WP Carey Inc

NYSE:WPC

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, hello and welcome to WP 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.

[Peter Sands, Director of Institutional Investor Relations]

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.

And with that, I will hand over to our Chief Executive Officer, Jason Fox.

[Jason Fox, Chief Executive Officer]

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 have closed our merger with CPA:17. We had an accelerated timetable and we contribute to the dedication and effort of our employees who are able to achieve it a whole 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 $11 billion in an enterprise value to a little over $17 billion, making us one of the largest REITs. The driver to this transaction is for both strategic and tactical, as the large company we will operate more efficiently with the simplified business model and improved earnings mix.

We have 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 dividends, as well as having the deleveraging impact on the consolidated debt to grow assets basis. And because we assembled the CPA:17 portfolio and managed it for over a decade, we expect a swift and seamless integration of the assets.

So with that, let's turn to the third quarter. 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 a high level, year-over-year AFFO growth was driven primarily by higher real-estate revenues from new acquisitions and solid same-store growth keeping the very high percentage of ABR generated from leases with either fixed rent bumps or increases to high 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 phase of rising rates deal activity remains strong. Peak pricing coupled with rising rates is motivating corporate considering sale lease back to assets. So we are still seeing opportunities this sufficient spread to our cost to capital without having to compromise on deal terms.

While 10 rates have moved back above 3%, they remain low relative to historic levels and we believe the more sustained level of higher rates is needed before it has a meaningful impact on cap a 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 under pressure across asset types, but the regions low interest rate environment continues to provide sufficient spreads. Interest rates will heavily move higher, albeit be at slowing if capital inflows will likely keep cap rates low for some time.

Despite this market backdrop, 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 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 $178 million acquisition of a portfolio of retail assets in the Netherlands, triple net leased to Intergamma, which is the country's number one do-it-yourself retailer. They are critical portion of the company's assets representing 80% of its retail footprint and on long-term triple net leases with the rent bumps tied to Dutch CPI.

Also in July, we completed two smaller transactions, a $23 million acquisition of a warehouse facility in the Netherlands, net leased 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 and $50 million off market transaction was still in IMC 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 of escalations tied to inflation at a remaining term of over 10-years. The property is situated on a large parcel of land with substantial building rates providing potential future expansion opportunities and the lease term expansion typically accompany them.

Three capital investment projects we completed during the quarter at a total cost of $37 million primarily consisted of two completed build-to-suite. One was $16 million Class A warehouse industrial facility in Poland that will serve at the central distribution hub for Ontex, which is a leading international manufacturer of personal hygiene products. Its triple net lease with a 15 year lease term, and CPI index rent escalations.

The other was a $15 million expansion in Florida for Nord Anglia, a leading global operator of Kindergarten till 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 expansion includes annual on cap CPI based rent increases.

On a combined basis, we currently have closed to $170 million of capital investment projects underway. $73 million of which we expect to complete by the end of this year and will therefore we included in our 2018 investment volume.

This consist primarily of an additional $25 million built-to-suite expansion with Nord Anglia and $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 projects by year-end will bring total capital investment projects for 2018 to around $150 million. Internal deals for 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.

Expansion also add criticality to the original asset and allow us to extended its lease term. For example, the expansions we expect to complete this year have added approximately four years of incremental lease term to existing assets with ABR of $24 million.

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 eight retail properties totaling just over one million square feet in approximately $12 million in ABR leased to Hellweg, which is a junior self retailer in Germany and largest overall tenant.

We continue to view the junior self space as well position to compete with ecommerce. Earlier this year modified the leases extended their term to 19 years, 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 quarter serves as a good example of the various avenues for 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 through both marketed and off-market deals and pursue discretionary capital investment opportunities with the existing tenants.

We have also completed our merger with CPA:17. In addition to the strategic and portfolio benefit to the transaction, our increased size provides us with the lighter pool of internally sourced investment opportunities, as well as enabling not to pursue larger portfolio deals and potential M&A opportunities.

And with that, I will hand the call over Toni Sanzone.

[Toni Sanzone, Chief Financial Officer]

Thank you, Jason. I will touch on our results for the quarter followed by some highlights from our portfolio and balance sheet. Lastly, I will give an update on how we are tracking towards full-year guidance, after taking into account the impact of closing CPA:17 merger at the end of October.

