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W. P. Carey Inc. (WPC) Q2 2019 Earnings Call Transcript

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W. P. Carey Inc. (NYSE: WPC)
Q2 2019 Earnings Call
Aug 2, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello and welcome to WP Carey's Second Quarter 2019 Earnings Conference Call. My name is Kevin and I'll be your operator today. [Operator Instructions]. I will now 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. Thank you for joining us today for our 2019 Second Quarter Earnings Call. Before you begin, 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 WP 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'll hand over to Jason Fox, Chief Executive Officer.

Jason E. Fox -- Chief Executive Officer

Thank you, Peter, and good morning everyone. We have an active second quarter, which included creatively converting the bulk of our operating self-storage assets to net leases, selectively adding several industrial properties and successfully accessing the capital markets, all of which I'll go through in my remarks this morning. Then, I'll hand it over to our CFO, Toni Sanzone to review our second quarter results, guidance and balance sheet. And after that, we'll take questions along with our President, John Park and our Head of Asset Management, Brooks Gordon who are joining us on today's call. Starting with the investment backdrop, Central Banks both in the US and Europe have signaled their intentions to keep interest rates low, that they may go even lower if global growth continues to slow.

The search for investment yield has kept demand for net lease assets high. And while this means that our portfolio is more valuable than ever, it has also kept the acquisition environment very competitive. Within industrial and logistics, which continues to be sought after asset classes, our long-standing presence and sale leasebacks in ability to provide certainty of close ensured we continue to see a significant number of opportunities, executing on those that met our underwriting criteria. Given our improved cost of capital, an increased number of higher-quality industrial assets at tighter CAP rates provides sufficient spread to be accretive and we are actively bidding on deals we like.

Other property types presented a good number of opportunities, but ultimately their deal structures do not provide an adequate risk return trade off. We are unwilling to accept shorter lease terms in office for example, and remain very selective in retail, which we view as generally unattractive as it continues to adjust to the disruption from e-commerce. Amid this backdrop, we completed $155 million of investments during the quarter.

This comprise for industrial sale leasebacks totaling $124 million, supported by strong tenant businesses and providing good rental growth and completion of three capital investment projects at a cost of $32 million. I'll briefly review some of the more notable deals. The largest of our second quarter investments was the $70 million sale leaseback of an operationally critical food production and distribution site in Pennsylvania totaling more than 400,000 square feet, net leased to Turkey Hill and industry leading supplier of ice cream and beverages.

This is a triple net lease with a 25-year term and fixed annual rent escalations. The site is powered entirely by renewable clean energy sources and the tenant has implemented green initiatives to eliminate waste and minimize it's environmental impact. So in addition to being an accretive transaction, we're pleased to add this environmentally responsible property to our portfolio. We also completed the $24 million sale leaseback of eight production facilities totaling 525,000 square feet located in the US and Mexico, net leased to a global supplier of electrical components. The tenant is a market leader, generating about $1 billion in annual sales to a diverse customer base.

The mission critical properties represent a significant portion of the tenant's North American manufacturing footprint. The portfolio is triple net leased for 20 years under master leases by country and denominated entirely in US dollars with annual rent escalations tied to US CPI, and we closed a $19 million sale leaseback of a 300,000 square feet warehouse and light manufacturing facility just outside of Charlotte, North Carolina.

The property is net leased to a leading supplier of sports uniforms, performance athletic wear and fan wear. The facility is triple net leased for 20 years with annual uncapped CPI rent increases. Our second quarter investments had a weighted average cap rate of 7.1%, providing a healthy spread to our cost of capital. We also achieved long lease terms with a weighted average of 20 years in conjunction with our recent leasing activity. This had a positive impact on the overall weighted average lease term of our portfolio, which ended the quarter at 10.4 years. These transactions brought our first half investment volume to $395 million and since quarter-end, we completed two additional investments totaling $45 million, bringing our total investment volume year-to-date to $440 million.

