Good morning, and welcome to Granite REIT's fourth quarter and year-end results for 2021 conference call. As a reminder, today's call is being recorded Thursday, March 10, 2022. 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.
Good morning. Before we begin today's call, I would like to remind you that the 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 Granite's 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 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 key assumptions regularly and may change its outlook on a going-forward basis if necessary. Granite 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 D iscussion and Analysis for the year ended December 31, 2021 for Granite REIT, 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. Now I'll get started on our operational results, and then followed by Kevan.
Granite opened a strong fourth quarter, driven by strong NOI growth, but despite continuing foreign currency headwinds. FFO per unit in Q4 was CAD 1.02, representing a 3-cent or 3% increase from Q3 and 2% relative to the same quarter last year. Strong NOI and same property NOI growth was partially muted by unfavorable foreign exchange translation losses, as both the Euro and U.S. dollar were weaker by 7% and 3%, respectively, relative to the same quarter last year, resulting in a 4-cent decline in FFO per unit. This was partially offset by foreign exchange gains of CAD 0.7 million realized on Granite's derivative hedges, which have now fully expired at the end of 2021.
Granite's AFFO on a per unit basis in Q4 was CAD 0.90, which is CAD 0.03 and CAD 0.04 lower, respectively, relative to Q3 in the fourth quarter of 2020. AFFO-related capital expenditures, leasing costs, and tenant allowances incurred in the quarter were higher than past quarters, totaling CAD 7 million as maintenance projects delayed from the summer were finalized at the end of the year. Total AFFO-related capital expenditures for the year came in at CAD 12.4 million. With respect to 2022 and an increased level of lease turnover for the year, we are estimating AFFO-related maintenance capital expenditures and leasing costs coming in slightly higher at approximately CAD 15 million for the year. Same property NOI for Q4 was strong relative to the same quarter last year, increasing 4% 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 rents, and CPI increases across all of Granite's regions, as well as the expiry of free rent periods that were realized in the prior years at Granite's Indianapolis asset and Tilburg, Netherlands asset. G&A for the quarter was CAD 12.4 million, which was CAD 4.5 million higher than the same quarter last year and CAD 3.5 million higher than Q3. The main variance relative to Q3 are the recognition of CAD 3.6 million in unit-based compensation expense as a result of fair value losses recognized on non-cash compensation liabilities due to a 17% increase in Granite's unit price during the quarter and also some higher salaries and benefits expense.
$1.3 million of these fair value losses related to our DSUs directly impact FFO and does not get added back. Given the pullback of Granite's unit price so far in 2022, we will expect to see a reversal of these losses and will likely recognize a gain in G&A related to these non-cash compensation liabilities. On a run rate basis, we expect G&A expenses to continue at approximately $8.5 million-$9 million per quarter, or roughly 8% of revenues, excluding any amount for fair value adjustments related to non-cash compensation liabilities. For income tax, Q4 current income tax was just $0.1 million when you exclude the $2.8 million of current taxes recognized in the quarter relating to the sale of an Austrian property.
Similar to last year, Granite recognized the reversal of tax provision totaling CAD 1.8 million for the quarter, favorably impacting the quarter, as did the weaker euro. On a run rate basis, we estimate current tax at approximately CAD 2.2 million per quarter. With respect to potential recognition of reversals of tax provision for 2022, Granite has a further potential CAD 2 million of tax liability reversals that may be recognized mostly in Q4 of this year. As always, we can't make a call on the reversal at this time. Granite continues to leverage its net investment in Europe and access to lower cost debt. The recent partial financing completed early February of its 2028 cross-currency interest rate swaps from U.S.-based payments to euro-based interest payments will result in annual interest expense savings of CAD 5.5 million or 8 cents per unit annually.
