W.P. Carey & Co. LLC
W.P. Carey & Co. LLC
Incorporated: 1998 as Carey Diversified LLC
Sales: $139.4 million (2001)
Stock Exchanges: New York
Ticker Symbol: WPC
NAIC: 531190 Lessors of Other Real Estate Property
W.P. Carey & Co. LLC, an investment firm headquartered in New York City’s Rockefeller Plaza, is the preeminent provider of corporate real estate financing solutions. The company specializes in acquiring properties which are then leased back to the tenant company. As a result, the real estate is removed from the tenant company’s balance sheet, unlocking capital that can be utilized for corporate initiatives such as funding future growth, paying down debt, facility expansion, or build-to-suits. Major corporations engaged in such leasing arrangements with W.P. Carey include Federal Express, Wal-Mart, and PETsMART, Inc. In addition, W.P. Carey works closely with private equity firms seeking to optimize the capital structure of their portfolio companies through the sale-leaseback of owned real estate. Transactions are typically with a single-tenanted property with a lease structure based on a triple net lease arrangement, in which the tenant, in addition to rent, pays for maintenance, taxes, and insurance on the property. In addition to acquiring properties, W.P. Carey also serves as the manager of four real estate investment trusts (REITs), including the Corporate Property Associates series of funds—CPA:12, CPA:14, and CPA:15—and Carey Institutional Properties Incorporated (CIP). In all, W.P. Carey owns and/or manages more than 450 properties located across the United States and Europe, totaling more than 55 million square feet of space.
Founding of W.P. Carey: 1973
Wm. Polk Carey founded W.P. Carey in 1973. Born in 1930 in Baltimore, Maryland, he grew up during the Depression. Having firsthand experience of difficult times would lead him to adopt a conscientious and careful approach to real estate investments. He attended Princeton University from 1948 to 1950 and ultimately earned a B.S. in Economics from the University of Pennsylvania’s Wharton School. Following a two-year stint in the United States Air Force, he went to work for A.J. Orbach Co. in Plainfield, New Jersey, rising to the level of vice-president and general manager. In 1959, at the age of 28, he decided to strike out on his own and form his first company—International Leasing Corporation, a name he chose primarily because it was available. At first, he leased equipment and vehicles to corporate customers and arranged the private placement of debt. He later took on the leasing of aircraft and complete factories. His first major deal, completed in 1960, was historic, the first direct investment that the government of Australia ever permitted. The client was L.J. Hooker, an Australian whose seven million acres of land made him the world’s largest private landowner. Carey arranged financing so that Hooker could expand his business empire, which included hotels and livestock.
Carey’s first business taught him valuable lessons that he would apply to future endeavors. He learned that equipment leasing was both a highly competitive and risky business—you could not count on the lessee to properly maintain the equipment and were uncertain of its residual value when the lease expired. Carey realized that by using a net lease approach, the lessee would be responsible for maintenance and operating costs. Carey recognized that net leasing real estate would be even more advantageous, since the residual value of the property was easier to gauge. Furthermore, Carey learned that he could borrow against the credit of the lessee. If the lessee had a solid credit rating and could meet the lease payments, Carey could go to a bank and arrange to finance a major share of the capital needed to buy the equipment being leased. In a similar way he would be able to receive a mortgage on the real estate.
It was when Carey merged International Leasing with Hubbard, Westervelt & Mottelay in 1964 that he became involved in the net leasing of corporate real estate. In 1967, he joined Loeb, Rhoades & Co., which ultimately became a part of Lehman Brothers, to head the Real Estate and Equipment Financing department. In 1971, he went to work as the director of corporate finance for duPont Glore Forgan Inc. In 1973, he resigned and at the age of 43 faced a crossroads in his life. According to a speech he delivered to the Newcomen Society, “I was being wooed by Lazard Freres, among others. I was quite content to be part of a large organization—the opportunities real and challenging, the compensation appropriate and the atmosphere congenial. But I despised the office politics that big, competitive operations often breed, and I hadn’t forgotten the pleasures of being the boss. I made up my mind when I saw some really cheap office space at 67 Wall Street. The rent was less than we now pay for flowers.”