The Increased size of our portfolio remains a good source of investment opportunities for us, including build-to-suits. We ended the quarter with six capital investment projects outstanding for an expected total investment of approximately $184 million of which we expect to complete four projects totaling $96 million this year in addition to what has already been delivered year-to-date. In many respects, the most meaningful addition to our net lease portfolio during the quarter was the transaction we entered into with Extra Space Storage under which 36 operating self-storage properties acquired in our merger with CPA 17 will be converted to net leases. As we said at the time, this creative transaction represents a win-win for both companies. For WP Carey, it allows us to maintain growing income from self-storage with rent increases expected to exceed same-store growth from our existing portfolio.

In a structure that minimizes our exposure to the capital expenditures associated with this business and it adds certainty to our cash flow streams, consistent with our focus on being a pure play net lease REIT. More broadly, it also emphasizes the potential of self-storage as a source of net lease investment opportunities for us, as operators look to take a more asset light approach. We know the asset class well, having invested in it for over 15 years and have a team of people focused on sourcing net lease investments within self-storage. Since announcing this transaction, I'm pleased to say that extra space has received an investment-grade rating from S&P, which will show up in our third quarter metrics as a boost to the percentage of ABR of from investment grade tenants. In giving the timing of the conversions, we also expect extra space to rank among our top 10 tenants, next quarter.

So in summary, this transaction added an investment grade tenant to our net lease portfolio with strong rental growth on a 25-year lease term. Turning briefly to our capital markets activity during the second quarter, we have been deleveraging since the start of the year and during the second quarter further utilized our ATM program to efficiently raise equity capital. We also successfully completed our 8th offering of senior unsecured notes with our recent US bond issuance, raising $325 million at a coupon of 3.85% for a 10-year term.

We saw strong institutional interest pricing at the tightest spread and at the lowest coupon of our US bond offerings to date. This was an excellent outcome for us highlighting our improving credit profile, as well as our ability to access a variety of capital markets as a regular issuer of both US dollar and Euro investment grade bonds. In closing, we're focused on utilizing the cost of capital advantage we've established to enhance our investment spreads and access a wider set of acquisition opportunities, while continuing to mine our large and diverse portfolio for following opportunities with existing tenants.

In aggregate, investments we've completed year-to-date and the capital projects, we expect to complete this year total close to $540 million. On top of this, the transaction we entered into with extra space once fully converted will add close to $0.5 billion of self-storage assets to our net lease portfolio. Equally, we're focused on the other side of the balance sheet and the importance of maintaining access to diverse sources of capital in order to fund our growth.

And with that, I'll hand the call over to Toni.

Toni Sanzone -- Managing Director, Chief Financial Officer

Thank you, Jason, and good morning everyone. This morning we announced AFFO of $1.22 per share for the 2019 second quarter with 96% or $1.17 per share generated by our core real estate segment. Annualized base rent or ABR grew to just over $1.1 billion at quarter end, primarily reflecting our second quarter investments and leasing activity and same-store rent growth of 1.6% year-over-year.

The majority of our second quarter investments were completed toward the end of the period, so their impact will be fully reflected in lease revenues beginning in the third quarter and we also expect our same store to bump up in the third quarter driven by a scheduled rent increase from one of our largest tenants. As Jason discussed our year-to-date investment volume through today totaled $440 million and we currently have about 100 million of capital investment projects scheduled to be completed during the remainder of this year.

Our near term pipeline remains active and we continue to expect our full year investment volume to be in line with our guidance assumptions. During the second quarter, we sold five industrial properties for gross proceeds of $17 million bringing dispositions for the first half of the year to $22 million. For the full year, we continue to anticipate total dispositions of between $500 to $700 million. The majority of which are expected to close toward the end of the year, including two larger dispositions in the fourth quarter comprising The New York Times repurchase and the anticipated sale of one of our two remaining operating hotel properties Which is currently under contract.

Turning to leasing activity, we were extremely active on the asset management front during the second quarter with releasing activity impacting about 3% of ABR. We executed 28 lease renewals and extensions with existing tenants that in aggregate recaptured just over 100% of the prior rent and added just over eight years of incremental weighted average lease term. Most significant was the restructuring of the [Indecipherable] portfolio, which comprises 23 grocery stores and one warehouse property acquired in our merger with CPA 17. Under the restructuring, we reached agreement with the tenant on new rents for 19 properties increasingly ABR associated with those properties from $10.1 million to $15.4 million and extending their lease term to 15 years.

