Granite Real Estate Investment Trust

TSX:GRT.UN

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the conference call for Granite REIT. Speaking to you on the call this morning is Mike Forsayeth; Kevan Gorrie, Granite's new CEO; and Ilias Konstantopoulos, 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 2017, filed on March 1, 2018. Readers are cautioned not to place undue reliance on any of these forward-looking statements and forward-looking information. Granite undertakes no intention or obligation to update or revise any of these forward-looking statements or forward-looking information whether as a result of new information, future events or otherwise, except as required by law. In addition, the remarks this morning may include financial terms and measures that do not have a standardized meaning under International Financial Reporting Standards. Please refer to the Q2 2018 condensed combined financial results and management's discussion and analysis of Granite Real Estate Investment Trust and Granite REIT Inc. and other materials filed with the Canadian Securities Administrators and U.S. Securities and Exchange Commission for additional and relevant information. I will now turn the call over to Mike Forsayeth. Please go ahead.

[Michael Forsayeth]

Thank you, Jose, and nicely done. With me here today is Granite's new CEO, Kevan Gorrie; Lorne Kumer, our EVP, Head of Global Real Estate; Mike Ramparas, our VP Global Real Estate; and Ilias Konstantopoulos, our CFO, who will be taking you through some of the details of our financial results in a couple of moments. Although today is officially Kevan's first day, I can tell you that we have been actively working with Kevan since his appointment was announced in June to ensure a smooth and successful transition. Today, since I've signed off on all the Q2 filings up until yesterday, I'll give my usual report, which I'll limit to the Q2 results and subsequent events only, then I'll turn it over to Ilias for his report, then over to Kevan for a couple of comments. After which, we'll take questions. So let's get started. From an acquisition and divestment perspective, it was busy both during and after the quarter-end, and it was a good busy. We acquired 5 warehouse and logistics properties in the United States, having a total gross leasable area of 4.2 million square feet during the quarter. And on July 12, we acquired another 720,000 square foot property in Germany. The total purchase price for these 6 properties, excluding transaction costs, was $426.4 million. Together, they have an average ingoing yield of approximately 5.9% and a weighted average lease term of 7.2 years as at the date of acquisition. On July 18, we sold our 254,000 square foot property in Tillsonburg, Ontario for $7.2 million. You may remember that this property was previously occupied by Siemens, who, a year ago, gave us notice that they were exercising their early termination rights. In addition to the 2 years' rent we received as a penalty, we sold the property for a nice little gain.Granite has 5 other properties held for sale with an aggregate value of just over $334 million, representing 1.9 million square feet of leasable area located in Canada, United States and Germany. They are expected to be sold during the third quarter of 2018, one being Tillsonburg, already has. These properties include Granite's 2 remaining special purpose properties in the United States, for which, as we announced this past Monday, Magna has exercised their rights of first refusal to acquire them in response to a bona fide third-party offer. Total sales price of approximately $341.4 million for these 6 properties represents a $65.1 million or $1.42 per staple unit in excess of the values reported for them in Granite's 2018 first quarter report. On a pro forma basis using gross leasable area, Granite's exposure to Magna will reduce to 49%, just under that magical 50%. The 6 properties held for resale contribute approximately $23 million in annual revenue. As a result of the increase in taxable income generated by transactions completed in 2018 to date and those anticipated to be completed during the remainder of 2018, Granite expects to make a special distribution to unitholders. Given the many variables in play, a lot could happen between now and the end of the year. So we're not going to comment on the amount or form of consideration of such special distribution other than that will be determined later in the year, and it will be entirely dependent on the REIT's actual taxable income for 2018. We expect that this special distribution will be declared certainly before December 31, 2018. Turning to the results. We had another solid quarter. Not only have we been very active with sales and acquisitions, but we've also made good progress on the leasing front. Here is a quick recap of the highlights. Funds from operations on a comparable basis was $0.86 per unit in the second quarter of 2018. This was against a comparable FFO of $0.79 for Q2 of 2017, strong quarter-over-quarter results in a period that saw a lot of change in the composition and quality of our portfolio. Ilias will give you more detail on the specific components of our FFO in a few moments. Our FFO in the -- our AFFO in the quarter reflects the improvement in CapEx attributable to Novi and also the recently acquired property in Olive Branch, though in Mississippi, is outside of Memphis. That was re-leased for 10 years to Milwaukee Tool and it also includes the related leasing commission paid in respect of that lease. As just mentioned, Granite acquired 5 warehouse and logistics properties in the United States, plus we closed another 1 in Germany a couple of weeks ago. The total purchase price for these 6 properties, including a planned expansion at one of them and excluding transaction costs, was approximately $450 million. We have over $340 million in assets held for resale. We renewed the NCIB and spent almost $10 million in the quarter in unit repurchases. We have just under 700,000 square feet of remaining 2018 lease expiries to contend with. This excludes certain leases with due per annum, which are finalized that are just out for signature. The $700,000 comprises 103,000 square feet at Portland -- in Portland, that's under negotiation; 460,000 square feet listed for lease in Botlek in the Netherlands and a property in Tesma in our -- in Bonn; and 130,000 square feet being 375 Edward and 330 Finchdene here in the GTA that we had listed for sale.We were 97.3% occupied at the end of the quarter, reflecting the recent expected lease vacancy of the tenant in our Botlek property in the Netherlands, the remaining space at Novi, a vacancy in Bonn in our Tesma campus just mentioned, and the property in Altbach, Germany that we are in the process of going through a complicated rezoning process. And our weighted average lease term is 5.9 years. As a result of these announced initiatives and accomplishments, the management team, not me, the whole management team, not just the work of any one individual, has made significant progress for diversifying and enhancing the quality of Granite's real estate portfolio through the thoughtful deployment of its balance sheet and selected dispositions. With that, I'll turn it over to Ilias to go over the financial highlights for the quarter.

