Granite Real Estate Investment Trust Q1 2023 Earnings Call
Speaker 2: Good morning and welcome to Granite Reap's first quarter 2023 results conference call. Please note that the call is being recorded. Speaking to you on the call this morning is Kevin Gorey, President and Chief Executive Officer and Chief Executive Officer for Granite Reap.
Speaker 3: and Teresa Nito, Chief Financial Officer. I would now like to turn the call over to Teresa Nito to go over certain advisories.
Speaker 4: 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 future earnings.
Speaker 5: capital expenditures and that actual results could differ materially from any conclusion forecast or projection.
Speaker 6: 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 in grants and material filed with the Canadian Securities Administrators and the U.S. Securities and Exchange Commission from time to time.
Speaker 7: 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.
Speaker 8: Granted, it undertakes no intention or obligation to update or revise its key assumptions, any 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.
Speaker 9: Please refer to the condensed, combined, unaudited financial results and management discussion and analysis for the three-month period ending March 31st, 2023 for Granite Real Estate Investment Trust and Granite REIT Inc. and other materials filed with the Canadian Securities Administrators and U.S. Securities Exchange Commission from time to time for additional relevant information.
Speaker 10: as well as the US dollar, partially offset by higher interest costs.
Speaker 11: FFO per unit in Q1 was $1.25 representing a $0.05 or 4.2% increase from Q4 2022 and a 19% increase relative to the same quarter in the prior year. Strong NOI from acquisitions, developments and expansions that came online since the first quarter of 2022 and same property NOI growth was enhanced by favourable foreign exchange movements.
Speaker 12: Fund 2023 NOI relative to Q4 is the effect of higher interest costs resulting from interest on Granite's secured construction facility which commenced being expensed in January 2023 upon the substantial completion of Granite's Houston development and foreign exchange on Euro denominated borrowings and current income tax.
Speaker 13: Lastly, in Q4 2022, we recognized the favorable 0.7 million current income tax recovery and the 0.7 million fair value gain which did not recur in
Speaker 14: Granite's AFFO on a per unit basis in Q1 2023 was $1.18 which is 13 cents higher relative to Q4 and 18 cents higher relative to the same quarter last year with the variances mostly tied to FFO growth and lower capital expenditures, leasing costs and
Speaker 15: due to the timing of leasing turnover and weather.
Speaker 16: AFFO related capital expenditures, leasing costs and tenant allowances incurred in the quarter totaled 1.1 million. For 2023, we continue to estimate AFFO related maintenance capital expenditures and leasing costs coming in at approximately 22 million for the year, with the increase relative to the past couple of years being a direct result of approximately 9.7 million.
Speaker 17: Square feet of GLA turning over this year.
Speaker 18: Same property NOI for Q1-23 was strong relative to the same quarter last year increasing 5.4% on a constant currency basis and 9.8% when foreign
Speaker 19: Same property NOI growth was driven 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 includes the impact of a completed expansion into the GTA in Indiana.
Speaker 20: G&A for the quarter was $14.7 million, which was $6.3 million higher than the same quarter last year and $6.1 million higher than Q4. The main variance relative to the prior quarter and Q4 is the change in non-cash compensation liabilities, which generated an unfavorable $6.7 million fair value swing.
Speaker 21: adjustments do not impact our FFO or AFFO metrics. For the remainder of 2023, we expect G&A expenses of approximately $9 million per quarter or roughly 7% of revenues, excluding any amounts for fair value adjustments related to these non-cash compensation liabilities. On income tax, Q1 2023...
Speaker 22: the aforementioned adjustment in Q4, the increase in current tax over both Q1, 22 and Q4 is primarily attributable to the strengthening of the euro relative to the Canadian dollar as virtually all of Granite's current income tax is generated from its European region.
Speaker 23: For 2023, on a run rate basis and factoring an announced, stronger year-old, we estimate current tax that approximately 2.2 million per quarter before recognizing any reversals of tax provisions.
Speaker 24: Interest expense was higher in Q1 2023 relative to Q4 by 1.1 million. This reflects interest on Granite's secured construction loan and foreign exchange. In the second quarter of Q23, Granite intends to repay in full the secured construction loan withdraws from the credit facility lowering the borrowing rate.
Speaker 25: On a run rate basis, we estimate interest expense will run approximately $18.5 million per quarter before factoring any new debt or additional credit facility draws other than that draw for the repayment of the construction loan.
