Q2 2021 Granite Real Estate Investment Trust Earnings Call
Good morning, ladies and gentlemen, and welcome to the conference call of corn I treat speaking to you on the call. This morning is Kevin Gordon President and Chief Executive Officer, and Theresa on metal Chief Financial Officer before we begin today's call.
All I would like to remind you that statements and information made in today's discussion may constitute forward looking statements and forward looking information, including but not limited to expectations regarding future earnings and capital expenditures and that actual results could differ materially from any conclusion.
The 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 Goodnight material filed with the Canadian Securities administrators, and the U S Securities and Exchange Commission from time to time, including the risk factors section.
All of its annual information form for 2021 filed on March 3rd of 2021reads.
The readers are cautioned not to place undue real.
Reliance or on any of these forward looking statements and forward looking information the night undertakes no intention or obligation to update or revise any of these forward looking statements. All 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 the international finance financial reporting standard piece or the for the Q2.2021concerned condensed combined unaudited.
Financial results and management's discussion and analysis of coordinate the real estate investment Trust in Grenada, REIT, Inc. And other materials filed with the Canadian Securities administrators, and U S Security Securities and Exchange Commission from time to time for additional relevant information.
During this presentation all lines will be in listen only mode. Afterwards, we will kind of question and answer session. Today's call is being recorded I will now turn the call over to Kevin Corey. Please go ahead.
Thank you operator, and thank you everyone for taking the time to join US for second quarter earnings call I Hope, you're all doing well and thought Damian Warner's cold metal performance. This morning into the CASM on <unk>.
As usual I am pleased to be joined this morning by <unk> recent neto, our CFO on tumor our executive Vice President of global real estate and Michael ramp Harris, our executive Vice President of investment.
Teresa will begin our discussion this morning with the review of the financial highlights I will then provide an update on our operations acquisitions developments and the ESG and then open up the call to any questions that you may have.
Thanks, Kevin and good morning, everyone granite second quarter results are in line with expectations with <unk> per unit coming on essentially flat to Q1 in light of continued negative foreign currency effects from the stronger Canadian dollar and the temporary dilutive effect of granite recent equity and debt offerings.
If appropriate unit in the Q2 was 99 cents, representing a 2.2 sand or a 2% increase relative to the same quarter prior year and sixth sense of 6.5% increase relative to Q1.
However, normalizing Q1 for the 4 and a half million of financing costs associated with the redemption of granite is 2021 debentures in January and accelerated amortization of financing costs relating to the amendment and upsize of grants credit facility Q1, <unk> per unit would have been $1 level with Q2s performance.
That's the thought was positively impacted by 12, 7% growth of net operating income relative to prior year. However, <unk> continues to be negatively impacted by foreign exchange translation losses on our foreign based income as the U S dollar and euro weaken by 11% and 3% respectively relative to the same quarter last year.
Here.
Partially offsetting these translation losses of $1.1 million of net foreign currency gains realized in the second quarter as a result of granite episode that FX hedging program.
Granite is a phone on a per unit basis. In Q2 was 96 cents, which is flat to Q1 after adjusting for the previously mentioned financing costs and 3 center of 3.2% higher than prior year.
And the flow related capital expenditures leasing costs and tenant allowances incurred in the quarter were $1.7 million, which was lower than the $2 million incurred in the same quarter last year, but 1 point of 1 million higher than Q1.
Maintenance projects are ramping up over the remainder of the year and we estimate maintenance capital expenditures in the leasing costs of approximately $13 million for the year, which is $2 million lower than communicated on the Q1 call.
In addition to the effects of foreign currency impacting episode of overall <unk> per unit resolves are partially affected by the temporary dilutive effect of the $316 million of equity offering completed June 9 as well as the Q4.2020 of equity and bond offerings, where net proceeds have not yet fully been deployed.
Granite <unk> payout ratio came in at the conservative 79% for the quarter.
