Q1 2022 Granite Real Estate Investment Trust Earnings Call
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Good morning, and welcome to the granite REIT first quarter results for 2020 to speak.
Speaking to you on the call. This morning is Kevin Gordon, President and Chief Executive Officer, and Theresa Neto, Chief Financial Officer, I will now turn the call to Terry It's an adult children and advisory followed by an instruction from Kevin Gory.
Good morning, ladies and gentlemen, and welcome to the conference call of granite REIT before we begin today's call I would like to remind you that statements and information made in today's discussion may constitute forward looking statements and forward looking information, including but not limited to expectations regarding future earnings and capital expenditures.
And that actual results could differ materially 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 the Canadian Securities administrators, and the U S Securities and Exchange Commission from time to time, including the risk factors section of the annual information form for 'twenty 'twenty. One filed on March nine 2022 readers are cautioned not to place undue reliance on any of these forward looking statements.
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 remarks. This morning may include financial terms and measures that do not have a standardized meaning under <unk>.
International financial reporting standards. Please refer you referred to the Q1 2022 condensed combined unaudited financial results and management's discussion and analysis of granite real estate investment Trust and granite REIT, Inc. And other materials filed with the Canadian Securities administrators, and U S Securities and Exchange Commission from time to time for additional relevant information.
Nation, I'll turn it now back to Kevin.
Thanks Teresa.
And 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'm pleased to be joined this morning, as you've heard from Jason Nadeau.
Our CFO Lorence, Kim our executive Vice President of global real estate.
And Michael Rod Paris, our executive Vice President of global real estate and head of investments for.
For this call. This morning, Theresa will begin our discussion with a review of the financial highlights.
I'll 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.
Granite posted Q1 'twenty to result, a very strong Q1, 'twenty two results driven by healthy NOI growth and yet despite foreign currency headwinds with the continuing weaker euro.
<unk> per unit in Q1 was $1 five representing a <unk> <unk> or two 9% increase from Q4 and 5% relative to the same quarter. Prior year. When you exclude debenture prepayment costs and credit facility accelerated financing costs, which we recognized in Q1 2021.
Strong NOI from acquisitions and same property NOI growth was partially muted by unfavorable foreign exchange translation losses related to the euro which was 7% weaker relative to the same quarter last year, resulting in a two cent decline in <unk> per unit.
Granted <unk> on a per unit basis in Q1 was a dollar which is 10 cents and borsa as higher respectively relative to Q4, 'twenty, one and the same quarter last year.
<unk> related capital expenditures leasing costs and tenant allowances incurred in the quarter totaled $3 1 million.
For 2022, we estimate <unk> related maintenance capital expenditures and leasing costs coming in between $15 million to $17 million for the year, which is slightly up from the 15 million estimate I provided in March on the Mark.
Hence calls did you in incremental revenue generating roof project in the U G T E at which we've added for 2022 not previously contemplated.
Same property NOI for Q1, 'twenty two was very strong relative to the same quarter last year, increasing four 6% on a constant currency basis, but up one 9% with foreign currency effects are included.
Same property NOI growth was driven primarily by higher than previous year, CPI adjustments positive leasing spreads and contractual rent increases across all of grass regions as well as the expiry of a free rent period that was realized in the prior year at granted Tilburg, Netherlands asset.
G&A for the quarter was $8 4 million, which was <unk> 4 million lower than the same quarter last year and $4 million lower than Q4. The main variance relative to your Q4 is the change in noncash compensation liabilities, which generated a favorable $4 4 million a fair value swings sequentially.
<unk> as we recognized fair value gains on those liabilities due to an eight 2% decrease in grant its unit price during this quarter.
All of the point 8 million fair value gains realized this quarter related to our D S use which which directly impacts F. S O.
Given the continued pullback of granites unit price so far in the second quarter, we should expect to see additional fair value gains recognized in G&A related to noncash compensation liabilities, if all else remains equal.
