Good morning, ladies and gentlemen, and welcome to the conference call of Granite REIT. Speaking to you on the
call this morning is Kevin Gorey, President and Chief Executive Officer and Ilyas Kostomtopoulos, Chief Financial Officer. Before we begin today's call, I would like to remind you that statements or 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, reflecting management's current expectations are subject to known and unknown risks and uncertainties. These risks and uncertainties are discussed in Granite's Materials Health 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 2018 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 morning may include financial terms and measures that do not have a standardized meaning to our international financial reporting standards. Please refer to the audited combined financial results and management's discussion and analysis for the year ended December 31, 2018, for Granite Real Estate Investment Trust and Granite Group Incorporated and other materials filed with Canadian Securities, Administrators and U.
S. Securities and Exchange Commission from time to time for additional relevant information. Now, I would like to turn the call over to Kevin Gorey. Please go right ahead, sir.
Thank you, operator, and good morning, everyone, and welcome to our Q4 2018 call. Elias and I are joined this morning by Lorne Feumer and Michael Ramcaris, our EVP and VP of Global Real Estate. Elias will begin our discussion this morning 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. So, Leroy, it's over to you.
Thanks, Kevin, and good morning to all. 2018 was a transformational year for Granite on many levels. Financial and operating highlights for the 3 month period and year ended December 31, 2018, including events subsequent to the quarter were as follows. Net operating income prepared in accordance with IFRS was 52,400,000 in the 4th quarter compared to 54,500,000 in the prior year period. Same property NOI prepared on a cash basis, a non IFRS measure, increased by 1.9% for the 3 month period ended December 31, 2018, and excluding the impact of foreign exchange.
For the year 2018, NOI was $216,600,000 compared to $213,300,000 in the prior year. Same property NOI on a cash basis increased 5.3% for the year 2018, excluding the impact of foreign exchange. Shifting to FFO for the quarter, it was $0.90 a unit compared to $0.89 a
unit in the Q4 of last year.
On a full year basis, FFO was $3.58 per unit compared to $3.25 in 2017. There are some notable items that create a bit of noise in those numbers, so I will provide you some clarity excluding some of these one time items or unusual items. Included in the number of 3.68, there is some lease termination and closeout fees of $1,000,000 and a net FX gain on the remeasurement of U. S. Dollar cash proceeds from sales we made early in the year in the order of $8,500,000 dollars Excluding these two items are 368,000,000 would be 347,000,000 per unit for 2018.
Similarly, and closeout fees of $1,600,000 in
the prior year, FFO would have been
$3.34 per unit. Shifting now to AFFO. For the quarter, it was $0.87 per unit compared with $0.69 per unit in the Q4 of 2017. For the full year, AFFO was $3.01 per unit, compared to $3.09 in the prior year. Once again, making adjustments for the lease termination and closed end fee, the foreign exchange gain that I mentioned, and the payments of $0.10 of allowance that we made in connection with the 2014 lease extension at our Eurostar facility of 9,100,000 dollars AFFO would have netted out to $2.99 per unit in the year 2018 as compared with the prior year, which making the similar adjustments I mentioned would have been 3.18%.
Shifting gears now to the disposition activity during the year and subsequent to it. For the year 2018, we sold a total of 16 properties for CAD730,000,000 which together with 6 properties that we held for sale and ultimately sold subsequent to the year end for $44,000,000 we lost roughly $51,000,000 of annualized revenue. Most of these properties that were sold were manually tenanted. Zicking up for some of those losses were acquisitions during the year, which amounted to 8 income producing properties comprising roughly 6,200,000 square feet and 13 acres of development land for total proceeds of 544,000,000 at a 5.8% ingoing yield. That represents roughly €31,600,000 of incremental stabilized NOI.
In terms of commitments to acquire, construct and develop properties, so in addition to the acquisitions I just mentioned, we have made payments for and have further contractual commitments related to acquisitions, construction and development projects, amounting to 690,000,000 at an in going stabilized yield of 5.6%. Once completed and stabilized, that would represent roughly 38,600,000 of additional NOI. The significant recycling that we underwent during the year reduced our Magna concentration to 54% 47% on a revenue and GLA basis, respectively, during the Q4 as compares to 71% 61% at Q4 of last year. We expect that our magma concentration will drop to below 50% by revenue by the end of 2019. In terms of our investment properties, these had an IFRS value of €3,425,000,000 at year end and benefited from favorable exchange rates in both the euro and U.