Speaker 26: When Granite refinances its upcoming $400 million debenture, maturing November this year, we expect our interest expense run rate will increase to approximately $22 million per quarter. All of Granite's debt is fixed rate debts for 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.
Speaker 27: Currently, granted weighted average cost of debt, SESA 2.29%.
Speaker 28: Looking out to 2023 estimates, granted the guidance provided on the March 8th call remains unchanged, which estimates FFO per unit within a range of 490 to 505 per unit, or approximately 11 to 14% increase over 22. For AFFO per unit, the forecasted range remains 430 to 445.
Speaker 29: of the range we are assuming for an exchange rate of the Canadian dollar to Euro 1.48 and Canadian dollar to USD of 137. On the low end of the range we are assuming exchange rates of the Canadian dollar to Euro and Canadian dollar to USD of 1.42 and 1.32 respectively.
Speaker 30: As well, at this time, there are no significant changes to our operational forecasts that would drive changes to our estimates.
Speaker 31: Granted, we'll provide updates to guidance each quarter as warranted based on leasing activities executed to date, as well as any changes to foreign exchange rate assumptions. The trust's balance sheet comprising of total assets of $9.3 billion at the end of the quarter was negatively impacted by $73 million in fair value losses on granted investment property portfolio and the
Speaker 32: attributable to the expansion in discount and terminal capitalization rates across all of Granith markets in response to rising interest rates.
Partially offset by fair market rent increases across the GTA and selective US and European markets, the renewals of three special purpose properties in Austria and Germany, and the stabilization of three properties under development in Houston, Texas.
which were completed and transferred to income producing properties during the first quarter. The Trust's overall weighted average cap rate of 5.01% increased 14 basis points from the end of Q4 and has increased 71 basis points since the
Total net leverage at March 31st was 32% and net debt to EBITDA was 7.8 times, which is slightly inflated due to granted partially funding and significant development program with debt.
Granted, expect its debt to EBITDA to decrease to the low seven times by the end of the year and to improve thereafter to 2024, as EBITDA from completed developments come online throughout this year.
The trust current liquidity is approximately 1.1 billion, representing cash on hand of about 110 million, and the Andron operating line of 990 million.
As of today, granted has 5 million drawn on the credit facility and there are 4.2 million letters of credit outstanding.
We continue to monitor the market conditions in the coming months to look to refinance our 2023 debentures which come due in November . I'll now turn the call over to Kevin. Thanks. Thanks, Theresa. Good morning, everybody.
I will be brief. As usual, we spoke roughly 60 days ago and we provided an outlook for 2023 at that time. I would echo Theresa's comments that are results exceeded expectations due primarily to the pace of development stabilizations in the quarter and the continued strengthening and income from our European portfolio.
I will begin my prepared comments on our development program where we have been focusing our capital deployment now for the past few quarters. As you can see from our press release in MDNA, we achieved substantial completion on our 690,000 square foot design bill distribution center in Houston for recomb, which user Chewy, for a term of just under 11 years as commencing February 1st.
We also achieved substantial completion of the two buildings totaling 669,000 square feet, which comprise phase one of the site. And we have executed two leases totaling 521,000 square feet to third par a logistic providers for five and seven year terms.
In addition, we achieved substantial completion in January of our 329,000 square foot expansion of our existing property in Whites Town, a suburb of Indianapolis, and the lease has been extended for 10 years in the entire building.
Further, we achieved substantial completion of our development project in Lebanon, a suburb of Nashville, Tennessee comprising roughly 500,000 feet over three buildings on April 6.
And finally, we completed the development of our 221,000 square foot property in Bollingbrook, a suburb of Chicago on April 12th, and the building is fully lease for a 12-year term.
Collectively, these projects and stabilizations are respected to contribute strongly to N.O.I. and cash flow growth in future quarters.
and all are expected to achieve green building certification in accordance with our published green bond framework.
To date, approximately 1.8 of the 3.4 million square feet of development space delivered year-to-date has been leased, leaving just under 1.6 million square feet remaining to be leased.
Looking at our current construction pipeline, our development project in Branford and Ajax, totaling roughly 450,000 feet, continues to progress well, with completion scheduled for the first quarter of 2024.
