W.P. Carey, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Investments: Strong first half investment volume, with over $1 billion closed YTD. The company has raised its full year AFFO growth outlook to 4.5% at the midpoint of the revised guidance range. Over $230 million of investments were closed in the third quarter, and the pipeline remains strong.
• Capital Sources: Progress with funding strategy via accretive asset sales. Sold self-storage properties, with more sales expected. Aim for over 100 basis points spread between asset sales and new investments, with potential to be closer to 150 basis points by year-end.
• Portfolio: Lowered the potential rent loss assumption due to no unforeseen disruptions in the business. Made progress with retenanting and selling Hellweg stores, reducing exposure.
• Balance Sheet: Strong liquidity with about $1.7 billion at quarter end. Low weighted average cost of debt at 3.1%. Ended the quarter with key leverage metrics within target ranges.
• Dividend: Declared a dividend of $0.90 per share, a 3.4% increase from the prior year, with a year-to-date payout ratio of approximately 73% of AFFO per share.

Segment Performance

• Investments: Year-to-date, W. P. Carey has completed over $1 billion in investments. In the second quarter, approximately $550 million of deals were closed at an initial weighted average cap rate of 7.5% and weighted average lease term of 19 years. Virtually all second quarter investments are in warehouse and industrial, which is the majority of year-to-date and pipeline investments. Year-to-date, fixed rent escalations on investments average 2.8%.
• Property Type: Warehouse and industrial are the dominant property types, supported by inflation-linked rent escalations and attractive fixed rent bumps.
• Geography: Second quarter investments concentrated in the U.S., with Europe having wider investment spreads and a significant pipeline.
• Self-Storage: Sold an initial tranche of 15 self-storage operating properties for $175 million at a sub-6% cap rate, with additional storage portfolios under contract.
• Portfolio Performance: Contractual same-store rent growth for the second quarter was 2.3% year-over-year, while comprehensive same-store rent growth was 4% year-over-year. The potential rent loss assumption was lowered to between $10 million and $15 million from $15 million to $20 million.

Guidance

• AFFO: Raised full year AFFO guidance range to $4.87 to $4.95 per share, with midpoint implying 4.5% year-over-year growth.
• Investments: Revised investment guidance higher, expecting $1.4 billion to $1.8 billion in investments, funded by $900 million to $1.3 billion in dispositions.
• Rent Growth: Expect contractual same-store rent growth in the mid-2% range, with comprehensive same-store growth in line to slightly higher than contractual for the full year.

Risks

• Economic Uncertainty: Lingering uncertainty over the broader economy, but no unforeseen disruptions to the business to date.
• Tariffs/Trade: Monitoring trade policy developments, but no direct impacts on the portfolio have been observed yet.
• Tenant Credit: Caution towards Hellweg's turnaround, but progress made with other tenants, and the rent reserve is expected to cover potential impacts.

Question and Answer Q: For the second straight quarter, your comprehensive income was pretty meaningfully above contractual. And Toni, you reminded us that typically, it's 100 basis points below. So for the second half of the year, do you expect it to be back to that historical level, 100 basis points below? Or would it be lower just given the outperformance this year?

A: Toni Ann Sanzone says she would say, if you look at it on a full year basis, they are expecting that to normalize a bit in the back half of the year. And there's a couple of things behind that. First, if you think about how we've described our rent loss reserve, we've got about $12.5 million at the midpoint in the revised range in that assumption. Right now, we haven't had any real disruption in the first half of the year. So our guidance assumption and comprehensive same-store, I'll assume that the $12.5 million is taken in the third and fourth quarters, that could prove conservative, and we could outperform that. So that's something that we're monitoring as well. And then I would just note that maybe the first half of the year was also impacted by some of the tailwinds associated with some of the headwinds we had in the portfolio last year. So it's a little uneven in the first half to the second half, but there could be some upside relative to the full year estimate that I described, which would track probably just north of the contractual in the mid-2% range.

Q: And my second question is on your self-storage operating portfolio. You provided a bit of an update on the income. But I was wondering, you've sold the first tranche, you transitioned some assets. Do you expect to transition more to the triple-net lease structure? And then as far as the buyer of the first tranche, I mean, reportedly, it's not an operator of those assets. I'm wondering if a buyer can come in and cancel the third-party management contracts?

A: Jason E. Fox says, in terms of the first question, we have kind of lots of flexibility on what we do with the remaining portion of our operating self-storage portfolio. You noted last year, we did take a sub-portfolio input under net lease with Extra Space. And that's always been the goal for some portion of the portfolio. We thought the timing was right. And then this year, obviously, we're clearly selling a substantial portion of it, and we think that's the best way to fund new investments. So kind of looking forward, what we do with the rest of the portfolio will -- that will depend on deal volume for the second half of the year into next year, what our capital needs are, what our other funding options are. But I would expect that we could lean into some more sales in the second half of the year since execution has been strong. But I also think that we could convert some portion of it to net lease as well. And it's likely going to be a combination of the two. So either way, I think that probably by this time next year, we're out of the operating storage business, but we have some options between what we do between now and then. And then in terms of the portfolio that we did sell, yes, I think the way those contracts work, the management agreements, they're typically cancelable upon 30 days' notice. So there's not a lot of hurdles you have to overcome when you're selling assets to a different operator.