S. Dollar to the tune of 148,000,000 euros The overall cap rate for our intermodation properties was 6.65% at year end versus 7.6% in the prior year, which reflects the change in our property mix to a greater portion of modern logistics and distribution properties as well as compression in overall cap rates, terminal cap rates, discount rates and higher market rents in several of our markets. The above, together with the sale prices realized on the disposition of 22 properties, including the 6 that were held for sale, resulted in net fair value gains of CAD 355,000,000 approximately, which is roughly CAD7.75 per unit in 2018. As you know, we completed 2 term loan financings in December, both of which were fully drawn and amounted to an aggregate of CAD550 1,000,000. The first was a CAD300 1,000,000 senior unsecured facility that we swapped into euro denominated payments at a fixed rate of interest of 2.20 percent.
The second was a US185 million dollars 4 year facility, term facility that we swapped as well into euro denominated payments at a 1.25 percent fixed rate of interest. Our balance sheet at December 31, 2018 stood at a net leverage ratio for a quarter of the sale of the 6 assets of 18%, giving us in excess of $1,250,000,000 of additional debt capacity at a 40% net leverage ratio. We've said our target net leverage ratio to be in the order of 35% to 40%. At a 35% net leverage ratio, the additional debt capacity would amount to just over 900,000,000 dollars Our liquidity at year end was $1,200,000,000 in the form of the sale of the 6 assets. We expect to tap this liquidity and debt capacity for, among other things, the 628,000,000 worth of future contractual commitments discussed earlier and as more detailed in our MD and A.
I want to shift for
a second to maintenance capital expenditures and leasing costs. We, as you know, report maintenance CapEx and leasing costs for purposes of deriving AFFO, and we do so on an actual basis. The inherent nature of these items are that they can be lumpy. So the purpose of what
I'm going to discuss is to give
you a sense for what is hopefully a sustainable level. So and improvement CapEx and leasing costs paid by quarter and for the years ended December 31, 2018 2017 are summarized in detail in our MD and A.
So the two items I'd
like to highlight are as follows. The first relates to our Novi, Michigan Flex office building. This 307,000 square foot facility is one of the very few office properties in our portfolio. Compensing with the Q3 of 2017, we undertook to redevelop our Novi property, which was vacated by Magna in March 2017. We invested a total of $22,700,000 in capital during 'seventeen and 'eighteen to reposition and lease our Novi Flex Office property.
You might recall, we leased 71% of the space to Hammond Systems for a minimum lease term of 15 years commencing in January 2018. We are currently actively marketing the remaining 90,000 square feet of available space and anticipate incurring additional cash outflows totaling approximately $6,600,000 in CapEx and leasing costs during 'nineteen to complete the Novae facility and lease it up the remaining available space. The second item involves a $9,100,000 payment we made in the Q1 of 'eighteen related to a tenant incentive allowance for a 2014 leaseback pension at our 1,100,000 Square Foot Eurostar facility in Graz, Austria. We view these 2 particular items as unique and do not believe they reflect a level of ongoing spending required to sustain our industrial portfolio. Excluding these two items, our actual spend on CapEx and leasing costs would have amounted to $0.14 a foot and $0.32 a foot for 2017 2018, respectively.
We believe that a more representative level of CapEx and leasing cost spend required to sustain our industrial portfolio would be within this range in the order of $0.20 to $0.25 a foot. Lastly, distributions. As you're aware, we increased our 2019 targeted annual monthly distribution by 2.9 percent to $2.80 per stapled unit, which amounts to $0.23 per month, commencing with the monthly distribution we paid in January of 2019. This is Granite's 7th consecutive annual increase to its distribution and represents a cumulative increase of 40%. And lastly, as a result of the increase in taxable income generated primarily by the sale transactions in 2018, we declared a special distribution in December of 'eighteen of $1.20 per staple unit, which included $0.30 per unit payable in cash ultimately paid in January.
With that, I'll turn the call back over to Kevin.
Thank you, Elias. As you can tell, 2018 was another active and successful year for Granite, underpinned by strong financial results, approval of a new strategic plan in November and significant progress against our corporate objectives. Our focus on effective capital allocation, portfolio enhancement and active management provided strong results for the year and positioned us for future growth and performance in 2019. As mentioned, we acquired over 540,000,000 in modern e commerce and distribution assets in the U. S.
And Germany at a go into the yield of 5.8%, which when combined with the gains generated from the sale of non core assets, significantly increased net asset value and improved the quality and tenant diversification of our portfolio, 2 main principles of our or priorities of our company. Dispositions totaled $730,000,000 and an average cap rate of 6.7%. And I will point out the location of the assets included Bowling Green, Kentucky St. Thomas and Tillsonburg, Ontario Piedmont, South Carolina and Clinton, Tennessee, which to us validates the liquidity and demand for assets with the Magna covenant. And despite the loss of $48,000,000 in annualized revenue from these dispositions in 2018, we were able to increase FFO per unit over 2017, while maintaining overall debt levels and liquidity with which to fund future acquisitions and development.
