Granite Real Estate Inc.

Good morning and welcome to Granite Reef's fourth quarter and year-end results for 2021 conference call. As a reminder, today's call is being recorded Thursday, March 10, 2022. Speaking to you on the call this morning is Kevin Gorey, President and Chief Executive Officer, and Teresa Netto, Chief Financial Officer. I will now turn the call over to Teresa Netto to go over certain advisories, followed by an introduction from Kevin Gorey. Please go ahead.

Good morning. Before we begin today's call, I would like to remind you that the statements and information made in today's discussion may constitute forward-looking statements and forward-looking information, including but not limited to expectations regarding future earnings and capital expenditures, and that actual results could differ materially from any conclusion, forecast, or projection. These statements and information are based on certain material 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 grant material filed with the Canadian Securities Administrators and the U.S. Securities and Exchange Commission from time to time, including the risk factor section of its annual information form for 2021 filed on March 9, 2022. Readers are cautioned not to place undue reliance on any of these forward-looking statements and forward-looking information. The REIT reviews its key assumptions regularly and may change its outlook on a going-forward basis if necessary. 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 a standardized meaning under international financial reporting standards. Please refer to the audited combined financial results and management discussion and analysis for the year ended December 31st, 2021 for Granite Read and Granite Read Inc. and other materials filed with the Canadian Securities Administrators and US Securities and Exchange Commission from time to time for additional relevant information. Now I'll get started on our operational results and then followed by Kevin. Granite posted a strong fourth quarter driven by strong NOI growth but despite continuing foreign currency headwinds. FFO per unit in Q4 was $1.02 representing a 3 cent or 3% increase from Q3 and 2% relative to the same quarter last year. Strong NOI and same property NOI growth was partially muted by unfavorable foreign exchange translation losses as both the Euro and US dollar were weaker by 7% and 3% respectively, relative to the same quarter last year, resulting in a 4 cents decline in FFO per unit. This was partially offset by foreign exchange gains of 0.7 million realized on Granite's derivative hedges, which have now fully expired at the end of 2021. Granted, AFFO on a per-unit basis in Q4 was $0.90, which is $0.03 and $0.04 lower, respectively, relative to Q3 in the fourth quarter of 2020. AFFO-related capital expenditures, leasing costs, and tenant allowances incurred in the quarter were higher than past quarters, totaling $7 million, as maintenance projects delayed from the summer were finalized at the end of the year. Total AFFO-related capital expenditures for the year came in at $12.4 million. With respect to 2022 and an increased level of lease turnover for the year, we are estimating ASFO-related maintenance capital expenditures and leasing costs coming in slightly higher at approximately $15 million for the year. Same property NOI for Q4 was strong relative to the same quarter last year, increasing 4% on a constant currency basis, but effectively flat when foreign currency effects are included. Same property NOI growth was driven primarily by positive leasing spreads, contractual rent and CPI increases across all of Granite's regions, as well as the expiry of free rent periods that were realized in the prior years at Granite's Indianapolis asset and Tilburg Netherlands asset. G&A for the quarter was $12.4 million, which was $4.5 million higher than the same quarter last year, and $3.5 million higher than Q3. The main variance relative to Q3 are the recognition of $3.6 million in unit-based compensation expense as a result of fair value losses recognized on non-cash compensation liabilities due to a 17% increase in grants unit price during the quarter and also some higher salaries and benefits expense. $1.3 million of these fair value losses related to our DSUs directly impacts FFO and does not get added back. Given the pullback of Granite's unit price so far in 2022, we will expect to see a reversal of these losses and will likely recognize a gain in G&A related to these non-cash compensation liabilities. On a run rate basis, we expect G&A expenses to continue at approximately $8.5 to $9 million per quarter, or roughly 8% of revenues, excluding any amounts for fair value adjustments related to non-cash compensation liabilities. For income tax, Q4 current income tax was just 0.1 million when you exclude the 2.8 million of current taxes recognized in the quarter relating to the sale of an Austrian property. Similar to last year, Granite recognized the reversal of tax provisions totaling 1.8 million for the quarter, favorably impacting the quarter, as did the weaker euro. On a run rate basis, we estimate current tax at approximately 2.2 million per quarter. With respect to potential recognition of reversals of tax provisions for 2022, Granite has a further potential $2 million of tax liability reversals that may be recognized mostly in Q4 of this year. But as always, we can't make a call on the reversal at this time. Granite continues to leverage its net investment in Europe and access to lower-cost debt. The recent partial financing completed early February of its 2028 cross-currency interest rate swaps from U.S.-based payments to Euro-based interest payments will result in annual interest expense savings of $5.5 million, or $0.08 per unit annually. Therefore, on a run rate basis, interest expense will run approximately $10.7 million per quarter before factoring in any new debt. Looking out to 2022, given the numerous variables of same property NOI, foreign currency, and growth expectations, we would like to provide some initial 2022 estimates with respect to FFO per unit and AFFO per unit. For 2022, Granite is forecasting FFO per unit of approximately $4.39 or a 10% increase from 2021 and within a range of $4.31 to $4.43. For AFFO per unit, we are forecasting $4.04, an 8% increase from last year and within a range of $3.96 to $4.08. This forecast is based on the closing foreign currency rate of the Canadian dollar relative to the Euro and US dollar as at December 31st, 2021. The high end of our range provides for an approximate 1% increase in both the Euro and US dollar relative to the Canadian dollar. The low end of the range provides for a 3.5% decrease in the Euro, which is reflective of where it is today, and a 1% decline in the US dollar. Please note that we estimate that a one-cent movement in the U.S. dollar relative to the Canadian dollar impacts FFO and AFFO per unit by two cents, and a one-cent movement in the Euro relative to the Canadian dollar results in a one-cent impact to FFO and AFFO per unit. The REITs balance sheet is comprised of total assets of $8.6 billion at the end of the quarter and was positively impacted by $349 million in fair value gains on Granite's investment property portfolio. And that was offset partially by $45 million of translation losses on Granite's foreign-based investment properties, but particularly the 1.8% decrease in the euro exchange rate relative to Q3. The fair value gains on Granite's investment property portfolio are attributable to fair value gains across all of our regions, but particularly the trust assets in the GTA and the U.S. due to increases in fair market rent assumptions and declines in cap rates. The trust's overall weighted cap rate of 4.5% decreased a further 24 basis points from the end of Q3 and has declined a total of 108 basis points in 2021. Our net leverage at December 31st was 25%, and net debt to EBITDA remains healthy at 6.7 times. Our current liquidity is sitting at about $1.3 billion, and that represents cash of about $260 million, and our undrawn operating line of $998 million.

