Granite Real Estate Investment Trust (GRP.U) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the conference call of Granite REIT. Speaking to you on the call this morning are Tom Heslip, CEO, and Mike Forsayeth, CFO.

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 US Securities and Exchange Commission from time to time, including the Risk Factors section of its annual information form for 2012 filed on March 5, 2013. 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 Q3 2013 condensed combined financial results for Granite Real Estate Investment Trust and Granite REIT, Incorporated, and other materials filed with the Canadian securities administrators and US Securities and Exchange Commission from time to time for additional relevant information.

I will now turn the call over to Tom Heslip.

Thank you, Myra, and good morning, everyone. Joining me on the call today is, as Myra mentioned, Mike Forsayeth, our CFO, Jennifer Tindale, our EVP and General Counsel, and Lorne Kumer, our EVP, Real Estate Portfolio and Asset Management.

Granite's third quarter and subsequent period was a very active and strong period for us. Much was accomplished on multiple fronts. Acquisitions, financing, leasing and potential sales activity all advanced considerably.

To recap the highlights, our FFO per unit was up 26% in comparison to the same quarter last year. We acquired eight income-producing properties in Germany, the Netherlands and the United States, totaling approximately CAD200 million and over 3.1 million square feet of leasable area, bringing the total acquisitions for 2013 to approximately CAD275 million and over four million square feet of leasable area.

In the quarter, we entered into a purchase and sale agreement to acquire approximately .1 million square foot income producing property in Germany for approximately EUR6.7 million, and with the closing expected at the end of November. We issued CAD200 million of 4.6% series one senior unsecured debentures on October 2 of this year with a five-year term, and this was subsequently swapped into EUR142 million denominated debt at 3.56% to facilitate the funding of the European acquisitions.

We entered into a non-binding letter of intent with Magna International to sell the Mexican property portfolio for $105 million, which is progressing, but at this time remains nonbinding. In the quarter, and including the recent acquisitions since January 1 of this year, we have reduced Granite's Magna tenant concentration of 97% to 87% based on annualized lease payments, and this trend is continuing favorably.

Since January 1 of this year, we have completed 16 lease renewals, new leases or extensions totaling 3.9 million square feet for a weighted average lease term of 5.6 years. And in the quarter, we commenced construction of a new 600,000 square foot logistics distribution facility in Shepherdsville, Kentucky, essentially Louisville, Kentucky.

Just to elaborate on a few areas of particular interest, in regards to acquisitions, as mentioned, we have now closed on the AEW European transaction, and based on recent price trends and comparable sales in Germany and the Netherlands, we're particularly pleased with the economics of this transaction. We're seeing a lot of capital flow into Germany, and even the Netherlands, in the past five or six months. It's become a very competitive landscape there. And what we're particularly liking right now are the things we're seeing in the US, and we are currently exploring some opportunities there right now.

On the leasing front, as of January 1 of this year, we had approximately 5.1 million square feet [and] 28 leases expiring in 2013. 14 of these leases have now been renewed or we have signed new leases, in all totaling approximately 2.8 million square feet, with good progress and momentum on a further 1.7 million square feet. In addition, we've extended two existing leases totaling 1.1 million square feet at our Salzgitter and Lannach properties. The remaining space related to our 2013 lease expiries is currently being marketed for lease, under contract for sale, or on a month-to-month lease term. Overall, the resulting renewal rental income, or ALP, as we refer to it, is better than initially anticipated, with good progress on new leasing and-or sales activity and on properties vacated by Magna and its subsidiaries.

With good momentum flowing from so many of the 2013 lease renewals now signed or progressing, we've been able to further increase our focus on possibilities for 2017 extensions. In this regard, as I mentioned, we recently announced that, at our Lannach, Austria property, we have agreed to a five-year extension, which moved the initial expiry date from December 31, 2017 to December 31, 2022.

Lannach is an approximately 760,000 square foot facility and the fifth largest lease in our portfolio by ALP as of September 30, 2013. The rent and the extension is not materially different. The deal included an allowance of approximately EUR4.4 million for upgrades. This is approximately equivalent of eight months free rent, with the funds to be used to enhance the facility with a new cafeteria, three new floors of office space, and the infrastructure to support further office expansion in the future should the tenant wish to expand further.

