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Executives

Tom Heslip - CEO

Mike Forsayeth - CFO

Jennifer Tindale - EVP & General Counsel

Lorne Kumer - EVP Real Estate Portfolio & Asset Management

Analysts

Sam Damiani - TD Securities

Mark Rothschild - Canaccord Genuity

Mark Marquetis - Digal Bank Capital Markets

Brad Sturges - CIBC

Granite Real Estate Investment Trust (GRP) Q3 2013 Earnings Call November 7, 2013 8:30 AM ET

Operator

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, Chief Executive Officer; and Mike Forsayeth, 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 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, expect 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 U.S. Securities and Exchange Commission from time to time for additional relevant information.

I will now turn the call over to Tom Heslip.

Tom Heslip

Thank you, Myra, and good morning everyone. Joining me on the call today 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, licensing, 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 $200 million and over 3.1 million square feet of leasable area, bringing the total acquisitions to 2013 to approximately $275 million and over 4 million square feet of leasable area.

In the quarter we entered into a purchase and sale agreement to acquire approximately 0.1 million square foot income-producing property in Germany for approximately €6.7 million with the closing expected at the end of November. We issued $200 million of 4.6% Series 1 senior unsecured debentures on October 2 of this year with a five-year term, and this will subsequently swap into €142 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 U.S. $105 million, which is progressing, but at this time remains non-binding. In the quarter, including both the recent acquisitions since January 1 of this year, we have reduced Granite's Magna tenant concentration from 97% to 87% based on annualized lease payments and this trend is continuing favorably.

Since January 1 of this year, we've 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 is now closed on the AEW European transaction. Based on recent price trends and comparable sales in Germany and the Netherlands we are 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 very competitive landscape there. And what we are particularly liking right now are the things we're seeing in the U.S. 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 in 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 Saltzgitter and Lannach properties. The remaining space related to our 2013 lease expiry is currently being marketed for lease under contracts for sale or on a month to month leasing term.

Overall, the resulting renewal rental income or ALP as we refer to it is better than initially anticipated with good projects 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 planning to 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 properties we have agreed to a five-year extension, which moves 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 grant and the extension is not materially different and the deal included an allowance of approximately €4.4 million for upgrades. This is approximately equivalent of eight months free rent with appliance 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 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 on place on this 90,000 square foot property.

Overall, on all elements of our strategic plans our third quarter was one of significant progress. In terms of growth and diversification, the closing of the Westchester Cincinnati property in Q3 and the subsequent closing in the ADW portfolio, we have, as I previously mentioned acquired over 4 million square feet, a new state-of-the-art logistics distribution warehouses and we've reduced our Magna tenancy exposure by 10%. Approximately 275 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 exceeds $300 million and with the commencement of construction of Louisville's building in July as I mentioned a region with less than 3% vacancy rate, we have an additional 624,000 square feet in our pipeline in a high demand rental market. Added to this a quarter with strong leasing activity, progress on selected asset sale, and new debenture finance, has swapped into favorable rate and hedged Europe 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 (inaudible) and are operating at the best level they have been 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.

Mike Forsayeth

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

Turning to the results for the third quarter, with higher revenue and favorable exchange rates stabilizing G&A cost, tax savings from the reconversion together with the impact of the fleet of acquisitions completed during fiscal 2013 Granite's funds from operations was $0.78 up 26% from the $0.62 reported for the third quarter last year. There is some significant items of note. Our top line was up $6.3 million to almost $51 million and benefited from contractual rent increases and revenue from completed projects to the amount of $2.7 million, favorable exchange rates added $2.4 million and our acquisitions contributed $1.8 million, while vacancies, releasing activities, and other minor adjustments reduced revenues by a net $600,000. Excluding $400,000 of operating costs recovered from the 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 $5.9 million; $2 million lower than a year ago primarily due to lower REIT and reorganization cost of $2.2 million. The net interest expense for the quarter was $4.7 million, relative to last year, was $900,000 higher due to 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 $1.3 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 $9.8 million or $0.21 per unit, while $55.8 million or a $1.41 per share was reported for the third quarter of 2012. The volatility of certain light -- line items under IFRS make historical comparisons difficult and complex.

