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Edited Transcript of GRT.UN.TO earnings conference call or presentation 1-Aug-19 6:00pm GMT

Q2 2019 Granite Real Estate Investment Trust Earnings Call

Toronto Aug 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Granite Real Estate Investment Trust earnings conference call or presentation Thursday, August 1, 2019 at 6:00:00pm 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 & Director

* Teresa Neto

Granite Real Estate Investment Trust - CFO

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Conference Call Participants

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* Chris Couprie

CIBC Capital Markets, Research Division - Research Analyst

* Howard Leung

Veritas Investment Research Corporation - Investment Analyst

* Michael Markidis

Desjardins Securities Inc., Research Division - Real Estate Analyst

* Nana Yang

Scotiabank Global Banking and Markets, Research Division - Associate

* 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 the Canadian Securities administrators and the U.S. Securities and Exchange Commission from time to time, including the Risk Factors section of its Annual Information Form for 2019 filed on March 6, 2019.

 

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 Q2 2019 condensed, combined, unaudited 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 from time to time for additional relevant information. As a reminder, this conference is being recorded, August 1, 2019.

 

I would now like to turn the conference over to Kevan Gorrie.

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

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Thank you, operator, and thank you, everyone, for taking the time to join us for our second quarter earnings call.

 

I am pleased to be joined this afternoon 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 the review of the financial highlights for the quarter. I will then follow with comments on acquisitions, operations, development and strategy and then open up the call to any questions that you may have.

 

Over to you, Teresa.

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

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Thanks, Kevan, and good afternoon all, and thank you for taking the time to join this call. The second quarter was acted transactionally with Granite executing acquisitions of 3 investment properties totaling approximately $225 million followed by an additional $83 million of investments announced post quarter and completing a $231 million equity offering in April.

 

FFO per unit for Q2 was $0.89, a $0.07 increase relative to Q2 2018 and flat to Q1 of this year. Included in this quarter's FFO is $0.6 million of lease termination fees and $2.1 million of additional G&A expense related to the departure of the trust's former CFO. Excluding these 2 items, FFO per unit would be $0.92. The comparative FFO of Q2 last year was impacted by a realized $1.9 million foreign exchange loss on the remeasurement of U.S. dollar proceeds related to sold properties in Q1 of last year and an incremental $1 million of G&A costs relating to departed executives in that year. Therefore, adjusted for these 2 items, FFO per unit for Q2 2018 would have been $0.88. Further, despite Q2 2019 being negatively impacted by the temporary dilutive effect of the $231 million equity offering, where proceeds have not yet been fully deployed, this was mostly offset by incremental FFO from new acquisitions, net of dispositions as well as a small net positive foreign exchange impact driven by a weaker Canadian dollar relative to the U.S. dollar, offsetting the effect of a strengthened Canadian dollar relative to the euro.

 

Granite's AFFO on a per unit basis in Q2 was $0.88, which is $0.24 higher than Q2 2018 and $0.02 higher than Q1 of this year. Included in the current quarter's AFFO are the termination fees and incremental G&A costs previously discussed, and in the comparative AFFO of Q2 2018 included are the foreign exchange loss and incremental G&A costs for departed executives also discussed. Therefore, adjusting for these various nonrecurring items, AFFO per unit for Q2 2019 would be $0.91 and for Q2 prior year, it would be $0.70, a $0.21 difference.

 

AFFO per unit was favorably impacted by a higher FFO per unit and significantly lower AFFO-related capital expenditures incurred in the quarter of only $0.6 million compared to $6.3 million in the same period last year. Capital expenditures in Q2 2018 reflected expenditures made in relation to the re-leasing activities of the trust's Novi, Michigan and Olive Branch, Mississippi properties. For fiscal year 2019, we are expecting total maintenance capital expenditures to reach approximately $7 million or about $2.5 million per quarter for the remainder of the year. As a result of a relatively low CapEx quarter and strong FFO performance, the AFFO payout ratio came in at 83% in Q2.