And Mercedes-Benz is now up and running in our newly renovated 67 Green Lane property in Markham, with only the exterior front facade work and parking pavement to be completed. The project came in on time and on budget, and with rental income now in place on this 90,000 square foot property.

Overall, on all elements of our strategic plan, it's our third quarter was one of significant progress. In terms of growth and diversification, the closing of the West Chester, Cincinnati property in Q3 and the subsequent closing of the AEW portfolio, we have, as I previously mentioned, acquired over four million square feet of new, (inaudible) state-of-the-art logistics distribution warehouses, and we've reduced our Magna tenancy exposure by 10%.

Approximately CAD275 million in income-producing properties acquired with a go-forward annualized rental income of over $20 million. When including the new development sites we acquired in Louisville and Pennsylvania, total acquisitions thus far this year exceed CAD300 million. And with the commencement of construction of the Louisville building in July, as I mentioned, a region with less than a 3% vacancy rate, we have an additional 624,000 square feet in our pipeline in a high demand rental market.

Add to this a quarter of strong leasing activity, progress on selected asset sales and new debenture financing swapped into favorable rate and hedged euro debt, and continued momentum on both the acquisition pipeline and additional leasing, this has been one of our most successful quarters to date. We believe that all facets of our strategic plan at Granite are operating at the best level they have been at since our inception, and we will continue to move actively on all fronts.

With that, I'm going to turn it over to Mike Forsayeth to take you through our financials.

Thanks, Tom. As outlined by Tom and summarized in the highlight section of our press release, Q3 and (inaudible) subsequent events produced very successful financial results and quantifiable progress on all the key metrics encompassed within our strategic objectives. Over the next several minutes, I'll try to give you some insight into the numbers and why we see this particular point in time as another milestone in Granite's transformation.

Turning to the results for the third quarter, with higher revenue at favorable exchange rates, stabilizing G&A costs, tax savings from the REIT conversion, together with the impact of accretive acquisitions completed during fiscal 2013, Granite's funds from operations was CAD0.78, up 26% from the CAD0.62 reported for the third quarter last year. Here are some significant items of note.

Our top line was up CAD6.3 million to almost CAD51 million and benefited from contractual rent increases and revenue from completed projects in the amount of CAD2.7 million. Favorable exchange rates added CAD2.4 million, and our acquisitions contributed CAD1.8 million, while vacancies, re-leasing activities and other minor adjustments reduced revenue by a net CAD600,000.

Excluding CAD400,000 of operating costs recoverable from tenants, [our property and] operating costs were up slightly from a year ago as a result of higher vacancies.

Our G&A for the quarter was CAD5.9 million, CAD2 million lower than a year ago primarily due to lower REIT and reorganization cost of CAD2.2 million. The net interest expense for the quarter of CAD4.7 million relative to last year was CAD900,000 higher due to the added interest and financing costs associated with the borrowings for the new properties acquired, as well as reduced capitalized interest and interest income. That said, this quarter's interest expense is virtually unchanged from Q2 of this year.

Also, despite the higher income level, current income taxes were almost CAD1.3 million lower than a year ago due to the tax savings from the REIT conversion. Under IFRS, on a GAAP reported basis, our quarterly net income was CAD9.8 million, or CAD0.21 per unit, while CAD65.8 million, or CAD1.41 per share, was reported for the third quarter of 2012. The volatility of certain line items under IFRS makes historical comparisons difficult and complex.

For the quarter, the three main items that impacted our quarterly GAAP reported earnings but are neutralized for FFO purposes are the fair value changes, deferred taxes, and acquisition transaction costs. As it relates to the fair value changes, in Q3 of 2013 there were fair value losses of CAD25.1 million before tax on our investment properties attributed to two reasons.

Firstly, following entering into a nonbinding letter of intent with Magna to sell the Mexican portfolio for $105 million, together with other market data points, we reassessed the fair value of our Mexican portfolio, resulting in a CAD15.6 million fair value loss. Secondly, there was an CAD8.5 million fair value loss due to changes in the leasing assumptions resulting from recent lease renewal activities primarily in Canada and Germany.

Q3 of 2012, on the other hand, saw fair value gains of CAD50.4 million mainly driven by discount and terminal rate compression in Canada, Austria, and Germany.

