Granite Real Estate Inc.

Good morning and welcome to Granite Rights' fourth quarter and year-end results for 2022 conference call. Speaking to you on this 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. Please go ahead.

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 factor section of its annual information form for 2022, filed on March 8, 2023. Readers are cautioned not to place undue reliance on any of these forward-looking statements and forward-looking information. The REIT reviews its key assumptions regularly and may change its outlook on an ongoing forward basis if necessary. Granted, it undertakes no intention or obligation to update or revise its key assumptions, any of 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's discussion and analysis for the three months and end year ended December 31, 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'll commence the call with some financial highlights and then Kevin will follow with the operational update. Granted posted Q4 22 results exceeding expectations with strong NOI growth compounded by strengthening of the US dollar and Euro relative to Q3 partially offset by higher interest costs from rising rates and borrowings. FFO per unit in Q4 was $1.20 representing a 12 cent or 11.1 increase from Q3 and 17.6% increase relative to the same quarter in the prior year. However, in the fourth quarter of 2021, Granite did recognize 1.3 million in fair value losses relating to the revaluation of DSU liabilities, but given the amendments made to Granite's DSU plan in June, these favorable changes no longer impact FFO, contributing to a two-cent favorable variance in the fourth quarter relative to Q4 21. Strong NOI from acquisitions, developments and expansions that came online since Q2 and same property NOI growth was enhanced by favorable foreign exchange movements where the Euro was 5.4% stronger and the U.S. dollar 3.9% stronger relative to the Canadian dollar in comparison to Q3. In comparison to the prior year, the Euro was 4% weaker and the U.S. dollar 8% stronger resulting in a positive 4 cent impact to FFO per unit. Negatively impacting Q4-22 relative to Q3 is the full quarter effect of higher interest costs on the new $400 million term loan that closed in mid-September. Lastly, in Q4, we recognized a net favorable $0.7 million to current income tax expense for adjustments related to prior tax years. Granted, AFFO on a per unit basis in Q4-22 was $1.05, which is $0.08 higher relative to Q3, and $0.15 higher relative to the same quarter last year, but the variance is mostly tied to FFO growth. AFFO-related capital expenditures, leasing costs, and tenant allowances incurred in the quarter totaled $7.4 million, and for the year-to-date period were $18.6 million. For 2023, we estimate AFFO-related maintenance capital expenditures and leasing costs coming in approximately $22 million for the year, with the increase relative to the past couple of years being a direct result of approximately 9.7 million square feet of GLA turning over this year. Same property NOI for Q4 was very strong relative to the same quarter last year, increasing 6% on a constant currency basis and 8.8% when foreign currency effects are included. Same property NOI growth was driven primarily by higher than previous year CPI adjustments, positive leasing spreads, contractual rent increases across all of Granite's regions, lease renewals in the U.S. and Canada, and it also includes the impact of a completed expansion in the GTA. G&A for the quarter was $8.6 million, which was $3.8 million lower than the same quarter last year and $2.1 million higher than Q3. The main variance relative to the prior quarter and Q3 is the change in non-cash compensation liabilities, which generated a favorable $3.6 million fair value swing relative to the same quarter last year and an unfavorable $2.5 million fair value swing relative to Q3, as we recognize fair value losses on these liabilities due to a 4.4% increase in Granite's unit price during the quarter. For 2023, we expect G&A expenses of approximately $9 million per quarter or roughly 7% of revenues, excluding any amounts for fair rally adjustments related to non-cash compensation liabilities. On income tax, Q4 2022 current income tax was $1.5 million, which is $1.4 million lower than the prior year and $0.4 million lower than Q3. However, excluding $2.8 million of current tax recorded in Q4 2021, Related to the disposition of an Austrian property, current tax actually increased by $1.4 million in the current year relative to last year. As mentioned earlier, in Q4, we recognized the net impact of adjustments pertaining to prior tax years in our European region of $0.7 million, in contrast to similar favorable adjustments in Q4 2021 of approximately $1.8 million. For 2023, on a run rate basis, we estimate current tax at approximately $2 million per quarter before recognizing any reversals of tax provisions. Interest expense was higher in Q4-22 relative to Q3 by $4 million, reflecting the full quarter impact of interest on the new $400 million U.S. $400 million term loan, which closed on September 15th. On a run rate basis, we estimate interest expense will run approximately $18 million per quarter before factoring any new debt or credit facilities. When Granite refinances its upcoming $400 million debenture, maturing November this year, we expect our interest expense run rate will increase to $20 million per quarter. All of Granite's debt is fixed rate debt through cross currency and interest rate swap hedges with the exception of the credit facility, which is at a variable rate and subject to increases in underlying treasury rates. We have no draws on the credit facility at this time. Looking out to 2023 estimates, Granite is forecasting FFO per unit within a range of $4.90 to $5.05, representing approximately an 11 to 