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Nontraded REIT buy further shifts W.P. Carey away from investment management

W. P. Carey Inc.'s planned acquisition of a nontraded real estate investment trust that it manages would eliminate a significant income stream from management fees but would add high-quality real estate assets to Carey's portfolio at an attractive price, company executives said.

On a conference call, W.P. Carey executives emphasized their familiarity with the assets of Corporate Property Associates 17 - Global Inc., or CPA:17, which the company has managed for 10 years. W.P. Carey's approximately $6 billion acquisition of CPA:17 would continue its shift away from investment management as a business line: About 4% of the company's adjusted funds from operations would come from investment management after the deal's close, compared to 20% currently.

The transaction would end the fees W.P. Carey earns from managing CPA:17, reducing AFFO from the investment management segment by 65 to 70 cents per share annually. More than half that decline is expected to be offset by accretion from acquiring the nontraded REIT's real estate assets, CEO Jason Fox said.

Fox said the transaction price represents about a 6.9% capitalization rate, giving the company a significant yield above its cost of capital. Moreover, he argued, investors ascribe a higher multiple to cash flows from real estate compared to asset management cash flows, so the shift in the company's income streams will further offset the loss of the management fees. Finally, Fox said, W.P. Carey's management fees for the nontraded REIT would end no matter who acquires the nontraded REIT, so the company is evaluating the transaction against that baseline.

Analysts on the call pressed W.P. Carey executives on the possibility that another buyer could emerge. Fox said that, while CPA:17 had formed a special committee in the third quarter of 2017 to evaluate the transaction and hired financial and legal advisers, he was not aware of any process the nontraded REIT undertook to shop itself to other bidders.

"We're as interested as you are," he told an analyst.

The two companies' agreement provides for a 30-day window in which CPA:17 can solicit competing proposals.