Turning to deferred taxes, the amounts reported in both periods are mainly associated with the net changes in fair values of the investment properties and Granite's taxable corporate entities, which in 2012 and pre-REIT conversion also included all of our Canadian entities.

Also in the quarter, we had approximately CAD5.7 million in acquisition transaction costs. The vast majority, CAD5.4 million, relate to the acquisition of the European portfolio and most of that CAD5.4 million pertain to land transfer taxes.

Turning to the year-to-date numbers, our comparable FFO for the nine months of 2013, which exclude the net CAD4.2 million withholding tax payment made in Q2 relating to the post-REIT conversion reorganizations, was CAD106 million, or CAD2.26 per unit. That's up CAD18.2 million, or CAD0.39 per unit, from the CAD87.8 million, or CAD1.87 per share reported for the first nine months of 2012.

The underlying explanations for the 21% improvement year-over-year are consistent with the analysis I just outlined for our Q3 performance and discussed in prior quarters. We enjoyed higher revenue, reduced G&A as a result of lower REIT and reorganization costs. We have lower current income taxes as a result of the REIT conversion itself. And these positive increases to our comparable FFO were partially offset by the higher interest expense associated with the accretive acquisitions completed in 2013.

Some additional financial metrics and matters that I'd like to highlight include, one, our annualized lease payments at the end of the third quarter are up slightly from the end of Q2 but are up CAD14.4 million higher than the beginning of the year. And although our annualized lease payments were adversely affected by lease renewals at lower rental rates and vacancies totaling CAD7.6 million, there were CAD22 million of positive factors that increased our annualized lease payments to a net CAD7.8 million increase since the beginning of the year. These positive improvements include contractual rent adjustments of CAD6.7 million, lease revenue from the acquisitions added CAD6.5 million, completed projects onstream contributed CAD2.4 million, and favorable exchange rates accounted for CAD6.4 million of the increase as the euro and US dollar have appreciated 6% and 3% respectively.

As Tom mentioned, we completed the acquisition of a single tenant property in West Chester, Ohio for approximately $21 million and financed it with US dollar borrowings and US dollars cash on hand. The value of our investment portfolio has increased from CAD1.94 billion at the beginning of the year to just over CAD2.1 billion at the end of the third quarter. The three main components of the CAD176 million increase were acquisitions of just over CAD100 million, foreign currency translation of just over CAD65 million as a result of the euro and US dollar appreciating since the beginning of the year, and total net fair value gains of approximately CAD5 million.

Our total debt at the end of the quarter was approximately CAD362 million, of which 24% is denominated in US dollars. With cash on hand of CAD77 million, that brings our net debt to CAD285 million, giving us a net asset value of about CAD1.8 [billion], or CAD39.12 per unit.

During the quarter, we declared CAD24.6 million of distributions to unit holders and CAD73.9 million for the first nine months of the year. In terms of a payout ratio year-to-date, we will have declared distributions representing just under 70% of our comparable FFO.

As Tom mentioned, subsequent to the quarter, we closed the acquisition of the European portfolio for EUR129 million, and we expect to close another single tenanted property and acquisition in Germany later in November. To fund these acquisitions, we completed Granite's first unsecured public debt issuance in almost 10 years. We subsequently swapped the principal and interest payment stream of this debenture into euros, providing an asset and liability currency match on the balance sheet, a direct cash flow hedge, and a favorable net overall interest expense of 3.56% that is over 100 basis points lower than the face amount of the interest on the debenture.

So, in closing, it's been another busy period for Granite, and we're pleased with our financial performance, as well as the progress towards our strategic objectives. Through all this, our staff continue to work tirelessly, and I want to thank them for all their dedication and support.

And with that, I'll turn it back to Tom.

Thanks, Mike. Myra, we'll turn it over now to you for questions.

(Operator instructions.) Sam Damiani, TD Securities.

Thanks. Good morning, everyone.

Morning, Sam.

Just on the Mexican deal, still nonbinding LOI. You'd said previously that there was a December 15 deadline. I'm wondering if that's still the case. And also, you're awaiting some antitrust approval there, if that's still pending, and if you could provide whatever you're willing to provide in terms of the tax leakage within that jurisdiction.

