Ladies and
gentlemen, hello and welcome to W. P. Carey's Third Quarter 2018 Earnings Conference Call. My name is Adam, and I will be your operator for today. All lines have been placed on mute to prevent any background noise.
Please note that today's program is being recorded. After today's prepared remarks, we will be taking questions via the phone line. Instructions on how to do so will be given at the appropriate time. I would now like to turn today's program over to Peter Sands, Director of Institutional Investor Relations. Mr.
Sands, please go ahead. Good morning, everyone, and Thank you for joining us today for our 2018 Q3 earnings call. I would like to remind everyone that some of the statements made on this call
are not historic facts and may
be deemed forward looking statements. Factors that could cause actual results
to differ materially from W.
P. Carey's expectations are provided in our SEC filings. An online replay of this conference call will be made available in the Investor Relations section of our website at wpkerry.com, where it will be archived for approximately 1 year and where you can also find copies of our investor presentations. And with that, I will hand over to our Chief Executive Officer, Jason Fox.
Thank you, Peter, and good morning, everyone. This morning, I'm joined by our CFO, Tony Sanzone our President, Sean Park and our Head of Asset Management, Brooks Gordon. Before covering our usual earnings call topics, I want to start briefly with the announcement we made on Wednesday of this week that we closed our merger with CPA:seventeen. We had an accelerated timetable, which attributes the dedication and efforts of our employees who were able to achieve the full 2 months ahead of our original schedule. In closing, we issued 54,000,000 shares in an all stock deal, which has increased our market cap to approximately $11,000,000,000 in our enterprise value to a little over $17,000,000,000 making us one of the largest REITs.
The drivers of this transaction are both strategic and tactical. As a larger company, we will operate more efficiently with a simplified business model and improved earnings mix. We've added a high quality diversified pool of assets and about a 7% cap rate that fits well into our existing portfolio. Diversification has increased and weighted average lease term has been suspended. It has also further strengthened our credit profile with earnings from real estate covering a much larger percentage of our interest expense and dividends, as well as having a deleveraging impact on a consolidated debt to growth assets basis.
And because we assembled the CPA:seventeen portfolio and managed it for over a decade, we expect a swift and seamless integration of the assets. And with that, let's turn to the Q3. Tony will review the combined portfolio and our balance sheet, as well as our revised 2018 guidance, reflecting the earlier than anticipated closing of the merger. At high level, year over year AFFO growth was driven primarily by higher real estate revenues, new acquisitions and solid same store growth given the very high percentage of ABR generated from leases with either fixed rent bumps or increases tied to inflation. This positions us well for further inflation, which has been running at or above 2% in the U.
S. Over the last year and at a similar level in Europe for the last few months. Moving to the market environment. In the U. S, while cap rates may be bottoming out in the face of rising rates, deal activity remains strong.
Peak pricing coupled with rising rates is motivating corporates considering sale lease tax to act. And we are still seeing opportunities with sufficient spread to our ops of capital without having to compromise on deal terms. While 10 year rates have moved back above 3%, they remain low relative to historic levels. And we believe a more sustained level of higher rates is needed before it has a meaningful impact on cap rates. In Europe, activity levels also remain high given continued capital inflows.
Certain offshore investors with relatively low return expectations have been prominent buyers, putting additional pressure on cap rates in core markets. Although we remain disciplined and continue to see interesting opportunities elsewhere. Cap rates generally remain under pressure across appetites, but the region's low interest rate environment continues to provide sufficient spreads. Interest rates will inevitably move higher, albeit slowly, but capital inflows will likely keep cap rates low for some time. Despite this market backdrop, we completed total investment volume of $296,000,000 during the Q3, consisting of 4 acquisitions for $260,000,000 and 3 completed capital investment projects at a total cost of $37,000,000 This brings total investment volume for the 1st 9 months of the year to $692,000,000 In aggregate, our year to date transaction volume was completed at a weighted average cap rate of approximately 7% and a weighted average lease term of 20 years.
On our last earnings call, I provided details of the deals we closed early in Q3, so I will only briefly recap them here. In July, we announced the $178,000,000 acquisition of a portfolio of retail assets in the Netherlands triple net lease to InterGammah, which is the country's number one do it yourself retailer. They are a critical portion of the company's assets, representing 80% of its retail footprint and are on long term triple net leases, the refunds tied to Dutch CPI. Also in July, we completed 2 smaller transactions, the $23,000,000 acquisition of a warehouse facility in the Netherlands that leased to the country's largest distributor of educational materials on a long lease with built in rent growth tied to Dutch inflation. The 2nd of the smaller deals was the $9,000,000 sale leaseback of an industrial facility in Wisconsin also on a long lease with annual 2% fixed rent bumps.