14% increase over 2022. For AFFO per unit, we are forecasting a range of 4.30 to 4.45, representing an increase of 6 to 10 percent. The high and low ranges are driven by foreign currency rates where, for the high end of the range, we are assuming foreign exchange rates of the Canadian dollar to Euro of 1.47 and Canadian dollar to USD of 1.37. On the low end of the range, We are assuming exchange rates of the Canadian dollar to Euro and Canadian dollar to USD of 1.42 and 1.32 respectively. We continue to estimate that a one cent movement in the Canadian dollar relative to the US dollar impacts FFO and AFFO per unit annually by two cents and a one cent movement in the Canadian dollar relative to the Euro results in a one cent impact to FFO and AFFO per unit. Granite will provide updates to guidance each quarter as warranted based on leasing activity executed to date. The Trust's balance sheet, comprising of total assets of $9.3 million at the end of the quarter, was negatively impacted by $230 million in fair value losses on Granite's investment property portfolio in the fourth quarter, offset by $80 million of translation gains on Granite's foreign-based investment properties, particularly due to the 7.5% increase in the spot euro exchange rate relative to Q3. The fair value losses on Granite's investment property portfolio were primarily attributable to the expansion in discount rates in certain assets and the 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, U.S., and selective European markets reflecting current market fundamentals. The Trust's overall weighted average cap rate of 4.87% increased 17 basis points from the end of Q3 and has increased 37 basis points since the same quarter last year. Since the height at the end of Q1 2022, our weighted average cap rate has increased a total of 57 basis points. Total net leverage as of December 31st was 32% and net debt to EBITDA was 7.9 times, which is slightly inflated due to grants partially funding a significant development program with debt. Granite expects its debt to EBITDA to decrease to the low seven times by the end of this year and to improve thereafter into 2024, as the EBITDA from completed developments come online throughout the year. The Trust's current liquidity is approximately $1.1 billion, representing cash on hand of about $130 million and the undrawn facility of $997 million. As of today, Granite has no amounts drawn, and the credit facility, there are $3.5 million of letters of credit outstanding. Granite will continue to monitor the market conditions in the coming months to look to refinance its 2023 debentures, which come due in November. And lastly, in other financing activities for the year ended December 31st, Granite did repurchase approximately 2.165 million stapled units under its NCIB at an average price of $71.81. for a total of $155.5 million, excluding commissions. I'll now turn over the call to Kevin.

Thanks, Teresa. Building on Teresa's comments, I would begin by saying that I would frankly characterize our results for the quarter as being in line with expectations, although very much at the high end. And frankly, it was the strongest quarter in my time with Granite, both from a financial and operational standpoint. as strong same-property NY growth and development stabilizations in the quarter drove outperformance in FFO and AFFO. I also hope you found the level of disclosure to be helpful, and fortunately for you, it leaves me with less to say on the cost. As you can see, there was no acquisition activity in the quarter as we continue to focus capital on funding our ongoing development program. With respect to said development, as you can see from our MD&A and press release, our new development property in the Freesboro, just outside of Nashville, was completed in the fourth quarter and the 844,000 square foot building has been fully leased to a single tenant for a term of roughly 10 years, commencing on December 1st. Subsequent to the quarter, we achieved substantial completion of our 690,000 square foot design-build distribution center in Houston for e-commerce user Chewy for a term of just under 11 years, which commenced on February 1st. We expect to achieve substantial completion of the two buildings, totaling 670,000 square feet, currently under construction on the Houston site by the end of this month. and we have signed two leases totaling 520,000 square feet approximately to third-party logistics providers for five and seven-year terms. In January, we also achieved substantial completion of our 330,000 square foot expansion of our existing property in Whitestown, a suburb of Indianapolis, and the lease has been extended for 10 years on the entire building. In summary, We have completed six development and expansion projects comprising 2.8 million square feet that commenced in late 2021 and early 2022 in the U.S., Germany, and the GTA, all now fully leased and generating an average unlevered development yield of 6.4%. We have a further 2.6 million square feet currently under construction, which is expected to generate an average unlevered yield of 6.25%. To date, we have leased 930,000 of the 2.6 million square feet currently in progress, and that activity continues to be strong on our remaining availabilities in Houston, Indianapolis, and Nashville. Collectively, these stabilizations will continue to strongly contribute to NOI cash flow and NAV in 2023, and I look forward to providing an update on our first quarter call. Looking towards 2023, With the successful stabilization of the majority of our development pipeline, which I just mentioned, we have applied for approval to build a 730,000 square foot building on our site in Brantford. We are targeting an unlevered development yield of roughly 7% and hope to commence construction later this year. We are also finalizing plans for the next phase of our