Q2 2022 Granite Real Estate Investment Trust Earnings Call
I.
Good morning and welcome to Granite Reads second quarter results for 2022.
Speaking to you on the call this morning is Kevin Gorey, President and Chief Executive Officer.
and Teresa Neto, Chief Financial Officer.
I would now like to turn the call over to Teresa Neto to go over certain advisories, followed by an introduction from Kevin Gory. Please go right ahead.
Good morning everyone. 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 information including but not limited to expectations regarding future earnings and capital expenditures and that actual results could differ materially from any conclusion forecast
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 disclosed and granted to material filed with the Canadian Securities Administrators and the U.S. Securities and Exchange Commission from time to time, including the Risk Factors section of its Annual Information Form for 2021 filed on March 9, 2022.
Readers are cautioned not to place undue reliance on any of these forward-looking statements and forward-looking information. The REIT reviews its key assumptions regularly and may change its outlook on an ongoing forward basis if necessary. Granted it undertakes no intention or obligation to update or revise its key assumptions or any of forward-looking statements or 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 standardized meaning under international financial reporting standards. Please refer to the audited combined financial results and management discussion and analysis for the three and six months ended June 30, 2022 for Granite Reit 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.
With that out of the way, I will commence the call with the financial highlights and then turn it over to Kevin who will follow with the operational update.
Granted, posted strong Q2-22 results driven by healthy NOI growth and despite foreign currency headwinds with a continuing weaker Euro, but that was partially offset by a strengthening US dollar.
FFO per unit in Q2 was $1.09, representing a 4 cent or 3.8 percent increase from Q1 and a 10.1 percent increase relative to the same quarter in the prior year.
Strong NOI from acquisitions and same property NOI growth was only partially muted by both unfavorable and favorable foreign exchange movements where the euro was 8% weaker and the US dollar 4% stronger relative to the same quarter last year resulting in a nominal impact to FFO per unit.
Granus AFFO on a per unit basis in Q2 was $1.04 which is four cents and eight cents higher respectively relative to Q1
AFFO-related capital expenditures, leasing costs, and tenant allowances incurred in the quarter totaled $1.5 million and for the year, the year-to-date period is $4.6 million. For 2022, we estimate AFFO-related maintenance capital expenditures and leasing costs coming in between $15 and $17 million for the year, which is unchanged from the estimate provided at the Q1 call. For more information, visit AFFO-related.com
Same property NOI for Q2-22 was very strong relative to the same quarter last year, increasing 3.6% on a constant currency basis, but up 2.2% when foreign currency effects are included.
Same property on OI was driven primarily by higher than previous CPI adjustments, positive leasing spreads, and contractual rent increases across all of Granite's regions, as well as the lease up of a vacancy that was realized in the prior year at Granite's Acid in Locust Grove, Georgia.
G&A for the quarter was $6 million, which was $2.3 million lower than the same quarter last year and $2.3 million lower than Q1.
The main variance relative to the prior quarter in Q1 is the change in non-cash compensation liabilities which generated a favorable $4 million swing relative to the same quarter last year and a $2.2 million fair value swing relative to Q1, as we recognize fair value gains on those liabilities due to a 19.5% decrease in Granite's unit price during the quarter.
Of the 3 million of fair value gains realized this quarter, 1.6 million related to the DSU's. However, as a result of amendments made to Granite's DSU plan on June 9, 2022, only fair value gains up to the amendment date of 0.9 million directly impact FFO.
Post the amendment of the DSU plan, fair value gains and losses on our DSU liabilities will be added back or deducted for purposes of FFO consistent with the fair value gains and losses recognized on granted other non-cash compensation liabilities, essentially removing some of the noise that we've experienced in the last few quarters.
On a run rate basis, we expect G&A expenses to continue at approximately $8.5 to $9 million per quarter or roughly 8% of revenues, excluding any amounts for fare-alley adjustments related to non-cash compensation liabilities.
