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Edited Transcript of GRT.UN.TO earnings conference call or presentation 5-Mar-20 2:00pm GMT

Q4 2019 Granite Real Estate Investment Trust Earnings Call

Toronto Mar 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Granite Real Estate Investment Trust earnings conference call or presentation Thursday, March 5, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kevan S. Gorrie

Granite Real Estate Investment Trust - President, CEO & Trustee

* Teresa Neto

Granite Real Estate Investment Trust - CFO

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Conference Call Participants

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* Bradley Sturges

Industrial Alliance Securities Inc., Research Division - Equity Research Analyst

* Chris Couprie

CIBC Capital Markets, Research Division - Research Analyst

* Himanshu Gupta

Scotiabank Global Banking and Markets, Research Division - Analyst

* Mark Rothschild

Canaccord Genuity Corp., Research Division - MD & Real Estate Analyst

* Michael Markidis

Desjardins Securities Inc., Research Division - Real Estate Analyst

* Neil William Edward Downey

RBC Capital Markets, Research Division - MD of Global Equity Research & Associate Head of Canadian Research

* Sam Damiani

TD Securities Equity Research - Analyst

* Troy Raymond MacLean

BMO Capital Markets Equity Research - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the conference call of Granite REIT. Speaking to you on the call this morning is Kevan Gorrie, President and Chief Executive Officer; and Teresa Neto, Chief Financial Officer. Before we begin today's call, I would like to remind you that 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 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 4, 2020. 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 under International Financial Reporting Standards. Please refer to the audited combined financial results and management's discussion and analysis for the year ended December 31, 2019, for Granite Real Estate Investment Trust and Granite REIT Inc. and other materials filed with the Canadian Securities Administrators and U.S. Securities and Exchange Commission from time to time for additional relevant information.

I will now turn the call over to Kevan Gorrie. Please go ahead.

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [2]

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Thank you, operator, and good morning, everyone. Thank you for taking the time to join us for our final earnings call for 2019. As usual, I am pleased to be joined this morning by Teresa Neto, our CFO; Lorne Kumer, our Executive Vice President of Global Real Estate; and Michael Ramparas, our Senior Vice President of Investments and Global Real Estate.

Teresa will begin our discussion with a review of the financial highlights, and I will follow with brief comments on acquisitions, operations, development strategy and thoughts on the impact of the COVID-19 virus, then open up the call to any questions that you may have.

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Teresa Neto, Granite Real Estate Investment Trust - CFO [3]

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Thanks, Kevan, and good morning all. Granite posted a solid fourth quarter, delivering strong same-property NOI and a continuation of investment activity with Granite closing acquisitions of 5 investment properties, totaling approximately $487 million followed by an additional $130 million of new investments for 2020 announced in December. FFO per unit in Q4 was $0.91, a $0.01 increase relative to prior year, but down $0.02 relative to Q3 2019.

Included in this quarter's FFO is the temporary dilutive impact of the $294 million equity offering that closed on October 31, where proceeds have not yet been fully deployed. The negative impact of a stronger Canadian dollar relative to the euro and a net $2 million expense related to real estate transfer taxes, net of tax recovery related to the internal reorganization of the REIT's Austrian entities previously communicated on our Q3 conference call. As mentioned on the call, this reorganization will result in future savings relating to withholding tax on Austrian dividends and will facilitate a potential future share sale efficiently.

We expect to realize savings of the same $2-plus million in 2020 when we anticipate distributing approximately EUR 36 million from Austria to the Netherlands or Canada, and we'll continue to realize withholding tax savings every year thereafter, on Austrian distributions of approximately EUR 0.7 million or about a CAD 1 million based on current distribution forecast.

Positively offsetting these items was the reversal of $2.3 million of current income tax provisions in Canada and Europe for tax positions relating to taxation years that have become statute barred. Granite's AFFO on a per unit basis in Q4 was $0.89, which is $0.02 higher than prior year and $0.01 lower than Q3 2019. AFFO per unit was favorably impacted by higher FFO per unit and lower AFFO related capital expenditures, leasing costs and tenant incentives incurred in the quarter of $1.1 million compared to $1.6 million in the same period last year and $1.4 million in Q3.

