Good morning, ladies and gentlemen, and welcome to the conference call of Granite REIT. Speaking to you on the call this morning is Kevan Gorrie, President and Chief Executive Officer, and Teresa Neto, Chief Financial Officer. Before we begin today's call, I would like to remind you that statements and information made in today's discussion may constitute forward-looking statements and forward-looking information, including, but not limited to, expectations regarding future earnings and capital expenditures, as well as the potential impact of COVID-19 on Granite's operations, and that actual results could differ material from any conclusion, forecast, or projection. These statements and information are based on certain material facts or assumptions, reflect management's current expectations, and are subject to known and unknown risks and uncertainties.
These risks and uncertainties are discussed in Granite's material filed with the Canadian Securities Administrators and the U.S. Securities and Exchange Commission from time to time, including the Risk Factor section of its Annual Information Form for 2020, filed on March fourth, 2020. Readers are cautioned not to place undue reliance on any of these forward-looking statements and forward-looking information. Granite undertakes no intention or obligation to update or revise any of these forward-looking statements or forward-looking information, whether as a result of new information, future events, or otherwise, except as required by law. In addition, the remarks this morning may include financial terms and measures that do not have a standardized meaning under international financial reporting standards.
Please refer to the Q1 2020 condensed combined unaudited financial results and management's discussion and analysis of Granite Real Estate Investment Trust and Granite REIT Inc., and other materials filed with the Canadian Securities Administrators and U.S. Securities and Exchange Commission from time to time for additional relevant information. I will now turn the call over to Kevan Gorrie. Please go ahead.
Thank you, Operator. Good morning, everyone. Thank you for taking the time to join us for our Q1 earnings call. As usual, I am pleased to be joined by Teresa Neto, our CFO, Lorne Kumer, our Executive Vice President of Real Estate, and Michael Ramparas, our Senior Vice President of Investments in Global Real Estate. First and foremost, I hope that everyone is healthy and holding up well during the lockdown. For our call this morning, Teresa will begin our discussion with a review of the financial highlights. I will then provide an update on our operations, acquisitions, developments, and ESG. Then we can open up the call for any questions that you may have. Teresa, over to you.
Thanks, Kevan, good morning, everyone. First off, before I get started, I do want to apologize for releasing the results a little bit late yesterday, particularly when we had a 9:00 A.M. call this morning. I do apologize for that and hopefully strive to do a little bit better next quarter. Granite posted a strong first quarter, delivering solid same-property NOI and double-digit FFO per unit growth relative to the prior year. FFO per unit in Q1 was CAD 1.05. It's CAD 0.16 increase relative to prior year and CAD 0.14 higher than Q4 2019. Included in this quarter, FFO was a CAD 2.8 million foreign currency gain on foreign cash held, as well as the reversal of CAD 800,000 of current tax provisions in Canada relating to the 2013 tax year that has been statute barred.
Excluding these two items, FFO per unit would be CAD 0.98, which is CAD 0.09 or 10.1% higher than prior year and CAD 0.07 or 7.7% higher than Q4 2019. FFO has been positively impacted by strong same-property growth, the full quarter impact of 2019 acquisitions, and lower interest expense as a result of term loan refinances completed in the fourth quarter last year. The impact of foreign exchange translation in the quarter was minimal, as U.S. average dollar relative to the Canadian dollar was 1% stronger, partially offset by the euro, which was 2% weaker relative to the Canadian dollar. At the end of the quarter, the Canadian dollar weakened significantly by approximately 9% relative to the U.S. dollar and 7% relative to the euro, and continues to remain weak at this time.
The weakening of the Canadian dollar will have a favorable impact on Granite's NOI, FFO, and AFFO, while foreign currency rates remain at this level. Generally, a CAD 0.01 change in either U.S. dollar or EUR FX rates relative to the Canadian dollar will result in an approximate CAD 0.01 per unit change in FFO or AFFO. Granite's AFFO on a per unit basis in Q1 was CAD 1.03, which is CAD 0.16 higher than prior year and CAD 0.14 higher than Q4 2019. Excluding the foreign currency gain or cash and reversal of the tax provision mentioned earlier, AFFO per unit would have been CAD 0.96, which is CAD 0.09 or 10.3% higher than prior year and CAD 0.07 or 7.9% higher than Q4 2019.