We also reached agreement to collect approximately half of the prior unpaid rent with about $7 million expected to be recognized in the second half of 2019 and $4.5 million in early 2020. These recoveries will flow through lease termination income and other revenues, which is where we typically capture lease related payments resulting from past recoveries and terminations. We expect this line item to trend higher in the third and fourth quarters resulting from these payments as well as certain other lease related settlements that are nearing completion, all of which has been reflected in our guidance range. In terms of new leasing activity, during the second quarter, we entered into 31 new leases on existing properties with a weighted average lease term of 24 years, driven primarily by the transaction we entered into with Extra Space Storage.

On June 1st, 22 self-storage operating assets were converted to net leases with ABR $13.6 million. An additional five properties were converted on August 1st with ABR $5.9 million. As a result, you will see the partial quarter impact of the increase in lease revenues in both the second and third quarters, along with an associated decrease in operating revenues and expenses. The remaining nine properties will convert to net leases as they become stabilized over the next few years. And as a reminder, we continue to operate 10 self storage properties, which were not part of the transaction with extra space. Those assets are performing well and we continue to generate operating revenues and expenses while we evaluate alternatives for them.

Moving to our capital markets activity, we further utilized our ATM program during the second quarter efficiently raising $88 million at a weighted average stock price of $80.33 per share. This brought our first half ATM issuance to $392 million at a weighted average price of $77.06 per share. The impact of ATM issuance during the first half of the year will be fully reflected in our third quarter diluted share count, which we expect to be approximately 172 million shares, assuming no further ATM activity.

As Jason mentioned during the second quarter, we also successfully completed the US bond issuance, raising $325 million with a maturity of 10 years and a coupon of 3.85%, which is well below the 5.1% weighted average interest rate on the mortgages we prepaid during the first half of the year. We continue to actively reduce mortgage debt during the second quarter primarily through $294 million of prepayments bring total mortgage prepayments during the first half of the year to $493 million. Secured debt as a percentage of gross assets was 14.7% at the end of the second quarter, down from 18.3% at the end of 2018 and we remain focused on continuing to find new opportunities to prepay mortgages and further reduce that percentage over time. Our capital market's activity over the course of this year has further strengthened our balance sheet with leverage levels currently at the low end of our targeted range. While this activity has a moderate near-term impact on earnings, it also positions us extremely well to execute on our acquisition plans and drive long-term AFFO growth going forward.

In the second half of the year, we expect acquisitions to largely be funded by disposition proceeds and a revised guidance range currently seems no additional equity or bond issuance in 2019. We will continue to monitor market conditions along with the timing of our capital needs and remain well positioned to act opportunistically.

Turning briefly to our Investment Management segment, we expect to continue to earn asset management fees on the remaining non-traded funds until their ultimate liquidations at run rates generally consistent with the second quarter. Structuring and other advisory revenue was negligible both to the second quarter and is expected to be insignificant going forward.

Turning quickly to expenses, G&A expense for the second quarter was $19.7 million. As certain compensation related costs such as payroll taxes are weighted in the first half of the year, we expect G&A to trend lower in the second half and for the full year, we continue to expect G&A to be between $75 and $80 million and lastly, as we announced this morning, we have narrowed our 2019 AFFO guidance range to between $4.95 and $5.05 per share including real estate AFFO between $4.70 and $4.80 per share, primarily reflecting our expectations for acquisition timing as well as the deleveraging of our balance sheet this year.

Given our diversified approach in current pipeline, we continue to anticipate that we will complete between $750 million and $1.25 billion of investments this year noting the tenancy for deal closings to pick up into year-end. We remain confident about both our short-term and long-term outlooks and our ability to generate growth through our existing portfolio and new acquisitions while maintaining a strong and flexible balance sheet.

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

Questions and Answers:

Operator

[Operator Instructions]. Our first question today is coming from the line of Spenser Allaway from Green Street Advisors. Your line is now live.