Sam, it's Mike. In terms of the timing, it's moving along. These things take time, and whether the December 15 date will be met, it's hard to say, but both parties are working diligently towards completion.

In terms of the competition, we haven't heard back from them as yet, but not expecting or hearing that anything untoward is happening there. As it relates to any tax leakage on the transaction, that's still, I'll say, a little bit up in the air depending on how we actually finalize it on the timing and the final structure.

Yes. No, just on the Mexico, I was looking to just get an update on what the tax leakage is on an annual basis. You've got, I think, CAD13 million or so of ALP coming out of Mexico right now. Just wondering how much that [holds true after tax].

Yes. The tax leakage, overall, Mexican tax rates are 30%, and we've got some G&A associated with that CAD13 million , so that brings you to somewhere in the neighborhood of overall CAD9 million to CAD10 million.

Got it. Thank you. You've switched focus to the 2017 maturities. Is there some likelihood that we could see some more of those leases get early extensions in the next short while?

Sam, this is Tom. The positive news is there is dialogue on some of those major ones, but at this stage it's dialogue. We like that. It wasn't happening this time last year, and we'll keep working towards it. But, at this stage, the only major one to kick things off is Lannach. We'll see how things unfold on some of the others.

Great. And just finally on the remaining 2013 lease expiries, how will your ALP be impacted by the end of the year, based on what you see today?

Well, I'll interpret that question as, in terms of the 2013 leases that we've now signed and the general direction we're seeing on the positive discussions we're having, I mentioned that it's a little bit better than we expected in terms of overall rent down. Keeping in mind that the 2013 leases were really the set of leases that marked-to-market versus the lease in place plus CPI, we had contemplated probably about CAD3 million more of a loss than we're currently seeing. So, the downward direction on those 2013s is better than we thought, and of course, with the CPI adjustments on so many of the other leases, and with the significant increase in acquisition new rent, that's substantially higher ALP, that's for certain.

Oh, for sure. I'm just wondering, like, I mean, if there's leases that were still cash flowing on September 30 that you know won't be by December 31 because of leases absolutely going to expire and then go vacant at least in the immediate future, what would that singular impact be? Is it fairly minimal, or is there still a few million (multiple speakers) offset?

It's fairly minimal in terms of the distance between September 30 and December 31. That one that'll go vacant at the end of the year is the Oberwaltersdorf property. There's a couple that are going to over-hold well into '14. So, the actual Q4 downwards ALP will be very minimal for Q1.

Thank you.

Mark Rothschild, Canaccord Genuity.

Thanks, good morning. Tom, are you -- just following up on that last point (inaudible) [you were speaking] to Sam's question, are you able to quantify that at all as far as the impact? When you say "minimal," is that a couple hundred thousand dollars? Is that more significant, just so we understand what maybe the run rate is?

Specific to what's in place September 30 versus December 31?

Yes, just like what -- as far as the timing of the rent escalations and potentially some of the vacancies that might be coming, you've said in the past that net it's going to be flat to positive, and now it sounds even more positive. So, I just want to make sure that I understand what's already in Q3 and what's going to be adjusted in the next quarter or two.

Well, for Q4, it'll hold content. The one lease that we know they're vacating is in Oberwaltersdorf, and that's at the end of the year. And that'll be about EUR1 million [or so], it's in around EUR1.1 million, I believe. That would be loss as of Q1 2014.

The rest kind of balance out in terms of existing leases versus CPI. There's no other surprises there. I think why it's a little bit hard is we have some interesting lease activity going on for some of the properties that have already been vacated, and it may well swing things not only in Q1 of '14 but may even have some impact late in Q4. So, the only thing I would tell you is the combination of things is up. It's positive. If you were to think back to when [we] used to talk about the 28 leases producing about CAD27 million of income, you certainly -- still recovering over CAD20 million on that before the re-leasing of some of these ones that are going well, and of course before CPI and other adjustments.

Okay, great.

Yes. Mark, it's Mike. If you look in the MD&A under the leasing activity, it's really -- it refers to sort of the fixed -- really fixed properties that we've either received notice or expect to be vacated, and that identifies roughly CAD6.1 million of vacancies related to those 2013s. But, there were two others that had early termination that add to that. So, to Tom's point, not a ton more than we're expecting, but that gives you a pretty good (inaudible).