Therefore, on a run rate basis, interest expense will run approximately CAD 10.7 million per quarter before factoring in any new debt. Looking out to 2022, given the numerous variables of same property NOI, foreign currency, and growth expectations, we would like to provide some initial 2022 estimates with respect to FFO per unit and AFFO per unit. For 2022, Granite is forecasting FFO per unit of approximately CAD 4.39, or a 10% increase from 2021, and within a range of CAD 4.31-CAD 4.43. For AFFO per unit, we are forecasting CAD 4.04, an 8% increase from last year, and within a range of CAD 3.96-CAD 4.08.
This forecast is based on the closing foreign currency rate of the Canadian dollar relative to the Euro and U.S. dollar as of December 31, 2021. The high end of our range provides for an approximate 1% increase in both the Euro and U.S. dollar relative to the Canadian dollar. The low end of the range provides for a 3.5% decrease in the euro, which is reflective of where it is today, and a 1% decline in the U.S. dollar. Please note that we estimate that a one cent movement in the U.S. dollar relative to the Canadian dollar impacts FFO and AFFO per unit by two cents, and a one cent movement in the Euro relative to the Canadian dollar results in a one cent impact to FFO and AFFO per unit.
The REIT's balance sheet is comprised of total assets of CAD 8.6 billion at the end of the quarter and was positively impacted by CAD 349 million in fair value gains on Granite's investment property portfolio. That was offset partially by CAD 45 million of translation losses on Granite's foreign-based investment properties, but particularly the 1.8% decrease in the Euro exchange rate relative to Q3. The fair value gains on Granite's investment property portfolio are attributable to fair value gains across all of our regions, but particularly the trust assets in the GTA and the U.S. due to increases in fair market rent assumptions and declines in cap rates.
The trust's overall weighted cap rate of 4.5% decreased a further 24 basis points from the end of Q3 and has declined a total of 108 basis points in 2021. Our net leverage at December 31 was 25%, and net debt to EBITDA remains healthy at 6.7 times. Our current liquidity is sitting at about CAD 1.3 billion, and that represents cash of about CAD 260 million and our undrawn operating line of CAD 998 million. Since placing our ATM in place in November 2021, Granite has not sold any units through the ATM to date. I'll now turn over the call to Kevan.
Thanks, Theresa, and thank you everyone for joining us on the Q4 call. As always, I will keep my comments brief and happy to take questions at the end. I'll start by repeating two themes from my opening comments on our past few calls. Once again, we posted an in-line quarter, and it is worth highlighting that FFO per unit for the quarter increased year-over-year, as Theresa mentioned, despite a corresponding negative move in FX of roughly CAD 0.04 and a CAD 0.02 impact on our G&A from the appreciation in our unit price in the quarter, which often gets overlooked.
Also worth highlighting, I think, is another increase in the fair market value of our portfolio in the quarter, led primarily by fair market value increases in the U.S. and GTA due to further increases in market rental rates and declines in capitalization rates for modern logistics assets across our markets in those jurisdictions. We continue to execute well on our strategic plan in the fourth quarter, acquiring six core and value-add properties in our target markets in the U.S., the Netherlands, and the GTA in the quarter for approximately CAD 330 million. We followed up 2021 with the acquisition of three properties in Germany for CAD 140 million. In all, we acquired 16 income-producing properties and three development sites for a total investment of CAD 923 million in 2021.
Further, we committed an additional CAD 216 million on three new development projects in our existing markets of Indianapolis and Tilburg, Netherlands, expected to be completed sometime in the third quarter of 2022. We also disposed of a small non-core asset in Austria for CAD 13 million at the end of November, and our sole asset in Poland for CAD 36.2 million in February. We expect the sale of our sole asset in the Czech Republic to close sometime in the second quarter. Our development program made significant strides in 2021, and our active pipeline comprises 6 sites and 9 buildings currently under construction in the U.S., Germany, and the Netherlands, plus expansions in Mississauga and Indianapolis, as disclosed, totaling roughly 5 million sq ft and CAD 450 million commitments.
