Good morning, ladies and gentlemen, and welcome to the conference call for Granite REIT. Speaking to you on the call this morning are Mike Forsythe, 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 1, 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 Q1 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 Revlon information. I would like to remind everyone that this conference is being recorded today, Monday, May 14, 2018.
I would now like to turn the call over to Mike Forsythe. Please go ahead, sir.
Thank you, France. With me here today is Lorne Coomer, our EVP, Head of Global Real Estate Michael Ramparis, 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 4 Class A single tenanted buildings totaling approximately 3,800,000 square feet on 78 acres of land near Columbus. The purchase price of U.
S. Dollars 232,500,000 represents an ongoing 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 United States due to its central location, excellent interstate highway system and strong labor base. The buildings are all modern distribution facilities with an average age of approximately 7 years and are currently 100% occupied.
The tenant base is diverse and comprises of large public and global private entities, and 2 of the tenants have options to expand their facilities by at least an additional 200,000 square feet. And while one of the tenants is currently in liquidation and may vacate 1 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. 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 fund from operations and adjusted funds from operations. Turning to the results. We had a solid Q1. 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 operation of $1.11 per unit for the Q1 of 2018 against $0.84 per unit in the Q1 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 Q1. Our FFO in the quarter reflects the expected improvement CapEx of approximately $8,000,000 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 €6,000,000 legacy payment related to the Gratz lease extension that has been accrued on our balance sheet since 2014.
In January, we sold 10 properties primarily Magna tenanted for approximately $390,000,000 We announced the acquisition of 6 quality warehouse and logistics properties in the United States, a target market for Granite for approximately $391,000,000 And if you go back to last fall, that number is $545,000,000 We entered into a 5 year unsecured $500,000,000 multi currency credit facility. We spent over $61,000,000 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 1,300,000 square feet of remaining 2018 lease expiries to contend with, comprising of 4 42,000 square feet under negotiation, 544,000 square feet listed for lease and 300,000 Square Feet that were 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 6 years. As a result of these announced initiatives and accomplishments, Granite will have made significant progress towards this 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 form a metrics to help illustrate that progress. Since the beginning of the year and after the Columbus deal, Brent's magnet concentration will have reduced from 61% to 52%. Our exposure to special purpose properties will go down to 41 from 41% to 31%. And Grant'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 from the 10 properties sold earlier in the year.
This was one of our key priorities for 2018. And to further facilitate that, it's also worth noting that on a pro form a basis after the Columbus deal, Granite's net debt leverage will be in the 23% range and we will still have close to $1,000,000,000 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, so stay tuned. And with that, I'll turn it over to Elias to go over the financial highlights for the quarter.
Good morning. I'll briefly summarize the operating results for the Q1 of 2018, which were generally in line with our expectations. Revenue for the Q1 in 2018 increased by $900,000 to $61,700,000 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 3 properties from IDI in the U. S.
In October of 2017 and the acquisition of the property in Plainfield, Indiana in late March, both of which contributed an aggregate of $2,900,000 of revenue in
the quarter.
Contractual adjustments comprising CPI inflation and fixed contractual rent increases across our portfolio added a total of $1,200,000 to revenue. A lease termination and closeout, as we mentioned, in connection with the recently acquired property in the U. S. In October, increased revenue by $1,000,000 Incidentally, this property was released in Q1 'eighteen, a positive development which had originally been hoped and expected to be materialized. As well contributing was a net favorable impact in FX during the quarter of $1,700,000 with the Canadian dollar depreciating against the euro and adding $2,500,000 revenue while the Canadian dollar strengthened against the U.