AFFO per unit was favorably impacted by higher FFO per unit, while AFFO-related capital expenditures, leasing costs, and tenant incentives incurred in the quarter of CAD 1.1 million was consistent with the same period last year and lower than Q4 2019. Looking forward to 2020, we are estimating total maintenance capital expenditures, leasing costs, and commissions to reach approximately CAD 14 million for the year, which includes approximately CAD 4 million of recoverable maintenance CapEx that was pushed out from 2019. As a result of a relatively low CapEx quarter and strong FFO performance, the AFFO payout ratio came in at 70% for the first quarter. Operating metrics continue to demonstrate positive momentum. NOI on a cash basis for the quarter increased CAD 12.7 million, or 23% from the same quarter in 2019, and CAD 4 million, or 6.3% from the fourth quarter of 2019.
Same property NOI for Q1 came in strong relative to the last same period last year, increasing 3.4%, and on a constant currency basis, increasing 4.2%. Driven by occupancy gains in the GTA and New Jersey, contractual rent increases and rent from an expansion completed at one of our West Jefferson, Ohio properties. Excluding this expansion rent, same property NOI for the quarter is 2.7%, and on a constant currency basis, 3.4%. G&A for the quarter was CAD 2.2 million lower than the same quarter last year, and CAD 2.3 million lower than the fourth quarter of 2019. In this quarter, Granite realized a fair value gain of CAD 1.5 million as a result of remeasuring its unit-based compensation liabilities, positively impacting G&A.
Looking out to fiscal 2020, G&A is estimated to be approximately CAD 7.5 million-CAD 8 million per quarter, which includes about CAD 1.6 million of non-cash compensation expense per quarter, but assumes no fair value losses or gains associated with the increase or decrease in non-cash compensation liabilities, which can't be predicted at this time. With respect to current income tax, we are estimating about CAD 2.2 million in current income tax per quarter for the remainder of the year. We have another potential reversal of CAD 1.7 million of tax provisions in Q4 this year, but it is too early to assess whether these tax assets can be realized at this time.
The trust balance sheet, comprising total assets of approximately CAD 5.1 billion at the end of the first quarter, increased by CAD 315 million since the end of 2019, driven mostly by CAD 278 million translation gains on Granite's foreign-based investment properties, and a net CAD 36 million fair value gain recognized on the trust investment property portfolio. This fair value gain is primarily attributable to the trust property in Dallas, Texas, partially offset by fair value reductions in a number of the trust's Austrian and German assets. The trust's overall weighted average cap rate decreased 10 basis points to 6% relative to the end of 2019. During the month of March, Granite was active under its NCIB program, acquiring just under 491,000 units at an average price of CAD 50.95 for consideration of CAD 25 million.
The NCIB activity was placed on hold at the end of March to preserve Granite's liquidity in light of the uncertainty around COVID-19 pandemic. Net leverage as of March 31 was 22%, only slightly higher by 1% from Q4, and the trust's current liquidity is approximately CAD 730 million, representing cash on hand of about CAD 230 million and the undrawn operating facility of CAD 500 million. I'll now turn the call over to Kevan, who will discuss further operations results. Thank you. Kevan?
Sorry, I had it on mute. As always, I'll keep my comments brief, but I trust that you've had the opportunity to review our press release and the MD&A, and we can get to any questions that you have. Clearly we began 2020 in a very solid footing, both financially and operationally. Even when you adjust for one-time items, as Teresa mentioned, I would characterize the quarter as being slightly ahead of our expectations. Notably, our growth in FFO and AFFO per unit year-over-year, when stripping out the one-time items, was not aided materially by FX impacts. Progress against our strategic plan continued, albeit slowed recently by the pandemic and resulting economic and market uncertainty. During the quarter, we acquired a development site in the Netherlands for approximately CAD 29 million.