Looking forward to 2020, we are expecting total maintenance capital expenditures, leasing costs and commissions to reach approximately $11 million for the year. As a result of a relatively low CapEx quarter and strong FFO performance, the AFFO payout ratio came in at 82% in Q4. Operating metrics continue to demonstrate positive momentum. NOI on a cash basis for the quarter increased by $10.9 million or 20.6% from the same quarter in 2018 and by $3.5 million or 5.8% from the third quarter of 2019. Same-property NOI for Q4 2019 was strong relative to Q4 last year, increasing 2.9%; on a constant currency basis, increasing by 4.6%, driven mostly by contractual rent increases and re-leasing and renewals of leases in the U.S., Netherlands and Canada. For fiscal year 2019, same-property NOI is up $5.6 million or 3.2%, but on a constant currency basis, 4.5%. G&A for the quarter was $800,000 higher than the same quarter last year and $1.1 million higher than the third quarter of 2019, mostly driven by increased unit-based compensation amortization expense due to an increase in words outstanding -- awards outstanding and the fair value loss associated with the increase in noncash compensation liabilities due to the increase in Granite's unit price.

Looking out to fiscal 2020, G&A is estimated to be approximately $30 million, which includes about $6 million of noncash compensation expense but assumes no fair value losses or gains associated with the increase or decrease in noncash compensation liabilities, which cannot be predicted. The trust's balance sheet remains very strong, comprising total assets of approximately $4.8 billion at the end of 2019, an increase of $300 million since the end of the third quarter, driven mostly by the net proceeds received from the $294 million October equity offering and a $47 million fair value gain realized on the trust investment property portfolio. This fair value gain is primarily attributable to the trust properties located in the GTA and U.S.A. The increase in total assets was partially offset by a decrease of approximately $42 million on the trust's U.S. investment property portfolio due to the strengthening of the Canadian dollar against the U.S. dollar since Q3, but positively impacted by an increase of about $12 million on the trust's European assets due to a weaker dollar, Canadian dollar against the euro since September 30.

The trust's overall weighted average cap rate also decreased 10 basis points to 6.1% at the end -- relative to Q3. As disclosed in December, the REIT financed and extended its $300 million term loan late in the quarter, which will result in interest expense savings of $0.04 per unit going forward. And when combined with the financing of its U.S. dollar term loan disclosed in Q3, total interest cost savings amount to $0.07 per unit commencing this year.

Total net leverage, as at the end of the year, was 21%, essentially flat from Q3. The trust's current liquidity is about $790 million, representing cash of $290 million and the undrawn operating line of $500 million.

I will now turn the call back to Kevan.

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [4]

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Thanks, Teresa. As always, I'll keep my comments brief, as I trust you've had an opportunity to review our MD&A and press release. I think, as Teresa mentioned, I would characterize the fourth quarter as being slightly ahead of our expectations financially when accounting for the onetime [rest] charge in the fourth quarter and the lag in deploying proceeds from the equity offerings in April and October, and I think we are also ahead of schedule slightly in terms of progress against our strategic plan.

As Teresa mentioned, during the quarter, we acquired 5 modern distribution and e-commerce fulfillment centers totaling 8.5 million square feet, representing, importantly, growth in 4 of our target markets in the U.S. In all, we acquired over $900 million in income-producing properties located in our target markets in Canada, the U.S. and the Netherlands at an average cap rate of 5.5% and $33.4 million on a 191-acre development site in Houston, Texas, which will eventually accommodate roughly 2.5 million square feet of new distribution space upon completion.

During the quarter, we also closed on the disposition of 6 assets in Canada and the U.S., bringing our total disposition program for the year to $105.8 million, which was admittedly at the low end of our guidance for 2019. As I mentioned on the last call, we expect our dispositions for 2020 to come in at roughly $50 million in total. As a result of this acquisition and disposition activity, our Magna concentration by revenue and GLA decreased to 42% and 35%, respectively, putting us well ahead of schedule on our previously announced target of reducing our Magna concentration to under 50% on a revenue basis by the end of 2019.

