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.

Thank you. 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 one followed by the three. One moment, please, for our first question. And our first question comes from the line of Brad Sturges with Raymond James. Please proceed with your question.

Hi there. Maybe just a quite helpful color on the 23 expiries, just maybe starting there. On the third of expiries still left to address, what would be your expectations for rent spreads?

I think the remaining ones are somewhere between 15% and 20% threat on the remaining. Okay. So overall... if you take the entire year, 9.4 million square feet, I think we're projecting 21% overall on average.

Okay. That helps. And then, you know, you're highlighting still good touring activity and interest in the development projects, I guess, and pretty positive commentary about the demand outlook. I guess short-term, though, have you seen any moderation and leasing velocity particularly in some of your U.S. markets or has that been pretty consistent to the levels you were seeing earlier in the year?

I think it's consistent and I want to put some context on this because we had a conversation very recently, in-depth conversation with our U.S. team and the theme right now is that tenants are focusing on securing space and is the resiliency that they're really concerned most about, and that's the priority. So we have not seen a drop-off yet. And as I said before, I think it's very telling that where we've had the highest leasing velocity is the ones that are nearing completion. I think what's giving tenants pause with all developments, not just with us, is they need the space in four months. You're saying it's going to be ready in four months, but what if it's six? What if it's seven? You know, in Houston, we've been waiting on a switch here for months. And so I think that that's affecting it. We're not seeing a slowdown in demand. And I think it's very telling, as I mentioned. All the markets we're looking at, the absorption almost matches the new supply in each market. Bang on. And I think the reason for that is they can see so low demand. People are waiting for them to come on and it's just being absorbed as it's hitting the market. So that's what we're seeing. Not a slowdown or moderation in demand per se yet. It's just more there are valid concerns about timing of delivery and I think the tenants want to make sure that they can get in the space when they need to get in the space.

Okay. That's helpful, Culler. Last question. Just On the 24 expires with the gross maturity, can you remind me, I believe Magnus got an option to renew. When would that option expire?

The end of January 2023, so a few months from now.

And if they were to exercise that option, is it a fixed rent increase or is it tied to CPI?

Correct, no, it's fixed.

It's tied to, sorry, it's a look-back CPI.

With a cap.

So it's fixed. Got it. Okay. That's helpful. Thank you. In this case.

Thank you. Our next question comes from the line of Himanshu Gupta with Scotiabank. Please proceed with your question.

Thank you and good morning. So I'm looking at the 6% to 7% same-property NOI growth guidance for 2023, obviously very strong there. Is it mostly led by U.S. and U.S. lease expiries, or are you seeing pickup in Europe as well? Because a lot of the indices are CPI indexation there.

It's a bit of both, but most, as you know, the 9.4%, I mean two-thirds of that, almost 70% is in the U.S., So it is driven by the marked market on our U.S. renewals. But there is also a contribution from higher CPI and higher contractual rent increases through CPI in Canada and in Europe, predominantly in the Netherlands.

Okay. Thank you. That's helpful. And then on the development program, again, you know, development unit has now been revised higher on, I think, almost all the properties there. How much of the development program is now pre-leased or put differently? Is there any property left where pre-leasing is not done?

Well, there's roughly 2 million feet left to go. So we have 500,000 feet in Nashville. I think we have 650,000 feet in Houston. We have quite a bit of activity in Houston. And we have the 700,000 and 300,000 footer left to go in all points, which is in Indianapolis across the street from the airport. So there's a lot of activity on those. And as I said before, I think that the The delays in construction or the uncertainty in timing in construction is what's, I think, driving some tenants to remain on the thought lines until there's more certainty around the timing of delivery. But activity has been very strong. So there's roughly 2 million feet left to go on the development. And these projects will be completed through the end of the fourth quarter and the first quarter of 2023. So there's still time left for construction. And again, let me provide further context. Typically, you would budget to complete the building, and then you would be achieving full rent on the building within 12 months. That's typically what you would do, because it would allow for downtime, lease up, fixturing by the tenant, et cetera. You might have three to four tenants in a building. It allows you to build demise walls, et cetera. But that's typically what you would budget. All of our expectations now still remain well within that. So that, to me, indicates a very strong market.

Go ahead. And then, you know, sticking to development here, I mean, you announced a new 10-acre purchase near Brantford. So is that a hub you like? I mean, do you want to expand further in terms of development program in and around GTA there?

