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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Hello and welcome to W. P. Carey’s First Quarter 2020 Earnings Conference Call. My name is Diego, 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.
Good morning, everyone. Thank you for joining us today for our 2020 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’ll 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 hand the call over to our Chief Executive Officer, Jason Fox.
Good morning, everyone and thank you for joining us on this call. I hope everyone and their loved ones are safe and well as we all move through these challenging times. Today, I focus my remarks on three main topics. First, I’ll briefly touch upon the actions we take in response to COVID-19. Second I’ll review where our business stands today including insight into our April rent collections, and third I’ll conclude with some comments on what we're most focused on as we look ahead.
After that I’ll hand over to Toni Sanzone, our CFO, who will briefly review our first quarter results and portfolio activity as well as the strength of our balance sheet and liquidity position. As noted in this morning's press release, we've withdrawn our previous 2020 AFFO guidance given the uncertain economic outlook. However, Toni will discuss our current views on various aspects of our earnings for the remainder of the year.
And before I jump into my prepared remarks, I'd like to also note that the 8-K we furnished this morning with our earnings release and supplemental disclosure also included slides with the COVID-19 update, much of which we'll cover on this call. As usual, Toni and I are joined by our President, John Park and our Head of Asset Management, Brooks Gordon were here to take your questions.
Our COVID-19 response began in late February and we started taking steps to prioritize the health and safety of our employees and it confirmed that our entire workforce had the technology and resources required to work remotely. By mid-March, we fully transitioned all employees in our four offices, New York, Dallas, London and Amsterdam to working remotely that proved to be a smooth transition, having previously moved our core systems including our financial, telecommunication and conferencing systems to the cloud.
Technology is clearly a critical component but it's our employees that have really made a difference. I'm immensely proud of the way our entire team has adapted to the current situation without skipping a beat in our day to day operations. It’s times like this that really highlight the caliber of our people and the culture of excellence we've cultivated at W.P. Carey.
Before reviewing our April rent collections, I think it's important to give some contacts by briefly revisiting our approach to at least invest in. While we seek to generate attractive long term I think it’s important to give some context by briefly revisiting our approach in net lease investment. While we seek to generate attractive long-term risk adjusted returns.
We are equally focused on downside protection including deep credit underwriting and targeting mission critical assets. We also take a long-term approach evaluating each new investment based not only on how we think the tenant will perform during times of expansion but also on how they will perform during times of distress. But we view tenants just below investment grade as providing the most attractive risk reward trade-off.
We focus on large companies which are generally better equipped to weather downturns. Large companies have better access to liquidity and in a worst case scenario are more likely to restructure and continue to operate in critical properties as opposed to small companies which are more likely to liquidate, 97% of our annualized base rent or ABR comes from tenants where they or their parent company generate over $100 million in annual revenue or our government entities.
The majority of our tenants are also public companies with private equity backed tenants representing less than 20% of ABR. It’s also important note that W.P. Carey has experienced multiple business cycles over which we've honed the protections built into our leases and couldn't place the infrastructure to effectively manage end of lease outcomes tenant credit issues and restructurings complemented by our proactive approach to asset management. And of course we've always believed that a well diversified approach is best for net lease.
Not only does it provide a wider opportunity set for external growth it protects us from overexposure to a single asset type or industry something it's proving to be more important than ever in the current environment. We've also had a longstanding underweight position in retail and in recent years have focused our investments in warehouses and industrial assets So with that context, where does their business stand today, in particular our April rent collection.
Overall, we collected 95% of April rents, which was broad based across property types including retail, the notable exception for fitness, theater and restaurants which represent just 2% of our ADR and for which we received only a very minimal amount of April rents.
We received 100% of April rents from auto dealerships, which represent 3.4% of ADR, but recognized stay at home orders have put near-term pressures on those businesses which may continue over the medium-term, particularly in a recessionary environment. About two-thirds of our retail property ADR comes either from do-it-yourself retailers or from grocery, convenience and wholesale stores, businesses that we view as well-positioned to perform in the current environment in over the long run.