Yes, perfect. Thanks. The G&A seems to have continued to trend lower. Maybe you can give us guidance on if this is a good run rate, going forward. And on that point, last year in Q4, there was a big jump. I don't recall exactly what it was, if some bonuses or one-time items. Maybe just give us some guidance on what we should expect there.

Yes, it's Mike again. In Q4 of last year, you had the large -- a really large G&A associated with the REIT reorganization costs. That was a really big number at the end -- I can't think of it off the top of my head, but our run rate is in -- right now, barring anything from the acquisitions that we're going to see, you're going to see a little bit of an uptick as a result from the AEW acquisition, et cetera. But, we're running about $21 million or so right now, and that likely could creep up again a little bit in the next year.

That being said, Mark, of course the target has been 10%. I mean, at one time we would still love to see it move to 8%, but we've certainly said 10%. And with the recent acquisitions and new ALP, from the point of view of G&A run rate versus top line rental revenue, we're now very close to 10%. And we'll continue to focus on that target.

Okay. And then, lastly, you've done some acquisitions in the US, and [as you're looking at], you've done stuff in Europe. What are your thoughts on growing in Canada? And should we expect most of the growth -- the external growth to come outside of Canada?

Well, I guess we've got to look at timeframes. I don't want to project out three, four or five years of where the best activity will be. But, I can say right now, and what's within our radar screen, we certainly liked the US market and certain portions of Europe in terms of just the hybrid of the quality of the asset and generally the yields we can achieve. Add to that some very, very solid tenants, many of whom are rebounding very strong.

For us, what we've seen in Canada is a lot more small bay, mixed smaller tenant industrial, which isn't really our strength and something that we want to go after. We're very focused on the logistics distribution market. We like larger two- to four-tenant buildings, or single-tenant buildings in some cases as we've done. And we're just not seeing a lot of that in Canada.

Candidly, I think the kind of product we've been able to acquire this year would be what you often describe as the pension fund quality here in Canada, so the less than six-year-old, seven-year-old, 200,000, 300,000 square foot facility, good long-term lease, which right now I believe in Canada would be -- depending on where, but if it were in Calgary, Edmonton or GTA, I suspect it would be at best around a 6%, could even be a touch lower.

And what we see in the US on similar stuff is somewhere between 75 to as much as 125 basis points higher. We certainly saw that in the case of our acquisition, the AEW portfolio, where from a point of view of locational attributes relative to Germany and the Netherlands, in terms of tenant and age of the property, we ended up at an 8%. And I think that comparable product here would be perhaps as low as 6%.

And when we see that kind of differential, we're going to keep our attention and our team focused on the US and Europe. I do want to say, though, that, at the end of the day, Canada is our home, and to be able to buy in Calgary, Edmonton, Greater Toronto would be of great interest to us. But, just haven't seen the kind of things that make sense relative to what we're seeing outside of Canada.

Perfect. Thanks, that's very helpful.

Mike Markidis, Desjardins Capital Markets.

Thank you, and good morning, everybody. Just with respect to the Lannach property, Tom, maybe you could just walk us through -- it seems to me like that actually is a quite strategic property for Magna itself. It's a relatively new build in terms of -- I think it was built in the late '90s, or even 2000. How did you come up with a five-year term, and did you ever entertain discussions with respect to whether they would lease this property or buy it back? And thirdly, how did the rent get determined? My understanding was that the option on the 2017 was basically at -- they had a renewal option at in-place rent plus. So, how did you guys come up with -- I know it's a minimal roll-down, but how did you come up with that?

Well, first of all, you're right that Lannach is a newer property. Their business is really strong there, and they wanted to do some enhancements, as they -- I mentioned. And so, our discussions said would we be willing to fund some of those enhancements in exchange for some reciprocal benefits, and looked at the things that they wanted to do with the building that bode well for their growth and enhance the property for our own sake.

So, the cafeteria and the office space came out at a cost somewhere around EUR4 million to EUR4.4 million, and we discussed with them how long an extension we could do, and ultimately the two parties settled on five years. They might have wanted to do a little less. They might have wanted to push a little more, and we settled on that. And we looked at it as essentially close to a 10-year term from our point of view.