On a run rate basis, we expect G&A expenses to continue at about eight and a half to $9 million per quarter or roughly 8% of revenues, excluding any amounts for fair value adjustments related to those noncash compensation liabilities.
Our income tax Q1, 'twenty two current tax was $2 million, which is flat to prior year. Although current income tax is slightly higher than the prior year on a constant currency basis due to the weaker euro current taxes on the Canadian dollar basis is lower.
On a run rate basis, we estimate current tax at approximately $2 2 million per quarter.
With respect to the potential recognition of reversals of tax provisions for 'twenty. Two granite has a further potential of $2 million of tax liability reversals that may be recognized mostly in Q4 of this year relating to tax positions taken on taxing taxation years, which will go statute barred, but we cannot make that determination.
Termination until Q4.
Interest expense was lower in Q1, 'twenty two relative to Q4 by $1 2 million, reflecting the interest savings realized from the partial refinancing completed early February of its 2028 cross currency interest rate swaps to euro based interest payments.
On a run rate basis, we estimate interest expense will run approximately $10 5 million per quarter before factoring in any new debt.
I'll have granted the debt is fixed rate debt through cross currency interest rate swaps are hedges with the exception of our credit facility, which is at a variable rate and subject to increases in underlying treasury rates.
As of today granite has drawn U S $90 million outstanding on its credit facility.
Subsequent sorry with respect to 'twenty two estimates granted continues to forecast a <unk> <unk> per unit will come in the range provided on the March call, which was between 431% to 443, four <unk> per unit and $3 96 to four O eight four <unk> per unit, however, given the greater than <unk>.
It's a bit of weakness in the Euro recently, our singular estimate has been lowered to <unk> per unit of approximately 435 from the 439 and <unk> <unk> per unit of about 398 from the 404 are provided on our March call.
This estimate is based on foreign exchange rates of the Canadian dollar to the Euro average of $1 three nine in the U S dollar one to six <unk>.
The estimates in March were based on a higher exchange rates of the Canadian dollar to the euro of $1 44 into the U S dollar or $1 27.
As communicated before we estimate that a one cent movement in the Canadian dollar relative to the U S dollar impacts as affluent <unk> by <unk> and a one one cent movement in the Canadian dollar relative to the euro results in a once an impact of <unk> and <unk> per unit.
The trust balance sheet, comprising a total assets of 9 billion at the end of the quarter was positively impacted by another $491 million in fair value gains to granites investment property portfolio in the first quarter that was offset partially by a $146 million of translation losses on granite foreign based investment properties, particularly.
The three 8% decrease in the spot Euro exchange rate relative to the end of 2021.
The fair value gains on granite investment property portfolio are attributable to fair value gains across all of granite regions, but particularly the trust the trust assets in the GTA in the U S. Due to increases in fair market rent assumptions and declines in capitalization rates.
The trucks overall weighted average cap rate of four three decreased a further 23 basis points from the end of Q4 and that full 110 basis points since the same quarter last year.
Total net leverage as at March 31 was 25% and net debt to EBITDA remained steady at six nine times. The current the trust's current liquidity is approximately $1 billion, representing cash on hand of about $175 million and the Undrawn operating line of $885 million.
As per our disclosures granite has drawn a total of U S $90 million under the credit facility and granted issued 136100 units.
Through the ATM program at near the end of March and through April at an average price of $98 77 for gross proceeds of $13 $13 4 million.
I'll now turn the call back to Kevin.
Thanks Teresa.
For everyone's information on the call on dealing with what I think to be about at some point. So I'll do my best to get through the script.
And the question but.
If I am unable to continue to lighten the load on the call more than capable of answering your questions.
So once again I think you see we posted an inline quarter characterized by strong cash flow growth operating performance and gained more valuable portfolio.
The increase in the market value of our portfolio in the quarter was once again led by fair market value increases in the U S and G to do to further increases in market rental rates and a slight decline in cap rates versus the fourth quarter of modern logistics assets across our markets based on available leasing and investment transactional data in the.
