Good morning, and welcome to Granite REIT's Third Quarter Results for 2022. As a reminder, this conference is being recorded Thursday, November 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 would like to turn the call over to Teresa Neto to go over certain advisories, followed by an introduction from Kevan Gorrie.
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 Granite's materials filed with the Canadian Securities Administrators and the U.S. Securities and Exchange Commission from time to time, including the Risk Factors section of the Annual Information Form for 2021, filed on March 9, 2022. Readers are cautioned not to place undue reliance on any of these forward-looking statements and forward-looking information.
The REIT reviews its assumptions regularly and may change its outlook on an ongoing forward basis, if necessary. Granite undertakes no intention or obligation to update or revise its key assumptions, forward-looking statements or forward-looking information, whether as a result of new information, future events or otherwise, except as required by law. In addition, the remarks this morning may include financial terms and measures that do not have a standardized meaning under International Financial Reporting Standards. Please refer to the audited combined financial results and Management Discussion and Analysis for the three and nine months ended September 30, 2022 for Granite Real Estate Investment Trust and Granite REIT Inc., and other materials filed with the Canadian Securities Administrators and U.S. Securities and Exchange Commission from time to time for additional relevant information.
I'm gonna commence the call with financial highlights, and then I'll turn it over to Kevan, who will follow with operational updates. Granite posted Q3 2022 results in line with expectations, with strong NOI growth, partly impacted by continuous weakness in the euro and higher interest costs from rising rates and borrowings. FFO per unit in Q3 was $1.08, representing a one cent or 0.9% decrease from Q2, and a 9.1% increase relative to the same quarter in the prior year. However, in the second quarter, Granite recognized $0.9 million in fair value gains relating to the revaluation of DSU liabilities. But given the amendments made to Granite's DSU plan in June, these fair value changes no longer impact FFO, contributing to a 1.4 cent unfavorable variance in the third quarter relative to Q2.
Strong NOI from acquisitions and same-property NOI growth was partially muted by both unfavorable and favorable foreign exchange movements, where the euro was 3.2% weaker and the U.S. dollar 2.3% stronger relative to the Canadian dollar in comparison to Q2. In comparison to the prior year, the euro was 11% weaker, but the US dollar 4% stronger, resulting in a negative CAD 0.02 impact to FFO per unit. Also impacting the third quarter was the effect of higher interest cost borrowing from the credit facility and the new $400 million term loan that closed in mid-September, adding an additional estimated CAD 2.2 million of interest expense or CAD 0.03 per unit relative to Q2.
Granite's AFFO on a per unit basis is, in Q3 2022 was CAD 0.97, which is CAD 0.07 lower relative to Q2 and CAD 0.04 higher relative to the same quarter last year, with variances mostly tied to capital expenditures. AFFO-related capital expenditures, leasing costs, and tenant allowances incurred in the quarter totaled CAD 6.6 million. For a year-to-date period, it is CAD 11.2 million. For 2022, we estimate AFFO-related maintenance capital expenditures and leasing costs coming in about CAD 17 million for the year, which is consistent with the estimate provided at the Q1 earnings call. Same property NOI for Q3 was solid relative to the same quarter last year, increasing 3.2% on a constant currency basis, but 1% when foreign currency effects are included.
Same property NOI growth was driven primarily by higher than previous year CPI adjustments, positive leasing spreads, and contractual rent increases across all of Granite's regions, as well as the realization of a free rent period in the prior year at one of Granite's properties in Germany, offset partially by short-term vacancies at two U.S. properties. G&A for the quarter was CAD 6.5 million, which was CAD 2.4 million lower than the same quarter last year and CAD 0.5 million higher than Q2.
The main variance relative to the prior quarter and from Q2 was the change in non-cash compensation liabilities, which generated a favorable $4.1 million fair value swing relative to the same quarter last year, and an unfavorable $0.5 million fair value swing relative to Q2 as we recognize fair value gains on these liabilities due to a 15% decrease in Granite's unit price during the quarter. On a run rate basis, we continue to expect G&A expenses to continue at approximately $9 million per quarter or roughly 8% of revenues, excluding any amount for fair value adjustments related to non-cash compensation liabilities. For income tax, Q3 2022 current income tax was $1.9 million, which is $0.5 million lower than prior year and essentially flat to Q2.
The variance relative to Q3 2022 is primarily due to the effect of the strengthening of the Canadian dollar on euro-denominated tax expense as compared to the prior year period, and to a lesser extent, due to the sale of an asset in Austria in 2021, reducing taxable earnings. On a run rate basis, we estimate current tax at approximately CAD 2 million per quarter before recognizing any reversals of tax provisions. Having said that, for Q2 2022 specifically, we are expecting to recognize adjustments pertaining to past tax years in Europe that could result in net positive adjustment to current tax of approximately EUR 500,000 or CAD 700,000.
