Q3 2022 Granite Real Estate Investment Trust Earnings Call
Good morning, and welcome to granite REIT third quarter results for 2022.
As a reminder, this conference is being recorded Thursday November 10, 2020 to speak.
Speaking to you on the call. This morning is Kevin Gori, President and Chief Executive Officer, and Theresa Nadeau, Chief Financial Officer, I wouldn't like to turn the call over to Teresa Neto Who'll go over certain advisory followed by an introduction from Kevin Gory.
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 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 projections.
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.
These risks and uncertainties and discuss are discussed in granites 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 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.
And forward looking information the REIT reviews, its assumptions regularly and may change its outlook on an on going forward basis if necessary.
Granite undertakes no intention or obligation to update or revise its key assumptions any of forward looking statements are forward looking information, whether as a result of new information future events or otherwise, except as required by law and.
In addition, the remarks. This morning May include financial terms and measures that do not have a standardized meaning under international financial reporting standards.
Please refer to the audited combined financial results and management discussion and analysis for the three and nine months ended September 32022 for 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.
I'm going to commence the call with financial highlights and then I'll turn it over to Kevin, which who will follow with operational update.
Granted posted Q3 2022 results in line with expectations with strong NOI growth, partly impacted by continuous weak weakness in the euro and higher interest costs from rising rates and borrowings.
<unk> per unit in Q3 was a dollar eight representing a one cent or <unk>, 9% decrease from Q2, and a nine 1% increase relative to the same quarter in the prior year. However in the second quarter granted recognized <unk> 9 million and fair value gains relating to the revaluation of D. S. You.
But given the amendments made to granted D. S. You plan in June these fair value changes no longer impact S. F O contributing to a 1.4 cent unfavorable variance in the third quarter relative to Q2.
Strong NOI from acquisitions and same property NOI growth was partially muted by both unfavorable and favorable foreign exchange movements, where the euro was three 2% weaker than the U S dollar or two 3% stronger relative to the Canadian dollar in comparison to Q2.
It could be a comparison to the prior year, the euro was 11% weaker but the U S dollar, 4% stronger, resulting in a negative two cent impact <unk> per unit.
Also impacting the third quarter was the effect of higher interest cost borrowings from the credit facility and a new U S 400 million term loan that closed in mid September adding an additional estimated $2 2 million of interest expense or <unk> <unk> per unit relative to Q2.
Granted <unk> on a per unit basis is in Q3, 'twenty two with 97 cents, which is seven cents lower relative to Q2 and four cents higher relative to the same quarter last year with variances, mostly tied to capital expenditures.
<unk> related capital expenditures leasing costs and tenant allowances incurred in the quarter totaled totaled $6 6 million and for year to date period. It is $11 2 million.
For 'twenty, two we estimate at <unk> related maintenance capital expenditures and leasing costs coming in about $17 million for the year, which is consistent with the estimate provided at the Q1 earnings call.
Same property NOI for Q3 was solid relative to the same quarter last year, increasing three 2% on a constant currency basis, but 1% when foreign currency effects are included.
Same property NOI growth was driven primarily by higher than previous years, CPI adjustments positive leasing spreads and contractual rent increases across all of granites regions as well as the realization of a free rent period in the prior year at one of granites properties in Germany, offset partially by short term vacancies at two U S properties.
<unk>.
G&A for the quarter was $6 5 million, which was $2 4 million lower than the same quarter last year, and <unk> 5 million higher than Q2.
The main variance relative to the prior quarter and from Q2 is the change in noncash compensation liability liabilities, which generated a favorable $4 1 million fair value swing relative to the same quarter last year, and an unfavorable $5 million fair value swing relative to Q2 as we recognized fare.
Value gains on these liabilities due to a 15% decrease in grant its unit price during the quarter.
On a run rate basis, we continue to expect G&A expenses to continue at approximately $9 million per quarter or roughly 8% of revenues, excluding any amounts for fair value adjustments related to noncash compensation liabilities.
For income tax Q3, 'twenty two current income tax was $1 9 million, which is $25 million lower than prior year and essentially flat to Q2, the variance relative to Q3 'twenty. One is primarily due to the effect of the strengthening of the Canadian dollar on euro denominated tax expense as compared to the prior year period and to a lesser X.
And due to the sale of an asset in Australia in 'twenty, one reducing taxable earnings.
On a run rate basis, we estimate current tax of approximately 2 million per quarter before recognizing any reversals of tax provisions.
Having said that for Q2 'twenty two specifically we are expecting to recognize adjustments pertaining to pass tax years in Europe that could result in net positive adjustment to current tax of approximately 500000 euros or 700000 Canadians.