Construction of these properties is expected to be completed in the second quarter through the fourth quarter of this year. To date, 2 of the buildings are fully leased and activity is strong on the remaining buildings under construction. We have seen an increase in costs associated with most of our projects. It has been absorbed mostly within established budget contingencies to date and offset by higher rents versus pro forma. I would estimate further that project completion on average has been delayed by 2-3 months from initial schedule due to supply chain and COVID-related issues. As I've mentioned before, development is core to our growth strategy, and these projects are expected to improve the quality and functionality of our portfolio and drive significant growth in cash flow and net asset value upon stabilization.
It is also worth repeating 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 for the year, and as disclosed in our MD&A, we are proud to report that Granite achieved a global ESG benchmark or GRESB score of 65 out of 100 for 2021 versus the average for a 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. We are currently developing our 2021 ESG report, which will outline the progress we made in 2021 against our objectives and set detailed and likely more ambitious targets and objectives for 2022 and beyond. The report is expected to be published early in the third quarter of this year.
Operationally, as stated on our Q3 call, all 2.3 million sq ft of our 2021 lease expiries were renewed or re-leased, and the team leased approximately 300,000 sq ft of vacancy in Atlanta in our recently acquired property in Utrecht, the Netherlands, in the fourth quarter. For 2022, we have now exercised renewals on 4 million sq ft of our 5.9 million sq ft of expiries at an average increase in rental rate of just over 10%. We anticipate achieving an increase of between 15%-20% on the remaining maturities for 2022.
As Theresa mentioned earlier, and as disclosed in our MD&A, same property NOI increased by 4% on a constant currency basis, driven by strong re-leasing spreads, contractual rent increases in the expiry of rent-free periods on a few of our newer assets in the U.S. and the Netherlands, offset partially by contractual free rent period and short-term vacancy at two of our properties in Germany. We expect same property NOI to be similar to 2021 and average between 3.5% and 4.5% in 2022, as the impact of strong re-leasing spreads could be partially offset in the short term by vacancy from turnover at two properties in the U.S. At this time, we also expect same property NOI growth to accelerate in 2023, but we will have more information on 2023 in later quarters.
We have all seen the devastation in the Ukraine, and I think like all of you, we are hoping for a peaceful resolution to this conflict as soon as possible. Notwithstanding the resulting disruptions to supply chains in that region, all of our tenants in Europe continue to operate in their space, and we are not aware of major disruptions so far to their operations involving our properties. We will, of course, continue to monitor the situation for any major developments. In closing, I think the quarter and the year were characterized by fair value gains, operational stability, progress on the ESG front, and significant investment in acquisitions and specifically development. We expect 2022 to be a busy and productive year for Granite, and we remain very well positioned to continue to execute on our strategic plan and deliver strong results for unitholders.
I would like to take this opportunity to thank all of our employees for contributing to another strong year in 2021. On that note, I will open up the floor for any questions.
Our first question comes from Sam Damiani of TD Securities. Please go ahead.
Thank you. Good morning, everyone.
Good morning, Sam.
Just on the conflict in Ukraine. Thank you for your comments, Kevan. Have you seen any impact on just sort of general levels of business activity, generally, but then also more specifically with people making decisions to lease space and you know and acquire, dispose, or finance properties, any impact on the investment market?
You know, I think we all agree that it's early days. We've been talking about this internally with our team in Europe, and so far we have not seen a major shift or a major disruption to normal operations or to acquisitions or development. You know, I would characterize, maybe this is unfair, I would just characterize it as in North America, we seem to have more, I guess, concern than what we're seeing from on the ground in Europe. Now, that may change, but that's what we're seeing so far.
Okay, that's great. Just on your 2022 renewal guidance for, you know, bigger lifts on the remaining renewals.
Mm-hmm.
Are there particular markets or projects that are driving that? I wonder if you could update us on your views on market rents generally in Germany and the Netherlands.
