Hello, and welcome to Virtual Investor Conferences. On behalf of OTC Markets, we are very pleased you have joined us for our Financial Services Conference. The next presentation is from Granite REIT. Please note, you may submit questions for the presenter at any time. You can also view a company's availability for one-on-one meetings by clicking "Book a Meeting." At this point, I am very pleased to welcome Kevan Gorrie, President and Chief Executive Officer of Granite REIT, which trades on the OTCQX Best Market under the symbol GRTUF and on TSX under the symbol GRT.UN. Welcome, Kevan.
Thank you, and thank you to OTC Markets for the opportunity today, and thank you to everyone who is attending this presentation. I know we have about 30 minutes. I have 15 slides to provide, and I will focus really on key points on each slide. I expect to get through the presentation, the formal part anyways, in about 15 minutes. Then happy to take any calls from the audience. Just to begin as an introduction, Granite is one of Canada's true blue-chip REITs. We have a diversified portfolio totaling roughly 62 million sq ft of industrial and logistics assets in Canada, the U.S., and Western Europe. We will go into more detail, obviously, in the following slides, but I think one of the things that has been a key part of our story is we have had very strong earnings growth over the past several years.
We have also been able to grow our distribution annually over 15 consecutive years since our inception in 2011. I think this is an important slide to understand both our history at Granite and our evolution. We were spun out of Magna International's portfolio, as I mentioned, in 2011. Since then, we have focused our growth solely on modern logistics and e-commerce assets in key markets in North America and Europe. Where we sit today, we are Canada's largest industrial REIT with roughly a $9.6 billion portfolio. We will get into more detail on the geography of that portfolio as well, but as you can see, one of the strongest balance sheets in the Canadian REIT universe as well. The bubbles aren't to scale, but this is a great illustration of where we are located geographically.
As we sit today, roughly 20% of our portfolio is located in Canada, and specifically that is in and around the Greater Toronto area. Roughly 30% is located in key markets in Europe, and that includes the U.K. I am including that in Europe. The remainder, roughly 50%, is located in key markets in the Southeast and the Midwest of the United States. The one thing I would point out on this slide before we move on is where we are focusing our growth acquisitions is in the U.K. and select markets in the Southeast United States. A bit about sustainability. We have a very pragmatic but comprehensive sustainability program. I think for the purpose of this presentation, I just wanted to limit my comments on a couple of tangible points.
The first one I will start with is our performance as measured by GRESB, which is the leading global sustainability benchmark for the real estate industry. As you can see, we are very pleased that we have achieved the highest ranking from GRESB for 2025, both in terms of sustainability public disclosure and overall score. Next, how are we deploying our capital sustainably? I like this slide because I think it ties in well with our development program, which is a very important part of our story. As you can see, we have deployed well over a billion towards eligible green projects that are verified by a third-party provider, which represents over 87%, or roughly 87% of our green bond commitments.
Moving to our development program, I think if you are a REIT like Granite, which is focused on modern logistics, development has to be part of your DNA, and it has to be an integral part of your value-add strategy, and it is to us. What you see here is a summary of the bulk of our development program since 2022, and certainly representative of our overall program. As you can see, it generated a weighted average yield on cost of just over 7%. Depending on what you think the exit yield is, that translates into a profit margin of roughly 20%-25%, an overall profit of almost $ 200 million, which translates into a profit per unit of almost $3, and an IRR of almost 30%. It has been a very successful program.
All the assets that you see here are fully leased and is an integral part of our value add strategy at Granite. In the latter half of 2023, we effectively ceased our speculative development program in response to deteriorating economic conditions and the deteriorating leasing market. That leasing market has rebounded. There has been quite a significant improvement and strengthening of leasing demand across our portfolio markets. To date, we have not resumed our speculative development program. We have limited it to design build opportunities within our portfolio, and this is the project we are currently working on in Houston, 400,000 sq ft, fully leased to a Fortune 50 company at a projected development yield, unlevered yield of roughly 7.5%.
As you can see, pretty measured and staggered lease expiry profile, which provides a good combination or balance of stability and the ability to capture market rents on renewals and turnovers. I will point out too, as you can see, committed occupancy of over 98%, which I think is, if not the strongest, one of the strongest occupancy rates in the entire sector. As we mentioned, Magna is one of our major tenants, obviously. The other tenants within the portfolio, there are a number of major and global retailers, and distribution tenants throughout our portfolio. We do happen to have larger tenants by nature of our portfolio, and that provides a very fair amount of stability and has provided us with strong growth over the past number of years. This has to be one of my favorite slides.