Quarter.
We continue to execute well on the street on the strategic plan in the fourth quarter acquiring two newly constructed stabilized assets in Indianapolis and in pre leased development projects in Bolingbrook Submarket of Chicago.
Assets stood out for us in terms of asset quality location potential value add expansion.
Tenant credit, which will further enhance quality of our portfolio.
With respect to dispositions, we still can start casino over so I said in the Czech Republic to close in the second quarter and most likely in May.
We are currently preparing for the sale of two assets in the U S for a combined price of roughly 120 million U S.
And May proceed with further asset sales in the second half of the year.
We continue to make progress on our development program and our active pipeline, including forward purchases now comprises eight sites in various stages of development in the U S, Germany, and the Netherlands plus expansion in Mississauga.
Jackson, Indianapolis totaling roughly $5 7 million square feet and $450 million of amendments.
Construction of the bulk of these partners is expected to be completed in the second quarter through the fourth quarter of this year.
And to date, roughly 45% of the $5 7 million square feet and it's fully leased.
Activity was strong on the remaining buildings.
We have seen an increase in costs associated with most of our projects.
It has been mostly absorbed within established budget contingencies to date.
Offset by higher rents versus pro forma and as stated on the last call.
I would estimate that project completion on average has been delayed by roughly three months from initial schedule due to supply chain issues.
As I have mentioned before.
The element is core to our growth strategy.
It's a respected to further improve the quality and functionality of our portfolio and drive significant growth in cash flow and novel upon stabilization.
It is also worth repeating that all of the above mentioned developments, we're expected to receive green building certification satisfying the criteria outlined in our Green bond framework.
On the ESG front, we continue to build upon the strong progress we made on several fronts. In 2021. We are currently developing our 2021 ESG plus all report, which will outline the progress we've made in 2021.
For a detailed unlike me more ambitious objectives and targets for 2022 and beyond.
Reports should be published early in the third quarter.
Operationally, we have now renewed $4 5 million of the roughly 6 million square feet of Expiries at an average increase of salaried of 11, 5%.
And we anticipate achieving an average increase of approximately 20% on the remaining maturities.
A total of $9 6 million square feet in leases scheduled to expire in 2023.
At this time, we are anticipating an average increase in rental rate of between 20% to 25%.
As Theresa mentioned earlier and as disclosed in our MD&A same property NOI increased by four 6% on a constant currency basis, driven by strong re leasing spreads contractual rent increases, particularly CPI increases.
And the expiry of rent free periods on a few of our new assets in the U S number.
Also partially by contractual rent free rent periods and short term vacancy of one of our properties in Germany.
At this time we are.
Reiterating our same property NOI guidance for 2022 of between three and a half to four 5%.
As the impact of strong releasing spreads could be partially upset by short term vacancy from turnover of two properties in the U S.
We also experienced the bankruptcy of one of our smaller tenants in New Jersey, 86000 feet, but we expect to re lease the space at a rate of approximately 25% above existing.
As a further quick update on our European portfolio with respect to the Ukraine, notwithstanding the resulting disruption to supply chains in that region.
All around the world all of our tenants in Europe continue to operate in their space and we're not aware of any major disruption so far to their operations involving our properties.
We will of course monitor the situation for any major developments.
Before opening the call for questions.
I'd like to finish by making a few comments on leasing fundamentals across our markets and obviously happy to take any questions on that.
Despite amazon's recent comments on excess capacity our outlook for the full year has not changed.
In fact, our current projections for rental rate growth exceed our budget projections for the year.
On our development project in Fort Worth for example, the team achieved a rental rate roughly 20% above pro forma on budgeted costs.
Thereby delivering much stronger returns and growth for unit holders and demonstrating continued strength and demand for modern logistics space.