We're always looking at opportunities. Like, I hope the tone that came across in the call is we like the cash position we're sitting in. We like our liquidity there. We want to make sure that we are in a very strong position to fund our development program. So we're always looking, but we are mindful of capital. This piece of land particularly was not an add-on. They were separate deals, but we were looking at this land simultaneously with the 92-acre site. This site just took a long time to close for various reasons. So we were looking at a number of opportunities at the time in 2021 and happened to close on the larger one first in this one second. So it wasn't as though this just came up on our radar. It's a deal the team's been working through for well over a year. So we're looking at opportunities, but again, our priority right now is maintaining liquidity and funding our current development program.

All right. Thank you. And the last question is, I mean, in terms of the fair value adjustments to property valuation, so we have seen, you know, two back-to-back quarter adjustments. So are you done with assessment of your U.S. portfolio? I mean, does that reflect the current bond yield and financing environment, so to speak?

I don't believe so. I don't want to. We still have to go through the deals. This is all really deal dependent. It's made our life a little difficult because we haven't always had sufficient data. In some ways, it is subjective. But I would be very surprised if the adjustments that you're talking about were done on. That's why I want to emphasize, I think, I look at our NAV per unit where it is at the end of the third quarter versus the first, and it's up despite $500 million in adjustments so far to date. But to your question, are we finished? I don't know the answer to that, but I don't think so.

Got it. And maybe just one follow-up clarification question. The sale of two U.S. assets, I mean, obviously they are not for sale anymore. Was there a gap between the buyers and sellers' expectations there?

I don't think that that's – the answer is when we decided to secure a term loan of $400 million in the U.S., that gave us – we were targeting $300 million. We ended up doing $400 million for a couple of reasons. It made sense to us. So that took any pressure that we were feeling on liquidity, that took it off. So when we looked at this disposition, this plan disposition, it was, We're not sure how the process is going to go. And so I think it's better to pull it early instead of starting a process and then having to pull it for whatever reason. So it really was due to the fact that the funds that came from the term loan gave us a lot more comfort around our liquidity. And, you know, why head into a market with so much change happening rapidly unless you have a lot of clarity around what the pricing is.

Thank you. Thank you, Kevin, and I'll turn it back.

Our next question comes from the line of Gaurav Mathur with IA Capital Market. Please proceed with your question.

Thank you, and good morning, everyone. Kevin, just staying on the valuation bit for a little longer, you know, I know that it's very hard to pin down an end in sight, but in your view, are we getting closer to that?

Well, it's funny. Those who know me know I don't like watching the market, but I think what we're waiting for, I think what a lot of investors are waiting for is just a little bit of doubt in central banks, a little bit of a pivot, and I think maybe they're reading it wrong. They have in the past. but I do think we're in the end in terms of negative sentiment, just a pivot. And look, we've seen some deals out there that suggest, and there's one out there that I think everybody knows quite well, and it signals a lot more strength than maybe the public markets think that there is. So I think everyone just wanted to understand better how far central banks were going to go, and obviously the market is guessing at this point. but it does feel like 2023, the first quarter of 2023, will be a different landscape from where we sit today.

Fantastic. Thank you for the color. And just lastly, with the NCIB activity and going into 2023, are there any major changes in how you're thinking about capital allocation?

I'll ask Teresa to chime in as well, but I think at this point we're we're finished. We executed on it as planned in 2022. And at this point, and anything can change, but at this point, we're not anticipating being active on the NCIB through the end of the year and early into 2023. Teresa, anything you want to add on that?

Yeah, no, I think that's right. I think we kind of had a finite number in mind. And a lot of what's driving that is, you know, we're very conscious of certainly where our debt metrics are. And I think we're kind of at the level that, you know, we'll tolerate and don't certainly, and we want to preserve whatever borrowing that we have left to fund the remaining commitments under our development plan. So that's the only thing I would add to that.

Perfect. Thank you so much for the call, Kevin and Teresa. I'll turn it back to the operator.

Thank you. Our next question comes from the line of Alex Leon with Desjardins. Please proceed with your question.

Hi, good morning, everyone. I think Teresa mentioned some free rent in Germany earlier on the call, but I was wondering if you can comment on some of the other factors that drove same-property NY growth in Germany and for the U.S.

