Q4 2020 Granite Real Estate Investment Trust Earnings Call
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Hello, welcome to the carpeting service. Good afternoon. May I ask for your name, please?
R e c h e l first name Smith last name. Is that good smelling on my side of my masks?
Beautiful. May I ask which company you represent, please?
Oh fantastic. Thanks for the spelling. I'll transfer you immediately.
Distracted to be in the low-to-mid threes in the second half of the year. So we should average out somewhere in the high 223 with you know, with increasing property in a white growth in the second half of the year.
Got it and maybe sticking with that note and obviously very strong organic growth in Canada. Could you need to provide some color in terms of which markets? Were you guys are drinking a lot of that growth?
Yeah, for sure. It's true. We've seen decent growth in the US. I mean twenty Twenty-One a lot of the turbo is in Europe, but we we will still see some some growth there but not as much in Canada. We don't have as much turn in 20 21 in Canada. So same propaganda life may not be as strong twenty twenty-two quite a bit of role in the US. I think 70% is in the us but we expect rent increases off on average and twenty twenty-two to be in the 7% range. So we think you know, 2022 will be a good years old. They will be a lot of noise around the really thing because we have over 5 million feet rolling in a 22, but the direction of the rent is is is moving in the right way. So I think 2022 will be a good year in terms of rent increases. Yep.
Get into a decent year of same property noi growth in the second half of 2022 and into twenty twenty-three and maybe switching to Acquisitions. I receive it very often dear. 20/20. Can we kind of expect the negotiations are constantly undergoing but I'm kind of the same kind of scope for 21.
So I think it's an active pipeline. I made I made the comment about being disciplined pretty intentionally markets are all over the place right now. I have grown uncomfortable with cap rates in in a number of our markets to be honest with you cuz we think in some cases I I made the comments just earlier about replacing cause yeah, I don't fully disagree with the argument that replacement only have one way to go. And so if you have a really good location and you have a new asset and a good tenant, I understand stretching on pricing and and the yields to a degree but in some cases we've seen what we think is a full Detachment wage other fundamentals. And so we've grown a little concerned that we're pricing is and market. So we're happy to sit back and continue to evaluate opportunities and if that ma'am
We do more land and we do stabilize properties then so be it not direction that that will go in but the pipeline right now is pretty active. It's just off the key is just to remain disciplined in the market that we want and the assets we want and in terms of pricing we do agree. We think pricing is going to remain very strong and very compelling assets over the next over the foreseeable future over the next few few years at least but I think it's it's part of our DNA to remain disciplined on that page and we'll see if we could be very active in the first quarter of the second quarter, but I think we'll just continue to review market conditions and and often make the right decision.
Okay, thanks. Maybe this will be a question more so for it to reset but it looks like there was a jump in the operating costs in terms of the recovery. Could you maybe just give a little bit more color on what drove that what is once in that bucket?
Well, I think the increase the overall I know why though percentage remained pretty consistent. So it's really just a new acquisitions coming on forward and you know increase their operating costs and then equal, you know recovery rents, so, that's really what's driving it as a new acquisition. Okay. I just wanted to clarify that that's just for me. I will pass it back. Thank you.
Yes.
I apologize our next question from the line.
McCormack, please. Go ahead with your question. Hi guys, just with regards it was asked earlier and and you don't have to speak to the specifics of a particular property. But you've bought a billion dollars of assets this year with a 10-year weighted average lease term and and the markets talking about inflation increasing. So can you speak to the inflation protection package these longer-term leases? I think we've heard that Industrial in particular you're getting more in the way of either annual rent steps or periodic rent steps. Can you speak to that as well as life or the existing portfolio in general sits on sort of embedded organic growth? Yeah happy to the the I think if I'm not mistaken off all of the Acquisitions this year with leases in place involved annual contractual rent increases or periodic rate increase this year Point wage.
for their CPI or inflation into
Lisa's and I think that's important to us. I I'm not maybe not as concerned about inflation as as others are but as we're looking at Aqueduct particularly long-term leases, we are very aware of contractual rent increases and the and the importance of that. So, uh, just off the top of my head. I would say it would be office hours around two and half percent. Now the CPI ones I can't who knows where CPI is going to be in the short term, but I wanted to point out and emphasize the fact that that's a consideration for us. We've looked at a number of assets where the locations great it fits our investment criteria, but it's a long-term lease that one and half percent annual increases in that that's what gives birth on so growth within the lease term is an important factor for us. Now. Are you going to get 4% and maybe in some markets at some point and we have on renewal?