Interest expense was higher in Q3, 22 relative to Q2 by $2 million, reflecting incremental interest expense on draws on granted credit facility and the interest on the new U S 400 million senior secured non revolving term loan which closed on September 15th and was used to repay the outstanding balance on the <unk>.
Credit facility, which at that time was about U S $235 million.
In conjunction with the drawdown of the 2025 term loan granite entered into a float to fixed interest rate swap to fix the interest rate on the term loan to an all in rate of five point or one 6%.
On a run rate basis, we estimate interest expense will run about $16 million per quarter before factoring in any new debt or credit facility draws.
All have granted that is fit is fixed rate debt through cross currency and 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.
As a result of the new term loan granted weighted average cost of debt did increase 57 basis points to two 6% from $1 six 9% last quarter.
With respect to 2022 estimates, reflecting an overall weaker euro offset by a stronger U S dollar and rising interest rates due to expected strong operational performance granted continues to forecast that <unk> per unit will come in the ranges provided in March of this year being 431% to $4 43.
<unk> per unit and $3 96 to 408, four <unk> per unit.
Further on our singular estimates.
We're increasing those slightly for <unk> per unit, increasing <unk> to approximately $4 37, and <unk> per unit, increasing <unk> to approximately $4 one.
We have updated our assumptions regarding foreign exchange rates and are estimating for the fourth quarter of 2022 and ongoing weaker weaker euro offset by a stronger U S dollar relative to the Canadian dollar.
The Canadian dollar to Euro average rate remained unchanged from last quarter at 132, and our Canadian dollar to U S dollar rate increases to $1 33 from one to eight last quarter.
The U S dollar foreign exchange rate forecasted is admittedly conservative relative to today's market and should the U S. Dollar exchange rate remain at current levels.
<unk> per unit could be positively impacted by a further 1% to above our singular estimates.
As communicated before we continue to estimate that a one cent movement in the Canadian dollar relative to the U S. Dollar does impact <unk> per unit annually by <unk> and <unk> movements in the Canadian dollar relative to the Euro resulted in a one cent annual impact of <unk> and <unk> per unit.
The trust balance sheet comprising of total assets of $9 6 billion at the end of the quarter was negatively impacted by $229 million in fair value losses on brightness investment property portfolio in the third quarter offset by $318 million of translation gains on granted foreign based investment properties, particularly due to the <unk>.
8% increase in the spot U S dollar exchange rate relative to Q2.
The fair value losses on granite investment property portfolio were primarily attributable to the expansion in discount rates and in certain assets and expansion of terminal capitalization rates across all of granite markets in response to rising interest rates.
Really offset by fair market rent increases across the GTA and U S and selective European markets, reflecting current market fundamentals.
The trust overall weighted average cap rate of 4684.
$4, 6% to 8% increased 18 basis points from the end of Q2, but still has decreased 12 basis points since the same quarter last year.
Total net leverage at September 30th was 29% and net debt to EBITDA remained steady at seven seven times.
Trust current liquidity is approximately $1 2 billion represented by cash on hand of about $195 million and the Undrawn operating line of $997 million.
As of today granite has no amounts drawn under the credit facility and there is $2 6 million in letters of credit outstanding.
With the closing of the U S 400 million term loan and repayment of outstanding amounts on the credit facility granted realized excess net proceeds of approximately $225 million, which provides pre funding for greatest ongoing development program base.
Based on the remaining development commitments forecasted dispositions and NCB and CIB activity for the remainder of the year granite estimates that it will end the year with about $90 million of cash on hand, and no draws on the credit facility for total liquidity liquidity of approximately $1 1 billion.
Granite continued to moderate monitor market conditions in the coming months to look to refinance as 2023 debentures, which come due in November of 2023.
Lastly in other financing activities on a year to date basis granted has repurchased $2 165 million stapled units under its and CIB at an average rate of $71 81 for a total of $155 $5 million excluding commissions.
I'll turn over the call now to Kevin.
<unk>, who will go over operational matters.
Thanks, Theresa its an excellent job welcome everyone to our Q3 call.
As usual on joining door Theresa and I are joined by more tumor micro in Paris.
I'll be brief as usual and despite a lack of investment activity per se I think there is quite a bit to unpack and this quarter Bill.
Building on <unk> comments, I will begin by saying I would characterize our results for the quarter as being in line with our expectations, although somewhat at the low end of the range in some areas.
We are seeing momentum those stayed very strong.
Our oil for us enough held up.
As further upward adjustments of terminal cap rates and discount rates were offset by translation gains primarily in our U S assets.
We turned over $400 million U S.
Of that as Teresa mentioned to improve liquidity.
We remain active on our CIB program and our development program continues to progress nicely.
To begin with investments that will take the least amount of time.