For income tax, Q2 current income tax was $1.9 million, which is $2.4 million lower than the prior year, and essentially flat to Q1. The variance relative to Q2-21 is largely attributable to the $2.3 million of current taxes recognized on the dis-semissions that occurred in that prior quarter.
After adjusting for the aforementioned current tax expense related to disassociation, current taxes are slightly higher than the prior quarter, resulting from a larger European portfolio.
On a run rate basis, we estimate current tax at approximately $2.2 million per quarter before recognizing any reversals of tax provisions.
Interest expense was lower in Q2 relative to Q1 by $0.2 million, reflecting the interest savings realized from the refinancing completed early February of its 2028 cross-currency interest rate swaps to euro-based interest payments, partially offset by incremental interest expense on draws on Granite's credit facility beginning in the second quarter of 2022.
On a run rate basis, we estimate interest expense will run approximately $11 million per quarter before factoring in any new debt over and above credit facility borrowings.
All of Grant's debt is fixed rate debt through cross-currency interest rate swap hedges with the exception of the credit facility, which is at a variable rate and subject to increases in underlying treasury rates.
With respect to 2022 estimates, despite an overall weaker Euro and rising interest rates impacting short-term borrowings, due to strong operational performance, Granite continues to forecast that FFO and AFFO per unit will come in the range provided in March of this year being 431 to 443 for FFOPU per unit.
and 3.96 to 4.08 for AFFO per unit.
Further, our singular estimates remain unchanged for FFO per unit of approximately 4.35 and an FFO per unit of $3.98.
We have updated our assumptions regarding foreign exchange rates and are estimating for the second half of 2022 a weaker euro offset by a stronger US dollar relative to the Canadian dollar.
Our Canadian dollar to euro average rate is now 1.32 from 1.39 assumed last quarter and our Canadian dollar to US dollar rate is 1.28 versus 1.26 from last quarter.
As communicated before, we estimate that a 1-cent movement in the Canadian dollar relative to the US dollar impacts FFO and AFFO per unit by 2 cents and a 1-cent movement in the Canadian dollar relative to the euro results in a 1-cent impact to FFO and AFFO per unit.
The trust balance sheet comprising of total assets of $9.1 billion at the end of the quarter was negatively impacted by $251 million in fair value losses on Granite's investment property portfolio in the second quarter, offset partially by $86 million of translation gains on Granite's foreign-based investment properties, particularly due to the 3.2% increase in the U.S. spot exchange rate.
The fair value losses on Granite's investment property portfolio were primarily attributable to the expansion in discount rates and an expansion of terminal capitalization rates across all of Granite's markets in response to rising interest rates, partially offset by fair market rent increases across the GTA, US and European markets reflecting current market fundamentals.
The Trust's overall weighted average cap rate of 4.48 increased 18 basis points from the end of Q1, but has still decreased a full 62 basis points since the same quarter last year.
Total net leverage as of June 30th was 28% and net debt to EBITDA remains steady at 7.4 times. The Trust's current liquidity is approximately $845 million, representing cash on hand of approximately $85 million and the undrawn operating line of $760 million. As of today, Granite has drawn a total of US $188 million or approximately $240 million Canadian.
under the credit facility and there is 2.5 million in letters of credit outstanding.
Based on forecasted dispositions and remaining development commitments for the year, Granite is estimating that approximately $260 million or the equivalent of $205 million will be drawn on the credit facility by the end of the year.
Granted, it is currently reviewing options to convert the credit facility borrowings into longer term, three year term financing with term loan debt.
Further, Granite will also be monitoring market conditions in the coming months to look to refinance its 2023 debentures which are coming due in November 2023.
In other financing activities during the period between April 1 and April 29, Granite issued 120,300 stapled units under the ATM program at an average stapled unit price of $98.84 for gross proceeds of $11.9 million. And then later in the quarter, between June 15 and June 30, Granite repurchased 448,400 stapled units under its NCIB.
an average stapled unit cost of $78.90 for total consideration of $35.4 million excluding commissions.