 

Operating metrics continue to demonstrate positive momentum. NOI on a cash basis for the quarter increased by $3.1 million or 5.6% from the same quarter in 2018 and by $3.2 million or 5.8% from the first quarter of this year. Same property NOI for Q2 2019 was flat relative to both Q2 last year and the first quarter of 2019. On a year-to-date basis, same property NOI is up $1.8 million or 2% relative to last year. The positive impact from contractual rent increases realized at the beginning of 2019 is being partially offset by the vacancy of 600 Tesma Way in Vaughan and 2100 Center Square Road in New Jersey. Also, the impact of the 10-year lease renewal at our property in Haaften, the Netherlands completed last year, which resulted in free rent and a reduction of rent as well as a negative FX impact with same property NOI variances skewed towards the weaker euro relative to the Canadian dollar. Same property NOI growth on a constant currency basis, eliminating for the impact of foreign exchange, is 0.6% for the second quarter and 2.8% year-to-date.

 

G&A for the quarter was $1.4 million higher than Q2 of last year and $0.7 million higher than the first quarter of this year. Included in G&A for this quarter are salary and unit-based compensation of $2.1 million related to the departure of the trust's former CFO in June previously mentioned. Assuming no further fair value variances from the remeasurement of unit-based compensation liabilities, G&A on a normalized basis, at this time, is estimated to be approximately $6 million per quarter for the remainder of the year.

 

The trust's balance sheet remains very strong comprising total assets of approximately $4.4 billion at the end of the second quarter, an increase of $283 million since the end of the first quarter this year, driven by the trust's acquisition activity partially funded by term loans drawn down in December 2018, and the $231 million equity offering completed in April as well as an approximately $70 million fair value gain recognized on the trust's investment property portfolio. Approximately half of this fair value gain is attributable to the trust's properties is located in the GTA. The increase in total assets was partially offset by a decrease of $40 million on the trust's U.S. and European investment property portfolios due to a strengthening of the Canadian dollar against both currencies since March 31, 2019. The trust's overall weighted average cap rate decreased 20 basis points to 6.3% at the end of this quarter. As of quarter end, Granite had a total of 6 assets held for sale comprising approximately 800,000 square feet, and an IFRS value of approximately $50.5 million and -- that contributes -- contributing annualized revenue of $3.6 million. Since Q1 of '19, we added 1 additional property located in Toronto to the assets held for sale category. The remaining 5 properties are located in Michigan and our Magna tenanted.

 

Total net leverage as of June 30, was 21%, slightly below the first quarter of 2019, which was at 22% due to the net proceeds received from the April equity offering as well as the fair value gains recognized on investment properties.

 

The trust's current liquidity is just below $1 billion, representing cash on hand of approximately $450 million and the undrawn operating line of $500 million. Net leverage and liquidity pro forma of the acquisitions and investments announced on July 18, and the completion of the disposition of the 6 assets held for sale is estimated to be 27% and approximately $650 million, respectively.

 

I'll now turn the call to Kevan, who will discuss the operational results and recent investment activity in greater detail.

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

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Thanks, Teresa. As in the first quarter, I would characterize our second quarter as being in line with our expectations and slightly ahead of schedule in terms of progress against our strategic plan. When adjusting for the onetime items, as Teresa mentioned, FFO and AFFO per unit came in ahead of Q1 despite the strengthening in the Canadian dollars since March 31, the sale of the Iowa assets in the first quarter and the $230 million equity issuance on April 30, which I believe positions us well for continued growth in FFO and AFFO per unit in the second half of the year. In the quarter, we closed on roughly $225 million in acquisitions, which included the Wayfair, Congebec assets in Mississauga and the newly constructed 800,000 square-foot Quaker distribution center in the Rickenbacker market of Columbus, Ohio. I will discuss the proposed expansion of the Congebec facility as part of my commentary on development momentarily.