Beginning Business in 1973
Although his new company, named W.P. Carey & Co., began business with an impressive address, it was unable to arrange for directors and officers liability insurance. As a result, the board of directors numbered just three: Carey; his brother Frank, a practicing attorney; and brother-in-law Raymond C. Clark, who headed Baltimore’s Canton Co., operator of the world’s largest privately owned marine terminal. Carey hired an acquisitions officer, Jim Umlauf, who had worked in the corporate finance department at duPont Glore Forgan. Umlauf was charged with the unenviable task of drumming up the company’s initial business. According to Carey, Umlauf called “all one thousand of the Fortune 1000 companies. Nine-hundred ninety-seven turned us down, but three agreed to give us some business. Even so, we came close to selling the firm to First Boston Corporation, despite unfavorable terms, because it took so long for our first deal to close and cash to start flowing.” To provide some security to the business, Carey combined transaction-related income with asset management income. In an interview with Global Real Estate Now, he explained, “In the asset management aspect, our asset management fees would cover the main overhead of the company so that if the transaction didn’t work out, we would still be able to survive.”
During the first years of its existence, W.P. Carey focused on lease-back ventures which served more as tax shelters than revenue producers. Although many high-flying firms were engaged in the same activity, Carey quickly grew wary of these tax-advantaged transactions. Because so many companies were pushing the boundaries on tax shelters, he felt that it was only a matter of time before the government cracked down. That day of reckoning would come in 1986, by which time W.P. Carey had long since abandoned tax shelter deals. The company turned to real estate limited partnerships (RELPs) in 1979, launching CPA.1, the first in a series of Corporate Property Associates investment funds. Only later, when the Tax Reform Act of 1986 made it more attractive, would W.P. Carey turn to real estate investment trust (REIT) funds. CPA:1, with $20 million in capital, was designed to provide a consistent return for its investors, the only tax shelter component being a function of depreciation. All of the CPA funds focused on long-term leases, offered stable returns and served as an effective hedge against the cyclical nature of the stock market.
Carey took steps to make sure that the company was making sound investment decisions, creating an independent investment committee to be involved in the approval of all acquisitions. “Basically, I set it up,” Carey conceded, “because I’m a deal man, and I wanted to protect myself against myself.” A key player on the committee, George E. Stoddard, was hired shortly before the first CPA fund was launched. Stoddard had 30 years of experience with the Equitable Life Assurance Society of the United States, where he was in charge of a multibillion-dollar portfolio of investments. Carey convinced him to join the company, despite a number of attractive offers Stoddard received from other Wall Street firms. According to Carey, “George works closely with our acquisition staff, but his compensation, unlike theirs, does not depend on the number or size of our acquisitions. His goal is not to poke holes in their deals, but to make certain there ARE no holes, and to be sure the terms give us a return that is commensurate with the real risks.” The importance of paying attention to detail became evident in problems associated with the firm’s first RELP. A major tenant in the Denver area, which was overbuilt, had financial trouble and was forced to vacate three buildings. Finding new tenants proved difficult and the RELP’s return was adversely affected.
With the investment committee in place, W.P. Carey developed a consistent acquisitions procedure for its new funds. The first step involved the careful selection of target properties and the sorting through of hundreds of potential deals brought to the firm’s attention in the course of a year. In addition, W.P. Carey’s acquisition staff searched for companies that were attractive candidates of lease-back deals. Credit worthiness was clearly important, but the firm was more than willing to take a chance on a company with potential that had not yet been recognized in the marketplace. Also relevant, but to a lesser degree, was the location of the property—only important in the event that the property had to be re-let or sold. Once the acquisition staff put together a deal, it still had to pass muster with Stoddard, then receive unanimous approval from the investment committee, which was comprised of other highly experienced executives. Only then would an acquisition be forwarded to the firm’s board of directors for consideration. To further protect the interest of its investors, W.P. Carey was also diligent about spreading out the risk in its portfolio, diversifying investments by industry, geography, and property type.
With nearly 30 years of experience in the real estate investment business, W.P. Carey’s integrity, commitment and reputation for developing creative financing solutions is unparalleled. The firm’s ability to work with companies to unlock the value of their real estate and maximize the potential of their core businesses will continue to distinguish W.P. Carey in today’s competitive marketplace.