I will now turn the call over to Kevin. Thank you.
Thanks, Theresa.
Building on Theresa's comments, I would begin by saying I would characterize the results for the quarter as being in line with our expectations, at least from a financial, operational and strategic perspective, but impacted somewhat by reversal and fair value gains we have seen on our portfolio over the past several quarters.
Although, I would point out the negative fair value adjustments were themselves partially offset by higher NOI and market rents.
as well as gains from the transfer of two of our properties under development to IPP in a quarter, which I will discuss in greater detail.
To begin with investments, the majority of the acquisitions closed in the quarter were previously announced in our Q1 MD&A and press release, so I won't comment further on those.
But I will highlight the two new smaller acquisitions completed in the GTA in the quarter.
Despite changing market conditions, we completed these transactions based on the combination of an attractive yield and average cost basis below $265 per square foot and a strong potential to increase returns through expansion and
With the exception of a small parcel of land located near our existing site in Brantford, there are no pending acquisitions in our pipeline.
With respect to dispositions, as you can see we completed the sale of our sole asset in the Czech Republic in a quarter.
As stated in our MD&A, we have initiated the sale process for two of our assets in the US and GTA for a combined value of roughly $150 million, and we may proceed with one to two further asset sales in the second half of the year.
On the development front you can see from our mDNA we transfer two of our development projects, Village Creek in Dallas and Alpach, Germany
from properties under development to IPP, generating a gain of approximately 80 million Canadian in the fair value of those properties.
We also officially launched our development project in Brantford with a 409,000 square foot state-of-the-art food grade facility for Barry Callebaut, a leading global producer of chocolate and cocoa products on a 20-year lease term.
Completion is scheduled for the first quarter of 2024 and the property is expected to generate an unlevered development yield of 6.5% driven by contractual rent significantly above pro forma.
As stated on our first quarter call, supply chain disruptions have caused delays to a number of our projects in the US.
which we believe has impacted the leasing velocity to a degree. We are currently in advanced negotiations on over 1 million square feet of development space and hope to have an update for you shortly.
All of our developments are expected to receive applicable green building certification and will satisfy the criteria outlined in our green bond framework.
Our Village Creek property is expected to receive two Green Globes certification and our Aalbach property recently received DGNB Gold certification.
Keeping with ESG, we are very pleased to present our global ESG R report for 2021, which is now available on our website.
This report documents the progress we made against several key targets set in 2021 and outlines our, in some cases, revised upward objectives and targets for 2022 and beyond.
I won't repeat the details of the report, but I do think it's worth highlighting the advancement made by the team against a number of key targets, including energy and weight and water reduction, EV charging stations, rooftop solar, green building certifications, and the alignment of our financial disclosure with globally accepted sustainability frameworks, which Theresa touched upon. renewable energy
Volunteering and community involvement were also notable for the team in 2021, and we are now proudly supporting over 50 charitable and community groups across our offices.
I invite you to read a report and we welcome your feedback.
Operationally, we signed renewals or new leases on just over 4 million feet of space since our last call inclusive of our development leasing.
That total includes roughly 1.6 million square feet of renewals at an average increase in rental rate of roughly 27%.
There is currently now.
340,000 feet of expiries remaining in 2022. We anticipate achieving an increase in rental rate of roughly 60% on those expiries.
Outlined in our MD&A, our occupancy decreased to 97.8 at the end of the quarter, but roughly half of that vacancy represented by our Dallas development, which became IPP at the end of the quarter as discussed, but where the tenants lease does not commence until the 1st of October .
The introduction of our alt-back development to our IPP portfolio also added roughly 200,000 feet of vacancy.
including committed space, our occupancy increases to 98.9% and we are close to agreeing to terms with a tenant on roughly 250,000 feet of the reported vacancy which would bring our occupancy back over 99%.
As Theresa mentioned, same property in Hawaii increased by 3.6% on a constant currency basis.
in line with our expectations and guidance, driven by strong releasing spreads, and leasing of vacant space at our Gardiner Logistics Park asset in Atlanta, offset by turnover of two U.S. properties.