 

Subsequent to the quarter, we acquired a 260,000 square-foot distribution center in the Netherlands and a newly constructed 300,000 square-foot distribution center in Horn Lake, Mississippi, a suburb of Memphis, with close proximity to Memphis International Airport and FedEx' main global air hub. These assets were acquired at an average going-in cap rate of 5.9% and importantly represent growth in 2 of our target markets in Europe and the U.S., respectively. As disclosed in the MD&A, there are 5 Magna-tenanted assets located in Michigan that are being held for sale as at June 30. We have negotiated a purchase and sale agreement with the buyer and expect to conclude the transaction in the third quarter. We are also currently under PSA for the sale of Finchdene asset, which we also hope to close by the end of the third quarter. Following the acquisitions and dispositions, which occurred in the first half of the year, our Magna tenant concentration by revenue and GLA has decreased to 48% and 41%, respectively, putting us well ahead of schedule on our previously announced target of reduction of our Magna concentration to under 50% on a revenue basis by the end of 2019.

 

Operationally, we have renewed 2.43 million of the 2.47 million square feet of space that was scheduled to expire in 2019. Further, we have negotiated extensions on 800,000 square feet representing 45% of the 1.8 million square feet of expiries in 2020 at an average increase in rental rate of 4.5%. The remaining 1 million square 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 renewal or re-leasing.

 

Of the 386,000 square feet of vacancy showing on the lease maturity schedule, we now have only 90,000 square feet of vacant space related to the Novi asset in Michigan and 145,000 square feet coming from our 600 Tesma asset in Vaughan. We are finalizing a conditional lease deal on the Tesma property with a strong credit rated tenant for a 10-year term and we expect rent to commence in the third quarter. With that, occupancy is expected to move slightly higher in Q3.

 

As Teresa mentioned, and as disclosed in our MD&A, same property NOI is up 2.8% year-to-date on a constant currency basis, but decreased significantly from Q1 due to a number of factors that aided our growth in the first quarter and reversed or decreased in the second quarter, including our Novi, Michigan property. We expect same property NOI to strengthen in Q3 and Q4 from this quarter due to leasing activity year-to-date and the anticipated lease-up of 600 Tesma and we reiterate our guidance of 2% to 3% for 2019.

 

As an update on our development program, we are proceeding to the building permit and tendering phase on our Altbach development project in Stuttgart, Germany, and hope to commence construction at the site in late fourth quarter of this year or early Q1 2020. Following a very productive marketing process, we are in discussions with a few prospects for the entire building.

 

Our development projects in Texas and AllPoints, Indianapolis continue to progress on schedule, with substantial completion expected in Q3 2019 and Q2 2020, respectively. As I touched upon earlier, we recently entered into an agreement with the tenant, Congebec at our recently acquired 2095 Logistics Drive property in Mississauga to expand our premises by approximately 60,000 square feet. The expansion is expected to cost approximately $9 million and generate an unlevered NOI yield of 8.9%.

 

The lease term on the expansion will be coterminous with their existing space at roughly 19 years remaining. We are very pleased to be working with Congebec on the expansion of this state-of-the-art food distribution facility years ahead of schedule.

 

For the proposed development in Calgary, we continue to assess various environmental planning and zoning issues related to the acquisition of the land and have no update at this time on the potential closing of that transaction. On a final development note this quarter, we closed, as announced, on the acquisition of 191 acres of land in Houston, Texas as part of the joint venture with NorthPoint Development. We hope to commence construction shortly on the first phase of the 2.5 million square-foot business park or roughly 650,000 square feet with completion scheduled for Q2 or Q3 of 2020. As announced, we expect to generate a development spread of roughly 200 basis points over stabilized yield.

 

And as previously discussed, we anticipate that these projects will further enhance the quality of our portfolio, generate superior returns and create significant NAV growth for our unitholders, a major component of our corporate strategy and philosophy.

 

In closing, it has been a very active and productive first half of the year as we have made significant progress against many of our strategic objectives for 2019. And following the equity raise, in April, we have ample liquidity to execute on acquisitions and development through 2019 while preserving our low leverage and balance sheet flexibility. We also look forward to launching our new website and sustainability plan in this quarter.

 

On that, I will now 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 Chris Couprie with CIBC.

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Chris Couprie, CIBC Capital Markets, Research Division - Research Analyst [2]

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Maybe just starting out with Europe. So you've closed on your first acquisition with a new office there. Can you maybe just discuss more broadly what the strategy in Europe is going to be going forward? What markets are you looking to target? And what size of properties and so on that you're looking to acquire?