In September, shortly before the end of the quarter, we completed the acquisition of a central logistics facility near Lisbon in Portugal and a $50,000,000 off market transaction with Sonae MC, which is the country's leading food retailer. It's a highly critical asset that forms part of the company's central distribution network and its only warehouse in the region with cold storage for perishable food products. The lease has built in annual rent escalations tied to inflation and the remaining term of over 10 years. The property is situated on a large parcel of land with substantial building rights providing potential future expansion opportunities and the lease term extensions that typically accompany them. 3 capital investment projects we completed during the quarter at a total cost of $37,000,000 primarily consisted of 2 completed build to suits.
1 was a $16,000,000 Class A warehouse industrial facility in Poland that will serve as the central distribution hub for Ontex, which is a leading international manufacturer of personal hygiene products. It's a triple net lease with a 15 year lease term and CCI indexed rent escalations. The other was a $15,000,000 expansion in Florida for Lourdanglia, a leading global operator of kindergarten through 12th grade private schools. In conjunction with the expansion, the lease term on the existing property was reset to 25 years, providing incremental lease term. As with the original sale leaseback, the recently completed extension includes annual uncapped CPI based rent increases.
On a combined basis, we currently have close to $170,000,000 of capital investment projects underway, $73,000,000 of which we expect to complete by the end of this year and will therefore be included in our 2018 investment volume. This is primarily of an additional $25,000,000 build to suit expansion with Nord Anglia and a $45,000,000 warehouse expansion project with Harbor Freight, which was part of the CPA:seventeen portfolio we acquired and therefore does not appear in our 3rd quarter supplemental. Completion of these two projects by year end will bring total capital investment projects for 2018 to around $150,000,000 Internal deals of this nature have become a meaningful source of deal flow for us, on which we are often able to achieve better deal terms and wider cap rates that we see in the market. Expansions also add criticality to the original asset and allow us to extend its lease term. For example, the expansions we expect to complete this year have added approximately 4 years of incremental lease term to existing assets with ABR of $24,000,000 Tony will review our dispositions in more detail and how we are tracking versus guidance, but I want to touch upon one that is currently classified as held for sale.
We are under contract to sell 8 retail properties totaling just over 1,000,000 square feet and approximately $12,000,000 in ADR leased to Helbig, which is a do it yourself retailer in Germany and our largest overall tenant. We continue to view the do it yourself space as well positioned to compete with e commerce. And earlier this year, modified the leases, extending their term to 19 years. This disposition therefore provides an excellent opportunity to harvest some of the value created in the assets, while proactively managing the overall diversification of our portfolio. Once the dispositions are completed, our investments in Helveig will be reduced from 4.4% to 3.3% of ABR on a pro form a basis.
In closing, the 3rd quarter serves as a good example of the various avenues of growth currently available to us. Strong same store growth contributed to higher earnings and our focus on writing CPI based rent escalators into our leases positions us well for further inflation. We remain on track with our expected acquisition volume for 2018 despite competitive market conditions as we continue to source acquisitions externally in both marketed and off market deals and pursue discretionary capital investment opportunities with existing tenants. We've also completed our merger with CPA:seventeen. In addition to the strategic portfolio benefits of the transaction, our increased size provides us with a wider pool of internally sourced investment opportunities as well as enabling us to pursue larger portfolio deals and potential M and A opportunities.
And with that, I'll hand the call over to Toni.
Thank you, Jason. I'll touch on our results for the quarter, followed by some highlights from our portfolio and balance sheet. Lastly, I'll give an update on how we are tracking towards full year guidance after taking into account the impact of closing the CTA:seventeen merger at the end of October. Our 3rd quarter financial results and the portfolio information in our supplemental disclosure are, of course, all as of September 30, which is before we closed our merger with CTA:seventeen. We've provided pro form a portfolio information as part of our investor presentation available in the Investor Relations section of our website.