Yeah. Well, the bulk of our remaining maturities in 2022 are in the U.S. You can see from our estimates, there's very strong rent growth in the U.S. We're seeing very healthy spread there, north of 10% almost across the board, and sometimes approaching 20%. The Netherlands and Germany, we're also seeing strong rent growth as well, but of course, we don't have a lot of roll in 2022 in Europe. We've seen more of it in 2023. We have a better roll in Europe. Of course, in 2024, with Graz, we are expecting good results there in Austria, and then continued, you know, strong growth in the U.S. as well.
One more, if I could, just before we turn it back. On the Magna leases in Austria, what are the typical terms, I guess, in terms of getting a rent bump on the renewals with this lease that's basically happening in Lannach and also the other properties to expire over the next couple years?
Yeah. Well, Lannach and Graz specifically have CPI look-backs, but I think we talked about this a bit on the Q3 call. Lannach is a bit different because it has multiple cash streams or rent streams. That CPI look-back is spread out over three years, I believe. The best way to look at Lannach is every five years, if it renews, it would be 10% that would be spread out over five years. Two percent contractual rent growth a year. Graz is a bit different, but it has the same CPI look-back mechanism that will kick in on the date of maturity.
Thank you. I'll turn it back.
Thank you. The next question comes from Joanne Chen with BMO. Please go ahead.
Hey, good morning. Congrats on a very great end to the year. I just had a quick question. I apologize if I missed this earlier, but on the renewals that you've done for 2022, do you what kind of rent lifts were you able to achieve on those? Was it did you say 10%–15%?
Yeah, Joanne, I said what we've achieved so far is just over 10%. I think I said it was 10.5%. On the remaining, I think 2 million sq ft, roughly, we are anticipating between 15% and 20% on average.
Oh, wow. Okay. That's a lot. That's a big pickup from what I think you said for last quarter. Great to see that momentum.
Sorry, just to clarify, I think what I said for 2022 is we would be around 11%-12%.
Mm-hmm.
10.5% and 15%-20% on the remaining should get us pretty close to that number. Maybe a bit above 12%, but I think it's consistent with what we saw in Q3.
Okay.
I do say I do appreciate you pointing that out. It is moving in the right direction.
Oh, for sure. I guess just going back, unfortunately, you know, obviously, what's going on in geopolitics in Europe right now. Do you think that pressure, you know, with rising oil prices and, you know, upward pressure on transportation costs, that will only fuel higher demand for, you know, assets for like logistics like located in your key logistics hub, just given how expensive transportation costs could get?
Yeah, that's. I think we've always kind of bought into that thesis that the higher oil prices go, the more storage space you're going to need, and you're going to need to shorten.
Yes.
drive times, and you're going to need to have more storage. You cannot.
For sure.
afford to have just-in-time delivery. I would say, I just think overall with what's happening in the Ukraine and Russia, that I think it just shows, you know, how mission critical the existing facilities we have with our tenants in Western Europe are. I think a lot of these tenants, not only Magna, are rethinking their supply chains and the vulnerability
Yeah.
of their supply chain. I think that bodes well for assets in Western Europe and locations in Western Europe.
No, for sure. That's helpful. I guess just one more last one from me. With respect to your kind of growth strategy for 2022, should we kind of expect more developments in land acquisitions in Canada and then kind of a more even split between development and income producing properties in the U.S., and I guess more income producing properties in Europe? Sorry, I know that's a long-winded question.
No, I know. I think, I mean, certainly it was a major pivot to development in 2022. What I would say is, we continue to look at the right opportunities. I'm not sure how comfortable we will be adding a lot of development right at the moment. I think we have some leasing to work through, which we expect to do through 2022. But yeah, on a normalized basis, we want development to play a major role in our growth. At some point, it's going to be more than 50% of our growth on an annual basis. I think we've kind of always pointed in that direction. I think 2022, we accelerated the program significantly.