Our third quarter financial results and the portfolio information in our supplemental disclosure are off course all as of September 30th which is before we closed our merger with CPA:17. We have 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 $1.48 through 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 rents 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 going to CPI and 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 consist of almost 1200 properties covering 133 million square feet net lease 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 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 type also remains well diversified and aligned with our premerger portfolio. On a pro forma basis at September 30, 44% of ABR came from industrial property, primarily light manufacturing, warehouse and logistics assets. Office comprises 25%, which we expect to be reduced for example through the exit by the purchase option of 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 dealership, which we view as less exposed to the affect from ecommerce. 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 is facing strong competition from ecommerce is extremely low representing less than 1.5% of total ABR, and 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 deleveraging 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 six times although we expect that to decrease overtime.

While secured debt to gross assets will increase from 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 in 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 €500 million offering of senior unsecured note at 2.25% that we completed in early October. We have a long-term goal of mitigating Euro currency risk just for the euro bond issuance.

This leave us to offering help partially fund recent European acquisitions while also making progress toward 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 latter series in debt maturity with limited exposure to interest rate volatility and we currently have ample liquidity with over $1 billion of capacity on our revolving credit facility.

And finally moving onto to 2018 guidance. As a result of the earlier than anticipated closing of our merger with CPA:17, we have 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 expectation.

This reflects the impact of the fess we seek 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 to $500 million. There are few transactions in our disposition pipeline, including the sub set of how retail properties that Jason referred to, which we currently expect to close by yearend, although timing could put 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 estimate for capital recycling within the managed fund. DNA expense is on pace with our guidance of $65 to $70.

With the CPA:17 transaction closing in October, we will likely end up closing in 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 growth assets have been reduced significantly as a result of the merger and more importantly will now benefit greatly from the inherent scalability of our business. Overall, we are pleased with our results thus far and are excited about the accelerated execution of the CPA: 17 transaction, including the seamless integration with our existing portfolio.

And with that, I will the hand call back to the operator to take questions.

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of Manny Korchman from Citigroup. Your line is now live.

[Emmanuel Korchman, Citigroup Inc.]

Just thinking about your acquisitions target for the year, if I'm factoring the $73 million of capital projects you are expected to deliver but 4Q volume seem pretty light compared to what you have been doing, am I thinking about that incorrectly?

[Toni Sanzone, Chief Financial Officer]

I think we have historically done transactions that are chunkier in nature and we certainly closed some big portfolios that 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 think any volume we do in the fourth quarter would have the significant impact on this year's guidance, but it's certainly possible the transactions at this point would be more skewed towards the first quarter.

[Emmanuel Korchman, Citigroup Inc.]

And on the with 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.

[Toni Sanzone, Chief Financial Officer]

Yes, I think that it's a fair point. We are not giving 2019 guidance at this point time, as if we evaluate our opportunities set in a number way that 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.

[Emmanuel Korchman, Citigroup Inc.]

And the last one from me, given your comments frothy acquisition markets or transaction markets, does the merger provides you opportunities for outsize dispositions compared to where you have been you sort kind of mentioned about storage, but anything else there that you would think about that leads to bigger disposition volumes.

[Brooks Gordon, Head of Asset Management]

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 are looking to improve the portfolio, it’s a combination of harvesting value opportunistically and risk management.

CPA:17s portfolio very much align with WP Carey’s long-term targets. It is important to note that next year we do have the New York Times purchase option for $250 million in the fourth quarter of 2019. So that will skew next year’s dispositions up somewhat. But we don’t expect our approach to disposition to change materially.

[Emmanuel Korchman, Citigroup Inc.]

Thanks everyone.

[Operator]

Our next question comes from the line of R.J. Milligan from Robert W. Baird. You are now live.

[William Harman, Robert W. Baird]

This is Will Harman on for R.J.. 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?

[Jason Fox, Chief Executive Officer]

Yes. It’s a good question. It’s one of the benefits of diversification who 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 best risk return at that particular time.

In a market that is competitive like we are seeing right now and that is both in the U.S. and Europe. We are still focused on sale leasebacks and built-to-suits and structural 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 our focus on the restructures.

It also allows us to get higher than market yields when there is a more complex components to deal front, it doesn’t mean the deal is anymore complex once its closed. In terms of geographies, for the year we have been most skewed towards Europe given some larger portfolio transactions that we have done, including Danske Freight and Intergamma. I think going forward it will probably be a little bit more evenly balanced between the two.

And then in terms of asset types, especially when we are 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 tend to be companies in the manufacturing logistics space.

So therefore, we tend to see more sale leasebacks in the industrial asset class and that is consistent with our portfolio I mean we are almost half of our total ABR is generated from industrial assets and I think that should continue to see some overweight towards that asset class.

[William Harman, Robert W. Baird]

That is it’s for us. Thanks guys.

