W.P. Carey Inc. (REIT) 2026 Q3 Earnings Call

Good morning, everyone, and thank you for joining us today for our 2026 third 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. With that, I will pass the call over to W. P. Carey's Chief Executive Officer, Jason Fox.

Good morning, everyone, and thank you for joining us. We have continued to execute at a high level throughout 2026, enabling us to further raise our outlook for AFFO per share growth, which we believe will be among the strongest in the net lease sector this year. Importantly, our growth has been supported by broad-based momentum across the business. Year-to-date investment activity has continued to exceed our initial expectations, enabling us to raise the low end of our full year guidance range for investment volume. While the recent sharp rise in long-term interest rates has made the outlook for fourth quarter activity harder to predict, we continue to see a path to the top half of the range. Our AFFO growth also continues to be supported by the strength of our rent escalations, providing a meaningful source of earnings growth independent of transaction activity.

Our portfolio is performing well, reducing our outlook for rent loss for the remainder of 2026. As we look further ahead to 2027, we are pleased with the early signs of repricing we are seeing. With the significant amount of capital we have raised this year, we are very well positioned to continue investing if attractive opportunities remain available. With only one bond scheduled to mature in each of 2027 and 2028, our exposure to refinancing headwinds should be manageable even if interest rates remain elevated. This morning, I will briefly review our progress so far this year and how we are thinking about the transaction market outlook for the fourth quarter and into 2027. Our CFO, Toni Sanzone, will focus on our results and guidance and touch upon aspects of our portfolio and balance sheet. We are joined by Brooks Gordon, our Head of Asset Management, to answer your questions.

Starting with our investment activity. Year to date, we have completed approximately $1.6 billion of investments at a weighted average initial cash cap rate of 7.5%. Cap rates have moved incrementally higher compared to the first half of the year. The investments we closed during the third quarter, and those we expect to close in the fourth quarter, have cap rates averaging in the mid to high 7s. That translates to average yields well into the 9s and approaching double digits in some cases. We continue to invest across a range of property types and cap rates. With most of our investment volume so far this year going into warehouse and industrial properties, consistent with what we have done in recent years. Similarly, from a geographic perspective, the mix between the U.S. and Europe has remained broadly in line with what we have done historically.

Our existing portfolio remains a meaningful source of investment opportunities, including expansions, build-to-suits, and redevelopment projects. Supported by our Carey Tenant Solutions initiative, these projects allow us to deepen tenant relationships while deploying capital at attractive returns. Currently, we have 11 projects underway that will add approximately $325 million to our investment volume over the next 12 to 24 months, including about $95 million scheduled to deliver during the fourth quarter. We continue to find these projects have higher cap rates and longer lease terms than traditionally sourced investments. Turning our attention to fourth quarter investment activity specifically. As the broader transaction market continues to adjust to higher rates, it has added some uncertainty around fourth quarter deal timing, particularly for deals in our pipeline tied to broader corporate transactions that may take longer to close in the current environment.

If those transactions remain on their anticipated timelines, we could see a path to the top half of our investment volume guidance range. Until we have greater visibility, however, we are maintaining a measured outlook for the remainder of the year and only moderately raising the low end, resulting in an overall range of $1.8 billion-$2.1 billion. Moving to our sources of capital. Our balance sheet remains in exceptional shape with ample liquidity, including about $540 million of forward equity available for settlement, and leverage at the low end of our target ranges. As we look further ahead to next year, we expect to generate approximately $300 million of annual retained cash flow from our real estate portfolio, providing another meaningful source of equity capital. We also retain the flexibility to pursue accretive asset sales in addition to ordinary course dispositions.

