Good afternoon, ladies and gentlemen, and welcome to the conference call for Granite REIT. Speaking to you on the call this afternoon is Kevan Gorrie, President and Chief Executive Officer, and Ilias Konstantopoulos, Chief Financial Officer. Before we begin today's call, I would like to remind you that the statements and information made in today's discussion may constitute forward-looking statements and forward-looking information, and that actual results could differ materially 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 material filed with the Canadian Securities Administrators and the U.S. Securities and Exchange Commission from time to time, including the Risk Factors section of its annual information form for 2019, filed on March 6, 2019.
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 afternoon may include financial terms and measures that do not have a standardized meaning under International Financial Reporting Standards. Please refer to the Q1 2019 condensed combined 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'll now turn the call over to Kevan Gorrie. Please go ahead.
Thank you, operator. And thank you, everyone, for joining us today for our Q1 call. Ilias and I are also joined today by Warren Coomer, our Executive Vice President of Real Estate, Michael Ramparas, our Senior Vice President of Investment in Global Real Estate, and Richard Schaper, our Head of Europe. Ilias will begin our discussion with a review of the financial highlights. I will then follow with comments on acquisitions, operations, and strategy, and we'll open up the call to any questions that you may have.
Thank you, Kevan. And good morning to all, or good afternoon to all. Financial and operating highlights for the first quarter of 2019 and events subsequent to the quarter were as follows. Net operating income was CAD 55.2 million compared to CAD 53.8 million in the prior year period. Same property NOI on a cash basis of CAD 45.1 million increased by 4.8% when excluding the impact of foreign exchange. Our Novi, Michigan property, which was partly leased to Hanon Systems and had a rent-free period during Q1 of 2018, contributed CAD 1 million or 2.3% to that SP NOI increase. It was the single most significant contributor of that increase. FFO was CAD 0.89 per unit compared to CAD 1.11 per unit in the prior year period.
FFO would have been CAD 0.88 per unit in the prior year period if the foreign exchange gain on the remeasurement of U.S. dollar cash proceeds from the sale of investment properties in January 2018 were excluded. AFFO was CAD 0.86 per unit compared to CAD 0.67 per unit in the prior year period. AFFO would have been CAD 0.63 per unit in the prior year period if the foreign exchange gain I just mentioned and the tenant incentive allowance made in connection with the 2014 lease extension at our Eurostar facility were excluded. Kevan will elaborate on the acquisition of the recent ones we made during the quarter and subsequent to it. I'll spend a minute on the dispositions made in the quarter and the assets held for sale.
During the quarter, as you know, we completed the sale of six properties comprising approximately 700,000 sq ft for CAD 44 million, most of which were tenanted by Magna. As at quarter end, March 31, 2019, that is, we had a total of five additional assets held for sale comprising approximately 700,000 sq ft, an IFRS value of about CAD 38.7 million, and contributing annualized revenue of CAD 3.6 million. All of these properties are located in Michigan and are Magna-tenanted. The ongoing recycling that we've been doing has reduced our Magna concentration to 51% and 43% on an annualized revenue and GLA basis, respectively, at Q1 2019. You recall this, the comparable figures would have been 54% and 47%, respectively, at the end of the year. In terms of our balance sheet, the investment properties had an IFRS value of a little over CAD 3.5 billion at the end of the quarter.
These were adversely impacted by the relative strengthening of the Canadian dollar versus both the EUR and the USD to the tune of CAD 85 million. Investment properties did benefit, however, from net fair value gains totaling approximately CAD 50 million during the quarter. As at the end of Q1 2019, the overall cap rate for our properties was 6.51% relative to the 6.65% at Q4 2018. In terms of net leverage and liquidity, at March 31st, we had a net leverage ratio of 22%, and our liquidity was approximately CAD 1 billion. We expect to tap our liquidity, including the net proceeds from the recent equity offering, which we completed and netted CAD 220 million.
