Good morning, and welcome to Granite REIT's Q3 2021 conference call. Speaking to you on the call this morning is Kevan Gorrie, President and Chief Executive Officer, and Teresa Neto, Chief Financial Officer. I will now turn the call over to Teresa Neto to go over certain advisories, followed by an introduction from Kevan Gorrie. Please go ahead.
Before we begin today's call, we would like to remind everyone 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, as well as potential impact of COVID-19, 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 Granite's materials filed with Canadian Securities Administrators and the U.S. Securities and Exchange Commission, including the Risk Factors section of its annual information form for 2021, filed on March 3rd, 2021. Readers are cautioned not to place undue reliance on any of these forward-looking statements and forward-looking information.
Granite undertakes no intention or obligation to update or revise any of these 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 Q3 2021 condensed combined unaudited financial results and MD&A of 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 for additional relevant information. Over to you, Kevan, for opening remarks.
Thanks, Teresa. Thank you to everyone for taking the time to join us for our Q3 earnings call. As usual, I am pleased to be joined this morning by, of course, Teresa; Lorne Kumer, our Executive Vice President of Global Real Estate; and Michael Ramparas, our Executive Vice President at Global Real Estate and Head of Investments. For our call this morning, Teresa will begin with a discussion of our financial highlights. I will then provide an update on our operations, acquisitions, development, and ESG, and then open up the call for any questions that you may have.
Thanks, Kevan. Good morning again, everyone. Granite posted solid third quarter results, which are in line with expectations despite FFO and AFFO per unit continuing to realize temporary dilutive effects of Granite's recent equity and debt offerings, where net proceeds have not yet been fully deployed. FFO per unit in Q3 was CAD 0.99, representing a 3.1% increase relative to same quarter prior year and flat to Q2. FFO was positively impacted by 10.5% growth in net operating income relative to prior year. However, FFO was negatively impacted by foreign exchange translation losses of our foreign-based income, as both the euro and U.S. dollar are 5% weaker relative to the same quarter last year, resulting in a CAD 0.05 decline in FFO per unit.
Partially offsetting these translation losses are CAD 0.8 million of net foreign currency gains realized in the third quarter as a result of Granite's AFFO foreign currency hedging program. Granite's AFFO on a per unit basis in Q3 was CAD 0.93, which is 2.2% higher than prior year and CAD 0.03 lower than Q2. AFFO-related capital expenditures, leasing costs, and tenant allowances incurred in the quarter were CAD 3.1 million, which is CAD 2.3 million higher than the same quarter last year and CAD 1.4 million higher than Q2. The majority of expenditures this quarter pertains to a lease extension and renewal at one of Granite's Ohio properties.
We are expecting an active final quarter in respect of capital expenditures and estimate maintenance, capital, and leasing costs of approximately CAD 7 million in Q4, for a total year expenditure of about CAD 13 million, unchanged from estimates provided on the Q2 call. With respect to 2022, an increased level of lease turnover for the year, we are estimating AFFO-related maintenance capital expenditures and leasing costs of approximately CAD 15 million. Granite's AFFO payout ratio came in at a conservative 81% for the third quarter and is tracking 79% on a year-to-date basis. NOI on a cash basis for the quarter increased CAD 9.1 million or 12.2% from the same quarter in 2020, and increased CAD 3.7 million or 4.6% from Q2 of this year, with some favorable impact coming from the U.S. dollar, which strengthened 2.6% since the second quarter.
Same property NOI for Q3 was very strong relative to same quarter last year, increasing 5% on a constant currency basis, but effectively flat when foreign currency effects are included. Same property NOI growth was driven primarily by positive leasing spreads, contractual rent, and CPI increases across all of Granite's regions, as well as the expiry of free rent periods that were realized in the prior year at Granite's AllPoints Indianapolis, and Tilburg and Ede Netherlands assets. G&A for the quarter was CAD 8.9 million, which is CAD 0.7 million lower than the same quarter last year, but CAD 0.6 million higher than Q2.
The main variance relative to Q2 is due to the recognition of CAD 1.5 million of unit-based compensation expense as a result of fair value losses recognized on a non-cash compensation liabilities due to an increase in Granite's unit price during the quarter. In comparison to the third quarter of 2020, the CAD 0.7 million positive variance is related to the CAD 1.1 million in severance costs we recognized in the prior year, which is not present this quarter. On a run rate basis, we expect G&A expenses to continue at approximately CAD 8.5 million per quarter or roughly just below 8.8% of revenues.
For income tax, Q3 current income tax was CAD 2.4 million, which is CAD 0.4 million higher than Q2, which excludes the CAD 2.3 million of current taxes we recognized on the sale of an Austrian property in Q2. The increase in current tax relates to a strengthened U.S. dollar this quarter and an increase in state taxes as a result of Granite's recent acquisition activity in the U.S. On a run rate basis, we estimate current tax at approximately CAD 2.25 million per quarter going forward. With respect to the potential recognition of reversals of tax provisions, as mentioned on previous calls, Granite does still have a further potential CAD 2 million of tax liability reversals that may be recognized in Q4 this year, but we cannot make an estimate until December 31st.