Interest expense was higher in Q3 2022 relative to Q2 by CAD 2 million, reflecting incremental interest expense on draws on Granite's credit facility and the interest on the new $400 million senior secured non-revolving term loan, which closed on September 15 and was used to repay the outstanding balance on the credit facility, which at that time was about $235 million. In conjunction with the drawdown of the 2025 term loan, Granite entered into a float to fixed interest rate swap to fix the interest rate on the term loan to an all-in rate of 5.16%. On a run rate basis, we estimate interest expense will run about CAD 16 million per quarter before factoring in any new debt of credit facility draws.
All of Granite's debt is fixed rate debt through cross-currency and interest rate swap hedges, with the exception of the credit facility, which is at a variable rate and subject to increases in underlying treasury rates. As a result of the new term loan, Granite's weighted average cost of debt did increase 57 basis points to 2.26% from 1.69% last quarter. With respect to 2022 estimates reflecting an overall weaker Euro offset by a stronger U.S dollar and rising interest rates due to expected strong operational performance, Granite continues to forecast that FFO and AFFO per unit will come in the ranges provided in March of this year, being 4.31-4.43 for FFO per unit and 3.96-4.08 for AFFO per unit.
Further, on our singular estimate, we're increasing those slightly for FFO per unit, increasing CAD 0.02 to approximately CAD 4.37, and AFFO per unit increasing CAD 0.03 to approximately CAD 4.01. We have updated our assumptions regarding foreign exchange rates and are estimating for the fourth quarter of 2022 an ongoing weaker euro offset by a stronger U.S. Dollar relative to the Canadian dollar. Our Canadian dollar to euro average rate remains unchanged from last quarter at 1.32, and our Canadian dollar to US dollar rate increases to 1.33 from 1.28 last quarter.
The US dollar foreign exchange rate forecasted is admittedly conservative relative to today's market, and should the U.S. dollar exchange rate remain at current levels, FFO and AFFO per unit could be positively impacted by a further CAD 0.01-CAD 0.02 above our singular estimate. As communicated before, we continue to estimate that a one-cent movement in the Canadian dollar relative to the U.S. dollar does impact FFO and AFFO per unit annually by CAD 0.02, and one cent movement in the Canadian dollar relative to the euro results in a CAD 0.01 annual impact to FFO and AFFO per unit.
The trust balance sheet, comprising of total assets of CAD 9.6 billion at the end of the quarter, was negatively impacted by CAD 229 million in fair value losses on Granite's investment property portfolio in the third quarter, offset by CAD 318 million of translation gains on Granite's foreign-based investment properties, particularly due to the 6.8% increase in the spot U.S. dollar exchange rate relative to Q2. The fair value losses on Granite's investment property portfolio were primarily attributable to the expansion in discount rates and in certain assets, an expansion of terminal capitalization rates across all of Granite's markets in response to rising interest rates. Partially offset by fair market rent increases across the GTA and U.S. and selective European markets reflecting current market fundamentals.
The Trust overall weighted average cap rate of 4.68% increased 18 basis points from the end of Q2, but still has decreased 12 basis points since the same quarter last year. Total net leverage at September thirtieth was 29%, and net debt to EBITDA remains steady at 7.7 times. The Trust current liquidity is approximately CAD 1.2 billion, represented by cash on hand of about CAD 195 million and the undrawn operating line of CAD 997 million. As of today, Granite has no amounts drawn under the credit facility, and there is CAD 2.6 million in letters of credit outstanding.
With the closing of the $400 million term loan and repayment of outstanding amounts on the credit facility, Granite realized excess net proceeds of approximately CAD 225 million, which provides pre-funding for Granite's ongoing development program. Based on the remaining development commitments, forecasted dispositions, and NCIB activity for the remainder of the year, Granite estimates that it will end the year with about CAD 90 million of cash on hand and no draws on the credit facility for total liquidity of approximately CAD 1.1 billion. Granite continues to monitor market conditions in the coming months to look to refinance its 2023 debentures, which come due in November 2023.
Lastly, in other financing activities on a year-to-date basis, Granite has repurchased 2.165 million stapled units under its NCIB at an average rate of CAD 71.81 for a total of CAD 155.5 million excluding commissions. I'll turn over the call now to Kevan, who will go over operational matters.