We anticipate achieving rents roughly 50% above expiring rents on both availabilities.
At this time, we are reiterating our same property Noy Guidance for 2022 of between 3.5% to 4.5%, but now expect to end the year at the higher end of that range.
with respect to our investment properties.
I would like to provide further detail on our fair value adjustment of approximately 250 million.
based on market data both from an investment market, i.e. terminal cap rates and discount rates, and from a leasing market perspective.
The majority of asset values in our portfolio were impacted by varying degrees by changes in market conditions.
Because we perform discounted cash flow models on all of our properties in each quarter, we utilize terminal cap rates and discount rates in our analysis of fair value rather than simply applying cap rates on annual NOI.
Beginning with the GTA, we adjusted our discount rates upward by roughly 25 basis points on average to reflect a higher premium on future cash flows, which negatively impacted asset values here.
Fair market rents for the GTA were also revised upward by 25 cents per square foot on average, partially upsetting the value impact of the expansion and discount rate.
Moving on to our US portfolio where we saw the highest quarterly movement in investment metrics, we adjusted our terminal cap rates and discount rates by 25 to 50 basis points.
with a higher adjustment concentrated in assets with longer lease terms and lower contractual rent escalations.
Fair market rents were increased between 0 and 50 cents per square foot on average, reflecting strong leasing market fundamentals and rank growth across our markets in a quarter.
Finishing in Europe , we adjusted TCRs and discount rates upward by 0 to 25 basis points and 0 to 40 basis points respectively and increased fair market rents by roughly 0.25 euros per square foot.
In summary, these adjustments negatively impacted asset values, but the losses were mitigated by higher NOI and increases in market rents.
Overall, as you can see, the fair value of our portfolio decreased by roughly 3%.
Further adjustments in terminal cap rate and discount rates may be required in future quarters, but at this point we expect a negative impact of those adjustments on asset values for warehouse and distribution assets to continue to be mitigated by improving NOI and higher market rents. Thank you.
Related to the value of our investment properties, it is worth repeating the contribution from our development assets, roughly adding $1.20 per unit in NAV and reducing the loss in the fair value of our portfolio in a quarter.
We expect this trend to continue as our current pipeline of development projects reach stabilization as expected over the next several quarters, fully consistent with our strategic plan.
I'd like to end my comments on market fundamentals before opening up the call for questions. As mentioned above, vacancy rates remain low across our markets and market rents continue to rise.
Notably, the US, where data for the second quarter is strongest.
Finished the second quarter at 2.9% vacancy, the lowest on record.
led by large bay demand from traditional retailers and wholesalers and third-party logistics providers.
Net absorption fell to 76 million square feet from 110 in the first quarter, but that was hampered by low availability and delays in construction completions.
There is currently over 600 million square feet under construction.
with pre-leasing representing roughly a third of that total.
Asking rents rose to $9.40 per square foot on average, an increase of over 5% from the first quarter and 15% year-over-year, another record. And rent growth is projected to continue into 2023.
On that note, I'd like to open up the
Thank you very much. And if you would like to register a question, please press the 1 by the 4 on your telephone. You are a 3-tone prompt to acknowledge your request.
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One moment please for our first question.
We'll get to our first question on the line. It is from Sumaya Siyad from CVIBC Capital Markets. Go right ahead. The deal has been a recent 1.5 million gross incomeEm speech has beendenbeat.com
Thanks, good morning. First, Kevin, just to go back to your comments on the US silent supply chain delays and impact on leasing velocity. Is that from terms of delaying decisions or pushing back on rents or just what's causing the dynamic there?
No, it's more why it's related more specifically to the schedule is that, you know, for example, in one of our markets, we lost in a prospect because we couldn't deliver the building in accordance with our timeline.
So it's not a pushback on rent. I think it's just meeting the prospective tenants timelines, which is impacting leasing.