[Ilias Konstantopoulos, Chief Financial Officer]

Thanks, Mike. Welcome, Kevan, and good morning to all. I'll briefly summarize the operating results for the second quarter of '18, which include the impacts of the recent and significant acquisition and disposition activity, as Mike referenced. Beginning with revenue. Revenue for the second quarter in '18 increased $1.6 million to $62.1 million from the prior year period. The main contributing factors to the slight increase in revenue for the second quarter include the acquisition of a total of 9 properties between October 2017 and May 2018, which contributed to a revenue increase of $6.5 million. Recall, the 9 properties comprise 1 in Olive Branch, Mississippi, near Memphis; 2 in Monroe, Ohio, near the Cincinnati market; 1 in Plainfield, Indiana, which was acquired in March '18; 1 in Greencastle, Pennsylvania acquired in April of 2018; and 4 near Columbus, Ohio, which we acquired in May 2018. Another contributing factor is the contractual adjustments comprising CPI inflation and fixed contractual rent increases across our entire portfolio, which added a total of $0.9 million to revenue. The leasing of most of the space in Novi that Mike referenced in January of '18 increased revenue by $1.7 million. A net favorable impact in FX during the quarter of $300,000 as a result of the Canadian dollar depreciating against the euro added $1 million. While the Canadian dollar strengthened against the U.S. dollar, which reduced revenue by $0.7 million, netting out to $0.3 million. The above-mentioned favorable factors were offset by mainly the impact of the sale of the 10 properties in Canada and the U.S. in January, which decreased revenue by $7.4 million and the vacancies from 3 lease expiries in Germany, Netherlands and Canada, which decreased revenue by $800,000. Turning to FFO. For the second quarter, reported funds from operations in accordance with the REALPAC's white paper definition was $37.6 million or $0.82 per unit relative to the reported FFO of $31.6 million or $0.67 per unit in the prior year period. Excluding the foreign exchange losses from the remeasurement of the U.S. dollar cash proceeds in the sale of the investment properties in January, which amounted to $1.9 million or $0.04 per unit, FFO would have been $39.5 million or $0.86 per unit in the 3-month period ended June 30, '18. In comparison, excluding the proxy expenses of $5.9 million or $0.12 a unit in the prior year period, FFO would have been $37.5 million or $0.79 per unit. The corresponding FFO payout ratio for Q2 after the above-noted adjustments was 79% as compared to 82% in the prior year period. Turning over to AFFO. For the second quarter, reported AFFO in accordance with the REALPAC's white paper definition was $29.4 million or $0.64 per unit relative to the reported AFFO of $32.5 million or $0.69 per unit in the prior year period. Once again, excluding the FX losses from the remeasurement of the U.S. dollar proceeds, which amounted to $1.9 million or $0.04 a share, AFFO would have been $31.3 million or $0.68 per unit for the 3 months ended June 30. And in comparison, and once again excluding the proxy contest expenses, AFFO would have been $38.4 million or $0.81 per unit in the prior year period. The corresponding AFFO payout ratio for the second quarter after the above-noted adjustments was 99% as compared to 80% in the prior year period. The higher AFFO payout ratio during Q2 '18 is a result of $5.9 million higher CapEx paid relative to the improvement projects at Novi and Olive Branch, which Mike referenced, that were released to a non-Magna tenant in the first quarter. Other factors impacting FFO and AFFO are further detailed and quantified in our MD&A of the Q2 financial report. Switching