Good morning, ladies and gentlemen, and welcome to the conference call for Granite REIT. Speaking to you on the call this morning are Michael Forsayeth, 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's material filed with the Canadian Securities Administrators and U.S. Securities and Exchange Commission from time to time, including the Risk Factors section of its annual information form for 2017, dated March 1st, 2018.
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 standardized meaning under International Financial Reporting Standards. Please refer to the first quarter 2018 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 for any additional relevant information. I would like to remind everyone that this conference is being recorded today, Monday, May 14th, 2018. I would now like to turn the call over to Michael Forsayeth.
Please go ahead, sir.
Thank you, Frances. With me here today is Lorne Kumer, our EVP, Head of Global Real Estate, Michael Grandin , VP Global Real Estate, and Ilias Konstantopoulos, our CFO, who will be taking you through some of the details of our financial results in a couple of moments. Before going into the highlights of the quarter, let me give you the details and some color on the Columbus portfolio acquisition we announced last Thursday night. We've agreed to acquire a portfolio of four Class A single-tenanted buildings totaling approximately 3.8 million sq ft on 78 acres of land near Columbus. The purchase price of $232.5 million represents an ingoing stabilized yield of approximately 6%. The properties are located in West Jefferson, which is part of the Greater Columbus industrial market.
This market has emerged as a major distribution corridor in the U.S. due to its central location, excellent interstate highway systems, and strong labor base. The buildings are all modern distribution facilities with an average age of approximately seven years and are currently 100% occupied. The tenant base is diverse and comprises of large public and global private entities. Two of the tenants have options to expand their facilities by at least an additional 200,000 sq ft. While one of the tenants is currently in liquidation and may vacate one of the buildings, we believe the re-leasing prospects for that building are strong. We underwrote the potential vacancy in our pricing of the portfolio, and given our success in a similar situation with the building outside of Memphis in the portfolio we acquired last fall, we're very comfortable taking on the potential vacancy risk.
The deal is subject to customary closing conditions, and the closing is anticipated to take place later this month. Granite will fund the purchase through a combination of cash on hand, largely from the proceeds from the property sales that occurred in January and topped up by a drawdown of our unsecured credit facility. The acquisition will be immediately accretive to Granite's funds from operations and adjusted funds from operations. Turning to the results, we had a solid first quarter, and as reported, we've been very active on the sales, acquisition, and leasing front since the beginning of the year. Here's a quick recap of the highlights. We reported funds from operations of $1.11 per unit for the first quarter of 2018 against $0.84 per unit in the first quarter of 2017.
Excluding the significant foreign exchange gain and the lease termination fee recognized in the quarter, we see it as a solid performance, in particular, given the significant revenue reduction from the 10 properties sold a third of the way into the first quarter. Our FFO in the quarter reflects the expected improvement CapEx of approximately $8 million at our Novi property, which was previously a Magna facility that was repurposed, and we subsequently entered into a long-term lease for 70% of the space. It also includes the EUR 6 million legacy payment related to the Graz lease extension that has been accrued on our balance sheet since 2014. In January, we sold 10 properties, primarily Magna-tenanted, for approximately $390 million. We announced the acquisition of six quality warehouse and logistics properties in the U.S., a target market for Granite, for approximately $391 million.
If you go back to last fall, that number is $545 million. We entered into a five-year unsecured, $500 million multi-currency credit facility. We spent over $61 million in unit repurchases under our Normal Course Issuer Bid since the beginning of the year, and we intend to renew the NCIB upon expiry. We have just 1.3 million sq ft of remaining 2018 lease expiries to contend with, comprising of 442,000 sq ft under negotiation, 544,000 sq ft listed for lease, and 300,000 sq ft that we're looking to be sold before the end of the year. At the end of the quarter, we were 98.7% occupied, and our weighted average lease term was just under six years.