NOI on a cash basis for the quarter increased nearly 9 million for 12, 5% from the same quarter in 2020 and unchanged from Q1 of this year with NOI growth muted by the U S. Dollar weakening further 3% in Q2 relative to Q1.
Same property NOI for Q2, 2021 with solid relative to Q2 last year, increasing 2.9% on a constant currency basis, but 3.5% with foreign currency effects are included.
Same property NOI growth was driven primarily by positive leasing spreads in Canada and incremental rent earned from excess land at the GTA Magnum property as well as contractual rent in CPI increases across all of granite regions.
G&A for the quarter was $8.3 million, which was between $7 million lower than the same part of last year and <unk> 5 million lower than Q1. The improvement over Q1 is primarily due to the nonrecurring compensation expense of <unk> 9 million related to the 2020 fiscal year that we recognized in the first quarter.
The comparison to second quarter of 2020, the point 7 million positive variance is mostly related to lower fair value losses on non cash compensation liabilities.
We continue to estimate G&A expenses of approximately $8 million per quarter on a run rate basis for the remaining half of 2021, which assumes approximately $1.6 million per quarter of noncash compensation expense the expenses, but assumes no fair value losses or gains associated with the increase or decrease in the non cash compensation liabilities.
<unk>, which we cannot predict.
With respect to current income tax for Q2 current income tax was $4.3 million. However, excluding $2.3 million of current taxes relating to the sale of an Austrian property. This quarter current taxes were $2 million, which was flat to Q1 and slightly lower than last year Q2 by the point 1 million, mostly due to a weaker euro real realm.
<unk> to the prior year.
On a run rate basis, we continue to estimate current tax at approximately $2.2 million per quarter with respect to the potential recognition of tax assets as I mentioned on the Q1 call granite has of further potential 2 million of tax assets. The may be recognized in Q4. This year relating to tax positions taken on taxation years, which will go <unk>.
She'd bird, but we cannot make that assessment until the fourth quarter the.
The trust balance sheets, comprising total assets of $7.2 billion at the end of the quarter was positively impacted by approximately $308 million in fair value gains to granite investment property portfolio in the second quarter offset by approximately $43 million of translation losses on granite foreign based investment properties, particularly impacted by.
The decline in the U S dollar of 1.4% relative to Q1.
The fair value gains on granite investment property portfolio is mostly attributable attributable to fair value gains in the trust the GTA and U S properties.
The trust overall weighted average cap rate of $5.1 per cent decreased 30 basis points from the end of Q1.
The net the.
The total net leverage as of June 30th was 20% down 5 percentage points from Q1 and debt to EBITDA remains healthy at 6.7 times the.
The trust current liquidity is approximately $1.7 million, representing cash of approximately $690 million and the Undrawn operating line of $998 million I will now turn the call over to Kevin.
Thanks Theresa.
As always I will keep my comments brief as I Trust, you've had the opportunity to review, our MD&A and press release on.
I'll begin again by echoing <unk> comments once again, an in line quarter. Although it is worth mentioning highlighting the <unk> per unit for the quarter increased year over year despite of corresponding negative move in FX of roughly 8 per units.
Also worth repeating is the increase in the market value of our portfolio on the quarter, representing almost $5 per unit with gains across our entire portfolio on a constant currency basis led by fair market value increases in our portfolios in the U S. GTA in the Netherlands due to a combination of rising market rental rates.
<unk> and declines in cap rates for industrial assets.
As disclosed on the MDA MD&A and press release.
We completed the sale of 1 non core asset in Austria and closed on 2 strategic acquisitions in the quarter, including a $1.1 million square foot portfolio on Chicago for U S $94 million and the forward purchase of an 800000 square foot state of the R. E Commerce distribution facility in the murphree growth.
Suburb of Nashville.
On the development will feature several key sustainability features and we will meet the criteria set out in our Green bond framework.
Leasing fundamentals in Nashville continue to be very strong with current vacancy in the national East market sitting at just over 1.5%.
It is the market we have been targeting for many months now.