We expect to fund acquisitions, future contractual commitments, and developments, which would be in keeping with our strategy. I'd like to spend a minute just to give you a sense of the sources and uses of capital as we sit today pro forma that financing. I mentioned liquidity of approximately CAD 1 billion at Q1. That's comprised of cash, CAD 500 million, which together with the net equity proceeds of CAD 220 million and the assets held for sale, which we expect to monetize and generate approximately approaching CAD 40 million, would give us about CAD 760 million of cash equivalent resources. That money is earmarked for, among other things, the Mississauga properties that Kevan will elaborate on. We have another CAD 147 million to spend on those. We announced those on April 9. We announced on April 11 the Columbus property that we were in advanced discussions on together with the Calgary development.
Those two would account for CAD 126 million. You'll recall, and you'll see in our MD&A, we've got commitments to acquire a development that's under construction. It's an e-commerce facility in Texas, which together with our Indy development, would require an additional CAD 300 million. Those three items would comprise CAD 573 million roughly. Together with the Altbach development, albeit that's more in the 2020 horizon, that would require another CAD 30 million. The sum total of what's on our horizon is in excess of CAD 600 million. We've got CAD 760 million of cash or cash equivalent, which leaves us with CAD 160 million to be used for general corporate trust purposes as well as for eventual acquisitions in what I think we would characterize as a robust pipeline. With that, I'll turn it over to Kevan.
Thank you, Ilias. I'll keep my comments brief because I trust you've had a chance to review the MD&A and press release. I would characterize the first quarter as being in line with our expectations generally, and slightly ahead of schedule in terms of progress against our strategic plan. We acquired two assets in the Dallas market for CAD 164 million, as mentioned. With a weighted average remaining term of roughly 10 years to creditworthy tenants, these assets will generate stable and growing cash flow, and being situated on over 225 acres of land collectively, provide significant potential for future development and value in one of our target markets in the U.S. Subsequent to the quarter, we completed the acquisition of a two-building portfolio across from Pearson International Airport in Mississauga.
The assets were both constructed in 2018 and represent best-in-class e-commerce and food distribution product in one of the premier locations in the country. The going-in yield of 4.5% is expected to be significantly enhanced in the near to medium term through expansion activity and mark to market on the rent of a major tenancy upon renewal. These acquisitions fall strongly in line with our strategy of adding scale in our target markets of Toronto and Dallas and improving the quality of our portfolio and cash flow. As Ilias mentioned, we disposed of six assets in the quarter, including four Magna tenanted assets in Iowa, for a total sale price of roughly CAD 44 million. All six properties were previously classified as assets held for sale. As disclosed in the MD&A, there are five Magna tenanted assets located in Michigan that are being held for sale as at March 31st.
We are currently conducting a sale process and hope to conclude the transaction in the third quarter. As mentioned, following the acquisitions and dispositions noted above, our Magna tenant concentration by revenue and GLA has decreased to 51% and 43% respectively, putting us firmly ahead of schedule on our announced target of reducing our Magna concentration to under 50% on a revenue basis by the end of 2019. Operationally, we have renewed 1.7 million sq ft of the 2.5 million sq ft of space that was originally scheduled to expire in 2019, leaving us with roughly 760,000 sq ft of space remaining to lease. We are currently negotiating renewals or expansion of existing tenants on 710,000 sq ft of that remaining space. Further, we have negotiated extensions on 440,000 sq ft of the 1.8 million sq ft of expiries in 2020.
Of the 386,000 square feet of vacancy we currently have, 241,000 or 60% is located in the U.S., including 90,000 square feet related to the Novi asset in Michigan, with the remaining 145,000 square feet coming from our 600 Tesson asset in Vaughan. We are currently negotiating new lease deals with prospective tenants on three of the four vacant properties. As an update on our development program, we have recently received zoning approval for our planned 300,000 square foot development project in Altbach, Germany. We are proceeding to the building permit and tendering phase and hope to commence construction at the site in late Q3 or early Q4. Our marketing program is in its very early stages, but interest in the project has already been high due to extremely strong leasing demand in the greater Stuttgart market, combined with a lack of available space, particularly space having modern distribution characteristics.
Additionally, we have received all municipal approvals and permits for our planned 510,000 square foot development project on our existing site in the AllPoints Indianapolis market. Construction is expected to commence in the second quarter. As stated, we expect the unlevered development yield on these projects to be in the mid 6%-7% range. Finally, as mentioned, we completed our CAD 230 million equity bought deal offering on April 30th, which performed well by all accounts. The proceeds from the offering will be partially used to fund our planned acquisition in Columbus and our planned development projects in Calgary, Indianapolis, and St. Louis. More importantly, the proceeds will enable us to pursue additional development and acquisition opportunities within our pipeline while preserving our low leverage and balance sheet capacity.