In Germany, it was that. It was a large asset increase. It's an older lease, but there was embedded free rent through periods of lease, and this hit us last year, which caused a large gain this year, and, of course, it caused a lot last year. In the U.S., I think it was 1.9 in constant currency basis, so it was lower, and it was impacted by the turnover. If you recall in the second quarter call, we had two assets. one with a small bankruptcy and one with a tenant that vacated. And in one of the assets, we further induced the tenant to leave to get control of the entire building. So that totaled maybe 450,000 feet, which occurred in the second quarter and leaked into the third quarter. And those, on average, we increased the rent 69%. It did cause, in one asset, two months downtime, and in another asset, one month downtime, which isn't big, but it did impact the same property NOI slightly for the third quarter, a little more than we thought.

That's great. Thanks. Turning to kind of new developments, some of the U.S. REIT CEOs have commented on their earnings call that they're pausing starting new developments. So I'm just curious how you're thinking about that and whether you're approaching Canada versus the U.S. differently.

Well, I think when I listen to Balazs' call, which is always a good idea, I think they do an excellent job, but their idea of pausing is building four to four and a half billion homes. next year, which to me is an interesting characterization of pause. But it does come from the ground up and you build where you see demand. And I've said even before recently that, you know, we undertook five and a half million square feet of development and much of it speculative. And we did want to continue the program, maybe not so ambitiously as five and a half million feet, but we do want to kind of average you know, two to three and a half million feet a year. But we weren't going to commit to anything in 2023 until we had worked through the bulk of our availabilities in 2022. We're getting there. So as we looked at 2023, the development program does slow down. We just don't have the land capacity to build another five and a half million feet. And there's nothing wrong with that. That wasn't the plan. But when we look at Brantford, for example, We are planning to move ahead with phase one, two buildings. It so happened that we had a design build opportunity, which made a ton of sense for us to kick off the park. So now we're building 420,000 feet design build for Barry Callable. And now we're going to follow up with probably a 750,000 footer on that site. And that's market driven. Are we concerned with Brantford? We are not. So we will move ahead in 2023 if we get the entitlement and the approvals. we will likely move ahead with another $750,000. But at the end of this year, we think we will move through our availabilities in the U.S., and so we'll be in a position where our exposure to the development side will be very manageable in 2023. So I'm hoping answering your question is a little bit of verbal diarrhea there, but that's kind of how we're doing in 2023. I think it will solve itself, yeah.

Yeah, I appreciate it. And then just last one, quick one. is can you guys remind us what percentage of the European portfolio have leases with CPI-based escalators?

I can answer that. In Austria, it's about 100%. And in Netherlands, it's around 85%. And I think Germany is similar to that, around 85%. Okay, great.

Thanks a lot. I'll turn it back.

Thank you. Our next question comes from the line of Matt Kornack with National Bank of Canada. Please proceed with your question.

Hey, guys. Just with regards to the conversation around liquidity, and obviously it's improved with this debt issuance, but, I mean, you have a billion-dollar undrawn credit facility. What is it that you're preparing for or want to keep liquidity-wise? when you talk about that and maybe pulling the asset sale. And then as a kind of secondary to that, is the liquidity ultimately to fund the development pipeline? And are you comfortable funding subsequent phases of Houston and Brantford with current liquidity?

Well, I think that's exactly it, Matt. Sorry.

No, you go ahead, Kevin.

I think that's exactly it. From a high level perspective, The liquidity, when we head into 2023, if we do want to look to the next phase of Houston or we have a design bill opportunity, we want to make sure we have the liquidity to fund that. So it is for the remaining development and future developments potentially in 2023. Teresa, did you want to add anything?

No, that answers it. I mean, when you look at it at the end of the third quarter, you know, really our commitments and developments is probably looking around $300 million between the fourth quarter and first quarter of next year, maybe into mid-second quarter. So we'll have more than sufficient liquidity for that between cash and the credit facility. And then, you know, it's just, it's also, it gives us sort of a backdrop, and I don't believe we're going to go there, but we also have a maturity in November 2023 of $400 million that we could easily cover with the line if we had to, if we had to.

Okay. No, that absolutely makes sense. Forgot about that. And then with regards to the same property NOI guidance, again, yeah, good figures there. Just wanted to know, Is that inclusive of FX and what it would be without FX? And then also, it sounds like you're doing quite well on the leasing front, but just want to understand kind of the occupancy assumptions that may have gone into that. You're going to get through the end of this year probably at 99 plus percent. Should we expect that to be the case for next year as well?