The trust balance sheet, comprising of total assets of CAD 8.2 million at the end of the quarter, was positively impacted by CAD 432 million in fair value gains to Granite's investment property portfolio in the third quarter, plus CAD 69 million of translation gains on Granite's foreign-based investment properties, particularly impacted by the U.S. dollar, which increased 2.2% over Q2. The fair value gains on Granite's investment property portfolio are attributable to fair value gains across all of Granite's regions, but particularly the trust assets in the GTA and U.S. due to increases in fair market rent assumptions and declines in cap rates. The trust's overall weighted average cap rate of 4.8% decreased a further 30 basis points from the end of Q2 and has declined a total of 80 basis points year to date thus far.
Total net leverage as of September 30th was 22.3%, up 3% from [Q2], and net debt to EBITDA remains healthy at 5.7 times. The trust's current liquidity is approximately CAD 1.8 billion, representing cash on hand of about CAD 770 million, and we still have our undrawn operating line of CAD 998 million. Thank you, and I'll turn it over to Kevan.
Thanks, Teresa. As always, I'll keep my comments brief, as I trust you've had the opportunity to re-review our MD&A and press release. I'll start by repeating two themes from our opening comments on our last call. Once again, we posted an in-line quarter, and it is again worth highlighting that FFO and AFFO for the quarter increased year-over-year despite a corresponding negative move in FX of roughly [CAD 0.05] and the drag from the proceeds of the ATM equity offering, as well as the [CAD 0.02] impact on our G&A from the appreciation of our unit price in the quarter, which often gets overlooked. Also worth highlighting, I think, is the increase in fair market value of our portfolio in the quarter.
As Teresa mentioned, with gains across our entire portfolio on a constant currency basis, led by fair market value increases in the U.S., GTA, and the Netherlands due to further increases in market rental rates and conversely declines in cap rates for modern logistics assets across our target markets in those jurisdictions. We continue to execute well on our strategic plan. As disclosed in the MD&A and press release, we acquired six income-producing properties in our target markets in the U.S. and the Netherlands in the quarter for approximately CAD 300 million. In addition, we acquired roughly 130 acres of development land in Brantford, Ontario, and Nashville, which will support over 2.2 million sq ft when completed.
Subsequent to the end of the quarter, we agreed to acquire 74 acres of land and approximately 1 million sq ft of new buildings upon completion in Indiana and a 495,000 sq ft build-to-suit distribution facility currently being constructed in Tilburg, the Netherlands. Combined, the Nashville, Indiana, and Tilburg properties represent roughly CAD 310 million in committed capital. We are also conducting due diligence on roughly CAD 390 million in further acquisitions of stabilized assets in our target markets in Germany, the Netherlands, and the GTA, which we expect to close on in Q4 or early Q1, 2022. Now, as I've stated on previous calls, a central component of our strategy is to leverage our platform and incorporate more development into our growth.
We now currently have four speculative projects underway totaling 2.3 million sq ft in Dallas, Nashville, and Altbach, which is a suburb of Stuttgart, Germany, and a further 1.7 million sq ft planned for 2022 in Houston, Indiana, and the GTA. Keep in mind that this excludes our development site in Brantford, which may also commence in 2022, depending on the pace of our current development projects and associated leasing. We also have 1.25 million sq ft of fully leased projects under development in the Netherlands, Houston, and the GTA. It is worth noting that aside from the expansion of the Congebec food distribution facility included in that total, the development properties in Houston and the Netherlands are not per se build-to-suit projects. They are both generic, functional distribution and e-commerce buildings that simply have long-term leases in place.
Once stabilized, we expect these developments to drive significant NAV and cash flow growth, as well as further enhance the quality of our portfolio. It is also worth noting that all of the above-mentioned developments are expected to receive green building certification and will satisfy the criteria outlined in our green bond framework. Staying on ESG, as disclosed in our MD&A, we are proud to report that Granite achieved a global ESG benchmark [GRESB] score of 65 out of 100 for 2021 versus the average for our peer group of 52, of which Granite was the only Canadian reporting entity.
We also achieved the highest score in the category of public disclosure. I would like to acknowledge and commend our team for their efforts in improving our ESG performance, and we believe there is an opportunity to further improve our benchmark scores as we set performance targets for 2021 and beyond. Operationally, as stated on our second quarter call, we have now renewed or released all 2.3 million sq ft of our 2021 lease expiries. We have conditional lease deals totaling approximately 300,000 sq ft on our vacant space in Atlanta and at our recently acquired property in Utrecht, the Netherlands. Looking to 2022, we have renewed just under 2 million sq ft in the U.S. at an average rental rate increase of 9.2%.