Okay, so have you otherwise noticed any changes in terms of tenant interest or activity for our new space, what it looks like today versus maybe a couple of quarters ago?
No, frankly not at all and we continue to see rents across our, you know, our development properties rise. So no, we have not seen a drop-off in demand and as a matter of fact I think there's probably more urgency in getting in the space than it was say three or four months ago.
Okay, and then I just wanted to confirm that for the recent development completions in Germany, Fort Worth and Mississauga expansion, if any partial NOI from those is included in this year's SFO guidance or is that more of a 2023 impact?
It's more of a 2023 impact, but there will be a little bit in FFO coming from the Dallas Fort Worth lease, but it's not significant this year and a little bit coming from the all-back leasing.
Okay, great. Thank you.
Thank you very much. We'll get to our next question on the line. This is Mark Rothschild with County Court General Weedy. Go right ahead.
Thanks and good morning everyone. Maybe focusing on the cap rates and the fair values, it appears that you're looking at different regions differently, whether it's Canada versus the US and Europe . I assume it's not based too much on acquisitions that already occurred, but maybe you can expand on that or just based on what you're seeing in the market and how you anticipate values settling or changing. I
Well, it is based on transaction data and I think as we look across our different markets, it's not a surprise to us that pricing or I would say pricing behavior has manifested itself more quickly in the US.
So I think we've moved Metrics More quickly in the US because that's what we've seen And so I would think maybe a lot of the heavy lifting on the moves We've already done in the US and with respect to Europe
And the GTA, there may be further moves here more than we would see in the US in the third quarter and perhaps the fourth quarter. So I think it's just the fact that it's moved quicker, changed the behavior of move quicker in the US. So we've adjusted our metrics more quickly there as well.
So obviously fundamentals are extremely strong in markets such as the GTA. Are you saying that you still expect there to be maybe some moving cap rates in the GTA?
Yeah, I think so. And as we think about it, it will be further adjustments in value in the third quarter. I would expect that there would be, I think.
But you have to mitigate that with the fact that NOIs and market rents are rising as well. So exactly what that looks like, I don't know. Would I expect the adjustments to be larger in the third quarter than what we saw in the second? I don't think so. Could it be less? Yes. Could it be similar in size? Yes, it could be. So to your point, I think that if there are further adjustments, there'd be more in Canada, in Europe , than there would be in our portfolio in the US.
Okay, that's very helpful. Thanks so much.
OK, that's very helpful. Thanks so much. Thank you.
I'll get to our next question on the line. It is from Himanshu Gupta with Scotiabank. Go right ahead.
Thank you and good morning.
So just on the asset dispositions announced, can you elaborate like what was sold, what kind of capital for your lives and how did you select those assets?
Well, for competitive reasons, we don't want to go into the specific assets at all or even the markets, not at all. But I would say it's a combination of the U.S.
in Canada and by value it's more biased towards the US.
I think as I stated on the last column, we are picking these assets.
There are a couple of factors that come into consideration. One is your exposure to a singular submarket and whether you feel your concentration is a bit high. That's number one. What is a rapid onset Mort babies Rudy?
If you've added value to the asset and the growth profile has changed, then it may be worth consideration for us to move on from that asset. So those are how we're looking at our disposition program. I hope that answers your question.
Okay, fair enough. And then maybe building on that on capital allocation, I mean obviously you were active on the TIB front as well and looks like more asset dispositions are in the hopper. So how do you prioritize capital allocation between acquisition developments and buyback here?
Well, I think we were active on the NCIB. We chose not to put in place an automatic buyback program during our blackout. I think the reason for that is we're happy with the strength of our balance sheet and our liquidity and we want to keep it that way. So moving forward, I think the focus is much more on executing on the development program, executing on select dispositions and making sure that we're maintaining the strength of our balance sheet and our liquidity.
above the former. So what kind of events were you underwriting and what did you end up achieving on the Brantford development? I think we were in the sort of 750 originally, I think I'm going back probably just over a year ago, it's hard to believe, say 12 to 16 months ago, I think we were in the 750 to 8 range and all I'll say is on this it was north of $10 a square foot.