Well, when I talk about staying property in Hawaii, it's always in local currency. So, yeah, it does not take into account currency fluctuations. So that's in local currency. And two, in terms of occupancy, again, when I say, you know, we're expecting to renew 90%, which is a very high number, in the year we are expecting there will be turnover, there will be short-term vacancy. But where we end up the year, we should be in that 99% range. That's our expectation for next year.

Okay, perfect. And then we've had this discussion, but maybe for the public, in terms of the worst-case scenarios during a recession and potential bankruptcies, can you give us a sense, historically speaking, as to what you've seen going through prior cycles with regards to the impact of bankruptcies if we do head into a recession in 2023? Well, just...

I've been asked this question a lot, and it's tough to... Recessions seem to always be different, and look how much the economy's changed in the last 10 years. So if you look at companies 10 years ago that would have went bankrupt, and you look today, you know, the largest companies are completely different. So it's hard to forecast what exactly is going to happen, obviously. But I have said to investors when asked the question, I look back historically, and we just went through a pretty... big downturn in 2020 related to a pandemic. And yes, we are a sort of distribution logistics e-commerce company, which thrives in it. But all to say, our tenants, I think we're one of the only companies that I know of in real estate that collected 100% of its rent for 2020. So one, I think it did speak to the stability of our portfolio and our tenants, which was very important. But I also look back to 08, 09, going through it in industrial terms, and watching an acute downturn. And I remember rents moving in the 20% to 25% range, depending on the market, but it was 20% to 25% was kind of the average that we saw. So I look at our portfolio today and say, okay, in a severe downturn, if the market rents move 20%, 25%, then we'd be at market. We need to appreciate how big a cushion there is. And as of today, that cushion seems to be getting bigger. And not that it won't get smaller, but just to say it's still moving upward. So that cushion is stronger than I think people give it credit for in our sector. And so that's kind of what we've seen in terms of bankruptcies. It's really hard to speculate on. But through my experience, industrial has never seen And knock on wood, industrial has never seen a high level of bankruptcies like I've seen in other sectors, historically speaking.

Okay. No, that makes sense and appreciate that color.

But just to further say, I think it's worth noting, I think we have been criticized, sometimes fairly, sometimes unfairly, for having too many bonds in our portfolio and not having enough equities, right? Right. when you look at deals that we do and attendance that we deal with and the underwriting we do, we've always said, we're trying to build this portfolio in a defensive manner because the good times will take care of themselves. And it's really strong management and strong management decisions that should carry portfolios through bad times. That's what we think about. And so I say that now because I'm asked questions from investors, like all portfolios are the same. They're just not. And, Our team works really hard at underwriting opportunities to make sure we're protecting the downside for our unit holders. And I hope over time that gets recognized and appreciated because it takes work. It's easy to buy a building if you think market rents are higher and you can drive rent. But are you underwriting on risk-adjusted return basis? Are you thinking about the risks if things go bad? And I want everyone to understand how much we think about that all the time. And as we head into this, I think we're Our portfolio is as well positioned as any in the market to persevere through a major downturn. I really do.

That makes sense. Couple it with one of the best balance sheets in the Canadian REIT universe, and you'd think that's what investors would be looking for. Anyway, appreciate it, Kevin.

Our next question comes from the line of Sam Damiani with TD Securities. Please proceed with your question.

Thanks, and good morning, everyone. Most of my questions have been answered, but I just wanted to, I guess, clarify. In Germany, with the renewals that were achieved, it doesn't look like that includes the light mobility solutions tendency, if you could just clarify that.

No, that's still outstanding. I think it's in the third quarter of next year. Our expectation is that they renew, and it's prescribed. The rent, I think it's expiring rent plus CPI, but I'd have to check, but it's a prescribed rent, and there's no renewal notice date. So there is not an urgent need for us to engage. We obviously have contact with the tenant, but we don't have any information that they're looking to leave or wish to leave. So our expectation is that they renew, but it has not been done yet.

Okay. And just on the guidance for next year's same property, I may have missed it, but did you provide any breakdown of that 6% to 7% on a regional basis?

I did not. I did not. I'm just trying to think offhand.

Yeah, no, it's not available.