We have only one new acquisition to announce which was which would be approximately 10 acres of land located in close proximity to our 92 acres with a development project.
The site is expected to accommodate approximately 170000 square feet of space and generate an unlevered development yield of seven 5%.
Construction is expected to commence in 2023 with completion sometime in 2024.
As for dispositions you can see from the MD&A that we have.
Move to the U S assets.
From assets held for sale in this quarter as the recent term loan was upsized from initial expectations and provided us with sufficient liquidity without having to execute on a sale for clarity clarity on pricing may have been difficult.
With regard towards development program.
As you can see we successfully executed 10 year leases on over 1 million square feet in Nashville, and in all bark, Germany.
As a result of these projects will deliver unlevered development yields of six 2% and seven 5% respectively.
Overall 4 million square feet or 64% of the $6 2 million square feet currently under development or recently completed.
Been released.
As I stated on our second quarter call.
Ladies and certain supplies, particularly for roofing materials, HVAC and electrical equipment.
Cause the later construction schedules, which has impacted leasing velocity.
Notably all of our leasing activity to date has been on projects that were close to or have been completed.
Leasing activity remains quite strong across our remaining development availabilities and we look forward to sharing further updates with you on our next call.
All in all our development yield projections have improved from underwriting.
But margins remain in tops.
Suggests broader development program should continue to contribute strongly to now growth in the fourth quarter and throughout 2023.
As an update on our ESG program.
As mentioned on our last call. Our 2021 ESG report was published in August and is available on our website.
We obtain green building certifications for our expansion in the GTA.
Two of our recently completed development in Dallas and all box.
And further obtain Brian building certification in new certification on three of our properties in the U S with a fourth Penguin.
To date, we have now obtained green building certification on 18 properties totaling totaling over 10 million square feet.
That number is expected to increase significantly over the next few years as we achieved certification on our new developments in accordance with our Green bond framework.
Rusty published their latest assessment of October .
And we are very pleased to report the granite ranked third in our plan for public disclosure.
And our greater grew from beta.
And further we ranked second overall among north American listed industrial companies.
Quite an achievement for the team.
Operationally there remains 340000 square feet of expiring remaining in 2022.
We have agreed to terms on an increase in rental rate of roughly 60% on two of those expiries and the third is related to the asset held for sale.
As for our 2023 expires.
Now renewed or extended $4 million of the $9 4 million square feet on an average increase of 13%.
Which was muted by large by a large property in Germany and the U S.
Where the renewal rent matched expiring as prescribed under the existing lease agreements.
We have also reached terms on a further $2 6 million square feet of expiring at an average increase of 44%.
And to date, we have renewed or rich terms on roughly 66% of our expiring for 2023.
And we anticipate an overall retention rate of 87% to 90% for next year.
From a mark to market perspective.
We estimate that the spread and market rent over in place now sits at roughly 70% for Canada effectively the GTA, 19% for the U S and 8% for Europe .
We plan to include this analysis in our MD&A and then commencing in the fourth quarter.
As Teresa mentioned same property NOI increased by three 2% on a constant currency basis someone at the low end of our expectations for the quarter as the impact of strong releasing spreads was muted by turnover vacancy of two of our U S properties.
However, both have since been released for October one and an average increase in rent of 69%.
At this time, we are reiterating our same property NOI guidance for 2022.
Between three five to four 5% and now expect to end the year higher end of that range.
We are setting guidance for 2023 same property NOI at 6% to 7%.
Turning to our investment properties, we recorded further adjustments as mentioned to our discount rates and terminal cap rates from the second quarter, resulting in a roughly $230 million necessary value loss in the quarter, which was fully offset by translation gains of $318 million due primarily to the strengthening of the U S.
Color in late September .
The net fair value loss in the quarter was concentrated in our U S and European portfolio.
In comparison with Q1 and in rough terms.
Our property values are flat to slightly negative for the GTA, and Austria and have fallen 7% in Germany, and the Netherlands, and 9% in the U S.
Although further upward adjustment.
To terminal cap rates and discount rates may be appropriate in future quarters I.
I think it is worth highlighting that despite almost $500 million net fair value losses, resulting from adjustments to date, our NAV per unit has increased over that period.
As a result of currency translation gains and contributions from our development program.
As mentioned earlier future development stabilization and growth in fair market rent are expected to continue to contribute strongly to our now.
The reduction in the number of units from our unit repurchase program. Since July one we will also obviously further enhance now per unit beginning in the fourth quarter.
In terms of our market update leasing fundamentals across our entire portfolio remains strong.
The man historically has tracked the business cycle, but it is expected to remain strong and demand is expected to remain strong.
Suppliers continue to modernize and improve the resiliency of their supply chain.
