Granite Real Estate Investment Trust (GRP.U) 2022 Q3 法說會逐字稿

Good morning, and welcome to Granite REIT 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 advisory 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 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 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 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 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 going to commence the call with financial highlights, and then I'll turn it over to Kevan, who will follow with operational update. 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 $0.01 or a 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 0.14 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 U.S. dollar, 4% stronger, resulting in a negative 0.02 impact FFO per unit. Also impacting the third quarter was the effect of higher interest cost borrowings from the credit facility and the new USD 400 million term loan that closed in mid-September, adding an additional estimated 2.2 million of interest expense or 0.03 per unit relative to Q2. Granite's AFFO on a per unit basis is in Q3 '22, was 0.97, which is 0.07 lower relative to Q2 and 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 $6.6 million. And for a year-to-date period, it is $11.2 million.

For '22, we estimate AFFO-related maintenance capital expenditures and leasing costs coming in about 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 2 U.S. properties.

G&A for the quarter was 6.5 million, which was 2.4 million lower than the same quarter last year and 0.5 million higher than Q2. The main variance relative to the prior quarter and from Q2 is the change in noncash 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 revenue, excluding any amounts for fair value adjustments related to noncash compensation liabilities. For income tax, Q3 '22 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 '21 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 later extend due to the sale of an asset in Austria in '21, reducing taxable earnings. On a run rate basis, we estimate current tax at approximately $2 million per quarter before recognizing any reversals of tax provisions. Having said that, for Q2 '22, 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 '22 relative to Q2 by $2 million, reflecting incremental interest expense on draws on Granite's credit facility and the interest on the new USD 400 million senior secured nonrevolving 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 USD 235 million.

In conjunction with the drawdown of the 2025 turn loan, Granite entered into a flow to fix 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 $16 million per quarter before factoring in any new debt or 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 to 4.43 FFO per unit and 3.96 to 4.08 for AFFO per unit.

Further, on our singular estimates, we were increasing those slightly for FFO per unit increasing 0.02 to approximately 4.37 and AFFO per unit increasing 0.03 to approximately $4.01. We have updated our assumptions regarding foreign exchange rates and are estimating for the fourth quarter of 2022 and ongoing weaker euro, offset by a stronger U.S. dollar relative to the Canadian dollar. Our Canadian dollar to euro average rate remained unchanged from last quarter at 1.32 and our Canadian dollar to U.S. dollar rate increases to 1.33 from 1.28 last quarter. The U.S. dollar foreign exchange rate forecasted is admittedly conservative relative to today's market. And should the U.S. dollar exchange rates remain at current levels, FFO and AFFO per unit could be positively impacted by a further 0.01 to 0.02 above our singular estimate. As communicated before, we continue to estimate that a 0.01 movement in the Canadian dollar relative to the U.S. dollar does impact FFO and AFFO per unit annually by 0.02 and 0.01 movement in the Canadian dollar relative to the euro resulted in a 0.01 annual impact to FFO and AFFO per unit.

The Trust's balance sheet comprising of total assets of $9.6 billion at the end of the quarter was negatively impacted by 229 million in fair value losses on Granite's investment property portfolio in the third quarter, offset by 380 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 and 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 selected European markets reflecting current market fundamentals. The trust's overall weighted average cap rate of 4.68%, increased 18 basis points from the end of Q2 but still have decreased 12 basis points since the same quarter last year.

Total net leverage at September 30 was 29%, and net debt to EBITDA remained steady at 7.7x. The Trust's current liquidity is approximately $1.2 billion, represented by cash on hand of about $195 million and the undrawn operating line of $997 million. As of today, Granite has no amounts drawn under the credit facility, and there is $2.6 million in letters of credit outstanding. With the closing of the USD 400 million term loan and repayment of outstanding amounts on the credit facility, Granite realized excess net proceeds of approximately $225 million, which provides prefunding for Granite's ongoing development programs.

Based on the remaining development commitment, forecasted dispositions and NCIB activity for the remainder of the year, Granite estimates that it will end the year with about 90 million of cash on hand and no draws on the credit facility for total liquidity of approximately 1.1 billion. Granite continue to monitor market conditions in the coming months to look to refinance its 2023 debentures, which come due in November of 2023. Lastly, in other financing activities on a year-to-date basis, Granite has repurchased 2.165 million staple units under NCIB at an average rate of 71.81 for a total of $155.5 million, excluding commissions. I'll turn over the call now to Kevan, who will go over operational matter.