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

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I appreciate the question. Right now our strategy in Europe is focused on the Netherlands, Germany and Poland. Now that may expand to one on one markets, but right now we feel those are the markets where we should be pursuing core and value-add properties first, and that's where we've been spending our time. On that, Chris, we've looked at individual asset sales and portfolio. We've recently pursued a portfolio transaction, but the pricing got a little heavy for us. So when we look at potential opportunities there, we're looking for individual assets on stabilized basis, redevelopment asset opportunities and even, to a smaller degree, development opportunities in our target markets.

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Chris Couprie, CIBC Capital Markets, Research Division - Research Analyst [4]

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And just in terms of pricing, how does pricing compare in Europe with, say, North America?

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

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Well, I think pricing in Europe is lower than the U.S. and comparable to what we're seeing in Toronto and even potentially Vancouver. And for a combination of factors, one, I think as you're aware, financing is extremely attractive and low, particularly in Germany. So the spread over financing continues to be attractive in those markets. And two, the leasing fundamentals continue to be very strong. I think as we've discussed, e-commerce is still in its early stages in continental Europe. We're seeing the impact. We're beginning to see the impact of e-commerce demand on those markets. Occupancy continues to move up. And we believe, and I think others agree, that rental rates are going to continue to climb and climb at a more rapid pace over the next 5 years in those markets.

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Chris Couprie, CIBC Capital Markets, Research Division - Research Analyst [6]

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And just sticking with Europe. Is there a potential to make any dispositions in that market of Magna-tenanted properties?

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

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We're currently working on dispositions of our Magna-tenanted assets -- or sorry, I'll just say assets, in the U.K. and Spain. And I think there are opportunities for a few others in Europe in 2019. And I think as we've announced, we expected to sell or dispose roughly $150 million in total to $200 million this year, and I think we remain on track to do that.

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Chris Couprie, CIBC Capital Markets, Research Division - Research Analyst [8]

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Okay. Great. And then just 2 quick questions on dispositions. Number one, the Finchdene Square. Kind of what led to that decision? And then secondly, in the disclosure, a tenant had a purchase option, I guess, on a property that they've exercised. I would really like to know which property that is. And if there are any other details you can disclose around that?

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Director [9]

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On the first question regarding Finchdene. That was an asset that we had listed for lease or sale. It is in Scarborough, it is in the GTA, but it is not -- by its criteria not core to our strategy. So we went into market for a tenant or a buyer and it turned out that the buyer prospects were more attractive than the lease prospects, so we decided to move forward with the sale -- or we are moving forward with the sale. On the question regarding the right to buy, we are in -- we are currently in discussions with the tenant. So at this point, Chris, we don't want to disclose the property because we don't want it to prejudice the process.

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Operator [10]

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(Operator Instructions) Our next question comes from the line of Nana Yang with Scotiabank.

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Nana Yang, Scotiabank Global Banking and Markets, Research Division - Associate [11]

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Kevan, what do you think are the sources of NAV unit growth going forward? Are you relying more heavily on same property NOI growth and active asset management? Or do you think there's still room for further cap rate compression?

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

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Well, I do think that there is further room for cap rate compression. I do see, actually, interest rates if anything will continue to move lower, I think that supports lower cap rates. I think there is general consensus that rental rates are going to continue to be -- rental rate growth is going to be -- continuing to be very strong for our sector. So that will also help to push cap rates lower. For us, I think what you said is generally true. We -- our NAV growth is, first and foremost, going to come from same property NOI. We believe in future continually -- sorry, especially as we're continuing to transform the portfolio. We're transforming the portfolio in terms of diversification and quality. We think that will set us up for better same property NOI growth in future. But also let's not forget our development program, I mean, what we have going on in Dallas, in Indianapolis, in Stuttgart, in Mississauga. These, we believe, will add significant NAV growth. Just off the top of our heads, I think we believe that those projects, the first phase in Houston and Dallas and Indianapolis will add roughly $1.50 per unit in NAV, and that's significant.