Thanks, Teresa. It's an excellent job. Welcome everyone to our Q3 call. As usual, I'm joined, or Teresa and I are joined by Lorne Kumer and Michael Ramparas. I'll be brief as usual, and despite a lack of investment activity, per se, I think there's quite a bit to unpack in this quarter. Building on Teresa's comments, I would begin by saying I would characterize our results for the quarter as being in line with our expectations, although somewhat at the low end of the range in some areas. Leasing momentum, though, stayed very strong. Our IFRS NAV held up as further upward adjustments to terminal cap rates and discount rates were offset by translation gains, primarily in our U.S. assets. We turned out $400 million of debt, as Teresa mentioned, to improve liquidity.
We remain active on our NCIB program, and our development program continued to progress nicely. To begin with investments, as that will take the least amount of time. We have only one new acquisition to announce, which would be approximately 10 acres of land located in close proximity to our 92-acre Brantford development project. The site is expected to accommodate approximately 170,000 sq ft of space and generate an unlevered development yield of 7.5%. Construction is expected to commence in 2023 with completion sometime in 2024.
As for dispositions, you can see from the MD&A that we have removed the U.S. asset from assets held for sale in this quarter as the recent term loan was upsized from initial expectations and provided us with sufficient liquidity without having to execute on a sale, where clarity on pricing may have been difficult. With respect to our development program, as you can see, we've successfully executed 10-year leases on over 1 million sq ft in Nashville and in Altbach, Germany. As a result, these projects will deliver unlevered development yields of 6.2% and 7.5% respectively. Overall, 4 million sq ft or 64% of the 6.2 million sq ft currently under development or recently completed have been released.
As I stated on the second quarter call, delays in certain supplies, particularly for roofing materials, HVAC, and electrical equipment, has delayed our construction schedule, which has impacted leasing velocity. Notably, all of our leasing activity to date has been on projects that were close to or have been completed. Leasing activity remains quite strong across our remaining development availabilities, and we look forward to sharing further updates with you on our next call. All in all, our development yield projections have improved from underwriting and our profit margins remain intact, which suggests that our development program should continue to contribute strongly to NAV growth in the fourth quarter and throughout 2023. As an update on our ESG program, as mentioned on our last call, our 2021 ESG report was published in August and is available on our website.
We obtained green building certification for our expansion in the GTA and on two of our recently completed developments in Dallas and Altbach. We further obtained BREEAM Building certification, in-use certification on three of our properties in the U.S, with a fourth pending. To date, we have now obtained green building certification on 18 properties totaling over 10 million sq ft, with that number expected to increase significantly over the next few years as we achieve certification on our new developments in accordance with our green bond framework. GRESB published their latest assessment in October, and we are very pleased to report that Granite ranked third out of 10 for public disclosure and our grade improved from B to A. Further, we ranked second out of 9 overall among North American listed industrial companies. Quite an achievement for the team.
Operationally, there remains 340,000 sq ft of expiries remaining in 2022, and we have agreed to terms on an increase in rental rate of roughly 60% on two of those expiries, and the third is related to the asset held for sale. As for our 2023 expiries, we have now renewed or extended 4 million of the 9.4 million sq ft at an average increase of 13%, which was muted by a large property in Germany and the U.S., where the renewal rent matched expiry as described under the existing leasing agreements. We have also reached terms on a further 2.6 million sq ft of expiries at an average increase of 34%.
Hence, to date, we have renewed or reached terms on roughly 66% of our expiries for 2023, and we anticipate an overall retention rate of 87%-90% for next year. From a mark-to-market perspective, we estimate that the spread in market rent over in place now sits at roughly 70% for Canada, effectively the GTA, 19% for the US, and 8% for Europe. We plan to include this analysis in our MD&A commencing in the fourth quarter. As Teresa mentioned, same property NOI increased by 3.2% on a constant currency basis, somewhat at the low end of our expectations for the quarter, as the impact of strong re-leasing spreads was muted by turnover vacancy at two of our US properties.
However, both have since been re-leased to October first at an average increase in rent of 69%. At this time, we are reiterating our same property NOI guidance for 2022 between 3.5%-4.5% and now expect to end the year at the higher end of that range. We are setting guidance for 2023 same property NOI at 6%-7%. Turning to our investment properties, we recorded further adjustments, as mentioned, to our discount rates and terminal cap rates in the second quarter, resulting in a roughly CAD 230 million net fair value loss in the quarter, which was fully offset by translation gains of CAD 318 million, due primarily to the strengthening of the US dollar in late September. The net fair value loss in the quarter was concentrated in our U.S. and European portfolios.
In comparison with Q1 and in rough terms, our property values are flat to slightly negative for the GTA in Austria, and have fallen 7% in Germany and the Netherlands, and 9% in the U.S. Although further upward adjustments to terminal cap rates and discount rates may be appropriate in future quarters, I think it is worth highlighting that despite almost CAD 500 million in net share value losses resulting from adjustments to date, our NAV per unit has increased over that period as a result of currency translation gains and contributions from our development program. As mentioned earlier, future development stabilizations and growth in fair market rent are expected to continue to contribute strongly to our NAV. The reduction in the number of units from our unit repurchase program since July first will also obviously further enhance NAV per unit beginning in the fourth quarter.