S. Dollar reducing revenue by $800,000 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 $4,900,000 As well, the vacancies from 3 lease expiries in North America and one in Germany in total decreased revenue by $1,100,000 Each of the previously noted factors is described further in detail and quantified on Page 7 of our MD and A within our Q1 2018 quarterly report. Shifting to FFO, for the Q1 FFO as reported in accordance with Realpac, Realpac's definition that is was $51,300,000 or $1.11 per unit relative to reported FFO for the prior year period of $39,600,000 or $0.84 per unit. The $11,700,000 or $0.27 a unit increase to FFO in the above quarter over quarter comparison was due primarily to a FX gain of $10,400,000 that resulted from the re measurement 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 RealTax 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 900,000 dollars an increase in interest income of $1,000,000 on account of higher cash balances and a vendor take back mortgage receivables stemming from the sale of the 10 properties previously mentioned. The above items were offset by an increase of $1,300,000 in G and A expenses due primarily to compensation paid to the former COO who is no longer with the company, as well as the other offset was slightly higher interest expense of 700,000 dollars Excluding the lease termination and closeout fee of $1,000,000 which accounts for $0.02 a unit and the FX gain on the U.
S. Dollar proceeds, which accounts for $0.23 a unit, FFO would have been $39,900,000 or $0.86 per unit in the 3 months ended March 2018 as compared to $39,600,000 or $0.84 a unit in the prior year period. The corresponding FFO payout ratio for Q1 2018 after the above noted adjustments was 79% as compared to 78% in the prior year period. Once again, these above factors impacting FFO and the ones described regarding AFFO, which I want to repeat as Mike covered them, are more detailed in our MD and 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 $32,000,000 which is approximately 1% of the IFRS value of our investment portfolio as compared with a $7,300,000 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 $2,900,000,000 implying an overall cap rate of 7.5 percent and our balance sheet remained entirely unencumbered by unsecured debt. Our income producing portfolio of 85 properties at quarter end comprised approximately 29,700,000 square feet, had an occupancy of 98.7 percent by GLA, had a walt of 5.9 years as measured by square feet and was 70% tenanted by Magna if measured by revenue or 60% if measured by GLA. Our total debt was $745,000,000 approximately, inclusive of a $98,000,000 swap mark to market. And 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 $200,000 Our debt also had a weighted average term to maturity of 4.7 years and a weighted cost of 2.53 percent and represents a net leverage ratio of 16%, which for greater clarity is net of 274,000,000 of cash and equivalents as at quarter end.
Please note that the above noted balance figures are and property metrics, I apologize, exclude the asset that we purchased subsequent to the Q1 in Greencastle, Pennsylvania on April 4 and the recently announced agreement to purchase the 4 properties in Columbus, Ohio as announced on May 10. We continue to expect annualized distributions for 2018 to be $2.72 per unit based on the current monthly distribution amount of $0.227 per unit. Total purchases made pursuant to Oren said from its inception in May 17 up to and including May 11 were 1,470,000 units for total consideration of approximately $73,000,000 which equates to an average purchase price of $49.50 per unit. During Q1 2018 alone, Ensign purchases amounted to just over $1,000,000 sorry, just over 1,000,000 units for a total consideration of $51,000,000 representing an average purchase price of $49.32 Our Board of Directors and Trustees have approved the renewal of the ANSIL 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, Elias. Operator, please open it up for any questions.
Thank you so much, sir. Sir. Our first question from the line of Mark Rothschild from Canaccord Genuity. You may proceed.
Thanks, and good morning, guys. Good morning. Good 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 what any other information you can give on that?
If you look the address is up on just on Google Maps, you can probably get a pretty good sense of it, Mark. It's a submarket in the Columbus area. And that total market has probably 250,000,000 square feet in that total market. And this submarket has probably in the area of 35,000,000, 40,000,000 square feet. It's just west of Columbus.
And it's a growing little submarket that's got low vacancy, at least in that area, 102%.
Okay. I will do that.
And in regards to the acquisition pipeline, the price that you're paying, the cap rate, the price per square foot 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?
Yes, it's market dependent, Mark, and I'm not trying to sort of evade the question, but the you go into the center ice area like Atlanta, Dallas, New Jersey, your price per pound is going to go up significantly. In these submarkets, we think, yes, there's available product that we can take advantage of. But in this one, as I mentioned, one of the buildings we literally priced as vacant. So that was also a factor.
Okay, thanks. And then just lastly, Elyse, 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 $1,900,000 which you'll see in our financials, Mark, it includes 3 assets that were one was the release of the Olive Branch location, which contributed about $900,000 of that amount rent free period. And then we have 2 other assets, 1 in Germany, Penn 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 the 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. Just to follow on the acquisition in Columbus. It is a fairly high concentration in a relatively small submarket. And as I understand, 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? And curious also how you plan to finance these properties once the one building is stabilized long term?
