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2 Carey Watermark Investors REITs to merge to create $4.6B entity

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Capital Markets View – January 2021


2 Carey Watermark Investors REITs to merge to create $4.6B entity

Carey Watermark Investors Inc. and Carey Watermark Investors 2 Inc. agreed to merge in an all-stock deal to form a $4.6 billion, internally managed nontraded lodging real estate investment trust.

Under the terms of the deal, Carey Watermark Investors' stockholders will get a fixed exchange ratio of 0.9106 share of Carey Watermark Investors 2's class A common stock for each share held.

Following the merger, Carey Watermark Investors 2 will be the surviving entity and will be renamed Watermark Lodging Trust. The portfolio of the new entity will consist of 33 lodging assets.

The respective boards of the companies approved the transaction, which is expected to close in the first quarter of 2020, subject to stockholder approval of both entities.

Carey Watermark Investors may solicit, receive, evaluate and enter into negotiations with respect to alternative proposals from third parties for a 30-day period continuing through Nov. 21.

Following closing, the merged entity will complete an internalization transaction with W. P. Carey Inc. and Watermark Capital Partners LLC, as a result of which the entity will become self-managed.

Under certain conditions, Carey Watermark Investors would need to pay a termination fee of approximately $28.7 million to Carey Watermark Investors 2, while the latter would be obligated to pay a termination fee of about $19.7 million to Carey Watermark Investors.

Immediately following closing, the respective advisory agreements between a W. P. Carey unit the REITs will terminate. The respective operating partnerships of the REITs will redeem the special general partnership interest that certain W. P. Carey units hold, for which the latter will receive approximately $97 million in consideration.

Moreover, Carey Watermark Investors 2 will internalize the management services provided by W. P. Carey.

Barclays is financial adviser to Carey Watermark Investors' special committee, with Hogan Lovells as legal adviser.

Morgan Stanley & Co. LLC is financial adviser to Carey Watermark Investors 2's special committee, while Clifford Chance US LLP and Pepper Hamilton LLP are legal advisers to the company and its special committee, respectively. Duff and Phelps rendered a fairness opinion to the company's special committee as to the internalization.