This morning, we announced AFFO per diluted share of $1.48 for the 2018 Q3, up 8% compared to the prior year period, driven largely by revenue growth within our Real Estate segment. On a year over year basis, annualized base rent, or EDR, is up over 5% to $714,000,000 as of the end of the quarter, reflecting the impact of net acquisitions and same store growth. Same store rent on a constant currency basis was 1.5% higher year over year. We remain well positioned to see this growth level continue with rent escalators in the CTA:seventeen portfolio very similar to our own. On a combined company basis, 65% of our ADR comes from leases with rent escalators linked to CCI and 31% comes from leases with fixed increases.
Turning now to portfolio composition, which is pro form a for our merger with CPA:seventeen. Our net lease portfolio now consists of almost 1200 properties covering 133,000,000 square feet net leased to 304 tenants, generating EBITDAR of $1,100,000,000 Occupancy remains high at 98.3 percent and weighted average lease term is now 10.5 years. As a result of our merger with CPA:seventeen, we also now own a portfolio of 44 self storage operating properties, from which we will earn approximately $26,000,000 of NOI on an annualized basis, while we continue to evaluate our various options for those assets. As a result of the merger, our top ten concentration has come down from 31% to 24%, and the percentage of ACR coming from investment grade tenants has moved up from 26% to 28%. From a geographic perspective, we remain well diversified with 62% of ABR generated by our properties across the U.
S. And 35% from properties in Europe. Our mix of property types also remains well diversified and aligned with our pre merger portfolio. On a pro form a basis of September 30, 44% of ACR came from industrial properties, primarily light manufacturing, warehouse and logistics assets. Office comprises 25%, which we expect to be reduced, for example, through the exercise of the purchase option on the New York Times building.
Retail assets represent 19% of ADR, the majority of which are in Europe and in sectors such as do it yourself and auto dealerships, which we view as less exposed to the threat from e commerce. On a combined basis, our exposure to U. S. Retail assets represents just under 4% of total ADR. Within that, concept in the US that we view as facing strong competition from e commerce is extremely low, representing less than 1.5% of total ADR.
And even then, over half of that comes from excellent retail locations. Turning now to our capitalization balance sheet. The CPA:seventeen transaction we closed this week was an all stock acquisition. We issued 54,000,000 shares, which has the impact of deleveraging our balance sheet. Our debt to gross assets will come down to around 45 percent from just over 50% at the end of the 3rd quarter.
Net debt to EBITDA will increase from 5.7 times at the end of the 3rd quarter to around 6 times, although we expect that to decrease over time. While secured debt to gross assets will increase from about 10% to almost 20% as a result of the merger, we have a clear path to bring that path down by replacing mortgage debt with unsecured debt, as we have done since embarking on our unsecured debt strategy in 2014. We continue to have access to multiple forms of capital, as evidenced by the successful execution of a €500,000,000 offering of senior unsecured notes at 2.25% that we completed in early October. We have a long term goal of mitigating euro currency risk through further euro bond issuance. This latest offering helped partially fund recent European acquisitions, while also making progress towards achieving the desired mix of euro and U.
S. Denominated debt in our capital structure after considering our post merger balance sheet. On a combined basis, we continue to have a well laddered series of debt maturities with limited excluded interest rate volatility, and we currently have ample liquidity with over $1,000,000,000 of capacity on our revolving credit facility. And finally, moving on to 2018 guidance. As a result of the earlier than anticipated closing of our merger with CPA:seventeen, we've adjusted our AFFO guidance for the full year to between $5.34 $5.44 per diluted share to reflect the net impact of the merger, which was 2 months ahead of our initial expectations.
This reflects the impact of the fees we ceased to earn from CPA:seventeen, which is partly offset from the net rental revenues on the real estate assets we acquired. We are on track with our previous estimates for investment volume of between $700,000,000 $1,000,000,000 having completed $692,000,000 during the 1st 9 months of the year. Dispositions completed year to date totaled $185,000,000 and we continue to make progress on our full year disposition range of $300,000,000 to $500,000,000 There are a few transactions in our disposition pipeline, including the subset of Helwig's retail properties that Jason referred to, which we currently expect to close by year end, although timing could push into the Q1. For the full year, we continue to expect structuring revenues to be between $15,000,000 $20,000,000 based on our current estimates for capital recycling within the managed funds. G and A expense is on pace with our previous guidance of $65,000,000 to $70,000,000 With the CPA:seventeen transaction closing in October, we will likely end up close to the high end of that range for 2018, reflecting the loss of reimbursements from CPA:seventeen for the remainder of the year.