As a result of these announced initiatives and accomplishments, Granite will have made significant progress towards its transformation from a largely single-tenanted REIT to a broadly tenanted, globally diversified industrial real estate business, and we believe we have improved the underlying quality of Granite's real estate portfolio. Using gross leasable area as a measure, here are some pro forma metrics to help illustrate that progress. Since the beginning of the year, after the Columbus deal, Granite's Magna concentration will have reduced from 61% to 52%. Our exposure to special purpose properties will go down from 41% to 31%. Granite's warehouse and logistics property category will be Granite's dominant asset category, representing 41% of our gross leasable area. Also, on a run rate basis, Granite will have made substantial progress replacing the cash flow from the 10 properties sold earlier in the year.
This was one of our key priorities for 2018. To further facilitate that, it's also worth noting that on a pro forma basis, after the Columbus deal, Granite's net debt leverage will be in the 23% range, and we will still have close to CAD 1 billion of borrowing capacity before reaching our internal leverage target of 40%. We will also continue to recycle certain properties as the year progresses. All of which gives us lots of dry powder to continue our quest to further transform Granite into a high-quality, globally diversified industrial real estate business. Lastly, as it relates to Granite finding a new CEO, again, all I can say is that the search is now in its advanced stages, stay tuned. With that, I'll turn it over to Ilias to go over the financial highlights for the quarter.
Good morning. I'll briefly summarize the operating results for the first quarter of 2018, which were generally in line with our expectations. Revenue for the first quarter in 2018 increased by CAD 0.9 million to CAD 61.7 million relative to Q1 2017, with a few offsetting items. The main contributing factors to the slight increase in revenue for the quarter include the acquisition of the three properties from IDI in the U.S. in October of 2017, and the acquisition of a property in Plainfield, Indiana, in late March, both of which contributed an aggregate of CAD 2.9 million of revenue in the quarter. Contractual adjustments comprising CPI inflation and fixed contractual rent increases across our portfolio added a total of CAD 1.2 million to revenue. A lease termination and close-out fee mentioned in connection with the recently acquired property in the U.S. in October increased revenue by CAD 1 million.
Incidentally, this property was re-leased in Q1 2018, a positive development which had originally been hoped and expected to be materialized. Contributing was a net favorable impact on FX during the quarter of CAD 1.7 million, with the Canadian dollar depreciating against the EUR and adding CAD 2.5 million in revenue, while the Canadian dollar strengthened against the U.S. dollar, reducing revenue by CAD 0.8 million. These net favorable factors were offset by the sale of the 10 properties in January in Canada and the U.S., which in aggregate decreased our revenue by CAD 4.9 million. The vacancies from three lease expiries in North America and one in Germany in total decreased revenue by CAD 1.1 million. Each of the previously noted factors is described further in detail and quantified on page seven of our MD&A within our Q1 2018 quarterly report. Shifting to FFO.
For the first quarter, FFO, as reported in accordance with REALPAC's definition, that is, was CAD 51.3 million, or CAD 1.11 per unit, relative to reported FFO for the prior year period of CAD 39.6 million, or CAD 0.84 per unit. The CAD 11.7 million, or CAD 0.27 a unit increase to FFO in the above over quarter comparison was due primarily to a FX gain of CAD 10.4 million that resulted from the remeasurement of the U.S. dollar cash proceeds received from the sale of the three investment properties in January 2018. I would point out that while this item is included in the reported FFO in accordance with REALPAC's definition and disclosure requirements, it is unusual and non-recurring item that we benefited from for this particular quarter.
The other contributing factors to FFO increasing include the previously described revenue increase of CAD 0.9 million, an increase in interest income of CAD 1 million on account of higher cash balances, and a vendor take-back mortgage receivable stemming from the sale of the 10 properties previously mentioned. The above items were offset by an increase of CAD 1.3 million in G&A expenses due primarily to compensation paid to the former COO, who is no longer with the company. The other offset was slightly higher interest expense of CAD 0.7 million.