Spenser Allaway -- Green Street Advisors -- Analyst

Hi, thank you. Could you, maybe can provide some color on the disposition pricing in the quarter, perhaps just like an average CAP rate and then maybe how these came about, are these reverse inquiries or are these opportunistic sales?

Brooks G. Gordon -- Managing Director, Head of Asset Management

Good morning, this is Brooks. While we won't comment on specific CAP rates for this quarter, I can tell you for the year we expect our average disposition CAP rate roughly in line with acquisition, so in and around 7%. These particular deals were pretty small, one with a small purchase option of industrial property in Las Vegas and the other four was actually put option of some printing facilities, which the tenant bought back.

Spenser Allaway -- Green Street Advisors -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question today is coming from Tony Paolone from JP Morgan. Your line is now live.

Anthony Paolone -- JP Morgan -- Analyst

Yeah, thanks. Can you talk about, just first half deal flow and whether it came in above or below expectation in terms of like the stuff that you all looked at or did you feel your hit rate was out of the ordinary, just trying to understand sort of back-end loading as we get through the year here on the transaction side?

Brooks G. Gordon -- Managing Director, Head of Asset Management

Yeah, sure. Good morning, Tony. As Tony mentioned, we feel like we're on good pace for this year, the first half of acquisitions. It was around $450 million closing to date, so that included in two deals that closed after quarter end that you won't see in the supplemental yet. It was focused more on industrial, I think year-to-date by 80% of what we purchased has been industrial. We certainly continue to value diversification and look at a wide range of opportunities, but industrial ware is where we've seen better opportunities. I think they had almost all been sale leaseback, certainly in the second quarter and what we've closed since quarter-end. They've all been sale leaseback, so that's a typical team structure transactions where we can get some incremental yield.

They have also all been in the US. The pipeline has picked up some in Europe, but given how low rates have moved in Europe there has been some more meaningful CAP rate compression and more capital inflows looking for kind of the stability of net lease. We do expect to do some deals there, but it has become a little bit more competitive. I think Tony, you also mentioned that we tend to see a pickup in deals going toward year-end. So again, we're optimistic about our acquisition range. And then lastly, we also have a number of what we call capital investment projects, expansions in some build-to-suits that are currently under construction, that once complete will flow through our rental income and will be part of our acquisition volume for the year.

Anthony Paolone -- JP Morgan -- Analyst

And as you look into the rest of the year, do you think that bent toward US and industrial will continue to be the case.

Brooks G. Gordon -- Managing Director, Head of Asset Management

I do. I think that's where our pipeline is a little bit more weighted right now. I do think that we'll do some European deals this year that we have in year-to-date or nothing significant size for that matter. So that will change, but I think by and large, it's still will be weighted toward the US and toward industrial And probably toward sale leasebacks as well.

Anthony Paolone -- JP Morgan -- Analyst

Okay. And then maybe a question for Toni. If we think about just the capital sourcing use that you talked about and you have New York Times coming out, what do you think net debt to EBITDA lands at the end of the year when you factor all these things in?

Toni Sanzone -- Managing Director, Chief Financial Officer

I think that is one that moves around, again depending on the quarter activity. We see that trending downward with the ramp up in earnings as the year progresses, continuing kind of our debt strategy where we are now. So I do see that coming down a bit toward the end of the year, but still within the range is what we're expecting, and I think we normally highlight our target range in the mid to-high five times.

Anthony Paolone -- JP Morgan -- Analyst

Okay. So the 5-8 in the last couple of quarters maybe comes down a little bit, but you're not probably go into the low 5 as it sounds like.

Toni Sanzone -- Managing Director, Chief Financial Officer

Right and any movement again could be temporary, could go up and down in any one quarter, but we do see that trending down slightly for the back half of this year.,

Anthony Paolone -- JP Morgan -- Analyst

Okay, great. Thank you.

Brooks G. Gordon -- Managing Director, Head of Asset Management

Welcome.

Operator

Thank you. Our next question is coming from Emmanuel Korchman from Citi. Your line is now live.

Emmanuel Korchman -- Citi -- Analyst

Hey, good morning everyone.

Brooks G. Gordon -- Managing Director, Head of Asset Management

Good morning. [Speech Overlap].

