W.P. Carey-Sponsored Carey Watermark Lodging NTRs to Merge
October 23, 2019 | Luke Schmidt | Blue Vault
On October 22, 2019, Carey Watermark Investors Incorporated (“CWI”) and Carey Watermark Investors 2 Incorporated (“CWI2”) announced an agreement to merge in an all-stock deal to form a $4.6 billion, internally managed non-traded lodging real estate investment trust. CWI and CWI2 are both publicly registered non-traded REITs sponsored by W.P. Carey Inc.
Under the terms of the merger, CWI stockholders will get a fixed exchange ratio of 0.9106 shares of CWI2 Class A common stock for each share of CWI common stock. The exchange ratio is based on the December 31, 2018 NAVs of CWI and CWI2. As of that date, CWI reported an NAV of $10.39 while CWI2 reported an NAV of $11.41.
Following the closing of the merger, CWI2 will be the surviving entity and will be renamed Watermark Lodging Trust (“WLT”) with a portfolio consisting of 33 lodging assets. WLT will then complete an internalization transaction with W.P. Carey Inc. and Watermark Capital Partners LLC, and, as a result, the entity will become self-managed.
“We are pleased to have structured a transaction that we believe has meaningful benefits for both CWI 1 and CWI 2 shareholders. The strategic combination of the two highly complementary portfolios is a unique opportunity to create a premier, internally managed lodging REIT and is the next step on the path to liquidity,” said Michael Medzigian, CEO of CWI 1 and CWI 2. “It allows us to create a more focused portfolio and improve profitability to position the company for the public markets and create long-term growth on behalf of our shareholders.”
The boards of both CWI and CWI2 have approved the transaction, which is expected to close in the first quarter of 2020, subject to stockholder approval of both NTRs. CWI has a 30-day period continuing through November 21 to solicit alternative proposals from third parties. Additionally, both CWI and CWI2 have suspended their distribution reinvestment plans and share redemption programs, effective immediately.
According to the sponsor, the proposed transaction is expected to create meaningful benefits for shareholders, including:
• Combines highly complementary portfolios creating a premier lodging REIT: The CWI and CWI2 portfolios benefit from strong brand affiliations and are geographically very well diversified with a focus on high barrier to entry markets and densely populated urban centers with multiple demand generators.
• Continuity of management team with proven record of creating shareholder value led by current CEO and CFO: Ensures ongoing execution of value maximizing investment strategies unique to each asset and creates greater alignment with shareholder interests.
• Internalization of management is accretive to earnings, distribution coverage and credit profile: Expected to result in significant annual savings and better positions WLT among public lodging REITs.
• Increases scale and operational efficiencies for long-term value creation: Larger asset base, elimination of separate joint venture interests and lower expenses simplifies WLT and provides the company with additional financial flexibility to further optimize the portfolio.
• Positions WLT for liquidity including a potential public listing or IPO in the coming years: Strategic merger and internalization of management team are important steps towards enhancing WLT’s overall operations and portfolio to best position it for a future liquidity event, including a public market listing / IPO.
CWI began operations in September 2010 and reported total capital raise of approximately $1.2 billion through the closing of its public offering in December 2014. As of June 30, 2019, CWI reported total assets of approximately $2.3 billion, consisting of 27 hospitality properties. CWI has seen its NAV increase from its initial offering price of $10.00 to $10.39 as of December 31, 2018, while also paying a consistent distribution rate in excess of 5.50%, based on the offering price.
CWI2 began operations in February 2015 and reported total capital raise of approximately $879 million through the closing of its public offering in July 2017. As of June 30, 2019, CWI2 reported total assets of approximately $1.6 billion, consisting of 12 hospitality properties. CWI2 has seen its NAV increase from its initial offering price of $10.00 for its Class A common stock to $11.41 as of December 31, 2018, while also paying a consistent distribution rate in excess of 5.00%, based on the offering price.
While this proposed merger will not constitute a full-liquidity event as defined by Blue Vault, W.P. Carey Inc., the current sponsor of CWI and CWI2, has a successful track record as it relates to taking its previous NTRs full-cycle. Blue Vault has done the full analysis on six full-cycle events completed by W.P. Carey, and the results are impressive. The average annual IRR, with DRIP participation, among the six NTRs is 9.06%, with a high of 10.86% and a low of 7.90%, indicating consistency with the returns across their products. The six NTRs, with their average holding-period returns to early investors in their respective offerings, include Carey Institutional Properties, Inc. (annualized IRR of 9.65%), Corporate Property Associates 10, Inc. (8.94%), Corporate Property Associates 12, Inc. (10.86%), Corporate Property Associates 14, Inc. (8.25%), Corporate Property Associates 15, Inc. (8.75%), and Corporate Property Associates 16, Inc. (7.90%). The sponsor has had one additional NTR go full-cycle, Corporate Property Associates 17 – Global. Blue Vault has yet to complete full analysis on this full-cycle event, but preliminary calculations completed by Blue Vault indicate an approximate IRR of 6.72% to early investors, 7.12% to middle investors, and 7.41% to late investors.
Blue Vault is currently in the process of completing the sixth edition of its Nontraded REIT Full-Cycle Performance Study. To see previous editions as well as definitions and methodologies, please visit Blue Vault’s website at www.bluevaultpartners.com.
Sources: SEC, W.P. Carey, Blue Vault
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