Onshoring of key manufacturing sectors, such as electric vehicles and.
And as reported by CBRE and others E. Commerce is expected to grow from roughly 20% of sales to 32% in the U S alone within 10 years.
Q3 data is not available for all of our markets.
But from what is available vacancy overall appears to be flat relative to the second quarter as absorption seems to be limited to the delivery of new supply due to historically low vacancy rates and.
And year over year market rental rate growth varies in the low to mid double digits across our markets.
As you have seen we.
We announced the 11th consecutive increase in our targeted annual distribution to $3 20.
The 10 cent or three 2% increase consistent with the past few years.
More than there is given our cash flow growth year over year, but we believe is appropriate at this time given it also enables us to maintain our conservative payout ratios preserve liquidity and assist in funding the ongoing development program.
On that point looking forward our liquidity remains very strong we're in a good position to fund our remaining development projects and we will continue to take advantage of strong market conditions to focus on leasing up our development.
<unk> abilities, and our 2023, expiries and driving NOI growth.
On that note I will open up the Florida any questions.
Thank you if you would like to register a question. Please press the one followed by the full on your telephone you will hear a three telecom technology a request. If your question has been answered any of these types of Australia registration. Please press. The one followed by the three one moment. Please our first <unk>.
<unk>.
And our first question comes from the line of Brad Sturges with Raymond James. Please proceed with your question.
Hi, there.
Maybe just.
It's quite helpful color on the 23 expiry, just maybe starting there on the third of expiry is still left to address.
What would what would be your expectations for rent spreads.
I think the remaining ones are somewhere between 15 and 20% growth on the remaining.
Okay. So overall.
If you take the entire year $9 4 million square feet I think we're projecting 21%.
Overall on average.
Okay.
That helps and then.
Youre highlighting still good touring activity and interest in the development projects I guess.
And pretty positive commentary about the demand outlook I guess short term, though have you seen any.
Moderation in leasing velocity.
Particularly in some of your U S markets or.
Has that been pretty consistent too.
No the levels Youre seeing earlier in the year.
I think it's consistent.
We want to put some context on those because we had a conversation.
Very recently in depth conversation for U S team and the theme right now is that tenants are focusing on securing space.
And is the resiliency.
They are really concerned most about and that's the priority. So we have not seen.
Drop off yet.
And as I've said before I think it's very telling that where we've had the highest leasing velocity as the ones that are nearing completion, I think what's giving tenants pause with all developments not with not just with US is they need the space in four months, you're saying, it's going to be ready for months, but what if it's six what if it's 7%.
In Houston, we have been waiting on a on a switch gear for months and so I think that that's affecting it we're not seeing a slowdown in demand and I think it's very telling as I've mentioned all the markets. We're looking at the absorption almost matches the new supply in each market.
Hang on and I think the reason for that is vacancies so low.
We're waiting for them to come on and it's just being absorbed as it's as it's hitting the market. So that's what we're seeing not a slowdown or a moderation in demand per se yet. It's just more there are valid concerns about timing of delivery and I think the tenants want to make sure that they can.
Get in this space when they need to get in this space.
Okay. That's helpful color.
Last question just.
The 2004 expires with the garage maturity can you remind me I believe maintenance got it.
An option to renew one would that option expire.
'twenty January through the end of January 2023, So a few months from now.
And if they were to exercise that option is it a fixed rent increase or is it tied to CPI.
Correct Nellix fix it's tied to sorry, it's a look back CPI.
The cap.
So it's fixed.
Got it okay. That's helpful. Thank you.
In this case.
Okay.
Thank you. Our next question comes from the line of Himanshu Gupta with Scotiabank. Please proceed with your question.
Thank you and good morning.
I'm looking at the 62, 7% same property NOI growth guidance for 2023, obviously very strong this.
So is it mostly led by U S and listeners expiries or are you seeing pick up in one of those laws.
Because.
A lot of them. This is a CPA indexation mode.
It's a bit of both but most as you know the 942 thirds of that almost 70% is in the U S.
So it is driven by the mark to market on our U S renewals, but there is also a contribution from.
Higher CPI and higher contractual rent increases through CPI in Canada and in Europe predominantly in the Netherlands.
Okay. Thank you that's helpful.
And then on the development program again, you know development uses it has evolved and revised tired old I think almost all the properties too.
How much overdeveloped in programs.
East.
Is there any property left 50, losing all of them.
Well, there's roughly 2 million left to go so we have 500000 feet.
Nashville.
I think we have 650000 feet in Houston, we are quite a bit of activity in Houston, and we have the 700000 and 300000 footer left to go.
All points, which is in Indianapolis across the street from the airport. So theres a lot of activity on those and as I said before I think that the.