Operationally, we completed a total of roughly 2.8 million square feet of leasing in 2019, at an average increase in rental rate of 7.7%. Further, we have negotiated extensions on roughly 70% of the 2.2 million square feet of lease expiries in 2020, at an average increase in rental rate of approximately 7%. The remaining 650,000 feet of expiries in 2020 occur in the second half of the year, and we anticipate an average increase in rental rate of 7% to 8% on those renewals or new leases.

Our vacancy increased in Q4 by 70 basis points from the previous quarter, due entirely to the addition of 300,000 square feet of vacant space related to the South Haven Memphis Airport acquisition made late in Q4. As Teresa mentioned earlier and as disclosed in our MD&A, same-property NOI for 2019 increased by 4.5% on a constant currency basis and exceeded our annual guidance of 2% to 3% for the year.

Moreover, same-property NOI growth was positive across all geographic segments on a constant currency basis, ranging from 0.6% in Austria to over 25% in the Netherlands. The increase in the Netherlands, as per the last quarter was due primarily to leasing activity and occupancy gains in late 2018. We reiterate our same-property NOI growth guidance of 3% to 4% for 2020, excluding intensification and 4%, including intensification.

As an update on our development program, we completed the permitting stage for a development project in Stuttgart, Germany, in Altbach and hope to commence construction in early second quarter 2020 for completion in early 2021.

We are in lease negotiations with prospective tenants for the entire building. Our 520,000 square foot development project in AllPoints, Indianapolis is nearly complete and should be ready for occupancy sometime in early Q2 2020. We are currently responding to 4 separate RFPs for the entire space. In Houston, wet conditions have delayed the site preparation of our development project on Highway 90 in the northeast of Houston. We hope to commence construction of the first 2 buildings, comprising 650,000 square feet in the second quarter, with completion scheduled for late 2020 or early 2021. And as previously discussed, we anticipate that these active development projects will further enhance the quality of our portfolio, generate superior long-term returns and create significant NAV growth for our unitholders upon stabilization, which is a major component of our corporate strategy and philosophy.

As Teresa mentioned, the combination of the Austrian restructuring charge and additional units from the October 31 equity offering negatively impacted FFO and AFFO per unit for the quarter, but the restructuring charge will help to improve our cash flow in 2020 and beyond. And the equity raise will enable us to execute on our growth plans in conjunction with planned refinancing and potential financing activities in 2020. ESG will also be an important focus for myself and the team in 2020. Building upon the principles outlined in our sustainability plan released in 2019, we plan to issue a comprehensive update on our ESG activities and objectives for 2020 within the next 60 days, and we look forward to sharing that with you all.

Given recent developments regarding the coronavirus, I think it would be appropriate to include a comment at this time. While I'm certainly no expert on this matter, there is no question that the spread of the virus has and will have a significant impact on the global supply chain, which by extension could impact the number of our tenants' businesses as their access to product, particularly from Asia may be temporarily disrupted.

With that said, we are in regular contact with our tenants and, to date, have not received any reports or observed any major reduction in activity at our properties. Further, I think that the strength of our covenant -- of our tenant roster positions us relatively well in periods of disruption, such as this. By any measure, we have a defensive tenant roster and lease profile. We will, of course, continue to monitor the situation and provide any updates to you all if necessary.

In closing, our major financial and strategic objectives for 2020 remain similar from 2019, that is: driving FFO and AFFO per unit growth and increasing our scale and diversification in our target markets while maintaining conservative capital ratios. As I have mentioned previously, the addition of Jon and Witsard as the Heads of our U.S. and European programs, respectively, and the opening of our new offices in Amsterdam and Dallas, significantly enhances our investment and asset management reach and capabilities locally in those markets and positions us to pursue and execute on a higher proportion of value-add opportunities, particularly in the U.S., where we already have a very strong foundation of newer generation, distribution and e-commerce fulfillment centers in key distribution markets. The recent announcement of our acquisition of 3 state-of-the-art assets being developed in the Netherlands also expands our foundation of core distribution and e-commerce assets in our target markets in Europe, on which we will continue to build.

