Granite Real Estate Investment Trust

TSX:GRT.UN

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the conference call for 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 the statements and information made in today's discussion may constitute forward-looking statements and forward-looking information including, but not limited to expectations regarding future earnings and capital expenditures, as well as the potential impact of COVID-19 on Granite's operations and the 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 2020 filed on March 4, 2020. Readers are cautioned to 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 Q1 2020 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.I will now turn the call over to Kevan Gorrie. Please, go ahead.

[Kevan S. Gorrie, President, CEO & Trustee]

Thank you, operator. Good morning, everyone. Thank you for taking the time to join us for our Q1 earnings call. As usual, I am pleased to be joined by Teresa Neto, our CFO; Lorne Kumer, our Executive Vice President of Real Estate; and Michael Ramparas, our Senior Vice President of Investments and Global Real Estate.First and foremost, I hope that everyone is healthy and holding up well during the lockdown. For our call this morning, Teresa will begin our discussion with a review of the financial highlights. I will then provide an update on our operations, acquisitions, developments and ESG and then we can open up the call to any questions that you may have.Teresa, over to you.

[Teresa Neto, Chief Financial Officer]

Thanks, Kevan, and good morning, everyone. First off, before I get started, I do want to apologize for releasing the results a little bit late yesterday, particularly when we have a 9 a.m. call this morning. So I do apologize for that, and hopefully strive to do a little bit better next quarter.Granite posted a strong first quarter, delivering solid same property NOI and double digit FFO per unit growth relative to the prior year. FFO per unit in Q1 was a $1.05, its $0.16 increase relative to prior year and $0.14 higher than Q4 2019.Included in this quarter's FFO is a $2.8 million foreign currency gain on foreign cash held as well as the reversal of $800,000 of current income tax provisions in Canada relating to the 2013 tax year that has become statute barred. Excluding these 2 items, FFO per unit would be $0.98 which is $0.09 or 10.1% higher than prior year and $0.07 or 7.7% higher than Q4, 2019.FFO has been positively impacted by strong same property growth, the full quarter impact of 2019 acquisitions and lower interest expense as a result of term loan refinancings completed in the fourth quarter last year. The impact of foreign exchange translation in the quarter was minimal as the U.S. average dollar relative to the Canadian dollar was 1% stronger, partially offset by the euro which was 2% weaker relative to the Canadian dollar.However, at the end of the quarter, the Canadian dollar weakened significantly by approximately 9% relative to the U.S. dollar and 7% relative to the euro and continues to remain weak at this time. The weakening in the Canadian dollar will have a favorable impact on Granite's NOI, FFO and AFFO, while foreign currency rates remain at this level. Generally, a $0.01 change in either U.S. dollar or euro FX rates relative to the Canadian dollar will result in an approximate $0.01 per unit change in FFO or AFFO.Granite's AFFO on a per unit basis in Q1 was a $1.03 which is $0.16 higher than prior year and $0.14 higher than Q4 2019, excluding a foreign currency gain or cash and reversal of the tax provision mentioned earlier, AFFO per unit would have been $0.96, which is $0.09 or 10.3% higher than prior year and $0.07 or 7.9% higher than Q4 of 2019.AFFO per unit was favorably impacted by higher FFO per unit, while AFFO related capital expenditures, leasing costs and tenant incentives incurred in the quarter of $1.1 million, was consistent with the same period last year and lower than Q4 2019.Looking forward to 2020, we are estimating total maintenance capital expenditures, leasing costs and commissions to reach approximately $14 million for the year, which includes approximately $4 million of recoverable maintenance CapEx that was pushed out from 2019. As a result of a relatively low CapEx quarter and strong FFO performance, the AFFO payout ratio came in at 70% for the first quarter.Operating metrics continued to demonstrate positive momentum. NOI on a cash basis for the quarter increased $12.7 million or 23% from the same quarter in 2019 and $4 million or 6.3% from the fourth quarter of 2019. Same property NOI for Q1 came in strong relative to the last -- same period last year, increasing 3.4% and on a constant currency basis, increasing 4.2%.Driven by occupancy gains in the GTA and New Jersey, contractual rent increases and rent permit expansion completed at West Jefferson -- one of our West Jefferson, Ohio properties. Excluding this expansion rent, same probably NOI for the quarter is 2.7% and on a constant currency basis 3.4%.G&A for the quarter was $2.2 million lower than the same quarter last year and $2.3 million lower than the fourth quarter of 2019. In this quarter, Granite realized a fair value being of $1.5 million as a result of remeasuring its unit-based compensation liabilities, positively impacting G&A.Looking out to fiscal 2020, G&A is estimated to be approximately $7.5 million to $8 million per quarter which includes about $1.6 million of non-cash compensation expense per quarter, but assumes no fair value losses or gains associated with the increase or decrease in non-cash compensation liabilities, which can't be predicted at this time.With respect to current income tax, we are estimating about $2.2 million in current income tax per quarter for the remainder of the year. We have another potential reversal of $1.7 million of tax provisions in Q4 of this year, but it is too early to assess whether these tax assets can be realized at this time.The Trust balance sheet, comprising total assets of approximately $5.1 billion at the end of the first quarter, increased by $315 million since the end of 2019. Driven mostly by a $278 million translation gains on Granite's foreign-based investment properties and a net $36 million fair value gain recognized on the Trust's investment property portfolio.This fair value gain is primarily attributable to the Trust's property in Dallas, Texas, partially offset by fair value reduction in a number of the Trust's Austrian and German assets. The Trust's overall weighted average cap rate decreased 10 basis points to 6% relative to the end of 2019.During the month of March, Granite was active under [Technical Difficulty] program, acquiring just under 491,000 units at an average price of $50.95 for consideration of $25 million. The NCIB activity was placed on hold at the end of March to preserve Granite's liquidity in light of the uncertainty around COVID-19 pandemic.Net leverage as of March 31 was 23%, only slightly higher by 1% from Q4 and the Trust's current liquidity in approximately $730 million, representing cash on hand of about $250 million and the undrawn operating facility of $500 million.I'll now turn the call over to Kevan who will discuss further operations results. Thank you. Kevan?