The delays in construction or the uncertainty and timing and construction is what's I think driving some tenants to remain on the sidelines until there's more certainty around the timing of delivery, but activity has been very strong. So theres roughly two 2 million feet left to go on the development and these projects will be completed through the end of the fourth quarter.
<unk> in the first quarter of 2023, so there's still time left for construction and again, let me provide further context typically you would budget too.
To complete the building and then.
You would be achieving full rent on the building within 12 months, but that's typically what you would do because it would allow for downtime lease up.
Fixed during by the tenant et cetera, you might have three years to four tenants in the building and allows you to build the module malls et cetera, but that's typically what you would budget all of our expectations now still remained well within so that to me indicates a very strong market.
Got it.
Sticking to development too.
And also new.
Sony Kobo jeans near Blackfoot so.
Is that a hub you like do you want to expand further.
In terms of development program.
G&A.
We're always looking at opportunities, but I hope the tone that came across in the call is.
We like the cash position, we're sitting in we like our liquidity, we want to make sure that we are.
And a very strong position to fund our development program. So we're always looking but we are mindful.
Of capital.
This.
Piece of land, particularly was.
Not an add on there were separate deals, but we were looking at this land simultaneously with the 92 acre site.
This site just took a long time to close for various reasons. So we were looking at a number of opportunities at the time in 2021 and happened to close on the larger ones first and this one second so it wasn't as though this just came up on our radar.
If the deal with the team's been working through for well over a year. So we're looking at opportunities but again.
Our priority right now is maintaining liquidity and funding our current development program.
Got it thank you.
Last question.
And then in terms of the fair value adjustments to property evaluation. So we have seen in two back to back quarterly adjustments.
Are you done the assessment of your U S portfolio.
Does that reflect the current bond you've done financing environment.
I.
Don't believe so.
I don't want to.
We still have to go through the deals because its all really deal dependent it's made our life a little difficult because we havent always had.
Sufficient data.
In some ways it is subjective, but I would say it would be very surprised.
The adjustments that you were talking about.
We're done on that and that's why I want to emphasize.
I think.
I look at our NAV per unit, where it is at the end of the third quarter versus the first and it's up despite $500 million.
An adjustment so far to date, but to your question are we finished I don't know the answer to that but I don't I don't think so.
Got it and then just one follow up clarification question. The sale of two U S assets I mean, obviously, we are not foreseeing any malls was.
The gap between the buyers and sellers expectations too.
I don't think that that's what the answer is when we decided to.
Secure term loan and 400 million U S that gave US we were targeting 300.
We ended up doing 400 million for a couple of reasons it made sense to us so that took.
Any pressure that we're feeling on liquidity that took it off so when we looked at this disposition plan disposition.
It was we're not sure how the process is going to go and so I think it's better to pull it early instead of starting a process and then having to pull it for whatever reason. So it really was due to the fact that the funds that came from the term loan gave us a lot more comfort around our liquidity.
Why head into a market with so much change happening rapidly.
Unless you have a lot of clarity around what the pricing is.
Thank you. Thank you Kevin I'm not quite done.
Okay.
Our next question comes from the line of gone up and Master with I E Capital markets. Please proceed with your question.
Thank you and good morning, everyone, Kevin just staying on the.
Valuation.
For a for a little longer.
You know I know that that is it.
Very hard to pin down an end in sight, but in your view or are we getting closer to that.
Okay.
Well it's funny.
Those who know me know I don't like watching the market.
But.
I think what we're waiting for I think what a lot of investors are waiting for is just a little bit of dough and central banks, a little bit of a pivot and I think maybe they are reading it wrong they have in the past.
But I do think we're in the and in terms of <unk>.
Negative sentiment just to pivot and.
Look we've seen some deals out there that suggests theres one out there that I think everybody knows quite well in it.
This signals a lot more strength than maybe the public markets I think that the risk. So I think everyone. Just wanted to understand better how far central banks were going to go and obviously the market is guessing at this point.
But it does feel like 2023, the first quarter of 2023 will be a different landscape for where we sit today.
Okay.
Fantastic. Thank you for the color and just lastly, with the MTA activity I'm going to try and train three are there any major changes in how youre thinking about capital allocation.
I'll ask <unk> to chime in as well, but I think at this point.
We're we're finished.
We executed on it as planned in 2022 and at this point and anything can change, but at this point, we're not anticipating being active on the in CIB.
Through the end of the year and early into 2023 can you say anything you want to add on that.
Yeah, No I think that's right I think we kind of had a finite number in mind and a lot a lot of what's driving that as you know we're very conscious of certainly where our debt metrics are and I think we're kind of at the level that will tolerate and don't certainly and we want to preserve whatever borrowing that we have left to fund the remaining.