We have further renewal commitments totaling roughly 550,000 sq ft at an estimated average increase of 38%. In total, roughly 45% of our 2022 expiries have been renewed, and we expect to achieve an average rental rate increase of between 7% and 8% on the remaining 3 million sq ft of expiries. As Teresa mentioned earlier, and as disclosed in our MD&A, same property NOI increased by 5% on a constant currency basis, driven by strong re-leasing spreads, contractual rent increases, and the expiry of rent-free periods on a few of our newer assets in the U.S. and the Netherlands, offset partially by a contractual free rent period and short-term vacancy at two of our properties in Germany. Concurrent with the release of our quarterly earnings, we announced the establishment of an at-the-market equity distribution program.
We believe the ATM is an appropriate option for Granite given our growth and particularly the scale of our ongoing development program. Furthermore, the timing we feel is appropriate given the recent renewal of our base shelf prospectus in October and the fact that we do not have immediate need for capital. I can assure all of our unitholders we intend to apply this tool in a thoughtful and prudent manner in the future. We're also excited to announce our tenth consecutive annual distribution increase. Operational performance and accretive acquisitions and developments, combined with a strong balance sheet, have positioned us well to increase distribution for 2022 while maintaining conservative capital ratios, and I think demonstrates the confidence that the board has in our ability to drive cash flow growth in the future.
In closing, I think the quarter was once again characterized by operational stability and fair value gains. While our cash flow per unit metrics were impacted somewhat by the dilution from our June equity offering and the timing of acquisitions, as mentioned, we are very well positioned to continue to execute on our strategic plan and deliver strong long-term results for our unitholders. On that note, I will open up the floor for any questions.
Thank you very much. Ladies and gentlemen, if you'd like to register a question, please press one-four on your telephone keypad. You will hear a three-tone prompt to acknowledge your request. Once again, for questions, please press the one followed by the four. One moment for the first question. Our first question comes from Brad Sturges with Raymond James. Please go ahead.
Hey, good morning. Just on the acquisition front there, I think you highlighted the potential for another call CAD 390 million of investments, Q4, Q1. Just what would be the mix of that between income producing and development?
Sorry, Brad, they're all income producing. They're all stabilized assets.
Got it. Okay. If I heard you correctly there, you know, the thinking around the ATM program, obviously you're in a very strong liquidity position now, but that would be, I guess, really just utilized to help fund the development pipeline or program, over time, I guess.
Yeah. To be fair, it's a program we have contemplated at Granite for many months now. We knew that our base shelf was expiring in October of this year, so it didn't make any sense to implement an ATM in the short term. We decided to wait until we renewed our base shelf prospectus for 25 months in October. The timing was right. You're right. This is not something that we feel we would need to utilize immediately, but it gives us a useful tool or option in the future, you know, to fund development acquisitions in the short term, and just do it on an as-needed basis when appropriate.
In general terms with the development program and, you know, there's obviously pretty robust rent growth happening, but also, you know, increasing costs on the development side. You know, when you think about your returns or development yields, you know, where do you see that playing out? Have you seen any change in the type of development returns you think you can achieve?
We certainly have seen rising costs, and I don't know in the short term if we've seen the end of that. We've also seen, as you've mentioned, rental rates increase, and we've seen cap rates decrease. The IRR part of our models is more or less intact. If it's hit, I don't think it's materially hit, but the yields may go down. As you've seen, we're not in the low sixes anymore. We're in the low to mid fives, but at the same time, our exit cap rates have had to be adjusted as well. The IRR portion of it is more or less intact on our development. We still find them very. You know, Nashville is a very difficult market to enter. We know that from experience.
It's very difficult to find product that meets, you know, our investment criteria in terms of quality. This is the best way for us to enter that market and deliver NAV growth and the type of returns that make sense for us. I hope I'm answering the question. I think the returns from development overall are intact.
Has your thinking changed at all in terms of the amount of exposure you would want from development versus, you know, what the returns that you get from buying stabilized product?
Well, no, I think we're bumping up against our range, to be honest with you. I think we have made a lot of investment in development projects in the short term. It's not an accident that the assets we're working on now are all stabilized. I would say this, before we were to invest significantly in future development projects, I think we have some leasing to do on our current pipeline, if that answers the question.
Yeah. That's great. I'll turn it back. Thank you.
Our next question is from Joanne Chen, BMO Capital Markets. Please go ahead.
Hi, good morning. Thanks for the color on the renewal for 2022. I just wondered that I might have missed this, so I just wanted to clarify. When you say that you expect to achieve about 7%-8% rent lift on the remaining renewals for 2022?
Of the [CAD 3 million], correct. There's [CAD 5.5-]
Of the [CAD 3 million]?
Million rolling. Yeah. Of the remaining [CAD 3 million] that have not been spoken for.
