NEW YORK--(BUSINESS WIRE)--Jim Walden of Walden Macht & Haran LLP has initiated an investigation into Carey Watermark Investors Incorporated (“CW1”) and Carey Watermark Investors 2 Incorporated (“CW2”), both Real Estate Investment Trusts (“REITs”) holding portfolios of hotels, concerning the advisory fees charged to investors. The investigation to date has disclosed that CW1 and CW2 investors pay advisory fees to Carey Lodging Advisors LLP based on appraisals of the portfolios performed by CBRE Hotels, which has a long history with W.P. Carey, the parent company of CW1 and CW2.
Walden Macht has compared CBRE’s own survey of regional capitalization rates for the hotels in the CW1 and CW2 portfolios to the capitalization rates indicated by the CBRE appraised values reported in the public securities filings of CW1 and CW2. The results show that the CBRE asset values used by CW1 and CW2 to calculate their management fees are grossly overstated when compared to the value of the real estate held by each REIT, as demonstrated by the average CBRE market capitalization rates for the geographic regions in which the hotels are located. The difference cannot be justified by any reasonable or industry-accepted methodology.
CW1’s inflated property valuations yield a management fee of $7,253,735 per month. But using the values implied by the capitalization rates reported by CBRE, this same fee is approximately 3 to 5 times greater than it should be. The inflated fees reduce the dividends of CW1 and CW2 investors and damage shareholders who have opted into the companies’ dividend reinvestment plan (“DRIP”), which reinvests distributions into the purchase of more shares of the company. By inflating the value of the CW REITs’ shares, a shareholder receives fewer shares than they would otherwise receive if their true value were employed. This, in turn, reduces those shareholders’ future distributions because the distributions are based on the total number of shares owned. In addition, the inflated values will lock in a grossly inflated fee to the Advisor in connection with the recently announced merger of CW1 and CW2, resulting in further losses to shareholders.
The resulting inflation of the net asset value of CW1 and CW2 shares is substantial. An analysis using CBRE’s own capitalization rates demonstrates that the net asset value of CW1’s shares could be over 80% lower than the net asset value per share of $10.39 publicly reported by CW1. The average capitalization rate per portfolio property implied by the property valuation disclosed in the CW1 Form 8-K is 4.75%, which is substantially lower than the average capitalization rate for any similarly situated property reported by CBRE. Similarly, based on the same analysis, the net asset value per share of CW2 could be over 60% lower than CW2’s reported net asset value per share of $11.41.