Q3 2021 Granite Real Estate Investment Trust Earnings Call
Okay.
Good morning, and welcome to granite REIT Q3, 2021 conference call speaking to you on the call. This morning is Kevin Gori, President and Chief Executive Officer, and Theresa Neddo, Chief Financial Officer, I will now turn the call over to Teresa and that ought to go over certain advisories followed by an introduction from.
Kevin Gordon. Please go ahead.
Before we begin today's call, we would like to remind everyone 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 as well as potential impact of COVID-19, and that actual results could differ.
From any conclusion forecast or projection. These statements and information are based on certain material factors or assumptions reflect management's current expectations and are subject to known and unknown risks and uncertainties. These risks and uncertainties are discussed in granites materials filed with Canadian Securities administrators, and the U S Securities.
And exchange Commission, including the risk factors section of its annual information form for 2021 filled on March filed on March three 2021.
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 are forward looking information, whether as a result of new information future events or otherwise except as required by law. In addition, the <unk>.
Remarks. This morning May include financial terms and measures that do not have a standardized meaning under international financial reporting standards. Please refer the Q3 'twenty one.
'twenty, one condensed combined unaudited financial results and MD&A 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 relevant information.
Over to you Kevin for opening remarks.
Thanks Teresa.
And thank you to everyone for taking the time to join US for our Q3 earnings call as usual I am pleased to be joined this morning by of course Teresa.
Lauren tumor <unk>, Vice President of global real estate and micro ramp Harris, our executive Vice President of global real estate and head of investments.
For our call. This morning, Theresa will begin with a discussion.
All of our financial highlights I will then provide an update on our operations acquisitions developments and ESG and then open up the call for any questions that you may have.
Thanks, Kevin.
And again, everyone granite posted solid third quarter results, which are in line with expectations. Despite SSO and anti Tau per unit continuing to realize temporary dilutive effect of granites recent equity endeavored debt debt offerings, where net proceeds have not yet been fully deployed.
Episodes per unit in Q3, with 99 cents, representing a three 1% increase relative to same quarter prior year and flat to Q2.
<unk> was positively impacted by 10, 5% growth in net operating income relative to prior year. However episode was negatively impacted by foreign exchange translation losses of our foreign based income as both the Euro and U S. Dollar a 5% weaker relative to the same quarter last year, resulting in a five cent decline in <unk> per unit.
Partially offsetting these translation losses or <unk> 8 million of net foreign currency gains realized in the third quarter as a result of <unk> foreign currency hedging program.
Granted the SFO on a per unit basis in Q3 was 93, which is two 2% higher than prior year and <unk> lower than Q2.
<unk> related capital expenditures leasing costs and tenant allowances incurred in the quarter were $3 1 million, which is $2 3 million higher than the same quarter last year and $1 4 million higher than Q2. The majority of the expenditures this quarter pertains to a lease extension and renewal at one of granites, Ohio properties.
We are expecting an active find out final quarter in respect of capital expenditures and estimate maintenance capital and leasing costs of approximately $7 million in Q4 for a total year expenditure of about $13 million unchanged from estimates provided on the Q2 call with.
With respect to 2022 and increased level of lease turnover for the year, we are estimating <unk> related maintenance capital expenditures and leasing costs of approximately 15 million granted.
<unk> payout ratio came in at a conservative <unk>, 81% for the third quarter and is tracking 79% on a year to date basis.
NOI on a cash basis for the quarter increased $9 1 million or 12, 2% from the same quarter in 2020 and increased $3 7 million or four 6% from Q2 of this year with some favorable impact coming from the U S dollar, which strengthen two 6% since the second quarter.
Same property NOI for Q3 was very strong relative to the same quarter last year, increasing 5% on a constant currency basis, but effectively flat when foreign currency effects are included.
Same property NOI growth was driven primarily by positive leasing spreads contractual rate and CPI increases across all our brands regions as well as the expiry of free rent periods that were realized in the prior year at ground rent at all points Indianapolis and Tilburg in Ed Didnt, Netherlands assets.
G&A for the quarter was $8 9 million, which is <unk> 7 million lower than the same quarter last year, but $6 6 million higher than Q2. The main variance relative to Q2 is due to the recognition of $1 $5 million of unit based compensation expense as a result of fair value losses recognized.
Noncash compensation liabilities due to an increase in grant its unit price during the quarter.
In comparison to the third quarter of $2020.
7 million positive variance is related to the $1 1 million in southern cause we recognized in the prior year, which is not present this quarter.
On a run rate basis, we expect G&A expenses to continue at approximately $8 5 million per quarter or roughly just below eight 8% of revenues.
For income tax Q3 current income taxes, $2 4 million, which is <unk> 4 million higher than Q2, which excludes the $2 3 million of current taxes, we recognized on the sale of an Austrian property in Q2.
