Good afternoon, ladies and gentlemen, and welcome to the conference call for Granite REIT. Speaking to you on the call this afternoon is Kevin Gorey, 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 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. Meters 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 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 Incorporated 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 Kevin Gorrie. Please go ahead.
Thank you, operator, and thank you, everyone, for joining us today for our Q1 call. Amy and I are also joined today by Warren Kummer, our Executive Vice President of Real Estate Michael Rem Paris, our Senior Vice President of Investment and Global Real Estate and Richard Scaper, our Head of Europe. Elias 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, Kevin, and good morning to all or good afternoon to all. Financial and operating highlights for the Q1 of 2019 and events subsequent to the quarter were as follows. Net operating income was CAD55,200,000 compared to CAD53,800,000 in the prior year period. Same property NOI on a cash basis of $45,100,000 increased by 4.8% when excluding the impact of foreign exchange. Our Novi, Michigan property, which was partly leased to Hannon Systems and had a rent free period during Q1 of 'eighteen, contributed CAD1 1,000,000 or 2.3 percent to that SP NOI increase.
It was the single most significant contributor of that increase. FFO was $0.89 per unit compared to $1.11 per unit in the prior year period. FFO would have been $0.88 per unit in the prior year period if the foreign exchange gain and the re measurement of U. S. Dollar cash proceeds from the sale of investment properties in January 'eighteen were excluded.
AFFO was $0.86 per unit compared to $0.67 per unit in the prior year period. AFFO would have been $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.
Kevin will elaborate on the acquisition, 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. So during the quarter, as you know, we completed the sale of 6 properties comprising approximately 700,000 square feet for $44,000,000 most of which were tenanted by Magna. As at quarter end March 31, 2019, that is, we had a total of 5 additional assets held for sale, comprising approximately 700 1,000 square feet, an IFRS value of about $38,700,000 and contributing annualized revenue of $3,600,000 dollars 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% 43% on an annualized revenue and GLA basis, respectively, at Q1 2019.
You'll recall this the comparable figures would have been 54% 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 3 point $5,000,000,000 at the end of the quarter. These were adversely impacted by the relative strengthening of the Canadian dollar versus both the euro and the USD to the tune of €85,000,000 Investment properties did benefit, however, from net fair value gains totaling approximately CAD50 1,000,000 during the quarter. As at the end of Q1 2019, the overall cap rate for our properties was 6.51% relative to the 65% at Q4 2018. In terms of net leverage and liquidity, at March 31, we had a net leverage ratio of 22% and our liquidity was approximately $1,000,000,000 We expect to tap our liquidity, including the net proceeds from the recent equity offering, which we completed and netted $220,000,000 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 form a that financing. So I mentioned liquidity of approximately $1,000,000,000 at Q1. That's comprised of cash, dollars 500,000,000 which together with the net equity proceeds of $220,000,000 and the assets held for sale, which we expect to monetize and generate approximately approaching $40,000,000 would give us about $760,000,000 of cash equivalent resources. That money is earmarked for, among other things, the Mississauga properties that Kevin will elaborate on. We have another $147,000,000 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 2 would account for 126,000,000 dollars And you'll recall and you'll see in our MD and 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 indie development would require an additional $300,000,000 So those three items would comprise $573,000,000 roughly. And together with the Alpac development, albeit that's more in the 2020 horizon, that would require another $30,000,000 So the sum total of what's on our horizon is in excess of $600,000,000 We've got $760,000,000 of cash or cash equivalent, which leaves us with 160,000,000 dollars 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. And with that, I'll turn it over to Kevin.
Thank you, Elias. I'll keep my comments brief because I trust you've had a chance to review the MD and A and press release. I would characterize our Q1 as being in line with our expectations generally and slightly ahead of schedule in terms of progress against our strategic plan. We acquired 2 assets in the Dallas market for $164,000,000 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 2 25 acres of land collectively, provides 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 2 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 products 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 the 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 Elias mentioned, we disposed of 6 assets in the quarter, including 4 Magna tenanted assets in Iowa for a total sale price of roughly $44,000,000 All six properties were previously classified as assets held for sale.
And as disclosed in the MD and A, there are 5 Magna tenanted assets located in Michigan that are being held for sale as at March 31. We are currently conducting the sale process and hope to conclude the transaction in the Q3. As mentioned, following the acquisitions and dispositions noted above, our Magna tenant concentration by revenue and GLA has decreased to 51% 43%, respectively, putting us firmly ahead of schedule on our announced target of reducing our magnet concentration to under 50% on a revenue basis by the end of 2019. Operationally, we have renewed 1,700,000 square feet of the 2,500,000 square feet of space that was originally scheduled to expire in 2019, leaving us with roughly 760,000 square feet of space remaining to lease. We are currently negotiating renewals or expansion of existing tenants on 710,000 square feet of that remaining space.