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Nana Yang, Scotiabank Global Banking and Markets, Research Division - Associate [13]

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Now circling back to Magna. Now that you're below 50%, do you have a long-term target in mind of how much concentration you would like to have?

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

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It's -- I've been asked that question before. It's difficult because roughly 20% of our portfolio is in the GTA. And most of that is Magna. And so the quality of locations are very attractive for us. So we're not sure we would want to dispose off those Magna assets. When you turn to Europe, it depends. I think it's hard to say at this point whether we would hold a significant exposure to Magna in Europe because as we've stated before, the goal is to maximize the attractiveness, if you will, of those assets. So that means lease extensions, increase in the rents, et cetera. So once we do that, if we're successful on doing that, then we'll evaluate whether the best thing to do is to keep those assets, sell those assets, sell an interest in those assets. So we'll evaluate that at that time. But I bring up the GTA component of that because these are assets we may wish to hold long term.

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Nana Yang, Scotiabank Global Banking and Markets, Research Division - Associate [15]

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Makes sense. And one last question. Your previous announcement of the spec development that you're doing with NorthPoint. Can you just give a bit of color on what's your thinking about how to proceed with the spec development? I don't think you've done developments on spec before.

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Director [16]

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Well, the Indianapolis development is on spec. And the one in Altbach could be. Although we're relatively confident from the prospects that we have that this may end up being a build to see project. But we have a lot of comfort moving ahead with speculative development in Stuttgart. It's extremely low vacancy there. In terms of Houston, the way we're approaching it, it's 2.5 million square feet in total. We are moving ahead with the project on a phase by phase basis. The first phase is 2 buildings, 650,000 square feet. We would not proceed -- we would likely not proceed to a second phase until we have leased up substantially the first phase. So that's how we would approach a project like that.

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Operator [17]

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Our next question comes from the line of Sam Damiani with TD Securities.

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Sam Damiani, TD Securities Equity Research - Analyst [18]

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Kevan, you've had a busy first 12 months on the ground with Granite, particularly on the piece of acquisitions and growth. How do you see year 2 shaping up for Granite?

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

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Well, it's a great question. I think 2020 will be active but probably not as active as 2019. And a lot of it, Sam, is contingent upon our disposition program. And at this point, it's hard to say what exactly that looks like, but land disposition program will drive a lot of our decision-making in 2020.

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Sam Damiani, TD Securities Equity Research - Analyst [20]

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That sort of ties into my next question. What is your leverage goal? Historically, it's been 35%. Where do you see that evolving to, if it's going to change at all? Like should we still expect 35% in the next year or 2? Or are you thinking maybe a little lower?

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

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I think on a long-term basis, we could do that. I think a little lower will be good. What we have said though is, we do reserve the right to be above 35% in the near term as we execute on strategic objectives. But long term, 35% to us would be the high end of the range.

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Sam Damiani, TD Securities Equity Research - Analyst [22]

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Okay. And maybe just switching over to debt. You've still got a lot of cash to use. But over the next few quarters, what type of debt do you see sourcing? And what is the pricing for that now? Like would you do more euro swap type deals or more traditional debt domestically?

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Teresa Neto, Granite Real Estate Investment Trust - CFO [23]

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So, Sam, we would, obviously, try and tap into the euro market because obviously where the interest rates are. But we are nearly 100% hedged relative to our investment there. So we always have to keep that in mind. We won't be swapping if we're not adding additional assets in Europe. But I think, frankly for us, the term loans and bank loans seem to be, certainly, the easiest, simplest way to access the right type of size of markets that we need. If we're going to go out and do like a public debenture, we have to be looking at $250 million to $300 million in an offering. So depending on our need, a term loan might suit us better and give us more flexibility. So that's probably going to be our primary type of debt in the near term.

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Sam Damiani, TD Securities Equity Research - Analyst [24]

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That makes sense. Okay. And just one last one. The property operating costs ticked up a little higher again in Q2. How do you see those -- that line item shaping up for Q3 and Q4 this year?

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Director [25]

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The property operating costs?