We are also in advanced due diligence on roughly $370 million and acquisitions of stabilized assets and development sites in our target markets in the U S. In the GTA, which we expect to close on in August.
And a further 200 million in acquisitions in the U S. The GTA in the Netherlands also comprising stabilize the assets and development projects, which we hope to complete by the end of the third quarter.
As an update on our development pipeline our project in <unk>, Germany, as well on progress and remains on schedule to be completed by the end of the year.
Construction on our development projects in Dallas, and Houston, comprising 3 buildings totaling nearly 1.3 million square feet has commenced with completion scheduled for the second quarter of 2022.
We are now also in negotiations with a national E Commerce retailer 4 of 690000 square foot build to suit project on our Houston development site.
In addition, the vertical construction on the expansion of our Controvert cold storage facility in Mississauga is well underway and we expect completion to occur in the second quarter of 2022.
As mentioned above and on previous calls development will continue to play a critical role on our growth plans, particularly given current pricing levels for modern stabilized assets across our target markets.
As of note all of our developments will meet the Green building criteria outlined in our Green Bond framework and we are pleased to have publish a comprehensive global ESG plus our report for 2020 in conjunction with our Q2 financials and MD&A.
As mentioned in our earnings release, a copy of the report is available on our website for review at your convenience.
Operationally, we have now renewed or released all of 2.3 million square feet of our 2021 lease expires. Although we are still finalizing fair market rent on 2 renewals, we estimate on average increase in rental rate of roughly 6%.
Of the $5.6 million square feet in leases scheduled to expire in 2022, we have renewed 650000 square feet to date and are currently in discussions on over 1.2 million square feet of remaining expires.
As Teresa mentioned and as disclosed in our MD&A. The same property NOI increased by 2.9% on a constant currency basis.
Same property NOI growth for the quarter was again muted by lower CPI increases, which came in below 1% for the year and of vacancy in Poland.
Through June 30 of 2021, CPR is tracking at 5.4% and 3.1% for the U S and Canada, respectively, and between 2% and 3% for our respective markets in Europe.
As mentioned R as announced in our press release I would like to recognize the appointment of Emily paying to our board of trustees.
Emily brings a wealth of experience in the logistics sector finance and governance among other skills and she will be of Great addition to our organization of sincere welcome to Emily.
In closing I think the quarter was characterized by operational stability and strength and fair value gains on.
While our cash flow per unit metrics were impacted somewhat by the dilution from our June equity offering we are poised to deploy a significant portion of our cash on hand in the third quarter on strategic acquisitions.
We continue to benefit from strong leasing and investment market fundamentals broadly across our portfolio and.
And our pipeline of investment opportunities remains very robust at well over 1 billion currently.
On that note I will now open up the floor for any questions.
Thank you, ladies and gentlemen on the phone lines. If he would like to register for a question. Please press. The 1 followed by the 4 on your telephone.
The question has been answered and I would like to withdraw your administration you can press 1 followed latency on the can.
Ladies and gentlemen, it is 1.4 if you have a question.
And we do have a question from the first 1 is from the line of the Brad stretches of with Raymond James. Please go ahead of your line is open.
Hi, good morning.
Thanks for the color on the acquisition pipeline that you have near term just wanted to get a little bit more sense on the potential split between development.
And stabilize the assets within the.
2 buckets you identified that are closing in August and then maybe by the end of the quarter.
Yes sure Brad.
For the $370 million in acquisition. This month's 2 thirds would be stabilized and roughly 1 third would be related to development.
And for the remainder of 200 million by the end of the third quarter. It's roughly a 50.50 split between stabilized on development projects.
And with those development projects are those opportunities that you'll be able to commence in the near term are those more like land bank and longer term prospects.
Well, we will be commencing construction, but we would not expect to see any income in 2021.
Got it.
Okay.
And then in terms of the the leasing.
The expires that youre addressing or have addressed in 'twenty 2 so far the 650000 square feet that was <unk>.