Is most of that in the U.S., or is it like the remaining lease?
No, mostly the remaining is mostly in the U.S., but there is still the large asset in Austria, Lannach with Magna. Just to remind everybody, that expires December 31st, 2022, but the notice period is December 31st, 2021. We expect to receive notice from the tenant, Magna, by the end of the year, maybe not before it, but by the end of the year, and that's 800,000 sq ft. That is a chunk of that [CAD 3 million] remaining to be renewed or released.
Okay, got it. Maybe this is something a little bit more specific, but, you know, obviously very strong organic growth across all your markets on a constant currency basis this quarter, which is great to see. Just wondering, it looked a little bit light in Germany. I was wondering if, I know obviously a very small component of your overall portfolio, but, just wondering, was there just one-off that happened during the quarter?
Yes, it is. It kind of is a one-off. We had a short-term vacancy at our asset in Erfurt, and then there was a contractual free rent period that hit us hard in the quarter in Q3 in one of our other assets in Germany. That was related to a renewal with the tenant a few years ago. That was a free rent period that hit us, and I believe that burns off.
After October. I think it's one more month.
Okay, one more month. We'll hit it somewhat in the fourth quarter, but then that will be it.
Okay, got it. You know, and then just going back to U.S., have you noticed any change in the leasing dynamics, you know, during the quarter with respect to any of the delta? I would imagine no, right? I would imagine it's still very strong demand across the board.
Yeah, I think the best way I would put it is, you know, in Q2, I think we felt I think overall for 2022, I felt like we would be 7%-8% ahead in terms of rent. Now as we sit here today, we're thinking 10%-11%. That's mostly driven by our spreads in the U.S. No, we don't have a lot rolling in Canada, to be fair, and a lot of the roll in Europe is contractually, you know, it's prescribed under the lease. There isn't as much ability to move to market per se. It's really driven by the U.S., and that's moved 2%-3% in a quarter.
Got it. I guess just on that, you know, within Canada, obviously, the GTA remains red hot. Just kind of wondering, thinking with respect to your growth, you know, opportunities within Canada, would you think you're gonna likely stick around the GTA, or would you start looking at, you know, kind of more so the neighboring secondary markets, which are picking up quite a bit as well?
We monitor other markets outside the GTA. We look at Montreal. We've looked at opportunities in Montreal. We've looked at opportunities in Vancouver, even to a degree, looked at opportunities in Alberta. It is very attractive in the GTA. The growth profile that's available in the GTA in certain assets is admittedly very attractive. Where you see the growth, these deals are going for [CAD 300], now north of CAD 320 a foot. I think for us that there are just better total return, risk-adjusted returns in other markets. Not to say, I mean, we have almost 100 million sq ft under contract in the GTA that we're working on. We are pursuing select deals. I just think there is the ability to overpay for growth.
We're trying to be as active as possible in the GTA. But I think your question is this going to move us into other markets? Well, we are looking at Montreal on a select basis. Vancouver, I just can't see how the returns are gonna make sense to us. There may be a time where we look more seriously at Alberta, again. But right now our focus in Canada is essentially the GTA.
Okay, got it. Okay. Yeah, 'cause you know, markets like London are really picking up as well. Okay. Maybe just one last one from me. Do you think we could see some dispositions pick up this quarter? I mean, given where pricing is, would that make sense for you guys?
Well, we have two plans. We have one in Oshawa which is a small one, and we have the Poland asset. I think in total, it's almost CAD 50 million that are assets held for sale. We do expect to sell those in the fourth quarter. I can't, off the top of my head, think of any large dispositions we have in front of us for 2022. That could change. But right now, I think that our disposition activity will be relatively light to the end of this year and into 2022.
Okay. No, that's very helpful. I will turn it back. Thanks very much.
Our next question is from Michael Markidis with Desjardins Capital Markets. Please go ahead.
Thank you. Good morning, everybody. Kevan, could you just remind us on the Lannach asset, is that a market option or is it a fixed option?
No, it's they are different cash flow streams too, but they're all subject to prescribed rental rate adjustments. That one does not move to market.
It does not move to market. What's the option then? Is it just a flat or is it CPI based or how does it
No, they're all different. There are all different mechanisms. Some are just fixed increases, some are CPI look backs. Again, there are different streams at that one property. They're a mix of all of the above over time. That's the best way I could describe it.
Just in terms of assuming they do exercise, would the average rent lift on that be consistent with the average you're expecting for the remainder of this year on the [CAD 3 million], or would it be materially above or below?
I don't think it would be materially below, but I think it would be below.
A little bit below. Okay. No, that's great. Okay. Thank you. On the development side, I haven't bothered, and I don't know if you disclose it, to calculate the amount of your balance sheet that's tied up in development. But just as you look to sort of lever your platform more, in an ideal world, is it at a steady state now where you like the share of the balance sheet in development, or is that something you'd like to increase, presuming the leasing growth over time?