Depending on investment activity and relative pricing, we can lean further into that source of capital if needed. Beginning in the second half of 2027, our Lineage shares will provide another source of liquidity. Together, these sources position us very well to continue deploying capital accretively throughout 2027 without needing to access the equity capital markets. With our funding needs well covered and limited refinancing requirements, we are approaching 2027 from a position of strength. The key remaining questions, therefore, are how quickly will sellers adjust to the higher rate environment, and what will that mean for investment activity? While we have started to see cap rates on comparable deals move higher, not all sellers will alter their expectations immediately, which can create a period where bid-ask spreads widen and transaction activity slows.

If long-term rates remain elevated, however, we'd expect to see the upward pressure on cap rates to continue next year. Ultimately, that should create more opportunities to transact at initial cap rates in the high 7s and in some cases into the 8s. In the meantime, we're continuing to pursue attractive opportunities while pushing for yields and returns that reflect current market conditions, taking into consideration both our spot cost of capital and the more favorable pricing achieved on the capital we've already raised. Given our diversified approach across property types and geographies, we expect to see a wide range of cap rates and believe we're well equipped to find opportunities where pricing has adjusted appropriately and spreads remain attractive. It's also worth remembering that most of our investment activity comes from sale-leasebacks, which are often driven by a company's capital needs.

Frequently, there's a specific use of proceeds, whether that's funding growth, pursuing M&A, or strengthening their balance sheet. As a result, many of these companies need to access capital within a defined timeframe, which we believe should continue to support attractive investment opportunities in 2027. Our focus on sale-leasebacks also gives us greater pricing power, and our expectation is that we'll see pricing move faster than in other areas of the net lease market, particularly those focused on smaller investment-grade commodity retail. In addition to external growth, a meaningful portion of next year's earnings growth is already embedded in our portfolio. We expect contractual same-store growth in 2027 to be slightly above the mid 2% range we anticipate for this year, reflecting current inflation forecasts and the fact that almost half of our rent escalations are tied to CPI.

Combined with our relatively high rent bumps, that gives us a unique profile amongst our net lease peers, providing a more predictable source of growth, a hedge against rising inflation, and making us less dependent overall on transaction market conditions to drive earnings growth. Let me pause there and hand the call over to Toni to discuss our results, guidance, and balance sheet in more detail.

Thank you, Jason, and good morning, everyone. Before I get started, I'd like to quickly note our new investor presentation. We've updated and expanded it to provide a more comprehensive overview of our portfolio, strategy, and the key drivers of our growth, and you can find it posted to the investor relations section of our website. Starting now with earnings and guidance. AFFO per share for the third quarter was $1.33, up $0.08 or 6.4% year-over-year, driven by the continued strength of both our investment activity and rent growth, partly offset by the impact of settling forward equity. The $0.01 decline in AFFO per share compared to the second quarter was mainly a function of timing for other lease related income, which was higher in the second quarter, as anticipated and built into our initial guidance.

For the full year, we further raised and narrowed our expectations for 2026 AFFO per share to between $5.23 and $5.29, increasing the midpoint by $0.03 and implying year-over-year growth of 5.8%. As Jason mentioned, we believe the AFFO per share growth we will deliver this year will be among the strongest in the net lease sector. While the underlying drivers of our growth remain strong, our AFFO guidance implies a lower fourth quarter, partly reflecting the impact of rent abatements associated with certain re-leasing activity, which I will come back to in a moment. Our portfolio continues to perform well with strong tenant collections and no new rent disruption from credit events. During the third quarter, we collected rent for the full period from Hellweg and received its previously outstanding June rent payment, contributing to better-than-expected rent collections.

As a result, we are lowering our estimated potential rent loss from tenant credit events to between $3 million and $5 million, or 25 basis points of ABR at the midpoint, down from our prior estimate of $7 million to $10 million. We have made good progress reducing our overall Hellweg exposure this year, moving it out of our top 25 tenants by the end of the third quarter. This included executing new leases with stronger operators, recapturing close to 100% of the prior rent, with rent scheduled to commence between late 2026 and mid-2027, following Hellweg's remaining lease terminations at the end of November. We expect to complete the sales of the other Hellweg stores over the remainder of this year and into early 2027.