro forces or really strategic events at W. P. Carey that are important to note. For one, we closed CPA:17 merger at the end of 2018. And then from there we continued the process of winding down the investment management platform. So as a result our cost of capital has improved since 2018 and that's really expanded our funnel. We began putting that into practice in call it 2019 especially by the end of that year and into the beginning of 2020. I think at that time, we've closed probably about $500 million of deals in that fourth quarter and maybe the first couple of weeks of January. So we were really beginning to hit our stride. And in fact last March, we were sitting on a very sizable pipeline probably something that feels a lot similar to what it is right now. And then of course, we got derailed by COVID, which clearly none of us could have ever predicted. But I think what you're seeing now in 2021 is really just a combination of having a clear runway, free of all distractions from some of our prior strategic changes and really a cost of capital that works quite well. Certainly our diversified approach helps. We can generate a pretty wide opportunity set across property types and geographies and as I mentioned a few minutes ago broad range of cap rates. And then our improved cost of capital has also allowed us to expand that range to include probably more in that lower-yielding, bottom end of that range, but what we think are higher-quality industrial assets maybe ones that have higher embedded growth or better market dynamics. And then lastly, you've seen us continue to ramp up sale-leasebacks and the availability of sale-leasebacks really continues to increase. We feel bit of a permanent shift in how corporates view owning versus leasing real estate. And as the market leader in sale-leasebacks, I think this is really a good trend for us. So all of this is now being reflected in 2021. I mentioned, year-to-date about $400 million deals done to date another $130 million under construction and then the pipeline of call it $0.5 billion and really growing. So we feel like that's a sustainable trajectory for us and kind of there's no reason to think that won't continue going forward.

Okay great. Thanks for the color. And then a quick funding question. So on the forward equity offering, do you actually need to settle that? Does it maybe make sense to let it expire and just using the ATM at $73 a share versus the 463?

No. I think we would have to settle that sometime this year. I don't think we have to, but I do think our expectation is that we like that capital still. We like having the flexibility of having it out there. As you mentioned, we did tap the ATM at pretty accretive pricing compared to our investment activity. But I think you would expect us to continue to do that as well as to potentially draw that the remaining proceeds perhaps even as soon as the end of the second quarter. I think we'll just keep an eye on the investment volume. But the point is, we have a significant amount of activity ahead of us that we need to fund. And we like our opportunity set and where we can fund that from I think the -- both avenues are attractive to us.

All right. Thanks, Toni.

Thank you. [Operator Instructions] Our next question comes from the line of Frank Lee with BMO. Please proceed with your question.

Hi, good morning everyone. Jason, just curious if you also took a look at the -- just curious if you also took a look at the VEREIT deal, and does that transaction make it more imperative for you to do a similar deal given their combined market cap and the advantages that it brings?

Yes. I mean, it's a high-profile transaction and we're digesting that announcement in details that were provided. But we probably can't talk too much about it specifically. I don't think it changes anything from how we're motivated. We still are looking at everything, whether it's portfolios, individual acquisitions and potentially M&A as well. I don't think that changes. Realty Income, as I mentioned earlier, they were the largest. They're a little bit larger now. So I think its business as usual for us.

Okay. Thanks. And then, you mentioned the majority of the $500 million of active deals will likely close in the second quarter. So that puts you close to $1 billion for the year, if you include the capital investment projects. Is it safe to assume that there could be some upside to your investment guidance range given that the acquisitions tend to be back-end weighted?

Yes. It's hard to predict what happens for the rest of the year. We don't have a lot of visibility into more than the next three months. But the trends are quite positive. And I think, if we continue at the pace that we're on right now, I think you could probably expect something that could put us in the top half of that range or maybe even above the range. And we're talking next in the end of July. Perhaps, we're talking about a further increase. But it's hard to predict. And as you know, our transactions tend to be a little bit lumpier, so maybe even less visibility into them. But we like our pace right now. We like the market opportunity. We like our cost of capital and liquidity. So, we're feeling quite positive about it.

Okay. And then just one more. And then, if we look at your capital investment pipeline, you added a lab project. I think, this is the first one in this property type. Can you talk about the opportunity there and potential for additional similar projects?

Yes. I mean, we're certainly as diversified -- with our diversified approach with -- we feel that R&D is kind of a hybrid between industrial and office in some ways, but this -- it's a specific use. The tenant tends to have a high investment into the property as well. We kind of do these on long lease terms which is the case here. And you get some incremental cap rate, given that it's a little bit outside of the core focus of most industrial buyers who focus on warehouse. So, we like a lot about R&D. We think there are more opportunities. There are some in our pipeline that we're looking at right now. And so, again, as a diversified net lease investor, we have the benefits to look across a broad range of property types and we'll continue to do them.

Okay, great. Thanks, Jason.

Yes, you’re welcome.

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

Great. Thank you, everyone for your interest in W. P. Carey. If anyone has additional questions, please call Investor Relations directly on 212-492-1110. That concludes today's call. You may now disconnect.