The 13-acre site will accommodate approximately 240,000 sq ft state-of-the-art grocery e-commerce distribution center for Ahold, a global food retailer, on a 10-year lease term with a going-in yield of 4.2% and subject to annual rent adjustments. The property is being developed to BREEAM excellent certification, one of the highest green building designations available. This is consistent with our commitment to sustainable development as part of our ESG program. I will discuss our ESG program in more detail later in my remarks. Sticking with development and the Netherlands, we also announced the closing of the first of three previously announced development assets being delivered this year.
Completed in March, the Weert property is fully leased to Moonen Packaging, a European leader in environmentally friendly packaging, for a 10-year lease term commencing in May 1st with annual contractual rent adjustments. The remaining two development projects in Tilburg and Ede remain on schedule for completion in late Q2. Our 520,000 sq ft development project in AllPoints in Indianapolis is now substantially complete, and we are currently in advanced discussions with a prospect for the entire building. Site work continues on our Houston development and should be completed by the end of the second quarter. We will assess market conditions at that time and determine whether to proceed with the construction of the first two buildings. Similarly, we have temporarily delayed construction of our project in Altbach, Germany, and over the coming weeks, we will assess conditions for the potential commencement of construction.
Finally, and not related to COVID-19, we are reviewing the scope and cost of a planned expansion at 2095 Logistics Drive in Mississauga with the tenant, Panjiva, and construction could potentially be delayed for through 2020. Although we continue to view development as an effective contributor to NAV growth and portfolio quality, and as an important part of our platform and growth strategy, we are reviewing our speculative construction projects with greater caution in the short term given current levels of uncertainty. From a leasing perspective, 2.1 million square feet of leases were scheduled to expire in 2020. To date, we have negotiated extensions on new leases or new leases on 1.7 million square feet, or roughly 80% of the expiries, on an average increase in rental rate of approximately 7.4%. The remaining 440,000 square feet of expiries in 2020 represents just over 1% of our GLA.
For 2021, 1.68 million sq ft, or roughly 4% of our leases by GLA, are scheduled to expire. To date, we have renewed 300,000 sq ft of those expiries at an average rate increase of 10%. We also recently completed a renewal in the GTA at a 30% increase in rental rates with very healthy annual rent escalations, signaling continued strength so far in market fundamentals. As Teresa mentioned earlier, and as disclosed in our MD&A, same-property NOI increased by 4.2% on a constant currency basis and 3.4% excluding expansions, which is in line with expectations. Same-property NOI growth was flat to positive across all geographic segments on a constant currency basis, led by our U.S. portfolio at 9.2%, due in part to the expansion of our Ace Hardware distribution center in Columbus, Ohio.
With respect to rent collections and deferrals, as outlined in our MD&A and press release, we have received 99% of the rent for April and thus far, 95% for May. As it stands, rent collection for May is on pace with April. To date, we have received rent deferral or abatement requests from 17 tenants totaling CAD 6.7 million, representing roughly 2.4% of our annual rent. This has increased slightly from 13 tenants and CAD 6.5 million as reported in our operational update published on April 15th. Discussions are ongoing with select tenants and no deferrals or abatements have been approved to date. I would like to take the opportunity to thank our team for their efforts in achieving these results. The levels of rent collection to date are a testament to the quality of our tenants, the quality of our people, and our approach in these times.
Our largest tenant, Magna, has fully resumed operations in Asia. They have begun to resume operations in most of their facilities in Europe and are scheduled to begin reopening their facilities across North America next week. The majority of our logistics properties in our portfolio remained at least partially operational during the lockdown, and a number were operating at or above normal levels. The Granite team has been working now remotely for approximately six weeks, and I think doing so very effectively. As an update, our office in Vienna reopened last week, and our offices in Amsterdam and Dallas are scheduled to gradually open next week in conjunction, of course, with updated health and safety protocols. We hope to commence a gradual reopening of the Toronto office by the end of the month.
