Granite Real Estate Inc.

Good morning and welcome to the Granite REITs fourth quarter and year-end results for 2023 conference call. Speaking to you on this call this morning is Kevin Gorey, President and Chief Executive Officer, and Theresa Netto, Chief Financial Officer. I will now turn the call over to Ms. Theresa Netto to go over certain advisories.

Thank you, Operator. 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 in grants 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 its annual information form for 2023, filed on February 28, 2024. 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 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 condensed combined audited financial results and management discussion and analysis for the three for the year ended December 31st, 2023 for Granite Real Estate Investment Trust and Granite Re-Ink and other materials filed with the Canadian Securities Administrators and U.S. Securities and Exchange Commission from time to time for additional relevant information. Now I'll start with the financial highlights as usual and Kevin will follow with his operational update. Granted posted Q4 2023 results ahead of Q3 and in line with expectations supported by strong NOI growth, lower current tax expense, and positive impact from foreign exchange primarily as a result of the strengthening of the U.S. dollar partially offset by higher interest costs. FFO per unit in Q4 was 127, representing a 3 cent or 2.4% increase over Q3 and a 5.8% increase relative to the same quarter in the prior year. The growth in NOI is derived from developments and expansions that came online since the fourth quarter of 22, and strong same-property NOI growth enhanced by leasing spreads in excess of 100% in Canada, double digits in the U.S., and inflationary increases in Europe, partially offset by the disposition of two properties during the first and third quarters of 23, and some new vacancies in North America. NOI growth was enhanced by foreign exchange as the U.S. dollar was 1.6% stronger in comparison to Q3, while the Euro was flat. In comparison to the prior year, the Euro was 6% stronger and the US dollar was flat, resulting in a $0.02 positive impact to FFO per unit. In Q4 23, we recognized a net favorable $1.8 million reversal of tax reserves related to a prior year, which resulted in a current tax expense being $2 million lower as compared to Q3 and $1.4 million lower relative to the prior year. negatively impacting Q4-23 relative to Q3 and the prior year quarter is higher interest costs, net of interest income of 0.9 million and 0.7 million respectively, which is primarily related to the full quarter effect of interest costs on our 70 million euro term loan that closed in early September and higher interest rate on the 400 million 2029 debenture post the repayment of our 23 debenture on November 30th. Granite's AFFO per unit on a per unit basis in Q4 was $1.15, which is $0.06 higher relative to Q3 and $0.10 higher relative to the same quarter last year, with the variances mostly tied to FFO growth and lower capital expenditures, leasing costs, and tenant allowances incurred due to the timing of leasing turnover and seasonality. AFFO-related capital expenditures, leasing costs, and tenant allowances incurred in the quarter totaled $6 million, with a decrease of $0.7 million and $1.4 million over Q3 and the prior year, respectively. For 2023, total AFFO-related capital expenditures, leasing costs, and tenant allowances incurred were $18.3 million, which is below prior estimates provided due to timing as certain leasing activity did not occur as forecasted. For 2024, we expect maintenance CapEx leasing costs and tenant allowances to come in at approximately 25 million, with the increase relative to the past couple of years being a direct result of anticipated leasing activity for the remaining 24 and 25 maturities, as well as the leasing up of existing vacancies. Same property NOI for Q4 23 was strong relative to the same quarter last year, increasing 4.7% on a constant currency basis, and up 6.8% when foreign currency effects are included. Same property NOI growth was driven primarily by higher than previous year's CPI adjustments, positive leasing spreads, contractual rent increases across all of Granite's regions, lease renewals in the U.S., Canada, and Netherlands, the lease up of a prior vacancy in Novi, Michigan, and includes the impact of completed expansion in Indiana and completed development in Fort Worth, Texas, and Altbach, Germany, which had free rent periods in the prior year, partially offset by vacancy of certain properties in the U.S. and Canada. G&A for the quarter was $9.4 million, which was $0.8 million higher than the same quarter last year, and $1 million higher than Q3. The main variance relative to the prior year quarter in Q3 is the change in non-cash compensation liabilities which generated an unfavorable $0.2 million fair value swing relative to the same quarter last year and an unfavorable $1.4 million fair value swing relative to Q3. These fair value adjustments do not impact FFO or AFFO metrics. Stripping out the fair value adjustments, as mentioned earlier, G&A expenses that impact FFO and AFFO were approximately $0.4 million lower than Q3, which is mostly related to timing of professional fees and travel expenses. For 2024, we continue to expect