Q4 2022 Granite Real Estate Investment Trust Earnings Call

Speaker 1: The nine.

Speaker 2: call. Speaking to you on this call this morning is Kevin Gorey, President and Chief Executive Officer and Theresa Neto, Chief Financial Officer. I will now turn the call over to Theresa Neto to go over certain advisories. Please go ahead.

Speaker 3: 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

Speaker 3: from any conclusion, forecast or projection. These statements and information are based on certain material facts or assumptions, reflect management's current expectations and are subject to known and unknown risks and uncertainties. These risks and uncertainties are discussed and granted to material filed with the Canadian Securities Administrators and the U.S. Securities and Exchange Commission from time to time.

Speaker 3: including the risk factors section of its annual information form for 2022 filed on March 8, 2023. 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.

Speaker 3: end year ended December 31, 2022 for Granite Real Estate Investment Trust and Granite Reed 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.

Speaker 3: I'll commence the call with some financial highlights and then Kevin will follow with the operational update.

Speaker 3: Granted, posted Q422 results exceeding expectations with strong NOI growth compounded by strengthening of the US dollar and euro relative to Q3, partially offset by higher interest costs from rising rates and borrowings.

Speaker 3: FFO per unit in Q4 was $1.20, representing a 12 cent or 11.1 increase from Q3 and 17.6 percent increase relative to the same quarter in the prior year. However, in the fourth quarter of 2021, Granite did recognize $1.3 million in fair value losses relating to the revaluation of DSU liabilities.

Speaker 3: But given the amendments made to Granite's DSU plan in June , these favourable changes no longer impact FFO, contributing to a 2-cent favourable variance in the fourth quarter relative to Q4-21.

Speaker 3: Strong NOI from acquisitions, developments and expansions that came online since Q2 and same property NOI growth was enhanced by favourable foreign exchange movements where the Euro was 5.4% stronger and the US dollar 3.9% stronger relative to the Canadian dollar in comparison to Q3. A short story about the

Speaker 3: In comparison to the prior year, the euro was 4% weaker and US dollar 8% stronger, resulting in a positive 4 cent impact to FFO per unit.

Speaker 3: Negatively impacting Q4-22 relative to Q3 is the full quarter effect of higher interest costs on the new $400 million term loan that closed in mid-September. Lastly, in Q4, we recognize the net favorable $0.7 million to current income tax expense for adjustments related to prior tax years.

Speaker 3: Granted, AFFO on a per unit basis in Q4-22 was $1.05, which is 8 cents higher relative to Q3 and 15 cents higher relative to the same quarter last year, with the variances mostly tied to FFO growth.

Speaker 3: AFFO-related capital expenditures, leasing costs, and tenant allowances incurred in the quarter totaled $7.4 million and for the year-to-date period were $18.6 million. For 2023, we estimate AFFO-related maintenance capital expenditures and leasing costs coming in approximately $22 million for the year, with the increase relative to the past couple of years being a direct result of approximately $2.5 million in total.

Speaker 3: primarily by higher than previous years CPI adjustments, positive leasing spreads, contractual rent increases across all of Granite's regions, lease renewals in the US and Canada, and it also includes the impact of a completed expansion in the GTA.

Speaker 3: G&A for the quarter was $8.6 million, which was $3.8 million lower than the same quarter last year and $2.1 million higher than Q3. The main variance relative to the prior quarter and Q3 is the change in non-cash compensation liabilities, which generated a favorable $3.6 million fair value swing relative to the same quarter last year.

Speaker 3: per quarter or roughly 7% of revenues, excluding any amounts for fair-related adjustments related to non-cash compensation liability.

Speaker 3: On income tax, Q4-22 current income tax was $1.5 million, which is $1.4 million lower than the prior year and $0.4 million lower than Q3. However, excluding $2.8 million of current tax recorded in Q4 2021, related to the disposition of an Austrian property, current tax actually increased by $1.4 million in the current year relative to last year.

Speaker 3: we estimate current tax at approximately 2 million per quarter before recognizing any reversals of tax provisions.

Speaker 3: Interest expense was higher in Q4-22 relative to Q3 by 4 million, reflecting the full quarter impact of interest on the new US $400 million loan which closed on September 15th. On a run rate basis, we estimate interest expense will run approximately $18

Speaker 3: before factoring any new debt or credit facilities. When Granite refinances its upcoming $400 million debenture maturing November this year, we expect our interest expense run rate will increase to $20 million per quarter. All of Granite's debt is fixed rate debt through cross currency and interest rate swap hedges with the exception of the current debt.

