Thoughts on WP Carey CPA 14's Merger into CPA 16 Global
I went through the CPA 14 proxy / merger document in my spare time this week.   The entire transaction is affiliated and the values were determined by the WP Carey not the market.   WP Carey obtained a "fairness opinion" on the transaction, but the firm that issued the fairness opinion, based on my understanding after reading the opinion, did not opine on the values involved in the merger, but on the valuation methodologies used by WP Carey.  (How do I get that gig, getting paid big bucks to write a no-opinion opinion?)

As I noted in my previous email, the entire merger went under my radar.   The initial proxy statement went out in December and the transaction closed last week.  I don't have exact figures on the merger other than was what in the press release, and will have to wait until the second quarter financial results are posted in mid-August to get the final data.  Investors could either choose to take cash of $11.50 per share or merge into CPA 16, and see an increase in yield, from about 8.4% to 9.2%.  Up to 50% of the investors could choose the cash option.  The cash that would be available for choosing the cash out option would come from the following sources:

• CPA 14 was to sell properties to CPA 17 and to WP Carey that would net $89 million
• CPA 16 was to obtain a $300 million line of credit
• CPA 16 was to utilize a portion of its cash (which approximated $59 million at 12/31/2010)
• Finally, WP Carey was to purchase shares of CPA 16, if necessary

I estimate that CPA 14 had approximately $950 million of investor equity at year-end, and half that would be about $475 million.   WP Carey had to purchase $121 million of CPA 16 shares to complete the merger and meet the cash out requests.  I have never heard of a sponsor investing this much money in one of its own funds.  I find this figure staggering.  Non-traded REIT sponsors are notorious for not investing in their own deals, the ultimate chefs who refuse to eat their own cooking.  WP Carey not only had to cook, but also got stuck with the bill for a three-star, five-course meal, served with a couple of bottles of First Growth Bordeaux.

CPA 14 had approximately $1.5 billion in total assets at year end.  If WP Carey gets a 1% annual asset management fee, this is $15 million a year on the CPA 14 assets.  It will take over eight years for WP Carey to recoup its $121 million through the asset management fee.  CPA 16 is a long-term investment and should have at least several more years before a liquidity event.  WP Carey has just tied up $121 million for an indefinite period.

WP Carey will probably try to spin its purchase of $121 million of CPA 16 shares in a positive manner.  I don't believe for a second that WP Carey had any expectation it would have to invest so much money in CPA 16.  WP Carey has a reputation as being one of the smartest operators in the non-traded REIT business.  It looks to me like it was too smart by half in this transaction.  I am guessing that the maximum number of investors chose the cash-out options, despite the premium exchange price offered CPA 14 investors and a nearly .80% increase in distribution.   I know I write this too much, but this transaction and how WP Carey gets its $121 million out bears watching.