On our Q4 call in early March, I stated that we would issue a comprehensive ESG update within 60 days of the date of that call. We have admittedly been delayed in finalizing the document, but we are close, and I hope to publish the update by mid-June. However, consistent with the principles outlined in our sustainability plan and as evidenced by the various green building certifications received or expected, we have incorporated sustainability in our current and planned development projects and in our business decisions as an organization. In closing, the impact of COVID-19 and the various restrictions have truly been a challenge for the vast majority of sectors and businesses globally, and none of us are immune. However, we are encouraged to date by the resiliency of our tenants and the performance outlook for the logistics sector in general.
During this time, we will continue to focus on driving operational performance, keeping our current development projects on schedule, and continuing to execute on our business plan for 2020. On that note, I will now open up the floor for any questions.
Thank you. If you would like to register for a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. Once again, to register for a question, press the one followed by the four. Our first question is coming from the line of Sam Damiani with TD Securities Inc. Please proceed, your line is open.
Thank you, and good morning, everyone. Kevan, maybe my first question would be kind of a bigger picture question. There's been a lot of talk of de-globalization in the markets over the last,
Few weeks. I'm just wondering what your thoughts are on that trend and to what extent it does impact the markets that Granite is targeting, and not just the markets, but also the property types that you're targeting.
It's a good question, Sam. I do think it's early days. Admittedly, it's something we will have to monitor. What I will tell you is in the short term, we have seen a number of requirements spanning many different sizes, I would say maybe up to 700,000 sq ft. There have been a number of tenant requirements that have flooded the market in the short term. A lot, I think, due to the increase in online activity. What we've been encouraged by is the number of requirements that have popped up in our target markets, those markets that we've been focused on over the past six to 12 months. So far to us, it signals that we are looking at the right markets, ones that are driven by e-commerce demand, and certainly that demand doesn't seem to have abated during this time.
We will see, but in the short term, we're quite happy with the markets we've been focused on.
Well, that's great. Maybe just for one more question. On the acquisition pipeline, understand that it's obviously on hold for now. I'm just wondering, though, the pipeline that you had been working on, have you kind of kept that on the shelf and ready to resume when the time is right? Or have you kind of just dropped whatever you were looking at and you kind of have to be starting at step one when the market stabilizes?
Well, heading into this, notwithstanding the unit purchases under our NCIB, we saw that as being highly opportunistic given the share price. It was clear heading into this that preservation of capital was our first priority. Yes, we did. There were a number of opportunities in our pipeline. Pretty early days, we made it very clear that we were going to preserve capital. Number one, we wanted to assess the impact of the pandemic on our portfolio. Two, we wanted to assess how the sector, the logistics sector, and I want to make it clear, we're not talking about small bay industrial. This is the logistics e-commerce sector, how it was going to respond. We've been encouraged by both. One, by the resiliency of our portfolio, and two, by the performance of the sector, and frankly, the outlook as we come out of this.
We are underwriting deals, and we continue to look at opportunities. We are encouraged by the direction, I guess, and the tone of the market. I can't speak for other sectors, but at least in our sector. We won't rush into anything. It has to be a very strong strategic fit, and we might be more price sensitive than we were before. It seems, Sam, to your point, it seems like it is changing and getting better. I don't think that this is a six-month thing, and we'll continue to assess opportunities. Just we have to be quite selective in how we do it.
That's great. Thank you. I'll turn it back.
As a reminder, to register for a question, press the one followed by the four. Our next question is coming from the line of Himanshu Gupta with Scotiabank. Please proceed, your line's open.
Thank you. Good morning.
Good morning.
On the greenfield Indianapolis development, looks like complete and looking to lease up. Do you see any change in rent expectations for the tenants or change in length of lease terms in general in the market due to COVID? Are they looking for any change in specs or functionality or any change in preferences you're observing in the market?
No. Again, it's early days, Himanshu, but I will say that the rents that we are discussing at the moment have not changed. The discussions originated before the pandemic, before March, and the rents in discussion have not changed. More, I think, would be changing at this time.
Got it. What about the new supply? Prior to COVID, we were expected to see some new supply in some of your core U.S. markets. Do you see any indication that the supply is likely to slow down? Has the availability or cost of construction financing changed for new developments?