Recently done and another $1.2 million square feet can you just give a little bit more context on the $1.2 million square feet.
In terms of location and the types of rent spreads youre seeing right now for those or do you expect for those renewals.
Happy to so on the 650000, we've achieved roughly 9% rent lift.
Of the $1.2 million as in the U S and I'll just say this overall, we're tracking we estimate.
On average increase of 7.5% to 8% for 2022.
Yes.
Okay, that's pretty similar to your.
Your guidance from last quarter.
Well that's good.
Yes, okay.
I mean rent the rents the rent market rents in the market are changing pretty rapidly, but at this stage or not.
Youre not thinking of that will change too much for your near term expires.
Well youre right on that and certainly we feel that same.
The demand pressure as well, but we're basing it on deals we're actually seeing occurring in the market. So I agree with you. We expect we hope to maybe do better in 2022 on those renewals, but we're still basing it on transaction data rental transaction data that were that we're seeing in receiving on the markets as of today.
Okay.
That's great I'll turn it back thanks a lot.
Thank you. Our next question is from the line of Matt <unk> with National Bank of Canada. Please go ahead. Your line is open.
Hey, good morning, guys.
A bit of of a broader question here with regards to the United States. They are a bit further than we are here in Canada on the reopening has that changed anything in terms of industrial tendencies, obviously you'd expect the ecommerce take up to go down a bit as people gain flexibility, but the.
It sounds like things are still quite strong, but any any color you can provide on on how the market is unfolding post depend on it could be great.
Matt I think it's a very fair question and I.
I always worry of those saying that our sector is immune in any way to what's going on in the world and the pandemic, but the truth is we have seen.
The strongest absorption in late 2020, and I think it was $100 million in the U S absorption in the first quarter is that related to.
The reopening activities, we can't point to that.
So it's hard for me to sit here today of comment on whether the reopening is causing more absorption.
We certainly think it's plausible, but we can't see any evidence.
The debt the reopening is having a major impact which I think is a good thing overall as I think of positive comment we can see that the reopening it's certainly not hurting us, but we can't point to any evidence quantitatively that is assisting our sector.
And just I guess at a time there were guys looking for shorter term space just to meet.
Crunch in terms of what they were doing.
Has that gone are the tenants in the market at this point looking for longer term leases.
Locking in rents.
Yes, I don't think maybe maybe there was a short period of time early on in 2020, where they were looking for short term leases I saw it more of the landlords who are looking at doing shorter term leases I think there was a period of time, where tenants, we're really unsure of the future of not wanting to commit that change very quickly.
And I think.
What was happening was those tenants were seeking longer term commitments on the space, but it was the landlords that wanted to lock in on shorter term leases and capture that that expected rent growth in the future. So I think that was more of the dynamic that we saw everything that we're seeing today.
I think tenants on the whole of looking for longer term leases, maybe more on North America right now than in Europe, but I think as we've mentioned before we think that dynamic is certainly going to make its way to Europe.
Shortly.
Fair enough.
The last 1 is a little bit more technical and it may maybe Theresa.
In terms of the mechanics behind these forward purchases for development how does it work exactly do you put the money out of today and get some sort of yield on the interim or is it.
Like you purchased it at the at some point in the future and the money goes out of them.
So at this point in times of with the <unk>.
Spiro.
Is that wrong.
We purchased the land effectively and then as construction commences, we will be funding the construction and we will be adding to that property under development and then at the end we settled on the profit and full price.
Complete so it'll be a graduate of spend.
Our use of cash over the over the construction period.
And the numbers quoted.
Terms of the value of that the full project or is that just for the the land day 1.
Thats the full project.
We noticed we just recorded as far as the acquisition for this quarter of $17 million. That's really just the land costs, but what we've described I think of the $66 million.
The total cost of the project.
Perfect. Thanks, guys.
Thank you once.
Once again, ladies and gentlemen, it is the 1 floor to ask a question and our next 1 is from the line of Joanne Chen with BMO capital markets. Please go ahead. Your line is open.