And on that note, I will open up the floor for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Sam Damiani with TD Securities.

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Sam Damiani, TD Securities Equity Research - Analyst [2]

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I just want to congratulate you on a very good year. I want to talk about the strategic plan that you announced about 18 months ago. You're making very significant progress, as you noted. And are you -- what are your thoughts about those targets that you set late in 2018? And any thoughts of updating them?

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [3]

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Well, it's a great question, Sam. I think when we drafted the strategic plan in 2018, you can't -- we did not make the assumption that the equity markets per se would be supportive. So we wrote the strategy in such a way where we can execute it -- execute on it, using our balance sheet. But the markets, I think, were very supportive. And I think we took advantage of that. So I would say that we, in terms of scale and in terms of diversification, are certainly well ahead of the plan. But I think as we move forward, we're not -- we're in a position where we don't want to assume things from a growth perspective. So every year, we look at it primarily on a conservative basis.

But certainly, I think the actions we took in 2019 position us to exceed those targets for 2020 and 2023.

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Sam Damiani, TD Securities Equity Research - Analyst [4]

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Okay. Just a follow-up on the special purpose properties, they're down to just 23% of fair value today, down significantly. Of the 7 assets, 4 have remaining lease terms between 3 and 4 years. Just wondering how you're looking at the potential timing of those lease extensions at those specific properties?

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [5]

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Well, I think as we -- as the remaining lease term goes down. I think, ironically, we're -- we have more comfort because I think the plans for -- we wanted to do in Austria. When you go in these assets in these facilities, and you see the amount of investment and commitment made by Magna in these facilities, they're impossible to replicate. And they're extremely -- I mean, prohibitively expensive to re-create.

So as we've said, rebalancing the portfolio is a long-term strategy of ours. I think the deeper we go into this, I think the better opportunity we have to create better conditions for that potential rebalancing. So I think we're going to remain patient. And I think our -- the conditions for us continue to improve. So that's how we're looking at it. I think we're looking at it with even more confidence than we did 2 years ago.

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Sam Damiani, TD Securities Equity Research - Analyst [6]

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That's great. That's helpful. And one last question. I appreciate the comments on the COVID-19. On the existing portfolio, are you seeing any impact on leasing discussions?

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [7]

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We have not yet. And I think that, that's a fair question and a fair point. We are in active discussions on a number of fronts, involving a number of properties. We have not seen any delay but not to say it can't happen.

I think what gives us confidence is we're 70% through our leasing activity in 2020. We don't have that much role in 2021. So it could, I will admit that it could have an impact, not because failure of businesses and not just -- as you can imagine, a number of companies will start to hoard cash. A number of companies will delay decisions until they see how this is going to develop or end, but we haven't seen anything yet.

We haven't seen an interruption in our leasing discussions to date.

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Operator [8]

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Our next question comes from the line of Chris Couprie with CIBC.

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Chris Couprie, CIBC Capital Markets, Research Division - Research Analyst [9]

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Maybe carrying on with the leasing discussion. Just in general, are you approaching leasing and renewals much differently between the various geographies?

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [10]

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I think, 100%. And I think -- but remember, a lot of our -- a lot of the lease expiries have extension rights in there. Now it may be set to market rents. So there's a discussion on that. But in terms of the extension terms, sometimes we're locked in. That's per the lease. So number one, I'll start there. But obviously, we're going to push harder in the GTA. We're going to be more comfortable with shorter lease terms in the GTA than other markets. I think that goes without saying.

But I will tell you this, it does feel, with very few exceptions, that broadly speaking, our market fundamentals remain strong and are growing, getting stronger. So the approach that we would take in the GTA, for example, we may apply it more broadly across our portfolio moving forward.

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Chris Couprie, CIBC Capital Markets, Research Division - Research Analyst [11]

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Okay. And then with respect to the investment and asset management teams that you're looking to build on in Europe and the U.S., maybe if you can just give us some color in terms of what's kind of left to do there? And maybe see if there's any sense for the potential G&A impact this could have?