For the quarter, the three main items that impacted our quarterly GAAP reported earnings that are neutralized for FFO purposes are the fair value changes, deferred taxes, and acquisition transaction cost. As it relates to the fair value changes in Q3 of 2013, there were fair value losses of $25.1 million before tax on our investment properties attributed to two reasons.

Firstly, following entering into a non-binding letter of intent with Magna to sell the Mexican portfolio for U.S. $105 million together with other market data points. We reassessed the vast of the fair value of our Mexican portfolio resulting in a $15.6 million fair value loss.

Secondly, there was an $8.5 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 $50.4 million mainly driven by discounts in 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 and fair values of the investment properties and Granite's taxable corporate entities, which in 2012 in pre-REIT conversions also included all of our Canadian entities.

Also in the quarter, we had approximately $5.7 million in acquisition transaction cost. The vast majority $5.4 million relates to the acquisition of the European portfolio and most of that $5.4 million pertain to land transfer taxes.

Turning to the year-to-date numbers. Our comparable FFO for the nine months of 2013, which excludes that net $4.2 million withholding tax payment made in Q2 relating to the post-REIT conversion reorganizations was $106 million or $2.26 per unit. That's up $18.2 million or $0.39 per unit from the $87.8 million or $1.87 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 cost. We had 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 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 $14.4 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 $7.6 million, there were $0.2 million of positive factors that increased our annualized lease payments to a net $7.8 increase since the beginning of the year. The positive improvements include contractual rent adjustments of $6.7 million, lease revenue from the acquisitions added $6.5 million, completed projects on stream contributed $2.4 million, and favorable exchange rates accounted for $6.4 million of the increase as the Euro and U.S. Dollar have appreciated 6% and 3% respectively.

As Tom mentioned, we completed the acquisition of a single candid property in Westchester, Ohio for approximately U.S. $21 million and financed it with U.S. dollar borrowings and U.S. dollar cash on hand.

The value of our investment portfolio has increased from $1.94 billion at the beginning of the year to just over $2.1 billion at the end of the third quarter. The three main components of the $176 million increase were acquisitions of just over $100 million, foreign currency translation of just over $65 million as result of the Euro and U.S. Dollar appreciating since the beginning of the year, and total net fair value gains of approximately $5 million.

Our total debt at the end of the quarter was approximately $362 million, of which 24% denominated in U.S. Dollars. With cash on hand at $77million that brings our net debt to $285 million, giving us a net asset value of about $1.8 or $39.12 per unit. During the quarter we declared $24.6 million of distributions to unit holders and $73.9 million for the first nine months of the year. In terms of the payout ratio year-to-date, we will declared distributions just under 70% of our comparable FFO.

As Tom mentioned, subsequent to the quarter, we closed the acquisition of the European portfolio for €129 million and we expect to close another single Canada 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 we swapped principle and interest payment stream of these 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 that we entrust on the debenture.

So in closing it's been another busy period for Granite, and we are pleased with our financial performance as well as the progress towards our strategic objectives. Through all of this our tech staff continued 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.

Tom Heslip

Thanks, Mike. Myra, I will turn it over now to you for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from Sam Damiani with TD Securities. Please go ahead.

Sam Damiani - TD Securities

Just on the Mexican deal still non-binding I don't know why. You had said previously that there was a December 15 deadline. I'm wondering if that's still the case and also you're waiting some antitrust approval there that's still pending, and if you could provide whether you're willing to provide in terms of the tax leakage within that jurisdiction?

Mike Forsayeth

Sam, its Mike. In terms of the timing it's moving along. These things take time and whether the December 15 date will be exact date that we're every -- both parties are working closely 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 happened there. As it relates to any tax linkage on the transaction, that's still I'd say a little bit up in the air depending on how it's -- how we actually finalize it on the timing and the final structure.