The increase in current tax relates to a strengthened U S. Dollar this quarter and an increase in state taxes as a result of grants recent acquisition activity in the U S.
On a run rate basis, we estimate current tax at approximately 2.25 million per quarter going forward.
With respect to the potential recognition of reversals of tax provisions as mentioned on previous calls granted does still have a further potential $2 million of tax liability reversals that may be recognized in Q4. This year, but we cannot make a an estimate until December 31.
The trust balance sheet comprising of total assets of $8 2 million at the end of the quarter was positively impacted by $432 million in fair value gains to granites investment property portfolio in the third quarter plus $69 million of translation gains on Brent its foreign based investment properties, particularly impacted by the U S dollar.
Which increased two 2% over Q2.
The fair value gains on branded investment property portfolio are attributable to fair value gains across all of <unk> regions, but particularly their trust assets in the GTA in U S. Due to increases in fair market rent assumptions and declines in cap rates.
<unk> overall weighted average cap rate of four 8% decreased a further 30 basis points from the end of Q2 and has declined a total of 80 basis points year to date, thus far.
Total net leverage as at September 32023% up three percentage points from Q2, and net debt to EBITDA remains healthy at five seven times. The trust's current liquidity is approximately $1 8 million representing cash on hand of about $770 million and we still have our undrawn operating line of $998 million.
Thank you and I'll turn it over to Kevin.
Thanks Teresa.
As always I'll keep my comments brief as I Trust, you've had the opportunity to review, our MD&A and press release I'll.
I'll start by repeating two themes from our opening comments on our last call. Once again, we posted an in line quarter and it is again worth highlighting that <unk> for the quarter the increase year over year, despite a corresponding negative move in FX roughly <unk>.
And the drag from the proceeds of the bought deal equity offering as well as the <unk> impact on our G&A from the appreciation of our unit price in.
In the quarter, which often gets overlooked.
Also worth highlighting I think as you increase the fair market value of our portfolio in the quarter.
As Teresa mentioned with gains across our entire portfolio on a constant currency basis led by a fair amount of fair market value increases in the U S. DTA in the Netherlands due to further increases in market rental rates.
And Conversely declines in cap rates for modern logistics assets across our target markets in those jurisdictions.
We continue to execute well on our strategic plan.
As disclosed in the MD&A and press release, we acquired six income producing properties in our target markets in the U S and the Netherlands in the quarter for approximately 300 million Canadian.
In addition, we acquired roughly 130 acres of development land in Branford, Ontario in Nashville, which will support over $2 2 million square feet when completed.
Subsequent to the end of the quarter, we agreed to acquire 74 acres of land and approximately 1 million square feet of new buildings upon completion in Indiana, and a 495000 square foot build to suit distribution facility currently being constructed in Tilburg Netherlands.
Combined the Nashville, Indiana, and Tilberg properties represent roughly $310 million Canadian and committed capital.
We are also conducting due diligence on roughly $390 million and further acquisitions of stabilized assets in our target markets in Germany, the Netherlands, and the GTA, which we expect to close on in Q4 or early Q1 2022.
Now as I've stated on previous calls a central component of our strategy is to leverage our platform and incorporate more development into our growth.
We now currently have four speculative projects underway totaling $2 3 million square feet in Dallas, Nashville, and all block, which is a suburb of Stuttgart, Germany, and a further $1 7 million square feet planned for 2022, and Houston, Indiana in the GTA Keith.
Keep in mind that this excludes our development site in Branford.
Which may also commenced in 2022, depending on the pace of our current development projects and associated leasing.
We also have 125 million square feet of fully leased projects under development in the Netherlands Houston in the GTA.
It is worth noting that aside from the expansion of the <unk> food distribution facility included in that total the.
The development properties in Houston in the Netherlands are not per se build to suit projects. They are both generic functional distribution that E. Commerce buildings that simply have long term leases in place.
Once stabilized we expect these developments to drive significant NAV and cash flow growth as well as further enhance the quality of our portfolio.
It is also worth noting that all of the above mentioned developments are expected to receive rebuilding certifications and will satisfy the criteria outlined in our green bond framework.
Staying on ESG as disclosed in our MD&A. We are proud to report that granted achieved a global ESG benchmark or <unk> score of 65 out of 100 for 2021.
Versus the average for our peer group with 52 of which granite was the only Canadian reporting entity.
We also achieved the highest score in the category of public disclosure.
I would like to acknowledge and commend our team for their efforts in improving our ESG performance and we believe there is an opportunity to further improve our benchmark scores as we set performance targets for 2021 and beyond.
Operationally as stated on our second quarter call. We have now renewed or released released all $2 3 million square feet over 2021 lease expires.
And we have conditional lease deals totaling approximately 300000 feet on our vacant space in Atlanta and at our recently acquired property in Utrecht in Netherlands.