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [12]

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Well, I think Teresa mentioned the budget. That includes the addition of asset management and investment team. So we've already budgeted that in. So the number you have, has that in there. I think we want to remain a small and nimble team. And so I don't think that there is too much additional overhead being contemplated, and we're already in discussion -- Jon and Witsard are already in discussions with a few key people, to add to the team.

So we should be able to round out those teams in 2020, and that would be in the budgeted number that's been communicated.

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Chris Couprie, CIBC Capital Markets, Research Division - Research Analyst [13]

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Okay. Great. And then maybe just last one for me. With respect to Magna for the year-end target to have it below 40% of revenues. You were at 42% end of the year. So obviously, there could be a wide range between 40% and something less than 40%. Can you maybe just walk through what you could potentially see that number looking like at the end of the year?

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [14]

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Well, I think we -- as we mentioned, we're only looking at a small number of noncore dispositions in 2020. We're not anticipating any large transactions. So on that basis, it would all be because of the growth of the denominator. We are expecting a year, we did $900 million -- over $950 million in acquisitions in total in 2019. Maybe we don't repeat that in 2020, but we do expect to be busy. So if we add a similar amount of assets to the portfolio in 2020, I mean, if you do the math, we should be close to 30%, 35%. That would be our expectation.

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Operator [15]

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Our next question comes from the line of Mike Markidis with Desjardins.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [16]

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Thank you for the budget on the G&A, very helpful. I was just wondering if you could give us a similar expectation for cash taxes next year.

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Teresa Neto, Granite Real Estate Investment Trust - CFO [17]

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Yes. So next year, I'm expecting around $7 million to $7.5 million, and that would be kind of a normal state. But we do have a similar position where I've got about $2.4 million of provisions that could potentially turn back, which would then take our provision down to around the $5 million similar to this year, $5 million, $5.5 million. So right now, I'm assuming the $7 million, $7.5 million, but we'll have to see. And I won't -- it's too early to determine whether or not those provisions will be statute barred, but there is another $2.4 million potentially that could be reversed.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [18]

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Got you. Okay. And then also equally as helpful, Kevan, thank you for the same-property NOI growth guidance of 3% to 4% next year. Are you able to walk through just sort of the different components, like roughly how much of that would be occupancy driven? And how much of that would be contractual bumps versus leasing activity?

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [19]

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Yes, almost entirely would be rent growth, Mike, because the 300,000 in vacancy that came on with the South Haven acquisition, that was after -- or that was just when we had our Q3 call. So we're maintaining our same-property NOI guidance from Q3, which I think is appropriate, but that is entirely rent growth.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [20]

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Okay. And it sounds like you've got some pretty nice escalators built in then for 2020.

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [21]

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Well, and some lease deals as well. And I think we can reach the 3% based on the rent escalations plus leasing that we did in 2019 and leasing that we're doing now for 2020.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [22]

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Okay, that's helpful. And congrats on the good year.

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [23]

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Thank you.

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Operator [24]

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(Operator Instructions) Our next question comes from the line of Neil Downey with RBC Capital Markets.

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Neil William Edward Downey, RBC Capital Markets, Research Division - MD of Global Equity Research & Associate Head of Canadian Research [25]

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My questions might be a bit more mundane, being late in the queue. But Teresa, your interest expense was about $7 million in the fourth quarter. With all of the refinancing efforts that occurred through the quarter, what's that look like for Q1 in terms of a run rate?

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Teresa Neto, Granite Real Estate Investment Trust - CFO [26]

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I'm just looking -- so I think for next year, we're budgeting around $30 million, but maybe even less, like $28 million. So if you want to look at that, $6 million, $7 million a quarter.

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Neil William Edward Downey, RBC Capital Markets, Research Division - MD of Global Equity Research & Associate Head of Canadian Research [27]

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Yes. Okay. And you've been able to earn a nice carry on cash balances. But as we all know, rates just got cut, not inconsequentially this week. So presumably, that will have some sort of a modest impact on your interest income. And to the extent it does, how quickly will that show up? Like is there a 30, 60, 90-day lag? Or will it be effectively instantaneous?