Commitments under our development plan. So that's the only thing I would add to that.
Okay got it.
Thank you so much for the color, Kevin and Teresa I'll turn it back to the Australia.
Thank you. Our next question comes from the line of Alex Jones with Stifel. Please proceed with your question.
Hey, good morning, everyone.
I think Theresa mentioned, some free rent in Germany earlier on the call, but I was wondering if you can comment on some of the other factors that drove same property NOI growth in Germany and toward the U S.
Yeah.
In Germany. It was that it was a large asset it's an older lease, but there was embedded free rent through periods of belief in this this hit us last year, which caused a large gain this year and of course it causes a lot of loss last year.
In the U S. I think it was one nine and constant currency basis. So it was lower and it was impacted by the turnover. If you recall in the last in the second.
In the quarter call.
We had two assets one with a small bankruptcy.
And one with a tenant that vacated.
And one of the assets, we further induce tenants to leave to get.
Control of the entire building so that totaled maybe 450000 feet, which occurred in the second quarter and leaked into the third quarter.
And those on average we increased around 69%.
It did cause and one asset two months downtime and another asset one month's downtime, which isn't big but it did impact same property NOI slightly four for the third quarter, a little more than we thought.
That's great. Thanks.
Turning to kind of new developments.
Some of the U S. REIT Ceos have commented on their earnings call that they're pausing.
Starting new developments, so I'm, just curious how you're thinking about that and whether you are approaching Canada versus the U S differently.
Yes.
Well I think.
When I when I listened to a full launch this call, which is which is always a good idea I think.
We do an excellent job, but their idea of pausing is building four to four 5 billion.
Next year, which to me is an interesting.
Characterization of pause.
But it does come from the ground up and you build where you where you see demand and I've said.
Even before recently that we undertook.
Five and a half million square feet of development.
Much of the speculative.
And we did want to continue the program maybe not so ambitiously is five and a half million feet, but we do want to kind of average.
Two to three and a half million feet a year.
But we weren't going to commit to anything in 2023 until we had worked through the bulk of.
Our availabilities in 2020, we're getting there so as we look to 2023 of the development program does slow down we just don't have the land capacity to build another five and a half million fee and theres nothing wrong with that and that wasn't the plant.
But when we look at Branford for example.
We were planning to move ahead with phase one two buildings. It. So happened that we had a design build opportunity, which made a ton of sense for us to kick off the park. So now we're building 420000 feet design built for Barry <unk> and now we're going to follow up with probably a 750000 foot or on site and Thats marked.
Driven ROE concern with Branford, we're not so we will move ahead in 2023, if we get the entitlement and the approvals we will likely move ahead with another 750000, but at the end of this year, we think we will move through.
Our availabilities in the U S.
And so we will be in a position where our exposure to the development side will be very manageable in 2023, So all I'm, hoping answering your question a little bit of verbal diarrhea, there, but that's.
That's kind of how we're viewing that as great great I think it will solve itself.
They appreciate it and then just last one quick one is can you guys just remind us what percentage of the European portfolio have leases with CPI based escalators.
I can answer that.
Hi, Oscar it's at 100% and Netherlands is around 85% and I think Germany is similar to that around 85%.
Okay, great. Thanks, a lot I'll turn it back.
Okay.
Thank you. Our next question comes from the line of Matt <unk> with National Bank of Canada. Please proceed with your question.
Hey, guys.
Just with regards to the conversation around liquidity.
And obviously, it's improved with this.
Debt issuance.
I mean, you have $1 billion Undrawn credit facility.
What what is it that you're preparing for or want to keep liquidity wise.
When you talk about that and maybe pulling the asset sale.
And as a kind of secondary to that is is the liquidity ultimately to fund the development pipeline and are you comfortable.
Ending subsequent phases of Houston, and Bradford with current liquidity.
Well I think that's exactly it.
Sorry.
No you've got it got it.
I think that's I think that's exactly from a high level.
Yes.
The liquidity when we head into 2023, if we do want to look to the next phase of Houston, where we have a design build opportunity. We wanted to make sure we have liquidity to fund that so it is for the remaining development and tissue development potentially in the 'twenty 2023, 3% that you want to add anything.
No. That's it yes, no that answers it I mean, when you look at it at the end of the third quarter. You know are really our commitments and development is probably looking around $300 million between the fourth quarter and first.
First quarter of next year, maybe youre into mid second quarter. So we will have more than sufficient liquidity for that between cash and the credit facility and then.
It's also it gives us sort of a backdrop and I don't believe we're going to go there, but we also have a maturity in November 2023 of $400 million that we could easily cover with the the line. If we had to if we had to.