Speaker 3: $4.90 to $5.05, representing approximately an 11 to 14 percent increase over 2022.

Speaker 3: For AFFO per unit, we are forecasting a range of 430 to 445, representing an increase of 6 to 10 percent. For more information, please visit www.acf.gov.

Speaker 3: The high and low ranges are driven by foreign currency rates for where for the high end of the range we are assuming foreign exchange rates of a Canadian dollar to euro of 1.47 and Canadian dollar to USD of 1.37. On the low end of the range we are assuming exchange rates of the Canadian dollar to euro and Canadian dollar to USD of 1.47.

Speaker 3: relative to the Euro results in a one cent impact to FFO and AFFO per unit.

Speaker 3: Granted, we'll provide updates to guidance each quarter as warranted based on leasing activity executed to date.

Speaker 3: The Trust's balance sheet, comprising of total assets of $9.3 million at the end of the quarter, was negatively impacted by $230 million in fair value losses on Granite's investment property portfolio in the fourth quarter, offset by $80 million of translation gains on Granite's foreign-based investment properties, particularly due to the 7.5% increase in the economy.

Speaker 3: interest rates partially offset by fair market rent increases across the GTA, US and selective European markets reflecting current market fundamentals.

Speaker 3: The Trust's overall weighted average cap rate of 4.87% increased 17 basis points from the end of Q3 and has increased 37 basis points since the same quarter last year.

Speaker 3: Since the height at the end of Q1 2022, our weighted average cap rate has increased a total of 57 basis points.

Speaker 3: Total net leverage as at December 31st was 32% and net debt to EBITDA was 7.9 times, which is slightly inflated due to grants partially funding a significant development program with debt.

Speaker 3: Granted, it expects its debt to EBITDA to decrease the rate to the low seven times by the end of this year and to improve thereafter into 2024, as the EBITDA from completed developments come online throughout the year.

Speaker 3: The Trust's current liquidity is approximately $1.1 billion representing cash on hand of about $130 million and the undrawn facility of $997 million. As of today, granted has no amounts drawn and the credit facility, there are $3.5 million of letters of credit outstanding.

Speaker 3: Granted, we will continue to monitor the market conditions in the coming months to look to refinance its 2023 debentures which come due in November .

Speaker 3: And lastly, in other financing activities for the year ended December 31st, Granite did repurchase approximately 2.165 million stapled units under its NCIB at an average price of $71.81 for a total of 155.5 million excluding commissions. I'll now turn over the call to Kevin.

Speaker 4: Thanks, Theresa.

Speaker 4: Building on Theresa's comments, I would begin by saying that I would frankly characterize our results for the quarter as being in line with expectations, although very much at the high end. And frankly, it was the strongest quarter in my time with Granite, both from a financial and operational standpoint.

Speaker 4: as strong same property and wide growth and development stabilizations in a quarter drove out performance in FFO and AFFO.

Speaker 4: I also hope you found the level of disclosure to be helpful and unfortunately for you it leaves me with less to say on the call.

Speaker 4: As you can see, there was no acquisition activity in the quarter as we continue to focus capital on funding our ongoing development program.

Speaker 4: With respect to said development, as you can see from our end DNA and press release, our new development property in the Freezebro just outside of Nashville was completed in the fourth quarter and the 844,000 square foot building has been fully leased to a single tenant for a term of roughly 10 years, commencing on December 1st.

Speaker 4: Subsequent to the quarter, we achieved substantial completion of our 690,000 square foot Design-Build-Distribution Center in Houston for e-commerce user Chewy for a term of just under 11 years, which commenced on February 1st.

Speaker 4: We expect to achieve substantial completion of the two buildings totaling 670,000 square feet early under construction on the Houston site by the end of this month.

Speaker 4: we have signed two leases totaling five hundred and twenty thousand square feet approximately to third-party logistics

Speaker 4: In January , we also achieved substantial completion of our 330,000 square foot expansion of our existing property in Whitestown, a suburb of Indianapolis, and the lease has been extended for 10 years on the entire building.

Speaker 4: In summary, we have completed six development and expansion projects comprising 2.8 million square feet that commenced in late 2021 and early 2022 in the U.S., Germany, and the GTA, all now fully leased and generating an average unlevered development yield of 6.4%.