In terms of a market update, leasing fundamentals across our entire portfolio remain strong. Demand historically has tracked the business cycle, but it is expected to remain strong. So demand is expected to remain strong. As suppliers continue to modernize and improve the resiliency of their supply chain, the onshoring of key manufacturing sectors, such as electric vehicles, and as reported by CBRE and others, E-commerce is expected to grow from roughly 20% of sales to 32% in the U.S. alone within 10 years. Q3 data is not available for all of our markets, but from what is available, vacancy overall appears to be flat relative to the second quarter, as absorption seems to be limited to the delivery of new supply due to historically low vacancy rates. Year-over-year market rental rate growth varies in the low to mid-double digits across our markets.
As you have seen, we announced the eleventh consecutive increase in our targeted annual distribution to CAD 3.20. The CAD 0.10 or 3.2% increase consistent with the past few years is more than merited, given our cash flow growth year-over-year, but we believe is appropriate at this time, given it also enables us to maintain our conservative payout ratios, preserve liquidity, and assist in funding our ongoing development program. On that point, looking forward, our liquidity remains very strong. We're in a good position to fund our remaining development projects, and we'll continue to take advantage of strong market conditions to focus on leasing up our development availabilities and our 2023 expiries and driving NOI growth. On that note, I will open up the floor to any questions.
Thank you. If you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you'd like to withdraw your registration, please press the one followed by the three. One moment please for our first question. Our first question comes from the line of Brad Sturges with Raymond James. Please proceed with your question.
Hi there. Maybe just quite helpful color on the 2023 expiry. Just maybe starting there on the third of expiries still left to address, what would be your expectations for rent spreads?
I think the remaining ones are somewhere between 15% and 20%, Brad, on the remaining.
Okay.
Overall, if you take the entire year, 9.4 million sq ft, I think we are projecting 21% overall on average.
Okay. That helps. You know, you're highlighting, you know, still good touring activity and interest in the development projects. I guess and pretty positive commentary about the demand outlook. I guess short term though, have you seen any moderation in leasing velocity, you know, particularly in some of your U.S. markets? Or has that been pretty consistent to, you know, the levels you were seeing earlier in the year?
I think it's consistent. I want to put some context on this because we had a conversation, you know, very recently, in-depth conversation with our U.S. team. The theme right now is that tenants are focusing on securing space. It's the resiliency that they're really concerned most about, and that's the priority. We have not seen a drop off yet. As I said before, I think it's very telling that where we've had the highest leasing velocity is the ones that are nearing completion. I think what's giving tenants pause with all developments, not just with us, is they need the space in four months. You're saying it's going to be ready in four months, but what if it's six? What if it's seven?
You know, in Houston, we've been waiting on a switchgear for a month. I think that that's affecting it. We're not seeing a slowdown in demand, and I think it's very telling, as I mentioned. All the markets we're looking at, the absorption almost matches the new supply in each market bang on. I think the reason for that is vacancy is so low that people are waiting for them to come on, and it's just being absorbed as it's hitting the market. That's what we're seeing, not a slowdown or a moderation in demand per se yet. It's just more there are valid concerns about timing of delivery. I think the tenants wanna make sure that they can get in the space when they need to get in the space.
Okay. That's helpful color. Last question. Just on the 24 expires with the gross maturity, can you remind me, I believe Magna's got an option to renew. When would that option expire?
January thirty-first, the end of January 2023, so a few months from now.
If they were to exercise that option, is it a fixed rent increase, or is it tied to CPI?
Correct. No, it's fixed. It's a look-back CPI with a cap. It's fixed.
Got it. Okay. That's helpful. Thank you.
Thanks, .
Thank you. Our next question comes from the line of Himanshu Gupta with Scotiabank. Please proceed with your question.
Thank you, good morning. I'm looking at the 6%-7% same property NOI growth guidance for 2023. Honestly, very strong there. Is it mostly led by U.S. lease expiries, or are you seeing pickup in Europe as well? Because a lot of the leases are CPI indexation there.
It's a bit of both, but most, as you know, the 9.4, I mean, two-thirds of that, almost 70% is in the U.S. It is driven by the mark-to-market on our U.S. renewals. There is also a contribution from higher CPI and higher contractual rent increases through CPI in Canada and in Europe, predominantly in the Netherlands.
Got it. Okay. Thank you. That's helpful. On the development program, again, you know, development yield has now been revised higher on, I think, almost all the properties there. How much of the development program is now pre-leased? Is there any property left where pre-leasing is not done?