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Teresa Neto, Granite Real Estate Investment Trust - CFO [28]

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I think it will be relatively instantaneous. We had a little bit of money tied up for 30 days, but right now, not really. So our average rate, for instance, just by way of example, in February, we obtained about 1.39% on our cash amongst all the markets. But I think we'll probably see that obviously drop now, so we'll be going down. So I think you're going to see it probably more immediately. So we'll probably see something more in the closer to the 1% range.

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Operator [29]

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Our next question comes from the line of Himanshu Gupta with Scotiabank.

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Himanshu Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [30]

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On the South Haven Memphis property vacancy of around 300,000 square feet, what are your thoughts in terms of lease up? And does that include in your 3% to 4% same-property NOI growth?

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [31]

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Yes. No, as I mentioned, Himanshu, it does not because we provided guidance without it. So I think, and looking at our team here, I think we are assuming that, that is leased up by the fourth quarter of this year, roughly, to give you an indication of our expectations. And that could certainly boost same-property NOI for that quarter.

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Himanshu Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [32]

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Fair enough. And on the development, it looks like you're making good progress on Plainfield, Indianapolis. What is your expectation in terms of lease-up, I mean when do you plan to announce that? And what rents are you underwriting on that property?

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [33]

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Well, again, I think we have budgeted or are expecting to have that leased up in the second half of this year with rent commencing -- I'm not sure if rent commences in the fourth quarter or early in 2021. I would expect -- we would expect to see some rent this year. We did assume 50% leased and 50% leased.

So one rent -- 50% of the building rent commencing in Q4 and 50% rent commencing early in 2021. However, from a leasing strategy perspective, we're holding out for one tenant for all 520,000 feet. So I would say we would expect by the end of this year at the latest to have the entire building leased and revenue producing.

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Himanshu Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [34]

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Okay. That's helpful. And maybe just switching to the acquisitions -- on the European acquisitions. So specifically the Tilburg distribution facility. What going-in cap rate is on that property? And what is the near-term and long-term upside on this acquisition?

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [35]

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Sorry, what acquisitions?

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Himanshu Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [36]

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On the Netherlands property, Tilburg distribution facility?

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [37]

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Oh, yes. Yes. So that's the 3. So those are brand-new assets being built, I think, to come on starting in June. And then there's an expansion piece that comes on in early 2021. So these are all core assets, we would consider them core assets in our Netherlands distribution markets.

And in terms of contractual rent growth, they're all set to CPI, Dutch CPI, which I don't know exactly what it was for 2019. I think it's been averaging around 2.5%. And they're all on long-term leases.

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Himanshu Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [38]

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Okay. And maybe just generally speaking, how different is the European market versus the U.S. industrial market? I mean in terms of e-commerce penetration or sophistication of supply chains? And how much product is available on sale like in the Dutch or German markets?

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [39]

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Well, I think it's been a very competitive market in Europe. I think most -- we were talking about it internally the other day. A lot of the assets in Europe are institutionally held, and they're not selling. And you look at the U.S., and you could say the same thing from an ownership perspective profile. However, you have a 1031 exchange rule in the U.S., you tend to get a lot more investment volume despite by nature in the U.S. and maybe a lot more merchant building in the U.S. itself and a lot more supply.

It's much more supply-constrained in Europe. I don't think I'm saying -- I think I'm stating the obvious. So there is a lack of supply. And combined with that, one of the reasons we really like the fundamentals in Europe is e-commerce on the continent is quite nascent when you compare it to Europe -- or sorry, when you compare it to the U.S., certainly, when you compare it to Asia and even when you compare it to the U.K.

So when we combine what we think is going to be very strong growth in e-commerce penetration in Europe, a lack of supply, we think the fundamentals are very supportive of strong rent growth over the next 5 to 10 years there.

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Himanshu Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [40]

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Okay. And maybe just final question from me. How actively are you looking in Canada for acquisitions?

