Granite Real Estate Inc.

Good morning and welcome to Granite Reap's third quarter results for 2022. As a reminder, this conference is being recorded Thursday, November 10th, 2022. Speaking to you on the call this morning is Kevin Gorey, President and Chief Executive Officer, and Teresa Netto, Chief Financial Officer. I would like to turn the call over to Teresa Netto to go over certain advisories followed by an introduction from Kevin Gorey.

Good morning, everyone. Before we begin today's call, I would like to remind you that statements and information made in today's discussion may constitute forward-looking statements and forward-looking information, including but not limited to expectations regarding future earnings and capital expenditures and that actual results could differ materially from any conclusion, forecast or 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 material filed with the Canadian Securities Administrators and the U.S. Securities and Exchange Commission from time to time, including the Risk Factors section of the Annual Information Form for 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 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, 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 Analysis for the three and nine months ended September 30, 2022 for Granite Real Estate Investment Trust and Granite REIT Inc. and other materials filed with the Canadian Securities Administrators and U.S. Securities and Exchange Commission from time to time for additional relevant information. I'm going to commence the call with financial highlights, and then I'll turn it over to Kevin, who will follow with operational update. Granted posted Q3 2022 results in line with expectations with strong NOI growth partly impacted by continuous weakness in the euro and higher interest costs from rising rates and borrowings. FFO per unit in Q3 was $1.08 representing a 1 cent or 0.9% decrease from Q2 and a 9.1% increase relative to the same quarter in the prior year. However, in the second quarter, Granite recognized 0.9 million in fair value gains relating to the revaluation of DSU liabilities. But given the amendments made to Granite's DSU plan in June, these fair value changes no longer impact FFO, contributing to a 1.4 cent unfavorable variance in the third quarter relative to Q2. Strong NOI from acquisitions and same property NOI growth was partially muted by both unfavorable and favorable foreign exchange movements. where the Euro was 3.2% weaker and the US dollar 2.3% stronger relative to the Canadian dollar in comparison to Q2. In comparison to the prior year, the Euro was 11% weaker, but the US dollar 4% stronger, resulting in a negative 2 cent impact FFO per unit. Also impacting the third quarter was the effect of higher interest cost borrowings from the credit facility and the new US $400 million term loan that closed in mid-September adding an additional estimated $2.2 million of interest expense, or $0.03 per unit relative to Q2. Granted, AFFO on a per-unit basis in Q3-22 was $0.97, which is $0.07 lower relative to Q2 and $0.04 higher relative to the same quarter last year, with variances mostly tied to capital expenditures. AFFO-related capital expenditures, leasing costs, and tenant allowances incurred in the quarter totaled $6.6 million, and for a year-to-date period, it is $11.2 million. For 2022, we estimate AFFO-related maintenance capital expenditures and leasing costs coming in about $17 million for the year, which is consistent with the estimate provided at the Q1 earnings call. Same property NOI for Q3 was solid relative to the same quarter last year, increasing 3.2% on a constant currency basis, but 1% when foreign currency effects are included. Same property NOI growth was driven primarily by higher than previous year CPI adjustments, positive leasing spreads, and contractual rent increases across all of Granite's regions, as well as the realization of a free rent period in the prior year at one of Granite's properties in Germany. offset partially by short-term vacancies at two U.S. properties. G&A for the quarter was $6.5 million, which was $2.4 million lower than the same quarter last year and $0.5 million higher than Q2. The main variance relative to the prior quarter and from Q2 is the change in non-cash compensation liabilities, which generated a favorable $4.1 million fair value swing relative to the same quarter last year and an unfavorable $0.5 million fair value swing relative to Q2, as we recognize fair value gains on these liabilities due to a 15% decrease in Granite's unit price during the quarter. On a run rate basis, we continue to expect G&A expenses to continue at approximately $9 million per quarter, or roughly 8% of revenues, excluding any amounts for fair value adjustments related to non-cash compensation liabilities. For income tax, Q3-22 current income tax was 1.9 million, which is 0.5 million lower than prior year and essentially flat to Q2. The variance relative to Q3-21 is primarily due to the effect of the strengthening of the Canadian dollar on Euro-denominated tax expense as compared to the prior year period and to a lesser extent due to the sale of an asset in Austria in 21 reducing taxable earnings. On a run rate