Warehouse, industrial and self-storage assets in aggregate comprised just over half of our portfolio, the April rent collection for warehouse was 93% and even stronger for industrial. Similarly, self-storage which has been performing well as an asset class had an equal rent collection rate of 100%.
We're encouraged by our April rent collections, but I want to emphasize that we are cautious about the uncertainty ahead. We expect May rent collections could be somewhat lower overall and particularly lower within retail, reflecting the impacts of regional lockdowns are likely to have on economic activity and consumer confidence.
Europe is a differentiated part of our strategy. So, I’ll briefly provide some added color on it. Overall, our European assets have performed in line with those in the US while providing additional diversification. Our largest property types in Europe comprise do-it-yourself retail, grocery, automotive dealerships, and government credits, of which are top 10 tenants. Germany is our largest country exposure in Europe.
It has been able to limit the impact of the pandemic through widespread testing and public discipline. It has been among the first countries in the region to begin easing lockdown measures. Our do-it-yourself retail assets are primarily German credits. April rent collection rate for Spain was 100% with a geographic exposure to Spain coming primarily from our government office portfolio with the State of Andalusia.
Looking ahead, we're focused on two key priorities. First proactively working with our tenants to ensure we continue to collect rent payments. Second, our balance sheet positioning ensuing that we have ample liquidity and flexibility for a range of scenarios, ranging from weathering and extended economic downturn to taking advantage of new capital allocation opportunities. Tenants representing about 25% of AVR had requested some form of rent relief, which we expect could tick up over time.
We are not taking a one size fits all approach to tenant discussions. Each situation is different and because our tenant base is so well diversified there are significant portions that require no assistance at all. That said, there are some general categories for those tenants that have requested rent reliefs. First, tenants that can pay and have access to capital should pay and we expect them to do so.
The large majority of tenants requesting relief fall into this category. And our expectation is that without any action on our part they will continue to pay rents. These situations may also yield opportunities to work with tenants on broader lease restructurings that will create substantial longer term value. Second, there will be short-term deferrals for tenants whose access to liquidity has been temporarily disrupted. These are typically short-term in nature with pay back required within a year. And there will of course be some kind of two businesses have been more severely impacted many of whom are part of the 5% who did not pay April rent.
We are working with these tenants to find mutually acceptable solutions focusing on structures that protect our position while providing a path through their current distress. We expect this to be a small list and we're very well positioned with critical assets, good collateral and a seasoned team with expect extensive restructuring experience.
So regarding our other priority, our balance sheet we've made important progress in recent years to improve our balance sheet which puts us in a position of strength despite the dislocation we are seeing in the capital markets. We've been on a long term trajectory to reduce secured debt and increased balance sheet flexibility. In 2018 and 2019, we also took the opportunity to reduce leverage through our merger with CPA17 and over $800 million of additional equity issuance for new acquisitions and mortgage debt prepayments.
We are very comfortable with our liquidity definitely having just closed the new credit facility in February. The facility matures in 2025 and we improved pricing to LIBOR plus 85 basis points on our revolver. We added $300 million in term loans and upsized our revolver to $1.8 billion of which nearly $1.6 billion is currently available.
As a result of our financing activity in recent years, we have limited near-term maturities to only about $110 million of debt maturing in 2020 and approximately $240 million in 2021 and we have no bonds maturing until 2023. Based on the initial performance of our tenants and the conservative positioning of our balance sheet, we are confident we will continue to have sufficient liquidity and importantly flexibility as we navigate the challenging environment ahead. While we don't need any additional capital at this time, we will continue to monitor closely our balance sheet.
and as always we'll evaluate opportunities to further strengthen it.
In closing I'll note that from a capital allocation perspective we've historically seen some of our best opportunities during downturns and periods of market stress. We’re staying engaged with brokers and potential sellers. And we're very focused on new opportunities to come to market and how they're priced although the capital markets have been volatile.