G&A expenses of approximately $9.5 million per quarter, or roughly 7% to 7.5% of revenues, excluding any amounts for fairly adjustments on non-cash compensation liabilities. On income tax, Q4 current income tax was $0.1 million, which is $1.4 million in the prior year, and $2 million lower than Q3. As mentioned earlier, in Q4-23, we recognized the reversal of tax provisions relating to positions taken on taxation years, which have gone statue-barred in our European region of $1.8 million, in contrast to similar favorable adjustments last year of just $0.7 million. For 2024, we are expecting current income taxes to increase slightly to approximately $2.4 million per quarter, and that's as a result of higher revenues and the burn-off of TIA amortization in Austria related to the branch lease renewal, which commences February 1, 24, increasing our taxable income in that region. Interest expense was higher in Q4 relative to Q3 by $4.1 million, while interest income also increased by $3.2 million as compared to Q3. As mentioned previously on the Q3 call, on October 12, Granda completed its $400 million green bond offering, known as the 2029 debentures, and concurrently entered into a cross-currency interest rate swap to exchange the Canadian dollar denominated principal and interest payments for euro denominated payments, resulting in an effective interest rate of approximately 4.93% for the five-and-a-half-year term of the 2029 debentures. The net proceeds from the offering were used to repay Granite's 2023 debentures with the same principal amount outstanding of $400 million upon its maturity on November 30th. For the period from October 12th to November 30th, Granite earned interest on its net proceeds from the 29 debentures at approximately 5.4%. Therefore, relative to Q3, net interest costs increased by $0.9 million. The increase is a result of the full corridor impact, as mentioned earlier, of the €70 million 2026 term loan, which has an effective rate of 4.33%, and the one-month impact of the repayment of the 23 debentures, which had an effective rate of 2.43%, in comparison to the higher effective rate on our 29 debentures of 4.93%. Granted weighted average cost of debt is approximately 2.59%, For 24, given that we have no debt maturing until very late December, our interest expense run rate is estimated to drop to approximately $21 million per quarter, which will be offset by some interest income of approximately $0.5 to $1 million per quarter. Now, looking out for 24 estimates, Granite is forecasting SFO per unit within the range of $530 to $545,000. representing approximately a 7% to 10% increase over 2023. For AFFO per unit, we are forecasting a range of $4.65 to $4.80, representing an increase of 3% to 7%. 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 Canadian dollar to euro of 1.48 and Canadian dollar to USD of 1.38. On the low end of the range, we are assuming exchange rates on the Canadian dollar to Euro and Canadian dollar to USD of 1.43 and 1.32 respectively. We continue to estimate that one cent movement in the Canadian dollar relative to the US dollar impacts FFO and AFFO per unit approximately by two cents, and a one cent movement in the Canadian dollar relative to Euro results in a one cent annual impact to FFO and AFFO per unit. Granite will provide updates to guidance each quarter, as warranted, based on leasing activity and other operational events executed to date. The trust balance sheet comprising of total assets of $9.1 billion at the end of the quarter was negatively impacted by $33 million in fair value losses on Granite's investment property portfolio in the fourth quarter and was further reduced by $73 million of translation losses on Granite's foreign-based investment properties primarily due to the 2.5% decrease in the spot USD exchange rate, partially offset by a 1.9% increase in the spot euro exchange rate relative to Q3. The fair value losses on granite's investment property portfolio were attributable to the expansion in the discounted terminal capitalization rates across selective granite markets, largely due to market conditions, partially offset by fair market rent increases primarily in selective U.S. and European markets. The trust's overall weighted average cap rate of 5.24% on in-place NOI increased 10 basis points from the end of Q3 and has increased 37 basis points since the same quarter last year. Our net leverage at the end of the year was 33%, and net debt to EBITDA was 7.3 times, which is flat relative to Q3. and lower than Q4 2022 as a result of same-property NOI growth as previously mentioned and the completion and stabilization of the majority of Grant's development properties. Grant continues to expect its net debt to EBITDA to improve in 2024 as the EBITDA from completed developments come online throughout the year. Our current liquidity is approximately $1.1 billion, representing cash on hand of approximately $120 million and the undrawn line of $997 million. As of today, we have no borrowings outstanding under the credit facility, and there are $2.9 million in letters of credit outstanding. And lastly, on other financing activities, for the three months in the fourth quarter, Granite repurchased approximately 393,000 stapled units under its NCIB at an average price of $68.73 for a total proceeds of $27 million. And I'll turn it over the call to Kevin.