gears to the fair value gains. For Q2, we reported fair value gains in connection with our investment properties totaling $128 million approximately. Of this, half or roughly $65 million of the gain relate to the 6 properties held for sale as at June 30, namely the 2 special purpose buildings and the head office buildings in Aurora, Tillsonburg and Schleiz properties that Mike also talked about. Turning to the balance sheet. At quarter-end, the IFRS value of our investment property portfolio, excluding the assets held for sale, was just over $3 billion, implying an overall cap rate of 7% and which remained entirely unencumbered by any secured debt. The fair value of our investment properties benefited by about $75 million worth of FX gains since the beginning of the year as a result of the Canadian dollar depreciating against both the euro and the U.S. dollar. Our income producing portfolio of 84 properties at quarter-end comprised approximately 31.8 million square feet, had an occupancy of 97.3% as measured by GLA, had a WALT of 5.9 years as measured by GLA, was 62% Magna-tenanted if measured by revenue or 50% if measured by GLA. Mike mentioned the 49%. Just to clarify, that would include the pro forma impact after the second quarter, and therefore, the 49% reference Mike makes is on a pro forma basis. Our total debt was $817.6 million, which includes a $77 million swap mark-to-market and a $93 million facility drop. Our debt was comprised only of unsecured debt, had a weighted average term to maturity of 4 years, had a weighted average interest cost of 2.65% and represents a net leverage ratio of 25%. When proceeds from the assets -- from the assets held for sale are netted against debt, then the net leverage ratio would be 14%. This, in turn, would provide Granite with debt capacity in excess of $1.25 billion at a 40% net leverage ratio target. At June 30, '18, Granite had available liquidity approaching $800 million. $50 million in the form of cash and cash equivalents, $407 million from unused credit facility and $341 million from the expected proceeds from assets held for sale. So once again, please note that the above-noted financial information and property metrics exclude the property repurchased in Erfurt, Germany subsequent to the quarter. Our credit rating is BBB-mid, with a stable outlook from each of DBRS and Moody's.Annualized distributions for 2018 are expected to be $2.72 per unit based on the current monthly distribution amount of $0.227 per unit. And then recapping the total purchases made pursuant to our NCIB program, since inception, we purchased roughly 1.5 million units for a total consideration of $73 million, which works out to be about $49.50 per staple unit. And then in the 6 months year to date, more specifically, Granite has repurchased about 1.2 million staple units for a total consideration of about 61 million, which equates to $49.41 per staple unit. Finally, we had 45.7 million staple units outstanding as at June 30. And with that, I'll turn the call now over to Kevan.

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

Thanks, Ilias.

[Michael Forsayeth]

Just before you go there, Ilias, the -- what I'd like to do is also right now is I'd like to think I'm leaving Granite in a pretty good shape, lots of dry powder and well positioned for continued success under Kevan's leadership. Now I want to say it's no secret that Kevan is a proven leader, who brings a broad range of experience in all aspects of the industrial asset class, and in particular logistics and e-commerce applications. I want to say that this makes him a great fit for Granite and for our management team. Now I'll turn it over to Kevan.

[Ilias Konstantopoulos, Chief Financial Officer]

Thanks, Mike.