Emmanuel Korchman -- Citi -- Analyst

Toni, the lease term, and other revenue item that you ran through in your opening remarks, were those already included in prior guidance, are those incremental to sort of the information you gave us previously?

Toni Sanzone -- Managing Director, Chief Financial Officer

Those had already been baked in at some degree. I think, at the beginning of the year, we had line of sight to the activity that we expected this year. I would say we refined that as the year progressed and certainly the [Indecipherable] done, that's a big portion of that. So, I would say it was certainly contemplated when we went into the guidance range this year.

Emmanuel Korchman -- Citi -- Analyst

Okay, and then in terms of the ATM issuance, it looks like the majority of that was concentrated in April, but the stock has certainly moved up since then. So, how did you think about the ATM issuance and so why didn't you guys issue more into the more recent strength in the stock?

Toni Sanzone -- Managing Director, Chief Financial Officer

Well, I think we look at the uses of capital as well, and we did identify a fair amount of mortgages that we could prepay fairly efficiently in the early part of this year. I'm continuing to look to look for those opportunities, but I would say that in large part we are trying to match with uses of capital. So bringing down the line, we also had the bond offering in the middle of the quarter as well. So factoring that in, I think we're just mindful of what the sources and uses of cash are at any one point in time and just balancing that out over the year.

Emmanuel Korchman -- Citi -- Analyst

Great. Thanks, Toni.

Operator

Thank you. Our next question today is coming from Todd Stender from Wells Fargo. Your line is now live.

Todd Stender -- Wells Fargo -- Analyst

Thanks. And ,just to kind of stay on that theme of the permanent capital, you've been more conservative you've tapped and being opportunistic, but you've tapped the ATM and the bond market as opposed to running up your line balance, which you could have gotten a little more accretion. I guess. Is that kind of the push and pull which you have to decide in the quarter, which ultimately I guess brought down your AFFO guidance at the high end?

Toni Sanzone -- Managing Director, Chief Financial Officer

Yeah, I think we're certainly always mindful of the dilution impact, but we do look to run with the most amount of flexibility that we can give ourselves to fund acquisitions in the long-term. So running the lineup high is not a part of our strategy, we like to have that flexibility to do significant deal volume as we need to and so it is a balance as we look at timing throughout the year, but I think we were happy with what we executed and the timing of when we did and we continue to keep the balance on our line fairly low.

Todd Stender -- Wells Fargo -- Analyst

All right. I guess switching gears, just to the income statement, your property operating expenses, we would have thought would have come down, I guess in Q2 versus maybe an elevated number in Q1. Any color there. I don't know if you've covered it already?

Toni Sanzone -- Managing Director, Chief Financial Officer

I think that line item is running around consistent with how it has in prior quarters and that's in line with our expectation. I mean, I think the vacancy rate has stayed fairly consistent quarter-over-quarter and as we're working through some of those vacancies. We do expect that will come down over time, but I think it's still in line with what our expectations were quarter-over-quarter.

Todd Stender -- Wells Fargo -- Analyst

And have you guided for a number for the full year.

Toni Sanzone -- Managing Director, Chief Financial Officer

No, we really don't guide on property expense, but I think in terms of kind of the percentage of revenues roughly in line with where we are now shouldn't move meaningfully.

Todd Stender -- Wells Fargo -- Analyst

Okay, thank you.

Operator

Thank you. Our next question today is coming from Greg Mikelis from Scotiabank. Your line is now live.

Greg Mikelis -- Scotiabank -- Analyst

Hey, good morning.

Brooks G. Gordon -- Managing Director, Head of Asset Management

Good morning, Greg.

Greg Mikelis -- Scotiabank -- Analyst

Toni, I apologize. It's a bit of a repeat of my question from last quarter, but the full year earnings guidance range was a fair bit of acceleration into the back half of the year. I know you mentioned the increase and same-store growth is expected later quarter acquisitions, and I'm curious if anything else needs to happen to reach the top end of the guidance range this year. I mean, the 700 million of back half acquisitions still seem like a reasonable goal given the more competitive environment you guys have noticed?

