W.P Carey (WPC -0.85%) recently announced the acquisition of Corporate Property Associates 18 (CPA:18) in a transaction valued at $2.7 billion, including debt. The deal will see the company exit its investment management business, a move that will provide greater long-term durability to its earnings stream. That will help put its dividend -- which yields an attractive 5.5% -- on an even firmer foundation.
Here's a closer look at the deal and what's ahead for the diversified real estate investment trust (REIT).
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The end of an era
W.P. Carey is acquiring the last of its sizable managed funds, completing the planned exit of its investment management business. The company has been steadily winding down this business by purchasing these investment vehicles. It acquired CPA:16 for $4 billion in 2014 and CPA:17 for $5.9 billion in 2018. It's now paying $2.7 billion to purchase CPA:18 in a cash-and-stock deal.
This acquisition strategy helps replace the earnings from managing these funds with more durable real estate income. Given the structure of the CPA:18 deal, W.P. Carey will offset over half the earnings from managing CPA:18 with the real estate income generated from owning its assets.
What CPA:18 brings to the table
W.P. Carey is acquiring a well-diversified, high-quality net lease portfolio that enhances its existing portfolio. CPA:18 owns 41 properties, including offices and warehouses, net leased to 40 tenants.
In addition, CPA:18 adds a portfolio of 65 operating self-storage assets with over 42,000 units. That will grow W.P. Carey's operated self-storage portfolio to 84 properties with 52,000 units. Self-storage REITs Extra Space Storage and CubeSmart manage most of these properties for W.P. Carey. In addition, W.P. Carey owns 27 self-storage properties that it leases to Extra Space Storage under long-term net leases.
This combination has several other strategic benefits. It reduces its top 10 tenant concentration below 20%, collapses seven joint ventures between W.P. Carey and CPA:18, and increases its scale (W.P. Carey will be the 23rd largest REIT after the deal closes). The transaction has no integration risk -- W.P. Carey assembled the portfolio and has managed it for years.
The merger also won't negatively impact the company's balance sheet. While W.P. Carey is paying some cash in the deal, there's an existing purchase option on 11 European student housing properties owned by CPA:18 that it expects the buyer to exercise before closing. W.P. Carey also plans to sell one additional operating student housing asset and some of the European office assets to help offset the cash needed to close the deal.
What's ahead for W.P. Carey?
The diversified REIT expects the deal to close during the third quarter of this year. W.P. Carey doesn't anticipate that it will have any impact on its dividend. The REIT intends to maintain its current policy, focusing on consistent dividend increases. It has given investors a raise every year since its initial public offering in 1998.
Since the deal won't affect its balance sheet, W.P. Carey continues to have the flexibility to expand. The REIT invested a record $1.72 billion in growing its portfolio last year, with about 70% of that capital going into the warehouse and industrial sector. It anticipates purchasing another $1.5 billion to $2 billion of properties this year. W.P. Carey is already off to a strong start, having signed deals to invest $166.3 million in 2022 as of early February.
These investments, combined with rising rental rates, have W.P. Carey on track to deliver accelerating growth in 2022. It's benefiting from inflation because a significant portion of its leases have inflation-linked rental rate escalators.
A great REIT for investors seeking to generate passive income
W.P. Carey took the final step toward simplifying its business by exiting its investment management operations. The acquisition of CPA:18 will further diversify its operations while providing it with more durable rental income. That puts W.P. Carey in an even better position to continue growing its dividend in the future. This stability makes it stand out as an excellent REIT for investors seeking to generate some passive income backed by high-quality real estate.