Well, including the commitments, I think we have quite a bit. I think we've always said being between 5%-10% makes sense for us. That would suggest we're building somewhere around, you know, based on our current size, we're building somewhere around 2.5-3.5 million sq ft. I think that's where we'll be. We're slightly elevated right now. Frankly, I will tell you the current state of the markets gives us that confidence. I think steady state will be somewhere between 5%-8% in development.
Okay. That's on a dollar basis or just looking at a square footage?
I think either way. The easiest way is square footage, but it works out to nominally the same number on a dollar basis.
Okay. Great. Thanks. Last one from me before I turn it back. Just with the, you know, the ATM program that you've launched, which, you know, I think is a great program for all REITs, going forward, and with the market as hot as it is, do you feel that you have the tools or do you have the visibility now where the cash balance can finally start to come down, or do you think that it will remain elevated through 2022?
I certainly don't. It will come down. Yeah, I wouldn't wanna put a number on it. I'm looking at Teresa. We're not interested in putting an exact number on it, but we do not intend to carry CAD 700 million in cash. Although it'd be nice, it's not our intent to carry at such an elevated level. Now, clearly, having development commitments makes us feel like a higher level of cash makes sense, but certainly not close to CAD 750 million.
Right. Okay. When you think about the cash, is that more in line with just thinking about where your leverage sits? Because you do have CAD 1 billion of availability on the line as well, right?
Correct. W e're not reluctant to use the line. I don't think we've needed to. As we've talked internally, you know, even if we're carrying CAD 300 million in cash and there's a very compelling acquisition opportunity in front of us, I don't think we would pass on it because we would have to dip into our line. As you said, the ATM for someone that's as active on the development side as us and growing, it seems to make sense. It's not a large number given our scale, CAD 250 million in total. It's not meant to replace, you know, a discrete equity offering that's tied to a use of funds, a particular use of funds, but it just gives us another tool.
I think we'll see how 2022 goes. I think that you know, there could very well be a situation where we're dipping into the line to fund particular transactions.
Gotcha. Okay. No, that's before I turn it back. Completely agree. I think the ATMs are a very responsible tool, and congratulations on getting that launched.
Thank you.
Our next question is from Sam Damiani, TD Securities. Please go ahead.
Thanks, good morning, everyone. Just first question, Kevan, I guess just on the development pipeline, I appreciate the color and the sort of targeted exposure. With respect to the existing active projects, what would be the timing we should expect in terms of getting meaningful lease up on that availability?
I hope when we have our fourth quarter call, we do expect to get some leases completed by the end of the year. When we have our fourth quarter call, we would expect to have updates on Altbach, which should be completed, I think, in the first quarter of 2022. Dallas, I think, is the second quarter, if I'm not mistaken, of next year. Dallas, the steel has just begun to be erected. I think that that's an important turning point in terms of marketing leasing. We've already responded to two requests for proposals on that project, which I think is still in the early stages from a marketing leasing perspective, but that is going well. They're coming along.
In Houston, our phase one was interrupted by our build-to-suit opportunity for the e-commerce user. We're using those approvals and site works, and we're moving it to that build-to-suit. Phase one will be delayed into 2022, and we'll start marketing pretty soon on that piece.
Phase one is now phase two?
Exactly. Yeah.
Maybe just looking at your held for sale in, I guess, Austria and Poland. I'm just wondering what the rationale was there. The decision to sort of exit the Poland market and, you know, this Austria asset, just curious why you put that one up for sale today.
The Austrian asset's an older manufacturing site, and it was always identified as non-core, probably one of our toughest assets. It's one that we never intended to hang on to, and we have an opportunity to sell it, we're taking it. The Poland asset's a little bit more, I think, frustrating to us. It's a market. The Wrocław market is one that we like in Poland, but this just is not the right size asset. The development does not give us enough flexibility to build the type of assets that we think we need in that market. Overall, we like Poland. We even like this market. It's just not the right asset in that market for us. I think it makes more sense for us to sell it and move on to other opportunities potentially in Poland.
Okay, that's helpful. Last question from me, is there capacity on the balance sheet today to do more cross-currency interest swaps?
There is lots for the U.S. dollar, but for the euro, not at this time. I'd say we're maxed out at this time on the euro until we get new investment in Europe.
Okay. Great. Thank you. I'll turn it back. Thank you.
Next question is from Himanshu Gupta, Scotiabank. Please go ahead.
Thank you, and good morning. First question for Teresa. What kind of foreign exchange hedges, if any, do you have in place for the next year? I'm just wondering how much fluctuations in currency will impact FFO next year.
Sorry, Himanshu, can you repeat the question? I didn't pick up on it.
Yeah. My question was, do you have any hedging program for 2022, for the next year? I'm just wondering, you know, the fluctuations in the U.S. dollar and euro, how will that impact the numbers?