The first phase of the Brandford site comprising a single 410,000 square foot building has been fully leased for a 20-year term and will generate a none-leverd development yield over approximately 6.8%. The 50,000 square foot expansion of our backass at an Ajax is being constructed on a speculative basis.
and is expected to generate an unlevered development yield of roughly seven and a half percent. As mentioned previously, we are in the approval process for the next phase of our branch for development, a single seven hundred and thirty thousand square foot building with potential commencement in
Operationally to date, we have renewed roughly 8.1 million or 85% of the 9.6 million square feet of lease maturities in 2023, and an average increase of roughly 20%.
and we anticipate achieving an average increase of 28% on the remaining maturities, an increase of roughly 4% in our estimate from the previous quarter.
As mentioned on our last call for 2024, we have renewed roughly 55% of the 9.6 million square feet of maturities and an average increase of 9.4% primarily due to the 10-year garage renewal announced earlier in this quarter.
At this point we continue to expect to achieve an average increase of 20 to 22 percent on the outstanding maturities in 2024. And I think it is worth repeating that our renewals in the corridor at Graz and Oberthausen in Germany totaling almost 5.5 million square feet in total.
either renewal. As Theresa mentioned, same-propeon-NY increased by 5.4% in the quarter on a constant currency basis within expectations. Same-propeon-NY was positive across all geographies on a constant currency basis led by our portfolios in the GTA and the Netherlands at 8.3 and 6.3% respectively.
followed closely by the US at 6.1 and Germany at 5%, driven partially by strong CPI increases in Q1 and a number of our properties in the GTA, Germany and the Netherlands.
We expect same property and analyte growth to improve over the coming quarters and at this time we are reiterating our range of guidance for 2023 same property analyte growth at 6.5 to 7.5%. As you can see from our disclosure, we adjusted cap rates and discount rates further in the quarter. The resulting 160 million in fair value losses associated with TCE.
value from the long-term renewal of our properties in Graz, Austria and Oberthausen, Germany. As for a general market update, I would characterize leasing activity in the first quarter as lower than in the past two years but in line to slightly above the 10-year average across our markets. Fundamentals remain strong with sentiment appearing somewhat more cautious among tenants in the face of greater economic uncertainty.
That absorption across our markets ranged from a low of negative 300,000 square feet, ironically in the GTA, to a high of almost 9 million square feet in Dowels.
Availability rose in most of our markets in North America, but not all, as new supply of paste demand in the first quarter.
We expect this trend to continue for the next two to three quarters as a backlog of current projects are delivered to the market.
However, we project that availability will begin to fall sometime in early 2024 as the pace of new starts has already began to decelerate acutely from past quarters.
In most of our markets, we are witnessing a drop of 50 to 75% in starts from the first quarter of 2022. As for rents, data suggests that market rents increased roughly 3% on average in the fourth quarter across our markets.
with Dowels in Atlanta leading the way at 8% and 7% respectively.
I would add that most of the net absorption has occurred in the newer product segment, so there is an obvious flight to quality steam underway.
So although demand is expected to moderate off exceptional highs of 2021,
and even 2022, the spread to market on our in place friends continue to widen in the first quarter.
and the abrupt cessation in new supplies should support continued rent growth over the near to medium term. With respect to investment market conditions, I won't go into much detail. It won't surprise anyone that volume slowed drastically in the second half of 2022.
And today, volumes appear to remain roughly 50% below the first quarter of 2022.
The bid-ass spread continues to exist that is narrowing as vendors slowly adjust to the current cost of market capital. That being said, industrial continues to be one of the preferred sector destinations for investor capital and flows appear to be improving. With active buyers, including private investors concentrated on smaller trade.
well positioned to execute on our plan for 2023 and once again deliver strong results for unit holders.
Thank you, sir. If you would like to register a question, please press the 1 followed by the 4 on your telephone. 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. Once again, it's 1-4 if you would like to register for a question.
Our first question comes from Mike Marquides with BMO Capital Markets. You may proceed with your question.
Thank you, operator. More in Kevin and Theresa. Kevin, just thanks for your comments on what you expect to see in terms of.
supply of facing demand over the next couple of quarters. I'm interested to just get your take on your portfolio the current occupancy level and I realized this quarter was the slippage was a function of the forward development that you are the forward purchase that you executed on.
But how do you see your portfolio performing from an occupancy perspective over the next two to 12 to 18 months versus where you expect the market to go?