[Kevan S. Gorrie, President, CEO & Trustee]

Sorry, I had it on mute, and I will unmute. As always, I'll keep my comments brief. I trust you had the opportunity to review our press release and the MD&A. We can get to any questions that you have.So clearly, we began 2020 in a very solid footing, both financially and operationally, even when you adjust for onetime items as Teresa mentioned, I would characterize the quarter as being slightly ahead of our expectations.Notably, our growth in FFO and AFFO per unit year-over-year, when stripping out the onetime items, was not aided materially by FX impacts and progress against our strategic plan continued, albeit slowed recently by the pandemic and resulting economic and market uncertainty.During the quarter we acquired a development site in the Netherlands for approximately CAD 29 million. The 13-acre site will accommodate approximately 240,000 square foot state-of-the-art grocery e-commerce distribution center for Ahold, a global food retailer on a 10-year lease term with the going-in yield of 4.2% and subject to annual rent adjustments. This acquisition complements our stated strategy of adding new generation food distribution products, particularly in Europe to our portfolio.Further, the property is being developed to a BREEAM "Excellent" certification, one of the highest green building designations available. And this is consistent with our commitment to sustainable development as part of our ESG program. I will discuss our ESG program in more detail later in my remarks.Sticking with development in the Netherlands. We also announced the closing of the first of 3 previously announced development assets being delivered. Completed in March, the Weert property is fully leased to Moonen Packaging, a European leader in environmentally friendly packaging for a 10-year lease term commencing in May 1st with annual contractual rent adjustments. The remaining 2 development projects in Tilburg and Ede remain on schedule for completion in late Q2.Our 520,000 square foot development project in AllPoints Indianapolis is now substantially complete and we are currently in advanced discussions with a prospect for the entire building. Site work continues on our Houston development and should be completed by the end of the second quarter. We will assess market conditions at that time and determine whether to proceed with the construction of the first 2 buildings.Similarly, we have temporary delayed construction of our project in Altbach Germany and over the coming weeks we will assess conditions for the potential commencement of construction.Finally, and not related to COVID-19, we are reviewing the scope and cost of the planned expansion of 2095 Logistics Drive in Mississauga with the tenant Congebec and construction could potentially be delayed for -- through 2020.Although we continue to view development as an effective contributor and that from portfolio of quality and as an important part of our platform and growth strategy, we are reviewing our speculative construction projects with greater caution in the short term, given current levels of uncertainty.From a leasing perspective, 2.1 million square feet of leases were scheduled to expire in 2020. To date, we negotiated extensions on new leases or new leases on 1.7 square feet or roughly 80% of the expiries at an average increase in rental rate of approximately 7.4%. The remaining 440,000 square feet of expiries in 2020 represents just over 1% of our GLA.For 2021, 1.68 million square feet or roughly 4% of our leases by GLA are scheduled to expire. To-date we have renewed 300,000 square feet of those expiries at an average rate increase of 10%. We also recently completed a renewal in the GTA at a 30% increase in rental rate with very healthy annual rent escalations, signaling continued strength so far in market fundamentals.As Teresa mentioned earlier, and as disclosed in our MD&A, same property NOI increased by 4.2% on a constant currency basis, and 3.4% excluding expansions, which is in line with expectation. Moreover, same property NOI growth was flat-to-positive across all geographic payments on a constant currency basis, led by our U.S. portfolio at 9.2% due in part to the