W.P. Carey Fleshes Out Details of Proposed $4B Merger with Affiliate REIT

A conference call Friday morning shed more light on the proposed merger between W.P. Carey Inc., of New York, and its publicly held, non-traded REIT affiliate, Corporate Property Associates 16 – Global Inc., including the combined company’s assets, ownership and leverage.
Trevor Bond

Trevor Bond, Carey president & CEO

A conference call Friday morning shed more light on the proposed merger between W.P. Carey Inc., of New York, and its publicly held, non-traded REIT affiliate, Corporate Property Associates 16 – Global Inc. (CPA:16), including the combined company’s assets, ownership and leverage.

The proposed merger, announced on Thursday, would result in a company with an equity market capitalization of about $6.5 billion and a total enterprise value of $10.1 billion. The merger itself would have a transaction value of about $4.0 billion.

The definitive merger agreement reportedly has been unanimously approved by the Carey board of directors and by the independent directors of the CPA:16 board of directors. The agreement contains a 30-day go-shop provision, under which the special committee of CPA:16’s board of directors may solicit potential alternative transactions to the merger.

Currently, Carey’s portfolio has 422 properties, 124 tenants and 39 million square feet in 10 countries; post-merger that would grow to 734 properties, 231 tenants and 86 million square feet in 10 countries. The combined portfolio would consist of 30.2 percent industrial, 23.3 percent office, 18.4 percent warehouse/distribution, 13.3 percent retail, 4.5 percent self-storage and 10.4 percent other (including health care, nursing homes and hospitality).

Besides substantially increasing Carey’s size, the merger has been touted as:

*  Continuing Carey’s evolution from a hybrid L.L.C. deriving most of its revenue from investment management fees into a leading global net-lease REIT enhancing its future access to capital,

*  Simplifying its financial statements, and

*  Continuing stable dividend growth, with an anticipated post-merger minimum annualized dividend of $3.52 per share.

In the conference call, Carey president/CEO Trevor Bond said that with its balance of various stakeholders’ interests, this transaction fits the truism that in a successful negotiation, no one gets everything they want, but everyone still believes that the deal is mutually valuable.

Given the reference share price of $69.42, the deal’s cap rate will be around 7.7, said John Park, Carey’s director of strategic planning. The merger would result in “a modest increase in our leverage,” from 28 percent to 36 percent, as net debt to enterprise value, he added.

Like Bond, Park emphasized how well Carey knows the CPA:16 portfolio.

Park also noted that “The combined company will look very different” in terms of its revenue mix.

Although the combined company’s percentage of earnings from investment management will drop from more than 20 percent to about 10 percent, “We still like the [investment management] business,” Bond said.

Catherine Rice, Carey managing director & chief financial officer, noted that the CPA:16 portfolio is overall very similar to Carey’s. ªThe combined company will be the second-largest public net-lease REIT.) Still, she added, the merger would bring further diversification by tenant industry and would reduce tenant concentrations.

The percentage of investment-grade tenants will decrease from 31 to 22 percent, though Rice noted that Carey’s philosophy has long been amenable to tenants of less than investment grade. Rice also pointed out that only 2.7 percent of leases in the combined company do not have contractual rent increases.

Finally, the company will be looking to structure its permanent debt as equity plus long-term debt. “We’re looking for efficient capital, ” said Rice.