We've been focusing, as you can tell, I think Q4 and into Q1, we have focused on some IPP acquisitions into 2022. We've got to work through these developments in 2022, maybe add some IPP, continue to add IPP in our target markets. At some point you're going to see development continue to outpace acquisitions.
Got it. No, that's very helpful. Thank you very much. I will turn it back.
Thank you. The next question comes from Matt Kornack with National Bank. Please go ahead.
Hi. Good morning, guys.
On the vacancy that you expect in the U.S., is the thinking around that it's still going to be pretty short term in nature and that the property's in pretty high demand?
Yeah. I'm just pointing out that I think like we're pretty bullish on the U.S. and where the leasing is going and where, you know, these tenants, they're not leaving because of, you know, the weakness of the location. They just need twice as much space as those assets can provide, so they're moving on. We're just thinking at some point when we re-lease to a new tenant, there could be some downtime associated by it. So it's really moving in the right direction. There may be noise in a quarter, maybe two quarters. I think as we've mentioned, our tenant in Pennsylvania, 750,000 sq ft, they triggered a six-month extension. So now they're there until September thirtieth, and we wouldn't be surprised if they overhold until the end of the year.
The same- property NOI could be stronger for 2022. Just pointing out, if we put a new tenant in there's a pretty good chance we're going to incur a month or two months of vacancy, maybe three months. We're not anticipating a prolonged vacancy associated with those assets or the re-leasing.
Okay. No, that makes sense. Then the 3.5%–4.5% same property NOI growth that anticipates at least some downtime on that property, even if it.
Right.
May get overheld until the end of the year.
Yeah.
Okay.
Absolutely.
Rule of thumb-wise, I know you can't really have rule of thumb. In terms of the geographic split on mark-to-market potential in the portfolio, and maybe not for 2022, but thinking of 2023, has the sort of-
Yeah.
10%-15%, is that moving up to sort of 15%-17% in the U.S.? I know Canada's kind of strong. Europe as well. I'm not sure exactly where that would fall.
Yeah, no, I definitely think it's closer to 15. It's moving towards 15 in the U.S. I think Europe we felt was 10% for the 2023million more capacity on that front in euros?. Obviously, we don't have that much rolling in the GTA, but that's closer to 60%.
Okay, perfect. And then a last one for me. Just in terms of the FX move, and I guess this is for Theresa. On the hedging front, I know you did that favorable hedge in the quarter, sorry, post-quarter. But how has the market dynamic shifted on the ability to do that? Let's say if you did another bond and wanted to swap it, has the rate moved at this point given this volatility, or is it more favorable, less favorable? I'm just not entirely sure on that.
I think it moved up a little bit as far as it's really, you know, where the Euro rates are relative to Canada, and I think it's just inched up a little bit. If we had additional investment in Europe and we could again hedge further with Euro debt, I don't think it'd be as favorable as 0.56% that we experienced, but let's say closer to like the 1% range.
Okay, perfect.
I think it
Is there, I guess, with the existing asset base or even with your forward purchases of European assets and the ones that close subsequently, would you anticipate there being EUR 200 million more capacity on that front in E uros?
Yeah. I mean, we have a forward purchase coming in the mid-year. With that we have a little bit of room left. There might be CAD 200 million in there. You know, I'd probably wait for it to bulk up a little bit more before we look at that again.
Okay, perfect. Thanks, guys.
Thank you. The next question comes from Himanshu Gupta of Scotiabank. Please go ahead.
Thank you, and good morning. Just on the Magna lease on Lannach. It looks like it was renewed. Was there any negotiation or any incentive given for this extension? Is it fair to say now that no big Magna lease is coming due until 2024?
Yes. The question on 2024, correct. There's very few Magna leases rolling before then. On Lannach, no, there were no incentives or commissions associated with that renewal. It's just a straight renewal.