Debut of First REIT: 1990
W.P. Carey’s thoroughness resulted in steady returns on investments, good relations with lessees, and a sterling reputation in the business world. As a result, while other companies suffered through the economic slump of the early 1990s, W.P. Carey maintained high occupancy rates and consistent profits. Unfortunately, it still suffered somewhat as a result of “guilt by association.” In 1990 the firm launched its first REIT fund, CPA:10, and had difficulty raising capital for it despite W.P. Carey’s track record of above-average returns.
W.P. Carey launched CPA:11 in 1991, later called Carey Institutional Properties (CIP), because of its attractiveness to institutional investors. By 1994, the firm topped the $1 billion mark in assets under its management. That amount would surpass $2 billion in 1997. At this time, the earlier CPA funds had reached a point at which they could be closed down. According to Carey, the firm faced a dilemma: “If we simply dissolved the funds and sold the assets, our investors—whose support and goodwill we had labored so tirelessly to earn and keep—would be saddled with huge, immediate taxes on $350 million in capital gains, just because we had been so successful. Many real estate operators were doing just that,” he said. “It wasn’t easy, but we found a way for our investors to have their cake and eat it, too. In January 1998, with the overwhelming consent of the investors, we consolidated the first nine funds in the series, CPAs 1 through 9, into Carey Diversified, a Limited Liability Company headed by Frank Carey, which we immediately listed on the New York Stock Exchange.” Because investors could swap their partnership interest for shares in the new company they not only avoided capital gains taxes, they were now in a position to achieve instant liquidity and decide for themselves when they wanted to realize capital gains.
The next step in the evolution of the firm came in June 2000 when its management company, W.P. Carey & Co., Inc., was merged with Carey Diversified LLC to form W.P. Carey & Co. LLC. The result was a fully integrated investment company—the nation’s largest net lease firm and the world’s largest publicly traded LLC, which was subsequently listed on the New York Stock Exchange and the Pacific Exchange. Not only did shareholders in the company enjoy the consistent returns of Carey Diversified’s net lease operations, they also benefited from the asset management business, which included the newer CPA series of REITs.
Altogether, the company had approximately $3.5 billion under ownership or management. In addition, it owned part of W.P. Carey International LLC, which was created to buy foreign properties for the public company’s family of funds. Inroads were made in Europe, with acquisitions in France, The Netherlands, Finland, and the United Kingdom, as W.P. Carey also began to cast an eye towards the potentially lucrative markets of India and China.
The U.S. market, however, would continue to be a major focus for W.P. Carey going forward. With the economy struggling during the early years of a new century, an increasing number of companies were looking to sell their buildings and lease them back. With its reputation and expertise in net-leasing, W.P. Carey was well positioned to take full advantage of that rising trend. The founder of the firm, now more than 70 years of age, was optimistic and confident in the abilities of several young executives he had groomed to take over control of the business. Edward V. LaPuma was tabbed to oversee global operations and Gordon F. DuGan, the firm’s president, was poised to run the domestic company. Carey stated his intention to remain as chairman “for the foreseeable future but in a less hands-on fashion. I want to spend more time helping with the international side because I have a solid feel for it, having been in the business as a young man, and I enjoy it.” There was every reason to believe that Carey would continue to make a valuable contribution and that the firm bearing his name would thrive for many years to come.
Carey Asset Management Corp.; Carey Financial Corporation; W.P. Carey Development, Inc.
CarrAmerica; Crescent Real Estate Equities; Lexington Corporate Properties Trust.
- William Polk Carey forms his first company, International Leasing Corporation.
- Carey forms W.P. Carey & Co., Inc.
- First Corporate Property Associates investment fund is launched.
- First real estate investment trust fund is offered.
- Assets under management tops $1 billion.
- Early CPA funds are used to create Carey Diversified LLC.
- W.P. Carey & Co merges with Carey Diversified to create W.P. Carey & Co. LLC.
Brown, Steve, “To Tap into Cash, Many Firms Are Selling Their Buildings, Leasing Them Back,” Dallas Morning News, January 25, 2002.
Carey, Wm. Polk, “W.P. Carey & Co. LLC,” New York: The New comen Society of the United States of America, 2001.
Grant, Peter, “Investor Backlash Hits Sober Syndicator,” Crain’s New York Business, November 19, 1990, p. 9.
“W.P. Carey & Co. LLC: Looking Global in 2002,” Global Real Estate Now, Spring 2002, pp. 7–13.