Speaker 4: We have a further 2.6 million square feet currently under construction, which is expected to generate an average unlevered yield of 6.25%.

Speaker 4: To date, we have leased 930,000 of the 2.6 million square feet currently in progress and that activity continues to be strong on our remaining availabilities in Houston, Indianapolis, and Nashville.

Speaker 4: Collectively, these stabilizations will continue to strongly contribute to NOI, cash flow and NAV in 2023 and I look forward to providing an update on our first quarter call.

Speaker 4: Looking towards 2023, we have the successful stabilization of the majority of our development pipeline, which I just mentioned.

Speaker 4: We have applied for approval to build a 730,000 square foot building on our site in Brantford.

Speaker 4: We are targeting an unlevered development yield of roughly 7% and hope to commence construction later this year.

Speaker 4: We are also finalizing plans for the next phase of our Houston development site, which would accommodate 1-2 buildings totalling up to 1 million square feet at a projected yield of roughly 6.25%. And pending final design, we may be able to commence construction again in late 2023.

Speaker 4: Finally, we have commenced a 50,000 square foot expansion of our existing property in Ajax, which is scheduled for delivery in early 2024 and an expected yield of 7.5%.

Speaker 4: And beyond the projects currently being contemplated, as just mentioned, we own an additional 35 acres in Branford and 65 acres in Houston and Columbus, which could accommodate up to 1.6 million square feet of future development. Hence, we will continue to search for the right land opportunities to expand our development pipeline moving forward.

Speaker 4: Operationally, 2022 finished and 2023 started on a positive note.

Speaker 4: As per our MD&A, we renewed or released roughly 6 of the 6.1 million square feet of leases which matured in 2022, and an average increase in rent of just over 19%. To date, we have renewed 7.7 or 81% of the 9.6 million square feet of lease maturities in 2023, and an average increase of roughly 20%.

Speaker 4: and we anticipate achieving an average increase of 24% on the remaining maturities or outstanding maturities.

Speaker 4: As mentioned on our last call, we expect to renew roughly 90% overall release maturities in 2023.

Speaker 4: For 2024, we have renewed 5.3 or 55% of the 9.6 million square feet of maturities.

Speaker 4: an average increase of 9.4%.

Speaker 4: primarily due to the 10-year garage renewal announced earlier this quarter.

Speaker 4: At this point, we expect to achieve an average increase of 20 to 22 percent on the outstanding maturities for 2024. I think it is worth highlighting that our renewals at Grotz and Oberhausen in Germany

Speaker 4: totaling almost 5.8 million square feet, required no investment from Granite for TI's, landlord work or leasing commissions.

Speaker 4: There was no capex associated with either renewal.

Speaker 4: As Theresa mentioned, same property in Hawaii increased by 6% in the quarter on a constant currency basis at the high end of our expectations driven by contractual annual escalations and strong releasing spreads overall.

Speaker 4: Same property in Hawaii was positive across all of our geographies on a constant currency basis led by our portfolios in Germany and the Netherlands at 10.9% and 8.3% respectively.

Speaker 4: The increase in San Francisco N.Y. was partially driven by strong CPI increases in those jurisdictions, which reached as high as 14% in the fourth quarter and the first quarter of this year.

Speaker 4: We anticipate that these markets will be a strong contributor to our organic growth in 2023.

Speaker 4: I think as mentioned, three tenants representing roughly one million square feet will not be renewing their space with us this year, which will impact St. Proprietto's NMI growth from quarter to quarter.

Speaker 4: But at this time, we are increasing our guidance for 2023 same property and NOI growth slightly from 6 to 7% originally to 6.5 to 7.5%.

Speaker 4: As you can see from our disclosure, and as Theresa spoke about, we adjusted cap rates and discount rates further in the quarter.

Speaker 4: The resulting $230 million in negative fair value adjustments was partially offset by $71 million in development spend and stabilizations.

Speaker 4: and roughly 75 million foreign exchange gains driven by the strong recovery of the euro and a quarter offset by a slightly weaker US dollar compared to Q3.

Speaker 4: Further adjustments may be required in the first quarter to terminal cap rates and discount rates, but at this point we believe that any further negative adjustments to cap rates or discount rates moving forward will continue to be at least partially mitigated by development stabilizations and increases in NOI and market rents throughout the year.

Speaker 4: With respect to ESG, our major activities and accomplishments are outlined in my letter to you holders, so I will not repeat them all here.

