On June 15, 2017, the Board of Directors of W. P. Carey Inc. (the “Company”) approved a plan to exit all non-traded retail fundraising activities carried out by its wholly-owned broker-dealer subsidiary, Carey Financial LLC, effective June 30, 2017, in keeping with the Company’s long-term strategy of focusing exclusively on net lease investing for its balance sheet. The Company anticipates that it will incur non-recurring charges to exit its fundraising activities of approximately $10.0 million, in aggregate, during the second and third quarters of 2017, consisting primarily of severance costs.The news was unexpected, but when you think about the management turnover at W. P. Carey over the past year, culminating in the departure of Carey Financial's President Mark Goldberg earlier this month, the decision should have surprised no one. W. P. Carey is a large listed REIT and carrying a syndication division that is raising limited capital puts pressure on earnings.
W. P. Carey provides sponsors that remain in the non-traded space some clear lessons for moving forward:
1 Know your skill set. W. P. Carey was known for its CPA net leased real estate investment trusts (REITs), not business development companies (BDCs) or hotel REITs. Carey tried to move away from something it knew, believing its sales organization and substitute products were interchangeable, and that broker dealers would adapt to products based on Carey’s earned reputation with its CPA product. W. P. Carey's net lease knowledge did not transfer to new product acceptance.
2. Products matter. W. P. Carey was late to offer a BDC and then came in with a lackluster sub-advisor and a structure that left W. P. Carey open to broker dealer objections. (I liked the master / feeder structure.) Its sub-advised hotel REIT was fine, but as a sector investment it was no replacement product for the core CPA product. Sponsors need to stick with their knowledge and competency, not chase sectors or product fads.
3. Fees matter. W. P. Carey products were always expensive, especially on the front end, which is a difficult position to maintain in market now focused and concerned with DOL and its low fee requirements. Yesterday's decision tells me that W. P. Carey was unwilling to adjust its fee structures in a manner to compete with broker dealer requirements in a DOL dominated environment.
The most attractive new products have low upfront costs, and align and subordinate sponsor compensation with investor returns. Investors need profitable sponsors, and meaningful and attainable incentives for sponsors are required as the industry moves forward.
One final note on W. P. Carey. Exiting the new product distribution removes a big incentive for W. P. Carey to provide liquidity to its existing investments. These investments are externally advised, which means they pay asset management fees to W. P Carey. A liquidity event means those fees go away. An earnings focused public company will want to extend the fee inflow.