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Sam Damiani, TD Securities Equity Research - Analyst [26]

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Yes. Kind of cost of carrying vacant space. I'm assuming it will go down, but I'm just wondering if you had a number in mind.

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Teresa Neto, Granite Real Estate Investment Trust - CFO [27]

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Could I get back to you on that, Sam? I just want to make sure I'm giving you the right number.

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Sam Damiani, TD Securities Equity Research - Analyst [28]

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Absolutely.

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Operator [29]

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(Operator Instructions) Our next question comes from the line of Troy MacLean with BMO.

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Troy Raymond MacLean, BMO Capital Markets Equity Research - Analyst [30]

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Just on the NorthPoint relationship. The 200 basis points development spread on the project in Houston. Is that typical for the market? Or is there something else that's driving that?

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

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I think that's a little bit better than market, to be honest with you. I think a lot of that comes down to the land basis, the cost of the land. And because of the relationship, we can't talk too much about the particulars there, Troy, but I think that, that would be above market. I would expect to see somewhere closer to 150 basis points.

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Troy Raymond MacLean, BMO Capital Markets Equity Research - Analyst [32]

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Okay. That makes sense. And then just on the latest acquisitions in Columbus and the Horn Lake acquisition. They're very new properties. How would the purchase price compare to replacement cost?

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

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I think it's very close to replacement cost, to be honest with you. Both Rickenbacker and the Memphis one have seen a tremendous amount of growth and we've seen land values move in both those markets. So I would put both those acquisitions very close to replacement cost.

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Troy Raymond MacLean, BMO Capital Markets Equity Research - Analyst [34]

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And then the acquisition market is, obviously, very competitive. But are there opportunities to buy, like vacant properties to do some value add? Or are you paying full price for those right now?

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

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It's hard to say. We do look at those opportunities very closely, Troy. And to be honest with you, we haven't seen too many where it has been compelling. I think in a lot of instances, the vendor wants full value or very close to full value. And so it hasn't, to date, worked for us, but we are working on one right now, one of our target markets which we would acquire on a vacant basis.

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Troy Raymond MacLean, BMO Capital Markets Equity Research - Analyst [36]

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And then there's been a lot of M&A in the space. And I know some of the -- when Prologis recently bought a portfolio, they talked about selling some of that portfolio. Are you seeing like more acquisition opportunities just because there's been so much transactions like the follow-on opportunities?

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

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I think in our experience, particularly our recent experience, those portfolio acquisitions have been very competitive. We've been very openly marketed. We are looking at one recently where the feedback from the broker was over 80 CAs were signed, and they had identified a top tier of buyers that was in the dozens. So I think for us, we feel the greater value is pursuing off market or individual assets. Obviously, we look at M&A opportunities. We look at portfolio opportunities. We want it fully marketed like that. We just feel that we probably can't be as competitive from a pricing perspective. We see better value in the one-off deals and in off-market transaction opportunities.

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Troy Raymond MacLean, BMO Capital Markets Equity Research - Analyst [38]

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And then just finally, with the recent lease-up of the vacant space and the higher rents on renewals, do you think organic growth in 2020 will be higher than the 2% to 3% you're guiding for 2019? Or should it be like kind of consistent?

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

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No. Two things I would say. I agree with that. I think I'm pretty sure at the beginning of the year, I think we said 2% to 3% for 2019 and 3% to 4% for 2020. And I would stick with that. The one thing, the one caveat that I would point out is, we need to remember with a number of these large Magna assets, they have rent that slides either till renewal or for 5 years. So until we see those rent bounce, they do mute our same property NOI growth. That's why we're guiding towards 2% to 3% this year and 3% to 4% for next year.

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Operator [40]

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(Operator Instructions) Our next question comes from the line of Howard Leung with Veritas Investment Research.

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Howard Leung, Veritas Investment Research Corporation - Investment Analyst [41]

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I want to just touch on and follow up on funding here. You did an equity raise last quarter, and given where you are now with your net leverage ratio and your disposition plans, what's your thoughts about doing another raise at this current valuation?