We believe there could be compelling opportunities and investments that continue to pencil out for us. The transaction markets have been relatively quiet. Sellers evaluate their options and in many cases are left to wait on launching new deals until they see more stability.
Some of the best opportunities we’re currently evaluating are with existing tenants where we see value add potential to provide near-term rent relief tide to longer term improvements to lease economics and structure but with so much uncertainty ahead we're being cautious. We're committed to preserving the safety and flexibility of our balance sheet and we evaluate all capital allocation decisions through that lens.
And with that I'll hand the call to Toni.
Good morning everyone. Before I begin I'd like to echo Jason's thoughts and hope that everyone in their families are safe and well. I'd also like to recognize all of our employees for their excellent work during this difficult time especially those who worked tirelessly over the past several weeks in support of our quarter close and earnings process. I'm going to start with a brief review of our first quarter results and portfolio activity before moving on to our current outlook and finishing with the review of our balance sheet and liquidity.
Looking at the first quarter we reported strong quarterly results with total AFFO coming in at a $1.25 per share. Our real estate segment generated AFFO of a $1.21 per share for the quarter, representing 7% year-over-year growth driven primarily by the accretive impact of net acquisitions and rent increases in addition to lower interest expense due primarily to the significant mortgage debt prepayments we made in 2019. These factors more than offset the dilution associated with strengthening and deleveraging our balance sheet, resulting from the shares we issued through our ATM program last year.
97% of our total first quarter AFFO per share was generated from real estate as we continue our exit from Investment Management, which was further advanced through the recently completed merger between the CWI lodging funds that we previously managed to form Watermark Lodging Trust.
Investments during the first quarter totaled $256 million at a weighted average cap rate of 6.5%. First quarter investment activity was comprised of three acquisitions for $189 million in addition to the completion of three capital investment projects at a cost of $67 million.
We currently expect to close an additional $193 million of capital investment projects over the remainder of the year which would bring total 2020 investment volume to $449 million. During the first quarter, we disposed four properties for growth proceeds of $116 million, almost all of which came from the sales of operating hotel in Miami completed back in January. We now have one remaining operating hotel in our portfolio, which is not a material contributor to our AFFO.
For the first quarter, the same store rent growth we’ve historically reported which represents the average contractual rent increase written into our leases was 1.8% and as noted in our supplemental as contractual same store growth. Taking into account the impact of leasing activity, vacancies and restructurings, the year over year same store rent growth was 80 basis points which we refer to as comprehensive same store growth.
Vacancies and restructurings year-over-year same-store rent growth was 80 basis points which we refer to is comprehensive same-store growth. You can see we've added this disclosure to our supplemental information in response to investor interest in this metric. Given the timing of the COVID-19 outbreak and the related business disruption, there was very minimal impact on our first quarter results and portfolio metrics.
As such, we’ve collected substantially all cash rent due from tenants for the month of March. At the end of the first quarter, we recorded non-cash impairment charges totaling $19 million, as we wrote down the carrying value of properties leased to two small tenants to their respective fair values.
During the first quarter, we also recognized non-cash impairment charges, totaling $47 million to reduce the carrying value of our equity investments in the CWI funds to their estimated fair values, as a result of the impact of the pandemic on the lodging industry.
Moving on to our outlook for the remainder of 2020, as we announced this morning given the significant economic uncertainty arising from COVID-19 including the duration and severity of measures to contain the virus, we've withdrawn our previously issued 2020 guidance.
As Jason discussed, we are actively monitoring our tenant collections and the overall health of our portfolio on a daily basis. While to-date we've had very positive outcomes in collecting 95% of our April rent due, we expect rent relief discussions to continue with possible outcomes falling into various categories including full collection of past due amounts, rent deferrals, lease restructures, as well as some tenant defaults.
We also expect to evaluate potential rent deferrals granted under the accounting model for revenue recognition on a case-by-case basis, and we'll recognize rental revenue When we conclude that the amounts of probable of collection based upon our assessment of a number of criteria most notably tenant credit worthiness and risk of solvency amongst others.