Those of us in the business frankly understood that Amazon's prodigious uptake of space in 2020 was neither sustainable nor healthy for the sector.
2021 absorption in the U S was still well above the 10 year average even when you exclude Amazons contribution so we remain in very healthy territory.
On that note I will now open up the floor for any questions operator.
Thank you if you'd like to register a question. Please press the one followed by the four on your telephone you will hear three Tom prompt with knowledge. Your request. If your question has been answered and you would like to withdraw your registration. Please press the one followed by the three.
Again, if you'd like to register a question. Please press one four on your telephone keypad.
Our first question comes from the line of Brad Sturges with Raymond James. Please proceed with your question.
Hi, there.
Thanks for your comments for Kevin at the end on Amazon and your outlook for leasing here.
Just to get more thoughts on you know what.
What youre seeing in the market today from other e-commerce users.
Ernie.
Change in the leasing velocity from other users for Mercury to Amazon.
No. We certainly haven't seen that trend I mean, when you look at UBS Fedex the lot of the three party logistics providers that are doing e-commerce.
Which we've been in regular contact with no changes to their plans for 2022.
Yeah, I would say.
I would like to say or don't like to say that there has been sort of a drop off in the last six or seven weeks.
And demand because of what Amazon.
Not there we're continuing to see the tenants looking for space and as a matter of fact, one of the tenants that was supposed to move into a new development from a property in the U S.
Now has decided to stay in our property and take on the new space because they just don't have enough space I think.
And if I could put one reason behind it above all other reasons is this sort of just in case versus just in time approach I think they realize that these disruptions to the supply chain may be more structural in nature. It may last a number of years and theyre looking to.
Basically take down more space to accommodate larger volumes of storage, that's what we're seeing in the market.
So far.
And maybe drilling into the U S. A little bit more I guess is there any markets, where youre getting a little bit concerned about the levels of new supply.
Under construction or in the pipeline or do you still see favorable demand supply.
Matrix in your core markets right now.
Well the supply is large but when you look at I mean, they're thinking we're probably absorbed 350 million peak. This year, we've got I think 350 million feet, roughly 380 million feet under construction.
Roughly 40% of that is pre leased.
U S is at a historical low vacancy of 3% or just under 3%.
So I don't think that there's anything today that worries me more than what we have to pay attention to in past years.
That's what people need to pay attention to the amount of supply that's coming on.
The level of pre leasing that's already been done in those buildings. So I think that the markets are lease that we're in and focus on our it will be more than able to absorb that space.
In 2022 and 2023.
And with the you noted the couple of.
Sales in the us that Youre contemplating can you give a little bit more color about location or and valuation metrics either on a cap rate basis, or I guess relative to your <unk> Brooklyn.
No I don't want to Brad.
I would rather we focus on the sale and not disclose.
Any information about about the assets until such time that we are under firm contract or or have closed the transaction.
Okay, No problem I'll turn it back to Michael.
As a reminder, if you wish to ask a question. Please press one four on your telephone keypad.
Our next question comes from the line of Human Shaw <unk> with Scotiabank. Please proceed with your question.
Thank you and good morning, So just on 2023 lease expiries.
I think Kevin you mentioned expectation of 20% to 25% then courts.
Oh that looks that there's a very strong hazards expectation gone up.
The last six months.
Yes, yes, I don't have an exact quantity for you, but I know last time, we looked at that number wasn't overtime.
And and if I looked at you know the expiry market, something obviously U S and Germany as it is what will that be more skus from the U S or are you seeing a.
Stronger growth from German market from Germany, do disclose is no. It's mostly the U S. I mean, there are some expires but.
Couple of the leases have CPI.
Increases even on the renewals our ability to unlock the values in 2023 and those assets is.
Is a bit muted and we only have roughly 400 feet rolling in the GTA in 2023, and so the bulk of the gains are in our U S portfolio I think.
Six two to $6 3 million feet of rolling.
Got it.