expansion of our Ace Hardware distribution center in Columbus, Ohio.With respect to rent collections and deferrals, as outlined in our MD&A and press release, we have received 99% of the rent for April and thus far 95% for May. As it stands, rent collection for May is on pace with April.To date, we have received rent deferral or abatement request from 17 tenants totaling $6.7 million, representing roughly 2.4% of our annual rent. This has increased slightly from 13 tenants and $6.5 million as reported in our operational update published on April 15. Discussions are ongoing with select tenants and no deferrals or abatements have been approved to date.I would like to take the opportunity to thank our team for their efforts in achieving these results. The levels of rent collection to date are a testament to the quality of our tenants, the quality of our people and our approach in these times.Our largest tenant Magna has fully resumed the operations in Asia. They have the same operations and most of their facilities in Europe and are scheduled to begin reopening their facilities across North America next week.The majority of our logistics properties in our portfolio remained at least partially operational during the lockdown, and a number we're operating at or above normal levels.The Granite team has been working now remotely for approximately 6 weeks, and I think doing so very effectively. As an update, our office in Vienna reopened last week and our offices in Amsterdam and Dallas are scheduled to gradually open next week, in conjunction, of course, with updated health and safety protocols. We'd hope to commence a gradual reopening of the Toronto office by the end of think month.On our Q4 call, in early March, I stated that we would issue a comprehensive ESG update within 60 days of the date of that call. We have admittedly been delayed in finalizing that document, but we are close, and I hope to publish the update by mid-June.However, consistent with the principles outlined in our sustainability plan, and as evidenced by the various BREEAM building certifications received or expected, we have incorporated sustainability in our current and planned development projects and in our business decisions as an organization.In closing, the impact of COVID-19 and the various restrictions have truly been a challenge for the vast majority of sectors and businesses globally, and none of us are immune. However, we are encouraged to-date by the resiliency of our tenants and the performance outlook for the logistics sector in general.During this time, we will continue to focus on driving operational performance, keeping our current development projects on schedule, and continue and execute on your business plan for 2020.On that note, I will now open up the floor for any questions.

[Operator]

[Operator Instructions] Our first question is coming from the line of Sam Damiani with TD securities, Inc.

[Sam Damiani, Analyst]

Kevan, my first question would be kind of a bigger picture question. There's been a lot of talk of deglobalization in the markets over the last few weeks. So I'm just wondering what your thoughts are on that trend? And to what extent it does impact the markets that Granite is targeting? and not just the markets, but also the property types that you're targeting?

[Kevan S. Gorrie, President, CEO & Trustee]

It's a good question, Sam. We do think it's early days. In Italy, it's something we will have to monitor. What I will tell you is in the short term, we have seen a number of requirements spanning many different sizes. I would say maybe up to 700,000 feet.But there has been a number of tenant requirements that have flooded the market in the short term, a lot, I think, due to the increase in online activity. But what we've been encouraged by is the number of requirements that have popped up in our target markets, those markets that we've been focused on over the past 6 to 12 months.So, so far to us, it signals that we are looking at the right markets, ones that are driven by e-commerce demand and certainly, that demand doesn't seem to have the abated during this time. So we will see. But in the short-term, we're quite happy with the markets we've been focused on.