Well, I mean, barring any unforeseen circumstances, I think we're expecting all of our turnovers this year to be leased or at least committed to be leased by the end of this year. So we should finish the year.
Close to 99%. I think that's our expectation. In 2024 I'd have to think that through a little bit, but again I don't think we're expecting occupancy to move that much off of the sort of 98 to 99% range.
Okay great and then are you just on that ending the year at close to 99% are there any significant non-renewals that you're aware of or just stuff that hasn't been locked down in the normal course yet getting some some cautious optimism on transitional downtime?
Yeah, I think that that's fair. I don't think that there's anything I think out there that we think we'll be surprised that there's one 300,000 feet in Memphis at the end of September that we're in discussions with a tenant. That's still kind of up in the air. But I think the discussions have been pretty constructive. So at this point, we think that it will be a renewal.
but that could be an additional 300,000 feet on top of the expected 1 million feet that we're working through right now. And I would say, I think on those particular spaces, the activity's been very good. And in some cases, we're dealing with adjacent tenants to take that space as well. So I think that that's going, I would characterize that as going well overall.
Okay and last one for me just before I turn it back maybe if you could just provide some incremental activity on the color that you're seeing on the asset you just bought and then on the development that you just delivered that's still looking for times. Thank you.
Yeah, that's the main one I think that we're focused on in Indianapolis. So those are the two buildings that were just delivered in Avon which is very close to our all points asset. And I think we've seen, I think I mentioned on the last call, we've seen good activity. But I think for us, we're focusing on a certain size of tenant and we're focused on what we have in getting these Sailor
There's been quite a bit of activity in that market.
Okay, that's great. Thanks. I'll turn it back. Our next question comes from Himanshu Gupta with Scotiabank. You may proceed with your question.
Thank you and good morning. Kevin just to follow up on your last comment on Indianapolis laser property and you mentioned you have seen good activity so would you say the tenant activity is comparable to the last two years or is it more comparable to
2019 and early of years. Well, I would compare it, I mean, I think it's a bit unfair to compare it to 2021 and part of 2022 because those really were exceptional years. I would characterize the market as being strong to, I would characterize the market as being strong. So I'm not sure.
2019 was a while back, but it does feel like tenants, there's a lot of tenants floating around, but clearly tenants are taking more time to decide on the space, but I would say it seems like they're delaying their decisions and not so much not needing the space. I just think that they're taking more time to do it.
If you were to push me on it, are we closer to 2019 or closer to 2021? We're somewhere in between both of those in terms of level of activity. Got it. And then in terms of, you know, tenants, they lay their decisions. So do you think the delay is more on larger spaces or is it more on the smaller spaces? I mean which one is, you know... I would say... Yes.
Yeah, in terms of the delay, I'm not sure there would be that much of a difference, but I would say we're seeing more activity in the three to five hundred thousand foot range than we are in the six to eight hundred million foot range. So there's a lot more activity in that sort of three to seven than there is above the seven right now.
And I think 2022 characterized was really a lot of the 700,000 to a million. There was an abnormal amount of activity in that range. Now it seems to be more reverting to the norm of that sort of 3 to 5, 3 to 700,000 foot.
Thank you. Thank you. Thank you. And then in terms of capital allocation, you know, acquisitions versus development, has carefully expanded enough in the US for you to come back to acquisitions rather than, you
to grow the development pipeline at this point of time? I think it's a great question. I think the short answer is
I don't think that there are too many compelling opportunities for us from a I think from a cap rate basis. One of the things we've discussed internally and I think I mentioned on the last call is
You know, we have a development pipeline we want to keep active and we're looking at select development opportunities. And although we have seen land costs come off in most markets, including the GTA to an extent, I don't think that we believe that they have moved enough to make the performance performance.
work financially for us to an appropriate level. So I think that there's, from our perspective, before we were to move, and this is assuming we have liquidity to do it, and that's, again, that's a question mark, but if we did, I think we would expect to see a little more movement.
before those opportunities become more compelling for us. Correct. Fair enough. Last question in terms of fair value adjustments. I mean, if I look at your Canada portfolio, I think it has hardly seen any negative adjustment. I mean, in fact positive last year.
and largely flat in Q1 as well. So do you think market trend growth in GDA has more than offset any impact of high interest expenses? Yes. I think so. I was just looking back actually if you look at Q1 of 2022 and where we are today.