G and
A as a percentage of gross assets has been reduced significantly as a result of the merger. And more importantly, we will now benefit greatly from the inherent scalability of our business. Overall, we're pleased with our results thus far and excited about the accelerated execution of the CPA:seventeen transaction, including the seamless integration with our existing portfolio. And with that, I'll hand the call back to the operator to take questions.
Thank you. Ladies and gentlemen, at this time, we will now be conducting our Q and A session. Our first question comes from the line of Manny Korchman from Citigroup.
Your line is now live. Hey, everyone. Good morning. Good morning, Manny.
Good morning, Manny. Just thinking about your acquisitions target for the year, if I factor in the $73,000,000 of capital projects you expected to deliver, the 4Q volume seems pretty light compared to what you've been doing. Am I thinking that correctly?
Well, I think we've historically done transactions that are chunkier in nature, and we certainly closed some big portfolios earlier in the year. I think based on where we are at this point in the year and what we expect to close towards the end of this year, and I don't think any volume we do in the Q4 would have a significant impact on this year's guidance, but it's certainly possible that transactions at this point would be more skewed towards the Q1.
Thanks, Hany. And on that same point, I know it's early and you
haven't given guidance yet, but how would you sort of help us think about transaction volumes going into 2019?
Yes. I think that it's a fair point. We're not giving 2019 guidance at this point. As we evaluate our opportunity set in a number of ways, as Jason mentioned, and really look at our growth there. But in terms of volume specific to the investments that we expect on balance sheet for 2019, I don't think we have a number or range to give at this point in time.
And the last one for me. Given your comments on
the frothy acquisition markets or transition markets, does the merger provide you opportunities for outsized dispositions compared to where you've been? You sort of kind of mentioned it at storage, but anything else there that you would think that would lead to bigger disposition volumes?
This is Brooks. Regarding dispositions, I think it's important to note that our strategy remains consistent. It's too early to provide specifics, but typically we're looking to improve the portfolio. It's a combination of harvesting value optimistically and risk management. CD17's portfolio very much aligns with the long term targets.
It is important to note that next year, we do have the New York Times purchase option, 250,000,000 dollars in Q4 of 2019. So that will skew next year's disposition up somewhat. But we don't expect our approach to disposition to change materially.
Thanks, everyone. Thank you. Our next question comes from the line of RJ Milligan from Robert W. Baird. You are now live.
Hey, good morning, guys.
This is Will Harman on for RJ. You guys mentioned that pricing still remains pretty aggressive for acquisitions. Just given the optionality to invest in different real estate sectors, which sectors are you seeing more attractive opportunities right now and which sectors are you seeing deals that just aren't penciling for you?
Yes, it's a good question. I mean, it's one of the benefits of diversification where we can look at a broad range of opportunities and choose to allocate capital to either the markets or the asset types that provide us the best risk return at that particular time. In a market that's competitive like we're seeing right now, and that's both in the U. S. And Europe, we're still focused on sale leasebacks and build to suits and structured transactions, each of which provide us opportunities to really control the structure of the deal, which in tight markets tend to loosen generally, and we can maintain focus on those structures.
It also allows us to get higher than market yields when there's a more complex component to deal upfront.
It doesn't mean the deal is any
more complex once it's closed. In terms of geographies, for the year, we've been more skewed towards Europe, given some larger portfolio transactions that we've done, including Danske Freight and Intergama. I think going forward, it will probably be a little bit more evenly balanced between the 2. And then in terms of asset types, especially when we're focusing on sale leasebacks, really the opportunities tend to be with companies whose real estate makes up relatively large percentage of their total enterprise value that tends to be companies in the manufacturing logistics space. So therefore, we tend to see more sale leasebacks in the industrial asset class.
And that's consistent with our portfolio. I mean, we're almost half of our total ABR is generated from industrial assets. And I think that you'll continue to see some over weight towards that asset class. That's it for us. Thanks guys.
You're welcome.
Thank you. Our next question comes from the line of Todd Stender from Wells Fargo. You are now live.
Thanks. You used to split the net lease assets between CPA funds and on balance sheet, several different metrics went into that, whether it was yield or lease term. But now that everything, at least the net lease will be on balance sheet, will you buy properties that once only qualified for the CPA funds on balance sheet? Just any color on your combined acquisition that was the primary investor for net lease that was the primary investor for net lease assets. Over the last couple of years when we've been investing on our balance sheet more prominently, it's mostly because CPA 17 was fully invested and some of the dry powder that we had in that fund as well as CP18, those were going more into operating assets such as self storage and student housing.