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

Thanks, Mike, and good morning, everyone. I'll keep my prepared comments very brief. Obviously, I haven't been in the seat, albeit officially all of 45 minutes. First of all, I'd like to thank Kelly and the Board trustees for their efforts in bringing me together with Granite. This is an exceptional team and a truly exciting opportunity. I would also like to thank Mike and the team for their support during the transition. It is not an easy thing, and Mike and everyone else in the organization have been extremely professional and supportive at every turn. We have truly a talented and dedicated team of investor and real estate professionals, and the future is very bright. I also wish to acknowledge the tremendous progress that has been made by Mike and the team over the past 12 months in reducing our exposure to Magna, the tenant, and replacing that income of modern logistics products and tenancies in the leading markets. It is certainly a good problem to have when a lot of your income is being delivered by such a credit-worthy tenant. But we will continue on that path of rebalancing under my leadership through dispositions, acquisitions and developments in select major markets, with a focus certainly on modern logistics and e-commerce. My focus over the next 60 to 90 days will be to continue to familiarize myself with the team, get to know them and let them get to know me and understand our current real estate portfolio. As well, I will meet with a number of our investors over the coming weeks to listen to their views on Granite and our direction. I will then work with our team and the board to formalize a strategy that will plot our course in the next number of years. With that being said, we do not plan on being complacent in the near term. Although we will continue to be thoughtful on our approach on new acquisition opportunities, we have an industry-leading balance sheet and enormous bench strength, and we're not afraid to use them. Thank you, and I will now turn it over to the operator for questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Sam Damiani of TD Securities.

[Sam Damiani, Analyst]

Mike, congratulations on your retirement. And Kevan, congratulations, and welcome to Granite. Kevan, first question is for you. Granite has communicated a strategy regarding leverage and the Magna exposure, historically. I'm just wondering if you can give us your -- at least, your initial thoughts today on that strategy and how you see implementing that in the near term.

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

Well, I appreciate it. It is a valid question, but it is still very early days. I would say this, though, Sam, it does feel -- I feel like referencing the Hippocratic Oath, the first thing a doctor should do is no harm. So I'm not looking to break the bank. I don't feel any urgency to necessarily get money out the door and deploy it. But I do feel like we have tremendous firepower, as Mike referenced, through the recent sales particularly. And we are looking at a number of very interesting opportunities, a number of these opportunities came to us before my arrival here. So we will continue to pursue them. I think they're in key markets, that will be key markets for us in the future. So we expect to be active over the next 90 days despite the fact we still have to formalize a strategy, and that will include balance sheet deployment, including payout ratio, leverage, et cetera.

[Sam Damiani, Analyst]

That is helpful. I look forward to more on that, I guess, as you formulate, I guess, in your discussion with the board and whatnot after you've sort of seen all the properties and whatnot. Just one follow-up. There has been a lot of leasing to do in 2018. Just wondering if you could comment on the average renewal uplift that you've experienced so far.

[Michael Forsayeth]

Yes. Sam, I'll take that. The average uplift has been about 5% that we've seen to date in the recent renewals. We still got a couple left to finalize as it relates to just negotiating that fair market rent. But we've seen some, as it relates to the 2018 expiries, a nice lift.

[Operator]

And our next question comes from the line of Mark Markidis (sic) [ Mike Markidis ] of Desjardins Capital Markets.

[Michael Markidis, Real Estate Analyst]

Kevan, I was just curious, I know it's early days, but if you look at -- you had a very successful run in your prior post, and there was certainly a strategy and a level of activity that you employed there. Notwithstanding the differences between Pure's business and what Granite has today, I'm just wondering within North America, how the industrial markets in North America may have changed over the past year or so and how that might impact your thought process with respect to where the right places to allocate capital will be going forward?

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

Well, Mike, it's a good question. I think what we've seen over the past 12 months is continued strengthening, I would say, effectively for us all markets in North America, particularly the big 6 in the U.S. And in Canada, the Toronto and Vancouver certainly have seen the greatest growth. I do think that, that trend will continue. If you look at the Canadian markets, e-commerce has become much more of a factor over the past 24 months. That will continue, obviously as Amazon and Wayfair and others expanded presence in Canada. And then you have the other retailers that are catching up and improving the supply chain and responding to e-commerce demand from their customers. So I certainly think that will continue. What we see -- or I have seen also, continued growth in the major U.S. markets and in the markets that Granite frankly has been impacted in. So I think that the opportunities in North America will continue to be exciting. I do personally hope to be more active in Canada over the coming years, but I do not see us stopping. We may not be as active every quarter, but I do not see us halting our growth in the U.S.

