Green Building
W. P. Carey's Approach to Sustainability
Net Lease REITs are unique because our tenants typically retain operational control of the property. This structure has enormous benefits for both landlord and tenant. The landlord is not exposed to operating costs or capital expenses and is able to own and manage a large and growing portfolio very efficiently. Meanwhile, the tenant retains operational control, enabling them to adapt the property to their specific operational needs. W. P. Carey prides itself on its proactive approach to asset management. Our goal is to create long-term relationships with our tenants, proactively working with their management teams to optimize their real estate to meet their evolving needs. In recent years, sustainability has grown to be a top priority for W. P. Carey and our tenant base alike. While the net lease structure has many benefits, it presents some challenges when it comes to helping our tenants reduce their carbon footprint. First and foremost, without direct operational control, it can be difficult for net lease landlords to access property-level emissions data in a scalable way. However, with real estate being one of the biggest contributors to global greenhouse gas emissions, net lease REITs must create the systems and processes to facilitate collaboration with our tenants to reduce the carbon footprint of the portfolio. To tackle the challenge, we employ a three-phased approach to quantify and reduce our portfolio’s global carbon footprint: Step 1: Data – Scalable systems to collect and analyze our portfolio’s carbon footprint data The first step – and perhaps the most challenging for net lease REITs in general – is to collect tenants’ energy usage data to accurately analyze and benchmark our portfolio. In 2021, W. P. Carey launched a program to leverage a suite of SaaS platforms to collect utility data in an automated and scalable manner. The data feeds into our proprietary business intelligence platform, enabling us to track energy usage, identify outliers and opportunities, and integrate with third-party benchmarking organizations. It also enables us to equip our tenants with tools to better manage and benchmark their own energy consumption. As of December 31, 2021, we’ve collected data from tenants representing over 30% of annualized base rent (ABR). In 2022, we intend to further expand this program throughout our portfolio. Step 2: Engagement – Systematic tenant outreach and collaboration The next step is to proactively engage with tenants to jumpstart actionable conversations that lead to projects that reduce carbon footprint. At W. P. Carey, each asset manager is responsible for a portfolio of tenants across all property types and regions. Our asset managers develop long-term relationships with tenant management teams, providing a direct and ongoing dialogue about the tenant’s business and how they can operate more effectively in their real estate. These conversations have created direct opportunities to pursue sustainability projects that both lower tenant operating costs and enhance W. P. Carey portfolio value. Step 3: Action – Targeted sustainability projects that lower carbon footprint The final step is to act on the insights and identify property-level sustainability opportunities within the portfolio. Sustainability projects fall within five key areas: renewable energy opportunities, building energy retrofits, existing building green certifications, new construction green certifications and tenant energy audits. In addition to the primary goal of reducing carbon footprint, collaborating with our tenants to invest in sustainability projects has several key benefits. For the tenant, a more efficient building reduces operating cost and helps reduces the tenant’s scope 1 and 2 emissions. For W. P. Carey, sustainability projects provide an enormous addressable opportunity set of accretive investments within our existing portfolio. These projects enable us to extend leases, enhance criticality of properties and improve the overall value of the portfolio. Conclusion Reducing the carbon footprint of a global net lease portfolio is an enormous long-term challenge. However, by developing a scalable, technology-driven approach to collecting data and engaging with tenants, we can systematically identify sustainability opportunities that are beneficial to the planet, attractive to tenants and improve our broader portfolio. At W. P. Carey, we’re committed to scaling up this effort and being an innovative sustainability leader in the net lease industry.
Why Tenant-Landlord Relationships Matter
Since our founding in 1973, W. P. Carey has been a long-term partner to our tenants. This means that when we invest in a property, we are also committed to advancing the tenant’s business and look to support their evolving real estate and capital needs throughout the duration of their lease and beyond. A Long-term Partner: Building Beyond the Original Transaction W. P. Carey partnered with Sonae MC, a leading Portuguese food retailer, in 2018 when it acquired its mission-critical warehouse facility in the Azambuja logistics park, Portugal’s prime logistics hub outside of Lisbon. Since its founding in 1985, Sonae MC has steadily grown its market share. Today, the company has more than 1,300 stores throughout Portugal and Spain, 35,000 employees and a broad range of products and services. At the time of the acquisition, Sonae MC was experiencing rapid growth, particularly through its city-center convenience stores and e-commerce operations. In order to meet rising demand and continue executing on its strategic plans, the company needed additional food distribution warehouse space. “In recent years, Sonae MC has been expanding its store portfolio, mostly with small, convenience stores; in the last decade, 750 new stores were opened. This growth will continue for the next few years to solidify even more of our dominant market share. This means our company’s logistics operation has to continue growing its warehouse footprint to be able to receive, prepare and ship an ever-growing number of merchandise," explained Rui Braz, Head of Area – Logistics Development at Sonae MC. To support Sonae MC’s growing business, W. P. Carey partnered with the company and agreed to fund a $28 million expansion of the Azambuja facility. Completed in 2020, the 300,000-square-foot expansion was custom built to Sonae MC’s specifications and totaled over 840,000 square feet, making it the largest refrigerated