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W. P. Carey roll-up called a win, but private buyer could still steal show

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Six trends shaping the industries and sectors we cover in 2021

Six trends shaping the industries and sectors we cover in 2021

Capital Markets View – January 2021


W. P. Carey roll-up called a win, but private buyer could still steal show

W. P. Carey Inc.'s planned $5.9 billion roll-up of Corporate Property Associates 17 - Global Inc. is garnering plenty of praise on the Street, but the curtain has not been drawn yet.

Private equity players, flush with cash, are on an epic buying spree, as evidenced by the uptick of real estate investment trust privatizations in recent months. W. P. Carey has long been considered the likely buyer of Corporate Property Associates 17, or CPA:17, a nontraded REIT unit that it manages, but D.A. Davidson & Co. analyst Barry Oxford said another buyer could still swoop in. CPA:17 can consider third-party offers through July 18, and the company said it will actively solicit alternative proposals.

"It wouldn't be shocking at all," Oxford said of the possibility of a topping bid.

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In an interview, Oxford described a palpable frustration among public REIT management teams earlier in June at REITWeek, Nareit's annual conference in New York, over their ability to close deals. Public REITs are frequently losing out on attractive assets to private equity firms, which in some cases have been outbidding them by orders of magnitude, he said.

Indeed, Oxford credits cash-rich private buyers for still-low capitalization rates despite rising interest rates.

"There's just a tremendous wall of money out there," he said.

CPA:17's portfolio is diverse, spanning the U.S. and Europe and covering several different property types, though its annualized base rent is weighted toward office and warehouses/industrial, the darling segment of the REIT space of late and the segment with perhaps the most M&A excitement.

In April, a Blackstone Group LP affiliate said it would buy Pure Industrial Real Estate Trust, the Canadian landlord, for C$3.8 billion in cash and, days later, another Blackstone affiliate moved to purchase Gramercy Property Trust in a $7.6 billion cash deal. ProLogis, the industrial REIT kingpin, said in April that it would buy its fellow public REIT DCT Industrial Trust Inc. for $8.4 billion in stock.

Baird Equity Research analyst RJ Milligan, for his part, thinks a higher bid for CPA:17 is unlikely to materialize. "We note that a topping bid would require any potential suitor to pay all the back end fees and interests to [W. P. Carey] which we believe would make it difficult for another buyer to outbid [W. P. Carey]," Milligan said in a research report.

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CPA:17 agreed to pay W. P. Carey $114.0 million — or $38.0 million if it signs a more favorable deal during the go-shop period — if it backs out of the stock-for-stock deal with W. P. Carey. The deal is subject to approval from both companies' shareholders.

Milligan listed in his note several positives for W. P. Carey, should the deal close by the end of the year, as expected. The roll-up will improve tenant diversification and, by shifting the company further away from its investment management business, advance the company significantly along the path toward becoming a pure-play net-lease REIT. Investment management fees will be replaced by recurring income.

"While the loss of fee income will lower 2019 street estimates ... we believe a merger makes the most sense for [W. P. Carey]," Milligan said.

Evercore ISI's Sheila McGrath cited the benefits of scale in the net-lease business. The deal, she noted, will make W. P. Carey the second-largest net-lease REIT by market capitalization after Realty Income Corp. and the 25th-largest REIT overall a positive from a cost-of-capital perspective.

"Overall, we believe the transaction should be a long term positive for [W. P. Carey] shareholders as it moves the investment management business to a much smaller component and adds many diversifying benefits that should over time enhance [W. P. Carey's] overall cost of capital," McGrath said.

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