Toni Sanzone -- Managing Director, Chief Financial Officer

Yeah, I mean I think we still feel good about the opportunity set we see, we held our guidance assumptions in that regard. But in terms of the factors that are driving us up. I think I did mention the bulk of them, I would say the transaction timing is certainly meaningful causing variation from quarter-to-quarter. So we will see the deals that we close just at the end of the quarter and just after quarter end take effect on the full year, depending on where you place the remaining transaction volume for the back half of the year, we'll certainly have an impact and our disposition activity really is weighted toward the very end of the year as I mentioned. So, combining that with some of the other items, The lower G&A expense that we were seeing toward the back half of the year and the higher lease termination income, largely due to Agricole[Phonetic] and some other settlements we are expecting. Those are really the points that are driving us up in the back half, and we'll see that ramp up, put us in line with our guidance range.

Greg Mikelis -- Scotiabank -- Analyst

Okay, thanks. And Jason. Can you just give us maybe an idea of, like the level of deals that are in discussion right now? In terms of acquisitions.

Jason E. Fox -- Chief Executive Officer

Yeah, I mean, we don't typically talk numbers. We've been doing this long enough where we know that these deals don't close until they're closed. But we do feel good about the pipeline, mentioned earlier characteristics are more US focused, more industrial focused. I think it's been kind of a consistent size throughout the year. The pipeline we do hope that and expect that it will build a little bit more as we get into the fourth quarter. That's typically what we see coming into the end of each year. And then lastly, we do have full visibility into our capital investment projects. Those are our properties that are under construction that we expect to complete this year and those get added to that volume at that point in time.

We've done, I think there is $200 million -- call it $185 million to $200 million under construction right now. We expect about 100 of those to close by year end. The rest of that would fall into the pipeline for 2020.

Greg Mikelis -- Scotiabank -- Analyst

All right, great, thank you guys.

Jason E. Fox -- Chief Executive Officer

Welcome.

Operator

Thank you. Our next question today is coming from Karin Ford from MUFG Securities. Your line is now live.

Karin Ford -- MUFG Securities -- Analyst

Oh, hi, thank you. Good morning

Brooks G. Gordon -- Managing Director, Head of Asset Management

Good morning, Karin.

Karin Ford -- MUFG Securities -- Analyst

How much do you think CAP rates have come down with the recent move in rates and I know you mentioned in your prepared remarks that you're willing to go lower on the spectrum given your cost of capital improvement. How low are you willing to go and where do you think investment spreads will end up in 2019?

Brooks G. Gordon -- Managing Director, Head of Asset Management

Yes. So, the first part of the question on CAP rates, I think in the US they have come down. It's hard to put a number on it, but broadly, I would probably say 25 basis points, perhaps, over the last quarter, as interest rates had really continue to move down lower. Europe, throughout the year, has probably been more than that. We're probably down at least 50 basis points in Europe, maybe even a little bit more depending on the country and the asset class. I think generally speaking we're still finding deals, I would say, in the sixs and into the sevens as you did mention that we are continuing to look at deals that are inside of six, call it maybe the low-to-mid fives is where we would start to focus and a lot of that is our cost of capital has come down.

We're actually E-[Phonetic] multiple has certainly expanded. We have our spreads have come in, as I mentioned earlier, we had the lowest spread and coupon for US bond issuance since our inception. So all that's trending positively for us from a cost of capital standpoint. We think we can pick up some incrementally deal volume by looking at what we expect to be higher quality deals at tighter yields, deals that may have better located real estate or higher growth built within them.

Karin Ford -- MUFG Securities -- Analyst

Okay. And what specifically, what type of characteristics would a deal have for you to be willing to pay a CAP rate in the low-to-mid five.

Brooks G. Gordon -- Managing Director, Head of Asset Management

There's a lot of variables that we look at At and some of those are the strength of the tenant behind the lease, the length of the lease term, the fundamentals of the market in which they in, more primary markets ones, we would expect to have long-term positive trends and dynamics. Those are factors certainly how we look at the real estate itself, we'd like to be in at market or below market rents perhaps to give us some mark to market opportunity, replacement cost matters, basis matters. So all of those factors will impact where we bid on deals and it's really individual deal specific.

