Nontraded REIT heavyweight W.P. Carey retreats from net-lease real estate

As spreads tighten, turning attention to lodging, self-storage and Europe

Jun 18, 2014 @ 11:31 am

By Bruce Kelly

A nontraded REIT heavyweight, W.P. Carey Inc., is carefully backing away from the sector that has long been its forte — net-lease real estate — and is looking for opportunities in other sectors and other markets.

While registered reps and advisers continue to sell the current net-lease-focused real estate investment trust managed by W.P. Carey, Corporate Property Associates 18, the company has no plans in the immediate future to launch its next net-lease REIT, CPA 19.

The net-lease market is getting crowded and pricey, analysts said. As a result, W.P. Carey has become active in the lodging and self-storage sectors, as well as looking for opportunities in Europe.

“W.P. Carey management recognizes that there is a lot more competition in the net-lease space for assets,” said Paul Adornato, REIT analyst with BMO Capital Markets. “This means that buying assets to fill up a net-lease-focused fund may not be as attractive as in the past.”

Under a triple-net lease, the tenant is responsible for paying all operating expenses, property taxes and insurance. In traditional property sectors, landlords bear the responsibility for most of those expenses.

Net-lease real estate has been one of the most popular sectors for nontraded REITs since the credit crisis and real estate crash. As real estate value fell and interest rates hit historic lows, net-lease REITs offered investors steady returns and income in the form of 6% to 7% dividends.

W.P. Carey nontraded REITs are sold by the leading independent broker-dealer networks in the country, including LPL Financial, Commonwealth Financial Network and Cetera Financial Group. The company converted from a publicly traded holding company to a REIT two years ago and currently has a market capitalization of $6.35 billion.

W.P. Carey's nontraded REITs have boasted strong returns. According to filings with the Securities and Exchange Commission, 15 CPA REITs have posted average annual returns of 7.17% to 18.81%. CPA 15, which merged with W.P. Carey in 2012, posted average annual returns of 9.58% over 10 years.

The net-lease real estate sector has grown tremendously and accounted for 7% of the traded REIT index at the end of last year, according to a January report by Green Street Advisors.

W.P. Carey is not the only REIT player backing away from the net-lease real estate market. American Realty Capital also is doing so — last summer it said it was no longer going to create and distribute nontraded net-lease REITs. That was a few months before a related traded REIT, American Realty Capital Properties Inc., said it was buying rival net-lease REIT, Cole Real Estate Investments Inc.

“A lot more capital is looking for net-lease assets,” Mr. Adornato said. “This has created what some investors see as somewhat of a bubble in the net-lease market.

The threat of rising interest rates is also spooking some net-lease investors.

“Net-lease properties have more bond-like characteristics than traditional property sectors,” according to a Green Street Advisors annual report from January. “In particular, net-lease investments are longer-duration assets compared to other real estate sectors due to long-term leases and flattish cash flows.”

W.P. Carey has widened its range of nontraded REITs beyond the CPA brand. In 2010, it introduced nontraded REIT Carey Watermark Investors Inc., which focuses on buying lodging properties and hotels. Last week, the company registered with the Securities and Exchange Commission for another such REIT, Carey Watermark Investors 2 Inc.

Carey Watermark is gaining ground with financial advisers and clients. For the year through May, it had about $83 million in sales, and has raised $659 million in equity since its launch.

“The halt in net-lease shows their investment discipline,” said Sheila McGrath, managing director with Evercore Partners, adding that the company remains open to net-lease investing because it could still do a follow up offering to CPA 18. “W.P. Carey is saying, 'We don't want to raise too much in net lease and we are considering other property types to add to the platform.' ”

This is not the first time W.P. Carey has pulled back from the net-lease market. In 2007, company founder William Carey decided to stop selling nontraded net-lease REITs.

“Bill Carey called it,” said Kevin Gannon, managing director with Robert A. Stanger & Co., an investment bank. “He said, 'I can't make the math work anymore. In the long term, people will thank me.' ”

According to Stanger, W.P. Carey sold $550 million of nontraded REITs in 2006 (all of which were net lease), none the next year, and re-entered the market in 2008, raising $342 million in equity.

The company's recent shift in sectors was a surprise, he said. “When Carey first said it was doing a hotel REIT, I scratched my head, but timing-wise it was brilliant.”

“There is an evolution of our investment management strategy,” said Trevor Bond, W.P. Carey's chief executive, in a recent interview. “We've changed a lot in the past two years since we became a REIT. The evolution towards multiple products has been a long time in coming.”

Along with hotels, the company is focusing on real estate opportunities in Europe and self-storage, he said. The company's expertise in those areas came from earlier transactions in the net-lease REITs, Mr. Bond said. “But it took us a while to learn how to swim outside the pool and we waited until we felt comfortable expanding the pool,” he said.

W.P. Carey has been “active sellers” in the net-lease sector as properties have become more expensive, he said. “With respect to new opportunities, we've gotten better growth and better opportunities in Europe in the past couple of years. We have weighted things slightly more towards Europe. It's a big region, and there's a lot of corporate-owned real estate there. That's where the growth is. Bill was a big internationalist, and I've continued that trend.”


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