Okay, Kevan, you know, now that, you know, Lannach has been renewed, would you look to monetize those assets? Bigger picture, you know, Magna overall exposure is reduced to 29% now. Are you happy where Magna is, or would you look to, you know, further reduce your exposure to Magna?
Well, no, I think we said on previous calls, there are that's a large single tenant exposure, and I get that. It's not so much reducing the exposure to Magna, but as we've said, at the end of the day, these aren't the facilities that meet our investment criteria. They'll probably at some point held better in someone else's hand. There is still some value to be added to those assets, and we want to see that. We want to see that through and execute on that strategy. We'll look at it. I think at 29%, we don't feel any urgency to do anything today. We want to make the best decision. The conditions for potential monetization are still continuing to improve, and we'll review it over the next few years.
We still believe that there is value in these assets to unearth before we look at doing something on a major scale.
Got it. You know, specifically for Lannach, I mean, given a renewal now, do you think the value would have enhanced, now just by the definition of, you know, you getting the renewal here?
Yeah, I think the question, if I'm correct, I think the question was there a value bump in because of the renewal? The answer is yes, that there was. Not as much as you might think, because we always knew there was going to be a renewal, or from our value perspective, we were not concerned of them moving out. Of course, yeah, there was a rather automatic sort of bump in value due to the renewal.
Got it. Okay. Thank you. Just shifting to your FFO per unit guidance for 2022, what acquisition activity or what leverage are you assuming in this 10% FFO per unit growth?
Yeah, not to provide too much detail, but I think we would see it as kind of a similar year, although I would point out quite strongly actually that, as we look at this market, we do expect to execute on more rebalancing and more dispositions. I'm not even sure I would use the word non-core. I would just say we are looking at the right opportunities to trim our portfolio as we always have, but we do expect to be a little more active on that front in 2022.
Okay. Thank you, and I'll turn it back.
Thank you. One moment please for our next question. The next question is from Howard Leung of Veritas Investment. Please go ahead.
Thank you. I just wanted to ask about the mark-to-markets and follow up on that. You know, they seem really favorable. Teresa, I know you talked about the higher CapEx in 2022. Are you seeing, you know, existing tenants, when it comes to expiries, maybe that, you know, a lot of them are, you know, opting to move out, but you're being able to find, you know, new tenants that are willing to pay the higher mark-to-market or, you know, any kind of pressure on that front?
I think the question is. Well, not sure what the question is, Howard, but I would say that definitely we feel like we're in strong markets, and our assets are, for the most part, very modern. We're not concerned per se if tenants, for whatever reason need to move out. The releasability of these assets, whenever we're looking at acquiring an asset or developing an asset, the leasability is always paramount in our considerations. We do approach a lot of leasing recently with the attitude that, you know, if the tenant moves out, then we feel confident we will be able to replace them with a similar comparable tenant at a higher rent.
That's kind of the attitude or approach we take as we're looking at these renewals. At the end of the day, tenants aren't going to—particularly in a market like this, they're not going to move for $0.50. They're going to move because there are differences in their needs. Like I mentioned before, the tenant that will move out probably by the end of the year or at the end of the year in Pennsylvania is moving into a facility that I think is 60%-70% bigger than our facility. We do have on this site some capacity to expand the building, but not that size. Their needs have changed and they're moving on.
There is a lot of interest in that building in the market right now. We're very comfortable and confident with our ability to re-lease that at a rent that's much higher than the tenant was paying at expiry. I hope that answers your question, Howard.
It does. Yeah, it was. I was trying to find, just kind of ask for the market dynamic, and it's of course, you know-
Yeah.
There is a lot of demand for your assets even if there is turnover. I guess on that same topic, you know, the inflation rates are pretty strong now. Given you know kind of it's more of a landlord's market, are there any thoughts to, you know, building in more CPI escalators in your, you know, non-Magna leases to kind of capture that inflation?