Sam Damiani - TD Securities

Yes, now just on the Mexico I was looking to just get an update on what the tax leakages are on an annual basis. But I think $13 or so million of ALP coming out of Mexico right now, just wondering how much that --?

Mike Forsayeth - Chief Financial Officer

Yes, the tax leakage overall Mexican tax rate are 30%. And we've got some G&A associated with that $13 million, so that brings you down somewhere in the neighborhood of overall $9 million to $10 million.

Sam Damiani - TD Securities

You switched focus to the 2017 maturities, is there some likelihood that we could see some of those lease get early extensions in the next short while (ph)?

Tom Heslip

Sam, this is Tom. The positive news Sam various dialog on some of those major ones but at this stage is dialog, in fact 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 that's kicked things off is Lannach, we'll see how things unfold on some of the others.

Sam Damiani - TD Securities

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

Tom Heslip

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 where the -- really the setout leases that mark-to-market versus lease in place for CPI.

We had contemplated probably about $3 million more of the loss than what we're currently seeing. So the downward direction on those 2013 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 actually hired us ALP that's for sure.

Sam Damiani - TD Securities

I'm just wondering I mean if there is leases that were its still cash flowing on September 30 that won't be by December 31, because of leases absolutely going to expire and called vacant at least for the immediate future. What would that singular be, is it fairly minimal or is there still a few million --?

Tom Heslip

A lot of this, it's actually --

Sam Damiani - TD Securities

Will be offset?

Tom Heslip

It's fairly minimal. In terms of the distance between September 30 and December 31, is -- the one that we're making at the end of the year is (inaudible) just going to property. The couple that are -- are going to overhaul well into '14. So the actual Q4 downwards ALP will be very minimal for Q1.

Operator

Thank you. Our next question comes from Mark Rothschild with Canaccord Genuity. Please go ahead.

Mark Rothschild - Canaccord Genuity

Tom, are you -- just following up on that last point (inaudible) speaking to Sam's question. Are you able to quantify that at all as far as the impact when you say minimal, is that couple $100,000, is that more significant just so we understand what may be the run rate is?

Tom Heslip

Specific to what would -- what inflates September 30 versus December 31?

Mark Rothschild - Canaccord Genuity

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

Tom Heslip

Well, for Q4, in a whole consent, there is a one lease that we know they're vacating is in (inaudible) store and that's the end of the year and that will be about a million -- seen around million or so euro, €1.01 million I believe. That would be loss as of Q1 2014. The rest kind of balance out in terms of existing leases versus CPI, that there is no other surprises there.

I think what surprise a little bit hard is to have some interesting lease activity going on with some of the properties that have already been vacated and it may well swing entirely in Q1 of '14 but may even have some impact late into Q4. So on the downward what I tell you is a combination of things, it's positive, I think talked to -- we talked about the 28 leases producing about $27 million of income you certainly are still recovering over $20 million on that before the releasing of some of these ones that are going well than of course before CPI and other adjustments.

Mike Forsayeth

Mark, its Mike. Again, if you look in the MD&A and the leasing activity is really it refers to certain fixed lease looking sort of six -- really six properties that we have either received notice or expect to be vacated and that identifies roughly $6.1 million of vacancies relating to those in 2013. But there are few others that weren't that had early terminations that add to that. So that add to that -- so to Tom's point, not fund more that we're expecting, basically they're pretty good properties.

Mark Rothschild - Canaccord Genuity

The G&A seems to continue to strength the lower, may be you can just guide us 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 its on bonus, is there a one-time item, may be just give us some guidance on what we should expect there?

Mike Forsayeth

Yes, it might begin. In Q4 of last year you had the large -- really the large G&A associated with the REIT and reorganization cost, that was a really big number at the end, I can't think off the top of my head. But our run rate is in -- right now, borrowing anything from the acquisitions that we're going to see, you're going to see a little bit of an uptick as a result on the AEW acquisitions. It's like we are running above $21 million or so rate now in that -- like if we could creep up again a little bit in the next year.