Talking about U S portfolio, you announced that acquisition.
Clinton, Indiana, a 10 year lease term.
Just wondering what kind of winter is could we do that you see now on the new leases being done I mean have they moved up in response to inflation.
Yes, certainly we have seen.
A number of leases at 3% I think the.
It's roughly I think thats, what we are on our development in Texas.
It's typically between two and 3%, but if you go back a few years ago. There's very few that had rent escalations above two in a quarter.
Now, we're seeing them regularly about two in a quarter, it's really sometimes we have a number of renewals that we've done.
In the U S and particularly in the GTA, where we've had.
Annual escalations of between three and 4%.
Got it okay.
Maybe my next question was on the extra football unit guidance till you saw you mentioned about the euro impact.
But what about the cost per bit frenzy that has gone up as well are you baking in that impact as well.
It would need a new debt to finance Clinton or some new developments also so any thoughts there.
Yes, so so I'm not sure yes, I did factor in the higher cost of debt, so and we're factoring in kind of a blend between our euro based out in U S. Based ads. So I have assumed a blended rate closer to like three 8% on any new debt.
So that has been factored in.
Okay, that's great actually by the way.
Do you have more capacity to do more euro denominated swap.
In terms of debt new debt.
Not at this point in time, no. We would we would be looking for incremental investments before we swap new debt into euros. So at this point if I were in need of new debt I would be swapping to USD or borrowing in USD as we've done with our first tranche.
And this is despite you about Germany acquisition being done in Q1, despite that digital much room there on your denominator.
Yeah, we use that utilize that investment when we did the refi out of our 2028 debentures that was as a result of the investment the German investment in February .
Okay. Okay. Okay. Thank you. Thank you everyone.
Our next question comes from the line of.
Matt Korn <unk> with National Bank Financial. Please proceed with your question Hey, guys.
Just just quickly on the Fort worth development.
Costs went up a bit but your yield went up by almost 100 basis points. I think you may have touched on it but is that something that youre generally seeing where rents are coming ahead of pro forma and was that ultimately I mean, it sounds like it's one tenant taking the full 600000 square feet.
Is that what youre, saying.
And I think that the team has done a fantastic job of walking in cost. So we've had some incremental costs, where it's appropriate on our projects, but the majority of our projects.
Cross our portfolio, including the U S are on fixed price contracts.
So we've been able to manage any cost increases within the contingency in the budget.
And we've been achieving rents well above pro forma and same thing on the leasing side as well not we're achieving new lease rates above.
In some cases, well above our budget projections through 2022.
Okay, perfect that makes sense and feel better.
Yeah.
Thank you.
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Yes.
Okay.
[laughter].
My apologies if you'd like to register a question. Please press one four on your telephone keypad.
Our next question comes from the line of Sam Damiani with TD Securities. Please proceed with your question.
Thanks, and good morning, everyone.
Was hoping to get a little bit more color on the traction you're getting on your remaining lease up properties under development. Kevin you mentioned, the 45% pre leasing rate on the pipeline now.
Nicely from last quarter, but is there anything specific I guess, you could point to I know it's.
Things are firm yet because it's early but specifically.
Specifically some of the larger projects, Indiana, Tennessee, and maybe in Germany.
And I think to be fair, Sam what's helped US we're now vertical on all of our projects are actually not on both films in Hindi.
And that's a big California going vertical I, just think off quickly in the market from a tenant broker perspective, it's important to be going vertical and they can see that they can see the progress. So it really is starting to pick up.
In Germany, we were pursuing a single time for the building and realized.
The market depth is much higher for.
100200, 50000 foot tenant so we're pretty close on our first lease there.
For a third of the building, which would be roughly a 110000 feet.
And we're starting to really see a good traction on our Nashville buildings, particularly the larger ones and the freeze grow. So it is picking up it's that time of year as well. This is one we would expect to see it but also just seeing vertical construction is now starting to.