Yeah, certainly we're approaching it from that way as well. I think we did one recently that was 3.5%. I think we're working on a deal right now where it's approaching 3.75% a year. So you can get it. I mean, the majority of tenants we deal with are very sophisticated tenants. Like, we don't have a lot of small bay tenants. We have major tenants that are very sophisticated. The pushback that they will have is we're not expecting. The issue is where inflation is going to be 3.5%-4% for the next 10 years. So that's where the most leases that we see in the market today are still in the 2%-3% range. I would say this, they're not closer to two anymore, they're closer to three.
We've seen contractual escalations average closer to 3% the past couple of years than 2%. That's a pretty recent move and a pretty significant move when someone's going to commit to space for the long term.
Right. Yeah, no, it adds up over time. Those are all my questions. Thanks for answering them. I'll turn it back.
Thank you. The next question comes from Mark Rothschild of Canaccord Genuity. Please go ahead.
Thanks. Good morning, everyone. Kevan, just want to make sure I understand your comments regarding developments. Maybe you could expand on it. You said that, or I think you said that you expect to be even more active in development going forward and view that even more than acquisitions. You've obviously, you know, assembled a large pipeline, but with land costs going up and pressure on yields, do you still expect to be able to find a large number of new development opportunities? And how do you think about that now in the context of acquisitions?
No, it's a great question, Mark. It is based on opportunity and what we think is the best thing to do. I think what we've been most focused on is just really optimizing our development capabilities, and I feel really good about where we are. I think I'm talking about, say, 2025, 2026. It would not surprise me at all if we're spending, you know, CAD 500 million a year on development and we're acquiring CAD 300 million a year in new property. All I'm saying is it's a bit of a shift there, and those numbers can change from year to year just based on where the market is and where the opportunities are. Absolutely. I've always, we've always been interested in redevelopment plays.
Those have been, as you can tell, I mean, almost look at the deals in the GTA. Some of them you could. Well, the two that we just closed on in December, those are redevelopment plays, or I would say refurbishment plays. The redevelopment plays are highly interesting to us as well. Both have been hard to come by and quite expensive. We watch for fluctuation and dislocations in the market as well, and we're built to be flexible and pursue what's going to, you know, generate the best long-term returns for unitholders.
Okay, great. Maybe just for Theresa, I'm not sure if you said this. You can have this one. I apologize. For the guidance, we talked about FFO for 2022. What G&A was built into that?
It's about, I'm going to say CAD 34 million. It's about eight-
Eight.
CAD 8 million a quarter.
You said 8 to 8.5.
CAD 8.5-9 million a quarter is what's built in.
Perfect. Thank you so much.
Thank you. The next question comes from Pammi Bir of RBC Capital Markets. Please go ahead.
Oh, hi, Rhonda. Good morning. Kevan, I was interested in your comments on Lannach and the additional perhaps value creation opportunity there. Can you just maybe expand on it? I'm just interested in sort of what you saw there.
Well, I think the question was there a bump in value when the renewal was triggered? I said that yes, there was. I wasn't sure exactly what the bump was, but there was. The other comment I made is it's probably not as high as you might think because it's not that binary. There was a very strong expectation that the tenant would renew at Lannach. Although there was a bump when it was crystallized, it probably wasn't as much as most people would think.
No, yes. No, I understood that part. You know, with respect to possibly, I guess, looking to monetize or sell that asset at some point down the road, you mentioned that, you know, maybe it's not necessarily the right time because you think there's still more value that can be created there. I'm just curious more about that aspect of your comment on the additional value that could be created down the road.
Yeah. Yeah. Because what I meant by it, Pammy, was, I don't want to go into it, you know, into too much detail, but we've set up our properties in Europe in a tax-efficient way. We have to think about how we approach that, and that may involve more than one asset at a time. That's what I meant by it.
Okay.
There are other assets in Austria and Europe that could impact that as well and the timing of extensions on those.