[Operator]

Our next question comes from the line of Todd Stender from Wells Fargo. You are now live.

[Todd Stender, Wells Fargo Securities]

Thanks. The usage split the net lease assets between CPA funds and on balance sheet several different metrics winning to that whether it was yield or lease term, but now that everything at least in 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 will be helpful? Thanks.

[Jason Fox, Chief Executive Officer]

No, I mean 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 have been investing on our balance sheet more prominently it's mostly been cut CPA:17 was fully invested and some of the dry powder that we had in that fund as well CPA:18, those were growing more into operating assets, such self storage and student housing. So the short answer is no, that won't change, we will continue to evaluate all net lease assets as we have and continue to grow our balance sheet that way.

[Todd Stender, Wells Fargo Securities]

Okay. Thank you. Can you give us the lease terms in cap rates maybe I missed the cap rates, but at least the lease terms on the warehouse in industrial you purchased in Q3?

[Jason Fox, Chief Executive Officer]

In where I’m sorry?

[Todd Stender, Wells Fargo Securities]

The stud you acquired in Q3 Portugal, Netherlands, Wisconsin looks like the warehouse and industrial stuff?

[Jason Fox, Chief Executive Officer]

Cap rates were in the high sixes, low sevens, we don’t talk specifically or give details on any specific deal. And then for year-to-date we have mentioned that our weighted average cap rate was right around 7% for all of our transactions, but for those specific deals it was kind of high sixes into the 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 shorter, a little bit north of 10-years for high quality of logistics asset in a prime logistics park outside of Lisbon.

[Todd Stender, Wells Fargo Securities]

Alright, pretty long. So no short-term stuff the Netherlands, or the Wisconsin property.

[Jason Fox, Chief Executive Officer]

That's correct. Those were all long-term. 10-years plus.

[Todd Stender, Wells Fargo Securities]

Thanks.

[Operator]

Our next question comes from the line Sheila McGrath from Evercore ISI. You are now live.

[Sheila McGrath, Evercore ISI]

Hey 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 but the remainder will wind down over and can you remind us is there any assets in CPA:18 that would be a target for W.P. Carey.

[Jason Fox, Chief Executive Officer]

Sure, hi Sheila. So yes, since our acquisition of CPA:17 we have shifted our revenue streams significantly from it was 80% contribution from real-estate in 20 from IM to where it is now about 95% from real-estate and 5% from IM on a pro forma basis.

So for all practical purposes IM segment really is contributing significantly, but there is some AUM to wind down and I would say timeline is over the next several years 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 1.5 billion to 2.5 billion of assets and we assemble that portfolio the same as we have assembled all of our net lease assets.

[Sheila McGrath, Evercore ISI]

And for the remaining funds Jason that W.P. Carey would be eligible if you hit certain hurdle rates for a back entry, is that correct?

[Jason Fox, Chief Executive Officer]

That is 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.

[Sheila McGrath, Evercore ISI]

Okay, and then I apologize if you mentioned this already, I have 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?

[Brooks Gordon, Head of Asset Management]

Yes, you are right. Those are operating assets as oppose to the U-Haul assets that we have owned in W. P. Carey for a while. We are evaluating different options, we are 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 an high demand very liquid. So lots of options and I would say stay tuned on what we end up doing there.

[Sheila McGrath, Evercore ISI]

Okay, great. And then I guess maybe this is for you Toni. The new guidance implies about $1.32 for fourth quarter. That is still fourth quarters not a good run rate, because one 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 2018 and 2019 is that correct?

[Toni Sanzone, Chief Financial Officer]

That is right. I mean I will start with the restructuring revenue part of that. As we continue to manage the assets and those funds we expect there will be some of level of capital recycling. We have done just over 12 million year-to-date and we are holding our range at about 15 million to 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, but we don’t really have the specific number to give at this point.

In terms of overall run rate for the fourth quarter, you are right that there is only two months of activity reflected there. So CPA:17 being on balance sheet. I think in terms of how we think about it I will go back to maybe how we thought we mentioned it earlier in prior calls, on an annualized basis the CPA:17 management fee stream go away and that is the tune of about $0.65 to $0.70 of our AFFO on a full-year annualized basis.

The incremental AFFO that we earn in the real estate lease we have acquired offset that by more than half or roughly $0.35. so that is kind of the full-year, you can certainly extrapolate back to the last two months of the year and that essentially translates to the $0.06 adjustment we made on our guidance range.