Okay, so that's pretty meaningful. And then maybe one more question here again on the development. So I'm looking at the two properties in Indiana, I think around 1 million square feet to be completed by end of the year. And I see the expected yield was increased to 5.6 from 5% last quarter. What was the reason for that? Just one thing.
We continue to see rents climb and so I would say that we are anticipating achieving a rent roughly 20% or more above original performa, which is causing the yields to rise.
Okay, okay. So better. Okay, fantastic. And maybe the last question more of a clarification. So I think what's like some vacancy in the US, I think two vacancies in the US side. Can you just elaborate on that and when do you expect to backfill?
Yeah, I think it was two, one, 250,000 feet, one, 86,000 feet. And those are the two that I mentioned on that we're in discussions currently on.
So those were two in the US that happened in the quarter.
And did you mention that you were expecting 60% higher rents over the expiry rents? Did you mention that as well? I think I said 50, but yeah.
You're in the you're in the ball Yeah, anyway, I'll turn it back. Thank you guys
Thank you very much. We'll get to our next question on the line. This is from Matt Cornack with National Bank Financial. Go right ahead.
Okay, guys, just to follow up on the leasing side, I think you had also mentioned that there was the potential for some turnover at an asset in Pennsylvania, but there was some question as to whether it would be held over. Is there any update on that front or should we expect something in the balance of the year and have you leased that space or are you in the process of leasing it? We have. So if you recall, I think the tenant.
I think the original expiry was in April of this year. The lieutenant exercised a right to stay in the space for six months.
And since then, they have exercised, I think, a five-year renewal with us. So, it was due to expire, I think, at the end of October . But now they have renewed in that space for five years. Okay, so and they were thinking of potentially expanding elsewhere. Was that the idea and they've just decided to stay under? The interesting thing is they have. So, they're under contract at another larger facility in our area. They've decided to hang on to both facilities.
I think our asset was very much in demand. I think the tenant, frankly, at the end of the day, didn't want to let it go. That's something we've seen across our markets. The demand for large bay, anything over 700,000 square feet remains very high.
Interesting. And would that have been captured in the 1.6 million of renewals at 27% rent spreads? And maybe if you could just speak to the geography or geographic breakdown of that 1.6 million in relative spreads that would be helpful.
Yeah, the 1.6 million did include that five year renewal and I would say the 1.6, the vast majority of that was in the US.
Okay, so good stats coming out of the US. So clearly, and I think it's been referenced, but this Amazon phenomenon may not necessarily be impacting the market to the extent the market is adjusting value expectations, at least from a public trading standpoint.
No, I would agree with that and I would think, you know, what's interesting is we've been monitoring the market pretty closely to see what Amazon is doing and there are so far...
almost zero, it's negligible the number of assets that Amazon is actually looking to sublease. So despite their comments on the call, I don't want to call their CEO or CFO for it, but they are not actively looking to sublease existing space, not that we've seen anyways in our markets.
Okay, now that's very helpful, Color. And then, Theresa, just a quick one with regards to the new approach to FFO on the compensation side. You're not going to restate prior quarters. It's just going to be an adjustment going forward. Is that correct? That's correct. Yeah, so my numbers won't be off your numbers going forward, which is nice. Yeah.
Perfect. Okay, thanks guys. Thank you very much. We'll get our next question on the line. It is from Gaurav Mathur, Industrial Alliance Capital. Go right ahead.
Thank you and good morning everyone. A couple of quick questions at my end.
So firstly we've seen some price discovery mechanisms happen across industrial markets on either side of the pond even though there is still a very high demand for assets.
Very quickly in your opinion do you think we're closer to finding a tentative flow price or is there still some ways to go given that underwriting remains strong and rents continue to grow?