Tom Heslip

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

Mark Rothschild - Canaccord Genuity

And then lastly, you've done some acquisitions in U.S. and you're looking at -- you've done some Europe, what are your thoughts on going in Canada and should we expect most of the growth, the external growth to come outside of Canada?

Tom Heslip

Well, I guess you got to look at pipeline, I don't want to project that three, four, five years of where the best activity will be. But I can say right now and what's within our radar screen, we certainly like the U.S. market and certain portions of Europe in terms of just the hybrid of the quality of the asset and generally the yields that we can achieve and add to that some very, very solid tenants, many of them are our rebounding very strong. For us what we've seen in Canada is a lot more, small day mixed smaller tenant industrial, which isn't really our strength and something that we want to last. So we're focused on the logistics distribution market. We like larger two to four tenant building or a single tenant building in some cases as we have done. And we're just not seeing a lot of that in Canada.

Candidly, I think the kind of product we were -- 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, 300,000 square foot facilities, good long-term lease, which right now I believe in Canada would be depending on where but it's a recovery Edmonton or GTA. I suspect it would be at best around 6%, could even be a touch lower.

And what we see in the U.S. 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 of the AEW portfolio, where from a point of view of vocational attribute 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 products here would be perhaps as low as six. And when we see that kind of differential, we're going to keep our attention and our team focused on the U.S. 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 Calvary, Edmonton, Greater Toronto and would be a 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.

Operator

Thank you. Our next question comes from Mark Marquetis with Digal Bank Capital Markets. Please go ahead.

Mark Marquetis - Digal Bank Capital Markets

Just with respect to the Lannach property, Tom may be you can just walk us through -- it seems to me like that it actually is a quite strategic property for Magna itself and it's relatively new build in terms of -- I think there was -- it was build 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 the term? And my understanding was that the option on the 2017 was basically at they had a renewal option I think placed rent plus. So how did you guys come up with -- I know that -- I know it is a minimal role down, but how did you come up with that?

Tom Heslip

Well, first of all, you're right Lannach is a newer property; their business is really strong there. And they wanted to do some enhancements that they -- I mentioned. And so our discussions that will we be willing to fund some of those enhancements and exchange for some reciprocal benefits and looked at the things that they want to do at the building that bode well for their growth and enhanced property for our own sake. So the cafeteria and the office space came out at a cost somewhere around €4 million to €4.4 million and we discussed with them how long an extension we could do and ultimately that the two parties settled on five years. They might have wanted to do a little less, they might have want to push it little more and we settled on that. We looked at that as essentially close to a 10-year term from our point of view. And so that's just the first route we went.

Often we talk to them about where their interest is on buying assets and it is tabled. It doesn't stand in the way of finishing lease negotiations 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 have necessarily said they want to buy. We wouldn't rule without one day, but we like it. It is 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 €100,000 on a rental stream significantly above €6 million, so it was modest. And what we said is, we will have a little bit reduction there but the ongoing CPI adjustments will remain in place. Upon expiry, the renewal terms will be then renting place for 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 your model that says it makes sense.

There could be times where we could extend and may not want paying an allowance at that time and we may rate it out, see all those, and there will be other times where we work with them the best we can 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 for five years for effectively eight months free rent and almost a measurable reduction in rent go forward.

Mark Marquetis - Digal Bank Capital Markets

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

Tom Heslip

It is on the total. There is no incremental rent added to what is approximately 28,000 square feet of office, there is no add on in rent. We think of that as we gave them essentially €4.4 million allowance. They used it to build the cafeteria and put three office floors on it. It all work physically and for us in terms of the future of the property and no new rent on that space.

Mark Marquetis - Digal Bank Capital Markets

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

Tom Heslip

Saltzgitter is 330,000 square feet, its Germany. The extension takes us to '22 -- to 2022 as well on that.

Mark Marquetis - Digal Bank Capital Markets

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 roles that are still to be done?

Tom Heslip

Yes, that is absolutely correct, nothing new. And on five or six of those that are going to be vacant, we actually have -- well, one is came to close on sale this week and the 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, non-Magna subsidiaries. So nothing new and in fact, some good activity happening not yet closed or firm but some good stuff happening.