Looking forward, we remain very well positioned to execute on our stated objectives for 2019 from an acquisition, disposition, development, and operations perspective. On that, I will open up the floor for any questions.
Thank you. Ladies and gentlemen, if you'd like to register a question, please press the one followed by the four on your telephone. Once again, to register a question over the phone, please press the one followed by the four. Our first question comes from the line of Troy MacLean of BMO. Please proceed with your question.
Good afternoon. Kevan, on the GTA acquisition, you mentioned expansion potential. Is that a near term something you could start in the near term, or is that more like a longer-term option?
It is scheduled, Troy, to be within the next three years. We are hoping that will be slightly earlier than that, it is an expansion that will occur within the next three years.
You've added the one development in Calgary. Is that a market that you want to add to beyond this development? Is there a minimum size you want to get there to have an efficient portfolio or?
It is one of our target markets, not like Toronto or Dallas, I would characterize it that way. We feel it's an important distribution market for Western Canada. We feel that the leasing fundamentals continue to strengthen. The rents haven't yet moved, we feel it's a good time to enter the market, particularly with new building characteristics, e-commerce characteristics. We feel the timing is right. How big that portfolio gets, we don't feel that it needs to be 3 million ft per se. We worry more about that in Toronto and Dallas and other key markets. Calgary to us would be a target market, it would not be one of the primary markets, like Toronto and Dallas would be.
On the acquisitions completed so far in 2019, most of those look like modern logistics warehouses. The leases that you guys have in place there, or are putting in place on the developments, what's the typical annual rent lift? Is there something in the leases that, is it like CPIs or a fixed step every year?
In terms of the new developments?
Just even the properties you bought in 2019. From what I remember, most of the Magna stuff was based on inflation. I was just wondering for the modern logistics stuff you've added in the last couple of quarters, is that mostly fixed rent steps?
They're mostly fixed contractual rent steps. A lot of times they're annual, sometimes they're every three to five years, but they would typically be in the 2%-3% range. Fixed contractual rent, annual rent increases.
Is that in the U.S., or would that be in Toronto as well?
Up until very recently, it would be in both, I would say. That's typically what we've seen in the U.S. and maybe Toronto up until the last 12 months.
You may have said this, but I think I might have missed it, but just on the 2019 lease renewals you've completed so far, can you give us an indication of how the new rents have come in versus expiry?
Yeah. I think for 2018, we averaged just under 4.5%-5%. 2019 was actually -3%, and that was due primarily to a large lease deal that was concluded in the Netherlands, a deal that was done in early 2018, I think under completely different circumstances. On the vacant space that we mentioned, 386,000 sq ft, we're expecting lease spreads of roughly 15%. On the deals that have been completed for 2020, we have averaged 6%, and for the remaining space in 2020, we are projecting a positive spread of somewhere between 6% and 8%.
That's great color. I appreciate that. I'll turn it back.
Our next question comes from the line of Nana Yang of Scotiabank. Please proceed with your question.
Hello and good afternoon. FP&I was really strong this quarter from the Novi, Michigan property. I recall you mentioned last quarter that FP&I would be mostly the same as 2018, which was flat. What's a good run rate we should expect for 2019?
I'm pretty sure we have provided guidance at some point in the 2%-3% range for 2019 and expect it to be somewhat better in 2020. I think Q1 was very strong. Although it made it exceed 3%, I think we're still comfortable with our guidance in the 2%-3% range for 2019 same property NOI.
Okay, that's helpful. With regards to Magna, you're now at 51% of revenue, which is pretty close to your 50% target. I'm looking at your five properties held for sale in Michigan. Those are all Magna tenanted, right?
Mm-hmm. They are.
Aside from the five held for sale, will you look to dispose more Magna assets, or are you more or less comfortable with where you're at?