In cases where we do not believe collection is probable we will not record revenue in accordance with GAAP and such revenue will not be reflected in our AFFO until cash rent is received. In cases where we do conclude collection is probable we will record revenue for both GAAP and AFFO with the related receivables continuing to be evaluated for collectability. This analysis introduces additional uncertainty regarding the timing of rental revenue we expect to receive and the overall impact on earnings over the remainder of the year.
Given the circumstances impacting our tenants businesses are evolving rapidly we are not currently in a position to estimate the financial impact on our rent collections nor the duration of this disruption with the form of any recovery that tenant rents may take. Operational efficiency remains a continuous focus for us across the business.
We've instituted a number of cost savings measures since the start of the COVID-19 crisis predominantly focused on discretionary spending. As such we currently expect to reduce our cash G&A expense by about 5% from previous expectations and we’ll continue to monitor our spending with the appropriate view on both our short term and longer term outlook
Moving to our balance sheet and liquidity as Jason discussed our balance sheet is well positioned to navigate the uncertainty of this environment with ample access to liquidity while we take a prudent approach on capital allocation. We have a very manageable amount of mortgage debt coming due over the next two years and our nearest bond maturity is not until 2023.
In terms of liquidity how are the capital needs in the near term are minimal and we continue to expect that our earnings will more than cover our dividend. For investment volume we are taking a pause while we monitor the overall economic environment. We expect to continue to fund our active capital investment projects, many of these projects are expansions or renovations with existing tenants and substantially all of our capital investment projects are already in process.
The remaining capital to fund is $143 million in 2020 with an additional $80 million committed in 2021. Given the current environment, we are not relying on any disposition proceeds in 2020 but could pursue certain asset sales if we believe execution and pricing are attractive.
From a leverage perspective, we ended the quarter with debt to growth assets of 41% and net debt to adjusted EBITDA of 5.6 times. We continue to target debt to gross assets in the low to mid 40% range and net debt to adjusted EBITDA in the mid to high 5 times. At our current leverage levels, we believe there is some capacity to absorb downside scenarios even if rent collections deteriorate from April results or if assets are impaired in the near term and there's substantial capacity in our covenants as well.
In closing, while we are encouraged by our April rent collections, we continue to be cautious about the future impacts of this unprecedented pandemic and are actively working with our tenants to minimize disruptions to rent payments. Given our balance sheet strength and the diversification within our portfolio, we believe we are well positioned for a range of market environments ahead.
With that, I'll turn the call back to the operator for questions.
Thank you. At this time, we will take questions. [Operator Instructions] Our first question comes from Jeremy Metz with BMO. Please state your question.
Hey. Good morning. I'm Aman with -- for in Jeremy here.
Good morning, Jeremy.
Hey Jason, I was just hoping to dig in to the decision for guidance a little bit, you had being cautious obviously, but it's arguably pretty easy to underwrite now buying or selling anything for the rest of the year. Do you have the strong rent collections, a lot of support from industrial and warehouse and office, I mean separately those sectors are all seeing -- to keep some guideposts in place.
You've got the long average leases. So I'm just wondering how much is yours really being overly cautious given the environment versus driven by some specific risks you're seeing wearing up and maybe have you nervous.
No. You're right, and we're encouraged by April rent collections. We feel good about our portfolio as you mentioned, the balance sheet is in good position, but it's really there's just too much uncertainty right now. They just really – we don't have enough visibility into what the impact on the global economy is going to be to really forecast for the rest of the year. I would think that there's probably a reasonable chance that on next earnings, we would reissue. But I think more to come on that as we continue to evaluate what's happening within our portfolio as well as the broader economy.
Yeah. I know that’s fair. And then on the 25% deferrals that you noted, at this point what's the baseline for how much of those do you expect to pass to grant. And then you mentioned the potential lease restructuring within that bucket. Are those along the blend and extend mood or what’s being contemplated. Any color on there the repayments for the deferrals you're discussing?