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 Mike 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. We seeing 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 termed out USD 400 million of debt, as Teresa mentioned, to improve liquidity. We remain active on our NCIB program and our development program continues to progress nicely.

To begin with investments, that will take the least amount of time. We have only one new acquisition to announce, which was -- 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 square feet of space and generate an unlevered development yield of 7.5%. Instruction 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. assets from assets held for sale in this quarter as the recent term loan was upsized from the initial expectations and provided us with sufficient liquidity without having to execute on a sale, but clarity on pricing may have been difficult.

With respect to our development program, as you can see, we successfully executed 10-year leases on over 1 million square feet in Nashville and in Altbach, Germany. As a result, these projects will deliver unlevered development yield of 6.2% and 7.5%, respectively. Overall, 4 million square feet or 64% of the 6.2 million square feet currently under development or recently completed has 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 schedules, which has impacted recent 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 rebuilding certifications for our expansion in the GTA and on two of our recently completed developments in Dallas and Altbach. We further obtained green 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 square feet, with that number expected to increase significantly over the next few years as we achieve certification on our new development 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. And further, we ranked second out of nine overall among North American listed industrial companies, quite an achievement for the team. Operationally, there remains 340,000 square feet 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 square feet on an average increase of 13%, which was muted by a large property in Germany and the U.S., where the renewal rent matched expiring as described under the existing leasing agreements. We have also reached terms on a further 2.6 million square feet 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% to 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 U.S. 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 is muted by turnover vacancy at 2 of our U.S. properties. However, both have since been released for October 1 and an average increase in rent of 69%. At this time, we are reiterating our same-property NOI guidance for 2022 between 3.5% to 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% to 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 230 million net fair value loss in the quarter, which was fully offset by translation gains of 318 million due primarily to the strengthening of the U.S. dollar in late September. The net fair value loss in the quarter was concentrated in our U.S. and European portfolio. 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 adjustment to terminal cap rates and discount rates may be appropriate in future quarters. I think it is worth highlighting that despite almost $500 million in net fair 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 stabilization 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 1 will also obviously further enhance NAV per unit beginning in the fourth quarter. In terms of our market update, using fundamentals across our entire portfolio remains strong. Demand historically has tracked the business cycle, but it is expected to remain strong -- sorry, 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 and 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 11th consecutive increase in our targeted annual distribution to $3.20. The 0.10 or 3.2% increase consistent with the past few years is more than narrative 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 own growing 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 the 2023 expiries and driving NOI growth. On that note, I will open up the floor to any questions.

(Operator Instructions) Our first question comes from the line of Bradley Sturges with Raymond James.

Maybe just quite helpful color on the 23 expiries. Just maybe starting there. On the third expiry, still left to address, what would be your expectations for REIT spreads?

I think the remaining ones are somewhere between 15% and 20% growth on the remaining. Okay. So overall, if you take the entire year, 9.4 million square feet, I think we are projecting 21% overall on average.

And then you're highlighting 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, particularly in some of your U.S. markets? Or has that been pretty consistent to the levels you're seeing earlier in the year?

I think it's consistent. I want to put some context on this because we had a conversation very recently in-depth conversation with our team. And the theme right now is that tenants are focusing on securing space. And if the resiliency that they're really concerned most about NAFTA priority. So we have not seen a drop-off yet. And as I said before, I think it's very telling that where we've had the highest lease 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 a 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.

In Houston, we've been waiting on a switch gear for a month. And so, 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 going on. And I think the reason for that is they can see so low that people are waiting for them to come on and it's just being absorbed as it's hitting the market. So that's what we're seeing, not a slowdown or moderation in demand per se yet. It's just more there are valid concerns about timing of delivery. And I think the tenants want to make sure that they can get in the space when they need to get our space.

And last question. Just on the 24 expiries with the Garage maturity, can you remind me, I believe Magna's got an option to renew. When would that option expire?

At the end of January 2023, so a few months from now.

And if they were to exercise that option, is it a fixed rent increase? Or is it tied to CPI?

No, it's fixed. It's tied sorry, it a look back CPI with a cap. So it's fixed.

Our next question comes from the line of Himanshu Gupta with Scotiabank.