Mark Marquetis - Digal Bank Capital Markets

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, five year mark?

Tom Heslip

I think on the excessive leases, yes.

Mike Forsayeth

Yes.

Mark Marquetis - Digal Bank Capital Markets

Okay. And may be just for Mike then, as these -- the sticks produce that are growing 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 of?

Tom Heslip

On the op-cost line, it will be less -- it will go up a little bit Mike and in terms of -- on that front, can't give you quantify number at this time, but it depends on some engines. One when it will be sold, when it will be released, it's not quite positioned to make a hard quantified number on that front right now. But okay will be higher and you saw a little bit of that uptick in this past quarter. Again, it's not going to be millions.

Mark Marquetis - Digal Bank Capital Markets

Yes.

Tom Heslip

So it's really in the grand scheme, not a lot but it's higher.

Mark Marquetis - Digal Bank Capital Markets

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 would be actually increase your net investment going forward?

Tom Heslip

Well, I mean obviously we want to buy good things and we can. Right now, we are adding some interesting stuff in the U.S. but we certainly don't have a tied up at this time. The remains should be seen. The cash that would come off from Mexico could match with some new investment early in the New Year; it could be a little bit delay on it. And we're not taking a view that sitting on that cash is burning a hole and we have to get it deployed. But right now, there is not a direct match. Of course, Mexico remains non-binding and we are after other assets. So longwinded answer, it remains to be seen whether there is a match there.

Mark Marquetis - Digal Bank Capital Markets

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

Tom Heslip

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

Operator

Thank you. Our next question comes from Brad Sturges with CIBC. Please go ahead.

Brad Sturges - CIBC

Just on the small German property acquisition that's pending. What sort of cap rate you are looking for that acquisition?

Mike Forsayeth

Around 7% -- 7%.

Brad Sturges - CIBC

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 and 2014 in terms of dollar volumes of acquisitions if everything holds true?

Tom Heslip

As you say everything holds true, yes.

Brad Sturges - CIBC

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 a little bit about the yield, I mean you've taken some fair value losses. So I guess it's fair to say that compared to what the price value you're looking at a fairly significant change in terms of what the cap rate could be achieved on that sale?

Tom Heslip

Brad, well one thing about the sale is basically you're collectively dealing with eight properties and one fell through. 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 advantage. In terms of the next side, we look at lot of comps or even newer product and came to the view that on a per square foot basis, the pricing we had agreed with Magna was there in 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 a lot of variables in it. So we looked at it as what we can sell at equivalent of IRR and it's certainly much lower than the equivalent of $13 million gross income on 105 purchase price. Do keep in mind that the tax rate of Mexico for us a huge rationale, we're looking at the cap rate a little differently. A 7 or 8 cap rate in the United States is a pretty much a net 7 or 8 cap rate. A 10 cap rate in Mexico translates into about a net 7. 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.

Brad Sturges - CIBC

And then just lastly on you started construction of your just recent facility in Kentucky, any guidance in terms of development yield once it's completed?

Tom Heslip

Well, we're only targeting well above 7, that's the target. It's moving well. The construction is a little bit ahead of schedule, walls are topping up and it's got now high visibility from the highway. So we're getting a lot of interest and right now, we certainly expect that north of 7, significantly north of 7 yield.

Operator

Thank you. Our next question is a follow-up question from Sam Damiani with TD Securities. Please go ahead.

Sam Damiani - TD Securities

The only question I had left was just on your U.S. acquisition pipeline is any of it with Dermody your previous partner, your current partner --?

Tom Heslip

No, this existing income stuff, which would not be in the joint venture with anyone. Dermody often can 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 fully for our own account.

Sam Damiani - TD Securities

And to may be just a tack on here, you're still targeting leverage in the 40% to 50% range, is that still accurate?

Mike Forsayeth

Absolutely.

Operator

Thank you. (Operator Instructions) And we're showing no further questions.

Tom Heslip

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

Operator

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.

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