Well, certainly in industrial, it is much easier to turn development on and off. Early days, it seemed very clear that the major players were pulling back strongly on their speculative development programs, think Prologis, Duke, and others. The expectation was supply would go from somewhere around 300 million in the U.S. to 150 million in the U.S. That 150 were developments that were design builds pre-leased. Part of that was in response to anticipated drops in demand. As we sit today, we think that that anticipation of a drop in demand has abated. I think the belief now is that demand will be more resilient through this and come out even stronger. There will be increased demand from even more acceleration of online penetration in sales. I think it's changing. It feels a bit like it's changing by the month.
I do believe that speculative development will in fact be much lower in 2020, I don't think demand will abate at the rate that people think that it will. It should continue to support the strong fundamentals in the core logistics markets in the U.S. That's our expectation. I do believe the speculative development will be much lower this year than it was in the trailing three years.
Okay. Thank you for that. Maybe last question from me. On the special purpose properties, I think seven with Magna. Do you know how those specific Magna subsidiaries are performing in this crisis? In terms of rent collection or negotiations, do you also work with the parent Magna tenant or mostly with these individual subsidiaries or entities? Any Magna lease coming up for renewals next year?
Well, the third question first, I don't think there's always Magna leases coming up every year. There's nothing major coming up. We did a number this year as well. I think the rent spreads have been positive. In terms of the facilities and operations, yes, they did. A few of them, I think, remained at least partially operational. We know that Graz did cease operations for a period of time, and that was in part due to the interruption in supply chain. Their Asian operations had completely ceased early in Q1, as did most production facilities in China and other parts of Asia, and they've now fully resumed. Graz is back online, at least partially. The SPPs in Canada are getting ready to resume, I think, next week. They did.
It feels like they ceased for between four and six weeks and now have started to resume operation in them. There was another question in there. Sorry if I missed it. What was it again?
In terms of rent collection or negotiations, do you work with the parent Magna or with individual subsidiaries or entities?
Well, it hasn't changed through this, but typically it's both. We have a strong relationship, obviously, with the parent company at office, and we deal with a number of major real estate items there globally across our portfolio. Also, we work with the business units in the individual jurisdictions.
Got it. Thank you. Thank you so much. I'll turn it back.
Our next question is coming from the line of Chris Couprie with CIBC. Please go ahead.
Good morning. First question, with respect to Logistics Drive, I think you said that the delay was unrelated to COVID-19. What was that related to?
Well, as I said in my remarks, Chris, we're still in discussions with them about the scope of the project and the cost of the project, too. We're just trying to get on the same page. That could take us through the better part of 2020, and that's completely unrelated to COVID.
Okay. Is the scope looking to be larger or smaller than what was previously thought?
That it was larger, now it could be smaller. We're not talking about big numbers, but what we're trying to do is just finalize exactly what scope of work works best for the tenant and what the cost of that is. It's just taking more time.
Sure. No problem. With respect to the NCIB, it's on hold right now, but I think you said that you used it opportunistically. If your shares got uncharacteristically weak again, notwithstanding the fact that you want to kind of preserve liquidity, do you think you would be responsive and active?
I think we would always keep that option open. At the end of March, when we entered into the blackout, we and the board, we were uncomfortable having an automatic program in place, particularly around the uncertainty in the market. It made sense to suspend the NCIB until at least we came out of blackout. It's not our first choice, certainly, but I think we would keep that option open depending on where the price is. If it happened to be trading so far below our NAV or where we felt the business was, that it made sense that we'd have to accept it at that time. We would keep that option open.
Okay, thanks. Just last one on the deferral requests that you've received so far. I like that you haven't granted any yet. Maybe if you can just give us any color in terms of the types of tenants, geographies, and just how you're thinking about the proposals that are in front of you. Thanks.