Yes. I think on your first question in terms of the rental growth in the market, these all of these leases have step ups in them. So in the near term, certainly we see the growth of the leases from the leases themselves. As supply comes on, that will we'll see how much supply actually does come on and the market will determine what that pricing will be at that time. But overall, these are in terms of the rents that you see on average $350,000,000 to $360,000,000 There's not it's not higher it's not a high rent district.
So we think there's opportunity for some 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.
And Elias? Yes. Sam, the only thing I would add is this particular location is 20 miles west of Columbus. So the Greater Columbus market in going through the tenant interviews, you would hear each of those tenants speak very, very highly about this location, namely that you could reach half of the U. S.
And Canadian population within one day's truck ride. So these markets and these tenants are servicing particularly the Northeast, Mid Atlantic and Midwest regions and each has chosen to go there because of the location as well as the generally speaking, the access to labor is very good in that market or has been. And so those are some of the attractive features around the market. And that 250,000,000 square feet that Mike refers to is roughly onethree of the GTA, just to put it in perspective. And so while it appears by U.
S. Definitions small, it is frankly a third of the GTA, which is quite remarkable. So I thought I'd add that for additional context.
And just on the long term financing of these assets, again, once the building is stabilized, what sort of how would you do it and what sort of rate would you get on perhaps a 5 or 7 year fixed rate?
Right. So 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 is some there are some other moving parts, Sam, that may lead to further monetizations. Mike mentioned that.
But ultimately, when we get to a critical mass within our facility to term it out on a fixed basis, to answer your question, on 5 7 year money, I'm going to ballpark at least 75%, 4 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 days.
So the 375 to 4 is on an unsecured basis?
Yes. And that's directional.
No, I know. The market is always moving for sure. Maybe just one more 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? And when will the free rent period end there on that new tenant?
Okay. Loren? Yes. It was about the TI was about $3,000,000 and the majority of that is going directly into the building with dock doors and air conditioning the entire facility. So they're all primarily enhancements to the building.
Our next question is 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?
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 1 year. That's for a couple I think it's about 200,000 square feet, if I got that right. 300.
300? Yes. Yes.
Okay. And given that the company has cash in multiple jurisdictions
One other one other bit, Neil. The other part you need to factor into that whole thing is the whole lease termination. Like this was a three way deal in terms of cash that Granite was putting together in this package. So yes, they're not paying cash rent on that portion of it, but we actually got the money.
Right. No, no, understood. I was just coming at it from a cash NOI run rate perspective. 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 actually yes.
Yes. So, Neil, keeping everything static, which it isn't, but keeping it static, to answer your question, I'll say about US70 $ish ish to US75 $1,000,000 The other cash, you recall in Europe, much of it we repatriated at year end. So our cash balances overseas are relatively small, I. E. In the order €20,000,000 €25,000,000 as we speak.
And so we will tap at that facility to the tune of €70,000,000 to €75,000,000 absent any other sales and absent any other purchase on the handset program and not any other acquisitions for that matter.
Okay, understood. And Mike, you mentioned, I think the wording you said you underwrote potential vacancy in the pricing of this portfolio. How do we think about that? Does that mean you underwrote potential for 6 to 12 months of vacancy plus a TI on the one building? Is that how we think about it?
That's correct.
Yes, that's
the best thing about it.
12 months. Okay. And as I understand it, that tenant that's in liquidation, the liquidator, I think, is really is looking to sell some of the leases. So is it possible that another tenant ultimately steps right into this building and there actually is no income interruption?
Absolutely right. Yes.
Okay.
Do you expect any closeout or lease termination fees in Q2? As I recall, I thought there was a situation here in Ontario where you might get something.
Yes. Well, there could be a little bit in the Clearview situation in Tillsonburg, but nothing significant, Neil.
Okay. And lastly, again, just for my memory, can you remind me that 70% of the Novae space that's leased, is it paying cash rent in Q2?