TCRs and DRs moving substantially to being offset by rent growth. In Europe , I think another part of the story is there's rent growth.
to be taken into account on our modern distribution assets, but for the legacy assets that we have, the Magna assets, we haven't seen that much movement in terms of cap rate and discount rate on those assets. So there hasn't been as much movement per se in the cap rates.
in the resulting cap rates in Europe as we've seen in the US.
All right, thank you, Kevin, and I'll turn it back. Our next question comes from Sam Damiani with TD Securities. You may proceed with your question.
Thanks, and good morning, everyone. Just on the on the Europe portfolio, setting aside the Magna property, the special purpose property specifically, what sort of same property growth are you getting out of the, you know, the newer assets you've acquired.
there in recent years. I think we've seen kind of in the low teens and that takes into account too that there are leases where the increases are fixed and if I can Sam I just want to address this because I've seen a couple of comments
last night on our results pointing to, at least in the US, on renewal where the renewal rent was the same as the expiry rent. And just to point out to everybody, to clarify this point,
These types of leases are common in all portfolios and not just ours. And when we talk about our mark to market or our expected increases on renewal for 2023 or in any given year, we take it into account. And I say that because I understand that there might be other reads that when they take it
disclose a mark to market or an increase in rent. Sometimes they exclude assets where the renewal rent is the same as the expiring rent. And in this case it wasn't a renewal. It was a tenant waiving their termination notice. So they had a termination right which was waived.
So there was no rent adjustment so technically I wouldn't call it a renewal but we put it in there I think to be conservative. So just to say when we provide so for example 20% increase in 2024 that would include any renewals in North America or Europe where the rent was fixed or flat.
Has that termination rate waiver played out the way you expected when you bought the asset?
Well, yes, because the rents on that asset, that's in Cincinnati, it's 678,000 square feet or thereabouts, and that's a 294 rent.
So yes, they are I think they're in there for three years and There's the end there was no adjustment this year But our thesis for that is if that was roughly I think a five and a half cap on 294 rents and I think we were roughly in the mid 50s per square foot So the cost basis for that asset in that location was very attractive
So it is playing out. Would we have hoped they didn't? Yes, but we weren't, we didn't go in expecting that this tenant was, and it's a good covenant tenant, that this tenant was not going to waive their, waive their termination right. We were hopeful but we weren't
Got it. Last one for me is just on you know on the development side which it sounds like still is the priority for in terms of capital allocation. What is the expectation for building up the land portfolio over in the near term to facilitate a continued active development pipeline over the next few years?
Well if I look at just what we have and what we've been talking about, I mentioned that we could move ahead with 730,000 feet in Brantford. We could potentially add another building there so that would be in the sort of 900,000 foot range in Brantford.
If we decide that it makes sense to move forward with the next phase of Houston, that could be roughly a million. So that could be 2 million in 2024, depending on market conditions at the time, obviously. Then on top of that, we would have to add more land. And as I mentioned before...
It's something we're looking at on a selective basis. I think it fits in with our long-term strategy. But we're not seeing any forced selling. We're not seeing any real distress in our sector. And that may not be a surprise to anybody. But at the same time, I think...
For us to move forward, we want to see a little bit more of an adjustment in development performance before we buy additional land or move into sort of development play. So for now, we think we could build $2 million next year. I'm not sure about building more that will depend on 2021oss Wheeler
any new development opportunities we
new development opportunities we feel make sense for us. Okay, that's great. Thank you and I'll turn it back.
Our next question comes from Kyle Stanley with Desjardins Capital Markets. You may proceed with your question.
Thanks, morning everyone. I just kind of sticking with that same line of questioning and you did kind of answer it there, but I'll ask it anyway. Would you say your view of progressing with a new spec development versus looking for a tenant to pre-lease has changed? And my question just comes from your, I guess, your commentary on tenants maybe being a bit more cautious in this environment.
It may, depending on the market and the flexibility you have in the land. For example, we have 13 acres in Columbus. That to us doesn't make sense to build on spec. I think that that truly is a design build. On Brantford, depending on the size of the building, we have the ability to build. It may make sense to do design build.
So, for example, that site would have a combination of design-build opportunities, inspect development, I think that that would fit. So for a 730,000 square foot building, we wouldn't wait for a design-build opportunity either. I think we would move forward. And that's measuring just the availabilities in the market at that size and where we think the market is going. So, for example, this one would have a box number, the style type and the overall quality Mengillary over possible and for the limit basically Jensen County Sponge Hill on the
So it depends. Houston is a bigger question for us.