So look at the 6% to 7% same-property NOI growth guidance, 33 million, only very strong here. So is it mostly led by U.S. and U.S. lease expiries? Or are you seeing pickup in Europe as well because a lot of them uses our CPI indexation there?

It's a bit of both. But most, as you know, the 9.4%, I mean 2/3 of that, almost 70% is in the U.S. So it is driven by the mark-to-market on our U.S. renewals, but there is also a contribution from higher CPI and higher contractual rent increases through CPI in Canada and in Europe, predominantly.

And then on the development program, again, development yield has now been revised higher around, I think, almost all the properties there. How much of the development program is now preleased or put differently, is there any probably less pre-leasing not done?

Well, there's roughly 2 million feet left to go. So we have 500,000 feet in Nashville. I think we have 650,000 feet in Houston. We have quite a bit of activity in Houston, and we have the 700,000 and 300,000-footer left to go in all points, which is in Indianapolis across the street from the airport. So there's a lot of activity on those. And as I said before, I think that the delays in construction or the uncertainty and timing in construction is what's, I think, driving some tenants to remain on this all line until there's more certainty around the timing of delivery, but activity has been very strong.

So there's roughly 2 million feet left to go on the development. And these projects will be completed through the end of the fourth quarter and the first quarter of 2023. So there's still time lag for construction. And 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 three to four tenants in a building. It allows you to build the musings, et cetera. But that's typically what you would budget. All of our expectations now still remain well within that. So that, to me, indicates a very strong market.

And then sticking to development. I mean, you announced a new 10 acres that use your brand food. So is that how you like? I mean do you want to expand further in terms of development program in and around GTA?

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 want to make sure that we are in a very strong position to fund our development program. So 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. So we were looking at a number of opportunities at the time in 2021 and have to close on the larger one first in this one second. So it wasn't as though this just came up on our radar. It's the deal -- the team has been working through for well over a year. So we're looking at opportunities. But again, our priority right now is maintaining liquidity and funding our current development program.

And the last question, I mean, in terms of the fair value adjustment to property valuation. So we have seen a to that quarter adjustments. So are you done with assessment of your U.S. portfolio? I mean, does that reflect the current bond in the financing 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, we're done on. That's why I want to 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 $500 million in adjustments so far to date. But to your question, are we finished? I don't know the answer to that, but I don't think so.

And maybe just one follow-up clarification question. The sale of 2 U.S. assets. I mean, obviously, we are not foreseeing any more. Was the gap between the buyer and seller expectations there?

I don't think that that's -- the answer is when we decided to secure a term loan of USD 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. So that took any pressure that we're feeling on liquidity, that took it off. So when we look at this disposition, this planned disposition -- it was -- we're not sure how the process is going to go. And so I think it's better to pull it early instead of starting a process and then having to pull it for whatever reason. So 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 and why head into a market with so much change happening rapidly, unless you have a lot of clarity around what the pricing is.

Our next question comes from the line of Gaurav Mathur with IA Capital Markets.

Kevan, just staying on the valuation a bit for a little longer. I know that there is -- 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. But I think what we are waiting for, I think what a lot of investors are waiting for is just a little bit of doubt in Central Bank a little bit of a pivot. And I think maybe they're really wrong they have in the past. But I do think we're in the end in terms of negative sentiment, just a pivot. And 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. So I think everyone just wanted to understand better how far central banks were going to go. And obviously, the market is getting at this point. But it does feel like 2023, the first quarter of 2023 will be a different landscape for where we sit today.

And 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 Neto to chime in as well. But I think at this point, we're finished. We executed on it as planned in 2022. And at this point, 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 want to add on that?

Yes. No, I think that's right. I think we kind of had a finite number in mind and a lot of what's driving that is we're very conscious of certainly where our debt metrics are. And I think we're kind of at the level that will tolerate and don't certainly -- we want to preserve whatever borrowing that we have left just on the remaining commitments under our development plan. So that's the only thing I would add to that.

Our next question comes from the line of Alex Leon with Desjardins.

I think Teresa mentioned some free rent in Germany earlier on the call, but 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 a large asset. It's an older lease, but there was embedded free rent through periods of lease and this hits last year, which caused the large being this year, and of course, it's causing 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 last -- in the second quarter call, we had 2 assets. One was a small bankruptcy and one with a tenant that vacated and in one of the assets we further induced a tenant to get control of the entire building.