Yes.
Okay. Thank you.
Our next question will be from the line of Pammi Bir with Scotiabank Capital. Please go ahead.
Thanks. Good morning. Just with respect to 115 Enterprise in the Columbus transaction, can you just comment on the current availability in that submarket? And give a rough sense of how much spec space is under construction there?
The availability for something of that nature in that submarket is 0 from our understanding. And I don't believe right now there's any current supply being built on a spec basis.
So the prospects, I guess, on this space are, again, as you mentioned, pretty good. I guess maybe just asking the question a little bit differently with respect to the pricing, and I haven't had a chance to do the math that quickly, but how much of a discount was applied in terms of your cap rate assumptions on this transaction, had that space not been expected to vacate?
Maybe 20% basis points, pardon me.
Okay. All right. That's helpful. And then just lastly, from a development standpoint, can you remind us where you are on the Plainfield site? And any pre leasing done there yet?
No pre leasing is done on that yet, Pammi. We're in the process of getting the permits on that site. But we're well along the path in terms of the plans, what we might build, etcetera on there. But right now, we're just working through the municipality and getting the permits in place.
And what would the rough estimate of the potential investment on that site be?
I'd say in the 25,000,000, 26,000,000 dollars Yes, with land. We already own the land. And that's U. S. Dollars Yes, and that's U.
S. Dollars.
And what sort of, I guess, unlevered yield do you think you could actually realize on that?
We think north of 7 all in from what we got.
Okay. And just, I guess, maybe adding to that, how actively are you pursuing additional sites, I guess, from a development standpoint, just given how competitive it is for acquisitions? You're clearly getting some deals done, but are there opportunities to expand the pipeline?
Yes. We're looking at the development side. We've been meeting with potential partners on the development side. So that's continuing. Nothing locked up yet, but we've got the playing field site and we're also looking at the one in Alt in Germany is another one that we're again we're working on the permitting on that side.
That's not in land under development yet, but once we get the permits, we'll move that property into land under development. But those are 2 that we're actively working right now. And as I say, we are working with and talking with potential joint venture partners on the development side. And would
that be in the U. S?
Yes.
Great. Thanks very much. Okay.
Our next question is from the line of Howard Leung with Vritis Investment Research. Please go ahead, sir.
Thanks and good morning. Just wanted to follow-up on the Columbus, Ohio property. Mike, you've 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% to 2% range.
Okay. And mentioned that you've also put in budgeted, I guess, some TI potentially if there was if the tenant end up being vacant. Is that what is there any kind of range that you'd expect to have to pay?
Yes, we're thinking maybe $3,000,000 $3 a square foot. $3 a square foot, sorry. Yes, so roughly 1 year's worth of rent
or there's a little under that. And then 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 doesn't now?
I'll leave it up to the next guy perhaps, but the team here has stepped up. Lauren's taken on additional stuff. My grandparents has taken on additional stuff. So nothing in the immediate plans.
All right. And just one last one, maybe for Elias. The I guess the tenant incentives in AFFO, I guess that was it was a cash payment, but it was it had been expensed earlier, right? It was with the grants facility, so it's just cash outflow this quarter?
Yes. So I'm not sure if you're referring to our yes, 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. So indeed, that cash has gone out the door. Yes.
And as I mentioned, Howard, that was that's been accrued on the balance sheet since 2014. And literally the terms of that were to be paid in January 2018.
Right, right. So that and that I think I saw on this balance sheet that liability is 0 now, right? So there's no Liability
is 0. And you continue to see the amortization of that literally over the 10 year timeframe. All right. So with the amortization, is that going to hit the revenue side there? The amortization is will hit in your call it in your straight line.
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?
Yes. We're still looking at a few. Nothing firm, nothing approved, but there are ones that we're looking at that we are looking at.
Can we expect more this year?
I think so.
Okay. And just
a follow-up on Olive Branch. What was the term of the new lease?
10 years.
10 years?
Thank you.
Mr. Foresight, we have no further questions at this time. I'll turn the call back to you at this time, sir.
Thank you very much, France. 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 everyone else on the phone for your time and attention. And 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.