[Michael Markidis, Real Estate Analyst]

Okay. That's helpful. And just maybe a question for everybody or Ilias. But just given that the -- you have 3 segments of properties, but the -- at least by fair value and catching up on income contribution, the modern logistics and warehouse properties are certainly becoming more prominent for Granite. Some of these properties have been recently acquired. Granite has also acquired some -- has owned some for a period of time. Curious if you can give us some insight into what for that segment the same property NOI growth profile is shaping up to be?

[Michael Forsayeth]

I'll take that, Mike. I think the year-over-year increase in the -- on the profile is probably 1% to 2% overall. This market depends, as you know, on the specific market itself. But the profile of that, I'd say, in the near term is 1% to 2%.

[Michael Markidis, Real Estate Analyst]

Okay. And has there been any recent leases or recent activity on renewals or new leases where you've seen a significant lift that you can cite?

[Michael Forsayeth]

No, not on that portfolio specifically. But as I mentioned, the ones for 2018 that have come up, we have seen strong lifts on those leases.

[Michael Markidis, Real Estate Analyst]

Okay. Last question for me before I turn it back. Just on the special purpose facilities that you've sold this year, I guess the 3 earlier this year that went through a third party -- well, Magna being a third party, but went through someone other than Magna and the recent 2 that went to Magna. Were these unsolicited offers? Or were you guys out there actively marketing them?

[Michael Forsayeth]

I'd say it's unsolicited offer, Mike.

[Michael Markidis, Real Estate Analyst]

Unsolicited, okay. And when you look at the 2 special purpose facilities that Magna has acquired, was there anything that you can see that was different for those 2 versus the ones where -- I guess, they elected not to exercise their right of first refusal on the other 2.

[Michael Forsayeth]

Hard to say. I think you'd have to say ask Magna.

[Operator]

Our next question comes from the line of Mark Rothschild of Canaccord Genuity.

[Mark Rothschild, MD & Real Estate Analyst]

Welcome, Kevan. It sounds like, Kevan, that you were somewhat involved with latest -- in looking at the acquisitions, when -- I see the REIT buying properties in Germany or in Europe, would that imply that you plan on being a more global REIT as opposed to just focused in North America?

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

Well, Mark, it was not involved in the acquisition, specifically in Germany. It was something that was done or sourced before my time. I will say it is early days to kind of plot long-term strategy, but what we're going to be focused on in the near term certainly is continuing the strength in the portfolios that we have, and that certainly includes Europe. And I'm very happy with that acquisition at Erfurt. It is becoming a real strong e-commerce node for the market. So we will continue to build out those portfolios in the near term and continue to strengthen them. So long term, still to be seen. But in the near term, that's our goal.

[Mark Rothschild, MD & Real Estate Analyst]

Okay. And I see obviously understandable, you're somewhat reluctant to talk about strategy, it's because it's your first day. But as far as the special purpose properties, would you view those long term as core properties that you would want to own? Or would you be in favor of getting out of owning those types of properties?

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

Well, that would be an easy question if they weren't -- some of them weren't so bulky and large. So again, I think that, that is still a strategy question. But I will say this, the color I will provide here is I think the progress and the direction that has been made under Mike's leadership will continue. And I think in the end -- the end game is to have the best platform possible in your markets, and we will continue to do that. So I think modern logistics and e-commerce is going to going to be our focus, and those special purpose endings are going to have a hard time finding a core position in that type of portfolio.

[Mark Rothschild, MD & Real Estate Analyst]

Okay. And then just lastly, you talked about growing in Canada. You obviously know these markets well. Toronto and Vancouver prices have gone up quite significantly of late. Do you still see value in these markets, considering the strength? Or would you call these markets maybe a little expensive now?

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

I would call them extensive now, but I will say -- I think we've seen very strong rental growth in the markets even when I was at Pure Industrial, where we saw strong rental growth in Toronto and Vancouver. I do believe that Calgary and Edmonton -- and this is just my personal view. I believe that Calgary and Edmonton will be strong markets, particularly Calgary over the next 5 years. They may lead the country in terms of growth coming out of the weakness that oil has delivered on them. So even though the cap rates may appear on the surface to be very low, and they are, certainly, I think that there are -- there is growth potential, so we'll have to look at that. Probably more development in the program over the coming years. We have the bench strength to do it, and we should use it, and we should leverage it. And we have, and I think we'll continue to do that and maybe increase that part of our program. So I think there are ways to deliver good growth and good returns in Canada. We have to be obviously very selective with what we do.