Looking to 2022, we have renewed just under 2 million feet in the U S. At an average rental rate increase of nine 2%.
We have further renewal commitments totaling roughly 550000 feet.
The estimated average increase of 38%.
So in total roughly 45% over 2022 Expiries have been renewed and we expect to achieve an average rental rate increase of between 7% and 8% on the remaining 3 million feet.
3 million square feet of expiring.
As Teresa mentioned earlier and as disclosed in our MD&A in same property NOI increased by 5% on a constant currency basis, driven by strong re leasing spreads contractual rent increases and the expiry of rent free periods on a few of our newer assets in the U S and the Netherlands, offset partially by a contractual free rent period.
In short term vacancy of two of our properties in Germany.
Concurrent with the release of our quarterly earnings we announced the establishment of an at the market equity distribution program.
We believe the ATM is an appropriate option for granite given our growth and particularly the scale of our ongoing development program.
And Furthermore, the timing we feel is appropriate given the recent renewal of our base shelf prospectus in October and the fact that we do not have immediate need for capital.
I can assure all of our unit holders, we intend to apply this tool in a thoughtful and prudent manner in the future.
We're also excited to announce our 10th consecutive annual distribution increase.
Operational performance and accretive acquisitions and developments combined with a strong balance sheet have positioned us well to increase distribution for 2022, while maintaining conservative capital ratios.
And I think demonstrates the confidence that the board has in our ability to drive cash flow growth in the future.
In closing I think the quarter was once again characterized by operational stability and fair value gains and while our cash flow per unit metrics were impacted somewhat by the dilution from our June equity offering and the timing of acquisitions as mentioned, we are very well positioned to continue to execute on our strategic plan and deliver strong.
Long term results for unit holders.
On that note I will open up the floor for any questions.
Thank you very much ladies and gentlemen, if you would like to register a question. Please press one four on your telephone keypad, you will hear a 300 ton Trump technology request once again for questions. Please press. The one followed by the four one moment for the first question.
Our first question comes from Brad Sturges with Raymond James. Please go ahead.
Hey, good morning.
Just on the.
Acquisition front there. Thank you highlighted.
Central for another call it $390 million.
Investments Q4, Q1, just what would be the mix of that between income producing and development.
Sorry, Brad the roll income producing are all stabilized assets.
Got it okay.
And.
If I heard you correctly there the thinking around the ATM program. Obviously, you are in a very strong liquidity position now but.
That would be I guess really just utilized to help fund the development pipeline our program.
Over over time I guess.
And it's to be fair, it's a program we have contemplated that granted.
For many months now, but we knew that our base shelf.
Was expiring in October of this year. So it didn't make any sense to implement an ATM in the short term. So we decided to wait until we renewed our base shelf prospectus for 25 months in October so the timing was right and you're right. This is not something that we feel we would need to utilize immediately but it gives us a useful tool.
Or option in the future.
To fund development acquisitions in the short term.
And just do it on an as needed basis when appropriate.
In general terms with the development program and.
Obviously, there's pretty robust rent growth happening, but also.
Increasing costs on the development side. So you know when you think about your returns or development yields.
Where do you see that playing out have you seen any change in this type of development returns do you think you can achieve.
Well I don't think we've seen it we certainly have seen rising costs and I don't know in the short term if we've seen the end of that but we've also seen as you've mentioned we've seen rent.
Rental rates increase and we've seen cap rates decrease so the IRR part of our models is more or less intact Titbits hit I don't think it's materially hit but the yields may go down as you've seen we're not in the low sixes anymore.
We're in the low to mid fives, but.
At the same time, our exit cap rates have have had to be adjusted as well. So the IRR portion of it is more or less intact on our development, we still find them very.
Nashville is a very difficult market to enter we know that from experience.
And it's very difficult to find product that meets our investment criteria in terms of quality. So this is the best way for us to enter that market and delivering outgrowth in the type of returns that make sense for us. So.
I hope I am answering the question I think the the returns from development overall are in town.
And has your thinking changed at all in terms of the amount of risk.
Closure, you would want from development versus what the returns you could get for buying stabilized product.
Well no and I think we are.
We're bumping up against our range to be honest with you I think we have made a lot of investment in development projects in the short term, it's not an accident that the assets. We're working on now are all stabilized.
And so before we I would say this before we were too.
Invest significantly in future development projects I think we have some leasing to do on our current pipeline.
That answers the question.
That's great I'll turn it back thank you.
Our next question is from Joanne Chen from BMO capital markets. Please go ahead.
Alright, good morning.
Thanks for the color on the renewal for the 2022 I just wanted to I might've missed this I just wanted to clarify.
You say that you expect to achieve about 7% to 8% lift on the remaining renewals for 2022.
Of the $3 million correct. So this $5 million rolling.