So the short answer is no, that won't change. We'll continue to evaluate all net lease assets as we always have and continue to grow our balance sheet that way. Okay. Thank you. And then just go ahead, sorry.
That was it.
All right. Can you give us the lease terms and cap rates, maybe I missed the cap rates, but at least the lease terms on the warehouse and Q3, Portugal, Netherlands, Wisconsin, looks like the warehouse and industrial stuff. The cap rates were in the high 6s, low 7s. We don't talk specifically or give detail to any specific deal. And then for year to date, we've mentioned that our weighted average cap rate was right around 7% for all of our transactions.
For those specific deals, it was kind of high-60s into the low-7s. Lease term on average for this year, weighted average is around 20 years as well. The Sonae transaction that we did in Portugal recently was a little bit shorter, a little bit north of 10 years for high quality logistics asset in a prime logistics park in Telkonet, Lisbon. It's pretty long. So no short term stuff, the Netherlands, Wisconsin property?
That's correct. That's all long term. Okay, great. Thank you. Thank you.
Thanks. Welcome.
Thank you. Our next question comes from the line of Sheila McGrath from Evercore ISI. You are now live.
Yes, good morning. CPA 17 closed and now the asset management business is much smaller. I'm just wondering how we should think about the timeframe that the remainder will wind down over? And can you remind us if there are any assets in CPA:eighteen
that would be accounted for GDP carry? Sure.
Thanks, Sheila. So yes, since our acquisition of CKS:seventeen, you're right, we have shifted our revenue stream significantly from what was about 80% contribution from real estate and 20% from I'm to where it is now, about 95% from real estate and 5% from I'm on a pro form a basis. So for all practical purposes, I'm segment really isn't contributing significantly, but there is some AUM to wind down. I would say timeline is over the next several years, but of course, it's up to the independent directors of those funds to make those decisions. CPA team, you asked that question.
It does have substantial net leased assets, I think, about $1,500,000,000 to $2,500,000,000 of assets, and we've assembled that portfolio the same as we have assembled all of our net lease assets.
And for the remaining funds, Jason, W. P. Carey would be eligible if you hit certain hurdle rates for a back end fee. Is that correct?
That's correct. That is part of the fee structure. I think you can look in the supplemental, which outlines in detail the fee structure associated with each of those funds.
Okay. And then, I apologize if you mentioned this already. I had to get on in progress. But the self storage assets that were part of CPA 17, are those assets currently on the market for sale or just what are your plans there?
Yes, you're right. Those are operating assets as opposed to the U Haul assets that we have owned in WPCR for a while. We're evaluating different options. We're comfortable holding those until we have the best option for us. And it's a strong portfolio.
As you know, storage is an asset class. It's in high demand. It's very liquid. So we'll have a lots of options. And I'd say stay tuned on what we end up doing there.
Okay, great. And then, I guess maybe this is for you, Tony. But the guidance, the new guidance implies about $1.32 for 4th quarter. That's still 4th quarter is not a good run rate because 1 month before the merger.
So I
was just wondering if factored into that implied guidance are additional structuring fees. And following up on that, we should assume structuring fees continue to go down relative to 'eighteen and 'nineteen. Is that correct?
That's right. I mean, I'll start with maybe the structuring revenue part of that. As we continue to manage the assets in those funds, we expect at least some level of capital recycling. We've done just over $12,000,000 year to date, and we're holding our range at about $15,000,000 to $20,000,000 Again, transactions can certainly close on either side of the year, given where we are in November. I think we would even expect that to come down further beyond this year, but we don't really have a specific number to give at this point.
In terms of an overall run rate for the 4th quarter, you're right that there's only 2 months of activity reflected there, so for QK17 being on balance sheet. So, I think in terms of how we think about it, I'd go back to maybe how we thought we mentioned it earlier in our prior calls where on an annualized basis, the CPA:seventeen management fee streams go away and that's to the tune of about 0.65 dollars to $0.70 of our AFFO on a full year annualized basis. The incremental AFFO that we earn from the real estate we've acquired offsets that by more than half or roughly $0.35 So that's kind of the full year. You can certainly extrapolate that to the last 2 months of the year. And that essentially translates to the $6,000,000 adjustment we made on our guidance range.