I mentioned one of the key stories of Granite has been our growth. As you can see on the left, a very impressive CAGR of just over 10% the last five years. That has been through a combination of strong organic growth, same store NOI growth, the contributions from our development program, as I mentioned, the successful stabilization of a number of our spec developments, and very opportunistic and strategic allocation of capital. What I mean by that is we have used free cash flow to creatively repurchase units from 2023-2025, which has contributed to this growth. We have been able to do that without in any way compromising the strength of our capital structure. As you can see on the right, in 2021, our AFFO payout ratio was 80%.
We have been able to successfully reduce that to 65% over that same period, all while increasing our annual distribution from $3-$ 3.55 or 18% over that same period. Many people will hear me complain about our stock price given our financial performance. That being said, this shows the relative outperformance of Granite's units, over a very long time period since 2013 when we converted to a REIT. You can see this level of outperformance versus even the TSX, but more importantly, the Canadian REIT Index, which is the bottom line in the light blue. I am going to finish. The last four slides are on the balance sheet, the credit side of things. We do have some debt maturing over the next couple of years, 2026 and 2028, involving some low-cost debt.
That is by virtue of our unique ability to issue debt in euros by virtue of our portfolio in Europe, which was a very significant advantage for us for the past number of years. Not so much now, but still an advantage over the Canadian debt markets and certainly quite still an advantage over the U.S. debt markets. With our low leverage, our low indebtedness, and our strong NOI growth, we will continue to drive FFO and AFFO growth post-refinancing over the next few years. A slide here from a rating agency, DBRS. We are including it because I think it is a useful independent slide comparing Granite to our peer group. The one thing I will point out here is there is a couple of metrics that are maybe different from our quarterly results. One is total debt to capital.
DBRS does not take into account cash on hand when calculating leverage. The second one is total debt to EBITDA at 7.1 x. That is as of December 31st, 2025. While still good, it is actually above where we would be today, which is in the mid-sixes as of the second quarter of this year. Finally, I would mention that DBRS has reported that Granite could be eligible for an upgrade from our BBB (high) current rating, if we continue to satisfy certain key criteria. A couple of final slides just showing how we compare against others. This is according to DBRS, so as you can see from a leverage perspective on the left and indebtedness, total debt to EBITDA on the right, we compare very favorably to our peers in the Canadian market and to the average.
And then finally, when you compare interest coverage and AFFO payout ratios, or this might be FFO payout ratios from operations, we compare very favorably, both against the average and against the overall REITs in the Canadian market. I think I am just over 13 minutes, actually. I just wanted to relate a comment that I heard from an investor earlier this week is, for Granite to keep doing what we are doing, we are a cash flow machine, and I don't think that there is a better sort of characteristic for REITs. On behalf of the management team at Granite, I wanted to thank everyone for attending the presentation today, and I am happy to turn the call over for any questions. One of the questions I see is, same property NOI grew 8.3% on a constant currency basis. Which markets are contributing most to the momentum?
It's a great question, and it can change from quarter-to-quarter, actually. Same property NOI, the contributions from each market can be quite volatile. But both Canada and the U.S. contributed most to that. I'd say Canada was probably double digits, and the U.S. I think was over 9% in the quarter as well. They've both been strong contributors to same property NOI overall. The other question is, what are the clearest catalysts between now and the November 4th third quarter results release that could help investors better recognize Granite's earnings and NAV growth potential? I can't say too much about that. I would just say if you look at our second quarter call, what would you say? We sort of narrowed our guidance for the year, which caused the midpoint to rise slightly.
I think that that gives you a clear indication of what our expectations are through the end of the year. The next one is, FFO payout ratio is around 66%. How do you view the balance between distribution growth and retaining internally generated capital for accretive investments? That's a great question. Let's remember, we got from 80%- 66%. I think you can see the payout ratio in retaining cash is very important to us. We are at a point now where we are retaining over $ 100 million a year, which may not sound like much, but for a REIT the size of Granite, I think it's very important to us. All I would leave you with is the payout ratio in maintaining conservative capital ratios is a priority for our organization.
How should investors think about the balance between recycling capital using the revolver and preserving leverage flexibility? Again, I think that ties into payout ratio. I think maintaining our balance sheet, maintaining our leverage is important to us. We have guided the market to say it's important to us to maintain our debt to EBITDA below 7x. It's important to us to maintain our leverage at 35% or below. We will use debt to grow if we have to in the near term. But at the same time, we want to maintain those credit metrics as we move forward over the long term. As Granite has grown into a diversified global industrial platform, what do you believe the market still underestimates about the portfolio? I would say one of the things is diversification may not be for everyone. We think it's been to our advantage.