Karin Ford -- MUFG Securities -- Analyst

Okay, great. And then last one for me, I know we talked about this a little bit on the last call, but have you seen any impact in the recent quarter in Europe competition-wise or deal wise from Realty Income's entry into the European market?

Brooks G. Gordon -- Managing Director, Head of Asset Management

We really haven't seen them in Europe yet. Generally we tend not to overlap with them a lot in the US, so perhaps that will hold true in Europe. As we mentioned before, we think it's a big enough market where there is plenty of room for a new competitor to the extent that we do overlap some and it adds credibility to our business model, but we really haven't seen much of them yet.

Karin Ford -- MUFG Securities -- Analyst

Great, thanks for taking the questions.

Brooks G. Gordon -- Managing Director, Head of Asset Management

Welcome.

Operator

our next question is coming from Sheila McGrath from Evercore ISI. Your line is now live.

Sheila McGrath -- Evercore ISI -- Analyst

Hi guys, good morning.

Brooks G. Gordon -- Managing Director, Head of Asset Management

Good morning, Sheila.

Sheila McGrath -- Evercore ISI -- Analyst

On the self-storage transaction, if you look at the NOI that you were receiving before the transaction, should we just assume you converted that into rent or was it structured considering some coverage ratio to account for property fluctuations. Just want to understand how that structure a little bit?

Brooks G. Gordon -- Managing Director, Head of Asset Management

Yes, sure. It's roughly in line with our NOI. I think there's a couple of exceptions and that's looking backwards, roughly in line. There is -- capex was factored into the formula to set rent. So when those were operating properties, those did not run through our income statement, but now that they've been set relative to rent, they will decrease net lease rent relative to NOI. Going forward, there will probably be a little bit of cushion, we hope there will be as these properties continue to grow. But by and large, I think it's roughly in line with NOI.

Sheila McGrath -- Evercore ISI -- Analyst

And then you mentioned in your release that you converted some more, is it the same structure with the same parties? Is that?

Brooks G. Gordon -- Managing Director, Head of Asset Management

Yeah, it was under the same deal with extra space. There really was just timing differences on the 36 assets, so some closed in June as Tony mentioned, some just converted August 1st and then there is a -- I think another nine properties that are stabilizing and once stabilized over the next year to two years, those would convert as well.

Sheila McGrath -- Evercore ISI -- Analyst

And do you think that this is kind of a one-off because you were in a position where you own the assets or do you think there is other opportunity in that segment to add to your balance sheet?

Brooks G. Gordon -- Managing Director, Head of Asset Management

So we think there's opportunity here. We've been in this space since 2004, when we first did the U-Haul transaction, a large sale leaseback, it was 78 properties a deal that I worked on at this point 15 years ago. So we know the space well, we've been a very active investor in this space within the funds, which is how we acquired these assets beginning with through the CPA 17 transaction. We have a deal team in place that's evaluating deals. So, it could be operating assets that are converted. We are in discussions with some of the operators to see if there are opportunities for sale leasebacks of their existing portfolios as they look to perhaps shift a little bit more to a asset-light strategy and there's also private players out there that it could play into.

So, it's hard to tell how big that opportunity will be for us. Time will tell of course, but it falls under the diversified business model for us. We have lots of opportunities in terms of asset classes and geographies to allocate capital and look for the best opportunities.

Sheila McGrath -- Evercore ISI -- Analyst

Okay, great. And then on the mortgage prepayments. Just curious, do you wait, target the mortgages that have burned through a prepayment penalty to unencumbered those or do you owe prepayment penalties?

Toni Sanzone -- Managing Director, Chief Financial Officer

Yeah, I mean generally our objective is to minimize that to as little as possible and that's where we're trying to be efficient there in identifying those opportunities, but we've been able to keep that number fairly low this year with around $500 million of prepayments.

Sheila McGrath -- Evercore ISI -- Analyst

Okay. And last question just on the transaction that you mentioned in US and Mexico. Is that all industrial and are the rental revenues all in US dollars.

Brooks G. Gordon -- Managing Director, Head of Asset Management

Yes, all industrial and all US denominated rent, with the US company as well.