[Sam Damiani, Analyst]

And maybe just for one more question on the acquisition pipeline. I understand that it's obviously on hold for now. I'm just wondering, though, the pipeline that you had been working on, have you kind of kept that in -- on the shelf and ready to resume when the time is right or have you kind of just dropped whatever you were looking at and you kind of have to be starting at the step one when the market stabilizes?

[Kevan S. Gorrie, President, CEO & Trustee]

Well, I mean, heading into this -- I mean, notwithstanding the unit purchases under our NCIB, we saw that being highly opportunistic given the share price. But it was clear heading into this that preservation of capital was our first priority. So yes, we did -- there were a number of opportunities in our pipeline, pretty early days. We made it very clear that we're going to preserve capital.Number one, we wanted to assess the impacts of the pandemic on our portfolio. And two, we wanted to assess how this sector -- the logistics sector, and I want to make it clear, we're not talking about smaller bay industrial. This is logistics, e-commerce sector, how it was going to respond. And we've been encouraged by both. One, by the resiliency of our portfolio, and two, by the performance of the sector, and frankly, the outlook as we come out of this.We are underwriting deals. But we continue to look at opportunities. We're encouraged by the direction, I guess, and the tone of the market. At least in our -- I can't speak for other sectors, but at least in our sector. But we won't rush into anything. It has to be a very strong strategic fit and we might be more price sensitive than we were before.But it seems, Sam, to your point, it seems like it is changing and getting better. So I don't think that this is a 6-month thing and we'll continue to assess opportunities just, but we have to be quite selective in how we do it.

[Operator]

[Operator Instructions] Our next question is coming from the line of Himanshu Gupta with Scotiabank.

[Himanshu Gupta, Analyst]

On the greenfield Indianapolis development, looks like complete and looking to lease up. Do you see any change in rent expectations for the tenants or change in rental lease terms in general in the market due to COVID? And are the tenants -- are they looking for any change in specs or functionality or any change in preferences you're observing in the market?

[Kevan S. Gorrie, President, CEO & Trustee]

No. Again, it's early days, Himanshu. But I'll say that the rents that we're discussing at the moment have not changed. The discussions originated before the pandemic before March and the rents in discussion has not changed nor I think would be change them at this time.

[Himanshu Gupta, Analyst]

And what about the new supply? I mean, prior to COVID you were expected to see some supplying some of your core U.S. markets? Do you see any indication of supplies likely to slow down? And has the availability or cost of construction and financing changed for new developments?

[Kevan S. Gorrie, President, CEO & Trustee]

Well, certainly, we -- in industrial, it is much easier to turn development on and off. And so early days it is very -- it seemed very clear that the major players were pulling back strongly on their speculative development programs -- Prologis, Duke and others. So the expectation was supply would go from somewhere around 300 million in the U.S. to 150 million in the U.S. Now 150 were developments that were design built pre-leased and part of that was in response to anticipated drop in demand.As we sit today I would think that that anticipation of a drop in demand has abated. I think the belief now is that demand will be more resilient through this and come out even stronger. There will be increased demand from even more acceleration of online penetration in sales. So I think it's changing. I feel a bit like it's changing by the month.I do believe that speculative development will be much lower. Will, in fact, be much lower in 2020. I don't think demand will abate at the rate that people think that it will. And so it should continue to support the strong fundamentals in the core logistics markets in the U.S., that's our expectation. But I do believe the speculative development will be much lower this year than it was in the trailing 3 years.

[Himanshu Gupta, Analyst]

And maybe last question for me. On the special purpose properties, I think, 7 with Magna. Do you know how those specific Magna subsidiaries are performing in this crisis? And in terms of rent collection or negotiations, do you also work with the parent Magna tenant or mostly with these individual subsidiaries or entities? And any Magna lease coming up for renewal next year or...?