Well, there's roughly 2 million sq ft left to go. We have 500,000 sq ft in Nashville. I think we have 650,000 sq ft in Houston. We have quite a bit of activity in Houston. We have the 700,000, 300,000 footer left to go in AllPoints, which is in Indianapolis across the street from the airport. There's a lot of activity on those. As I said before, I think that the delays in construction or the uncertainty in timing in construction is what's, I think, driving some tenants to remain on the sidelines until there's more certainty around the timing of delivery, but activity's been very strong. There's roughly 2 million sq ft left to go on the development.
These projects will be completed through the end of the fourth quarter and the first quarter of 2023. There's still time left for construction. Again, let me provide further context. Typically, you would budget to complete the building, and then you would be achieving full rent on the building within 12 months. That's typically what you would do because it would allow for downtime, lease up, fixturing by the tenant, et cetera. You might have 3-4 tenants in a building. It allows you to build demise involved, et cetera. That's typically what you would budget. All of our expectations now still remain well within that. That, to me, indicates a very strong market.
Got it. You know, sticking to development, I mean, you announced a new 10-acre purchase near Brantford. So is that a hub you like? I mean, do you want to expand further in terms of development program in and around GTA there?
We're always looking at opportunities, but I hope the tone that came across from the call is we like the cash position we're sitting in. We like our liquidity. We wanna make sure that we are in a very strong position to fund our development program. We're always looking, but we are mindful of capital. This piece of land particularly was not an add-on. They were separate deals, but we were looking at this land simultaneously with the 92-acre site. This site just took a long time to close for various reasons. We were looking at a number of opportunities at the time in 2021 and happened to close on the larger one first and this one second. It wasn't as though this just came up on our radar.
It's a deal the team's been working through for well over a year. We're looking at opportunities, but again, our priority right now is maintaining liquidity and funding our current development program.
Got it. Thank you. The last question, I mean, in terms of the fair value adjustments to property valuation, so we have seen, you know, two back-to-back quarter adjustments. Are you done with assessment of your U.S. portfolio? I mean, does that reflect the current value in the financial environment, so to speak?
I don't believe so. I don't want to. We still have to go through the deals. This is all really deal dependent. It's made our life a little difficult because we haven't always had sufficient data. In some ways it is subjective, but I would say I'd be very surprised if the adjustments that you're talking about were done on. That's why I wanna emphasize, I think I look at our NAV per unit where it is at the end of the third quarter versus the first, and it's up despite CAD 500 million in adjustments so far to date. To your question, are we finished? I don't know the answer to that, but I don't think so.
Got it. Maybe just one follow-up clarification question. The sale of 2 U.S. assets, I mean, obviously they are not for sale anymore. Was there a gap between the buyer and seller expectations there?
The answer is when we decided to secure a term loan of $400 million, that gave us. We were targeting $300 million. We ended up doing $400 million for a couple of reasons. It made sense to us. That took any pressure that we're feeling on liquidity, that took it off. When we looked at this disposition, this planned disposition, we're not sure how the process is going to go. I think it's better to pull it early instead of starting a process and then having to pull it for whatever reason. It really was due to the fact that the funds that came from the term loan gave us a lot more comfort around our liquidity.
You know, why head into a market with so much change happening rapidly, unless you know you have a lot of clarity around what the pricing is.
Got it. Thank you. Thanks, Kevan, and I'll turn it back.
Our next question comes from the line of Gaurav Mathur with iA Capital Markets. Please proceed with your question.
Thank you, and good morning, everyone. Kevan, just staying on the valuation bit for a little longer. You know, I know that it's very hard to pin down an end in sight, but in your view, are we getting closer to that?
Well, it's funny. Those who know me know I don't like watching the market. I think what we were waiting for, I think what a lot of investors were waiting for is just a little bit of doubt in central banks, a little bit of a pivot. I think maybe they're reading it wrong, they have in the past. I do think we're at the end in terms of negative sentiment, just to pivot. Look, we've seen some deals out there that suggest, and there's one out there that I think everybody knows quite well, and it signals a lot more strength than maybe the public markets think that there is. I think everyone just wanted to understand better how far central banks were gonna go, and obviously the market is guessing at this point.
It does feel like 2023, the first quarter of 2023 will be a different landscape from where we sit today.
Fantastic. Thank you for the color. Just lastly, with the NCIB activity and going into 2023, are there any major changes in how you're thinking about capital allocation?
I'll ask Teresa to chime in as well. But I think at this point, we're finished. We executed on it as planned in 2022. At this point and anything can change, but at this point, we're not anticipating being active on the NCIB through the end of the year and early into 2023. Teresa, anything you wanna add on that?