Well, I think we have a similar story to a lot of other REITs. Ours are split geographically 50%, roughly U.S., 50% in Europe. The bulk of them are large, very well-capitalized companies, and a number of them involve facilities where the facilities have been active. It's hard to understand the validity of the request, but nonetheless, we've received it. That's not all of them. I would characterize it as being relatively broad-based, whether it's manufacturing, whether it's food distribution, whether it's apparel. It's been pretty broad-based by sector, Chris, and geographically split 50% U.S., 50% Europe. A number of the deferral requests that come in from very large companies.
Thanks very much.
As a reminder, to register for a question, press the one followed by the four. Our next question is coming from the line of Michael Markidis with Desjardins Capital Markets. Please go ahead.
Hi. Good morning. Thank you. Two questions from my side. I didn't get a chance to recently see the magnitude of the change, but I was just curious if you could give us a little bit more color on what drove the fair value decline that you booked in Austria and Germany.
Sorry, Teresa? I don't know.
Sorry. Combined, it was about CAD 20 million, not very significant. I think it was about CAD 13 million in Austria, maybe CAD seven or eight million in Germany. It was really just an adjustment on some of the properties of just the discount rate, and that's reflected in the fair value reduction.
Got it. Thank you. Okay. More of a high-level question here for you, Kevan. Obviously, you guys have been executing very well on your strategy to minimize your, or dilute down, I guess, the Magna exposure while growing your e-commerce and logistics platform, which has worked very well. At the same time, having Magna at about 40% is obviously serving you very well from a production standpoint right now.
I know it's early days. Just curious if you've had any thoughts with respect to what that means going forward in terms of whether you'd like to maybe slow down on decreasing Magna given the credit quality, or if you think the other side that maybe with a potential slowdown in auto requirements globally post-COVID, if it makes sense to accelerate that as soon as the liquidity in the market returns.
Michael, I think that's a great question, and it highlights, I think, the comment I wanted to make anyways was that we're very happy to have Magna's cash flow. They have been very professional through this. Lorne and the team continue to have very constructive discussions with Magna on a whole number of issues related to the real estate, and a lot of them have been beneficial to Granite. They've been great to work with, and we really value the cash flow. At the end of the day, we are really focused on logistics and e-commerce. It only makes sense that over time, our concentration with Magna will reduce. That's not going to change. It's not just through this pandemic, even before it. I want it to be understood that we're not rushing to do it. We're not rushing into it.
We feel that when the time is right, if there are any dispositions out there, we'll do it when the time is right and when the conditions are ideal, because we believe strongly in the stability of that cash flow. No major change in strategy, and no change, I think, even in the pace of it. We have a plan ahead of us in where we think we're going, and I don't think that this has strongly altered our viewpoint in that way. It has been very encouraging to see how they have handled this. I'm not just talking about vis-a-vis rent but how they've handled their business through this, how they've managed their liquidity, how they've bolstered their liquidity. I would think that they might even be more on the offense through this. Our strategy remains intact, and the pace so far remains intact.
It may be delayed this year for obvious reasons. In terms of growing the denominator, we will see. Right now, we just went through a full reforecast exercise, and I think we feel pretty confident that our strategy remains intact.
Thanks.
Our next question is coming from the line of Howard Leung with Veritas Investment Research. Please proceed. Your line is open.
Morning. Thanks. I just wanted to talk about the extensions on the 2020 expiries. I think last time, Kevan, you mentioned that you expected the remaining expiries to have renewals of 7%-8%. Do you still expect that for, I guess, the remaining, I think it's like 400,000 square feet you have for fiscal 2020?
That's a good question. We only have 400,000. Well, if you go back to Q1, I guess that would stand because at that time, we had 650,000 feet expiring. We did just over 200,000 feet rent lift at 30%. If you take the remaining 400,000 feet, I think referring back to that comment, I think that that still is intact for the remainder of 2020.
All right. I guess looking forward into 2021, you mentioned you did some renewals there already, and they were pretty healthy. The remainder of those, I guess it's still early days, but do you expect market rates to still kind of hold steady for the time being?