Hi, good morning.
Maybe just jumping back on the acquisition of comments for the stabilized assets.
At the kind of range of kind of what kind of cap rates, you're seeing right now and for the.
The stabilized assets.
The ones that we're still to close I don't want to disclose it at this time not even a range I apologize, we'll announce it as soon as we're able to flow from you guys.
Yeah, we're not able to at this point in time under the terms of the purchase and sale agreement.
Okay. No. That's fair I mean would you say the bulk of the 370.
Net.
The balance between kind of in the USA, Canada.
Well the ones on August <unk>.
It's roughly I think 2 thirds of U S <unk>, Canada.
And then for the remainder in the third quarter I think it's roughly 25% cash.
Canada, 25% the Netherlands.
And 50% of the U S.
Got it okay.
Okay, and then the use of it would be markets that you.
R&D operating or any new markets.
Correct as of today, okay. Okay.
And I guess, just the things around on the other side of things how much capital recycling opportunities.
Got it.
It wouldn't be for the remainder of the year.
Roughly $35 million I think is the number.
It could be it could be a bit higher but it's not going to it's not going to be it's going to be very consistent with that number I think.
Between 30 and 40 on it.
The left to go over here on it.
Okay.
Sorry, just wanted to clarify I might've missed it earlier in terms of the.
Understood.
<unk> for the 2022 lease expiry of did you say 1 of them.
7 to 8 per cent, sorry, just wanted to clarify.
Okay.
Okay. That's it from me thanks, very much guys I'll turn it back.
Sure.
Thank you. Our next question is from the line of Tom Damiani with the TD Securities. Please go ahead. Your line is open.
Thank you and good morning, everyone.
Just first off on the acquisitions, Kevin I just wanted to clarify the.
The larger pools of assets that you are expecting to close over the next couple of months.
These are these include the deals that you announced with the equity offering and then you've added to that in other words those those original deals back in June are still underway as planned.
Absolutely yes.
Absolutely.
I would just offer the comment.
Particularly on land acquisitions, there is a lot of due diligence involved and so we're we're still confident we're going to close I think the due diligence is going well overall, but there is still work to be done to make sure that we cover of all of the issues related to those types of acquisitions. So it's what we've announced already.
And plus.
Add on acquisitions.
Perfect and then just switching over to Magna nice to see the concentration falling to 32% on revenue I guess, just 3 quick questions.
The new tenant over at I guess Oberhausen did you so you're familiar with the firm or they are they going to stay in the building for the long longer term.
Yes, so the sale of <unk>, we do know terrorists as private equity of the specializes in these types of business acquisitions. The due diligence that we did that our team did.
I think we're very comfortable that they are going to continue to invest and commit to that building I don't see much of a point of buying that business and not using that asset so.
We gained a lot of comfort from what we learned of the tariffs and their plans for the for the building.
And are you able to share of the the current lease expiry.
These 2023 of these 2023.
Okay.
Then just I assume there is no news, but magna has a notice the deadline at the end of this year on 1 or more of Liza.
Any update there.
No I will tell you that's just there the modus operandi, we would not expect for them to engage with us on those and there is no change in our we have a high degree of comfort that they're going to renew on those assets.
Exactly Okay, and then just finally the <unk>.
Mall building you did sell in Austria, I know, it's hard to extrapolate, but where the metrics there at all relevant in terms of how you look at the value of industrial property generally in Australia, and specifically your use of the rest of your portfolio there.
Yes keep in mind that did have a vacancy in the building. So I think the cap rate is reported as low while I would think the sale of would be closer to a 7 on the on the on that asset thats not exact but it.
It's a little.
Misleading with the with the in place income.
Okay, and just finally, 1 for Teresa what's the hedges.
The exchange rates stay the same for the balance of the year do you expect the quarterly impact to stay around 1 on $1.1 million or would that sort of taper off of it.
I'm glad you asked that question, yes, it will be tapering off simply because even the R. Hedge levels are are.