[Kevan S. Gorrie, President, CEO & Trustee]

Well, the third question first. I don't think -- there is always Magna leases coming up every year. There is nothing major coming up. We did a number this year as well and I think the rent spreads have been positive.In terms of the facilities in operations, yes, they did --and a few of them, I think, remained at least partially operational. We know that Graz did seize its operations for a period of time and that was in part due to the interruption in supply chain.So their Asian operation had completely seized early in Q1, as did most production facilities in China and other parts of Asia and they've now fully resumed. So Graz is back online, at least partially. And the SPPs in Canada are getting ready to resume, I think, next week. So they did -- it feels like they seized for -- between 4 and 6 weeks and now have started to resume operation.And there was another question in there. Sorry, if I missed it. What was that again?

[Himanshu Gupta, Analyst]

So in terms of rent collection or negotiations, do you work with the parent Magna or the individual subsidiaries or entities?

[Kevan S. Gorrie, President, CEO & Trustee]

Well, it hasn't changed through this. It typically is both. Typically, it's both. We have a strong relationship, obviously, with the parent company and head office and we deal with a number of major real estate items there globally across our portfolio and also we work with the business units in the individual jurisdiction.

[Operator]

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

[Chris Couprie, Research Analyst]

First question with respect to Logistics Drive. I think you said that the delay was unrelated to COVID-19. So what was that related to?

[Kevan S. Gorrie, President, CEO & Trustee]

Well, as I said in my remarks, Chris, that we're still in discussions with them about the scope of the project and the cost of the project too. So we're just trying to get on the same page. That could take us through the better part of 2020 and that's completely unrelated to COVID.

[Chris Couprie, Research Analyst]

And is this scope looking to be larger or smaller than what was previously thought?

[Kevan S. Gorrie, President, CEO & Trustee]

That it was larger. Now it could be smaller. We're not talking about big numbers. But what we're trying to do is just finalize exactly what scope of work, works best for the tenant and what their thoughts about it. So it's just -- it is taking more time.

[Chris Couprie, Research Analyst]

And then with respect to the NCIB, it's on hold right now. But I think you said that you use it opportunistically. Is that -- if your shares got uncharacteristically weak, again notwithstanding the fact that you want to kind of preserve the liquidity. Do you think you would be responsive and active?

[Teresa Neto, Chief Financial Officer]

I think we would always keep that option open. When we head -- at the end of March, when we entered into the blackout, we and the Board, we were uncomfortable having an automatic program in place, particularly around the uncertainty in the market. So it made sense to suspend the NCIB until, at least, we came out of blackout. So it's not our first choice, certainly, but I think we would keep that option open depending on where the price is. It happened to be trading so far below our now with where we felt the business was that it made sense that we have to access it at that time. But we would keep that option open.

[Chris Couprie, Research Analyst]

And then just last one on the deferral request that you've received so far, highlight that you haven't granted any yet. Maybe if you can just give us any color in terms of the types of tenants, geographies or -- and just kind of how you're thinking about the proposals that are in front of you?

[Kevan S. Gorrie, President, CEO & Trustee]

Well, I think we have a similar story to a lot of other REITs. Ours are split geographically 50% roughly U.S., 50% in Europe. The bulk of them are large, very well-capitalized companies. And a number of them involve facilities where activity has been -- where the facilities have been active. So it's hard to understand the validity of the request, but nonetheless we received it. That's not all of them. I would characterize it as being relatively broad-based, whether it's manufacturing, whether it's food distribution, whether it's apparel. So it's been pretty broad-based by sector, Chris and geographically split 50% U.S., 50% Europe. And a number of the deferral requests has come in from very large companies.

[Operator]

[Operator Instructions] Our next question is coming from the line of Michael Markidis with Desjardins Capital Markets.

[Michael Markidis, Real Estate Analyst]

Two questions from my side. I didn't get a chance to see any magnitude of the change, but I was just curious if could you give us a little bit more color on what drove the fair value decline that you booked in Austria and Germany?

[Kevan S. Gorrie, President, CEO & Trustee]

Sorry, Teresa, can you deal with it?