So that totaled maybe 450,000 feet, which occurred in the second quarter and leaked into the third quarter. And those on average, we increased the rent 69%. It did cause us in one asset, 2 months downtime and another asset one month on time, 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. 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. So, 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 the last call, which is always a good idea, I think we do an excellent job, but their idea of pausing is building 4 billion to 4.5 billion next year, which is an interesting characterization of pause, but it does come from the ground up and you build where you see demand. And I've said even before recently that we undertook 5.5 million square feet of development and much of it speculative and we did want to continue the program, maybe not so ambitiously is 5.5 million feet, but we do want to kind of average 2 million to 3.5 million feet a year, but 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. So, as we look at 2023, the development program does slow down. We just don't have the land capacity to build another 5.5 million. And there's nothing longer that that wasn't the plan. But when you look at Brantford, for example, we are planning to move ahead with Phase I/II buildings. It still happened that we had a design build opportunity, which made a ton of sense for us to kick off the park. So now we're building 420,000 feet design built for very callable. And now we're going to follow up with probably a 750,000 footer on that site. And that's market-driven. ROE concerned with Brantford? We are not. So, we will move ahead in 2023, if we get the entitlement and the approvals, we will likely move ahead with another $750,000. But at the end of this year, we think we will move through our availabilities in the U.S. And so, we'll be in a position where our exposure to the development side will be very manageable in 2023. So I'm hoping answering your question with a little bit of [verbal diarrhea]…

Yes, I appreciate it. And then just last one, quick one is, can you guys remind us what percentage of the European portfolio have leases with CPI-based escalators.

In Austria, it's about 100%. And in Netherlands, it's around 85%, and I think Germany is similar to that, around 85%.

Your next question comes from the line of Matt Kornack with National Bank of Canada.

Just with regards to the conversation around liquidity. And obviously, it's improved with this debt issuance. But I mean, you have $1 billion undrawn credit facility. What is it that you're preparing for or want to keep liquidity wise when you talk about that and maybe pulling the asset sale? And 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 at that. Sorry. I think that's exactly. From a high level, the liquidity, when we head into 2023, if we do want to look to the next phase of Houston or we have a design build opportunity, we want to make sure we have equity to fund that. So, it is for the remaining development and future developments potentially in 2023. Teresa, did you want to add anything?

No, that's -- yes. No, that answers it. I mean when you look at it at the end of the third quarter, really our commitments and development is probably looking around 300 million between the fourth quarter and first quarter of next year, maybe into mid-second quarter. So, we will have more than sufficient liquidity for that between cash and the credit facility. And then it's just -- it's also -- it gives us sort of a backdrop, and I don't believe we're going to go there, but we also have a maturity in November 2023 of 400 million that we could easily cover with the line if we had to, if we had to.

Okay. That absolutely makes sense. I forgot about that. And then with regards to the same property NOI guidance, again, you had good figures there. Just wanted to know, is that inclusive of FX? And what it would be without FX? And then also, it sounds like you're doing quite well on the leasing front, but just want to understand kind of the occupancy assumptions that may have gone into that. You're going to get through the end of this year probably at 99-plus percent. Should we expect that to be the case for next year as well?

Well, when I talk about same property NOI is always in local currency, so yes, it does not take any account from any fluctuation. So that's in local currency. And 2, in terms of occupancy, again, when I say we're expecting to a new 90%, which is a very high number. In the year, we are expecting there would be turnover, there will be short-term vacancy. But where we end up the year, we should be in that 99% range. That's our expectation for next year.

Okay. Perfect. And 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, just I've been asked this question a lot and it's talk, recession seem to always be different and look how much the economy has changed in the last 10 years. So, if you look at companies 10 years that would have been bankrupt and you look today, the largest companies are completely different. So, it's hard to forecast what that is going to happen, obviously. But I have said to investors when I ask the question. I look back historically. And we just went through a pretty big downturn in 2020 related to pandemic. And yes, we are a sort of distribution logistics e-commerce company, which drives all the way 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. So, one, I think it did speak to the stability of our portfolio and our tenants, which was very important. But also back to '08, '09 going through in industrial and watching an acute downturn. And remember rents moving in the 20% to 25% range, depending on the market, but it was 20% to 25% is kind of the average that we saw. So, I look at our portfolio today and say, okay, in a severe downturn, if the rent -- 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.