Going to be a little bit lower in the second in the third and fourth quarters. So on the U S. Dollar of if things don't change I'm not expecting a lot of gains on a R. U S. Hedges on the Euro will probably continue to see may be about 300000, each quarter for the for the remaining half of this year, assuming the euro stays where it is.
Yes.
We'll see smaller gains with respect of the callers and really we're only hedged to the end of December we haven't extended out to 2022.
Okay. Thanks, very much I'll turn it back.
Okay.
Thank you. Our next question is from the line of Mark Rothschild with Canaccord. Please go ahead. Your line is open.
Thanks, and good morning, everyone I'm, Kevin in regards to development projects have you seen any change on the way people are underwriting of the way even youre looking at going into new development projects in the context of the market with rising inflation.
Well I would say, yes, but for example, if you look at land values in the GTA certainly I think people are underwriting from where we even sit today a fair amount of rent growth in the short term.
When it comes to the U S probably not so much and I think thats, where we see that's where we continue to see I think the most opportunity to drive value there, whereas the rents continue to climb it maybe not as much as the GTA, but the continued decline climb pretty handsomely.
But there's still the opportunity to acquire well located land on.
That has not frankly kept pace with the increase in rent so and it's as I've mentioned, many many times before is just a lot less expenses to carry of land in the U S and it has to carry land in the GTA in Europe for that matter. So.
That's why we continue to look at opportunities in the U S. Although we're looking at an opportunity and we are close to closing on the land opportunity in the GTA.
That's why we continue to be busy in the U S on the development side.
And I know in Chicago, it's more it's not necessary the development, but should we can we connect your comment about seeing opportunities in the U S with expanding in markets like Chicago, where historically granite has not been that it's been more difficult to grow.
We would like to it is 1 of our I mentioned Nashville, and Chicago day.
Our target markets for us we've been focused on for the better part of the year. So we hope to continue to.
Grow in the Chicago market and hope to continue to grow in the Nashville market for that matter.
And then just lastly, you of prior experience in the Vancouver market have you seen any opportunities there that would make sense for granite or is that just a market that's not going to be possible to really growing in a material way.
We I mean, we certainly see the opportunities.
I, just think where cap rates are.
<unk>.
What is really are what is the realistic ability for us to grow with scale of non market. It frankly is not a focus market of ours. If the right opportunity came up with scale I think we certainly would would give it a lot of careful attention.
But we're not expecting an opportunity like that to come up. So we're focused on other markets frankly, and I would say in Canada. Our main focus obviously is the GTA.
Great. Thanks, so much.
Thank you. Our next question is from the line of Himanshu Gupta with Scotiabank. Please go ahead. Your line is open.
Thank you and good morning, just a follow up on 2022 lease expiries.
I think Kevin you mentioned that the the spread of 7.5% to 8%.
Does that include all of 2020 lease Expiries are only on.
On the U S portfolio.
Oh.
Okay and as you'll see on that includes the Magna Lodge.
So you were expecting some rental pick up on that is part of the as well.
Yes.
Okay, Okay, and then just turning to the balance sheet.
Much of cash when you have left in a bowl is the announced acquisitions and the.
By when do you think you can do by most of the cash day.
So based on what Kevin mentioned earlier, so, we're probably going to and maybe mid third quarter or end of third quarter of around $100 million ourselves. The way. So we have quite a bit in the in the pipeline, which we're sitting on about $680 million to $90 million right now so I anticipate somewhere in the $100 million range.
By the time sometime in Q4.
Okay, Okay and that is revenue.
<unk> all of the announced the acquisitions and I think you guys mentioned another $200 million of under negotiations as well so that day.
The closing of that acquisition sort of okay. That's great.
And then maybe on a broader bush from Kevin on the acquisition strategy in the U S.
The recent acquisitions have been in Chicago, Atlanta and Nashville.
Northern Pennsylvania.
Are you looking to add more markets are the families to gain scale in some of the existing U S markets now.