Sheila McGrath -- Evercore ISI -- Analyst

Okay, great. Thank you.

Brooks G. Gordon -- Managing Director, Head of Asset Management

You're welcome.

Operator

[Operator Instructions]. Our next question today is coming from John Socha from Ladenburg Thalmann. Your line is now live.

John Socha -- Ladenburg Thalmann -- Analyst

Good morning.

Toni Sanzone -- Managing Director, Chief Financial Officer

Good morning, John.

Good morning, John. [Speech Overlap]

John Socha -- Ladenburg Thalmann -- Analyst

Apologies if I missed this in your leasing commentary in the prepared remarks, but if you look at page 32 of this up, what drove the rent roll-down, in kind of five warehouse properties that were renewed or extended in the quarter. Just any color there would be helpful.

Brooks G. Gordon -- Managing Director, Head of Asset Management

Sure, this is Brooks, those were our portfolio of warehouses across the US, leased to true value. We were able to extend leases by 12 years. We did absorb a bit of a roll down and contributed a small amount of TI, which is spread over about six years in terms of its actual payment. We think the deal added tremendous asset value and really locked in the criticality of that portfolio with true value. But yeah, slight roll down on those.

Unidentified Speaker

Okay, so essentially blend and extend.

Brooks G. Gordon -- Managing Director, Head of Asset Management

Correct.

John Socha -- Ladenburg Thalmann -- Analyst

Okay. And then following up on your comments on kind of the potential for converting operating self-storage assets to kind of a net lease structure, do you think there are opportunities with other operating property types that you could maybe bring on to balance sheet as operating properties and then transition in the net lease and maybe more specifically, I was kind of thinking is that a possibility in the student housing space.

Brooks G. Gordon -- Managing Director, Head of Asset Management

Yeah, sure. I mean, we've done a number of transactions like this, where we've taken operating assets and converted them to net lease and this goes back a long time. I think back in the '90s we did a large sale leaseback in the hotel space with Marriott and still own a number of those properties. As you know and I mentioned earlier, the sale leaseback that we did with U-Haul in 2004 and obviously the extra space conversion we just did right now. We are also pioneers in cold storage, probably 15-20 years ago moving that operating business into a at least model as well.

So I think there are opportunities for us. What's important here is that we make sure that we're balancing the risk return. We don't want to take too much of the downside, if we're not getting all the upside in our operating property. So that would mean that we want to see longer lease terms, we want to see strong credits behind them. I think, student housing is a space that could be interesting, to the extent there are operators out there that are -- that we deem creditworthy, that we can put on long-term leases. We are not doing anything actively right now, although we do have a couple of those assets within our portfolio, but we've done with some universities over the years. So I think it's a possibility. And I think again, given our diversified model, there is a wide opportunity set for us to consider those different types of opportunities.

John Socha -- Ladenburg Thalmann -- Analyst

I appreciate the color. That's it from me. Thank you very much.

Brooks G. Gordon -- Managing Director, Head of Asset Management

Thank you very much John.

Operator

Thank you. We reached end of our question-and-answer session. I would like to turn the floor back over for any further or closing comments.

Brooks G. Gordon -- Managing Director, Head of Asset Management

Thanks everyone for your interest in WP Carey. If you have additional questions, please call Investor Relations directly on 12124921110. That concludes today's call, you may now disconnect.

Operator

[Operator Closing Remarks]

Duration: 40 minutes

Call participants:

Peter Sands -- Director of Institutional Investor Relations

Jason E. Fox -- Chief Executive Officer

Toni Sanzone -- Managing Director, Chief Financial Officer

Brooks G. Gordon -- Managing Director, Head of Asset Management

Unidentified Speaker

Spenser Allaway -- Green Street Advisors -- Analyst

Anthony Paolone -- JP Morgan -- Analyst

Emmanuel Korchman -- Citi -- Analyst

Todd Stender -- Wells Fargo -- Analyst

Greg Mikelis -- Scotiabank -- Analyst

Karin Ford -- MUFG Securities -- Analyst

Sheila McGrath -- Evercore ISI -- Analyst

John Socha -- Ladenburg Thalmann -- Analyst

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