When I think about same property NOI 2023, we had very strong same property NOI by virtue of our CPI leases in Europe. I think sometimes people don't value or appreciate the stability that diversification provides. That's one thing that I would say I think gets overlooked about our portfolio, because you think about it, 98% occupancy, where occupancy has been a metric that's been top of mind for investors the past few years. We're almost 100% leased in Europe. That has been a contributing factor to our stability and our NOI growth. I think sometimes that gets overlooked. Are you seeing any meaningful difference in leasing conditions between North America and Europe? I would say right now, the U.S., the change or the strengthening of leasing has been strongest. We've seen it in the U.S., in our portfolio markets in the U.S.
I can't speak to L.A. We don't have any assets in Los Angeles or in the Inland Empire. But for our markets, which are the Midwest through the Southeast, which have been the strongest performing markets, that's probably where we've been seeing the most acute pick up in demand. Europe's been steady to positive, and our one market in Canada, the GTA, has been steady. I think from a rent perspective, it's been our weakest market. But we do expect that to begin to improve at some point in the middle of next year or late 2027. Are tenants showing greater willingness to commit to longer lease terms today? I would say yes. I would say the last few years, the terms have been shortening.
There's been more 3PL activity, but we are beginning to see longer commitments, and we're beginning to see more straight lease terms with the direct retailer or distributor versus a 3PL. So we are beginning to see longer-term leases emerging, particularly among the larger bay segment of our portfolio. What gives you confidence in industrial fundamentals can remain supportive even in a more uneven economic backdrop? I think a lot of people look at tariffs and trade tension as a negative, and I'm not going to sit here and say that it's a positive for us. But certainly we have seen onshoring and nearshoring and growth in manufacturing. We have felt it in our portfolio markets, which has been a positive.
The other thing too, I would say, is data center development, which is not necessarily part of our sector, but it is tangential and has been positive for our sector because we are beginning to see data center users and data center developers take up industrial space, and also take up industrial land, which is driving a value of industrial land and industrial properties, and that's putting pressure on rents, which ultimately is good for our sector. Occupancy is around 98%. Where do you see the best opportunity for incremental leasing? I would say 98% is a fully baked number. I know it's very strong. I think it would be unfair to expect 98% to go higher to 99%. At that point, I think there are some probably valid arguments that we're not pushing rents enough.
If you are anywhere, I would just say overall as a sector, what we have said is, look, because of the quality of our portfolio, we should outperform the sector by 1%-2%, the market. If the market for industrial is 94%-96%, we should be in that 96%-98% range just by virtue of the quality of our portfolio. What is the strongest evidence that diversification is already improving the durability of Granite's cash flows? I think it is durability and volatility as well. Like I said, if you go back the past number of years through COVID, diversification, I think you saw the benefit of it. Frankly, you saw the benefit of Magna as a tenant as well. This conversation came up recently with an investor.
We were the only REIT that I knew of, and I could be wrong, we were the only REIT that collected 100% of our rents in 2020. 100%. We had no bad debt in 2020. That was partly because of the contributions from our portfolio in Europe as well, which has provided great stability to us. Certainly that has been strong evidence of the durability. Being at 98%, we are not at 98% in our U.S. portfolio. I will point that out. How are you prioritizing capital among new developments, acquisitions, unit buybacks available, debt reduction? Great question. Where we sit today, we have not been active on the buybacks. I hope our stock price is not at a point where it becomes very attractive to us, but we have shown the willingness to do it. We do not want to use debt to do it.
We will use free cash flow. If I were to prioritize, I would say developments build to suit, not spec, build to suit developments because we can earn a very attractive yield and control the quality of assets that we are adding to our portfolio. Two would be strategic acquisitions and/or debt reduction. Right now we have barely anything drawn on the line of credit, and we have our existing debt. To the point where we would use a line of credit for acquisitions, certainly free cash flow, we would prioritize paying down that debt in the short term. When you look out over the next two to three years, which single metric, occupancy, leasing spreads, development deliveries, do you believe has the greatest potential to surprise investors positively? I would say, I hope leverage wouldn't surprise anybody.
I think it is a good story, and I do not expect that to change. I would say leasing spreads just in that, and I am not saying from year-to-year that wouldn't change, and it depends on the leasing rollover, that particular rollover that you have. I think what people underestimate about our sector overall is that market rents in our markets, in our portfolio markets, have continued to grow positively. I think overall, there has been a narrative the past few years. Everyone looks at L.A. and certain major gateway markets and thinks that rents have come off 30%, 40%, which is the case in certain markets, but not all. In our markets overall, market rent growth has continued to be positive, and that has provided resiliency, I guess, if you would, in terms of our market-to-market, our in-place rents versus market rents.