basis, we estimate current tax at approximately 2 million per quarter and before recognizing any reversals of tax provisions. Having said that, for Q2 2022 specifically, we are expecting to recognize adjustments pertaining to past tax years in Europe that could result in net positive adjustment to current tax of approximately €500,000 or €700,000 Canadian. Interest expense was higher in Q3-22 relative to Q2 by $2 million, reflecting incremental interest expense on draws on granted credit facility and the interest on the new U.S. $400 million senior secured non-revolving term loan, which closed on September 15th and was used to repay the outstanding balance on the credit facility, which at that time was about U.S. $235 million. In conjunction with the drawdown of the 2025 term loan, Granite entered into a float-to-fix interest rate swap to fix the interest rate on the term loan to an all-in rate of 5.016%. On a run rate basis, we estimate interest expense will run about $16 million per quarter before factoring in any new debt or credit facility draws. All of Granite's debt is fixed rate debt through cross-currency and interest rate swap hedges, with the exception of the credit facility, which is at a variable rate and subject to increases in underlying treasury rates. As a result of the new term loan, Granite's weighted average cost of debt did increase 57 basis points to 2.26% from 1.69% last quarter. With respect to 2022 estimates, reflecting an overall weaker euro, offset by a stronger U.S. dollar, and rising interest rates due to expected strong operational performance, Granite continues to forecast that FFO and AFFO per unit will come in the ranges provided in March of this year, being 431 to 443 for FFO per unit and 396 to 408 for AFFO per unit. Further, on our singular estimates, we're increasing those slightly for FFO per unit, increasing two cents to approximately 437 and AFFO per unit increasing 3 cents to approximately $4.01. We have updated our assumptions regarding foreign exchange rates and are estimating for the fourth quarter of 2022 an ongoing weaker Euro offset by a stronger U.S. dollar relative to the Canadian dollar. Our Canadian dollar to Euro average rate remains unchanged from last quarter at 1.32%, and our Canadian dollar to U.S. dollar rate increases to 1.33 from 1.28 last quarter. The U.S. dollar foreign exchange rate forecasted is admittedly conservative relative to today's market, and should the U.S. dollar exchange rate remain at current levels, FFO and AFFO per unit could be positively impacted by a further 1 to 2 cents above our singular estimates. As communicated before, we continue to estimate that a one cent movement in the Canadian dollar relative to the U.S. dollar does impact FFO and AFFO per unit annually by two cents and one cent movements in the Canadian dollar relative to the Euro results in a one cent annual impact FFO and AFFO per unit. The trust balance sheet, comprising of total assets of $9.6 billion at the end of the quarter, was negatively impacted by $229 million in fair value losses on Granite's investment property portfolio in the third quarter, offset by $318 million of translation gains on Granite's foreign-based investment properties, particularly due to the 6.8% increase in the spot U.S. dollar exchange rate relative to Q2. The fair value losses on Granite's investment property portfolio were primarily attributable to the expansion in discount rates and in certain assets and expansion of terminal capitalization rates across all of Granite's markets in response to rising interest rates, partially offset by fair market rent increases across the GTA and U.S. and selective European markets reflecting current market fundamentals. The Trust's overall weighted average cap rate of 4.68% increased 18 basis points from the end of Q2, but still has decreased 12 basis points since the same quarter last year. Total net leverage at September 30th was 29%, and net debt to EBITDA remained steady at 7.7 times. The trust's current liquidity is approximately $1.2 billion, represented by cash on hand of about $195 million, and the undrawn operating line of $997 million. As of today, Granite has no amounts drawn under the credit facility, and there is $2.6 million in letters of credit outstanding. With the closing of the US $400 million term loan and repayment of outstanding amounts on the credit facility, Granite realized excess net proceeds of approximately $225 million, which provides pre-funding for Granite's ongoing development program. Based on the remaining development commitments, forecasted dispositions, and NCIB activity for the remainder of the year, Granite estimates that it will end the year with about $90 million of cash on hand and no draws on the credit facility for total liquidity of approximately $1.1 billion. Granite continues to monitor market conditions in the coming months to look to refinance its 2023 debentures, which come due in November of 2023. Lastly, in other financing activities on a year-to-date basis, Granite has repurchased 2.165 million stapled units under its NCIB at an average rate of $71.81 for a total of $155.5 million, excluding commissions. I'll turn over the call now to Kevin, who will go over operational matters.

