The Wall Street Transcript publishes interview with Gordon DuGan, President & CEO of W.P. Carey & Co.
February 8, 2010 - The Wall Street Transcript has just published WP Carey offering a timely review of the REIT sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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TWST: What is it about the current economic and capital market environment that creates good buying opportunities for you with your target corporate deals?
Mr. DuGan: Our market now is, I think, a very attractive investment opportunity for a couple of reasons. Number one, there seems to be some equilibrium that's returned and returning to the marketplace. Debt providers are there; we have equity capital to invest. And companies realize that because there is some equilibrium in the capital markets, now is not a bad time to do a sale-leaseback. One of the objections we heard a year ago was that companies didn't want to sell their real estate and lease it back as much because they thought that there wasn't enough capital in the marketplace. What we found was after the financial crisis, there was a bit of a disconnect between buyers and sellers in the sale-leaseback space, and I think that disconnect has really narrowed to the point where there really isn't a disconnect. Buyers and sellers are willing to transact on market terms, and market conditions today are attractive. If you look at where interest rates are, whether it's three-month, one-year or 10-year, you are still in an extremely low interest rate environment. And all investment products are measured off of the riskless rate. Equities, bonds, the type of sale-leaseback investments that we make - with respect to these products, you have to keep going back to the reference point of the riskless rate. And in both Europe and the United States, it's quite low. And so we are able to achieve the returns we are achieving today, and those are attractive returns. And yet there is equilibrium in the marketplace because sellers know it's not a bad time to execute one of these transactions because there is a debt capital market that's returned and returning, and there are investors such as W. P. Carey that have equity to invest. It's returned to what I would say is more of an equilibrium. Whereas 2007 was a sellers' market and maybe for a short period 2009 was a buyers' market, now I would say it's at an equilibrium, which means it's an attractive market for the buyer but the seller can still get the execution that works for them. They don't have to sell at a massively distressed price, and they are not going to. So I think that's why it works.
TWST: I believe two of your most recent deals to be announced were the US Oncology headquarters here in the States and then abroad, the Spanish supermarket portfolio. Would you talk about why they were attractive to Carey, and how they exemplify the types of deal you seek?
Mr. DuGan: Yes, I think they are both good examples of the types of investment opportunities that we are finding and that we find attractive. US Oncology is a headquarters building in the Woodlands, Texas, which is a planned development community outside of Houston that has been a very attractive place for corporate headquarters facilities. We were able to structure the investment with a long-term lease with US Oncology, which is a leading company in its market. It's in the health care business, so it's not without some controversy, but it's a good company and a leader in its business. And we have a long-term lease on a very nice Class A asset in what is a good marketplace in one of the better general markets in the country, which is Houston. We felt that the income was secure, and we had an asset that we found quite attractive, and we have a long-term lease in place. As long as US Oncology is able to pay the rent - which after our credit review, we felt they would be able to, obviously - we have a nice, long income stream, plus a nice asset that secures that income stream both during the lease and after. It's a more conservative way of investing in commercial real estate than obviously development or buying half-empty buildings and trying to reposition them. What we do tends to be more conservative, but I think it's a very attractive asset class in terms of risk-return. The portfolio in Spain was with a company called Eroski, they are the leading supermarket food retailer in the Basque region. They are not just in the Basque region, but this is a very large company with a dominant market position. And we were able to buy a portfolio of their properties in a region that they dominate, which is the Basque region in Northern Spain. This is a good example that opportunities are created in environments like what we've seen in 2009 and to some extent we continue to see in 2010, where Spain's economy has taken a hit. Spain has taken, in some respects, a significant hit, although the Basque region is better from an economic perspective than the rest of Spain. But when economies take a hit, there is opportunity to be found. We were able to buy a portfolio of supermarkets on a long-term lease with the leading retailer in their marketplace. And supermarkets tend to be a more defensive type of industry because food is not a discretionary purchase. So it fits the profile of long-term lease, steady income, a leading company and in a market that's taken its hits. But you would much rather invest in Spain in 2009 and 2010 than in 2006 and 2007, when yields were lower and people were betting that everything was going to appreciate to the sky. Now is an attractive time to think of Spain.
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