Okay now that that absolutely makes sense forgot about that and then with regards to the same property NOI guidance again. Good figures. There just wanted to know is that inclusive of FX and what it would be without FX and then also it sounds like youre doing quite well on the leasing front.
But just want to understand kind of the.
The occupancy.
Assumptions that may have gone into that.
Going to get through the end of this year probably.
99, plus percent should we expect that to be the case for next year as well.
Well when I talk about the same property NOI, it's always in local currency.
So yes, it does not take into account growing to fluctuations. So that's in local currency into in terms of occupancy again, when I say we're <unk>.
<unk>.
To renew 90%, which is a very high number.
In the year. There we are expecting there would be turnover there will be short term vacancy, but where we end up the year, we should be in that 99% range. That's our expectation for next year.
Okay, perfect and then Uh huh.
We've had this discussion, but maybe for the public good in terms of.
The worst case scenarios during a recession and potential bankruptcies can you give us a sense historically speaking as to.
What you've seen going through prior cycles with regards to the impact of bankruptcies.
If we do head into a recession in 2023.
Well, it's just that I've been asked this question a lot and it's tough to.
Recession seemed it always be different and look how much the economy has changed in the last 10 years. So if you look at companies 10 years ago that would've went bankrupt. When you look today largest companies are completely different so it's hard to forecast what exactly is going to happen, obviously, but I have said too.
<unk> went on to question I look back historically, and we just went through a pretty big downturn in 2020 related to endemic.
And yes, we are a sort of distribution logistics ecommerce company, which thrives in this at all to say our tenants I think we were one of the only companies that I know of and real estate and collected 100% of its rent for 2020. So one I think it did speak to the stability of our portfolio and our tenants, which was very important but al.
So in fact to all weighed on our end going through it in industrial.
And watching and acute downturn.
And I remember red smoothing in the 20% to 25% range, depending on the market, but it was.
20% to 25% was kind of the average that we saw so I look at our portfolio today and say, okay in a severe downturn.
If the rent market rents move 2025% then we'd be at market.
We need to appreciate how big a cushion there is.
And as of today that question seems to be getting bigger and not that it won't get smaller, but just to say, it's still moving upward. So that cushion is stronger than I think people give it credit for.
Our sector and so that's kind of what we've seen in terms of bankruptcies and it's really hard to speculate on but.
Through my experience industrial has never seen.
And knock on wood industrial has never seen a high level of bankruptcies like I've seen in other sectors historically speaking.
Okay.
Makes sense and I appreciate that color.
But just the just to further say like.
It is I think it's worth noting.
I think we have been criticized sometimes fairly sometimes unfairly for having too many bonds in our portfolio and not having enough equities right. So when you look at deals that we do and the tenants that we deal with and the underwriting we do we've always said, we're trying to build this portfolio on a defensive manner because the good Tom.
We will take care of themselves and it's really strong management and strong management decisions that should carry portfolio through bad times, that's what we think about.
And so on.
I'd say that now because I'm ask questions from investors like all portfolios are the same they're just not.
Our team works really hard at underwriting opportunities to make sure. We're protecting the downside for our unit holders and I hope over time that gets recognized and appreciated because it. It takes work it's easy to buy a building. If you think market rents are higher and you can drive rents, but are you are you underwriting on risk adjust.
Good return basis are you thinking about the risk if things go bad and I want everyone to understand how much we think about that all the time and as we head into this I think where our portfolio.
<unk> is as well positioned as any in the market to persevere through through.
A major downturn.
We do.
That makes sense couple it with a one of the best balance sheets in the Canadian REIT universe.
You think that's what investors would be looking for anyway I appreciate it Kevin.
Our next question comes from the line of.
Jani with TD Securities. Please proceed with your question.
Thanks, and good morning, everyone.
Most of my questions have been answered, but I just wanted to I guess clarify in Germany with the renewals that were achieved.
It doesn't look like that includes as the late mobility solutions tenancy, if you could just clarify that.
No Thats still outstanding I think it's in the third quarter of next year, our expectation is they renews that they renew its prescribed.
Rent I think its expiry rent plus CPI, but I'd have to check but it's the prescribed so there is.
And there is no renewal notice state. So there is not an urgent need for us to engage we obviously have contact with the tenant, but we don't have any information that they're looking to leave or wish to leave so our expectation is that they renew but it has not been done yet.
Okay.
And just on the guidance for next year same property.
I've missed it but did you provide any breakdown of that 6% to 7% on a regional basis.
I did not.
I did not.
I'm just trying to put all of that.
Yeah, no if we get it's not available.
Okay.
But we don't have a lot of turn next year.
It is predominantly in the U S and I think.