It's a great question. It does feel to us like we are near the end, but it does also depend very much on how far the central banks go and how far or how persistent inflation is. A couple of things I would say is to support the fact that we could see stabilization in pricing or even an increase in pricing before the end of the year.
and not that we're in the habit of surveying competitors, but we're in discussions with major investors in industrial real estate relatively regularly. And we're not hearing any plans to wait until 2023 to deploy capital. So I think there's still.
a fair amount of capital on the sidelines that wants to be in this market before the end of the year and they expect the central banks or the central the central bank interest rates to start stabilizing in the next two to three months.
and then be active. Number two is there is still this continuing.
What would you say? This willingness to transact at yields that are below prevailing interest rates and to grow into accretion. So those are the two things that we're hearing and seeing that would support a stabilization and perhaps a return to lower cap rates and higher prices before the end of the year. But it's hard to say. We're seeing so much and where inflation and corresponding interest rates go.
I know it's a hard exercise, it's not a fair question, but just given the strength and underwriting one has to think about how close we are to that flow price versus...
I know it's a hard exercise, it's not a fair question, but just given the strength and underwriting, one has to think about how close we are to that floor price versus what the market seems to be counting up.
I'm not sure I really, sorry Glorov, I'm not sure I really heard the question.
Oh, sorry, I was just saying that, you know, given the underwriting
demand and the strong growth and underwriting, it seems to me that we're closer to finding the floor price than what the market might make us think it is.
I agree with that too because I think if you look at all the noise in the second quarter, one was rising interest rates and inflation, but the other one also was from what Amazon said was what's going to happen in the leasing market fundamentals, which really is what we spend a lot more time on is what are the market fundamentals, the real estate fundamentals there. And I think what is giving people...
encouragement in our sector is the continued strength in demand for modern logistics distribution.
I'm agreeing with you for those points. I think that you could see a return in investment demand and activity before the end of the year.
Great. And just switching to leasing, you know, and there's quite a bit of lease renewals that are coming up in 2023. How should investors think about leasing costs beyond the end of the year and as we look forward to all that leasing velocity that hopefully comes back in sooner than expected.
Yeah, I think we have almost 15% rolling next year, which we are happy about. Two-thirds of that is in the US.
and then I think roughly 30% is in Europe and 4, 4.5% in the GTA. So overall we're projecting between a 15 and 20% lift in rents on those renewals.
So we're encouraged by the early sort of leasing discussions activity we're seeing in 2023.
Okay, great. Thank you for the call, Kevin. I'll turn it back to the operator.
Thank you very much.
And once again, I direct off a question is the one for on your telephone keypad I got our next question on the line is from Danny per with RBC Capital Markets. Go right ahead
Thanks, good morning. Just coming back to maybe the occupancy slip in the quarter, aside from the developments, were any of those vacancies that came through were any of them unexpected or were they all pretty much known. Or were they all pretty much known.
Yeah, no we had one bankruptcy I think we mentioned on the first quarter call in May. We had a small tenant bankruptcy in a lot of things in New Jersey, sorry, in New Jersey that was just under 90,000 square feet so that that was unexpected in the quarter.
Got it. And then just Kevin, maybe coming back to your outlook commentary with respect to the organic growth, you mentioned you expect to finish at the upper end of the range by the end of the year. Just to clarify, is the bulk of that really coming from the occupancy or the leases that you talked about that would kind of get you to above 99% or just given where you're tracking, I guess, currently just at the low end of the range? So just any colour there would be helpful? Yes, I think so.
Yeah, but I think we were pretty clear with respect to 2022, we expected Q1 and Q4 to be our strongest quarters in terms of same property at Hawaii. We expected 2 and 3 to be positive but impacted by a potential turnover. And that's kind of what we saw in the first, sorry, in the second quarter at 3.6%. So we expect Q3 to be stronger and we expect Q4 to be very strong. So to be clear, when I look at the average over the four quarters, we expect to be really between 0 to 1.
rather large, at least getting done.
