W.P. Carey (NYSE:WPC) is a real estate investment trust that has a deeply ingrained method of running its business. That focus, which is a bit different than most, has served it and its shareholders well for years. In many ways this is the exact type of company I'd like to own. Only there's a big corporate shift brewing that could change a great deal about the company.
Carey as a great REIT
The first thing to understand about Carey is that it really is a rock solid company. I use the word company and not REIT because Carey has something that transcends the REIT space - a corporate identity and purpose that holds it together. Essentially, Carey takes the extra time to understand both the assets it's buying and the companies (and governments) to which it's leasing properties. The goal isn't just to grow, but to grow by acquiring assets that aren't easily replaced and that represent a good value. Essentially, it's looking to partner with entities that can (perhaps have to) keep paying, even if they are in a rough spot when they come to Carey for cash.
The New York Times (NYSE:NYT) is a great example. Back when it was assumed that the Internet would destroy every print publication on Earth, even those with global name recognition, The New York Times was struggling. The company needed cash to help it move more quickly toward digital. There was no question that the move toward digital was needed, the question was what value was there in a paper?
Carey acquired a chunk of the company's headquarters, a relatively new building, in a sale leaseback transaction valued at $225 million in early 2009. The deal's structure allows The New York Times to buy back the asset for $250 million in 2019. Since the deal was inked, The New York Times has managed to prove that the reports of its death were greatly exaggerated. While it's true that the newspaper isn't the company it once was (its top line is roughly half what it was a decade ago), its valuable brand name has found a place in the digital age.
Notably, after eliminating its dividend in 2009 to save cash, the paper was able to restart the disbursement in 2013. In fact, the company's revenues appear to have stabilized over the last year. This is far from a huge upswing, of course, but it's a statement to the relevance of the Times brand. Which is really what Carey was "buying." So far, it has been a solid asset for the REIT and one that only a thoughtful examination of the issues facing The New York Times would have allowed. And, if the Times did have to fold, Carey would own a piece of a premier property in New York City. Not a bad insurance policy.
This was a headline transaction, but it shows the educated risks that Carey is willing to take - once it has done its due diligence. And it's why Carey is a great company - this methodical, outside the box thought is simply ingrained in its DNA. More recently, for example, Carey has shifted its attention to Europe and away from what it viewed as an expensive U.S. market. Again, it took a look at the risks and rewards and decided to do things its own way. Let competitors pay up for U.S. assets. Carey chose to play in a different pond.
Which brings up the company's diversification. Carey is really three businesses in one. It has a diversified U.S. portfolio, a foreign portfolio (35% of the owned portfolio, based largely in Europe), and an asset management business. The latter has long caused investors concern despite the fact that it's a relatively small portion of the overall company (around 20% of total revenues).
Essentially, the company's asset management arm creates and operates non-traded REITs. It's "pivoting" into new areas to avoid any potential conflict issues with the REIT and trying to regroup around assets that will provide more consistent revenues over the somewhat episodic nature of non-traded REITs. Is there a reason to be concerned about this part of the business? Yes, it's outside the REIT box. But it has always been a part of Carey and the REIT has managed the business well. Moreover, outside the box is what Carey does.
Going back a step, it's worth looking at the owned portfolio a bit. Carey is basically a triple net lease REIT. But it isn't focused on any one sector or industry that really wouldn't jibe with its contrarian investing style. The company's assets are spread across the office, warehouse, industrial, and retail subsectors. There's also a notable "other" sector that houses things like self storage facilities. With Carey's contrarian thinking, picking up assets that don't fit cleanly into a category fits the business mold.
Basically, Carey is a well-run REIT with a global and diversified business. More than that, the business model lives in its DNA and, all things being equal, you could reasonably expect Carey's approach to outlast the people currently running the company. That's how long-term value gets created.
Sounds like a buy
So, at this point, you might be wondering if I think Carey is a worthwhile REIT to buy right now. The answer is no. But not because I don't like the REIT. And not because of valuation, either. In fact, the REIT has sold off around 20% over the past year and I'm still not pulling the trigger. Another big name triple net lease REIT, Realty Income (NYSE:O), for reference, has gone up around 5% while Carey has sagged. Both are great companies, which suggests Carey is being mispriced by Mr. Market.
That said, I think it's pretty clear I like the company as it stands today. If the company were to remain as it is, I'd probably be looking to initiate a position. As currently structured, I'd feel comfortable with my wife owning this REIT if I weren't around. And that's understanding that Carey will take risks that others won't, but only after it fully understands and is comfortable with those risks.
The problem I have with Carey today is that management is looking to change the corporate structure. It could end up as two or even three separate companies. This shift could destroy the global diversification Carey offers and it would leave shareholders with multiple companies and "new" management teams to understand (potentially diluting or even destroying the DNA). You really can't talk about Carey without talking about the potential for a breakup. It is the most important thing about the company right now.
That isn't to suggest that any one piece of the company won't be worth owning if it is broken up. You just can't know what's going to happen until more news is available. Presumably the company will provide an update when it next reports earnings. But until then, there are too many question marks.
Sit and wait
A reader recently asked me for my take on Carey, which is why I wrote this. The answer is really two-fold. On the one hand I think the REIT, as it is today, is the kind of company you could own for a long time and be well rewarded. On the other, until there's more on the potential breakup (which I'm not a fan of) it's hard to suggest that conservative investors climb aboard. There's just too much risk of damaging the things that make Carey special.
That said, more aggressive types looking for a special situation might like it, since you could convincingly argue that the sum of the parts is worth more than the whole. But that's a short-term strategy and one that long-term investors probably shouldn't be playing.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.