[Operator]

Our next question comes from the line of Howard Leung of Veritas Investment Research.

[Howard Leung, Investment Analyst]

Congratulations, Mike, on your retirement. And welcome, Kevan. Kevan, just wanted to ask about, what's your view of the ideal Magna exposure over time? You mentioned just focused on the modern warehouse, but Magna is also a good tenant to have. So just want to hear your thoughts on that.

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

I -- again, these are all good questions. I don't have an answer to a specific number, but I will tell you I do agree. These special purpose entities, light manufacturing and manufacturing have a place, in my mind, any good industrial portfolio. There is not an industrial portfolio out there, whether it's Prologis or Duke or Goodmans or others that does not have a component of manufacturing. You -- these are somewhat specialized assets to be sure, but the tenancy is quite sticky. It is not uncommon, and as I've learned more about Magna, it is quite common for the tenant to invest more behind the doors in the value of the property. So that to me provides an extremely sticky tenancy and stable cash flow and a growing cash flow. So it will have a place. That number, I don't know specifically what the right number is. I do know that we're moving in the right direction, and certainly under 50% is where we should be.

[Howard Leung, Investment Analyst]

Okay. That's really helpful. And on that, the recent special purpose properties that were sold, I think the cap rate was 6.9%, the remaining portfolio of special purpose properties that Granite still has, do you expect any further cap rate compression on this?

[Michael Forsayeth]

I don't think so. It's Mike. The -- I think the sale of the special purpose properties both in January and Magna's interest and also wanting to acquire the 2 in the U.S. give certainly additional perspective in terms of value as it relates the remaining special purpose properties. And I'll leave it at that. I think it's important to note that we're now down to a handful on the special purpose. We've got 2 in Graz. We've got 1 in Austria, Obertshausen in Germany, Albersdorf in Austria, and we've got the Milton properties. So it's -- the number is down, the percentage is down, and the covenant of Magna is very strong.

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

Yes, if I could add something to that, too, is when I joined and learned that an asset like Tillsonburg was sold, I was quite happy about it. I will tell you. I didn't realize it was that small. But owning an asset like this in Austria or Germany, to me, is a completely different story than owning an asset like this in Tillsonburg or Bowling Green. So I think -- you know what I mean? I think the urgency around a Graz to me is much, much less than you would see. So I think the way that team has done this has been pretty exceptional. I may disagree with Mike on the cap rate. I think what we're seeing -- and I don't know this, but I think what we're seeing through these sales is a lot of interest -- number one, a lot of interest in stable cash flows; a belief in Magna; and they obviously feel -- and the investors are out there that feel that this is such a stable credit, and there is such stickiness around this location and the assets, that they're going to be there for a very long time and continue to generate superior cash flows. So I think there is interest in the other assets, or there will be interest in the other assets. But again, owning these in Germany and Austria and not being subject to a lot of the discussions we're having around trade disagreements in North America kind of separates them from the assets that have been sold recently.

[Howard Leung, Investment Analyst]

Right. That's really good. And just one more for Ilias maybe. I saw that there was a -- you mentioned that there was gains on sales and future gain on sales for the year that may need a special distribution. But there is also over $300 million of, I think, capital loss carryforwards that -- initially said that it might not be able to be applied. But do you think they could be applied maybe to offset some of those -- for the need for special distribution?

[Ilias Konstantopoulos, Chief Financial Officer]

Short answer is it's factored in. The capital losses sit in an entity don't naturally lend themselves to be used specifically for the special distribution Howard. Rest assured, though, that we are constantly looking at ways to manage the tax profile in a way that it's optimal for our unitholders.

[Operator]

[Operator Instructions] And our next question comes from the line of Pammi Bir of Scotiabank.

[Pammi Bir, Analyst]

Just maybe going back to the fair value gain booked in the quarter. I believe you mentioned half was from the pending asset sales and the rest from changes in assumptions. Based on your current assumptions, do you feel that there is room for upside in any of those values, perhaps on the other 2 property types and not necessarily the SPPs? And if so, which are the 2 property types, modern warehouse or the multipurpose, do you feel that you've been the most conservative?