Okay. Got it. Just maybe rounding up the discussion on Lannach. What was the other renewal term? Secondly, you spoke about, you know, the 10% renewal spread that you've accomplished so far on the 2022 maturities to date. Just curious, did that 10% include Lannach in that figure?
Yeah. It's 5 years. They're 5-year extensions. I mentioned that there are different cash flows, and the largest cash flow when it triggers is in 2024. What I was saying is the best way to look at it probably is to say it's going to increase by 10% over that 5-year term. Really, it's going to average 2% a year. Probably the best way to look at it. The big bump in Lannach hits in 2024, early 2024. Or June 2024.
Got it. Just the cash on the books, you know, you put some of that to work in February and, you know, you talked about some additional income-producing acquisitions, you know, in the pipeline, maybe even some perhaps developments. I guess we'll see. But what can you share with us in terms of what the acquisition pipeline looks like today? And does your guidance assume that you'll be carrying excess cash for a good portion of the year?
Yeah. I'll start and Theresa can jump in any time. First of all, I think the acquisition pipeline is in the CAD 250 million range. These are deals that are actively under negotiation, and then we're obviously always looking at opportunities. We have balance sheet capacity to add to that when the time is right. I mentioned on the disposition side, we are looking at trimming parts of our portfolio, some in the U.S., some in Europe, that we think will also be a pretty active way to raise capital for deployment. So was that the question or?
Yep. Yeah. I think just on the, I guess the general view on, you know, will you be carrying some excess cash? Just the guidance is seeing some excess cash being carried over the course of the...
I don't think we're going to see a lot of excess cash being carried outside of Q1. You know, we're sitting around CAD 260 million, but we do have commitments. Obviously, we have CAD 480 million of development and forward purchase commitments. I think we're going to get to a point where we're just going to be holding cash more at an operational level, and it won't be excessive as we've seen in the last couple of years. It'll be managed to a lower level.
Right. Okay. Then just last one from me. The same property NOI growth you talked about, you know, that 3.5%–4.5%. You also talked about, I guess, some transitional vacancy possibly, I guess, maybe toward the end of the year. Fair to assume that the bulk of this growth is really just mostly coming from rents, minor rents to contractual steps, maybe some renewal leasing, rather than occupancy. I mean, I'm assuming that the growth that you've guided to assumes some lower occupancy than where you sit today.
Yeah. I think it's just pure rental rate growth.
Thanks very much. I'll turn it back.
Thank you. The final question comes from Brad Sturges, Raymond James. Please go ahead.
Hi there. Just to go back to the guidance there on FFO and AFFO again, just to clarify, that does assume that there will be some rebalancing within the portfolio?
Yeah. Yes, it does. Yes, it does.
Would that be a negative impact or just from a transactional, like timing of transactions to redeploy on the buy side? Or is there expectation to see a little bit of a roll down on ongoing yield?
I don't think we're going to see necessarily an impact on a per unit basis, Brad. I think it'll be a redeployment into new IPP.
Got it. Just to understand the strategy there a bit, it's not necessarily non-core assets, more of a rebalancing. Are you making a rebalancing just based on the market specifically within the U.S. and Europe? Or how should we think about what that rebalancing strategy could look like?
Yes, it could include assets where we feel like we have enough exposure in a certain market. It could be assets where we feel we've added a lot of value and maybe the growth and the continued appreciation value is not going to be there versus what we're acquiring today. Those are the things. You have the growth profile to look at and maybe market concentration. Those are two things that are constantly on our minds looking at, and I think we have some attractive opportunities to mine the portfolio this year.
Okay, that makes sense. I'll turn it back.
Thank you. That was our final question. I'll turn the call back over for any closing remarks.
Okay, thank you, operator. Again, on behalf of the trustees and the team here at Granite, thank you all again for participating on our call. To our unitholders, thank you for your continued trust and support.
Thank you. This does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you, and have a good day.