Of the remaining $3 million that have not been spoken for.
And there is most of that in the U S or is it.
So it remaining with mostly the remaining is mostly in the U S. But there is still the large.
The large asset in Austria, <unk> with Magna and just to remind everybody that expires December 31, 2022, but the notice period is December 31, 2021, So we expect to receive notice from the tenant magna by the end of the year, maybe not before it.
But by the end of the year and that's 800000 feet. So that is a chunk of that $3 million remaining to be to be renewed or released.
Okay got it and.
And then I'll go a little bit more specific.
Very strong organic growth across all your markets on a constant currency basis.
It's great to see.
But just wondering it was a little bit of it look a little bit late in Germany. I was wondering I know, it's a very small component of your overall portfolio, but.
I'm just wondering was there just one off that happened during the quarter.
Well, it's yes.
It is it kind of visit one off we had a short term vacancy at our asset and are referred and then there was a contractual free rent period that hit us hard in the quarter in Q3, and one of our other assets in Germany and that was related to a renewal with a tenant a few years ago.
So that was a free rent period that hit us and I believe that burns off.
After our October I think its one moment, okay. One more months. So we will hit us somewhat in the fourth quarter, but then that will be it.
Okay got it.
And then just going back to the U S.
You noticed any changes.
From dynamics during the quarter with respect to that.
Any of the Delta I would imagine right.
Very strong demand across the board.
Yeah, and I think the best way I would put it as you know in Q2 I think we felt.
Overall for 2022, I felt like we would be 7% to 8% ahead in terms of rent and now as we sit here today, we were taking 10% to 11.
And thats, mostly driven by our spreads in the U S. Now we don't have a lot rolling in Canada to be to be fair and a lot of the role in Europe as contractually.
Prescribed under the lease so there isn't as much ability to move to market per se. So it's really driven by the U S and thats move 2% to 3% in a quarter.
Got it and I guess just on that front.
Canada obviously.
<unk> remains red Hot.
I'm, just kind of wondering thinking with respect to your growth.
Within Canada.
Thank you.
Likely stick around looking to when you start looking at kind of Morningstar, Inc.
Secondary markets, which are picking up quite a bit as well.
We monitor other markets outside of the GTA, we look at Montreal, we've looked at opportunities in Montreal, we've looked at opportunities in Vancouver, even to a degree looked at opportunities now Berta. It is very attractive in the GTA the growth profile that's available in the GTA and certain assets is admitted.
<unk> very attractive, but these deals are going where you see the growth. These deals are going for three now north of 320 a foot.
And I think for US I think that there are just better total return risk adjusted returns in.
In other markets, so not to say I mean, we have almost 100 million feet under contract in the GTA that we're working on so we are pursuing select deals.
I, just I think there.
I think there is the ability to overpay for growth.
So we're trying to be as active as possible in the GTA.
But I think your question is is this going to move us into other markets. We are looking at Montreal on a select basis Vancouver I just can't see how the returns are going to make sense to us and there may be a time, where we look more seriously at Alberta again.
But right now our focus our focus in Canada is essentially the GTA.
Okay got it okay.
Okay.
Alright, and then really picking up as well.
Okay, and maybe just one last one from me.
Any.
Do you think we could see some dispositions pick up this quarter I mean.
Would that make sense for you guys.
Two plants, we have to plan that we have won in Australia, which is a small one and we have the Poland and I think in total it's almost $50 million that are assets held for sale, we do expect to sell those in the fourth quarter.
I can't off the top my head think of any large dispositions, we have in front of us for 2022 that could change.
But right now I think that our disposition activity will be relatively light to the end of this year and into 2022.
Okay, well, that's very helpful. I'll turn it back thanks very much.
Our next question is from Mike Mark Hughes with <unk> capital markets. Please go ahead.
Thank you and good morning, everybody.
Kevin could you just remind us on the on.
On the.
<unk> asset is that.
Is that a market auction or is it a fixed option.
No its fixed they are a different cash flow streams too, but they are all subject to prescribed rental rate adjustments. So that one does not move to market.
It does not move to market and what's the what's the option that isn't to say a flat or is it CPI based or having to know there.
No they're all they're all different there's all different mechanisms summer just fixed increases some are CPI look backs again, there are different streams at that one property.
So there are a mix of all of the above over time, that's the best way I could describe it.
Okay. Okay, and then just in terms of I.
Assuming they do exercise with the average rent lift on that.
Consistent with the average you're expecting for the remainder of this.
This year on the $3 million would be materially above or below.
I think I don't think it would be materially below but I think it would be below.
Okay, well that's great. Okay. Thank you.
On the development side I haven't bothered I don't know if you disclosed that you calculate the amount of your balance.
Balance sheet Thats tied up in development.
But just as you as you look to sort of lever your platform more.