Further, we have negotiated extensions on 440,000 of the 1,800,000 square feet 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 Testmont asset in bond. We are currently negotiating new lease deals with prospective tenants on 3 of the 4 vacant 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 permanent 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 out of 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 Allpoint Indianapolis market, and construction is expected to commence in the Q2. As stated, we expect the unlevered development yield on these projects to be in the mid 6% to 7% range. Finally, as mentioned, we completed our $230,000,000 equity bought deal offering on April 30, which performed well by all accounts. The proceeds from the offering will be partially used to fund our planned acquisition in Columbus and our plant development projects in Calgary, Indianapolis and Stupro.
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 And our first question comes from the line of Troy MacLean of BMO. Please proceed with your question.
Good afternoon. Kevin, on the GTA
acquisition, you still 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 3 years. We are hoping that will be slightly earlier than that, but it is an expansion that will occur within the next 3 years.
And then you've added the one development in Calgary. Is that a market that you want to add to beyond this development? Is there like 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, but we feel it's a good time to enter the market, particularly with new characteristics, new building characteristics, e commerce characteristics. So we feel the timing is right.
How big that portfolio gets, we don't feel that it needs to be 3,000,000 feet per se. We worry more about that in Toronto and Dallas and other key markets. So Calgary to us would be a target market. It would not be one of the primary markets like Toronto or Dallas would be.
And then on the acquisition completed so far in 2019, most of those look like modern logistics warehouses. The leases that you guys have in place there or putting in place on the developments, what's the typical annual rent life? Is there something in the leases that is it like CPIs or fixed up every year?
In terms of the new developments?
Just even like the properties you bought in 2019. But from what I remember, most of the Magna stuff was based on inflation. I was just wondering for the monologistic stuff you've had 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 3 to 5 years. But they would be in the they would typically be in the 2% to 3% range, based 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. But that's typically what we've seen in the U. S. And maybe Toronto up until the last 12 months.
And then you may say 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 rents the new rents have come in versus expiry?
Yes. So for I think for 2018, we averaged just under like 4.5% to 5%. 2019 was actually negative 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 feet, 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% 8%.
Our next question comes from the line of Nana Yang of Scotiabank. Please proceed with your question.
Hello and good afternoon. SPNOI was really strong this quarter from the Novi, Michigan property. But I recall you mentioned last quarter that SPNOI would be mostly the same as 2018, which was flat. So what's a good run rate we should expect for 2019?
I think we have felt I'm pretty sure we have provided guidance at some point in the 2% to 3% range for 2019 and expect it to be somewhat better in 2020. I think Q1 was very strong. And although it made it exceed 3%, I think we're still comfortable with our guidance in the 2% to 3 percent 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 5 properties held for sale in Michigan. Those are all Magna tenanted, right?
Yes.
So aside from the 5 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 are further opportunities in 2019 to dispose of Magna tenanted assets. A few of them were still negotiating lease extensions, which I think better positions us for a sale. I do not expect the 5 assets in Michigan to be the final Magna assets that we sell in 2019. I think you provided guidance in the $100,000,000 to $200,000,000 range of dispositions in 2019, and I think we'll still fall firmly within that range.
Okay. And with regards to the 2 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. So 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 Airport Authority. These are typical of lands that you would see around airports and major infrastructure.
Okay. Thank you. I'll turn it back.
Okay. Okay. And we have a question from the line of Sam Damiani of TD Securities. Please proceed with your 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 rate 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 lease extension in one of our special purpose assets. So 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 Abbotsford 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 like another thing,
it's like 10 years from now.
Yes. So 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. And 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. The 51%, is that including or excluding the properties that are currently held for sale?
Excluding.
Excluding? Okay. And then 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 mean, I think our I would put it this way, Chris, our acquisition pipeline is in the $400,000,000 range. If you exclude the you have the Michigan, which is around $40,000,000 in dispositions. If you add another potentially $50,000,000 to $70,000,000 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.
Yes. And I think it's fair to say, Kevin, that it doesn't end there. It's simply that's where we get to at the end of the year, and we will continue to call by way of adding to the denominator, Chris, primarily.
Understood. And are you being approached by parties on these assets? Or are you basically going through and saying, okay, these are not for sale, these are not for sale? Show us
your business. On the I would say this, on the larger ones, on the larger Magna assets, we have at times been approached. And 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. So 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 will typically run a sale process for. So 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 BC kind of shaded in. Just on the latter versus Colombia, 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 could have perfectly that's aspirational. I think we monitor the market because it's somewhat in our backyard, and we know the market well. But we have not seen it's not worthwhile for us to pursue assets that are openly marketed. We just feel the pricing is very high right now. So that's not a market that we're spending a lot of time on.
If something comes up that's opportunistic and we feel strategically fits, maybe we'll pursue it strongly, but we haven't seen an opportunity like that come along.
Okay. I'll turn it back. Thanks.
Thank
you. And there are no further questions at this time.
Right. Well, thank you, everyone. On behalf of the trustees and management here at Granite, thank you for being on the call today. And 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 ask that you please disconnect your lines.