I'm sorry renewals. We've been able to achieve that but in the two to 3% range, which is very common in the US that's what we've been certainly what's been, uh, an important factor standard for us on new acquisitions with long-term leases. And then I guess you don't have many of them this year. The European asset you noted is interesting but odds are you would you entertain looking at some of these things that are exceptionally low going in cap rates, but the rent bumps could be fifty-two who knows a hundred percent on some of the assets or is that not something do you think it's priced appropriately in the market today? And and is that something that you'd entertain looking at?
Yeah, it it's it's I think the recent acquisitions that we've made in the GTA. I think like the tenderly ones the rent growth very attractive for us. And what was it attractive for us on an acquisition was the price per square foot? So again, just looking at other fundamentals that makes sense was where we bought joked a bit on these is and as I said before, you know a 3 and 1/2 going and you'll might make sense that's not really on its own white scares. It's just if that's three and a half percent represents $300 a foot. Well, then we have a problem like that's when we have an issue. So what you're talking about absolutely look for and we are willing to get aggressive on cap rate. It's when it starts Contracting with other important fundamentals and listen. I'm not I'm not sure.
Going to sit here and say crisis and Trauma should be $125 a foot. That's a that's gone. I realized that and looking at land prices recently pressing three and half million and a curse clearly replacement cost are much closer about two hundred foot than they are a hundred I get that but those are the opportunities that we look at home from an aggressive Catholic perspective. We just had to make sense from other fundamentals for us to move forward on it. But it definitely it's it's on the radar. Yes, that absolutely makes sense and then just technical question for Teresa on this straight-line rent, which I think is Q3. It was impacted by some free rent and I think it's going to wear off over the first half of 2021. Can you just give us a sense of the steps down? Is it around 500,000 a quarter or or how should we think about that?
Have to take a closer look Mac, but you're right that free rent that we saw in Q3 will be burning off in the first quarter and that's probably in the ballpark. That's 500k I can I can get back to you offline. Okay, no worries. That that's perfect. Thanks Jeff.
Thank you very much. We'll get your next question on the line from Howard along with Veritas investment research go right ahead.
Good morning. I just wanted to ask you know, what have you done kind of a market market analysis of wage properties and you know, is it right to say that a fair to say that I guess the way better mark-to-market than what you see in Europe.
Well, I would say it's fair to say because of the Magna concentration in Europe and and not that we think that the rents are much higher than Market, but I would just point out that a quarter to determine what the market rent is in those in those markets versus Logistics in the US. There's a lot more transparency around the house, but just in general I would say you're right be mark-to-market on r u s s is higher than it is in Europe and I wouldn't look at as much long-term powered. I would just walk. I think it's better to focus on what do we anticipate? What happened in 2020? What do we anticipate? It's going to happen in twenty Twenty-One. And what do we anticipate going to happen in 2022? So for a 2020 it was rough life 8% Mark to market for a 2021 overall and there is one acted in there on renewal were an amortization does burn off so it kind of seems the numbers that that but for sure.
921 we anticipate it being in the 5% range. And then as I mentioned for twenty twenty-two as we sit here today, we expect a mark-to-market in the 7% range for twenty twenty-two and I don't think we've looked carefully at 2023 yet all to say I think that that would indicate kind of where we feel the input in place rent our house versus versus Market. I hope that right right and and and I think you mentioned earlier that because there's more than a 2021.
Yes, it's 70% now interestingly in 2022. But when you look at the the rents and sells the renewals mostly involved magnet. Yep. I think it represents over 45% of the of the rents that are expiring in 2022. And we do extent we do expect rents to move positively off on those on those renewals. So we expect rent list to be positive in Europe as well as the US has obviously as well as Canada, but overall we're investing anticipating this point would be 7.
That's right. Now that's fair. I want to turn to kind of interest rate than I know. It's been pretty recently fries and bond yields, but, you know any thoughts as to whether you would maybe do some finance and earlier than dated on on debentures just to maybe get ahead of get ahead of actual further Rising deal.
So Howard we have been looking at this so our next maturity though is in November 2023. So that's almost two two years nine months and months. You're right. We could refinance right now, you know, probably a 10-year in you know to 2.7% range. So, you know lower financing and we can certainly. It to something much lower than our current 2023 Dodge Avenger, but the prepayment penalty right now is is too prohibitive and it doesn't really make sense to do that. Now, it's quite significant and I just it's it's too costly to to call and interest rates would have to write or we we would have the conviction that interest rates would have to rise significantly in order to make any sense of it. So at this point in time, it doesn't look favorable to to refinance the 2023.
Right, that's what's going to happen in two years or interest rate. Exactly. And then yeah, I'm just I'm expecting in 2022 for taxes around $0.30 a square foot capital leasing it and I know that's kind of kind of higher than what it has not just be twenty-twenty. But even before is that really a function of like a, you know, less Meg more more Logistics property. So we expect you could expect that maybe code even a bit higher of or Magna process or supposed. That's exactly the case. You're right. So lots of the Magna which is our really are quadruple net leases to moving more to traditional properties where we're going to have more ongoing general maintenance capex programs in place. So as we move away or as the as we have fewer and fewer exposure or less exposure to the manufacturing wage.
