W.P. Carey Builds Do-It-Yourself Approach

Peter Slatin

For an international real estate investment manager that has a three-decade track record in the business and more than $5 billion under management, you'd think that a $445 million deal would be routine -- especially in today's capital-infused environment.

But it's the largest single transaction ever for investment manager W.P. Carey(WPC), a pioneer of the sale-leaseback format in the U.S. The nearly half-billion-dollar deal -- which Carey International President Edward LaPuma says has a capitalization rate of around 7.5% -- is a major vindication of Carey's concerted 10-year push into markets in Europe and Asia, regions that have yet to really embrace sale-leaseback as a strategy.

In early May, Carey announced it had acquired an interest in one of Germany's leading do-it-yourself (DIY) retailers, Hellweg Die Profi-Baumarkte GmbH & Co., through a partial buyout of Hellweg's real estate subsidiary. At the same time, Carey provided Hellweg with financing backed by 37 of the company's 72 stores. All of the locations in this transaction are in Germany; Hellweg also has stores in Austria.

The Sale-Leaseback Trend

Although not particularly large deal in a time of proliferating multibillion-dollar asset sales, the scope of this deal is meaningful not just for W.P. Carey and Hellweg, but also in the framework of a growing awareness of triple-net leases as a means of leveraging cash and moving assets off balance sheets overseas.

"It's the cultural significance of owning property," explains LaPuma. "In the U.S., owner-occupied real estate is in the 20%-to-50% range," he notes. In Europe, by contrast, "about 70% to 75% of commercial real estate is owner occupied." In other words, the market there has a mind-set that reflects centuries of in-place fee ownership, where land titles just don't trade. "Intellectually, practically, it's a more difficult market" for sale-leasebacks than the U.S., he says.

This, however, is the second multiple-asset transaction that the two entities have closed; the first was a $154 million, 15-property deal completed in 2005. The current transaction gives W.P. Carey a roughly 25% interest in Hellweg's real estate subsidiary.

Simultaneously with that purchase, Carey created a lease between that entity and the operating company "that is our typical type of lease," says LaPuma. But that wasn't the end of the deal. W.P. Carey then "made a loan collateralized by those 37 properties" to Reinhold Semer, the principal owner of the 102-year-old retail chain, who, says LaPuma, returned the proceeds of the deal to the operating company. "It looks like a sale-leaseback, but it is two distinct transactions."

Why the Rube Goldberg variations on the typical sale-leaseback? LaPuma says the deal reflects Hellweg's desire to move slowly into the new ownership structure in a way that "made them comfortable." Indeed, although at some point, as the comfort level rises, W.P. Carey could end up owning all Hellweg's real estate assets outright, Semer retains the right to buy back the properties.

The DIY Growth Bet

In choosing Hellweg as the vehicle for a distinctive presence in European retail, Carey is also staking a claim to what LaPuma sees as a serious opportunity in Germany's $40 billion DIY industry. That industry continues to capitalize on the handyman activities that proliferated in pre-1989 East Germany, when do-it-yourself home improvement -- on housing stock that was among Europe's oldest and home ownership among its lowest -- was not a matter for discretionary spending (something that itself was in extremely short supply). It was simply a matter of making things work despite little resources. Now, with the Iron Curtain gone, Germans are pleasuring in fixing things up.

Thus, what Carey and LaPuma -- and, most likely Semer as well -- are looking toward is consolidation in the DIY retailing sector. If Hellweg becomes part of such a wave, says LaPuma, that would boost Carey's "investment premise severalfold," not just by bulking up the retailer but by boosting its creditworthiness as well.

Finally, although it might seem counterintuitive for a U.S. investor to make a big move in Europe as the dollar falls against the euro, LaPuma finds upside there as well. While he says U.S. lenders have a "historical bias" that does not favor single-tenant assets, such properties "are more highly prized outside the U.S." Thus, he adds, "we can get very good leverage at pretty attractive rates."

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