In an ideal world it.
Is it at a steady state now where you'll likely share of the balance sheet and development or is that something you'd like to increase presuming that leasing is there.
Including the commitments I think we have quite a bit I think we've always said being between 5% to 10% makes sense for us. So that would suggest we're building somewhere around you know based on our current size, we're building somewhere around two five to $3 5 million feet.
And I think that that's where we'll be we're slightly elevated right now and frankly I will tell you that the current state of the markets gives us that confidence.
But I think steady state will be somewhere between 5% to 8% in development.
Okay, and Thats on a dollar basis or just looking at the square footage.
I think either way is the easiest way to square footage and it works out to nominally the same the same number on a on a on a dollar basis.
Okay, great. Thanks, and last one for me before I turn it back just with the.
The ATM program that you've launched which are.
I think it was a great program for all reach.
Going forward and with the market as hard as it is.
Do you feel that you have the tools or do you have the visibility now where the cash balance can finally start to come down or do you think that it will remain elevated.
'twenty two.
I certainly don't it will come down yeah, I wouldn't want to put a number on it I'm looking at 3% overnight has been putting an exact number on it but we do not intend to carry a $700 million in cash.
Although it would be nice I it is not our intent to carry.
Such an elevated level now clearly having development commitments makes us feel like we should have higher level of cash.
Makes sense, but certainly not close to $750 million.
Right. Okay, and then when you think about the cash is that more of a in line just thinking about where your leverage sits because we do have $1 billion of availability on the line as well right.
Correct.
Increasingly we are not.
We don't we're not reluctant to use the line I don't think we've needed to but as we've talked internally, even if we're carrying $300 million in cash and Theres, a very compelling acquisition opportunity in front of US I don't think we would pass on because we would have to dip into our line.
And as you said the ATM for someone that says active on the development side as those and growing it seems to make sense, it's not a large number given our scale $250 million in total so it's not meant to replace.
As a discrete equity offering that's tied to the use of funds a particular use of funds, but it just gives us another tool.
I think.
We'll see how 2022 goes.
But I think that.
There could very well be a situation, where we're dipping into the line to fund particular transactions.
Got you okay.
I turn it back completely agree with Atms are irresponsible tool.
Congratulations on getting that launched.
Okay.
Yeah.
Our next question is from Sam Damiani TD Securities. Please go ahead.
Thanks, and good morning, everyone.
First question, Kevin I guess, just on the on the development pipeline I appreciate the color and the targeted exposure.
With respect to the existing pact of projects what would be the timing, we should think you're expecting in terms of getting meaningful lease up on that availability.
Yes, I hope when we have our fourth call fourth quarter call well certainly it would be we do expect to get some leases completed by the end of the year, but when we have our fourth quarter call.
We would expect to have updates on all back which should be completed I think in the first quarter of 2022, Dallas. They think as second quarter, if I'm not mistaken of next year now Dallas I mean as steel has just begun to be erected.
I think that Thats, an important turning point in terms of marketing leasing we've already responded to request for proposals on that project, which I think is still in the early stages from a marketing leasing perspective, but that is going well.
So they're coming along in Houston, our phase one was interrupted by our build to suit opportunity for the E. Commerce user. So we're using those approvals and site works we're moving it.
That build to suit and so phase one will be delayed into into 2022, and we will start marketing pretty soon on that on that piece.
So phase one is now phase III.
Exactly.
Okay.
So Joe maybe just looking at your your held for sale and I guess, Austria and Poland I'm just wondering what the rationale was there is a decision to sort of exit the Poland market.
And this Austria asset just curious why why split that one up for sale today.
The Austrian assets and older manufacturing site.
And it was always identified as noncore, probably one of our toughest asset. So it's one that we never intended to hang on to and we have an opportunity to sell that we're taking in the Poland assets, a little bit more I think frustrating to us.
It's a market.
<unk> market is one that we like in Poland, but this just is not the right size asset and the development does not give us enough flexibility to build the type of assets that we think we need in that market. So overall, we like Poland. We even like this market is just not the right asset in that.
<unk> for us So I think it makes more sense for us to sell it and move on to other opportunities potentially in Poland.
Okay. That's helpful and the last question from me is there capacity on the balance sheet today to do more cross cross currency interest rate swaps.
There is lots for the U S dollar, but for the euro not at this time I'd say were maxed out at this time on the euro until we get new investments.
Okay.
Great. Thank you I'll turn it back thank you.
Next question is from Himanshu Gupta with Scotiabank. Please go ahead.
Thank you and good morning, So first question for Theresa.
What kind of foreign exchange hedges, if any do you have in place for the next year.
And then just wondering how much fluctuations in currency than about ethical thanks to you.
Sorry, I'm not sure can you repeat the question I didn't pick up on it.
Yes. So my question was do you have any hedging program for 2022 for the next year.