No, I think there were further opportunities in 2019 to dispose of Magna tenanted assets. A few of them were still negotiating lease extensions, which I think better positioned us for a sale. I do not expect the five assets in Michigan to be the final Magna assets that we sell in 2019. I think we provided guidance in the CAD 100 million-CAD 200 million range of dispositions, in 2019. I think we'll still fall firmly within that range.
Okay. With regards to the two Mississauga properties you recently acquired, the ground lease was pretty interesting. Can you give us some background on why it was structured that way?
It's typical if you're within major infrastructure, such as an airport or a port. For us, we see this as being a very strategic location. The land lease is with the Crown, the government of Canada, but it's with the Greater Toronto Airports Authority. These are typical of lands that you would see around airports and major infrastructure.
Okay, thank you. I'll turn it back.
Okay. Once again, to register your question, press one four. Okay, we have a question from the line of Sam Damiani of TD Securities. Please proceed with the question.
Thanks, and good afternoon. Just curious on the IFRS fair value gains in Austria. Could you be specific on what sort of factors drove that? I'm assuming the low interest environment was part of it, but was there any other factors that drove that?
It was, Sam, primarily through our special purpose assets in Austria, as well as a lease extension in one of our special purpose assets. It's a combination of things that contributed.
Okay. I didn't catch the lease extension in Austria, which asset and for how long?
Sorry. The Obersteiermark facility had a renewal and an amended rent to it, and we had a valuation bump on it, specifically.
Okay. What's the maturity of the lease now?
10 years.
I think it's-
It's like another ten years from now. Yeah.
Yeah.
Beyond the cars.
Yeah. It's about 10 years. I'll confirm that with you if it's different than that, but it's in the order of 10 years.
Thank you. Okay. I'll turn it back. Thank you.
Our next question comes from the line of Chris Couprie of CIBC. Please proceed.
Afternoon. Just following up on the Magna exposure. 51%, is that including or excluding the properties that are currently held for sale?
Excluding.
Excluding? Okay. If we just think about the objective for year end of 50%, I guess we're pretty much there for the most part. Any thoughts on where it might end at this point?
Well, I would put it this way, Chris. Our acquisition pipeline is in the CAD 400 million range. If you exclude the You have the Michigan, which is around CAD 40 million in dispositions. If you add another potentially CAD 50 million-CAD 70 million in additional dispositions of Magna assets, I'm not sure what percentage that comes out to, but that would be pretty reasonable guidance of where we could end up at the end of the year.
Yeah. I think it's fair to say, Kevan, that it doesn't end there. It's simply that's where we get to at the end of the year, then we will continue to call by way of adding to the denominator, Chris.
Yeah
primarily. Yeah.
Understood. Are you being approached by parties on these assets, or are you basically going through and saying, "Okay, these are now for sale." Show us your bids.
I would say this. On the larger ones, on the larger Magna assets, we have, at times, been approached. As we've said on previous calls, we feel very strongly that the right thing to do is create the right conditions for a strategic review of what we do with those assets, which could involve a disposition. On those we have. On the smaller ones, not typically. We have ran sale processes for that. We ran a sale process for Iowa. We are running a sale process for Michigan. On the radar this year are a few other smaller assets, including those in Europe, which we'll typically run a sale process for. On the larger ones, we have, at times, been approached. On the smaller ones, that typically requires a sale process.
Okay, great. Switching gears, just in terms of your identified target markets. In Canada, you've got Ontario, Alberta, Quebec, and then BC kind of shaded in. Just on the latter, British Columbia, is that a market? How do you see yourself getting into that market? Or is that more of an aspirational one day?
No, I think you put it perfectly. That's aspirational. I think we monitor the market because it's somewhat in our backyard, and we know the market well. It's not worthwhile for us to pursue assets that are openly marketed. We just feel the pricing is very high right now. That's not a market that we're spending a lot of time on.
Okay.
If something comes up that's opportunistic and we feel strategically fits, maybe we'll pursue it strongly. We haven't seen an opportunity like that come along.
Okay. I'll turn it back. Thanks.
Thank you.
There are no further questions at this time.
All right. Well, thank you, everyone. On behalf of the trustees and management here at Granite, thank you for being on the call today. To our unitholders, thank you for your continued trust and support.
Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation, and I ask that you please disconnect your lines.