Obviously, now that is still continues to be a strong market. I think it's in this sort of low to 4% availability range. So we're trying to decide if we move forward with the next phase. The first two phases went very well obviously and part of that was the design build. $690,000 was a design build.
I'm not really answering your question because I think it's on a case-by-case basis and on a site-by-site basis.
Yes, no, I think that makes a lot of sense. You commented on, I guess, the strong kind of fundamentals you're seeing in Texas. And then, you know, I'm just curious, you know, what do you think is really contributing to maybe the improved performance we're seeing in those southern markets? You know, what type of tenant is maybe driving that incremental?
But also you're seeing, we talked about before, a shift in the supply chain away from the West Coast to the East Coast and markets right through Texas and the Port of Houston, et cetera. But the thing I would say is
The investment by the US government in onshoring certain industries back into the US is a real thing and we're seeing it. So 3PLs continue to be the largest single occupier in the market right now looking for space.
but manufacturing is playing a part as well. And so that's taking up space and that's not the type of tenant per se that we're targeting but it certainly is is fulfilling a part of the demand in those markets particularly in Texas and some of the other markets that we're in.
Okay, great. And just one last one. So you saw the small disposition this quarter with another asset held for sale. Do you have a disposition target that you might be looking at which would help you achieve your goal of reducing leverage or is that mostly just going to be achieved with development deliveries? I think mostly development deliveries. We didn't really have. We have one building in to earn. We put upbeing Baird Lateef where, where Clint1969 because it's about 200 or more needed. Show me the top 10 for tapefreaks
back. Thanks for the call. Our next question comes from Matt Kornack with National Bank of Canada. You may
Hey guys, Kevin, I don't know if you can provide these details or if you have them at your fingertips, but you mentioned the 20% spread was inclusive of some of the renewals or rights that were waived that are at no spread. But we really want to hear from the policymakers. In terms of issues, there is one group off the table that is current to be at the maximum, onemunity.com and they're just about 100%, Atlas, and multiple other relationships that have paid our bills. But yes, we would like to hear your transmission at some level.
what would be kind of the number on kind of market renewals? And then maybe as a tangent to that, when you approach leasing, it sounds like you're particular in terms of the tenants that you go after, but do you also leave a bit of meat on the bone with regards to the mark-to-market that you're achieving in those negotiations?
Yeah, we do leave meat in the bone. I think we're talking about the same thing. For sure, and just to get back to the Indianapolis one too, I think we can afford, we walked into this knowing we can afford to be patient. This is a location that we think should command a higher rent.
We've seen some deals get done not exactly in the size range we're looking for but east of the market that we're in for example at lower rents. We feel this should command higher rents and we think the best thing to do is be patient and wait for the right tenant in the right opportunity. And so I think what we projected to the market is
on the conservative side of what we can achieve and I think we're talking about the same thing in terms of the mark to market there is some subjectivity through this whole exercise and we talked about it internally and I think the best thing to do is to be conservative on it so for example getting back to the Cincinnati
in a 450 to 480 market. So the mark to market on that asset is truly 50%. But we haven't in our projections what we're telling you is zero because we can't get at that rent at least for three years.
And probably longer, I don't know what the renewal is after three years. But just to say if we can't get at that rent, we don't show that as a mark to market of 50 percent. Now, you know what, get really being very, you know what, tough culture will get or,
So I hope that answers your question, but let me know if you... Yeah, I guess it's maybe even for the remaining leases that would be coming due for the remainder of the year because obviously that's zero on a pretty sizable amount of square footage. If you're going to get to 20, presumably the mark-to-market spread on the remainder is 30 plus, if not higher.
colour you can provide with regards to the straight line rent side of things. Understandably, you're delivering some development assets. There may be some free rent periods in the earlier phases of those. But how should we think about straight line rent and where it trends over the balance of the year?
Yeah, so I was looking at that and you're right, like this quarter was like about 4.6 million and yeah, a bit of that is the development and free rent associated. So I think for this year, Matt, I would take that number and that'll be pretty consistent for the next three quarters.
in that four and a half million range for the rest of the year. Okay, and then next year, I guess as those convert to cash rents or I guess in GRAS would be an issue maybe on the straight line rent front as well at some point, but... Actually GRAS, no, because on a CPI lease we don't do straight line rent. It'll adjust.