As a real catalyst for our interest in the buildings that we've seen.
And then just over in Branford here in Ontario.
Any update there or any sort of change in the timeline of expected there and what are you seeing in the marketplace. We understand theres been a big land purchase are not too far away.
Yeah, No, which I think certainly.
<unk> validates.
The price that we paid for the land is certainly in land values have gone up and the other as they have across the whole GTA, but in particular, we're seeing at Bradford.
In discussions with a tenant on a design build.
We don't have any information at this time on it we definitely expect to have news on that by our second quarter results, our second quarter call.
And again I was just to characterize it this way rents.
Well above our pro forma.
No I agree.
And just finally, just given the market conditions.
Just interest rates and the share price and everything else I mean, where are your capital allocation priorities differ.
Different than in March and if so what way in terms of development or acquisitions or geography or.
There anything changed in your capital allocation priorities.
Well I think we as a team understand the situation we're in.
Certainly it behooves us to be more selective and I will say you know the we're very happy with the quality of the assets that we acquired recently.
Both in Chicago and in Bolingbrook has a great submarket of Chicago Fantastic. This is a trophy asset.
And in the themes I think of these assets.
In terms of asset quality location.
The the buildings and.
In Indianapolis gives us the ability to expand which we think we will be able to get out during the term of the lease gives us some real upside there, but I just think overall tenant credit asset quality location are going to be very prevalent themes over the next couple of years, but we did acquire them you know these are.
Acquisitions, we've been working on for months. So if you'd asked me today would we have moved forward with vocals. It's a question Mark I don't know.
So I hope that in a roundabout way answers. Your question right now our priorities are to fund the development projects and lease them up that's priority number one.
Look at selective non core disposition.
Number two.
And probably I should say is priority number one is get through the leasing and drive rents as much as we can.
No.
I certainly would tell you we are not in the market for large portfolios unless there is something thats, so transformational and compelling that we would have to look at it.
Not to say that we wouldn't look at.
Smaller opportunities that we think are really compelling to us.
But I hope I've laid out for you what our priorities are for the remainder of this year and we're very aware of our balance sheet.
And.
And the situation around the capital markets at the moment.
That's great color, thanks, very much I'll turn it back.
Our last question comes from the line of <unk> with CIBC capital markets. Please proceed with your question.
Thanks, Good morning.
Just following up on the Bolingbrook acquisition.
The yield on that up to $3 nine seems a bit lower than your other under development projects is there anything specific driving that and how does that compare to like a stable lifestyle cap rates in that market.
Well, we it's just the quality of the location that we like and it's a very low site coverage.
For that asset, particularly in that market and that's what was really compelling to us so you're right at three nine is low.
But we just think that the future growth in that market.
Asset and the rents of the tenants are paying have a lot of upside. So this is a real core acquisition for us as a forward purchase and so we're not developing it ourselves we're partnering on it.
What we like about it most of all it's just the the potential color rent growth in the future.
Okay, and and just on the one tenant that you know what I want a bankruptcy here it's been a.
But at least but just curious what kind of had so far visibility you had and if they were on our watch list and so.
Safe to assume it was an isolated incident.
Yeah, I mean, we went through 2020.
And they were on our watch list by virtue of.
They were wanting the tons that asked for rent abatement, which they didnt get we collected all of our rent in 2020.
But they would be one of the ones that would have been on our watch list.
But again there are 90000 feet.
And the rents are way below market.
So I would call. This an isolated incident, but I wouldn't mind, if we had a few more of these.
[laughter].
Okay. Thanks for that thank you.
And we have no further questions on the audio lines at this time I'll turn the conference back over to you.
Alright. Thank you so on behalf of the trustees and <unk>.
The management team here at granite. Thank you for being on our call today, Joe unit holders. Thank you.
Once again for your continued trust and support have a great day.
This does conclude today's conference call. We thank you for your participation and ask that you kindly disconnect. Your lines have a good day everyone.
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