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 operative 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 third quarter 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 wpcarey.com, where it will be archived for approximately one year, and where you can also find copies of our investor presentations. 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, Toni Sanzone, our President, John 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:17. We had an accelerated timetable, and it's a tribute to the dedication and efforts of our employees who were able to achieve a full two months ahead of our original schedule. At closing, we issued 54 million shares in an all-stock deal, which has increased our market cap to approximately $11 billion and our enterprise value to a little over $17 billion, making us one of the largest REITs. The drivers of this transaction were 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 extended. 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 de-leveraging impact on a consolidated debt to growth assets basis. Because we assembled the CPA:17 portfolio and managed it for over a decade, we expect a swift and seamless integration of the assets. With that, let's turn to the third quarter. Toni 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 from 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-leasebacks to act. We are still seeing opportunities with sufficient spread to our cost 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 asset types, but the region's low interest rate environment continues to provide sufficient spreads. Interest rates will inevitably move higher, albeit slowly, yet capital inflows will likely keep cap rates low for some time.
Despite this market cap drop, we completed total investment volume of $296 million during the third quarter, consisting of four acquisitions for $260 million and three completed capital investment projects at a total cost of $37 million. This brings total investment volume for the first nine months of the year to $692 million. 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 the third quarter, so I will only briefly recap them here.
In July, we announced the $178 million acquisition of a portfolio of retail assets in the Netherlands, triple net lease to Intergamma, which is the country's number one do-it-yourself retailer. They're a critical portion of the company's assets, representing 80% of its retail footprint, and are on long-term triple net leases with rent bumps tied to Dutch CPI. Also in July, we completed two smaller transactions. The $23 million acquisition of a warehouse facility in the Netherlands that leads to the country's largest distributor of educational materials on a long lease with built-in rent growth tied to Dutch inflation. The second of the smaller deals was the $9 million 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 in a $50 million off-market transaction with Sonae MC, which is the country's leading food retailer. It is 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 a 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 million, primarily consisted of 2 completed build-to-suits.
1 was a $16 million 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 CPI indexed rent escalations. The other was a $15 million expansion in Florida for Nord Anglia, 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 million of capital investment projects underway, $73 million of which we expect to complete by the end of this year, will therefore be included in our 2018 investment volume.
This consists primarily of an additional $25 million build-to-suit expansion with Nord Anglia and a $45 million warehouse expansion project with Harbor Freight, which was part of the CPA:17 portfolio we acquired, and therefore does not appear in our third quarter supplemental. Completion of these 2 projects by year-end will bring total capital investment projects for 2018 to around $150 million. 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 than 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 million.
Toni 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 million square feet with approximately $12 million in ABR leased to Hellweg, 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 investment in Hellweg will be reduced from 4.4% to 3.3% of ABR on a pro forma basis.
In closing, the third quarter serves as a good example of the various avenues for growth currently available to us. Strong same-store growth contributed to higher earnings, 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 through both marketed and off-market deals and pursue discretionary capital investment opportunities with existing tenants. We've also completed our merger with CPA:17. In addition to the strategic and 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&A opportunities. 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 CPA:17 merger at the end of October. Our third quarter financial results and the portfolio information in our supplemental disclosure are of course all as of September 30th, which is before we closed our merger with CPA:17. We've provided pro forma 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 third quarter, 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 ABR is up over 5% to $714 million 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 CPA:17 portfolio very similar to our own. On a combined company basis, 65% of our ABR comes from leases with rent escalators linked to CPI, 31% comes from leases with fixed increases. Turning now to portfolio composition, which is pro forma for our merger with CPA:17. Our net lease portfolio now consists of almost 1,200 properties covering 133 million sq ft, net leased to 304 tenants, generating ABR of $1.1 billion. Occupancy remains high at 98.3%, and weighted average lease term is now 10.5 years.
As a result of our merger with CPA:17, we also now own a portfolio of 44 self-storage operating properties, from which we will earn approximately $26 million 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 10 concentration has come down from 31% to 24%, and the percentage of ABR 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 forma basis of September 30th, 44% of ABR 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 ABR, 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 ABR. Within that, concepts in the U.S. that we view as facing strong competition from e-commerce is extremely low, representing less than 1.5% of total ABR. Even then, over half of that comes from excellent retail locations. Turning now to our capitalization and balance sheet. The CPA: 17 transaction we closed this week was an all-stock acquisition. We issued 54 million shares, which has the impact of de-leveraging our balance sheet.
Our debt to gross assets will come down to around 45% from just over 50% at the end of the third quarter. Net debt to EBITDA will increase from 5.7 times at the end of the third 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 back 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 million 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 Eurobond 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 exposure to interest rate volatility, we currently have ample liquidity with over $1 billion of capacity on our revolving credit facility. Finally, moving on to 2018 guidance. As a result of the earlier-than-anticipated closing of our merger with CPA :17, we've adjusted our AFFO guidance for the full year to between $5.34 and $5.44 per diluted share to reflect the net impact of the merger, which closed two months ahead of our initial expectations.