Speaker 4: But I wanted to say that we continue to execute strongly on our EST program, placing second among our North American peer group for Grespi and receiving the highest grade available for public disclosure.

Speaker 4: We also finished in first place among Canadian REITs and fourth overall among Canada's largest 220 public companies for governance in 2022, this according to the Globe and Mail, achieving a score of 95%. Non-governance continues to be a part of our DNA.

Speaker 4: it's satisfying to be recognized for our efforts. Before I open up the call for

Speaker 4: I'd like to take a minute or so to reflect on our performance over the past five years. This is the first time in my tenure in doing this, but I hope it will provide a level of perspective on our business and performance which some of you may find helpful.

Speaker 4: We finished 2017 with just over $3 billion in assets and with just over 71% of those properties being tenanted by Magna.

Speaker 4: We generated per unit FFO and AFO of 325 and 309 respectively, and our leverage at the time is 25%.

Speaker 4: In comparison, we finished 2022 with just over $8.8 billion in assets.

Speaker 4: an increase of over 280%, this despite the sale of 980 million of magnetented properties over that period.

Speaker 4: Leverage increased to 32% as we utilize some of our balance sheet capacity to fund acquisitions in the development of modern

Speaker 4: At 443 and 405 for 2022, we grew FFO and AFFO per unit by 36% and 31% respectively over that period, all while reducing our magnet concentration from 71% to 26% by revenue.

Speaker 4: Our team demonstrated the ability to diversify our tenant base.

Speaker 4: build a truly institutional quality logistics portfolio while generating strong cash flow and distribution growth and maintaining one of the strongest balance sheets in the Canadian REIT sector.

Speaker 4: In spite of the turbulence in the market and higher rates, I feel as confident as ever in our ability to deliver growth in NOI and cash flow for unit holders.

Speaker 4: And finally, I'd like to acknowledge our team for a great quarter. On that, I will open up the floor for any questions.

Speaker 2: Thank you. If you would like to register a question, please press the 1 followed by the 4 on your telephone and you will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. If you are using a speakerphone, please lift your handset before entering your request.

Speaker 2: Once again, that's 1-4 to register for a question, one brief moment for the first question. We do have a question from the line of Brad Sturgess with Raymond James. Please go ahead, your line is now open.

Speaker 5: Hi, good morning. Just on the fair value changes, you highlighted that there might be a little bit more to do in Q1, but should we start to be thinking about a little bit moderate?

Speaker 5: case of change in terms of those fair value changes and you've kind of got the bulk of those adjustments done for now.

Speaker 4: Well, I think that's possible Brad. I think at this point, we just, I think, want to be in the conservative side and give us some flexibility. I would say, I think as much or more than any other. We have recognized. The changes in terminal cap rates and discount rates.

Speaker 4: I will reiterate we use TCRs

Speaker 4: and discount rates because we run 10-year models of all of our real estate, all of our assets. I'm not sure that everybody does. When we talk about adjustments and cap rates, we've taken almost 100 to 125 basis points in adjustments.

Speaker 4: but that hasn't resulted in an equal adjustment to the overall cap rate or going in cap rate because higher NOI and market rents have mitigated some of those adjustments.

Speaker 4: So I'm unsure what Q1 looks like at this point. I think we'll need to look at precedent deals in the market, but I would say let's not forget with respect to our NAV.

Speaker 4: We have a number of development stabilizations that are going quite well. That should mitigate any further adjustments in cap rates and discount rates.

Speaker 5: Okay, that's helpful. Just on the November maturity, just based on your discussions with...

Speaker 5: your various that counterparties they're just curious of what you think that the financing rates might look like if you were to tap the unsecured market.

Speaker 3: Yeah, so just based on current pricing right now, you know, we could either do like a six year or maybe a ten year on that and remember that that 400 million is swapped to euros so we're going from like a rate of 243 to probably something that looks like about 4.9

Speaker 3: We're kind of assuming 5% just in our forecasts right now.

Speaker 3: just in our forecasts right now.

Speaker 5: That's helpful. And then just on the organic growth guidance, 6.5 to 7.5, just curious of how that would break down by market or region.

Speaker 4: I think we provided sort of the leasing spreads.

Speaker 4: on the regions. And so I think we're, you know, when you look at our turnover for 2023 is predominantly in the US. We have very little rolling in Canada and in Europe . So I think more than two thirds of that, roughly 70% is in the US. So most of that same property in Hawaii will be.