As a result of these transactions, as mentioned, we reduced our MANTA concentration to 47% of GLA and 54% of revenue. As an example of effective capital allocation, as Elias mentioned, I take this towards highlighting again. In December, we raised $550,000,000 in unsecured financing at an average fixed rate of 1.76 percent on average term of almost 6 years. Our credit rating and European asset base enabled us to enter into a euro currency swap to secure extremely competitive capital with which to pursue growth opportunities. Operationally, we renewed over 3,000,000 feet of expiring space, primarily Magna tentative in 2018 for an average increase in base rent of roughly 12.5% at an average lease term of over 7 years and ended the year at a very respectable 99% occupancy rate.
So far in 2019, we have closed 2 acquisitions totaling roughly $170,000,000 in Dallas, Texas and sold 4 Magna tenanted assets in Iowa and 1 small property in Richmond Hill, Ontario. We also completed the 300,000 square foot expansion of our 8 hardware property in Columbus, Ohio. For the remainder of 2019, I think as we disclosed, we will focus on the following priorities: increasing our scale in Florida markets continuing to dispose of select non core assets and exit non core markets, driving NAV, FFO and AFFO per unit growth in 2019 execute on our development projects in Plainfield, Indianapolis and Alprotec, Germain, reduce our magnet concentration to below 50% as a percentage of revenue and enhance our platform capabilities in both Europe and the U. S. With respect to platform enhancement, I am pleased to welcome Witsard Schaeffer to our team as our new Head of Europe.
Witsard joins us with over 15 years of experience in investments of real estate, including logistics, most recently with CPGIB in London. And we'll be working with our existing team in Vienna to execute on our strategy in Europe. As we deliver on these initiatives in 2019, we will continue to adhere to our core principle of delivering maximum long term value for unit Granite unitholders. Accordingly, we will continue to prioritize net asset value, portfolio quality, platform capability and maintaining a conservative capital structure. Looking forward, all of us at Granite are truly excited about meeting the challenges and fulfilling our potential in 2019.
And I believe that we are very well positioned to do so. On that, I will now open up the floor to any questions.
Thank you. And we'll take our first question on the line from the line of Sam Damiani with TD Securities. Please go ahead.
Thank you and good morning. Just wanted to just based on the acquisition side, the acquisition of the leasehold properties in Mississauga, I wish you could provide a little bit color on the tenancy, the lease term, the square footage and the terms of the ground lease? And I have a follow-up question as well.
Well, Sam, we're still operating under a PSA for that acquisition. So we are limited in what we can discuss. We do expect to close on that acquisition probably within the next 30 days, and we'll have more details to announce then.
Maybe just bigger picture, given the yield on that one and what else you're looking at in the GTA, is this indicative of the cap rates that you're looking at for what you want to buy in the GTA?
Well, I mean, certainly, as we disclosed in our strategy, we will pursue core acquisitions if it feels the right fit. This one represents to us one of the best locations in the country, period. The other thing too is due to a combination of expansion potential, contractual rent growth and where the rents are vis a vis the market today. We feel that the growth prospects are superior for this. So it may be a low 4.5 yield going in, but we feel the prospects of generating higher yield in the short term are very good.
Okay. Thank you.
And look forward to learning more there. Maybe just a quick one, Ilias, on the Eagle Track side. I don't want make a big deal of this, but there was a little bit of an adjustment, I guess, in Q4 related to Austria. I wonder if you could shed some light on that if it's material for Granite's plans going forward?
Right. It relates, Sam, to an item that we had provided for many, many years ago, dating back to the MEC once upon a time, which you're probably familiar with. And so it went statutory part. Effectively, we reversed the provision we had and therefore benefited from that onetime $500,000 or so. And so what we expect to be helpful to your question, what we expect is our current income taxes
to be in the order of $8,000,000
and for the year, if you will, give or take. And so that item we view as one of them.
We'll get to our next question on the line from Mike Mercatus with Desjardins. Please go ahead.
Hi, thanks. Good morning, guys. Tim, I was just curious, can you give us a sense for how large your disposition program is in Fisher?
We've identified I would say most of the assets obviously, Magna tentative, Mike, that we've identified are in the smaller range. So I think we'll be in terms of disposition somewhere between $100,000,000 position somewhere between $100,000,000 $300,000,000
Okay. And would that be incremental
to what you've already done subsequent to the quarter or including the stuff that you did subsequent? Incremental.