I think we have enough in the existing markets to keep US busy we have said before we do like the Florida market and that's something that we have been.
Looking and pursuing opportunities and it's not just in Florida or Atlanta, the cap rates of really really tightened.
Across those markets. So certainly we're not the only ones that are interested in in Florida, but that's the market that you could see us add in we don't have anything on the go currently but is something you could see in the next 12 months.
So what we're working on right now we're all on markets, where we where we have existing assets or development land today.
Got it okay that's great.
And maybe just 1 final question on the forward, but she is 12.50 in Tennessee I think it wasn't the suburb of Nashville is.
Is it being built on speculative basis do you plan to pre lease the property.
Correct correct.
Just for just as the comment.
In that market that they can see.
The existing vacancy rate and what we're building I mean, it is a perfect for us I think as of a perfect ecommerce market. So we're comfortable moving ahead and for a lot of these projects is difficult to pre lease until at least youre going vertical with the steel. So we hope to make progress on the leasing side as we move through this.
Development.
In the coming months, but yes as of now it is a speculative development.
Got it and just to clarify this property will qualify for the eligible Green certification and I think you still have some room to deploy on the proceeds from the opening and bond offering.
The <unk> noticed correct.
Awesome. Okay. Thank you guys all done in the back.
Okay. Thank you.
Thank you. Our next question is from the line of bombing per barrel with capital Mark sort of RBC capital markets. Please go ahead of your line is now open.
Thanks.
Everyone.
Just with respect to coming back to I guess, those leasing spreads for 2022, the 7% to 8% that you quoted the I'm just curious does that fully closed the mark to market opportunity on that on those expiries.
And it really just I guess, a second piece of that question would be.
Are you trying to balance occupancy of near term growth.
Or are you willing to sacrifice some occupancy growth, perhaps some stronger upside.
The longer term.
Yeah.
No I don't think its the question of trying to balance or it's the question of <unk>.
Prior to rising occupancy over cash flow I, certainly think internally, we know when Youre 99, 5% occupied you can't really you can't really improve on that and I think you've seen where we're willing to purchase assets with vacancy.
Which drives our vacancy up a little bit like Lucas growth. This quarter as an example, so it's not about maintaining our high occupancy its about driving the highest NOI growth that we can.
So I would say looking today upon me at overall in our portfolio and remember a lot of the special purpose will not the.
Special purpose properties in Europe of few of them have CPI look backs. So it's hard to look at those and say, okay. What is the mark to market on rents, but taking a conservative view I would say the overall were roughly our in place rents were roughly 10% below market rents.
That's just the generally across our entire portfolio.
Got it yes, no thats good color.
Yes, certainly recognize the challenges on.
With some of the magnet leases on getting more just given the unique nature of those assets.
Thats It from me I'll turn it back thanks, so much.
Thank you and there are no for the we have another question and that is a follow up question on momentum. The your line is now open it is Sam Damiani with TD Securities. Please go ahead.
Yeah. Thanks, just wanted to touch on your comment Kevin about the the CPI increases.
Singly being below average, but with inflation tracking higher like how much of an impact on NOI growth will be of this higher inflation have on greatest portfolio.
It's a good question.
I mentioned the special purpose properties. So overall roughly 40% of our portfolio by revenue is tied to the CPO and now a portion of that is again CPI look back mechanisms and a part of it is related to annual CPI increases so roughly I would say half of that R..20% of our portfolio.
Is tied to annual CPI adjustments, so that that's the inside of that it will have so hopefully we go from sub 1% for 2021 to somewhere I don't know, 3% for 2022, which should which should assist overall same property NOI growth for next year.
Okay. That's great. Thank you very much.
Thank you.
And there are no further questions on this.
Okay. Thank you operator, so on behalf of the trustees of management team here at granite. Thank you for participating on our Q2 call and we look forward to speaking with you again in November have a great day.
Thank you, ladies and gentlemen that does conclude today's call. We thank you for your participation of that you. Please disconnect your lines.
Okay.
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