Thanks, Teresa. That's an excellent job. Welcome, everyone, to our Q3 poll. As usual, I'm joined or Teresa and I are joined by Maureen Coomer and Mike Remperis. I'll be brief as usual. And despite a lack of investment activity per se, I think there's quite a bit to unpack in this quarter. Building on Teresa's comments, I would begin by saying I would characterize our results for the quarter as being in line with our expectations, although somewhat at the low end of the range in some areas. Leasing momentum, though, stayed very strong. Our IFRS NAV held up as further upward adjustments to terminal cap rates and discount rates were offset by translation gains, primarily in our U.S. assets. We turned out $400 million U.S. of debt, as Teresa mentioned, to improve liquidity. We remain active on our NCIB program, and our development program continues to progress nicely. To begin with investments, as that will take the least amount of time, We have only one new acquisition to announce, which would be approximately 10 acres of land located in close proximity to our 92-acre Brantford development project. The site is expected to accommodate approximately 170,000 square feet of space and generate an unlevered development yield of 7.5%. Construction is expected to commence in 2023 with completion sometime in 2024. As for dispositions, you can see from the MD&A that we have removed the U.S. asset from assets held for sale in this quarter as the recent term loan was upsized from initial expectations and provided us with sufficient liquidity without having to execute on a sale, but clarity on pricing may have been difficult. With respect to our development program, As you can see, we successfully executed 10-year leases on over 1 million square feet in Nashville and in Altbach, Germany. As a result, these projects will deliver unlevered development yields of 6.2 percent and 7.5 percent, respectively. Overall, 4 million square feet, or 64 percent of the 6.2 million square feet currently under development or recently completed, have been released. As I stated on the second quarter call, delays in certain supplies, particularly for roofing materials, HVAC, and electrical equipment, has delayed our construction schedules, which has impacted leasing velocity. Notably, all of our leasing activity to date has been on projects that were closed to or have been completed. Leasing activity remains quite strong across our remaining development availabilities, and we look forward to sharing further updates with you on our next call. All in all, our development yield projections have improved from underwriting and our profit margins remain intact, which suggests that our development program should continue to contribute strongly to NAV growth in the fourth quarter and throughout 2023. As an update on our ESG program, as mentioned on our last call, our 2021 ESG report was published in August and is available on our website. We obtained green building certifications for our expansion in the GTA and on two of our recently completed developments in Dallas and Alpac. We further obtained BREEAM building certification in-use certification on three of our properties in the U.S. with a fourth pending. To date, we have now obtained green building certification on 18 properties totaling over 10 million square feet. with that number expected to increase significantly over the next few years as we achieve certification on our new development in accordance with our green bond framework. Grespi published their latest assessment in October, and we are very pleased to report that Granite ranks third out of 10 for public disclosure and our grade improved from B to A. And further, we rank second out of nine overall among North American listed industrial companies. quite an achievement for the team. Operationally, there remains 340,000 square feet of expiries remaining in 2022, and we have agreed to terms on an increase in rental rate of roughly 60 percent on two of those expiries, and the third is related to the asset held for sale. As for our 2023 expiries, we have now renewed or extended 4 million of the 9.4 million square feet at an average increase of 13 percent, which was muted by a large property in Germany and the U.S. where the renewal rent matched expiring as described under the existing lease agreements. We have also reached terms on a further 2.6 million square feet of expiries at an average increase of 34 percent. Hence, to date, we have renewed or reached terms on roughly 66 percent of our expiries for 2023 and we anticipate an overall retention rate of 87 to 90 percent for next year. From a mark-to-market perspective, we estimate that the spread in market rent over in place now sits at roughly 70 percent for Canada, effectively the GTA, 19 percent for the U.S., and 8 percent for Europe. We plan to include this analysis in our MD&A commencing in the fourth quarter. As Theresa mentioned, same property in Hawaii increased by 3.2% on a constant currency basis, somewhat at the low end of our expectations for the quarter, as the impact of strong releasing spreads was muted by turnover vacancy at two of our US properties. However, both have since been released for October 1st, and an average increase in rent of 69%. At this time, we are reiterating our same property in Hawaii guidance for 2022, between 3.5 to 4.5 percent, and now expect to end the year at the higher end of that range. We are setting guidance for 2023 same-property NOI at 6 to 7 percent. Turning to our investment properties, we recorded further adjustments, as mentioned, to our discount rates and terminal cap rates from the second quarter, resulting in a roughly 230 million net fair value loss in the quarter, which was fully upset by translation gains of $318 million due primarily to the strengthening of the U.S. dollar in late September. The net fair value loss in the quarter was concentrated in our U.S. and European portfolios. In comparison with Q1 and in rough terms, our property values are flat to slightly negative for the GTA in Austria and have fallen 7% in Germany and the Netherlands and 9% in the U.S. Although further upward adjustment to terminal cap rates and discount rates may be appropriate in future quarters, I think it is worth highlighting that despite almost $500 million in net share value losses resulting from adjustments to date, our NAV per unit has increased over that period as a result of currency translation gains and contributions from our development program. As mentioned earlier, Future development stabilization and growth in fair market rent are expected to continue to contribute strongly to our NAP. The reduction in the number of units from our unit repurchase program since July 1st will also obviously further enhance NAP per unit beginning in the fourth quarter. In terms of our market update, leasing fundamentals across our entire portfolio remain strong. Demand historically has tracked the business cycle, but demand is expected to remain strong as suppliers continue to modernize and improve the resiliency of their supply chain, the onshoring of key manufacturing sectors such as electric vehicles, and as reported by CBRE and others, e-commerce is expected to grow from roughly 20% of sales to 32% in the U.S. alone within 10 years. Q3 data is not available for all of our markets, But from what is available, vacancy overall appears to be flat relative to the second quarter, as absorption seems to be limited to the delivery of new supply due to historically low vacancy rates. And year-over-year market rental rate growth varies in the low to mid-double digits across our markets. As you have seen, we announced the 11th consecutive increase in our targeted annual distribution to $3.20. The $0.10 or 3.2% increase, consistent with the past few years, is more than merited given our cash flow growth year over year, but we believe is appropriate at this time given it also enables us to maintain our conservative payout ratios, preserve liquidity, and assist in funding our ongoing development program. On that point, looking forward, our liquidity remains very strong. We're in a good position to fund our remaining development projects and we'll continue to take advantage of strong market conditions to focus on leasing up our development availabilities and our 2023 expiries and driving NOI growth. On that note, I will open up the floor to any questions.