[Michael Forsayeth]

So do you like to take a stab at that, Ilias?

[Ilias Konstantopoulos, Chief Financial Officer]

Sure. So yes to your first part, there is upside, certainly more to the modern. It's a loaded question as to how much upside. I think what we're trying to do, Pammi, is put out what is a best estimate and judgment that is defensible. I think we've done that. I think the process that we go through perhaps would be helpful, we get intelligence from whether it's precedent transactions or appraisals, et cetera. We do that regularly. And in every quarter, we step back and go through the process of property-by-property, challenging ourselves to see that we're reflecting the current reality, which I think is what we're trying to capture. This all being said, we think there is upside, particularly in the Category 1 in terms of gains or the modern logistics that is.

[Michael Forsayeth]

I'll add a little bit to that. One, certainly the GTA, assets in the GTA, we've seen some lift, and I think there has been continued look there. The other aspect that's been influencing those, we've had good success on the leasing front with lease terms and with some rental growth in certain areas. So you're seeing that being reflected in the current numbers.

[Pammi Bir, Analyst]

That's very helpful. And then just coming back again to the, I guess, potential asset sales. Can you comment on whether there has been any approaches or perhaps any discussions with potential interested parties on the remaining special purpose assets in Canada, Germany or Austria?

[Michael Forsayeth]

No, no.

[Pammi Bir, Analyst]

Okay. Last one for me. Just looking at that Dutch vacancy, I think, was -- I think it's one property. But can you comment on where you are in terms of the re-leasing progress there?

[Michael Forsayeth]

Well, I'll let Lyle and Lorne answer that.

[Lorne Kumer, Executive VP & Head of Global Real Estate]

The tenant has left now. It is listed for lease. We -- it's early days since the tenant left, but we have had some activity. We've had a couple of tours of a local player who is looking at a consolidation and is going on a second tour, and there is an additional regional player that's looking at a consolidation of 3 logistics facilities and is also interested. So it's still early days, but we're pleased with the initial traffic through the property.

[Pammi Bir, Analyst]

And would you be confident to say that there's a good chance that, that should get re-leased before year-end?

[Lorne Kumer, Executive VP & Head of Global Real Estate]

That's certainly our intention. Obviously, we're not in control of it, but our goal is to have a new tenant in place, maybe not in occupancy, but in place by the end of the year.

[Operator]

And our next question comes from the line of Troy MacLean of BMO Capital Markets.

[Troy Raymond MacLean, Analyst]

For the acquisitions you're looking at now, generally speaking, would you say cap rates are in line with what you've acquired so far in 2018, kind of in the mid-5s? Or have cap rates compressed over the last 3 or 4 months?

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

It's Kevan, Troy. I think they're in that range.

[Troy Raymond MacLean, Analyst]

And then you talked about maybe doing more development. What kind of yield spread would you want taking on development risk versus acquisitions?

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

It's dependent on the markets. It's dependent on the opportunity. I would say there are some markets where leasing activity is so strong that the development spread might be 50 basis points, where you might want to wait longer. Or the markets aren't quite as frothy, might be 100 basis points or 125 basis points, but it's kind of in that range. It's highly dependent on the market and the opportunity.

[Troy Raymond MacLean, Analyst]

And would that be -- would you consider JVs for like development going forward? Or would that be just for Granite only?

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

No. We would consider JVs, and I say that because it depends very much on who has control on the opportunity. There are times where you've got such a belief in a site or in a market, and it's controlled by a developer. And as long as you have the right relationship and get the right outcome out of it, we'd certainly be open to those relationships.

[Operator]

And there are no further questions at this time.

[Michael Forsayeth]

Okay. Well, thank you, Jose. Maybe in closing, I'd just like to take the opportunity to thank everyone I've worked with at Granite, past, present, in Canada, the U.S. and Europe for their support of me and certainly in their contribution in making Granite what it is today. It's been a very good run. And lastly, I wish Kevan, the board and certainly the whole Granite team every success in the years to come. And with that, we'll sign off. Thanks very much.

[Operator]

Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask you to please disconnect your lines.