Right. No. The hedging program that we had in place this year, which we've been realizing some gains on, that does end on December thirty-first. Our only hedging will really be the debt that we have in place is a natural hedge in both Europe and in the U.S. Of course, in the U.S., we're a little bit more exposed. I would say, you know, a cent change in the U.S. dollar would cause a [CAD 0.02 ] impact on FFO. For the euro, a [EUR 0.01] change impacts FFO by [CAD 0 .01] We'll just have natural hedges for now. We didn't extend it because we definitely put in place at the right time, which we, you know, has worked in our favor this year.
To extend the program, we felt that we would be locking in at, you know, rates that we think that would not allow us to participate in any strengthening of the euro and the USD, which, at least on the USD side, there, you know, forecasts seem to indicate that we will be seeing a rise in U.S. dollar. Euro is another story. It looks like it's, it may be holding flat for a while.
Got it. Okay. Thank you. Thank you, Teresa. Shifting gears, Kevan, on the GTA development in Brantford, looks like it may or may not start next year. Are you waiting for zoning or any other approvals before you begin construction there?
No, it's not that. We are actually moving dirt and preparing it, preparing the site for site work. We wanna be in a position where we can respond to build-to-suit opportunities, and we'll monitor the market and see. I mean, the market may be so strong, we decide to move ahead on the first phase, especially. I would like to see us clear up some of the leasing opportunities on our current development pipeline. We're preparing the site to be able to respond quickly to any opportunities. I'm just saying right now where we sit, we've got a lot of work to do, in the current development pipeline. We could see Brantford commencement of vertical construction start in 2023 versus 2022. I hope that I'm wrong.
I think the team agrees. If there is an opportunity for us to move forward with the build to suit or something really compelling in 2022, we won't hesitate. Right now, I think we've got enough on our plate as we sit here today. That may change in the coming quarters.
Got it. Will there be preference to pre-lease some of it or go speculative and then lease as it comes closer to completion?
You know what? We don't hesitate to go forward on spec. Because at the end of the day, a lot of times these tenants, even the large ones, even the sophisticated ones, make leasing decisions within six months. You know, we'll hold out for build-to-suit, but we also have a very good idea in our mind what we want to build. We're willing to move forward and do that and then try and find a tenant later. We'll see. Right now, we're developing the site so that we can respond to the right build-to-suit opportunities if they come along in 2022.
Got it. That's fair enough. On the same lines, on the Houston development, you know, phase one is now the phase two. Is there a change in strategy how you are approaching the construction? I mean, is phase two was more relevant for the type of tenants for that site?
No. Actually, we're building a bigger building in phase two for the tenant than we thought we were going to build. In a way, it's benefiting us because it actually increases our density in the site. It makes the site a little more efficient for us. We have approvals, stormwater approvals, et cetera, for phase one. We're shifting that to phase two to meet the tenant's deadline, and now we will reapply for those site work approvals and stormwater approvals for what is now phase two, which was phase one. We'll start construction hopefully in 2022. It has not impacted the site negatively. In a way, it's made it a little more efficient where we can add more density there without affecting the access or the flow of the site.
As you can imagine, phase two, we thought we were gonna build two buildings at 700,000 sq ft. Now we're building one building at 700,000 sq ft. Just to make the point that phase three, we've designed the site and phased the site intentionally to leave a large piece to the east that could accommodate two 500,000 sq ft buildings or one building in excess of 1 million sq ft, just in case there is that need in the market.
Got it. Thanks for the color there. Then I'm looking at the Nashville forward purchase, the property, [$66 million], 500,000 sq ft. Is the construction cost $130 per foot, I mean, as per my calculation?
That sounds a little high on that. It sounds a little high, but CAD 130?
No, $130 . I'm looking at the [$66 million] purchase, and I think it's 500,000 sq ft. Got it, you know, something like $130 . I thought, you know, a bit on the high side. Just wondering, is that a reflection of the property or the higher construction cost?
Well, it could be-
Maybe just the market in Nashville.
We'd have to check. Frankly, this project in Nashville is actually three smaller mid A buildings. The one in Murfreesboro is a large 850,000 sq ft sort of e-commerce monster. These buildings are smaller A buildings, so they should carry a higher cost per square foot to build them. That would also include demising costs, et cetera.
Okay. No, that's helpful. I'm just looking. Maybe the last question on the acquisition mix, and I know, you know, I think it's been addressed to a large extent. My question is that next year, the mix is still going to be more U.S. versus, you know, Canada and Europe. Are you seeing any, you know, like, more new supply in any of your U.S. markets?
Sorry, I think, are you tying to 2022 in terms of the turnover?
I'm talking about the acquisition mix for the next year. Will that still be-
Oh, I see.
More towards the U.S.? Are you seeing, like, new supply pockets which you may not prefer in those markets because of that?