Speaker 4: in the US. I would say, and I did point out, we do have a million feet which we expect to turn over. So we've renewed 90%, 10% will be vacating. So there will be some vacancy related to that turnover but obviously that's built into our projections for the year.

Speaker 5: Can you remind me when do you get that space back and what are you projecting in terms of downtime with the space?

Speaker 4: Primarily there's two spaces. One I think is the end of August and the other one is I think a similar timeline maybe a little bit before one is 600,000 feet one is roughly three. We would anticipate downtime of say two months on that. I'm going to run my writing a little more.

Speaker 4: I think is the end of August and the other one is I think a similar timeline maybe a little bit before one is 600,000 feet, one is roughly three, we would anticipate downtime of say two months on that. Lauren, am I right? A little more? Yeah.

Speaker 2: Okay, that's helpful. I'll turn it back. Our next question is from Mark Rothschild with Canaccord Genoide. Please go ahead. Your line is open.

Speaker 6: Thanks, and good morning everyone. Kevin, as you look at the market where it's difficult to figure out the pricing for buying stabilized properties with a traceable ground, can you just talk a little bit about your confidence and ability to continue buying raw land for development and how you're looking at new specular development that might still take a few years to reach a point where you can lease it?

Speaker 4: Yeah, I think we're in an interesting time, Mark. I think we are seeing some compelling opportunities in our target markets. Frankly, I think we're talking about this internally.

Speaker 4: I think there's always a lot of questions about what markets we're looking at. I think at this point we don't want really want to disclose the markets where we're really focused on right now because there are compelling opportunities out there both for land for development and for IPP. So we don't want to...

Speaker 4: I think we have conviction in certain markets in which we want to pursue select opportunities. We just don't want to talk about it. But we're also mindful of the balance sheet and where our leverage is and where our limitations are. So all to say if we see opportunities out there both on the development side and the IPP side.

Speaker 4: I'm not sure how much access we will have to equity this year. So we're also looking at rebalancing opportunities within our portfolio. I think that, listen, I would say, I would characterize granite as being buyers in this market, more than sellers in this market. So something always, it is a complicated topic, so I think overall maybe we will be getting, you know we will be HQ payment being more than detaining

Speaker 4: much access we will have to equity this year. So we're also looking at rebalancing opportunities within our portfolio. I think that, listen, I would say every characterized granted as being buyers in this market more than sellers in this market. So

Speaker 4: As we look forward, I don't think our plans for investing in land or IPP at this point in time are too ambitious. I certainly think that they are manageable. If we have to dispose of non-core assets to fund that growth, we are happy to do that and prepared to do that. As we look forward, I don't think our plans for investing in land or IPP at this point in time are too ambitious. I certainly think that they are measurable.

Speaker 6: I hope that answers the question. No, that does and maybe it leads into one more question. Obviously, you've had some good growth. How do you think about when you talk about looking to sell assets that might be more slower growth or fully leased now and maybe you don't want to talk

Speaker 6: specifically about grats, but that's obviously going to give you very stable income for many years, but You can turn that into something that's more value creation. Is that something that's more interesting to sell now than maybe a year ago Yeah, I think it's I think that's a great question I would put it I would put it this way without being too detailed and that is I think there is

Speaker 4: Enough embedded growth in our business over the next couple years that we're not Concerned about selling a higher cap asset to buy a lower cap asset. We're not Now there's there's obviously limitations to that but that doesn't intimidate us and as we think through

Speaker 4: in Austria though, you know, we've always said we want to optimize the conditions to give us the right options to consider about any action with that. And we did that through the extension and I think we've significantly improved the financeability of a number of these larger assets in Europe which would in our minds...

Speaker 4: increase the number of suitors for some sort of potential transaction. But at the same time, pricing certainty is not strong right now on the market. And I don't think market conditions are particularly strong for any sort of major disposition.

Speaker 4: And I mentioned in my comments, and I want to highlight this, I think it's very important because I was going through the math this morning with the team.

Speaker 4: in my comments and I want to highlight this, I think it's very important because I was going through the math this morning with the team.

Speaker 4: between Gratz and Oberhausen, 5.8 million feet, if that had been a normal distribution building of that scale in anyone's portfolio.

Speaker 4: The releasing costs associated with that much space would have been 15 to 20 million euros. But because of the nature of the leases associated with those assets and the relationship that we have with the tenants, the cost to us was zero.

Speaker 4: So that NOI growth goes straight to the bottom line and that's something that we find valuable.