So there won't be an effect, but we should see more normalized, which is more in that two million range-ish per quarter. But yeah, it's a little bit elevated because of the new developments. And then one more just in terms of the development.
It's going to be a pretty small amount. I'm going to say like 20%. Is that fair?
Maybe. Yeah, maybe. I think 20% maybe is a good number. Yeah. For this year. 20% this, okay, so there's a significant upside then to next year as well on the development side. Yes. Okay, fair enough. Thanks, guys.
Thank you and good morning everyone.
distressed asset sales in any of your markets going forward.
Well, I think we were expecting it already and maybe we shouldn't be surprised and we're not seeing as much in our sector, but the short answer is I think we've seen very little. Do I expect that we will see some distress opportunities? roof?
And I think in a lot of cases buyers are jumping the gun a little bit on this.
But all to say we think that there will be more distress just generally in the market which should open up opportunities for us But there's a lot of capital chasing it. That is part of the reason why I talk about select development opportunities because that's where I feel our program those would fit our program
and probably not have as much immediate competition from large private equity funds who have capital deployment requirements. Great. And that's a great segue into my next question because when you are looking at
A terminal cap rate and discount rates, are you expecting further adjustments through the year ahead given the volume of capital that's chasing these assets as well?
Yeah, I think we've been, we've remained very data dependent from quarter to quarter so I would say it's possible but I definitely think we're near the end of it and that's assuming that you know the Fed is close to being finished, the bank account is close to being finished, etc. The macroeconomic sort of
But that being said, assuming that's the case, we think that if we're not done, we're very close to the end. Okay, great. And just last question from me. On your comments of on-shoring by the US government, apart from the 3PLs, are you seeing any renewed tenant demand from any other tenants in the market?
that you possibly weren't sort of witnessing a year ago? Well, I think it falls more into the manufacturing side. I think that anything related to EV, anything vehicle production in general and EV and solar panels, those tenants are very active. We've seen them across our sites.
retailers and 3PLs and right now it's been the 3PLs in the wholesale distribution that have been most active in the markets and a third behind that would be manufacturing. Okay great thank you for the color Kevin I'll turn it back to the operator. Our next question comes from Pat.
the timing of when you're actually hoping to have that or aiming to have that leased up as opposed to hope.
Yeah, well I was going to interject when Theresa said 20%. I was going to say what we're forecasting in the market, what our expectations are internally are far two different things. Let's be clear about that. But I think what we're seeing, mentioned before, we're seeing a lot of activity in that sort of three to five.
So when you think about it, anything over three is too large for our 300,000-foot building. And anything close to five could be a fit for the larger building but with conditions.
so that's where we've seen the most activity in the market and so for us I think we just need to be selective. So in terms of timing it's our expectation that those buildings are fully leased by the end of the year. Now are we counting on cash flow? We may not but our expectation is you know for the end of the year those buildings are fully leased. That is our
Okay, thanks. Yeah, that was sort of the next part of that question as far as cash flow producing. And maybe just coming back to your comments on EV manufacturing, you know, just on that Volkswagen EV battery plant, I guess that's coming in, say, Thomas, still a few years away.
But are you seeing any pick up in interest at all and the Brantford site? Yeah, I realize it's don't call it an hour's drive But I'm just curious if that You know has seen some pickup in activity at all.
Well that was in the mix. Certainly it was a site that was considered, it was a market that was considered, and so I would say pick up from that particular deal, no. But I think that there's a lot of interesting industries that are circling out right now and Brantford is near the top of the list for what a lot of...
these sectors are looking for. Thanks very much. I'll turn it back. Our next question comes from Brad Sturgess with Raymond James. You may proceed with your question.
sectors are looking for. Thanks very much. I'll turn it back. Our next question comes from Brad Sturgess with Raymond James. You may proceed with your question. Hi there.
Just to touch on your comment on the flight to quality that you're seeing, I guess, within leasing and at risk of, I guess, this be more of a market specific answer. But I guess if you were to generalize, is there kind of a sweet spot in terms of the...