Excluding the lease termination and close-out fee of CAD 1 million, which accounts for CAD 0.02 a unit, and the FX gain on the U.S. dollar proceeds, which accounts for CAD 0.23 a unit, FFO would have been CAD 39.9 million, or CAD 0.86 per unit in the three months ended March 2018, as compared to CAD 39.6 million, or CAD 0.84 a unit, in the prior year. Period. The corresponding FFO pay-out ratio for Q1 2018 after the above-noted adjustments was 79%, as compared to 78% in the prior year period. These above factors impacting FFO and the ones described regarding AFFO, which I won't repeat as Mike covered them, are more detailed in our MD&A on pages 13 and 14 of the Q1 report.
For Q1 2018, we recorded fair value gains in connection with our investment properties totaling CAD 32 million, which is approximately 1% of the IFRS value of our investment portfolio, as compared with a CAD 7.3 million in net fair value losses recorded in the prior year period. Turning to the balance sheet at quarter end, the IFRS value of our investment portfolio stood at CAD 2.9 billion, implying an overall cap rate of 7.5%, and our balance sheet remained entirely unencumbered by any secured debt. Our income-producing portfolio of 85 properties at quarter end comprised approximately 29.7 million sq ft, had an occupancy of 98.7% by GLA, had a WALT of 5.9 years as measured by sq ft, and was 70% tenanted by Magna if measured by revenue, or 60% if measured by GLA.
Our total debt was CAD 745 million, approximately inclusive of a CAD 98 million swap marked to market. Our debt was comprised only of unsecured debt. It did not include any draw on our unsecured credit facility other than for letters of credit in the amount of CAD 200,000. Our debt also had a weighted average term to maturity of 4.7 years and a weighted cost of 2.53%, and represents a net leverage ratio of 16%, which, for greater clarity, is net of CAD 274 million of cash and equivalents as at the quarter end. Please note that the above-noted balance figures and property metrics exclude the asset that we purchased subsequent to the first quarter in Greencastle, Pennsylvania, on April 4th, and the recently announced agreement to purchase the four properties in Columbus, Ohio, as announced on May 10th.
We continue to expect annualized distributions for 2018 to be CAD 2.72 per unit, based on the current monthly distribution amount of CAD 0.227 per unit. Total purchases made pursuant to our NCIB from its inception in May 2017 up to and including May 11th, were 1.47 million units for total consideration of approximately CAD 73 million, which equates to an average purchase price of CAD 49.50 per unit. During Q1 2018 alone, NCIB purchases amounted to just over 1 million units for a total consideration of CAD 51 million, representing an average purchase price of CAD 49.32. Our board of directors and trustees have approved the renewal of the NCIB program, which is subject to customary regulatory approvals that Granite has undertaken and expects to obtain. With that, I will turn the call back to Mike.
Thank you, Ilias. Operator, please open it up for any questions.
Thank you so much, sir. Ladies and gentlemen, 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, you may press the one followed by the three. Once again, to register, you may press one-four. Our first question from the line of Mark Rothschild from Canaccord Genuity. You may proceed.
Thanks. Morning, guys.
Morning.
In regards to the acquisitions in Columbus, you gave some detail. Is it possible to give any more detail on the locations and the types of locations of the properties and any other information you can give on that?
If you look the addresses up just on Google Maps, you can probably get a pretty good sense of it, Mark. It's a sub-market in the Columbus area. That total market has probably 250 million sq ft in that total market. This sub-market has probably in the area of 35 million, 40 million sq ft. It's just west of Columbus. It's a growing little sub-market that's got low vacancy, at least in that area, under 2%.
Okay. I will do that. In regards to the acquisition pipeline, at the price that you're paying, the cap rate, the price per sq ft for these assets, is there quite a bit more available at this type of pricing? Is there anything unique about this deal versus what you're seeing broadly in the U.S. market?
Yeah. It's market-dependent, Mark, I'm not trying to sort of evade the question, you go into center ice area like Atlanta, Dallas, New Jersey, your price per pound is going to go up significantly. In these sub-markets, we think, yes, there's available product that we can take advantage of. In this one, as I mentioned, one of the buildings we literally priced as vacant. That was also a factor.