since placing our atm in place in november of 2021 granite has not sold any units through the atm to date i'll now turn over the call to kevin thanks teresa and thank you everyone for joining us on the q4 call as always i will keep my my comments brief and happy to take questions at the end i'll start by repeating two themes from my opening comments on our past few calls once again we posted an inline quarter And it is worth highlighting that FFO per unit for the quarter increased year over year, as Theresa mentioned, despite a corresponding negative move in FX of roughly $0.04 and a $0.02 impact on our GNA from the appreciation in our unit price in the quarter, which often gets overlooked. Also worth highlighting, I think, is another increase in the fair market value of our portfolio in the quarter, led primarily by fair market value increases in the U.S. and GTA due to further increases in market rental rates and declines in capitalization rates for modern logistics assets across our markets in those jurisdictions. We continue to execute well on our strategic plan in the fourth quarter, acquiring six core and value-add properties in our target markets in the U.S., the Netherlands, and the GTA in the quarter for approximately 330 million Canadians. We followed up 2021 with the acquisition of three properties in Germany for $140 million. And in all, we acquired 16 income-producing properties and three development sites for a total investment of $923 million in 2021. Further, we committed an additional $216 million on three new development projects in our existing markets of Indianapolis and Tilburg, Netherlands, expected to be completed sometime in the third quarter of 2022. We also dispose of a small non-core asset in Austria for 13 million at the end of November, and our sole asset in Poland for 36.2 million in February. And we expect the sale of our sole asset in the Czech Republic to close sometime in the second quarter. Our development program made significant strides in 2021. And our active pipeline comprises six sites and nine buildings currently under construction in the U.S., Germany, and the Netherlands, plus expansions in Mississauga and Indianapolis as disclosed, totaling roughly 5 million square feet and 450 million commitments. Construction of these properties is expected to be completed in the second quarter through the fourth quarter of this year. To date, two of the buildings are fully leased and activity is strong on the remaining buildings under construction. We have seen an increase in costs associated with most of our projects, but it has been absorbed mostly within established budget contingencies to date and offset by higher rent versus pro forma. And I would estimate further that project completion on average has been delayed by two to three months from initial schedule due to supply chain and COVID-related issues. As I have mentioned before, development is core to our growth strategy, and these projects are expected to improve the quality and functionality of our portfolio and drive significant growth in cash flow and net asset value upon stabilization. It is also worth repeating that all of the above-mentioned developments are expected to receive green building certification, and will satisfy the criteria outlined in our green bond framework. Staying on ESG for the year and as disclosed in our MD&A, we are proud to report that Granite achieved a global ESG benchmark or Grespi score of 65 out of 100 for 2021 versus the average for our peer group of 52, of which Granite was the only Canadian reporting entity. We also achieved the highest score in the category of public disclosure. We are currently developing our 2021 ESG report, which will outline the progress we made in 2021 against our objectives and set detailed and likely more ambitious targets and objectives for 2022 and beyond. The report is expected to be published early in the third quarter of this year. Operationally, as stated on our Q3 call, all 2.3 million square feet of our 2021 lease expiries were renewed or released And the team leased approximately 300,000 feet of vacancy in Atlanta and a recently acquired property in Utrecht, the Netherlands, in the fourth quarter. For 2022, we have now exercised renewals on 4 million over 5.9 million square feet of expiries and an average increase in rental rate of just over 10%. And we anticipate achieving an increase of between 15% to 20% on the remaining maturities for 2022. As Theresa mentioned earlier and as disclosed in our MD&A, same property NOI increased by 4% on a constant currency basis, driven by strongly releasing spreads, contractual rent increases and the expiry of rent-free periods on a few of our newer assets in the US and the Netherlands, offset partially by a contractual free rent period and short-term vacancy at two of our properties in Germany. We expect same property NOI to be similar to 2021 and average between 3.5% and 4.5% in 2022, as the impact of strong releasing spreads could be partially offset in the short term by vacancy from turnover at two properties in the U.S. At this time, we also expect same property NOI growth to accelerate in 2023, but we will have more information on 2023 in later quarters. We have all seen the devastation in the Ukraine, and I think, like all of you, we are hoping for a peaceful resolution to this conflict as soon as possible. Notwithstanding the resulting disruptions to supply chains in that region, all of our tenants in Europe continue to operate in their space, and we are not aware of major disruptions so far to their operations involving our properties. But we will, of course, continue to monitor the situation for any major developments. In closing, I think the quarter and the year were characterized by fair value gains, operational stability, progress on the ESG front, and significant investment in acquisitions and specifically development. We expect 2022 to be a busy and productive year for Granite, and we remain very well positioned to continue to execute on our strategic plan and deliver strong results for unit holders. I would like to take this opportunity to thank all of our employees for contributing to another strong year in 2021. On that note, I will open up the floor for any questions.