This reflects the impact of the fees we ceased to earn from CPA: 17, which is partly offset by 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 million and $1 billion, having completed $692 million during the first nine months of the year. Dispositions completed year to date totaled $185 million, and we continue to make progress on our full-year disposition range of $300 million-$500 million. There are a few transactions in our disposition pipeline, including the subset of Hellweg retail properties that Jason referred to, which we currently expect to close by year-end, although timing could push into the first quarter.
For the full year, we continue to expect structuring revenue to be between $15 million and $20 million based on our current estimates for capital recycling within the managed funds. G&A expense is on pace with our previous guidance of $65 million to $70 million. With the CPA:17 transaction closing in October, we will likely end up closer to the high end of that range for 2018, reflecting the loss of reimbursements from CPA:17 for the remainder of the year. G&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 are pleased with our results thus far and excited about the accelerated execution of the CPA:17 transaction, including the seamless integration with our existing portfolio.
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&A session. If you would like to ask a question, please push star 1 on your telephone keypad. If you would like to withdraw your question, please push the star 2. One moment while we poll for questions. Our first question comes from the line of Manny Korchman from Citigroup. Your line is now live.
Hey, everyone. Good morning.
Morning, Manny.
Good morning, Manny.
Just thinking about your acquisitions target for the year. If I factor in the $73 million in capital projects you're expected to deliver, the fourth Q volume seems pretty light compared to what you've been doing. Am I thinking about that correctly?
Well, I think we've historically done transactions that are chunkier in nature. 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, I don't think any volume we do in the fourth quarter would have a significant impact on this year's guidance. It's certainly possible that transactions at this point would be more skewed towards the first quarter.
Thanks, Toni. 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?
Yeah, I think that it's a fair point. We're not giving 2019 guidance at this point. I think we evaluate our opportunity set in a number of ways, as Jason mentioned, and really look at our growth there. 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 a range to give at this point in time.
The last one from me. Given your comments on the sloppy acquisition markets or transaction markets, does the merger provide you opportunities for outsized dispositions compared to where you've been? You sort 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 opportunistically and risk management. CPA: 17's portfolio very much aligns with [Inaudible] long-term targets. It is important to note that next year we do have The New York Times purchase option, $250 million in the fourth quarter of 2019. That will skew next year's disposition up somewhat. 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 for Robert W. Baird. You are now live.
Hey, good morning, guys. This is William Harmon on for RJ. You guys mentioned that pricing still remains pretty aggressive for acquisitions. Just given that you have 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?
It's a good question. I mean, it's one of the benefits of diversification. 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. I mean, we can maintain a focus on those structures. It also allows us to get higher than market yields when there's a more complex component to deal up front. 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 Fragtmænd and Intergamma. I think going forward, it'll probably be a little bit more evenly balanced between the two. 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 a relatively large percentage of their total enterprise value. That tends to be companies in the manufacturing logistics space. Therefore, we tend to see more sale-leasebacks in the industrial asset class. That's consistent with our portfolio. I mean, almost half of our total ABR is generated from industrial assets, and I think that you'll continue to see some overweight towards that asset class.
That's it for us. Thanks, guys.
Welcome.
Thank you. Our next question comes from the line of Todd Sander 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. 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 strategy would be helpful. Thanks.
No, our strategy won't change. Really in the past, when we had raised CPA: 17, 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 been because CPA: 17 was fully invested and some of the dry powder that we had in that fund, as well as CPA: 18, those were going more into operating assets such as self-storage and student housing. 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. Then just Oh, go ahead. Sorry.
No, 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 industrial you purchased in Q3?
In where, I'm sorry?
The stuff you acquired in Q3. Portugal, Netherlands, Wisconsin. Looks like the warehouse and industrial stuff.
The cap rates were in the high sixes, low sevens. We don't talk specifically or give details on any specific deal. 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 sixes into low sevens. 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 just outside of Lisbon.
All right. Pretty long. No short-term stuff, the Netherlands, Wisconsin property?
That's correct. Those were all long-term.
Okay, great.
15 years plus.
Thanks.
Welcome.
Thank you. Our next question comes on the line of Sheila McGrath from Evercore ISI. You are now live.
Yes, good morning. CPA: 17 closed. 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. Can you remind us if there are any assets in CPA: 18 that would be a target for W. P. Carey?
Sure. Hi, Sheila. Yes, since our acquisition of CPA: 17, you're right, we have shifted our revenue stream significantly from what was about 80% contribution from real estate and 20% from IM, to where it is now, about 95% from real estate and 5% from IM on a pro forma basis. For all practical purposes, IM 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: 18, you asked that question. It does have substantial net lease assets. I think about a billion and a half to two and a half billion of assets. We assembled that portfolio the same as we have assembled all of our net lease assets.