Thanks, Theresa. Certainly an in-line quarter as NOI continued to increase despite a slight decline in occupancy from the previous quarter. Further, as mentioned, FFO for 2023 was in line with guidance of 490 to 505, which was provided in March of last year. And I think it is worth noting at the outset that we generated double-digit growth in FFO per unit for the second consecutive year. I'll begin with a brief update on our current development pipeline. As stated in the MD&A, the 19-year lease on our 409,000 square foot build suit project for Barrie Callebaut commenced on schedule in mid-January, which I think is quite an accomplishment by the team for such a complex development project. Additionally, we have executed a new 10-year, 30,000 square foot lease on our 50,000 square foot expansion in Ajax, which commences in June of this year. And finally, for development, we have received approvals and executed a lease amending agreement with the tenant for a 52,000 square foot expansion on our property in Wert, the Netherlands. The expansion is expected to be completed in the fourth quarter at a cost of approximately 6 million Canadian and generate a return of roughly 8.5% on cost. As a reminder, all projects are expected to achieve certification in accordance with our published green bond framework. In addition to the projects just discussed, we have roughly 160 acres of land remaining for development in Brantford, Houston, and Columbus, which could accommodate up to 2.4 million square feet of space once constructed. As outlined in our press release in MD&A, the team achieved an average increase in rental rate of 24% on renewals for roughly 3.8 million square feet of leases that expired in the quarter. With respect to our 2024 maturities, we have now renewed 7.8 million, or roughly 79%, of our 9.8 million square feet of maturities, and an average increase in rental rate of 15%, with the increase, ironically, muted somewhat by the 10% increase associated with the garage renewal. As Theresa mentioned, same property NOI increased by 4.7% in the quarter on a constant currency basis, lower than in Q3, but in line with expectations. Same property NOI was positive across all our geographies on a constant currency basis, led by the Netherlands and Canada at 9.8% and 7.7% respectively. And despite higher vacancy, our U.S. portfolio posted same property NOI of just under 4%. Overall, same property NOI growth for the quarter, for the year, sorry, came in at the lower end of our initial guidance of 6% to 7%. As you can see, we project same-property NOI growth within the range of 7% to 8% on a constant currency basis for 2024, and we expect that growth to continue to be strong through 2025 based on today's expected leasing spreads over that period. As you can see from our disclosure, we adjusted cap rates and discount rates nominally in the quarter based on relevant transactional data. Excluding FX movement, we have now recognized roughly $175 million in fair value losses on our investment properties in 2023 and just under $900 million in total since Q1 of 2022 as a result of adjustments to capitalization and discount rates, mitigated partially by increases of market rents and development stabilizations within our portfolio. Based on recent transactional data and a move lower in overnight rates across our jurisdictions from the fourth quarter, At this time, we do not anticipate significant further declines in asset values moving forward. However, we also believe that the prospect for distressed sales is likely to rise for the coming quarters, as many owners and developers struggle to cope with debt loads and are unable to recapitalize their investments. And while that increase in activity may provide, granted, with compelling investment opportunities, we recognize that a significant number of such sales could concurrently place downward pressure on pricing in the short term. As a general market update, leasing activity continued to slow in the fourth quarter as higher interest rates and economic uncertainty continued to impact tenant activity broadly across the sector. On a comparative basis, our markets once again represented eight of the top nine markets in the US for net absorption, totaling 22 million square feet for the quarter, and over 135 million square feet for the year, led by Dallas, Chicago, and Houston. As for rates, our market saw relatively positive year-over-year growth, from 1% in Columbus to 16% in Dallas, 19% in Indianapolis and Louisville, 26% in Houston, and over 40% in the I-78-81 corridor. The GTA, Netherlands, and Germany posted growth rates of 6.3%, 6% and 12% respectively over 2022. As for Q1, we are definitely seeing an increase in traffic and leasing activity across our markets versus levels that we saw in the fourth quarter. I cannot discuss specific deals on the call, but the team is currently negotiating leases or in advanced discussions on approximately 1.5 million square feet of renewals and new leases, which I think bodes well for leasing momentum into the second quarter. At this point, we expect to renew between 85% to 90% of our lease expiries overall in 2024, a very strong number in my opinion. As mentioned in the press release, we have renewed our base shelf prospectus, which expired in November of last year on effectively the same terms as before. As I telegraphed on our Q3 call, this renewal is simply a formality and is being executed in normal course to facilitate Any potential actions we may contemplate over the next 25 months. Also, as Teresa mentioned, we opportunistically utilize available cash on hand to purchase roughly 400,000 units at an average price of $68.73. As you know, unit buybacks are not our first choice for capital allocation, but we will not hesitate to capitalize when the unit price is that far below now. In closing, our results were in line with expectations. NOI and cash NOI increased each quarter in 2023, and our liquidity position remained very strong at roughly $1.1 billion in cash and available credit. As I have stated on previous calls, we utilized the power of our balance sheet and consciously made a sizable investment in development beginning in 2021 with a goal to deliver, when combined with attractive same-property NOI growth and retained earnings, strong cash flow growth for multiple years. Since the beginning of 2022, we have generated FFO growth of over 26%, and per our guidance, we expect to deliver further FFO growth of 7% to 10% in 2024, depending on applicable change rates. All of this while continually improving the quality of our portfolio. So, addressing our current availabilities and remaining 2024 maturities and preserving capital for future strategic opportunities remains our highest priorities. And we are very well positioned to deliver NOI, FFO, and AFFO growth once again in 2024. On that, I will now open up the floor to questions.