And as of today, that cushion seems to be getting bigger and not that it won't get smaller, but just to say it's still moving upwards. So that cushion is stronger than I think people give a credit for in our sector. And so that's kind of what we've seen in terms of bankruptcies, it's really hard to speculate on. But through my experience, industrial has never seen a knock on with industrial has never seen a high level of bankruptcies like I've seen in other sectors historically speaking.

But just to further say like 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? So, 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, and its really strong management and strong management decisions that should carry portfolios through bad times. That's what we think about.

And so, I say that now because I asked questions from investors like all portfolios are the same. They're just not. And our team works really hard at underwriting opportunities to make sure we're protecting the downside for our unitholders. And 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. But are you underwriting on a risk-adjusted return basis. Are you thinking about the risk if things go back, and I want everyone to understand how much we think about that all the time. And as we head into this, I think we're -- our portfolio is as well positioned as any in the market to persevere through a major downturn. I really do.

That makes sense, couple it with one of the best balance sheets in the Canadian REIT universe and I think that's what investors would be looking for. Anyway, I appreciate it, Kevan.

The next question comes from the line of Sam Damiani with TD Securities.

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 tendency, 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 they renew, they renew and it's prescribed. The rent, I think, is expiring rent plus CPI, but I'd have to check, but it's a prescribed land. And 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. So our expectation is that they renew, but it has not been done in.

Okay. And just on the guidance for next year, same property, I may have missed it, but did you provide any breakdown of that 6% to 7% on a regional basis?

I did not. I'm just trying it offhand.

No, it's not available.

But we don't have a lot of churn next year. It is predominantly in the U.S. And I think, actually, if I think offhand, I think a mark-to-market on the turnovers next year are roughly 60% of the GTA, roughly 20% in the U.S. And in Europe, it's quite low just because not so much it's -- the market isn't higher. It's a number of the leases roll at CPI. So on renewal, it doesn't move to market. It's a CPI-adjusted renewal rate. So it is limited. So it would be in the sort of 5% to 10% range.

And 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're obviously going through your pipe land pipeline fairly quickly. Are you satisfied with the pipeline that we'll end up with a year from now? Or is there a desire to go out and buy more land? And sort of a related question, Granite has got a number of forward purchases and is that still an opportunity that you see attractive in the current market?

I think where we sit today and we talk about liquidity and funding our development program and obviously, it's going to moderate naturally because to your point, we don't have a 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 feet of Brantford in total. So we will be active on a grander side, as I mentioned. Houston will see depends on how phase, I guess, Phase II goes, technically Phase I kind of that goes, but it would be hard for us to, I think, break-around in 2023 or at least the first half of 2023. So to answer your question, yes, I think when we look at opportunities and in 2023, if the current market conditions create some distress, we want to be well positioned to exploit those weaknesses.

One of those things would be on land. And 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. So I don't know how much opportunity they would necessarily be in and around the GTA. But when we look at the U.S., we're watching it very carefully because we take down 50 acres, could we take down 80 acres. And that's something we are watching and are monitoring. And so that would be of interest to sort of reload the land bank in an uncertain time and take advantage of weakness among the market. So 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.

(Operator Instructions) Our next question comes from the line of Pammi Bir with RBC Capital Markets.

Kevan, just coming back to the gross facility, if Magna were to exercise that option early next year. I'm just curious, how would that impact your view on the potential longer term 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, Pammi, because it's been a great asset for us. But obviously, I think it's on people's mind. So it's something we have to look at. 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. So it depends very much on what's going on in the world in the market, but 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. So certainly, it brings the options more into play than it did before, and I think that's a very positive thing for us.

And then just last one. It sounds like your comments around liquidity are really focused on sort of preserving that for -- when you talk about opportunity, it seems to be certainly focused on more land opportunities and development type point that might come up. Is that fair to say rather than sort of anything from an income producing standpoint, stabilized assets. And 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 our 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. So 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.

But 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. And as Teresa mentioned, we have the 2023 is maturing. We want to have options around that, whatever is best for us. We have a development program that's ongoing and we could add a few more projects to it in 2023. So those are the top priorities. But it also -- we should be in a position even in a very poor investment environment, we should be in a position to take advantage on some land acquisition opportunities without really compromising our liquidity in a big way.

(Operator Instructions) There are no further questions at this time. I will turn the call back to you.

Thank you, Operator. So 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.