[Teresa Neto, Chief Financial Officer]

Yes, sorry. Yes, so combined it was about $20 million, so not very significant. I think it was about $13 in Austria and maybe $7 million or $8 million in Germany. And it was really just an adjustment on some of the properties, but just the discount rate and that's reflected in the fair value reduction.

[Michael Markidis, Real Estate Analyst]

And then more of a high-level question here for you, Kevan. Obviously, you guys have been executing very well on your strategy to minimize or dilute down, I guess, the Magna exposure, while growing your e-commerce and logistics platform, which has worked very well and at the same time having Magna at 40% is obviously serving you very well from a collection standpoint right now.I know it's early days, just curious, if you had any thoughts with respect to what that means going forward in terms of whether you'd like to maybe slow down on decreasing Magna, given the credit quality? Or if you think other side that maybe with a potential slowdown in auto requirements globally post COVID, if it makes sense to accelerate as soon as the liquidity to the market returns?

[Kevan S. Gorrie, President, CEO & Trustee]

I think that Mike that's a great question and it highlights, I think, the comment I wanted to make anyways was, we're very happy with Magna's cash flow and they have been very professional through this. And Lorne and the team, we continue to have very constructive discussions with Magna on the whole number of issues related to the real estate and a lot of them have been beneficial to Granite. So they've been great to work with and we really value the cash flow.At the end of the day, we are really focused on logistics and e-commerce. So it only makes sense that over time our concentration with Magna will reduce. That's not going to change. But it's not just through this pandemic, even before it, I wanted to be understood that we're not rushing to do it. We're not rushing into it. We feel that when the time is right, if there are any disposition out there, we will do it when the time is right and when the conditions are ideal because we believe strongly in the stability of that cash now.So no major change in strategy and no change, I think, even in the pace. But we have a plan ahead of those and where we think we're going and there is -- I don't think that this has strongly altered our viewpoint in that way. It has been very encouraging to see how they have handled this. And I'm not just talking about vis--vis rents and how they've handled their business through this, how they have managed their liquidity, how they've bolstered their liquidity. I would think that they might even be more on the offense through this.So our strategy remains intact and the pace so far remains intact. It may be delayed this year for obvious reasons in terms of growing the denominator we will see. But right now we just went through a full reforecast exercise and I think we feel pretty confident that our strategy remains intact.

[Operator]

Our next question is coming from the line of Howard Leung with Veritas Investment Research.

[Howard Leung, Investment Analyst]

I just want to talk about the extension on the 2020 expiries. I think last time, Kevan you mentioned that you expected the remaining expiries to have renewals of 7% to 8% leased. Do you still expect that for, I guess, the remaining -- I think it's like 400,00 square feet for fiscal '20?

[Kevan S. Gorrie, President, CEO & Trustee]

That's a good question. We only have 400,000 -- well, if you go back to Q1, I guess, that would stand, because we had -- at that time we had 650,000 feet expiring. We did just over 200,000 feet rent lift, that's 30%. So if you take the remaining 400,000 feet, I think, referring back to that comment, I think that that's still is intact for the remainder of 2020.

[Howard Leung, Investment Analyst]

And I guess looking forward into 2021 you mentioned you did some renewals there already and they were pretty healthy. The remainder of those, do you expect -- I guess, it's still early days. But do you expect market rates to still kind of hold steady for time being?

[Kevan S. Gorrie, President, CEO & Trustee]

Well, 2 things. One is, the first 200,000 feet or 10%, we do not expect that to be the norm for the remainder -- admittedly, that's for the remainder of expiries. But to your point it is early days. I don't think we're going to take a view on those expiries yet. We don't expect it to be that different than what we saw a quarter ago, but I think that's probably a better conversation for the second or third quarter of this year.

[Howard Leung, Investment Analyst]

And then just one more on the deferral or abatement request. I guess, you put out a release last month discussing, I think, at that point around mid-April 95% of tenants had paid and then around 2.3% had submitted deferrals. And now looking back, 99% paid, but there is still 2.4%. Does that mean some of the tenants that paid in April then decided that they wanted a deferral or abatement in May and going forward? Is that kind of how should we read the numbers?