Triple net leases we should see it level off. It'll probably level off in that $0.30 per square foot range longer-term.
Okay. No, that's great. That's that's very helpful. Thanks so much turn back.
Thank you. Look at your next question on the line for the line of time Eber RBC Capital markets go right ahead.
Hi, everyone. Just I want to maybe go back to your comment too, though. You do Capital allocation, you know, you mentioned that maybe it's getting a little bit uncomfortable with work a price on some transactions. So as you think about maybe the next, you know, twelve to twenty-four months. I'm just curious, you know, how you see perhaps, you know your approach to development changing or maybe you know increasing some of the capital towards developments or is there enough in the pipeline to keep the active such that Acquisitions will likely outweigh development projects over the next few years.
No, it's a great. It's a great question. I don't think that we have enough if we are successful and we believe that we will be if we were successful on our development projects this year, namely Dallas all back in Germany and the first days of Houston after this will just have Houston as an ongoing divorce in sight. And so we wanted to add more development this year. It just so happens that the stabilized Acquisitions made more sense for us off, but our objectives in 2021 is to continue to build up our investment or sorry our development pipeline. So it is a focus of our this year to do it off of the platform to do that. We built the platform around capability. It should be a core competency of ours so you will see as hopefully dead.
Really ramp up the development side of our of our Capital deployment program.
Scott it, I guess and just coming back to I think you partially answered one of my questions really the only question I have left but you mentioned that I think is it roughly 45% of the 2022 maturities are with Magda whether it's in USA Europe. I'm just curious if you have a sense of I think that the total for 2022 is maybe just over five million square feet what portion of that would be subject to fixed-rate renewals.
I think the majority of the Magna renewals are fixed rate renewals.
So that 45% of Revenue I referred to.
Yeah, it's magnet in Europe and it's fixed rate rentals.
And so the balance of the 2022 maturities would not necessarily they would be at Market rates. There would be at Market. Yes. There's I think 7% is in the GT and the remainder was in the US.
Okay, and I think you mentioned that would be likely generating positive spreads a lot left in the game ended assets where the rents actually roll down or is that if we gotten through most of all that in the last several years.
No, I think we've gotten through that. There are there are Magna leases where they do go to fair market value, but the majority of them have fixed rate formulas in there. I won't go up to the details of it. But where you're speaking about rents going down. No that is not the that is certainly not the majority of the magnets. That's moving forward.
At all great. That's great. Thanks very much. I will I'll turn it back. All right.
Very much. I will get to our next question on the line from Mike market for a job in capital markets go right ahead.
Thanks, everybody. Just one question for me Kevin. I was wondering if you could just revisit where some of the larger Legacy maturities are in Austria, which I think you've based on your your your fair value disclosure or comments cited as being a a market. That's maybe a little bit weaker than the others where those the timing of that is and and just revisit what your thoughts on in terms of approaching magnet for an early renewal or is it just better to to wait at this juncture? Thank you.
Yeah, well, I'll serve the last part of the question why I think the best thing to do is wait, we have two larger ones coming up in Austria Vienna 2022 is is one off but in Austra the other one is garage since 2024 and we'll we'll have renewed that in 2023. That's that's the notice. So, those are the two big ones in Austria and I are our approach to this hasn't changed at all. We obviously monitor to the degree that we can activities around me again what they're doing in Europe what they're doing with with rods and we continue to be encouraged by contracts that they're taking on Partnerships that they're forming including with Fisker which will require in in our opinion which will require Graz to a large degree. So our comfort around a likelihood of birth.
Still continues to grow I don't think it would make economic sense for us to try and do an early renewal. The the renewal terms are prescribed. And I think the best thing to do is to wait until the renewal date is here the notice. Is here and and finalize that and then you know what the best move forward is with those assets in here.
Okay, and just to confirm the the one that's at the end of twenty two presumably that's part of the 45% of 2022 maturities with Magna and that would correct into your 7% overall expectation for earnings. Yes. Okay. That's it. Thank you very much for crabs on this right here.
Thank you very much. I have no further questions on the line. I'll turn it back to you.
All right, we'll just on behalf of management and trustees at Granite. Thanks again for joining us for the Q4 and and 2020 year end call and as always to our universe. Thanks for your continued faith and support.
Thank you very much. I thank you everyone. I know there's conclude the conference call for today. We thank you for your participation as we disconnect your lines. Have a good day everyone.
Thank you.
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