Yeah. No, I think that's right. I think we kinda had a finite number in mind and, you know, a lot of what's driving that is, you know, we're very conscious of certainly where our debt metrics are. I think we're kind of at the level that, you know, we'll tolerate and don't certainly and we wanna preserve whatever borrowing that we have left to fund the remaining commitments under our development plan. That's the only thing I would add to that.
Mm-hmm.
Okay. Perfect. Thank you so much for the color, Kevan and Teresa. I'll turn it back to the operator.
Thank you. Our next question comes from the line of Kyle Stanley with Desjardins. Please proceed with your question.
Hi, good morning, everyone. I think Teresa mentioned some free rent in Germany earlier on the call. I was wondering if you can comment on some of the other factors that drove same property NOI growth in Germany and for the U.S.
In Germany, it was that. It was a large asset. It's an older lease, but there was embedded free rent through periods of the lease, and this hit it last year, which caused a large gain this year, and of course it caused a lot a loss last year. In the U.S., I think it was 1.9 in constant currency basis, so it was lower, and it was impacted by the turnover. If you recall in the second quarter call, we had two assets, one with a small bankruptcy and one with a tenant that vacated. In one of the assets, we further induced a tenant to leave to get control of the entire building.
That totaled maybe 450,000 sq ft, which occurred in the second quarter and leaked into the third quarter. Those on average, we increased the rent 69%. It did cause in one asset, 2 months downtime, and in another asset, 1 month downtime, which isn't big, but it did impact the same property NOI slightly for the third quarter, a little more than we thought.
That's great. Thanks. Turning to kind of new developments. Some of the U.S. REIT CEOs have commented on their earnings call that they're pausing starting new developments. I'm just curious how you're thinking about that and whether you're approaching Canada versus the U.S. differently.
Well, I think when I listen to Prologis this call, which is always a good idea, I think they do an excellent job. Their idea of pausing is building $4-$4.5 billion next year, which to me is an interesting characterization of pause. It does come from the ground up and you build where you see demand. I've said even before recently that, you know, we undertook 5.5 million sq ft of development and much of it speculative. We did want to continue the program, maybe not so ambitiously as 5.5 million sq ft, but we do want to kind of average, you know, 2-3.5 million sq ft a year.
We weren't going to commit to anything in 2023 until we had worked through the bulk of our availabilities in 2022. We're getting there. As we look to 2023, the development program does slow down. We just don't have the land capacity to build another 5.5 million sq ft, and there's nothing wrong with that. That wasn't the plan. When we look at Brantford, for example, we were planning to move ahead with phase one two building. It so happened that we had a design build opportunity, which made a ton of sense for us to kick off the park. Now we're building 420,000 sq ft design build for Barry Callebaut. Now we're gonna follow up with probably a 750,000 sq ft footer on that site. That's market driven.
Are we concerned with Brantford? We are not. We will move ahead in 2023 if we get the entitlement and the approvals. We will likely move ahead with another 750,000. At the end of this year, we think we will move through our availabilities in the U.S, and we'll be in a position where our exposure to the development side will be very manageable in 2023. I'm hoping I answered your question with a little bit of verbal diarrhea there, but that's kind of how we're looking at 2023.
No, that's very color.
I think it will solve itself. Yeah.
Yeah, appreciate it. Just last one, quick one is, can you guys remind us what percentage of the European portfolio have leases with CPI-based escalators?
Oh.
I can answer that. In Austria, it's about 100%, and in the Netherlands, it's around 85%, and I think Germany is similar to that, around 85%.
Okay, great. Thanks a lot. I'll turn it back.
Thank you. Our next question comes from the line of Matt Kornack with National Bank Financial. Please proceed with your question.
Hey, guys. Just with regards to the conversation around liquidity, and obviously it's improved with this debt issuance. I mean, you have a billion-dollar undrawn credit facility. What is it that you're preparing for or wanna keep liquidity-wise, when you talk about that and maybe pulling the asset sale? Then as a kind of secondary to that, is the liquidity ultimately to fund the development pipeline, and are you comfortable funding subsequent phases of Houston and Brantford with current liquidity?
Well, I think that's exactly it, Matt. Sorry,
No, you go ahead, Kevan Gorrie.
I think that's exactly. From a high level, the liquidity when we head into 2023, if we do wanna look to the next phase of Houston or we have a design build opportunity, we wanna make sure we have the liquidity to fund that. It is for the remaining developments and future developments potentially in the 2023. Teresa, did you wanna add anything?