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [41]

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Well, in Canada, the short answer is we are. We certainly don't want to -- there's been many opportunities where we're just unwilling to stretch to prices that others are going to. So we have admittedly been priced out of a few deals. And we're focused on the GTA. We will look at Montreal. Vancouver, I think, is just too expensive for us. And I think also Alberta, as I mentioned before, we had a development deal that fell through last year, and we were unwilling to move on our pro forma for that. So the deal economically didn't work in the end.

But for the right deal in Alberta, we do believe that, that's going to be an important distribution market in Canada. There has been some positive net absorption in Calgary. So we've looked there for the right deal, but really, our growth in Canada, we'll focus on the GTA and potentially Montreal.

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Operator [42]

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Our next question comes from the line of Troy MacLean with BMO Capital Markets.

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Troy Raymond MacLean, BMO Capital Markets Equity Research - Analyst [43]

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For Phase I in Houston, you've mentioned 200 bps development spread. Are you seeing any cost pressure that would bring down that spread for Phase II?

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [44]

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I don't think so. I think the cost pressure -- we would expect that the cost pressure would be associated with rent pressure as well. So I don't anticipate to be a material reduction in the second phase, that's still to be seen. We'll see what happens over the next couple of years, but that's our viewpoint today on that.

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Troy Raymond MacLean, BMO Capital Markets Equity Research - Analyst [45]

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And if you look out to 2021 or 2022, are there any new markets that you want to develop properties in, in either the U.S. or Europe?

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [46]

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Well, I think it's a great question. And as I attempted anyways to illustrate in my comments about Jon and Witsard, one of the reasons why Jon and Witsard are here is I think it enables us to pursue more management-intensive, value-add investments. And not that we didn't look at them before. But I think it gives us much more comfort to pursue potentially different types of assets and to look at different markets and that we feel are complementary, and I'll use the U.S. as an example.

We have a great portfolio, 20 million square feet, core products, key distribution markets. And now I think we're in a position with our office in Dallas and the team to look at potentially different value add opportunities, look at more consumption-based markets such as Florida, potentially Denver as we move forward. And frankly, there are markets where we're reaching our critical mass. I think we've had a great -- I think we've done a great job of being in centerized locations in our target markets. But as we're growing, if we are successful, and we continue to grow, I think we'll look at expanding the footprint in certain markets where we feel could add a little more growth to our story. And look at assets that, frankly, might have a different risk profile to us, but I think we can afford to do that based on our tenant roster, the types of assets we already own, our lease expiry profile, we can afford to add a little more risk to generate some higher returns over the next few years.

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Troy Raymond MacLean, BMO Capital Markets Equity Research - Analyst [47]

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And this -- I know this is probably early, but when you mentioned higher return, like what type of return would you -- I mean I think you're about 5.5% in 2019. Like, is it 100 bps spread you want to do -- you'd want to have value add?

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [48]

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I think that, that would be fair. I think, look, at the core of our business, we are a logistics real estate company. We don't want to move away from that. But that being said, we've always been open to infill locations to the type of assets that we feel down the road will fulfill that sort of service offering and generate higher returns.

But frankly, it's going to come with a lot of -- it may come with higher turnover, shorter lease terms, et cetera. And I always counsel investors that it is great -- same-property NOI is great, but it is not the only metric.

It's -- what's really important to us is that we're growing our cash flow. So if you're moving rents to market and you're generating higher NOI, but you're paying more to do that, and it's not really translating into your bottom line, that's not the type of business that we want. So it has to be something that fits strategically for us. And really generates growth and cash flow over the long term.

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Troy Raymond MacLean, BMO Capital Markets Equity Research - Analyst [49]

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Would it be fair to say like value add opportunities, there's maybe less competition for those type of properties rather than the fully leased kind of class A you bought so far?

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [50]

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Well, certainly, it's hard to say that these -- like you look at and I'm not -- it's not totally analogous. But if you look at the older, smaller Bay assets in Toronto, it's hard to say they're not competitively bid. Those have been fantastically bid.

But if we remain disciplined in our target markets, I think we have the relationships where we will see are fair amount of off-market deals. I think that, that is fair. They could be smaller single acquisitions or smaller portfolio acquisitions. And now I think we have the right people and we'll have the right teams on the ground to find those opportunities.