Just wild fluctuations in the U S dollar and euro.
How will that impact the numbers right.
No. So the the hedging program that we had in place this year, which we had been realizing some gains on that does end on December 31st though are only hedging will really be the.
The debt that we have in place as a natural hedge in both Europe and in the U S. So.
Of course in the U S. We're a little bit more exposed and I would say a cent change in the U S dollar which caused a.
<unk> impact on <unk> and for the Euro one <unk> change impacts as it fell by one so we all just have natural hedges for now we didn't extend it because we definitely put in place at the right time, which we.
It has worked in our favor this year, but to extend the program. It just we felt that we would be locking in at rates that we think that we wouldn't.
That allows us to participate in any strengthening of the euro and USD, which at least on the USB side their forecast seem to indicate that we will be seeing a rise in U S. Dollar Euro is another story it looks like it may be holding flat for a while.
Got it okay. Thank you. Thank you Sir.
And then shifting gears, Kevin on the GTA development and one foot.
It looks like it may or may not start next year.
Are you waiting for zoning or any other approvals before you begin construction debt.
No. It's not that we arent, we are actually moving dirt and preparing it.
Preparing the site for site work, so we want to be in a position, where we can respond to build to suit opportunities.
And we will monitor the market and see I mean, the market may be so strong we decided to move ahead for the on the first phase is speculative, but I would like to see is clear up some of the leasing opportunities on our current development pipeline. So we're preparing the site to be able to respond quickly to any opportunities I'm, just saying right now where we sit we've got a lot of.
Work to do.
In the current development pipeline and so we could see brandford commencement.
The commencement of a vertical construction start in 2023 versus 2022, I hope that I hope that I'm wrong I think the team agrees.
If there is an opportunity for us to move forward with the build to suit or something really compelling in 2022, we won't hesitate, but right now I think we've got enough on our plate as we sit here today that may change in the coming quarters.
Got it and will there be best sense to pre lease and some more folks are both spectrum will be then move as it comes closer to completion.
It's we're not we don't hesitate to go forward on spec.
Because at the end of the day.
Lot of times these tenants, even the large ones, even the sophisticated ones make leasing decisions within six months and so.
We'll hold out for build to suit, but we also have a very good idea in our mind, what we want to build and so we're willing to move forward and do that and then try and find a tenant later.
So we'll see but.
Right now we're developing the site so that we can respond to the right build to suit opportunities if they come along in 2022.
That's fair enough.
And then on the same lines on the Houston development.
Phase one is now the phase two.
Is there a change in strategy.
Jim Lucas Watson oven is phase two.
It was more relevant for the type of tenants for that site.
No. It actually we are building a bigger building in phase III for the tenant than we thought we're going to build so in a way it's benefiting us because it actually increases our density in the say it makes us a little more efficient for us.
So we have approvals.
Storm water approvals et cetera for phase one we're shifting that to phase II to meet the tenants deadline and now we will reapply for those site work approvals and storm water approvals for what is now phase II, which was phase one.
And we'll start construction hopefully in 2022, but it has not impacted the site negatively in a way it's made it a little more efficient where we can add more density there without affecting the access or the flow of the site.
So if you can imagine phase II, we thought we're going to build two buildings at 700000 feet. Now we're building one building at 700000 feet and just to make the point that phase three we've we've designed the sites in phase the site intentionally to leave a large piece.
To the east that could accommodate two 500000 square foot buildings or one building in excess of 1 million feet. Just in case, there is a need in the market.
Got it thanks for the color there.
And then I'm looking at the last <unk>.
Property is $66 million of half a million square feet.
Is the construction cost $100 per foot.
From my calculation.
That sounds a little high.
That sounds a little high but 130 Canadian.
And the ones that the U S. So I'm looking at the $66 million with all the changes and I think it's half a million square feet. So collagen of something like one third of U S.
I apologize.
But on the high side, just wondering is that a reflection of the property or the higher construction cost.
It would be that we'd have to check.
Thanks Lee.
This this project in Nashville is actually three smaller mid day buildings. So the one in Murfreesboro is a large 850000 foot sort of E. Commerce Monster. These buildings or smaller bay buildings. So they should carry a higher cost per square foot to build them and that would also.
That would also include demise and cost et cetera.
Okay. Okay. That's helpful and I'm, just looking and maybe the last question on the acquisition mix.
And I know you know I think its been addressed to a very large extent.
My question is that next year.
The mix is still going to be more U S.
As you know, Canada, and Europe and are you seeing any.
Like more new supply and more for the U S markets.
So are you talking about 2022 in terms of the turnover.
I'm just wondering.
Acquisition mix for the next year.
Oh, I see which are more towards the U S and are you seeing like new supply buckets.
Which you may not have to be endorsed <unk>, because I see what you mean.