[Kevan S. Gorrie, President, CEO & Trustee]

Yes. I would characterize it as same. The deferral request in April has changed very little. There's been a few smaller add-ons. But for the most part the deferral requests include those that did it at the beginning, early on in April. And I think 70 -- of that $6.7 million, roughly 70% has been paid for April and May. So there hasn't been much change from the deferrals from the April operational update.

[Howard Leung, Investment Analyst]

So just to make sure I'm understanding that right, it means that some of these tenants that submitted deferrals, they actually paid for April and May to your point and they're requesting deferrals or abatements after.

[Kevan S. Gorrie, President, CEO & Trustee]

Yes.

[Howard Leung, Investment Analyst]

Got it. Okay, that's better things are clear.

[Kevan S. Gorrie, President, CEO & Trustee]

Thank you. That's probably a better way to put it.

[Howard Leung, Investment Analyst]

Yes, I know. Yes, that's -- there -- and I understand why you say that either larger ones and they're maybe trying to -- they're so operational. So it's a little confusing from your standpoint.

[Operator]

[Operator Instructions] Our next question is from the line of the Sairam Srinivas with BMO.

[Sairam Srinivas, Associate]

My first question was on -- essentially on COVID-19 and how it's impacted the supply chain. Are you guys seeing any, like, increase in demand for, like, in the short term for logistics-related spaces and how has that impacted your current leasing pipeline?

[Kevan S. Gorrie, President, CEO & Trustee]

No, I think I partially answered it at an earlier question. But, no, we are not seeing it in the short term. And certainly, if there are -- particularly third-party logistics companies, 3PLs, they are withholding major decisions, which makes sense. But we've also seen a number of tenant requirements flood the market, if you will. So there has been this sort of shorter-term demand that may be offsetting the delays in decisions -- long term decisions regarding taking up space from 3PLs.I mean, I think what's encouraging too is, looking at the major players in the U.S. like Prologis that have been doing a number of shorter-term renewals -- 12 and 18 months' renewals with tenants that are coming up in 2020.And one can look at that and say, well, that's -- they're trying to hedge their shorter-term role and keep their occupancy up and avoid greater vacancy. And I don't look at it that way. I think if those companies felt that the sector was under a prolonged pressure or issue, they probably would have entered into longer-term leases for those tenants and gave a lot of concessions. They didn't do that.I think the guess is, if tenants are hesitant to make long term decision during this time, they will do shorter-term leases to bridge the gap, because they feel 12 or 18 months from now market fundamentals will be even stronger, and the outlook will be stronger, and demand will be there. And I think that's encouraging for the sector. So interruptions to the supply chain, still too early to see. But we haven't seen -- and certainly deals that we've seen in the markets -- there haven't been too many lease deals, but deals that we've seen, support that there's continued strong demand in the markets. We haven't seen any material deterioration in rents yet, and it was across our markets.

[Sairam Srinivas, Associate]

And probably a related question to that. I know this is really early day right now, and I would still kind of ask that question now, which is. Are you seeing a divergence in cap rates between like different kind of industrial properties like logistics versus let's say flex or any other kind of industrial property?

[Kevan S. Gorrie, President, CEO & Trustee]

Well, I mean, again, it's early days, but I will tell you there is -- there always was. But, I think, the difference between modern logistics and say small Bay industrial or other types of industrial assets has been -- is more pronounced now.I certainly don't think that there's going to be a garage sale of any kind. I wish there was to a degree to provide us with more opportunities that short term discounts. I just don't see that happening. I think the majority of logistics -- modern logistics, anyway, is institutionally held. They're well capitalized.And every signal I'm seeing and anecdotally, that capital is building and there's more demand and more allocation. More demand and more capital being allocated to this sector. So I don't see there being a movement of cap rates unless this is prolonged, unless we are misreading the trajectory of the recovery, and we could.But right now the way it looks, I think cap rates will hold up relatively well through the second quarter. I think the bigger challenge for people right now is, what cash flow are you underwriting? And what tenant credit are you underwriting? And certainly, I've mentioned that we are looking at a few opportunities. And obviously, the work that we're doing in tenant credit is elevated.I think it's always been strong. It's always been something we've focused. I mean, look at our portfolio, it's obviously something we focus on as a company, as part of our philosophy that's even greater now. Greater attention is being paid in that area. So -- but from a cap rate perspective, you may question what NOI is capping, but from a cap perspective itself, I think it will hold up very well through this. And if you have treasuries trading below 1%, there's nothing to indicate to me that cap rates coming out of this are not going to be where they are now or even lower going forward.