Okay, thanks. Just lastly, Ilias, I'm not sure if you mentioned anything on the straight line rent. Is this quarter a good run rate for what we should expect going forward?
No. The straight-line rent this quarter includes, in particular, of the $1.9 million, which you'll see in our financials, Mark, it includes three assets. One was the release of the Olive Branch location, which contributed about $900,000 of that amount rent-free period. We have two other assets, one in Germany, Peine, Germany , I should say, and one in New Jersey, Logan, New Jersey, which together those three items comprise the lion's share of the straight line. We expect that to diminish in the next quarter, and coming quarters.
Okay, great. Thanks a lot.
Our next question will be from the line of Sam Damiani with TD Securities. Please go ahead.
Thanks. Good morning, everyone.
Good morning, Sam.
Just to follow on the acquisition in Columbus. It is a fairly high concentration in a relatively small sub-market. As I understand it, the vendor did retain some land for some potentially significant excess land for construction of new facilities in the future. What is your outlook for rental rate growth for these properties over the medium term? I'm curious also how you plan to finance these properties once the one building is stabilized long term.
I think on your first question in terms of the rental growth in the market, all of these leases have step-ups in them. In the near term, certainly we see the growth literally just from the leases and the leases themselves. As supply comes on, we'll see how much supply actually does come on, and the market will determine what that pricing will be at that time. Overall, in terms of the rents that you see, on average CAD 3.50-CAD 3.60. It's not a high rent district. We think there's opportunity for certainly some medium growth over the long term. From a financing perspective, ultimately, as we get our balance sheet leveraged up, I'd see us, and utilizing our cash. Ultimately, we would term that out. Ilias?
Sam, the only thing I would add is this particular location is 20 miles west of Columbus. The greater Columbus market, in going through the tenant interviews, you would hear each of those tenants speak very highly about this location. Namely that you could reach half of the U.S. and Canadian population within one day's truck ride. These markets, and these tenants are servicing particularly the Northeast, Mid-Atlantic, and Midwest regions. Each has chosen to go there because of the location as well as, generally speaking, the access to labor is very good in that market, or has been. Those are some of the attractive features around the market. That 250 million square feet that Mike refers to is roughly one-third of the GTA, just to put it in perspective.
While it appears by U.S. definitions small, it is frankly a third of the GTA, which is quite remarkable. Anyways, I thought I'd add that for additional context.
Just on the long-term financing of these assets, again, once the building is stabilized, how would you do it, and what sort of rate would you get on perhaps a five or seven-year fixed rate?
Right. For the time being, as you know, we've got cash on hand, which, for the most part, will be used. We will tap the credit facility for any shortfall. There are some other moving parts, Sam, that may lead to further monetizations. Mike mentioned that. Ultimately, when we get to a critical mass within our facility to term it out on a fixed basis, to answer your question, on five- and seven-year money, I'm going to ballpark 375, four-ish percent fixed rate and question what we do from there in terms of other options, of course, whether we swap, whether we consider other forms of financing, including secured debt. That's all really it is.
The 375 to 4 is on an unsecured basis?
Yes.
Okay.
That's directionally.
No, I know. The market's always moving, for sure. Maybe just one more, and then I'll turn it back, is just on the Olive Branch, the new tenant there, was there a TI required, and if so, how much? When will the free rent period end there on that new tenant?
Lorne?
The TI was about $3 million. The majority of that is going directly into the building, dock doors and air conditioning the entire facility. They're all primarily enhancements to the building.
Our next question from the line of Neil Downey with RBC Capital Markets. Please go ahead.
Thank you. I'll just follow up with Sam's question. When does that Olive Branch lease start paying cash rent?
It's paying cash rent now, on the majority of it. There's a small piece that they're not paying cash rent as we fill out these TIs, and I believe that starts in one year. I think it's about 200,000 sq ft. We've got that right?
It's CAD 300.
300?
Yeah.
Okay. Thank you. Given that the company has cash in multiple jurisdictions.