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Operator [51]

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(Operator Instructions) Our next question comes from the line of Mark Rothschild with Canaccord Genuity.

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Mark Rothschild, Canaccord Genuity Corp., Research Division - MD & Real Estate Analyst [52]

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My questions have generally been asked already, and I appreciate your comments you made on the virus, obviously there is a lot that's unknown. But I'm curious how this is impacting your comfort with buying properties right now? And do you think this will put people on the silence for some time?

Obviously, you guys have plenty of capacity with the balance sheet?

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [53]

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Well, in short, Mark, we had a long discussion about this internally. We had a long discussion about this with the Board. And I think our thesis, the consensus in the room with the team is that we are going to continue to pursue acquisitions. And frankly, if this creates -- from lack of travel alone, if this creates some opportunities for us, I think we want to be nimble. We want to remain nimble and creative and capitalize on those opportunities. So the short answer is, we are not changing our investment focus. We will monitor the situation. But right now, there's nothing that indicates that we'll be backing off that.

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Operator [54]

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Our next question comes from the line of Brad Sturges with Industrial Alliance Securities.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [55]

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Just maybe following up on the acquisition environment right now, and you've highlighted a pretty strong year last year. I guess, how does the acquisition pipeline look as it stands today? And where are you seeing the better opportunities within the current pipeline?

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [56]

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Well, today, and -- Brad, it does -- it really does change quarter-to-quarter, or at least half year to half year. So right now, where we sit today, I think we are seriously looking at roughly $400 million in acquisitions. It does feel like roughly 50% or above that is in the U.S. It has been relatively quiet in Germany right now, and that might be something that's a little more structural and that people are not letting go of assets where there hasn't been that much trading that's been going on. There's been more in the Netherlands. But if you go back 6, 7 months ago, there was a lot more activity in Germany, and there was nothing going on in the Netherlands.

So it really changes. But where we sit today, there are probably more of our leasing -- or sorry, more of our acquisition opportunities. Are emerging in the U.S. versus Canada or Europe.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [57]

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Okay. Great. And one other question. In terms of leasing discussions and negotiations right now, is there any other opportunities within the existing portfolio for intensification or expansion within the current discussions at the moment?

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [58]

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There are a couple and one we're looking at right now in Canada. I don't want to say too much more because I don't want to compromise our efforts there. But -- and keep in mind, on top of the development, we have land in Poland. We have a small parcel of land in Columbus, and we have the remaining land after Phase I in Houston. So we'll continue to look at intensification within our land holdings in our portfolio.

But right now, we do have one we're working on in Canada.

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Operator [59]

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Our next question is a follow-up question from the line of Sam Damiani with TD Securities.

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Sam Damiani, TD Securities Equity Research - Analyst [60]

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Just a couple of quick clarifications. First, on the same-property NOI growth guidance for 2020. Was there any sort of meaningful change between the sort of first couple of quarters of the year and the last half of the year? Or is it pretty -- expected to be pretty consistent?

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [61]

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You mean in 2020?

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Sam Damiani, TD Securities Equity Research - Analyst [62]

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Yes.

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [63]

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I don't know the answer to that, Sam. I -- that's a great question. I don't know the answer to that. If I were to guess today, I would guess, probably be a little bit stronger earlier than later.

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Sam Damiani, TD Securities Equity Research - Analyst [64]

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Okay. And then lastly, just on the acquisition pipeline, in response to an earlier question, it sounded like you said you kind of expected a similar volume as 2019. Was that what you intended to say? I just want to clarify.

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [65]

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A similar volume to 2019? Yes. Yes, but what I did say is we did $950 million. So we may not do as much in 2020, but I think it will be a similar number. If it's slightly less, that's -- I want to make the point, and thanks for asking for the clarification, to clarify, I want to make the point, if we did less than that, we would be -- we would still be happy.

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Operator [66]

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There are no further questions at this time.

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Trustee [67]

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All right. Thanks, operator.

On behalf of the trustees and the management team here at Granite, thank you again for participating on our call today. And to our unitholders, thank you for your continued trust and support. Have a great day.

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Operator [68]

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That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.