But we don't have a lot of turn next year. You know, it is predominantly in the U.S. And I think, actually, if I think offhand, I think our mark-to-market on the turnovers next year are roughly 60% in the GTA, roughly 20% in the U.S., And in Europe, it's quite low just because not so much the market isn't higher, it's a number of the leases roll at CPI. So on renewal, it doesn't move to market. It's a CPI-adjusted renewal rate. So it is limited. So it would be in the sort of 5% to 10% range.

Got it. And just finally, I know this was touched on a couple of times, but just with the fairly large volume of development completions over the next few quarters. You know, you're obviously going through your land pipeline fairly quickly. Are you satisfied with the pipeline that you'll end up with a year from now, or is there a desire to gloat and buy more land? And sort of a related question, Grant's done a number of forward purchases in recent years. Is that still an opportunity that you see attractive in the current market?

I think where we sit today, and we talked about liquidity and funding our development program, and obviously it's going to moderate naturally because, to your point, we don't have the land bank to really continue aggressively in that regard. We still have 100 acres in Houston, and we still have the capacity to build over a million feet of Brantford in total. So we will be active on the Brantford site, as I mentioned. Houston, we'll see. It depends on how phase, I guess, phase two goes, technically phase one. how that goes, but it would be hard for us to, I think, break ground in 2023 or at least the first half of 2023. So to answer your question, yes, I think when we look at opportunities and in 2023, if the current market conditions create some distress, we want to be well positioned to exploit those weaknesses. One of those things would be on land. And You have to be careful of how much land you have. Obviously, you have to think about carry costs and your own cost of capital. So I don't know how much opportunity there would necessarily be in and around the GTA, but when we look at the U.S., we're watching it very carefully. Could we take down 50 acres? Could we take down 80 acres? And that's something we are watching and are monitoring. And so that would be of interest to sort of reload the land bank in an uncertain time and take advantage of weakness among the market. So that is on our mind for next year, definitely reloading that land bank at a cost basis that makes a lot of sense to us.

That's great. Thank you, and I'll turn it back.

As a reminder, to register for a question, press the 14. Our next question comes from the line of Tammy Burr with RBC Capital Markets. Please proceed with your question.

Thanks. Good morning. Kevin, just coming back to the gross facility, if Magnum were to exercise that option early next year, I'm just curious, how would that impact your view on the potential longer-term deal of that asset in terms of holding it or possibly monetizing it?

Well, I think it certainly opens up options, and I think – I don't know. I don't know the answer to that, Tommy, because it's been a great asset for us, but obviously I think it's on people's minds. So it's something we have to look at, and it depends on the market conditions. I mean, would we do something today? I think it would be – I'm not sure conditions today would be supportive of doing anything. So it depends very much on what's going on in the world and the markets. But we just want to put ourselves in the right position and prepare to look at and assess all the options that are available to us. So certainly it brings the options more into play than it did before, and I think that's a very positive thing for us.

Got it. And just last one, you know, it sounds like, you know, your comments around liquidity are really focused on sort of preserving that for when you talk about opportunities, it seems to be certainly focused on more land opportunities and development type, you know, plays that might come up. Is that fair to say rather than sort of anything from an income producing standpoint, stabilized asset? And I'm just curious what you're seeing in terms of what is out there at the moment.

Well, I'm saying that because, particularly in the U.S., we feel we could execute on land acquisitions in a distressed situation and not use up a lot of our liquidity. That's why I say that. If you look at doing a portfolio acquisition and using your line of credit, etc., we're taking sort of a worst-case scenario view, and that is we do not have access to capital in 2023. So that's why we're talking about it in such a cautious way, if that's what you're getting. If market conditions change, then it changes for us. And we might be more willing to use our liquidity depending on what the landscape looks like. But for now, assuming there's a lot of uncertainty in the 2023, and I'm not sure, but assuming that there is, we really value our liquidity. And as Teresa mentioned, we have the 2023 is maturing. We want to have options around that, whatever's best for us. We have a development program that's ongoing and we could add a few more projects to it in 2023. So those are the top priorities. But it also, we should be in a position, even in a very poor investment environment, we should be in a position to take advantage of on some land acquisition opportunities without really compromising our liquidity in a big way.

Got it. No, that's great, Colin. Thanks very much. I'll turn it back.

If you have a reminder to register for a question, press the 14. Kevin Gorey, there are no further questions at this time. I will turn the call back to you.

All right. Thank you, operator. So on behalf of the management team and the trustees at Granite, thank you very much for taking time to attend our Q3 call. We look forward to speaking to you on the Q4 call in a few months. Take care.