Sorry, one other bit, Neil. The other part you need to factor into that whole thing is the whole lease termination. This was a three-way deal in terms of cash that Granite was putting together in this package. Yes, they're not paying cash rent on that portion of it, but we actually got the money.
Right. No, understood. I was just coming at it from a cash NOI run rate perspective.
Yep. Understood.
Given that the company does have cash in multiple jurisdictions, how much do you anticipate drawing on your credit facility for the West Jefferson portfolio?
Right.
Conversely, how much cash do you Yeah.
Yeah. Neil, keeping everything static, which it isn't, but keeping it static to answer your question, I'll say about $70 million-$75 million U.S. The other cash, you'll recall in Europe, much of it we repatriated at year-end. The cash balances overseas are relatively small, i.e., in the order of EUR 20 million, EUR 25 million as we speak. We will tap at that facility to between a CAD 70 to CAD 75, absent any other sales and absent any other purchase on the
Actively working right now. As I say, we are working with, and talking with potential joint venture partners on the development side.
Would that be in the U.S.?
Yes.
Great. Thanks very much.
Okay.
Ladies and gentlemen, as a reminder, to register for questions, you may press the one followed by the four. Our next question from the line of Howard Leung with Veritas Investment Research. Please go ahead, sir.
Thanks. Good morning. Just wanted to follow up on the Columbus, Ohio property. Mike, you'd mentioned that there were step-ups on there. Is that the fixed step-ups or are they based on CPI?
No, they're fixed step-ups, in the 1.5%-2% range.
Okay. You mentioned that you'd also put in, budgeted I guess, some TI potentially if the tenant ended up being vacant. Is there any kind of range that you'd expect to have to pay?
Yeah. We're thinking maybe CAD 3 million. CAD 3 a sq ft? CAD 3 a sq ft, sorry.
Right. So roughly one year's worth of rent, or just a little under that. On the COO, you mentioned that they're no longer there. Are there plans to hire another one or promote someone, or there's no plan as of now?
I'll leave it up to the next guy, perhaps. The team here has stepped up. Lorne's taken on additional stuff. Michael Grandin has taken on additional stuff. Nothing in the immediate plans.
All right. Just one last one maybe for Ilias. The tenant incentives in AFFO, I guess that was a cash payment, but it had been expensed earlier, right? It was with the Graz facility, it's just a cash outflow this quarter?
Yeah. I'm not sure if you're referring to our AFFO breakdown, Howard, includes cash paid in terms of tenant incentives. That's the method that we've adopted just to state the actual. Indeed, that cash has gone out the door.
Yeah. As I mentioned, Howard, that's been accrued on the balance sheet since 2014. Literally, the terms of that were to be paid in January 2018.
Right. I think I saw on the balance sheet that liability is zero now, right?
That liability is zero. You continue to see the amortization of that literally over the 10-year timeframe.
Oh, right. With amortization, is that going to hit the revenue side now?
The amortization will hit in your straight line.
Okay. Sounds good. Thanks. I'll turn it back.
Our next question is a follow-up from Sam Damiani from TD Securities. Please go ahead.
Thank you. Just on dispositions. I don't see anything in the held-for-sale bucket on the balance sheet. Are you pursuing, in the near term, additional Magna property disposals to bring the concentration down? Still relatively high at around 64% of revenues.
Yep. We're still looking at a few. Nothing firm, nothing approved, there are ones that we are looking at.
Can we expect more this year?
I think so.
Okay. Just to follow up on Olive Branch, what was the term of the new lease?
10 years.
10 years? Thank you.
Yeah.
Mr. Forsayeth, we have no further questions at this time. I'll turn the call back to you at this time, sir.
Thank you very much, Frances. Well, in closing, I'd like to thank certainly all our employees in both North America and Europe for their support, dedication, and commitment to Granite. Thank you everyone else on the phone for your time and attention. With that, we'll sign off. Thanks very much. Bye for now.
Ladies and gentlemen, this does conclude the conference call for today. We thank you all for your participation today, and we kindly ask that you please disconnect your lines.