Speaker 4: Although we would look to rebalance our portfolio and that could involve a

Speaker 4: To us, I think it's important to recognize how valuable that cash flow and that cash flow stability is to us. But all to get to your main point, Mark, we're not worried about selling higher yielding assets to buy a lower yielding asset.

Speaker 4: if it's the right return growth profile for us at the end of the day.

Speaker 2: Okay, I think I get it. Thanks so much. Our next question is from Hamanchu Gupta with Scotiabank. Please go ahead. Your line is open. Okay, thank you.

Speaker 7: Thank you and good morning. So just on the one million square feet space which is coming back, is it all US or is it Germany as well? It's US.

Speaker 7: It's obvious, okay. And then Kevin, you know, a fair bit of new supply is coming to some of your US markets. And as you continue on the raising front, is that a topic of discussion at all with your tenants? I mean, do you see, you know, the balance of power changing from landlord to tenant any time soon? Second?

Speaker 4: Well, when you say anytime soon, I think you're asking me where we sit today, and I think our leasing spreads increased, I think, 3% from Q3 to Q4. So as we sit here today, in our opinion, the market rents have continued to go up.

Speaker 4: And I will say, you know, we have a million feet in Indianapolis development that's coming online soon and the leasing activity has been very strong. And I always get this mixed up with Nashville. But I think we have

Speaker 4: six or seven RFPs that we're currently responding to in those two buildings in Indian and Nashville I think it's as high as 10 on the space there.

Speaker 4: We are not seeing much of a slowdown in those markets and our remaining availability, the activity on that continues to be strong and again, as I said, the leasing spreads in Q4 in our opinion are higher than they were in Q3.

Speaker 7: Thank you. And then Kevin, you mentioned market trends continue to go up.

Speaker 7: And, you know, thanks for the new disclosure on in-place rents across regions. That was very helpful by the way. So how would you compare the in-place rents in US versus the market rents today?

Speaker 4: I think we've got them in there. I think on the remaining it's roughly 24% in 2023 and in 2024 it's 20% and we have I don't know what the point would be to look beyond that. So, for the next 2 years.

Speaker 4: 24% on a remaining and 20% for 2024, probably 20 to 22%. And I think one of the things I would point out is

Speaker 4: in Europe market rents have really moved in the Netherlands and Germany as well. And so we've seen strong growth there and obviously we've talked about the CPI, the contributions from the CPI growth across our portfolio. So I would remind everybody I think Europe is going to be …

Speaker 7: real contributor to our to our growth in 2023. Okay thank you thank you. Next question is I mean in terms of balance sheet Teresa can we say that you know cash in hand should take care of all development commitments this year.

Speaker 7: And then you'll have to come to unsecured market for the $400 million dollars reduction in November . Is it fair to say that? I think we might need to borrow a little bit just to cover the remaining development. I'm going to say between $25 to $50 million. So nothing meaningful at all.

Speaker 7: you pointed out as one of the opportunities. So we have been hearing some adjustments on the land pricing side of the US, much more than stabilized properties. So do you see that as an opportunity? Is it time to build some land bank or it's still early? I mean, you expect more adjustments on the land pricing.

Speaker 4: Well, I think it is a good opportunity and we are looking to increase our land bank to sustain a higher level of development on a stabilized basis. But again, as I was mentioning to Mark, part of that is going to depend on our liquidity.

Speaker 4: and our ability to fund the acquisition of land and development. So that's the question that we have this year, but I think that

Speaker 4: I think that the price adjustments that we've seen across the markets, not just for land, but for IPP, we would like to...

Speaker 4: continue to grow in our target markets, but we will of course be limited by the capital that we have to deploy. Awesome, thank you guys. I'll be back.

Speaker 2: Our next question is from Sam Damiani with TD Cohen. Please go ahead, your line is open. I found a weird passive on the drop-down.

Speaker 8: Thank you and good morning. Kevin, you started out referencing the strategic plan that was put out shortly after you joined the REIT.

Speaker 8: in 2018. And I think we can all agree that that was largely met over the last five years. As we sit today, do you have a different direction or an updated view as to where you see the REIT or the board sees the REIT evolving over the next five years?

Speaker 4: Well, we have been in discussions, you know, at the end of this year, you know, boards are going to want a new plan. We've been working in that and taking stock. And we do have some observations. I won't share obviously all of them with you. We do have some observations. And I think.