I guess the property kind of amenities or characteristics that you know you would point towards in terms of where you're seeing kind of the most demand or flexibility in terms of diverse groups of types of users that you're seeing or would feel I guess would be more the...
the type of asset to kind of show where the, I guess the demand is trending towards right now. It's been really hard to see a clear pattern I think emerge, Brad. I think, like you always go into these things trying to be everything to everyone. You're trying to build the best building and appeal to the largest group of users.
in our markets.
I wouldn't say it's...
location, agnostic. That's not true. I think location has continued to matter. But a lot of these tenants, just when you think that 700,000 feet is a sweet spot, then it's five. When you think it's five, then it's seven. There has been no pattern that's really immersed to show us that there is a particular size.
characteristic of building other than clear height, you know, all those functionality sort of characteristics that are important to us, access to highways, access to infrastructure, all these things remain important but there's been no clear pattern emerged yet in this market as to the right size or particular characteristic that matters
Okay that makes sense. Just I guess and going back to your comment you were expecting maybe to see a little bit of stress and how it happened you know in terms of who is actually executing on the vendor side from a asset sale point of view is there a particular group that's emerged that has been a little bit more active in terms of you know is it private REITs that you're seeing selling the liquidity
diversifying a little bit. That's one thing that I would put out there. Certainly, portfolio sales have been challenged. So we're seeing smaller portfolios and single assets on the market. From a buyer side, it depends on the market, but there's no other market like Toronto in terms of individual or private buyers.
just by the nature of this market. So there's been a lot of activity among private buyers here whose cost of capital is known only to them and probably don't require debt to close these transactions. So we've seen that sort
Whereas in the US we've seen some private family buying in some of our markets in the southwest.
And in Europe , it's predominantly been the private equity funds that have been active and have been actively allocating capital in those markets. And probably a little bit more, I think. I'm not sure I would use the word distressed.
But we have seen you know that the private equity funds have a life as well And they've been probably the most active sellers a product and portfolio at least in our sector in the market Okay, that's helpful. I'll turn it back. Thanks a lot And we do have a follow-up
would you be willing to do a development at the similar yields?
relative to what you have on active today or is it that your yield threshold has gone up?
No, I think our yield threshold has gone up. But remember, I mean when we're talking about yields in Brantford of 6.8, I'm not sure we'd be very okay with that today. But just based on the land value and our cost to develop, that yields okay.
In the US, I mean obviously we've seen terminal cap rates move, so our yield expectations have moved in those markets. Fortunately for us in our developments that have been delivered, we have seen an increase in yield. So we've been able to maintain the profitability of those sites. We're assuming so for Indianapolis, obviously, if we achieve the rents that we expect to achieve. We're achieving yields that are much higher than our pro forma.
but we're obviously employing a stabilized cap rate that's higher in our proforma as well. So when I say...
employing a stabilized cap rate that's higher in our proforma as well. So
something that's got to give on the land side in a lot of these markets, we're seeing development opportunities where they need to underwrite. And this is also based on the cost of construction, which has been sticky. We do expect it to moderate, but so far it has continued to be very high. We've seen economic rents on those or what are being performed on those to be, you know, 15 to 20% above what we think market rents are. So until such time that the market rent expectations come down or the land prices adjust to a point where it makes economic.
sense for us, I don't think we feel any urgency to step into any of those opportunities. And I guess part of it is you're hearing it in my voice. We don't, we're waiting for the right opportunity and I think we're positioned for it, which is important, but we don't have any urgency to do it.
So we could end up if we don't find the right opportunity this year. That's fine. We have a lot on our plate obviously That keeps us busy. So we don't feel any need to to do a deal for the sake of doing a deal but we do believe that Something has to give and a lot of these smaller developers will need to recapitalize We'll face a wall need to recapitalize and I think that's when we'll probably find some compelling opportunities
Yeah, got it. We seem to be in this very, very slow moving period of adjustment here. Just to finish off on that topic, Kevin, if you were to start something in the US, let's say Houston, what would you need to see for a stabilized yield all else equal today?
Well, we achieved the yield, I think, of the high sixes than what we did. I think we would have to achieve similar yields, if not higher, on future development.
Got it. That's it for me. Thanks so much. We have no further phone questions at this time. I will now turn the call back over to you. Please continue with your presentation or your closing remarks.
Okay, thank you, moderators. So, on behalf of management trustees at Granite-Reid, thank you for taking the time for our Q1 call and look forward to speaking with you again in August .
That does conclude the conference call for today. We thank you for your participation and we ask that you please disconnect your lines.