warehouse in Portugal. With the additional space, Sonae MC was able to increase its capacity and speed of supply to Mainland stores in the central and southern regions of Portugal. “The Azambuja expansion was part of a plan to strengthen our logistic capability, which makes it a fundamental piece to the company’s strategy,” said Braz. A Shared Vision: Committing to a Greener Future Our ability to support our tenants’ real estate needs goes beyond just expansions. We can also partner with our tenants on projects to help reduce their carbon footprint and meet their sustainability goals. W. P. Carey and Sonae MC are both committed to creating a greener future, which meant the expansion of the Azambuja warehouse was built with sustainability in mind. In 2021, a solar roof generating an estimated 4,000 MWh/year was successfully installed on the newly expanded facility, earning a LEED Gold certification for the property. This makes the facility Portugal’s first LEED Gold certified warehouse, an exciting milestone for W. P. Carey, Sonae MC and the country as a whole. “Receiving a LEED Gold certification for our new building in Azambuja, being the first in Portugal and, on top of that, the first for a refrigerated warehouse, is an important acknowledgement of our focus on sustainability. The thought that was put into multiple aspects like the isolation of the building, rainwater utilization system, and the investment in the photovoltaic solar plant–that reduces 30% of our electrical power grid needs for the entire facility–clearly portrays our intention in diminishing the operation’s environmental footprint,” Braz added. The new building is also equipped with innovative cooling and insulation systems that are more energy efficient and environmentally friendly. The joint delivery of fresh produce allows 20% fewer deliveries to shops, a reduction of 1.4 million km traveled per year and the equivalent of 1,100 tons of CO2 saved per year. A Win-Win: Long-term Benefits for Both Tenant and Landlord W. P. Carey prides itself on serving as a long-term, flexible partner to its tenants. By building strong relationships we are able to not only understand the business objectives of each tenant, but also their unique corporate values. In the case of Sonae MC, we were thrilled to have the opportunity to support them and their business needs, while also advancing our goal of reducing the carbon footprint of our overall portfolio. “W. P. Carey has had a fundamental role in the development of this project, proving to be the right partner along the entire process of building this warehouse and its sustainability and efficiency features, which we’re all proud of,” Braz concluded.
The Importance of ESG for Net Lease REITs
Nearly three-quarters of institutional investors are factoring ESG into their investment decisions, up 18% since 2019 according to a recent report. As the importance of responsible investing continues to grow and more investors evaluate companies based on ESG-related criteria, REITs are recognizing both the benefits and necessity of a holistic ESG strategy. Despite the increased focus, the net lease industry has lagged behind. In a recent WMRE survey focused on the net lease sector, only six percent of respondents said ESG was a significant factor in their investment decisions. While net lease REITs have developed robust governance policies and social initiatives, environmental has been more difficult to address—largely due to the triple-net lease structure whereby tenants are responsible for the day-to-day operations of the property, including energy usage and environmental practices. While net lease REITs don’t directly control property operations, there is an enormous opportunity to work with tenants to reduce their environmental impact and implement sustainability initiatives to support the ‘E’ in ESG—here’s how. Integrate ESG into underwriting ESG criteria can be integrated into the underwriting of new investments both at the property and tenant levels. In assessing properties, factors to consider are the types of energy used, equipment age and waste management standards. Most importantly, considering not only the current state of the building, but what improvements can be made in the future, is critical. On the tenant level, it’s important to understand the company’s broader ESG goals and ensure they are committed to reducing their carbon footprint. For build-to-suit investments—where REITs fund the construction of a new facility— taking a proactive approach to engaging with tenants on sustainable design decisions early in the process is crucial and a great way to turn a conventional investment into a green one. Source sustainability projects from within Net lease REITs can source sustainability-focused opportunities from their own portfolio. REITs with industrial properties are particularly well suited to working with tenants on sustainability projects that improve carbon footprint, reduce operating expenses and enhance asset quality. Such projects include, renewable energy opportunities, green building certifications (ie. LEED, BREEAM), building efficiency retrofits or energy audits. By identifying owned properties best suited for certain projects and proactively reaching out to tenants, net lease REITs can build a steady pipeline of sustainable investments while helping tenants decrease operating costs and advance their environmental goals. Finance investments through green bonds As more investors look to increase their allocation to ESG-related investments, public net lease REITs may be able to secure attractive financing to fund their pipeline of sustainable investments through the issuance of green bonds. Green bonds are designed to support strategies and initiatives that have a positive environmental benefit and can help net lease REITs appeal to a wider investor base and raise the capital needed to fund green investments. In closing Implementing environmental initiatives as part of a broader ESG strategy is possible for all REITs, net lease included. At W. P. Carey, we take a proactive approach to reducing our global carbon footprint, partnering with our tenants to reduce their environmental impact and meet their own ESG goals. These initiatives are not only beneficial to the planet, but to a REIT’s broader portfolio. Green buildings generally increase property value, drive higher rents, attract higher-caliber tenants and often improve renewal outcomes, which can all lead to enhanced cost of capital and accelerated growth.