I see what you mean. I would say again, I think a lot of it's going to be opportunity driven. I would like to keep our mix the way that it is, but this year we seem to be more active in Europe, and I think we'll finish the year pretty active in Europe. You could see our activity in Europe go up a little more. I think what we've seen in the past few years, we'll see continue. I think we'll continue to be busy in the U.S. In terms of where we've really seen opportunities, there isn't a lot of pricing opportunities or dislocation in any of our markets. You know, we've identified Savannah, Louisville, and a few others as being those markets that may have been overlooked. In the past couple of years, they are no longer overlooked.
I think there's a lot of pricing tension in the market. To go back to my comments from the second quarter, this is why we're looking at forward purchases. This is why we're looking at development opportunities in these markets, because it seems to be the only way we can get the type of assets that meet our quality expectations and deliver decent returns. You know, there are some opportunities that we're seeing out there. I don't wanna say too much because I don't want to give away any of our competitive advantage. Just to make the comment that, you know, and you've seen it in our fair value gains, the cap rates right now are very tight and falling across all of our markets.
Admittedly, we pay more attention to our target markets, as we should, than other markets. L.A. is in the 2s. We've seen New Jersey in 2%-3%, and these are stabilized assets. Clearly, investors believe that there's a lot of runway for rent growth, and they're willing to get very aggressive. It's interesting to see in L.A., your 2%-3%, you're gonna have a negative arbitrage to your financing costs. If there are levered buyers out there, which we know that there are, they're clearly relying on rent growth to create a positive arbitrage to their financing. It's interesting to see, but the sort of dynamic and falling cap rates we've seen across all of our markets.
All right. No, that's definitely the case, and I'll turn it back on that note.
Our next question is from Pammi Bir, RBC Capital Markets. Please go ahead.
Thanks, good morning. Just with respect to the Brantford site again, I'm just curious, how would the rents today perhaps in that market, or maybe the rents that you might be targeting on the site, how would they compare to the GTA? Have you seen any expressions of interest yet, from a build-to-suit standpoint?
We have received some interest in the site. We're not sure who the tenant is. I would just say that it's very initial interest. In terms of the rents, it's one of the things that drew us to this market, as we said, we looked at all of the markets around the GTA, and where was the best place for us to deploy capital on the development side in the GTA. We underwrote rents in CAD 7.50-CAD 8 range, and I feel that that probably has moved up another CAD 0.50 or so since we first started looking at the site. You compare that to the GTA, where we've seen average rents, you know, north of CAD 12 now, for similar. Actually I wouldn't even say similar product
We think that there's still quite a difference or an arbitrage between the rents in Brantford and markets like that and I would say the central GTA locations.
Got it. Maybe just, you know, you mentioned, I think it was a 38% spread on 500,000 sq ft of leasing that was done. Just, can you provide some context around that? Which markets was it or the types of tenants there?
I can't provide too much. I don't wanna name the tenants, but roughly half of that is in the GTA and half of it's in Europe.
Okay. Just, you know, again, nice to see the pickup in the organic growth and, you know, recognizing that a number of your leases do still have, of course, you know, CPI and fixed rate increases, and you've still got lot to address. How does the momentum perhaps impact, you know, your outlook for same property NOI growth next year, and how might that break down regionally?
Well, it's a good question. I mean, I think, like we said, as we look into 2022, we're seeing very healthy gains in rental rate, but we have a lot of turnover. I think that, and you said before, looking at same property NOI on an annual basis may not be the most relevant metric for us. I would look at it on a quarter-over-quarter basis as we move forward. Next year, I think will be, I would just put it similar to this year. But there will be pockets or quarters where we have turnover. Right now, what we're looking at, of the remaining 3 million sq ft, there's roughly 1 million sq ft where there will be turnover, where the tenant will move out.
We will have short-term downtime associated with those assets, but we are projecting rent lifts of, you know, between 10% and 20%. We'll set it up for a better 2023, if you will, and I think we're gonna finish the year quite strong on a same property NOI basis next year. A lot of leasing activity, a lot of strong lifts, but there will be some downtime associated with some of these re-leasing efforts at these properties.
Got it. Maybe just on the Indiana acquisition, just curious whether yourselves or the developer are responsible for leasing there, and what does that sort of targeted yield look like?
No. We will. When we have more information, we'll share it to you on a yield for Indiana. We really can't say much under the terms of the purchase and sale agreement. I will say this, as with all of our developments, we drive the leasing.
Okay. Is the expectation then based on that, you know, that asset would be income producing by the end of next year? Or does that kind of bleed into perhaps 2023, you know, once the tenant is maybe in place?
I would expect it would bleed into 2023. I think we are estimating we will have leasing done by the end of the year. Whether it's 100%, I don't. We're not expecting that. I think it will bleed into 2023.