Okay. That's super helpful. Just last question for me. I think Tony, you did outline previously the guidance for 'eighteen on G and A, 65% to 70% and being on the higher end. Can you remind us that there would be a little bit of a pickup in G and A after acquiring CPA 'seventeen?
Can you just remind us what that magnitude was?
Sure. I think our cash G and A expense increases on an absolute dollar basis simply because we no longer collect the reimbursement from CPA:seventeen. So on a full year basis, that reimbursement was about $7,000,000 to $8,000,000 Our internal cost structure remains largely the same, while we absorb a 50% increase in our on balance sheet assets. And that model becomes very scalable such that we can add incremental assets with minimal to no increase in personnel going forward.
Okay. Thank you.
Thank you. Our next question comes from the line of John Massocca from Ladenburg Thalmann. You are now live.
Good morning. Good morning, John. Good morning, John. You said that $1,100,000,000 kind of run rate pro form a ABR you're giving in the presentation. Is that impact kind of known credit issues as the CPA-seventeen, maybe specifically AgriCore?
And has your view on AgriCore changed at all recently given some of the move they've made to settle some of the issues you've had?
This is Brooks. That's correct. That EBR number fully incorporates our view of the AgriCore portfolio. Just as a reminder, we fully underwrote a 50% haircut to contract rent on acquiring CP17, and we do expect that that will prove to be a conservative approach. So we're making good progress on restructuring negotiations with the tenant and we'll have more to report on that in the coming quarters.
And then again, Brooks, looking at Page 33, there's a warehouse property that had a pretty decent releasing spread down in terms of rent and some tenant improvements as well. You got a decent amount more lease term, but maybe just some color on what that
what situation is with those 2 properties 2 warehouse properties? Sure. So first to put it in the broader context for the quarter, we did recover 101% of the rent versus prior rent. So I think it's important to put that in the context of 2 specific assets were what we call tri temp warehouses, so freezer, cooler and dry leased to Reinhardt, which is a very large food distribution company. We've owned those assets for 20 years.
They had very attractive rent bumps throughout that period. The approach we took with this renewal was to extend them by about 10 years and we are evaluating those for sale. So we think that created a lot of value and it's a very good tenant and good properties, but it does did require a roll down for that particular long term lease extension. Okay. That makes sense.
And then as you guys kind of look at
the debt capital markets going forward, what do you think is your capacity for additional kind of euro on significant portion of your kind of debt stack today, maybe relative to what your kind of rents from Europe are, kind of thinking of the additional capacity you have
to be more euro denominated debt?
Yes. I think we obviously, you're highlighting we executed a €500,000,000 bond offering early in October with a fixed coupon of 2.25 and a 7.5 year term, and that did help us accomplish a number of important objectives, one of which you're referencing. We've created capacity and flexibility by reducing borrowings on our revolver that we used to fund our recent acquisitions. And we de risked our balance sheet by locking in a low fixed interest rate, while we also increased the natural hedge on our euro denominated assets. And this issuance brings us closer to our optimal balance sheet euro debt and euro assets, but still leaves us some capacity to further lever in euros in the short term to get back to our pre merger levels.
In terms of specifics, we'll monitor sort of the acquisition and disposition environment, but we do believe we have some room there.
Thank
you.
Our next question comes
from the line of Doug Christopher from D. A. Davidson. You are now live.
Thank you for taking my question and Just mentioning the early or the debt, how should we think about debt to EBITDA coming down over the next 8 quarters? Does it decline through debt coming down or repayment or through EBITDA moving higher? How should we think about that? Thanks.
Yes. I think just overall and maybe I'll give just kind of an overview on the balance sheet in general. While we review the transaction as deleveraging, it hasn't really changed our overall philosophy on how we manage the balance sheet. With debt to gross assets coming down to about the mid-40s, that remains in line with our leverage targets and gives us a little bit flexibility to work with. On a net debt to EBITDA basis, the shift in our earnings mix is up to about 6 times after the merger.
As we continue to replace the management fees with rental revenues, we expect that to come back down to under 6 times.
Thank you. Ladies and gentlemen, at this time, we have no further questions in queue. I would now like to hand the call back over to Mr. Sands. Thanks everybody for your interest in W.
P. Carey. If you have additional questions, please call Investor Relations directly on 212-492-eleven 10. That concludes today's call. You may now disconnect.