[Sheila McGrath, Evercore ISI]

Okay, that is super helpful. Just last question for me. I think Toni you did outlined previously the guidance for 2018 on G&A 65 to 70 and beyond the higher end. Can you remind us, there would be a little bit of pickup in G&A after acquiring CPA:17. Can you just remind us what that magnitude was?

[Toni Sanzone, Chief Financial Officer]

Sure, I think our cash G&A expense increases on absolute dollar basis simply because we no longer collect the reimbursement from CPA:17. So on a full-year basis that reimbursement was about $7 million to $8 million. Our internal cost structure remains largely the same while we absorb the 50% in our on balance sheet assets. And you know that model becomes very scalable such that we can add incremental assets with minimal to no increase in personal going forward.

[Sheila McGrath, Evercore ISI]

Okay. thank you.

[Operator]

Thank you. Our next question comes from the line of John Massocca from Ladenburg Thalmann. You are now live.

[John Massocca, Ladenburg Thalmann]

Good morning, as we look at that 1.1 billion run rate pro forma ABR you are giving in the presentation does that include the impact of kind of known tenant issues at CPA:17 maybe specifically Agricore and has your view on Agricore changed at all recently given some of the move they have made to settle some of the debt issues they had?

[Brooks Gordon, Head of Asset Management]

This is Brooks. That is correct, that ABR number fully incorporates our view of the Agricore portfolio. Just as a reminder we fully underwrote a 50% share cut to contract rent when acquiring CPA:17 and we do expect that that will prove to be a conservative approach. So were making good progress on restructuring negotiations with the tenant and we will have more to report on that in the coming quarters.

[John Massocca, Ladenburg Thalmann]

And then looking on Page 33 those warehouse property that had a pretty decent releasing spread down in terms of rent and at least in that tenants improvement as well, you got a decent that more lease term, but maybe just some color on what situation is of those properties, those two warehouse properties.

[Brooks Gordon, Head of Asset Management]

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 into context, those two specific assets what we call tri-temp warehouses, so freezer, cooler and dry leased to Reinhart, which is a very large food distribution company.

We don’t know the assets for 20 years, they have very attractive rent bumps throughout that period, and the approach we took with this renewal was to extend them by about 10-years and we are evaluating those for sales. So we think that created a lot of value and it’s a very good tenant and good properties, but those did require a roll down for that particular long-term lease expansion.

[John Massocca, Ladenburg Thalmann]

Okay, that makes sense. And then if you kind of look at the debt capital markets going forward what do you think your capacity for additional kind of euro unsecured debt. It's kind of significant portion of your debt fact today maybe relative to what your kind of rents from Europe was but just kind of thinking as the additional capacity you have to be more euro denominated debt.

[Toni Sanzone, Chief Financial Officer]

Yes, I think we obviously you are highlighting we executed a €500 million bond officering early in October with a six coupon up two in the quarter and its 7.5 term and that did help us accomplishing number of important objectives one of which you are referencing.

We created capacity and flexibility and by reducing the borrowings on our revolver that we use to fund our recent acquisitions and we do risk our balance sheet by locking in a low fixed interest rates while we also increased the natural hedge on our euro denominated assets.

In this issuance when it is closer to our optimal balance to euro debt and euro assets, but still needed some capacity to further levering Euros in the short-term if you get back to our three merger levels.

In terms of specifics, we will monitor sort of the acquisition and disposition environment, but we do believe we have some room there.

[John Massocca, Ladenburg Thalmann]

Understood. That is it from me. Thank you very much.

[Operator]

Thank you. [Operator Instructions] Our next question comes from the line of Doug Christopher from DA Davidson. You are now live.

[Doug Christopher, DA Davidson]

Hi thank you for taking my question and congratulations on the really closing. Just mentioned in the early the debt, how should we think about debt to EBITDA, it would be coming down over the next eight quarters. Does it decline through a debt coming down or repayment or through EBITDA moving higher, how should we think about that? Thanks.

[Toni Sanzone, Chief Financial Officer]

Yes, I think just overall I mean you will get just kind of an overview on the balance sheet in general while we view the transaction as deleveraging and hasn’t really changed our overall philosophy on how we manage the balance sheet. So with debt to growth assets coming down to about the mid-40 that remains in-line with leverage target and give this is a little bit of flexibility to work with.

On net debt to EBITDA basis, the shift in our earnings mix it will bring this up to about six times after the merger. But as we continue to replace the management fees with rental revenues, we expect that come back down to under six times.

[Doug Christopher, DA Davidson]

Thank you so much.

[Operator]

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.

[Peter Sands, Director of Institutional Investor Relations]

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.