The Houston build-to-suit has a 12 year lease for the Global Consumer Food company. How meaningful could that asset be once stabilized? Well, I think at a 7.5% yield, that will provide very strong NOI for us next year, and it will provide very strong profit margin and IRR for investors as well. We're very happy to We should have that completed in the first quarter of this year and should contribute strongly to 2027 results. Sorry, I'm just going through them here. With dispositions helping to fund new investments, is this increasingly a portfolio upgrading story rather than simply a growth story? Yes. It's always a portfolio quality story, period. It's never really been just about a growth story. Just to go back, when we wrote the strategy in 2018, we knew the markets that we wanted to be in.
We wanted to be a leading provider of logistics real estate, but we also understood that we had a cost of capital to work with. I'm just going to make a point. We didn't have the cost of capital to move into L.A. in a very major way, or South Florida in a major way, or the U.K. at the time in 2018. We tailored our strategy over what tier one markets do we want to be in, and what tier two markets do we want to be in, where we think the strongest growth over the next 5 - 10 years. That's exactly what we did. We had basically a balance of 50% tier one markets in terms of growth and tier two markets.
Where we sit today, we think it's a very interesting opportunity to rebalance that portfolio more towards tier one markets than tier two markets. That's why we're focusing on growth in the markets that I mentioned. Now, understanding that we don't always have access to equity capital based on our unit price. We are disposing of non-strategic assets to move and redeploy that capital into markets that we want to be in. It really is about a portfolio quality and income growth story than it is just an asset growth strategy. How much capacity do you have to pursue growth without needing to issue further equity? Where we sit today, I'll use the second quarter as an example. We did telegraph that I think we had $200 million in acquisitions.
Using that 35% leverage in debt to EBITDA below 7x, I would estimate we probably have in the $300 million-$ 400 million range of acquisitions before we would need to dispose of further assets or issue equity. But I want to be clear, there's no interest here in issuing equity where our price is today. That will not happen. If we get to a point where we've used the line of credit or we've used debt to acquire certain assets, then we will stop right there, and it will become more of a pure rebalancing strategy, which we're fine to do, and I think we've executed on very successfully to date. What new perspectives do Amber Choudhry and Jonathan Kelly bring to board discussions on growth, capital allocation, and risk? Well, it's a great question.
Amber spent many years on the debt side and the banking side at CIBC. Amber brings a very strong understanding of capital markets, debt capital markets, and Canadian public markets. Jonathan Kelly, from his time at Blackstone and Brookfield, is located in the U.K. He ran a fund for Blackstone focused on data centers in Europe. What Jonathan brings is obviously very strong capital markets experience and a very strong understanding of the European market. Those are the particular strengths that each of those new trustees bring to the board. It was outlined roughly $195 million of acquisitions by early Q4. What makes these opportunities especially compelling for Granite? Two things. They're in the target markets that we said that we're focused on. Overall, we think that that improves the quality of the portfolio.
Two, all of these assets that we're looking to acquire provide strong income growth over the near to medium term. We're targeting assets that we feel can deliver a 6%+ yield within three years and more than that over the next five years. That's what's compelling about those, and obviously the quality and location of those assets is very important to us. Which decision over the past few years do you believe has most improved the quality and resilience of Granite's earnings? The move into development I'll highlight because I think that it was a more difficult decision than most people would understand. Because you're a REIT, and we deployed, I think, roughly $750 million in cash towards development in 2021 and 2022. That was dilutive to our earnings in the near term. I think we paid a price for that.
At the end of the day, it generated better returns in the future, and obviously improved the quality of our portfolio by, number one, having new assets in the portfolio. Number two, we were able to control the quality of those assets. That's how it really. I think the development part sometimes gets underappreciated and has been a great contributor to the success of the organization in the last few years. "What operating discipline has allowed Granite to maintain growth while materially reshaping the portfolio?" Well, if anything, I think we at Granite have exercised great discipline over the past number of years from a balance sheet perspective, from a capital allocation perspective. For example, like I said, 2023 through 2025, I think we repurchased almost or more than $ 500 million in unit buybacks over that period of time. That was a very deliberate decision.
Instead of putting it towards acquisitions, it was more accretive and more effective for us to deploy it on unit buybacks over that time. Our capital allocation strategy has been very disciplined over the past number of years, and I think that sets us up very well today for the future. I think that's it. I'm not even sure if I'm still on, but if I am, thank you for attending the presentation