I would say again I think a lot of it is going to be opportunity driven we are I would like to keep our mix the way that it is but.
This year, we seem to be more active in Europe, and I think we'll finish that you are pretty active in Europe. So you could see our activity in Europe go up a little more I think what we've seen in the past few years. We will see continue I think we will continue to be busy in the U S. In.
In terms of where we've really seen.
Opportunities there isn't a lot of pricing opportunities or dislocation in any of our markets. We have identified savanna, Louisville and a few others as being those markets that may have been overlooked in the past couple of years. They are no longer overlooked I think there is.
A lot of pricing tension in the market. So enhanced to go back to my comments for from the second quarter. This is why we're looking at forward purchases. This is why we're looking at development opportunities in these markets because it seems to be the only way we can get the type of assets that meet our quality expectations and deliver decent returns.
But.
There are some opportunities that we're seeing are there I don't want to say too much because I don't want to give away any of our competitive advantage, but just to make a comment.
And you've seen it in our fair value gains.
The cap rates right now are <unk>.
Falling are very tight and falling across all of our markets and admittedly, we pay more attention to our target markets as we should than other markets, but lays in the twos.
We've seen new Jersey in 2% to 3% and these are stabilized assets. So clearly investors believe that theres a lot of runway for rent growth and they're willing to get very aggressive and it's interesting to see I mean L. A.
Your 2% to 3% year youre going to have a negative arbitrage to your financing cost and so.
If they're levered buyers out there, which we know that there are there clearly.
They're relying on rent growth to create a positive arbitrage to their financing so it's interesting to see but the.
The sort of dynamic and falling.
Cap rates, we've seen across all of our markets.
Got it.
That's the case.
On that note.
And our next question is from upon me for RBC capital markets. Please go ahead.
Thanks, Ed.
Good morning.
Just just with respect to the Branford side again, I'm, just curious how would the rents today, perhaps in that market.
Or maybe the brands that you might be targeting on the site how would they compare to the GTA and.
And have you seen any expressions of interest yet from a build to suit standpoint.
We have received some interest in the site, we're not sure who the tenant is but I would just say that its very its very initial interest in terms of the rent since one of the things that.
Drew us to this market as we said we looked at all of the markets around the GTA and where it was the best place for us to deploy capital on the development side in the GTA, we underwrote rents and $7 50 to $8 range and I feel that that probably has moved up another 50 or so since we first started looking at this site.
You compare that to the GTA, where we've seen average rents north of 12 now.
For similar for actually I wouldn't even say similar product.
But so we think that there is still quite a difference or an arbitrage between the rents in branford and markets like that and I would say the central GTA locations.
Got it and maybe just you mentioned I think it was 38% spread.
500000 square feet of leasing that we've done I'm just can you provide some context around that which markets.
Was it or the types of tenants there.
I can't provide too much I don't want to name the tenants, but roughly half of that is in the GTA and half of that in Europe.
Okay, and just again nice to see the pickup in the organic growth.
Recognizing that a number of your leases do you still have of course, CPI and fixed rate increases and you still got <unk> to address how does the momentum perhaps impact your outlook for same property NOI growth next year.
How might that breakdown regionally.
Well, it's a good question I mean, I think like we said is we're looking to 2022, we're seeing very healthy.
Gains in rental rate, but we have a lot of turnover and so I think that we said before looking at same property NOI on an annual basis may not be the most relevant metric for us I would look at it on a quarter over quarter basis as we move forward.
So next year I think will be I'll, just put it similar to this year.
But there will be pockets are quarters, where we have turnover right now where we're looking at of the remaining 3 million feet, there's roughly 1 million, where there will be turnover where.
Where the tenant will move out so we will have short term downtime associated with those assets, but we are projecting rent lifts of between 10% and 20%. So it will set us up for a better 2023, if you will and I think we're going to finish the year quite strong on a same property NOI basis next year, so a lot of leasing activity.
A lot of strong lifts, but there will be some downtime associated with some of these re leasing efforts at these properties.
Got it.
Maybe just on.
On the Indiana acquisition.
Just curious whether yourselves or the developer are responsible for leasing there and what does that sort of targeted yield look like.
No. We we will when we have more information, we'll surety on a yield for Indiana, We really can't say much under the terms of the purchase and sale agreement I will say this as with all of our developments we drive the leasing.
Okay.
The expectation then based on that that that asset would be income producing by the end of next year or does that kind of bleed into perhaps 2023.
Once that once the tenant that may be in place.
I would expect it would bleed into 2023 I think we will we are estimating we will have leasing done by the end of the year, whether it's 100% I don't I don't were not expecting that I think it will bleed into 2023.
Okay, and maybe just lastly.
And I'll take a shot at this but based on your last answer I'm not sure if we'll get color, but on the Tilberg acquisition.