Incremental. Okay,
great. And then just obviously I appreciate the PSA that you've done on the Mississauga assets that you're buying. Looking forward to getting the details there. But just curious if you could shed some light on how you view your existing GTA footprint and how the next, let's call it, 5 years in conjunction with your strategic plan, you might see that evolving?
Well, I mean, I've stated before, I would like us to be more relevant in Canada. And the GTA is obviously Canadian's largest industrial market and the market we want to be active in. And we have the expertise and then the connections to be successful doing that. And this acquisition we feel fits in very well to our strategy, modern e commerce location in this market. So it is a perfect fit for our strategy.
The remaining portfolio is largely Magna. And a number of the assets I wouldn't consider would meet that criteria of modern distribution and logistics. But the value of the land on which they sit, including the ones in Milton, are very good. So we're very happy with that cash flow in this market. So overall, Mike, I would say our footprint in the GTA will be larger.
How much larger, how many opportunities we see that make sense, both strategically and financially, it's hard to say. But I would say I would guess that our footprint in the GTA will be larger a couple of years from now than it is today.
Okay. And last one for me, if I could just appreciate the disclosure on the same property specifics, just thinking on a constant currency basis based on what you guys know today, what we should be thinking about for 2019?
It's a good question. I think 2019, we expect to be similar to 2018 based on what we know today. I we've had some good tailwinds in 2018 on the leasing side. 2019, we're we progressed well on the renewal there. Opioid growth is not nearly as strong as it is in 2018.
We expect it to be similar. I would point out because of the nature of a few of the larger MEG assets, the rent increases are rather lumpy. They're not necessarily annual bumps. So we expect 2019 to be very similar to 2018, but we'll see those years where we could get a rather attractive bump and can drop the NOI as a result of the Magna assets.
Understood. Thanks for the color.
Thank you very much. We'll get to our next question on the line from the line from Howard Leung with Veritas Investment Research. Please go ahead.
Thank you and good morning. I want to ask about the follow-up on the question with dispositions. I guess, Kevin, given you mentioned that only $100,000,000 or $200,000,000 is probably we won't be seeing a special distribution this year then?
That's too early to say. Among other things, you're right, Howard, that dispositions would be one of the items that would impact. But it would be too early to say that there certainly isn't an expectation at this point. There are many variables, so I'd rather not speculate at this point.
Okay. No, that's fair. And then the question had to do with lease step ups. I'm currently just taking a calculation of expense also, contractual adjustments divided by the base rent. Seems like it's around 1.2%.
Is that what we think about the contractual adjustments? And I know here you mentioned Magna tenants, there's been a bit of a step up there. It should be a little higher this year than that?
I don't
know an answer for 2019 specifically, but I will say a number of these assets, even the larger ones are tied through CPI, but they're not necessarily annual. So I would say 1% to 1.2% would be on the low end.
Okay. Okay. That's my preference. And then just last one, the magma diversification, the goal that you mentioned was to get above 50%. You're close to that now.
And even after completing new developments, especially the large within Texas, Indiana, you should be below that. Is there a lower number, maybe a higher 30% that you would eventually target or is that as long as you could manage 50% in the company?
No, I don't think we're done at below 50%. I think as we've stated earlier, it's really important that we're making the right real estate decision for investors. We'll continue on a disposition program, but where we feel there's an opportunity to extend the lease and increase the value of the asset or drive the value of the asset for, say, a perpetual disposition, we would do that. So we're going about the disposition program as thoughtfully as we can and trying to maximize value.
Right. Yes. And you guys do have like a renewals impact
you.
Thank you very much. We'll get to our next question on the line from Tami Grier with Scotia Capital. Please go ahead.
Thanks. Good morning. Just with respect to, I guess,
the potential U. S. Platform or plans for the U. S. Platform, would you consider acquiring 1?
And how would you describe the opportunities that you are seeing here at the moment?
It's a good question. The short answer is yes, we would and have. But what we have seen is on the pricing side on M and A in the U. S, it's quite expensive. So we have not seen a platform acquisition opportunity that has made any real sense to us.
So we continue to consider that as one viable option, if you will.
Okay. And in terms of those opportunities that
you have looked at, what would sort of the geographic mix
of those portfolios look like?
I think that has been one of the challenges. Any acquisition opportunities like that, that have been shown to us or we have seen have involved 1 or more markets that are outside of our target areas. So that has been for us one of the factors that has prevented us from making any transaction like that.
Okay. And would your target areas include,
I guess, some of the coastal markets?