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Director [42]

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It would not be, I think, in our best interest to do an equity raise at this valuation. I think in terms of the timing in April, with the acquisitions we had announced and our development capital commitments and/or pipeline, what we wanted to avoid was being in a position near the end of the year where we had deployed all of our capital. We had reached 35% leverage and needed further equity to fund acquisitions and development. And based on our cost of capital at the time, it made perfect sense. So we're very happy that we have liquidity to see us through 2019. And where we are trading right now, I would not issue equity.

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Howard Leung, Veritas Investment Research Corporation - Investment Analyst [43]

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Okay. That's fair. And then just another follow-up on your comment, Kevan, about the off-market assets. Can you just maybe give some color or discuss some strategies that your team's going through to kind of engage and source these one-off deals?

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

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Well, number one, it's about transacting with the right brokers in our target markets. And we, I think, do an excellent job, the team does an excellent job with doing that. It's very important to us how we transact and who we transact with. So I think we have developed a very strong reputation in our markets with key brokers and other relationships, vendors and developers. We transact very fairly, very professionally and do what we say we're going to do. And I -- it sounds rather clichéd, but it's the truth. So I think we've built a reputation of transacting and being very honest in our transactions with people. And over time that earns you friends in it. It earns you first look and at times last look at opportunities, and it has brought us, in my opinion, a number of off-market opportunities which we transacted on.

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Howard Leung, Veritas Investment Research Corporation - Investment Analyst [45]

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Right. And do you see that -- like the -- like for those deals, it's getting more efficient, I guess, as you guys get more connections?

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

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I think that, that's a fair comment. And I will tell you, I know we've -- I know it looks like we've been active on the acquisitions front we have. But we're still probably transacting on 1 out of 10 opportunities that we see. We see opportunities -- opportunities are brought to us every day. And we are very clear and we're very concise in our communication with what we want to buy and the markets we want to buy in. We don't want to waste anybody's time. And I think that, that's another important point that I would make is, you have to be very clear in your communication with what you want to acquire and how you want to acquire it. And we've done that in our markets. And so that is leading to better efficiencies. We are starting to see acquisition opportunities that fit our investment criteria. And we can choose which ones we want to pursue.

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Operator [47]

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

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [48]

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Kevan, just to clarify the 2% to 3% and 3% to 4% same property kind of growth outlooks for this year and next, are those constant currency basis?

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Director [49]

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Yes.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [50]

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Okay. Can you kind of -- I mean you mentioned that because of the nature of these steps in the Magna sort of special purpose that, that could temper it just because of the timing and when that comes through. So we think about that, and can you walk us through the contributors of growth on the other side because your lease maturity schedule is not that -- by annualized revenue of 3% next year, 6% the year after that, and you're talking about 7% to 8% rent steps or rent renewal increases on new leases renewals. So I'm just trying to get a sense of what -- where the growth is coming from?

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Director [51]

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Yes. And I think -- you're right. There were some leasing. We've had some downtime in free rent in 2019, which I think will -- the leasing activity this year will help set it up for next year. The rent spreads that we are seeing late in 2019 and, frankly, the expiries in 2020 by our own math brings us just over 3%.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [52]

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Okay. So it sounds like some leasing activity and the follow-on effect of leasing activity and burn off of free rent. So I guess then going forward in 2021 and 2022, I mean we're starting to really look out forward here but as those sort of things normalize and if you maintain existing occupancy, what do you sort of see as being a normalized same property growth rate?

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

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It's hard to say. I'll admit that it's hard to say at this point, Mike. I think our goal would be in that sort of 4% range. And keep in mind, like I said, if you have one of a large asset, like the Graz or others where you have a CPI look back, those rentals can be large. So we may have a situation where we're 2.5% 1 year, 4.5% 1 -- the next year 3%. So it's lumpy. But I'm comfortable with the 4% range in 2021 and 2022 at this point in time.

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Operator [54]

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Mr. Gorrie, there are no further phone questions at this time.

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Kevan S. Gorrie, Granite Real Estate Investment Trust - President, CEO & Director [55]

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Okay. Thank you, everyone, for joining us on the call. And again, for our valued unitholders, thank you, for your trust and your support. And we look forward to talking with you in Q3.

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Operator [56]

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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.