And so, that's the first route we went. Often, we talk to them about where their interest is on buying assets, and it gets tabled, and it doesn't stand in the way of finishing lease negotiations. So, on anything we might from time to time be talking to them about on selling, we always -- the parties always try to have the leases in place for future needs for both sides.

Lannach is not right now one we're targeting for sale or that they've necessarily said they want to buy. I wouldn't rule it out one day, but we like it. It's working well for them.

The rental adjustment was very minor. It was a bit of a -- I guess just a bit of cushion for them, and essentially it's in the range of a couple hundred thousand euro on a rental stream, significantly above EUR6 million. So, it was modest. And what we said is we'll have a little bit of reduction there, but the ongoing CPI adjustments will remain in place. Upon expiry, the renewal terms will be then rent-in-place plus CPI. So, we kept the same structure there and went forward.

It's interesting for us, because we know they're doing well at the property. We do think there is a reason to spend some money for certainty, and it's not always easy to quantify the exact amount we should spend to get that certainty, but to turn that into essentially a 10-year lease, you kind of work with -- [through a] model that says it makes sense.

There could be times where we could extend and may not warrant paying an allowance at that time, and we may wait it out and see how it goes, and there will be other times where we'll work with them the best we can. But, to provide some incentives to push those certain large leases out and eliminate uncertainty, that has a beneficial impact outside of just the lease term and revenue stream. Remember, as we push out these leases, it helps our overall credit stability. It helps our future debenture work that we might do, and we think we get quantifiable benefits from that.

In the end, we extended a 770,000 square foot lease five years for effectively eight months free rent and almost immeasurable reduction in rent go-forward.

Okay. And just to clarify, so the rent -- you're increasing the square footage, but does the total ALP increase commensurate with the -- on a dollar per square foot basis at the new rate, or is it just the total ALP comes down by 4% or 5% on the total?

It's on the total. There's no incremental rent added to what is approximately 28,000 square feet of office. There's no add-on rent. We think of that as we gave them essentially a EUR4.4 million allowance. They used it to build a cafeteria and put three office floors on. It all worked physically, and for us in terms of the future of the property, and no new rent on that space.

Okay. Then, you also mentioned Salzgitter, I believe was the other property, and could you just remind me of where that property is and how large that was and what the extension was there?

Salzgitter is 330,000 square feet-ish. It's in Germany. The extension takes us to '22, to 2022 [as well] on that.

Okay, great. Now, just with respect to the remaining 2013, so it would seem to me, based on your commentary, that you're not expecting any new vacancies that you haven't already highlighted on those [rolls] that are still to be done?

Yes, that's absolutely correct, nothing new. And on five or six of those that are going vacant, we actually have -- well, one is scheduled to close on sale this week. It's a smaller one in Maryland. That eliminates that. There is a couple that we have very positive lease negotiations going on as well with new tenants, on Magna's subsidiaries. So, nothing new, and in fact some good activity happening, not yet closed or firm but some good stuff happening.

Okay. And just with -- when you actually do execute with the remaining leases that you have still to do with Magna for this year, should we expect a term that's consistent with the average term of what we've been seeing so far this year, so like around the four- or five-year mark?

I think on these types of leases, yes.

Yes.

Okay. And maybe just for Mike, then, as these -- the six properties that are going vacant in '14 come offline, I guess I should say, do you have -- like, is there a specific cost per square foot? I'm just trying to get a sense of your ALP should be stable, if not slightly higher, from existing run rates as we head into 2014, but what's the impact on the op cost line that we should be thinking about?

On the op cost line, it'll go up. It'll go up a little bit, Mike, in terms of -- on that front. I can't give you a quantifiable number at this time because it depends on, as Tom mentioned, what's looking to be sold and one might be re-leased. So, we're just not quite positioned to make a hard, quantifiable number on that front right now. But, it will be higher, and you saw a little bit of that uptick just in this past quarter.

Okay.

It's not going to be millions, so it's really in the grand scheme not a lot, but it's higher.

Okay. With respect to the Mexico portfolio sale, do you expect to be carrying excess capital for a while once you get that done, or is there enough in the pipeline where you think you'll be able to actually increase your investment -- your net investment, going forward?

