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How Would Acquiring CPA:17 Aid W. P. Carey's (WPC) Growth?

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The net lease real estate investment trust — W. P. Carey Inc. WPC — has recently agreed to merge Corporate Property Associates 17, Global Incorporated ("CPA:17"), in a stock-for-stock deal valued at around $6 billion.

The move would substantially enhance W. P. Carey’s size and scale with pro forma equity market capitalization of around $10.9 billion and pro forma enterprise value of about $17.3 billion. Also, it would improve earnings quality and significantly boost the company’s real estate adjusted funds from operations (AFFO) derived from long-term, recurring lease revenues.

Per the terms of the agreement, shareholders of CPA:17 would receive a fixed exchange ratio of 0.16 shares of W. P. Carey common stock for each share of CPA:17 they hold. Based on W. P. Carey's closing share price of $67.03 as of Jun 15, 2018, this equals $10.72 per share. Expected to close at or around Dec 31, 2018, the deal will see CPA:17 being merged with and into a subsidiary of W. P. Carey. While the board of directors of both W. P. Carey and CPA:17 has given their nod for this transaction, its closure is now subject to approval from their stockholders.

According to Jason Fox, W. P. Carey's chief executive officer, "This transaction simplifies our business and effectively transforms W. P. Carey into a pure-play net lease REIT with earnings derived almost entirely from higher-multiple lease revenues".

Particularly, the higher-multiple real estate segment is estimated to generate around 96% of total pro forma AFFO, up from its current level of 83%. Moreover, the deal seems a strategic fit because it would increase tenant and industry diversification besides extending the weighted-average lease term to 10.4 years. Further, it would improve the overall credit profile, lower debt to gross assets, and is expected to place W. P. Carey with better capital access.

Notably, New York-based W. P. Carey has an enterprise value of more than $10 billion and a portfolio of commercial real estate, aggregating 886 properties, spanning around 85 million square feet of space. On the other hand, CPA:17 is the largest fund advised by W. P. Carey and owns a high-quality, diversified, primarily net lease portfolio. Particularly, CPA:17’s portfolio includes 411 properties across 44 million square feet of space.

The combined portfolio would have 26% of its total portfolio belonging to the office category, 24% industrial, and 19% each of warehouse and retail properties. Given the healthy fundamentals of these asset categories, W. P. Carey is expected to ride on the growth curve with this buyout.

W. P. Carey currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The company’s shares have appreciated 6.8% in the past three months compared with its industry’s growth of 5.4%.

Stocks Worth a Look

A few better-ranked stocks from the same space are Extra Space Storage Inc. EXR, Lamar Advertising Company LAMR and Host Hotels & Resorts, Inc. HST. All three stocks carry a Zacks Rank of 2 (Buy).

Extra Space Storage’s Zacks Consensus Estimate for 2018 funds from operations (FFO) per share has inched up 0.7% to $4.62 in two months’ time.

Lamar’s FFO per share estimates for the current year increased 1.1% in a month’s time to $5.40.

Host Hotels & Resorts’ FFO per share estimates for 2018 have increased 3% to $1.71 over the past two months.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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