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. I apologize if you mentioned this already. I had to get on in progress. 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?
Yeah, you're right. Those are operating assets as opposed to the U-Haul assets that we have owned in W. P. Carey for a while. We're evaluating different options. We're comfortable holding those until we have the best option for us. It's a strong portfolio. As you know, storage is an asset class that's in high demand. They're very liquid, so we'll have lots of options. I would say stay tuned on what we end up doing there.
Okay, great. I guess maybe this is for you, Toni, the new guidance implies about $1.32 for fourth quarter. That still fourth quarter is not a good run rate because one month is before the merger. I was just wondering if factored into that implied guidance are additional structuring fees. Following up on that, we should assume structuring fees continue to go down relative to 2018 and 2019. 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 there'll be some level of capital recycling. We've done just over $12 million year to date, we're holding our range at about $15 million-$20 million. 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, we don't really have a specific number to give at this point. In terms of an overall run rate for the fourth quarter, you're right that there's only two months of activity reflected there. For CPA: 17 being on balance sheet.
In terms of how we think about it, I'd go back to maybe how we mentioned it earlier in our prior calls, where on an annualized basis, the CPA:17 management fee streams go away, and that's to the tune of about $0.65-$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. That's kind of the full year. You can certainly extrapolate that to the last two months of the year. That essentially translates to the 6M adjustment we made on our guidance range.
Okay, that's super helpful. Just last question from me. I think, Toni, you did outline previously the guidance for 2018 on G&A, $65 million-$70 million and being on the higher end. Can you remind us there would be a little bit of a pickup in G&A after acquiring CPA:17? Can you just remind us what that magnitude was?
Sure. I think our cash G&A expense increases on an absolute dollar basis simply because we no longer collect the reimbursement from CPA:17. On a full year basis, that reimbursement was about $7 million-$8 million. Our internal cost structure remains largely the same while we absorb a 50% increase in our on-balance sheet assets. 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.
You guys get $1.1 billion kind of run rate pro forma ABR you're giving in the presentation. Is that impacted kind of known tenant credit issues with the CPA: 17 maybe specifically Agrokor, and has your view on Agrokor changed at all recently given some of the moves they've made to settle some of the debt issues they've had?
This is Brooks. That is correct. That ABR number fully incorporates our view of the Agrokor portfolio. Just as a reminder, we fully underwrote a 50% haircut to contract rent when acquiring CPA:17. We do expect that that will prove to be a conservative approach. We are making good progress on restructuring negotiations with the tenant, and we will have more to report on that in the coming quarters.
Okay. Again, Brooks, looking at page 33. There is a warehouse property that had a pretty decent releasing spread down in terms of rent and some decent tenant improvements as well. You got a decent amount more lease terms, maybe just some color on what the situation is with those two properties, the two warehouse properties.
Sure. First, to put it in the broader context for the quarter, we did recover 101% of the rent versus prior rent. I think it is important to put that into context. Those two specific assets were what we call tri-temp warehouses. Freezer, cooler, and dry leased to Reinhart, which is a very large food distribution company. We have 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. We think that created a lot of value. It is a very good tenant and good properties, but those did require a roll down for that particular long-term lease extension.
Okay. That makes sense. As you guys kind of look at the debt capital markets going forward, what do you think is your capacity for additional kind of EUR unsecured debt? It has become a significant portion of your kind of debt stack today maybe relative to what your kind of rents from Europe are. Just kind of thinking of the additional capacity you have to do more EUR-denominated debt.
Yeah, I think obviously you're highlighting we executed a EUR 500 million bond offering early in October with a fixed coupon of 2.25% and a 7.5-year term. 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. We de-risked the balance sheet by locking in a low fixed interest rate while we also increased the natural hedge on our euro-denominated assets. This issuance brings us closer to our optimal balance sheet euro debt and euro assets. It 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.
Understood. That's it for me. Thank you very much.
Thanks, John.
Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question, please push star one on your telephone keypad now. 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 congratulations on the early closing.
Thanks, Doug.
Hi. Just mentioning the early or the debt. How should we think about debt EBITDA and coming down over the next 8 quarters? Does it decline through a debt coming down or prepayment or through EBITDA moving higher? How should we think about that? Thanks.
Yeah, I think just overall, maybe I'll give just kind of an overview on the balance sheet in general. While we view the transaction as de-leveraging, 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 of flexibility to work with. On a net debt to EBITDA basis, the shift in our earnings mix brings us up to about six times after the merger. As we continue to replace the management fees with rental revenues, we expect that to come back down to under six times.
Thank you so much.
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 212-492-1110. That concludes today's call. You may now disconnect.