Yeah. Let me pass it over to Brooks to take that question. Go ahead, Brooks.
Sure. Thanks. So as Jason said, roughly 25%, a little under 25% of AVR requested rent relief, I mean, that includes tenants that didn't pay in April. Of those tenants we expect about two-thirds can and will remain current and then the balance, the roughly 10% of total AVR may require some near-term deferral. But it's very hard to predict exactly when and exactly how many of those, but deferrals in this case are typically three to six months, payback roughly within a year.
And I mean we do expect to eventually collect the majority of that deferred rent. And again I think it's important to note that each situation is very different, so it's very much a tenant-specific approach. And then with respect to your question on some of the restructures, we're being very cautious with those but there will be some opportunities where we so choose with tenants that otherwise would pay where we may talk to them about broader lease restructures, and then, that typically would relate to lease term and rent bumps but we're going to be very selective with those.
Yeah. Hi, guys. Within your capital investment project pipeline, have any of the tenants approached you about potentially holding off or delaying confinements. I just want to get a sense of how visible the pipeline is. Thanks.
Hey, Brooks, you want to take that one as well.
Sure. So on the capital projects we're not experiencing any material delays or any hesitancy from the tenants. And as Tony mentioned, we fully intend to complete those projects as planned and all are continuing as we would expect.
Our next question comes from Manny Korchman with Citi. Please state your question.
Hey. Jason, earlier in the call, you talked about perhaps you sort of adding value add projects in those cases where there was near term rent lead for class or at least that's the way I understood it. Can you help us sort of tie the two thoughts together putting more capital into a project where you have a tenant that's weaker now I guess is the way I'm thinking about it and sort of your thought process there is a setting up that asset to retenent, is it actually shortening the term rather than lighting the term, so how should we think about those two concepts?
Yeah. As Brooks mentioned, I think each one has yielded different, but I think it's important to emphasize here, those type of deals are with tenants that we think can and would pay otherwise. And it's more that if there is opportunities for us to provide some kind of short term relief to them again when they could pay otherwise but it may be beneficial to them that may create an opportunity for us to really increase the long term intrinsic value that asset.
It's probably mainly through lease extensions and perhaps higher bumps, perhaps there are some provisions in leases we can modify if it’s to our benefit but these are I would say these are more offensive deals than defensive and again those trends we would expect to pay otherwise and we would have left at our discretion whether or not we want to do some modifications to create more long-term value. I don’t know if you add anything to that Brooks?
Yeah. I would just further clarify when we when we consider kind of investing capital in this situation but it's really in the form of providing some short-term rent relief. But these are really the ones where it may benefit the tenant in the short run but they don't really need it, but they're just kind of looking to build some more flexibility on their side. And so it's not necessarily that we're investing new dollars, it’s just We’re considering those deferred rents as in many ways a new investment for us in our mindsets.
Got it
And at this point and we’ll underwrite those through the same lens as we would any investment look at unlevered IRRs on what that rent relief in the increase in value could eventually become.
Right and then it's probably way too early to be thinking about it but I'll ask it anyway in terms of just the sale leaseback market. Have you heard anything there that could change positive or negative or what types of tenants might start looking at that as a source of capital.
Yeah. It's still early. I think that generally speaking investment activity really globally has slowed. I think cap rates for example they really haven't moved all that much. I think it'll take some time for sellers to adjust their expectations. I think that will be the case with sale leasebacks as well.
We'll take a little bit of time but I think absolutely we should see a - an increase in those opportunities I think we'll see a shift of companies looking to raise capital through sales leasebacks especially if the price persists longer than maybe under their base case models and I think if you think back to the last economic crisis we did some of our best opportunities.
So we did some of our best deals during that point in time and many of those were sale leasebacks. So even more to come on that perhaps in the second half of the year. But I would expect us to see you know an increased opportunity and producing opportunities with that.
Right. Thanks everyone.
Thank you. Our next question comes from Greg McGinniss with Scotiabank. Please proceed with your question.