No. I think as you can see in our strategy, we've kind of laid out what markets are we're focusing on in the U. S. It would not include L. A.
Or Seattle, for example, or even Miami. Those markets are very expensive. They're dominated by a number of large players. So it's hard to see how we can have any real relevance or competitive edge in those markets.
Got it. Just last one, and I apologize that you mentioned this already, but on the Altbach developments
in Germany, can you
just describe what you're envisioning there and the expected cost and I guess target return?
It's a good question. We are targeting a return of in the mid spaces on an unlevered yield. And it's just outside of Stuttgart in the Southeast. And I would say we're very excited about it. The level of interest in this site, if you know the Stuttgart market, I don't think there's a level, it's a valley, I don't think there's a level piece of land.
I think we happen to sit on one of the only remaining level pieces of land there. So there has been a lot of interest really on. What's important to us as we develop, whether we go ahead on a speculative basis or we do a pre lease deal, which could happen for sure, we could build an asset that fits our criteria. And I will tell you we've had prospects from multiple sectors for it. And right now everybody would be happy to get that scale in that location.
So we're quite confident in this prospects for the site.
And sorry, this would be then a 2020 completion?
Yes.
And roughly the total investment? €25,000,000 to €27,000,000
dollars Perfect.
Okay. Thanks guys.
Thank you very much. And we'll take our next question on the line from siren Srinivas from BMO. Please go ahead.
Good morning, guys. My question was primarily around development and that too around the recent acquisitions in Texas. So I was hoping if you could kind of share some color around the demand you are seeing in that market as well as the demand you have for the excess and around the property?
Are you referring to the 2 acquisitions in Dallas that we just announced? Yes, that's right. Yes. One of them is a very large site, which we purchased, only 200,000 square feet on the, I think, 170 acres. So really a covered land play and a market in the Southeast that we feel continues to be a really important distribution node for the Dallas market and its proximity to Houston and the UP Intermodal yard there.
So we feel it's a strategic site, particularly with proximity to the Intermodal. It's a 12 year lease. So we certainly have stable cash flow and time to think about what we do with the land. But if you look at that node in the southeast of Dallas, it continues to grow in importance as distribution and e commerce node. And we feel that site will be very strategically positioned in the next 10 years.
Thanks for the color. And probably around 2019, do you guys have a broader developmental target?
Not necessarily development target. We have the development project in Minneapolis, which we're moving forward. We have the development in Alpac, which we'll see how 2019 works out. We have some development opportunities we are looking at strongly and pursuing. So but we don't have any definitive target for 2019.
We have said we want to do more development and we hope to do that in 2019. We just don't have a specific target.
Perfect. Thanks for the color, Karen. I'll turn it back.
And we do have another follow-up question from the line of Sam Damiani with TD Securities. Go right ahead.
Thanks. I just wanted to follow-up on the dispositions. The sort of 4, 5 properties that have been sold in Q4 and Q1 to Gates are all very into very small markets where it looked like the Granite Building basically housed the major employer in the town, hence the cap rate on those. I'm just wondering when the dispositions going forward this year for the $100,000,000 to $200,000,000 are we going to see sort of similar profile assets in that mix? Or should we expect the disposition cap rates to be a little bit different?
Well, I'm kind of looking around the room. I would say the assets that were sold in Iowa are probably the most rural isolated assets for the Alarm portfolio. So I would not, but we're looking at selling and some of it's in Europe. I certainly would anticipate much lower cap rates, probably closer to what we achieved in 2018.
Very helpful. And just one last one on the portfolio occupancy, it took a nice jump in the Q4. Just wondering, was all of that recycling of capital portfolio changes? Or was there some actual absorption in some of the properties of the portfolio?
No, no. It was leasing, including Bolivaruk in the Netherlands, which was a $300,000 plus lease deal that was done. And the remaining vacancy that we have now totaling just under 300,000 feet, we have some very good prospects on that space and we're making good progress there. So it is due to releasing within the portfolio.
I was wondering what the weather lines, when does that rent catch in?
December 1 was a commencement. I believe May 1 is the end of the rent free period. So, Sam, don't quote me April or May. So it's, I think, a 5
month rent free, was it, Laurent? Yes.
Very helpful. Thank you.
Thank you very much. And Mr. Gore, we have no further questions on the line. I'll now turn it back to you.
Okay. Well, thank you, operator. And thank you for joining us on the call. On behalf of the trustees and management here at Granite, we thank you for your continued trust and support and look forward to speaking to you on the Q1 call in May.
Thank you very much. And thank you, everyone. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask for your disconnect your lines. Have a good day, everyone.