Well, two things. One is the first 200,000 feet at 10%, we do not expect that to be the norm admittedly for the remainder of the expiries. To your point, it is early days. I don't think we're going to take a view on those expiries yet. We don't expect it to be that different than what we saw a quarter ago, but I think that's probably a better conversation for the second or third quarter of this year.
Right. That makes sense. Just one more on the deferral abatement request. I guess you put out a release last month discussing, I think at that point, around mid-April, 95% of tenants had paid, around 2.3% had submitted deferrals. Looking back, 99% paid, there's still 2.4%. Does that mean that some of these tenants that paid in April then decided that they wanted a deferral or abatement in May and going forward? Is that kind of how to read the numbers?
Yeah, I would characterize it as saying the deferral requests in April have changed very little. There's been a few smaller add-ons, but for the most part, the deferral requests include those that did it at the beginning, early on in April. I think 70 Of that CAD 6.7 million, roughly 70% has been paid for April and May. There hasn't been much change from the deferrals from the immediate operational update.
Right. Got it. Just to make sure I'm understanding that right, it means that some of these tenants that submitted deferrals, they actually paid for April and May to a point.
Correct
requesting deferrals, abatements.
Yeah
got it. Okay. No.
A better way to put it.
Thanks for clearing.
Thank you. That's probably a better way to put it. Yeah.
Yeah. No, yeah. Now I understand why you'd say that either larger ones and they're maybe trying to, they're still operational, so it's a little confusing from your standpoint.
So I-
Thanks. Thank you.
As a reminder, to register for a question, press the one followed by the four. Our next question is from the line of Srinivas Sriram with BMO. Please proceed, your line's open.
Hey, Kevan and Teresa. Thanks for the comments earlier. My first question was essentially on COVID-19 and how it's impacted the supply chain. Are you guys seeing any increase in demand for in the short term for logistic-related spaces, and how has that impacted current leasing pipeline?
No, I think I partially answered it on an earlier question, but no, we are not seeing it in short term. Certainly, if there are particularly third-party logistics companies, 3PLs, they are withholding major decisions, which makes sense. We've also seen a number of tenant requirements flood the market, if you will. There has been this sort of shorter-term demand that may be offsetting the delays in decisions or long-term decisions regarding taking up space from 3PLs. I think what's encouraging too is looking at the major players in the U.S., like Prologis, that have been doing a number of shorter-term renewals, 12 and 18 months renewals with tenants that are coming up in 2020.
One can look at that and say, "Well, they're trying to hedge their shorter-term roll, and keep their occupancy up and avoid greater vacancy." I don't look at it that way. I think if those companies felt that the sector was under a prolonged pressure or issue, they probably would've entered into longer-term leases with those tenants and gave a lot of concessions. They didn't do that. I think the guess is, if tenants are hesitant to make long-term decisions during this time, they will do shorter-term leases to bridge the gap because they feel 12 or 18 months from now, market fundamentals will be even stronger, and the outlook will be stronger, and demand will be there. I think that's encouraging for the sector.
Interruptions to the supply chain, still too early to see, but we haven't seen. Certainly, deals that we've seen in the markets, there haven't been too many lease deals. The deals that we've seen support that there's continued strong demand in the markets. We haven't seen any material deterioration in rents yet, anyways, across our markets.
Thanks for that color, Kevan. Probably a related question to that. I know this is really early day right now, and I should kind of ask the question now is, are you seeing a divergence in cap rates between different kind of industrial properties, like logistics versus, let's say, flex or any other kind of industrial property?
Well, I mean, again, it's early days, but I will tell you there always was. I think the difference between modern logistics and, say, small bay industrial or other types of industrial assets is more pronounced now. I certainly don't think that there's going to be a garage sale of any kind. I wish there was, to a degree, to provide us with more opportunities at short-term discounts. I just don't see that happening. I think the majority of logistics, modern logistics anyway, is institutionally held. They're well-capitalized, and every signal I'm seeing, and anecdotally, that capital is building, and there's more demand and more allocation, more demand and more capital being allocated to the sector.