Actually if I think offhand I think our mark to market.
On the turnovers next year, roughly 60%, 60% in the GTA roughly 20% in the U S.
In Europe , it's quite low just because it's not so much.
The market isn't higher.
Number of the leases roll at CPI, so on renewal it doesn't move to market. It's a it's a CPI adjusted renewal rate.
So it is unlimited so it would be in the sort of 5% to 10% range.
Got it.
Just finally I know this was touched on a couple of times, but just with the.
Fairly large volume of development completions over the next few quarters.
Obviously going through your pipe.
Land pipeline fairly quickly.
Are you satisfied with.
The pipeline that will you'll end up with a year from now or is there a desire to go out and buy more buy more land in sort of a related question grants, but a number of forward purchases in recent years is that still.
And the opportunities that you see attractive in the current market.
I think where we sit today and we talked about liquidity and funding our development program and and obviously, it's going to moderate naturally because to your point, we don't have the land bank to really continue aggressively in that regard, we still have 100 acres in Houston and.
And we still have the capacity to build over a million feet in branford in total so we will be active on our brand per site as I mentioned Houston will see it depends on how phase.
I guess phase two goes technically phase one.
How that goes but it would be hard for us to I think.
Break ground in 2023 or at least the first half of 2023. So to answer your question, Yes, I think.
When we look at.
Opportunities in in 2023, if the current market conditions create some distress, we want to be well positioned to exploit those weaknesses one of those things would be on land.
And.
As a REIT you have to be careful of how much land you have obviously you have to think about carry cost and your your own cost of capital So I.
I don't know how much opportunity there would necessarily be in and around the GTA, but when we look at the U S. We're watching it very carefully.
Could we take down 50 acres could we take down 80 acres and that's something we are watching and are monitoring and so that would be of interest to sort of reload the land bank in a in an uncertain.
Certain time and take advantage of weakness among among the market. So that is on our mind for next year definitely reloading that land bank at a cost basis that makes a lot of sense to us.
That's great. Thank you and I'll turn it back.
Yeah.
As a reminder to register for a question press the one four.
Our next question comes from the line of Patty Berg with RBC capital markets. Please proceed with your question.
Thanks, Good morning.
Kevin just coming back to the the garage facility, if magnum where taxes sides that option early next year I'm, just curious how how would that impact your view on the potential.
Longer term do you have that asset in terms of holding it or possibly monetizing it.
Well I think it certainly opens up options and I think.
I don't know I don't know the answer to that for me because it's been a great asset for us, but obviously I think it's on People's minds. So it's something we'd have to look at it and it depends on the market conditions I mean would we do something today I think it would be.
Not sure I'm not sure conditions today would be supportive of doing anything so it depends very much on whats going on in the world in the market.
But we just wanted to put ourselves in the right position and prepare.
To prepare.
Prepare to look at and assess all the options that are available to us so certainly it.
It brings the options more into play than it did before and I think that's a very positive thing for us.
Got it and then just slots one.
It sounds like your comments around liquidity or really.
Focused on sort of preserving that for when you talk about opportunities. It seems to be certainly focused on more land opportunities and development type.
Places that might come up is that fair to say rather than sort of any sort of anything from an income producing standpoint stabilized asset.
And I'm just curious what you're seeing in terms of what is out there at the moment.
Well I'm, saying that because.
It, particularly in the U S. We feel we could execute on planned acquisitions in a distressed situation.
And not use up a lot of our liquidity, that's why I say that if you look at doing a portfolio acquisition and using our line of credit et cetera.
We're taking sort of a worst case scenario view and that is we do not have access to capital in 2023. So that's why we're talking about it in such a cautious way if thats, what youre getting if market conditions change then it changes for us and we.
We might be more willing to use our liquidity depending on what the landscape looks like but for now assuming there's a lot of uncertainty in the 2023 and I'm not sure, but assuming that there is.
We really value our liquidity and as Teresa mentioned, we have the 2023 is maturing we want to have options around that but have risk best for us we have a development program, that's ongoing and could we could add a few more projects to it in 2023. So those are the top priorities.
But it also we should be in a position even in Oh.
Very poor investment environment.
Should be in a position to take advantage on some land acquisition opportunities without really compromising our liquidity in a big way.
Yes.
Got it that's great color, thanks, very much I'll turn it back.
Just as a reminder to register for a question press the one four.
Kevin Barry There are no further questions at this time I will turn the call back to you.
Alright. Thank you operator, so on behalf of the management team and the trustees of granite. Thank you very much for taking time to attend our Q3 call and we look forward to speaking to you on the Q4 call in a few months.
Take care.
Yeah.
Okay.
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Yes.
Okay.
Okay.
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