No. That's. Yeah. No, that answers it. I mean, when you look at the end of the third quarter, you know, really our commitments and developments is probably looking around CAD 300 million between the fourth quarter and first quarter of next year, maybe into mid-second quarter. We'll have more than sufficient liquidity for that between cash and the credit facility. Then, you know, it's just it also gives us sort of a backdrop, and I don't believe we're gonna go there, but we also have a maturity in November 2023 of CAD 400 million that we could easily cover with the line if we had to.
Okay. No. That absolutely makes sense. Forgot about that. With regards to the same property NOI guidance, again, you have good figures there. Just wanted to know, is that inclusive of FX, and what it would be without FX? It sounds like you're doing quite well on the leasing front, but just wanna understand kind of the occupancy assumptions that may have gone into that. You're gonna get through the end of this year probably at 99%+. Should we expect that to be the case for next year as well?
Well, when I talk about same property NOI, it's always in local currency. Yeah, it does not take into account currency fluctuations. That's in local currency. Two, in terms of occupancy, again, when I say, you know, we're expecting to renew 90%, which is a very high number, in the year we are expecting there will be turnover, there will be short-term vacancy. Where we end up the year, we should be in that 99% range. That's our expectation for next year.
Okay, perfect. Then, we've had this discussion, but maybe for the public in terms of the worst case scenarios during a recession and potential bankruptcies, can you give us a sense, historically speaking, as to what you've seen going through prior cycles with regards to the impact of bankruptcies, if we do head into a recession in 2023?
Well, it's just that I've been asked this question a lot, and it's tough to. Recessions seem to always be different, and look how much the economy has changed in the last 10 years. If you look at companies 10 years ago that would have went bankrupt, and you look today, you know, the largest companies are completely different. It's hard to forecast what exactly is gonna happen, obviously. I have said to investors when asked the question, I look back historically, and we just went through a pretty big downturn in 2020 related to the pandemic. Yes, we are a sort of distribution, logistics, e-commerce company which thrived in it. But ultimately, our tenants, I think we're one of the only companies that I know of in real estate collected 100% of its rent for 2020.
One, I think it did speak to the stability of our portfolio and our tenants, which was very important. I also look back to 2008, 2009, going through it in industrial, and watching an acute downturn. I remember rents moving in the 20%-25% range, depending on the market, but it was, you know, 20%-25% was kind of the average that we saw. I look at our portfolio today and say, okay, in a severe downturn, if the, market rents move 20%-25%, that's, then we'd be at market. I think there's, we need to appreciate how big a cushion there is. As of today, that cushion seems to be getting bigger. Not that it won't get smaller, but just to say it's still moving upwards.
That cushion is stronger than I think people give it credit for, in our sector. That's kind of what we've seen. In terms of bankruptcies, it's really hard to speculate on. Through my experience, industrial has never seen—and knock on wood—a high level of bankruptcies like I've seen in other sectors, historically speaking.
Okay. No, that makes sense, and appreciate that color.
Just to further say, it is. I think it's worth noting. I think we have been criticized, sometimes fairly, sometimes unfairly, for having too many bonds in our portfolio and not having enough equities, right? When you look at deals that we do and the tenants that we deal with and the underwriting we do, we've always said, we're trying to build this portfolio in a defensive manner because the good times will take care of themselves. It's really strong management and strong management decisions that should carry portfolios through bad times. That's what we think about. I say that now because I'm asked questions from investors like all portfolios are the same. They're just not. Our team works really hard at underwriting opportunities to make sure we're protecting the downside for our unit holders.
I hope over time that gets recognized and appreciated because it takes work. It's easy to buy a building if you think market rents are higher and you can drive rent. Are you underwriting on risk-adjusted return basis? Are you thinking about the risk if things go bad? I want everyone to understand how much we think about that all the time. As we head into this, I think our portfolio is as well-positioned as any in the market to persevere through a major downturn. I really do.
No, that makes sense. Couple it with one of the best balance sheets in the Canadian REIT universe, and you think that's what investors would be looking for. Anyway, appreciate it, Kevan.
Our next question comes from the line of Sam Damiani with TD Securities. Please proceed with your question.
Thanks, and good morning, everyone. Most of my questions have been answered, but I just wanted to, I guess, clarify in Germany with the renewals that were achieved, doesn't look like that includes the Light Mobility Solutions tenancy, if you could just clarify that.
No, that's still outstanding. I think it's in the third quarter of next year. Our expectation is that they renew, and it's prescribed. The rent, I think it's expiring rent plus CPI, but I'd have to check. It's a prescribed rent. There's no renewal notice date, so there is not an urgent need for us to engage. We obviously have contact with the tenant, but we don't have any information that they're looking to leave or wish to leave. Our expectation is that they renew, but it has not been done yet.
Okay. Just on the guidance for next year, same property, I may have missed it, but did you provide any breakdown of that 67% on a regional basis?