Brooks, could you perhaps provide some detail regarding the tenant industry or property types where you’re seeing the deferral requests?
So yeah, from a region perspective, the request are roughly 60/40 US to Europe. So a slightly higher overall request rate in Europe versus U.S., but we're pretty close to inline. We expect that potentially because of a higher retail concentration in Europe. But important to note that most of those did indeed pay rent and it's concentrated in DIY and grocery, our retail portfolio.
On the property type front, about 40% of requests were from retail or experiential properties. And so those only represent about 20% of our overall portfolio. So that implies a much higher rate of requests in those property types. And then the same goes for industry, that retail and experiential really was overweight from a retailer – from a request perspective. But that's the primary trend we're seeing.
Okay. Thanks. And then Jason I'm just curious, are there any country specific government programs or policies that have either helped or hindered rent collection that may have a bigger impact in that.
Brooks, you want to address that.
Sure. So Europe, watch country is certainly taking a different approach to reopening and I will add that they are somewhat ahead of US in time in their pandemic and in many of those businesses whether retail or for example the major auto manufacturers are in the process of reopening. Each country has a little bit of a different approach to aid to its tenants.
So that's a little bit granular to get into explicit detail country by country but in certain cases for example in UK, there's a fair bit of relief in place to help pay wages. So broadly similar in concept to the US and I think important to note that we're certainly not counting on or underwriting any of that relief as necessary for our tenants to pay rent, but it is certainly helping in certain pockets.
Great. Thank you.
Okay. Thank you.
[Operator Instructions] Our next question comes from Joshua Dennerlein with Bank of America. Please state your question.
Just curious on the 5% of rent that wasn't paid. Was that it like a few tenants who didn’t pay the full amount or was it that some tenants paid like less than the full amount, but they still paid some rents. Brooks, you want to handle that?
Sure. So, of the 5% not paying you can really kind of break it into three buckets, so of that 5%, about 30% relates to effectively accounts payable disruption at the tenant. Those have been sorted out and are coming in and I'll note that much of that was in Europe. And so that, and that will, and kind of has -- as of today after we printed the slides brought Europe in line with US and will boost our April collection rate a little bit about 96%.
And so, that's just kind of logistical disruption. And about half of the 5% will turn into short-term deferrals as I described and then the balance of 20% percent comes from one or two tenants who didn't pay, but clearly can, and we are in discussions with them and pursuing that for full payment and expect to do so.
Okay.
Yeah. I think Josh it's also important to note that in discussions with them and pursuing that for full payment and expect to do so.
Okay.
And I think Josh it's also important to note that we mentioned that about 2% of our ADR, only 2% of our ADR is in the part of the retail markets that are most impacted, fitness facilities, theaters and restaurants, almost all of that was not paid. So that's a big part of the rate there. And I think as Brookes said what happens with those over time I think will change too.
Yeah. Interesting. Yeah I guess with that number going up to 96 is about half of those three property types. And then oh I noticed -- oh actually maybe a follow up on the accounts payable disruption. Any more color you can broaden out what was it just like checks in the mail kind of slowed down due to the virus, people are running around. Any color would be awesome.
More or less I think you pretty much nailed it. And we certainly can't see on the other side what exactly is going on, but it's been paid and there was no request for relief it's just somewhat late.
Okay. Okay. Interesting. And then I noticed – I guess the warehouse property type, it looks like it was include the fitness theaters and restaurants so it was the lowest percent paid at 93%. Any color there on any why was lower or is it just more tenants with disruption?
It's really that same answer believe it or not.
Okay.
Those payments that trickled in really after we printed the slides are primarily warehouses.
Okay. Awesome. I'll leave it there. Thanks, guys.
Okay. Thanks Josh.
At this time, I am not showing any further questions. I'll now hand the call back to Mr. Sands.
Thank everyone for joining us and for your interest in W.P. Carey. If you have additional questions please call Investor Relations directly on 212-492-1110. That concludes today’s call. You may now disconnect.