I don't see there being a movement of cap rates, unless this is prolonged, unless we're misreading the trajectory of the recovery. Right now, the way it looks, I think cap rates will hold up relatively well through the second quarter. I think the bigger challenge for people right now is what cash flow are you underwriting, and what tenant credit are you underwriting. Certainly, I've mentioned that we are looking at a few opportunities, and obviously the work that we're doing on tenant credit is elevated. I think it's always been strong. It's always been something we focus. Like, look at our portfolio. It's obviously something that we focus on as a company, as part of our philosophy. That's even greater now. Greater attention is being paid in that area.
From a cap rate perspective, you may question what NOI you're capping, but from a cap rate perspective itself, I think it will hold up very well through this. If you have Treasuries trading below 1%, there's nothing to indicate to me that cap rates coming out of this are not going to be where they are now or even lower moving forward.
Thanks for the color, Kevan. I'll turn it back.
Our next question comes from the line of Brad Sturges with Industrial Alliance Securities. Please proceed, your line's open.
Hi, good morning. Just a couple of quick ones. Just on the, I guess, a small amount of asset sales you were looking for this year. Is that still something you're pursuing at the moment, or is that on hold?
Well, there are two dispositions that are still in progress. We obviously I'm not even sure the vendor asked specifically. These are both in Canada. We just said, "Why don't we just wait?" It's very difficult to From a practical perspective, Brad, it's tough to do due diligence. Tenants, rightfully so, do not want strangers coming through their space. In some cases, probably against policy. Those two have been delayed. We believe that they still will proceed. The other ones in Europe, they were primarily smaller assets. At this point, we have no visibility whether those will move forward this year or not. There's a good chance that they don't move forward this year in 2020.
The unsecured market seems to have opened up recently. Is that something you're looking at in terms of tapping for further liquidity? Can you give some context in terms of the interest rates and the credit spreads you're seeing currently available in the unsecured market?
Sure. Teresa, I'll let you take this one.
Sure. Hi, Brad. Yeah, it does seem to be opening up, and as you saw, there were two REITs that issued this week, so I think that's positive story from the real estate perspective. Spreads are elevated definitely relative to pre-COVID in February. I'd say for us, around five or seven years, you'd be looking at probably 280, 300 basis points. However, given the reductions in the underlying interest rates, the all-in coupon rates are fairly low and would be in that 3% range, which is quite low and close to kind of what we saw as far as indicative pricing prior to COVID-19. As far as need, it really is driven by our acquisition pipeline and activity. As we've mentioned, we're fully funded for this year. We certainly have sufficient liquidity even taking us out into next year when the 2021s mature.
It's something we keep an eye on, and I think largely will be driven by our acquisition pipeline and how we proceed with that.
Got it. That's great. Thank you.
As a reminder, to register for a question, press the one followed by the four. Our next question is a follow-up question from the line of Sam Damiani with TD Securities Inc. Please proceed, your line's open.
Thank you. Just wanted to follow up from, I think some commentary given on the Q4 call regarding 2020 same-property NOI expectations. I think the comment was 3%-4% was expected for the year. What are the largest variables that impact that outlook today, and including potential for bad debt expense, and is there an updated same-property NOI guidance that you'd be willing to put out today?
Thanks, Sam. The ones that are going to impact it this year are we haven't recorded any bad debt yet. We don't think so. There's a bad debt allowance and any expiries at the end of the year, whether there's any changes to our renewal assumptions, whether the tenants stay. There is possibly an uptick in vacancy. Our updated same-property NOI, we said 3%-4%, including expansions. Right now, looking at the potential for elevated bad debt or vacancy, we would estimate it to be in the 1.5%-2.5% range for 2020.
Would, I guess, the bulk of that difference would be the bad debt? Because it doesn't feel like vacancy's going to change a whole lot.
Yeah
a whole lot this year.
Right. 1.5%-3%, exactly. 1.5%-2.5% from 3%-4% would be the combination of a little higher bad debt and a little higher vacancy.
Okay. Thanks very much.
There are no further questions at this time.
All right. Thanks, everyone, for being on the call. On behalf of management and the trustees at Granite REIT, thank you for your time today and your continued support.
That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.