[Operator]

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

[Bradley Sturges, Equity Research Analyst]

Just a couple quick ones. Just on the -- I guess, the small amount of asset sales you're looking for this year, is that still something you're pursuing at the moment? Or is that on hold?

[Kevan S. Gorrie, President, CEO & Trustee]

Well, there are 2 dispositions that are still in progress. We, obviously -- I'm not even sure the vendor asked specifically these are both in Canada. So we just said, why don't we just wait. Because it's very difficult to -- I mean from a practical perspective, Brad, it's tough to do due diligence. Tenants rightfully so do not want strangers coming through their space, in some cases probably against policy. So it's -- those 2 have been delayed. We believe that they still will proceed. And then the other ones in Europe, they were primarily smaller assets. And at this point we have no visibility, whether those will move forward this year or not, there's a good chance that they don't move forward this year in 2020.

[Bradley Sturges, Equity Research Analyst]

And the unsecured market seems to have opened up recently. Is that something you're looking at in terms of tapping for further liquidity? And can you give some context in terms of the interest rates or the credit spreads you're seeing currently available in the unsecured market?

[Kevan S. Gorrie, President, CEO & Trustee]

Sure, Teresa, I'll let you take this one.

[Teresa Neto, Chief Financial Officer]

Sure. Hi, Brad. Yes, it does seem to be opening up. And as you saw, there were 2 REITs that issued this week. So I think that's positive, certainly from a real estate perspective. Spreads are elevated, definitely relative to pre-COVID, in February. But I'd say for us, around 5 or 7 years, you'd be looking at probably 280-300 basis points. However, given the reductions in the underlying interest rates, the all in coupon rates are fairly low, and we know would be in that 3% range, which is quite low and close to kind of what we saw as far as indicative pricing prior to COVID-19.As far as need, we -- it really is driven by our acquisition -- for our acquisition pipeline and activity. As we've mentioned, we're fully funded for this year, we surely have sufficient liquidity even taking us out into next year when the 2021 matures. So it's something we keep an eye on and I think largely will be driven by our acquisition pipeline and how we proceed with that.

[Operator]

[Operator Instructions] Our next question is a follow-up question from the line of Sam Damiani with TD Securities Inc.

[Sam Damiani, Analyst]

Just wanted to follow up from, I think, some commentary given on the Q4 call regarding 2020 same property NOI expectations. I think the comment was 3% to 4% was expected over the year. One of the largest variables that impact that outlook today, including potential for bad debt expense, and is there an updated same property NOI guidance that you'd be willing to put out today?

[Kevan S. Gorrie, President, CEO & Trustee]

Thanks, Sam. The ones that are going to impact this year are -- and we haven't recorded any bad debt yet. We don't think so. But there's a bad debt allowance and any expiries at the end of the year whether there's any changes to our renewal assumptions, whether the tenant stays, so there is a possibly an uptick in vacancies.Our updated same property NOI, we expect -- we said 3% to 4% -- 4% including expansions. Right now, looking at the potential for elevated bad debt or vacancy, we would estimate it to be in the 1.5% to 2.5% range for 2020.

[Sam Damiani, Analyst]

And well, I guess the bulk of that difference would be the bad debt, because it doesn't feel like vacancy is going to change a whole lot. It couldn't really change a whole lot this year.

[Kevan S. Gorrie, President, CEO & Trustee]

Right. But 1.5% to 3%, exactly. 1.5% to 2.5% from 3% to 4% would be a combination of a little higher bad debt and a little higher vacancy.

[Operator]

And there are no further questions at this time.

[Kevan S. Gorrie, President, CEO & Trustee]

All right. Well, thanks for everyone. Thanks, everyone, for being on the call. On behalf of management and the trustees at Granite REIT, I thank you for your time today and your continued support.

[Operator]

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