Speaker 4: When you saw us pivot strongly in 2021 towards development, it really was sort of a recognition that, you know, we had a lot of long-term strong covenant tenant, cashflow assets.

Speaker 4: in our portfolio. And as I've mentioned before, maybe we had too many bonds and not enough equities in our portfolio.

Speaker 4: But I stand by all the acquisitions we made and I think we pursue growth in a very disciplined manner.

Speaker 4: But what we began to recognize is that we were building this platform to add value which included development And we needed to start demonstrating that commitment And so it was a very strong pivot on the development side that I think the board was very supportive of that We had to put forward a plan of course, but the board was very supportive of that. So looking forward I think

Speaker 4: We're heading into a different, I think our outlook of the next 24 months is obviously different today than it was a few years ago. It's a different environment and I think people will view risk very differently. So I state that openly. What's the best decision? Is it to pursue riskier assets and drive growth?

Speaker 4: Or is it to pay a lot more attention to tenant covenants and lease terms? And I don't know the answer to that. I think it obviously will always be a combination of both. But we're going through that process right now, Sam. And I think looking back over the past five years, it's been very educational and instructive for us.

Speaker 4: And moving forward, one thing for sure I can tell you is we're going to continue to leverage the strength of our platform. And that means value add, that means development, all those things. But the sort of, I think, focus or obsession we have with institutional quality assets, I think is going to play out very well for us.

Speaker 4: over the next two, three, four, five years because I think there's going to be a lot more attention paid by investors to the quality of the real estate within portfolios and the quality of the tenants. That's our view today, but we're obviously working through the details of a new plan which we'll put in place for 2024 through 2028.

Speaker 8: Certainly a different environment today than it was over the last year or two. Just on the disclosed weighted average lease term for MAGNA as of year-end, would it be fair to say that today would be about seven and a half years.

Speaker 3: Given the GROTS renewal? I thought it was more like 6.8. 6.8, I think is kind of where we were coming. 6.8? Yeah, we actually did pro forma in our, oh 7.8. 7.8 is with the GROTS renewal in there. Okay.

Speaker 8: Thank you. And then the LMS renewal in Oberthausen, did I hear that that was achieved, that that was done in what term? It is. It is. So you and I don't have to talk about this anymore.

Speaker 4: But we think things go through the eyes of some Contrast merging Software and Bye everyone.

Speaker 8: 12 years and it's subject to a CPI increase which I think comes up very soon. Excellent, excellent. And just last quick question, there's a loan receivable sort of separated on the balance sheet for $69 million. Any color behind that you can share in terms of how that works. Thanks for listening and I'll turn it over for improvement with you.

Speaker 3: will play out over as that development reaches completion? Yeah so that that loan will be obviously paid out when we purchase the asset so it'll be netted

Speaker 3: will play out over as that development reaches completion? Yeah so that that loan will be obviously paid out when we purchase the asset so it'll be netted against the purchase price of the asset.

Speaker 2: So it moves into IPP effectively. Perfect. Thank you. Our next question is from the line of Pami Beer with RBC Capital Markets. Please go ahead. Your line is open. Thanks. Good morning. Just thinking back to some of the past MAGNA-related dispositions in the portfolio, was GRAS ever part of those conversations? I'm just curious if there's been any expressions of interest post the...

Speaker 2: Yes, they've been private equity at times and also there have been buyers that are more net lease buyers and not so much real estate buyers. So there's been a combination of both. Okay. Just on the NCIB, again, it was fairly active in Q4 and over the course of last year.

Speaker 2: But just, you know, how are you feeling about buybacks, you know, at this point, particularly just given the focus, you know, that you've spelled out with respect to developments? Well, certainly at this level, we're not planning to buy back stock. I think, as Theresa mentioned, the average was around 71, 72. Part of it is liquidity.

Speaker 4: that we have and I think we felt comfortable in the fourth quarter to move forward with it. There are a number of factors whether we would execute on the NCIB. I would just point out our liquidity is still very strong, but not the same as it was in Q4 and two, it's very price dependent and where it is today, we don't plan to be active on the NCIB.

Speaker 2: Okay, and then just in terms of, I guess, maybe coming back to your comments around maybe the five-year outlook from here, where does the balance sheet fit into that conversation in terms of the leverage that you perhaps are targeting and any color you can share on that?

Speaker 3: Yeah, Pammy, I don't think it really changes. We're really trying to maintain our targets, which are really between 30 to 35 percent and frankly, like it's closer to 30. But the focus that we mostly center on is debt to EBITDA. And I'd say that EBITDA is at the height of where we're comfortable right now.