Okay. Maybe just lastly, I'll take a shot at this, but based on your last answer, I'm not sure if we'll get color. On the Tilburg acquisition, what you know, that property is, I believe, fully leased. What does the EBITDA cap rate on that look like, or even a range?
Uh, [3.25%-3.5%] .
Thanks very much. I will turn it back.
Our next question is from Matt Kornack at National Bank of Canada. Please go ahead.
Hi, guys. I don't know if this is by design or if it's just the nature of the opportunities that presented to you, but it seems like the weighted average lease term on the assets you're acquiring has come down this year. Is that a function of just confidence in the leasing market, or is it just what was presented in the assets you like to, for location and other attributes?
Well, I think a lot of them may be just five-year renewal options that the tenant has. I think that would be the reason behind that.
Okay. It wasn't, it's not necessarily a shift in strategy that you wanna get at the potential rent increases earlier in the term?
Well, yes and no. I mean, I do agree with what you said. I don't feel the need to do long-term leases. I don't feel the need to provide concessions or pay for long-term leases. I'm very comfortable, and I think the team is very comfortable in looking at different options, including shorter lease terms, and getting to that higher rent, in near term. We are comfortable with it. It's not a specific strategy that we have. It's not that we're looking to do two and three or five-year terms versus 10-year terms. I think it's just the way it's turning out. A lot of it would be related to renewal options in favor of the tenant.
Okay, that's fair enough. With regards to because obviously in 2019, you got some fully leased longer duration leases on acquisitions. Do you kind of track where in place versus market rents are and can you kind of speak to how that has widened? Because presumably the rents at which you bought these assets, it seems like market's probably increasing at a greater rate than the steps in those leases. Any sense where the mark to market is?
Yeah, we do. I would characterize it this way. My earlier comment to your question this morning was from Q2. I think we projected next year's turnover, and a lot of that was in the U.S., was around 7%-8%. We were expecting to see that in terms of rent lists. We've now changed that to 10%-11%. It has moved roughly 3%, from last quarter. Now, maybe we're a bit conservative, but it gives you a sense of how fast the market's moving, the rental market's moving.
We know obviously, again, Toronto's strong, but in terms of the Midwest, Southeast, Texas, et cetera, where you are those kind of increasing, maybe not at the same rate, but fairly strong rates as well?
Yeah. I mean, you mentioned those markets, we've seen 4%-5%. You're right. Is it moving as fast as the GTA? Probably not, but it's moving. You know, that 4%-5% range is, I think, fair for those markets at annual rate growth.
That's great. Thanks, Kevan.
Next question from Sumayya Syed with CIBC. Please go ahead.
Thanks. Good morning. I'm just curious, Kevan, if you're seeing any of the supply chain issues filtering through to the portfolio and how that's impacting tenant behavior and their demand for space?
Yeah, it's a great question, and we talked about it internally. We haven't really seen it manifest itself in a way that seems to be impacting your tenants. The one thing that we've heard is they're very full. You know, they're not able to move goods, particularly inland. A lot of the containers seem to be moving and shuttling back and forth between Asia, and they're not making it into the interior part of the U.S. They're busy, but they're reaching capacity at their warehouses. Now, I don't know what the impact will be if this sort of supply chain disruption continues for another six months or so. They're busier than they were six months ago because of the supply chain disruptions.
Okay, interesting. I just wanted to follow up on, I guess, capital recycling in your international footprint. You exit the U.K., and now you're gonna be out of Poland. Are you sort of comfortable with your current market footprint, or do you see more opportunities to narrow that further?
Well, you're right. We are out of the U.K., but we did look at an opportunity in the U.K. recently. Not to say that we couldn't go back to the U.K. We have stated that the markets we're most focused on in Europe are the Netherlands, Germany, and Poland. Maybe in that order, maybe not. Even though we expect to sell our lone property in Poland by the end of this year, I would expect us to be in Poland next year in terms of assets. We are looking at opportunities actively in Poland as well. Those are the three markets we're spending our time on right now, are Germany, the Netherlands, and Poland.
Okay. Thank you. I'll turn it back.
Now we have a follow-up from Sam Damiani, TD Securities. Please go ahead.
Thanks. Just a couple of quick follow-ups. First of all, you have a number of fixed rent renewal leases in Europe. Is there much of that in the GTA portfolio for Granite?
Yeah. Well, there's the two big ones in Milton are CPI annual increases. I think there's a couple more of those, but, I think that's about it. The vast majority of them on renewal would move to fair market rent.
Okay, great. Actually, no, the question was answered earlier. Thanks. That's it.
Okay.
Those are all the questions we have. I'll turn the call back to you for closing remarks.
All right. Thank you, Operator. On behalf of the trustees and management team here at Granite, thank you again for participating on our call today. To our unitholders, thank you for your continued trust and support. Have a great day.
Ladies and gentlemen, that concludes our call for today. We thank you all for your participation. Have a great rest of your day. You may disconnect your line.