Well, I mean, obviously we want to buy good things the minute we can. Right now, we are looking at some interesting stuff in the US, but we certainly don't have it tied up at this time.

It remains to be seen. The cash that would come off of Mexico could match with some new investment early in the New Year. There could be a little bit of delay on it. And we're not taking the view that sitting on that cash is burning a hole and we have to get it deployed. But, right now, there's not a direct match. Of course, Mexico remains nonbinding, and we're after other assets. So, long-winded answer, it remains to be seen whether there's a match there.

Okay. And finally from me, just before I turn it back, we're approaching 2014, and last year with the reconversion, you delivered a small or a decent distribution bump to investors. Do you have any early thoughts on what we might see for 2014?

Only one comment, is that our Board and ourselves have a view that, as you grow revenue and it becomes even more stable, growing our dividend is important. And it's something we'd like to have be part of what's associated with Granite. So, we're certainly not in a position now to say we will, but we know it's part of our game plan to do it as revenues grow.

Okay, that's it for me. Thank you very much.

Brad Sturges, CIBC.

Hi, good morning. Just on the small German property acquisition that's pending, what sort of cap rate are you looking for that acquisition?

It's probably around 7%.

So, looking into 2014, obviously you had a pretty successful year in terms of completing acquisitions. You're mentioning a fairly robust pipeline of opportunities that you're still seeing. Do you think that you could repeat 2013 in 2014 in terms of dollar volumes of acquisitions if everything holds true?

As you say, if everything holds true, yes.

And I guess in terms of the Mexican sale to Magna, are you able to talk a little bit about -- I know it's under LOI, but are you able to talk about a little bit the yield? I mean, you've taken some fair value losses, so I guess it's fair to say that, compared to what the appraised value is, you're looking at a fairly significant change in terms of what the cap rate could be achieved on that sale.

Well, the one thing about the sale is that you're collectively dealing with eight properties in one fell swoop, some of which might be more challenging to sell than others. So, from that point of view, doing a portfolio as a whole has huge advantages.

In terms of the next [side], we looked at a lot of comps of even newer product and came to the view that, on a per-square foot basis, the pricing we'd agreed with the Magna was fair and reasonable, and that made sense to us.

The one thing I do want to say about the Mexican portfolio is income for 2013 is not necessarily what income was, going forward. There are a lot of variables in it. So, we looked at it as what did we sell it at as equivalent IRR, and it's certainly much lower than the equivalent of CAD13 million gross income on $105 million purchase price.

Do keep in mind that the tax drag of Mexico for us has a huge rationale. We're looking at the cap rate a little differently. A seven or eight cap rate in the United States is pretty much a net seven or eight cap rate. A 10 cap rate in Mexico translates into about a net seven. So, you have to keep that in mind, because that would apply not only to us but to any outside buyer, non-Magna. So, all in all, there were a lot of variables. We looked at it as the whole really benefited us to be able to exit that jurisdiction and drove a lot of the final agreement on price.

Okay, great. And then, just lastly on -- you started construction of your distribution facility in Kentucky. Any guidance in terms of development yield once it's completed?

Well, we're hearing targeting well above seven. That's the target. It's moving well. Construction's a little bit ahead of schedule. Walls are tilting up, and it's got high visibility from the highway, so we're getting a lot of interest. And right now, we certainly expect a north of seven, significantly north of seven yield.

Okay, great. Thank you.

Sam Damiani, TD Securities.

Thank you. The only question I had left was just on your US acquisition pipeline. Is any of it with Dermody, your previous partner -- your current partner, I should say?

No. This is -- this existing income stuff, which would not be in a joint venture with anyone. Dermody often help us with some thoughts on due diligence and market data that we dig into, but from a point of view of what we're looking at buying right now, it's solely for our own account.

Okay. And maybe just to tack on here, you're still targeting leverage in the 40% to 50% range? Is that still accurate?

Absolutely.

Okay, thank you very much, guys.

Thank you. (Operator instructions.) It appears there are no further questions.

Well, thank you, Myra, and thanks, everybody, for your questions. And hopefully we've answered them clear enough. We appreciate everybody joining the call today. Take care.

Thank you. Ladies and gentlemen, that concludes our conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a good day.