Houston development site, which would accommodate one to two buildings totaling up to 1 million square feet At a projected yield of roughly 6.25%, and pending final design, we may be able to commence construction again in late 2023. Finally, we have commenced a 50,000 square foot expansion of our existing property in Ajax, which is scheduled for delivery in early 2024, and an expected yield of 7.5%. And beyond the projects currently being contemplated, as just mentioned, We own an additional 35 acres in Brantford and 65 acres in Houston and Columbus, which could accommodate up to 1.6 million square feet of future development. Hence, we will continue to search for the right land opportunities to expand our development pipeline moving forward. Operationally, 2022 finished and 2023 started on a positive note. As per our MD&A, we renewed or re-leased roughly six of the 6.1 million square feet of leases which matured in 2022 and an average increase in rents of just over 19%. To date, we have renewed 7.7 or 81% of the 9.6 million square feet of lease maturities in 2023 and an average increase of roughly 20%. And we anticipate achieving an average increase of 24% on the remaining maturities or outstanding maturities. As mentioned on our last call, we expect to renew roughly 90% overall of our leased maturities in 2023. For 2024, we have renewed 5.3 or 55% of the 9.6 million square feet of maturities at an average increase of 9.4%, primarily due to the 10-year garage renewal announced earlier this quarter. At this point, we expect to achieve an average increase of 20% to 22% on the outstanding maturities for 2024. I think it is worth highlighting that a renewal at Graz and Oberhausen in Germany, totaling almost 5.8 million square feet, required no investment from Granite for TIs, landlord work, or leasing commissions. There was no capex associated with either renewal. As Theresa mentioned, Same property NOI increased by 6% in the quarter on a constant currency basis at the high end of our expectations, driven by contractual annual escalations and strong releasing spreads overall. Same property NOI was positive across all of our geographies on a constant currency basis, led by our portfolios in Germany and the Netherlands at 10.9% and 8.3% respectively. The increase in St. Propp, Illinois was partially driven by strong CPI increases in those jurisdictions, which reached as high as 14% in the fourth quarter and the first quarter of this year. We anticipate that these markets will be a strong contributor to our organic growth in 2023. And I think, as mentioned, three tenants representing roughly 1 million square feet will not be renewing their space with us this year. which will impact same-property NOI growth from quarter to quarter. But at this time, we are increasing our guidance for 2023 same-property NOI growth slightly from 6% to 7% originally to 6.5% to 7.5%. As you can see from our disclosure and as Teresa spoke about, we adjusted cap rates and discount rates further in the quarter. The resulting $230 million in negative fair value adjustments was partially offset by $71 million in development spend and stabilizations and roughly $75 million in foreign exchange gains, driven by the strong recovery of the euro and a quarter, offset by a slightly weaker U.S. dollar compared to Q3. Further adjustments may be required in the first quarter to terminal cap rates and discount rates. But at this point, we believe that any further negative adjustments to cap rates or discount rates moving forward will continue to be at least partially mitigated by development stabilizations and increases in NOI and market rents throughout the year. With respect to ESG, our major activities and accomplishments are outlined in my letter to you holders, so I will not repeat them all here. But I wanted to say that we continue to execute strongly on our ESG program placing second among our North American peer group for Grespi and receiving the highest grade available for public disclosure. We also finished in first place among Canadian REITs and fourth overall among Canada's largest 220 public companies for governance in 2022, this according to the Globe and Mail, achieving a score of 95%. Strong governance continues to be a part of our DNA and it's satisfying to be recognized for our efforts. Before I open up the call for questions, I'd like to take a minute or so to reflect on our performance over the past five years. This is the first time in my tenure in doing this, but I hope it will provide a level of perspective on our business and performance, which some of you may find helpful. We finished 2017 with just over $3 billion in assets and with just over 71% of those properties being tenanted by Magna. We generated per unit FFO and AFFO of 325 and 309 respectively, and our leverage at the time was 25%. In comparison, we finished 2022 with just over $8.8 billion in assets, an increase of over 280%, this despite the sale of $980 million of Magna Tenanted properties over that period. Leverage increased to 32% as we utilized some of our balance sheet capacity to fund acquisitions and the development of modern logistics products. At 4.43 and 4.05 for 2022, we grew FFO and AFFO per unit by 36% and 31% respectively over that period, all while reducing our magnet concentration from 71% to 26% by revenue. Our team demonstrated the ability to diversify our tenant base and build a truly institutional quality logistics portfolio while generating strong cash flow and distribution growth and maintaining one of the strongest balance sheets in the Canadian REITs sector. In spite of the turbulence in the market and higher rates, I feel as confident as ever in our ability to deliver growth in NOI and cash flow for unit holders. And finally, I'd like to acknowledge our team for a great quarter. On that, I will open up the floor for any questions.