Yeah, there have been discussions on remaining opportunities on the site to a degree where we're actually tweaking our designs to look at building something larger. And we originally anticipated so very early days, but there has been, you know, poor activity. And in a few discussions under underway, so there's a very good chance next year, we launch more than the 1st building. That we that we mentioned, it could be a 2nd building that we develop or begin to develop in 2023.
Interesting, and just any colour on the types of tenants looking at that site?
We're looking at wholesalers, we're looking at, I think one of the trends we've seen is, as I mentioned in the US, we're looking at tenants that want to build...
more resiliency into their supply chain. So that's putting pressure, upward pressure on demand. We're also seeing onshoring where producers of product need to be more local like we've seen with Barrie, Calibul and Branford. So it's been a real mix of manufacturers and and wholesalers and distributors and retailers. So it's been across the board.
And the the I'm never the I'm never deal that you quoted on the the first building it sorry was that better than what you'd initially expected or kind of in line?
It was much better.
Great. Thanks very much. I'll turn it back.
Thank you. We'll get to our next question on the line from Sam Damiani with TD Securities. Go right ahead.
Thank you.
Mr. Damiani, your line is open for your question.
I thought I'd figure that out by now. Congratulations on the lease in Branford. Most of my questions have been answered. Just wanted to really get your...
See how you're thinking about acquisitions. Clearly development is preferred over acquisitions at the moment, but what would it take for Granite to pick up the pace and resume pursuit of acquisitions?
Assuming our liquidity and balance sheets in the position that we want it to be,
I mean, we want to be able to move from defence to offence very quickly. That's why we think about liquidity all the time. Partially why we think about liquidity all the time. So, if there is distress...
we would like to take advantage of that situation. And we saw it, I think, in 2020. I mean, let's be honest, we transacted.
on three assets slash portfolios in the GTA in the middle of 2020, when no one was looking at it. We bought about $100 million worth of assets at 160 a foot, 165 a foot on average. And no one really pays attention to that. So if there are similar opportunities like that in front of us, that would be compelling. What that cap rate exactly looks like today, I don't want to say or speculate.
But those would be the conditions that would be interesting to us, Sam, in terms of putting our money on IPP.
That's interesting. Thank you and I'll turn it back.
Thank you very much.
Our next question on the line is our follow-up question on the line of Himachal Gupta of Scotiabank. Go right ahead.
Thank you. Sorry, just one follow up here. On the cost of financing, I think Teresa, you mentioned you're looking to do a three year term loan financing. What is the expected interest rate on that? And would you also consider like accessing the unsecured venture market here? I think that's a good question. I think that's a good question. I think that's a good question.
Yes, we're looking at both markets but really right now the term loan market is more favorable. So that's looking like low 4% range right now, which is a little bit higher than what we're borrowing right now in our credit facility. So let's call it low 4, 4.10, 4.20.
Okay, and I'm assuming that you don't have any space for doing EuroSwap at this point of time.
Not at this time. So if we were to initiate a loan, it would be in US dollars and act as a hedge in our US net investment.
Fair enough. And then I think the venture renewal, the big one, is not coming due until November of next year. So are you going to wait or are you monitoring the market at the same time?
We're monitoring the market right now. We were always holding back simply because there was a fairly significant prepayment penalty that we would have to incur. But now with the rising interest rates in the one, two years, that prepayment penalty has come down quite a bit. So we're going to look for a good opportunity. But right now I'd still say spreads are probably wider than I like and obviously the underlying treasuries are where they are, although improved.
So, but it is something I'm going to keep my eye on. Yes. In the next quarter or first quarter of 2023. Thank you. Thank you.
Okay.
Thank you very much.
Ms. Gorey, there are no further questions at this time. I'll turn it back to you for any closing remarks.
All right, thank you, Tommy. Well, I just want to say thank you for everyone that participated on the call today and look forward to speaking with you in our
Take care.
Thank you very much and thank you everyone. That concludes the call for today. We thank you for your participation. We disconnect your lines. Have a good day everyone.
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