I did not. I'm just trying to think offhand.
Yeah, no, that is not available.
We don't have a lot of turn next year. You know, it is predominantly in the U.S. Actually, if I think offhand, I think our mark-to-market on the turnovers next year are roughly 60% in the GTA, roughly 20% in the U.S. In Europe, it's quite low just because of not so much the market isn't higher, it's a number of the leases roll at CPI. On renewal, it doesn't move to market. It's a CPI-adjusted renewal rate. It is limited. It would be in the sort of 5%-10% range.
Got it. Just finally, I know this was touched on a couple of times, but just with the fairly large volume of development completions over the next few quarters, you know, you're obviously going through your land pipeline fairly quickly. Are you satisfied-
Mm-hmm.
with the pipeline that you'll end up with a year from now? Or is there a desire to go out and buy more land? Sort of a related question, Granite's done a number of forward purchases in recent years. Is that still an opportunity that you see attractive in the current market?
I think where we sit today, and we talked about liquidity and funding our development program, and obviously it's gonna moderate naturally, because to your point, we don't have the land bank to really continue aggressively in that regard. We still have 100 acres in Houston, and we still have the capacity to build over 1 million sq ft in Brantford in total. We will be active on the Brantford site, as I mentioned. Houston, we'll see. Depends on how phase two goes, technically phase one, how that goes. It would be hard for us to, I think, break ground in 2023, or at least the first half of 2023. To answer your question, yes.
I think when we look at opportunities in 2023, if the current market conditions create some distress, we wanna be well positioned to exploit those weaknesses. One of those things would be on land. As a REIT, you have to be careful with how much land you have. Obviously, you have to think about carry costs and your own cost of capital. I don't know how much opportunity there would necessarily be in and around the GTA, but when we look at the U.S, we're watching it very carefully. Could we take down 50 acres? Could we take down 80 acres? That's something we are watching and are monitoring.
That would be of interest to sort of reload the land bank in a, in an uncertain time and take advantage of weakness among the market. That is on our mind for next year. Definitely reloading that land bank at a cost basis that makes a lot of sense to us.
That's great. Thank you. I'll turn it back.
As a reminder, to register for a question, press the 14. Our next question comes on the line of Pammi Bir with RBC Capital Markets. Please proceed with your question.
Thanks. Good morning. Kevan, just, you know, coming back to the Graz facility. If Magna were to exercise that option early next year, I'm just curious, how would that impact your view on the potential, you know, longer term view of that asset in terms of holding it or possibly monetizing it?
Well, I think it certainly opens up options, and I think I don't know. I don't know the answer to that, Tony, because it's been a great asset for us, but obviously I think it's on people's minds. It's something we have to look at, and it depends on the market conditions. I mean, would we do something today? I think it would be. I'm not sure conditions today would be supportive of doing anything. It depends very much on what's going on in the world and the market. We just want to put ourselves in the right position and prepare to look at and assess all the options that are available to us.
Certainly it brings the options more into play than it did before, and I think that's a very positive thing for us.
Got it. Just last one. You know, it sounds like, you know, your comments around liquidity are really focused on sort of preserving that for when you talk about opportunities, it seems to be certainly focused on more land opportunities and development type, you know, plays that might come up. Is that fair to say, rather than sort of anything from an income producing standpoint, stabilized assets? I'm just curious what you're seeing in terms of what is out there at the moment.
Well, I'm saying that because, particularly in the U.S, we feel we could execute on land acquisitions in a distressed situation, and not use up a lot of our liquidity. That's why I say that. If you look at doing a portfolio acquisition and using a line of credit, et cetera, we're taking sort of a worst case scenario view, and that is we do not have access to capital in 2023. That's why we're talking about it in such a cautious way, if that's what you're getting. If market conditions change, then it changes for us, and we might be more willing to use our liquidity depending on what the landscape looks like.
For now, assuming there's a lot of uncertainty into 2023, and I'm not sure, but assuming that there is, we really value our liquidity. As Teresa mentioned, we have the 2023s maturing. We wanna have options around that, whatever's best for us. We have a development program that's ongoing and could add a few more projects to it in 2023. Those are the top priorities. It also, we should be in a position, even in a very poor investment environment, we should be in a position to take advantage of some land acquisition opportunities without really compromising our liquidity in a big way.
Got it. No, that's great, Colin. Thanks very much. I'll turn it back.
Just as a reminder, to register for a question, press 14. Kevan Gorrie, there are no further questions at this time. I will turn the call back to you.
All right. Thank you, operator. On behalf of the management team and the trustees at Granite, thank you very much for taking time to attend our Q3 call, and we look forward to speaking to you on the Q4 call in a few months. Take care.