Conflicts of Interest in the Managed REIT business
WPC is often described as a “self-managed” REIT, but realistically its managed investments business is something different and it creates conflicts of interest. Specifically, the fees WPC charges the managed investments are huge, and they create incentive for WPC management to grow the managed investments assets under management instead of its profitability.
For starters, let’s consider the many layers of fees WPC is charging the managed investments. Total Net Investment Management revenue (as shown in the following table) includes structuring revenue, reimbursable costs, asset management revenue, dealer manager fees, and incentives.
And for perspective, in 2015 total managed investments revenues were $202.9 million and assets under management in the program were recently $11.7 billion, for an expense ratio approximation of 1.73% (this is a very significant amount).
And what makes this amount more concerning is that the total management fee amount paid to WPC can be increased dramatically by growing the businesses without concern for profitability because the investors in the program bear the investment risk, not WPC. In a nutshell, even though this business appears lucrative for now, it seems likely to shrink in the future as investors demand lower fees, or competition creeps in. Further, this type of perverse investment incentive seems to invite future lawsuits by the investors in the managed programs.
Also worth noting, there is already a history of WPC purchasing investment from the managed program which creates more conflict of interest. As WPC acknowledges in its most recent annual report: “There may be competition among us and the Managed REITs for business opportunities.” Again, this appears lucrative in the short-run, but may open WPC up to liabilities in the long-run.
Conclusion:
Even though W.P. Carey Inc. REIT (NYSE:WPC) offers a big dividend and its price has declined sharply, it’s still not a screaming buy. The stock’s recent price decline was consistent with many other REITs (the sector was overheating and due for a pullback), and WPC in particular is still not cheap relative to its own historical standards. Further, the company remains exposed to significant risk factors such as rising interest rates and the upcoming wall of debt maturities, risky foreign currency investments, and the conflicts of interest in its managed programs. We don’t believe WPC is the worst investment idea ever at these price levels, but it’s still not compelling enough for us to buy.
Note: This article was written by Blue Harbinger. At Blue Harbinger, our mission is to help you identify exceptional investment opportunities while avoiding the high costs and conflicts of interest that are prevalent throughout the industry. We offer additional free reports and a premium subscription service at BlueHarbinger.com. If you are ever in the Naperville, IL, USA area, our founder (Mark D. Hines) is happy to meet you at a local coffeehouse to talk about investments. Please feel free to get in touch.