That property is I believe fully leased.
What does the cap rate on that look like or even a range.
Three in the quarter to three and a half.
Thanks, very much I will turn it back.
Our next question is from Matt Korn Act National Bank of Canada. Please go ahead.
Guys.
I don't know if this is by design or it was just the nature of the opportunity set presented to you, but it seems like the weighted average lease term on.
The assets, you're acquiring has come down this year is that a function of just confidence in the leasing market or is it just what was presented in the assets you like for location and other attributes I think align them, maybe just five year renewal auctions the tenant has.
I think that would be the reason behind that.
Okay. So it wasn't it's not necessarily a shift in strategy that you want to get at.
Potential rent increases earlier in the term.
Well, yes, and no I mean, it's.
I do agree with what you said.
Don't feel the need to do long term leases they don't feel the need to provide concessions or pay for long term leases I'm very comfortable I think the team is very comfortable.
And looking at different options, including shorter lease terms.
Getting to that higher rent in the near term. So we are comfortable with it.
It's not a specific strategy that we have.
So it's not that we're looking to do two and three year five year terms versus 10 year terms I think it's just the way, it's turning out and a lot of it would be related to renewal options in favor of the tenant.
No fair enough and then with regards to because obviously in 2020 in 2020, sorry in 2019, you bought some fully leased longer duration.
Yes.
Leases on the acquisitions.
Do you kind of track where in place versus market rents are and can you kind of speak to how that has widened because presumably the rents at which you bought these assets. It seems like market is probably increasing at a greater rate than the steps and those leases. So.
Any sense, where the mark to market is.
Yes, we do and I would characterize it this way my earlier comment to a question. This morning was.
From Q2, I think we projected next year's turnover and a lot of that was in the U S was around 7% to 8%.
We were expecting to see that in terms of Mentalists, we've now changed that to 10% to 11%.
It has moved roughly 3%.
From last quarter now, maybe we're being conservative, but it gives you a sense of.
Of how fast the market is moving the rental market is moving.
And we know obviously again Toronto strong but.
In terms of the Midwest and southeast.
Texas et cetera, where you are.
Are those kind of increasing that maybe not at the same.
Right.
Fairly strong rates as well.
Yes, I mean, we've seen.
You mentioned those markets, we've seen 4% to 5% Youre right is it moving as fast as the GTA.
Probably not but it's moving at 4% to 5% range is I think there for those markets.
Rental rate growth.
That's great. Thanks, Ed.
And next question is from.
So yet.
<unk>. Please go ahead.
Thanks, Good morning, just curious Kevin if you're seeing any of the supply chain issues filtering through to the portfolio.
How is that impacting tenant behavior and their demand for space.
Yeah, It's a great question.
We've talked about it internally, we havent really seen it manifest itself.
In a way that's.
That seems to be impacting your tenants one thing that we've heard is they are very full.
We're not able to move goods, particularly in land or lot of the containers seem to be moving shuttling back and forth between Asia and theyre not making it into the interior part of the U S. So they are busy but they're reaching capacity at their warehouses. So now I don't know what the impact will be if this sort of supply chain disruption continues for another six.
Months or so.
But it's they're busier than they were six months ago because of the supply chain disruptions.
Okay.
And I just wanted to follow up on I guess capital recycling and you are in your footprint you exited the U K and now youre going to be out of Poland. So are you sort of comfortable with your current market footprint or do you see more opportunities to narrow that further.
Well you're right.
We are out of the U K, but we did look at an opportunity in the U K recently, so not to say that we couldnt go back to the U K. We have stated that the markets were most focused on in Europe, or the Netherlands, Germany and Poland may.
Maybe in that order maybe not.
So even though we expect to sell our loan property in Poland by the end of this year I would expect us to be in Poland next year in terms of assets. So we are looking at opportunities actively in Poland as well. So those are the three markets, where we're spending our time on right now or Germany.
The Netherlands and Poland.
Okay. Thank you I'll turn it back.
And we have a follow up from Sam Damiani TD Securities. Please go ahead.
Thanks.
A couple of quick follow ups first of all you have a number of fixed fixed rent renewal leases in Europe.
Much of that in the GTA portfolio for granite.
And whether it's the two big ones and Milton our CPI annual increases I think theres a couple of more of those but I think that's about it the vast majority of them on renewal would move to fair market rent.
Okay great.
Last one for me is.
Actually no. The question was answered earlier. Thanks, that's it thank you okay.
And there was all the questions we have I'll turn the call back to you for closing remarks.
Alright, Thank you operator.
So on behalf of the trustees and management team here at granite. Thank.
Thank you again for participating on our call today and to our unit holders. Thank you for your continued trust and support have a great day.
Ladies and gentlemen that concludes our call for today. We thank you all for your participation have a great rest of today you may disconnect your line.
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