Speaker 3: we'd like to get that into the low sevens and even below seven times. Like that's really what's going to drive, you know, how we could how we lever our balance sheet.

Speaker 2: Okay, yeah, it all makes sense and would agree on the debt to EBITDA metrics. Just on the, maybe the last one for the Indiana acquisitions, I think you've got a loan structure there, I think on the $115 million or so, where does leasing stand on those projects and at what point do those get acquired?

Speaker 4: in the market and we really like the location obviously there. So we expect to have more to report at the end of the at the end of the first quarter on those and substantial completion at some point later this month or in April . Okay sorry one last one just in terms of the

Speaker 3: to complete all of our developments and some of the developments that are going to be going into 2024, for example, Bradford. So it's about 170 million.

Speaker 2: Thanks very much. I'll turn it back. Thank you. Our next question is from Gaurav Mathur with IA Capital Markets. Please go ahead. Your line is open.

Speaker 9: Thank you and good morning everyone.

Speaker 9: Kevin, when you are thinking about future development initiatives, how have development yields changed across your markets when compared to a year ago?

Speaker 4: Well, certainly not as high as a year ago. I mean, there was a lot of commitment at one period of time. So we've always said we would like roughly 5% of our capital 5 to 10% of our capital at work on development. So I say 4% in my job and within've set out to give M

Speaker 4: We were hoping to, or we are hoping to.

Speaker 4: develop roughly two to three or two to four million square feet of space each year. Obviously the 2022s are leaking into 2023 but 2024 right now as we look at this point would be in that sort of two million range so again we are looking to backstop some of that land for development to give us the ability to increase that pipeline if we want to.

Speaker 4: But that's what we're targeting, would be that 2 to 4 million feet on average per year being developed.

Speaker 9: Okay, great. And then just lastly, you know, think about capital allocation and your focus on development. I mean, how should we think about the pivot from, you know, development to acquisitions to, you know, a potential NCI we use in 2023? Well, I think what's...

Speaker 4: Interesting to us is, and let's be clear on the development side, the land has to make sense and I think we see in some markets there may be an opportunity where IPP is trading below replacement costs. So all these things factor into your capital allocation decision. I certainly hope we're not in a position to buy back stock, to be honest with you, because it doesn't feel good. It may be good for your FFO and AFFFO per unit.

Speaker 4: But we're certainly not anticipating tapping into the NCIB in 2023. Hopefully that is behind us. So we focus on growth opportunities involving select acquisitions and development. And we'll see. Again, we are...

Speaker 4: We will go where our liquidity takes us and we will focus on the opportunities that are going to provide the best long-term total returns for us.

Speaker 9: Thank you for the color cabin. I'll turn it back to the operator.

Speaker 2: Thank you and we have a question from Mike Marchetes with BMO Capital Markets. Please go ahead, your line is open. Hi everybody. Just a couple of quick ones on my end. Thanks for taking the time. Just with respect to the guidance, I may have missed it but is there any assumption of any net acquisition activity or is it just based on the existing assets?

Speaker 2: Is that like an average for the year? Because presumably that's going to scale higher as you get interest decapitalization for the year, correct?

Speaker 3: Yeah that's an average just based on current run rate and then I mentioned depending on timing but when we do execute and refinance the 400 million to venture then it's going to creep up to 20 million per quarter so it's just a matter of when that happens. Yeah okay fair

Speaker 2: Just the straight line rent picked up again this quarter and I imagine it's just due to the the leasing activity that you guys have plus you know the delivery of Murpreesboro and December 1st. So is it safe to say that that number remains fairly elevated relative to historical over the next sort of several quarters before maybe coming back down to

Speaker 3: what was more a typical level in 2024? Yes, exactly. So it's probably mostly tied to the developments and the new leases and some free rent periods in there that you're seeing and that's why it's elevated. So you're right, it should come down in a few quarters.

Speaker 10: Okay, that's it for me. Thanks so much and congrats on such a strong end to your year.

Speaker 10: Okay, that's it for me. Thanks so much and congrats on such a strong end to your year. Thank you.

Speaker 4: And there are no further questions at this time. Thank You operator. So on behalf of the management team and trustees at Granite, thank you for taking the time today and look forward to speaking you on the Q1 call in May. Have a good day. That concludes the call for today. We thank you for your

Speaker 1: seven eight 8, four and.