Granite Real Estate Investment Trust (GRP.U) 2022 Q4 法說會逐字稿

Good morning, and welcome to Granite REITs Fourth Quarter and Year-end Results for 2022 Conference Call. Speaking to you on this call this morning is Kevan Gorrie, President and Chief Executive Officer; and Teresa Neto, Chief Financial Officer. I will now turn the call over to Teresa Neto to go over certain advisories.

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 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 its annual information form for 2022 filed on March 8, 2023. Readers are cautioned not to place undue reliance on any of these forward-looking statements and forward-looking information. The REIT reviews its key assumptions regularly and may change its outlook on an ongoing forward basis, if necessary.

Granite undertakes no intention or obligation to update or revise its key assumptions, any forward-looking statements or forward-looking information, whether as a result of new information, future events or otherwise, except as required by law. In addition, the remarks this morning may include financial terms and measures that do not have a standardized meaning under International Financial Reporting Standards, -- please refer to the audited combined financial results and management's discussion and analysis for the 3 months and year ended December 31, 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'll commence the call with some financial highlights, and then Kevan will follow with the operational update. Granite posted Q4 '22 results exceeding expectations with strong NOI growth compounded by strengthening of the U.S. dollar and euro relative to Q3, partially offset by higher interest costs from rising rates and borrowings. FFO per unit in Q4 was $1.20, representing a $0.12 or 11.1% increase from Q3 and 17.6% increase relative to the same quarter in the prior year. However, in the fourth quarter of 2021, Granite did recognize $1.3 million in fair value losses relating to the revaluation of DSU liabilities, but given the amendments made to Granite's DSU plan in June, these favorable changes no longer impact FFO, contributing to a $0.02 favorable variance in the fourth quarter relative to Q4 '21.

Strong NOI from acquisitions, developments and expansions that came online since Q2 and same property NOI growth was enhanced by favorable foreign exchange movements, where the euro was 5.4% stronger and the U.S. dollar 3.9% stronger relative to the Canadian dollar in comparison to Q3. In comparison to the prior year, the euro was 4% weaker and U.S. dollar 8% stronger, resulting in a positive $0.04 impact to FFO per unit. Negatively impacting Q4 '22 relative to Q3 is the full quarter effect of higher interest costs on the new $400 million term loan that closed in mid-September.

Lastly, in Q4, we recognized a net favorable $0.7 million to current income tax expense for adjustments related to prior tax years. Granite's AFFO on a per unit basis in Q4 '22 was $1.05, which is $0.08 higher relative to Q3 and $0.15 higher relative to the same quarter last year, with the variance is mostly tied to FFO growth. AFFO related capital expenditures, leasing costs and tenant allowances incurred in the quarter totaled $7.4 million and for the year-to-date period were $18.6 million. For 2023, we estimate AFFO-related maintenance capital expenditures and leasing costs coming in approximately $22 million for the year. With the increase relative to the past couple of years being a direct result of approximately 9.7 million square feet of GLA turning over this year.

Same-property NOI for Q4 was very strong relative to the same quarter last year, increasing 6% on a constant currency basis and 8.8% when foreign currency effects are included. Same property NOI growth was driven primarily by higher than previous year's CPI adjustments, positive leasing spreads, contractual rent increases across all of Granite's regions, lease renewals in the U.S. and Canada, and it also includes the impact of the completed expansion in the GTA.

G&A for the quarter was $8.6 million, which was $3.8 million lower than the same quarter last year and $2.1 million higher than Q3 a -- the main variance relative to the prior quarter and Q3 is the change in non-cash compensation liabilities, which generated a favorable $3.6 million fair value swing relative to the same quarter last year and an unfavorable $2.5 million fair value swing relative to Q3 as we recognize fair value losses on these liabilities due to a 4.4% increase in Granite's unit price during the quarter.

For 2023, we expect G&A expenses of approximately $9 million per quarter or roughly 7% of revenues, excluding any amounts for fair value adjustments related to noncash compensation liabilities. On income tax, Q4 '22 current income tax was $1.5 million, which is $1.4 million lower than the prior year and $0.4 million lower than Q3. The However, excluding $2.8 million of current tax recorded in Q4 2021 related to the disposition of an Austrian property, current tax actually increased by $1.4 million in the current year relative to last year.

As mentioned earlier, in Q4, we recognized the net impact of adjustments pertaining to prior tax years in our European region of $0.7 million in contrast to similar favorable adjustments in Q4 2021 of approximately $1.8 million. For 2023, on a run rate basis, we estimate current tax at approximately $2 million per quarter before recognizing any reversals of tax provisions.

Interest expense was higher in Q4, '22 relative to Q3 by $4 million, reflecting the full quarter impact of interest on the new $400 million -- $ 400 million term loan, which closed on September 15. The -- on a run rate basis, we estimate interest expense will run approximately $18 million per quarter before factoring any new debt or credit facilities. When granted refinances its upcoming $400 million debenture maturing November this year, we expect our interest expense run rate will increase to $20 million per quarter. 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.

We have no draws on the credit facility at this time. Looking out to 2023 estimates, Granite is forecasting FFO per unit within a range of $4.90 to $5.05, representing approximately an 11% to 14% increase over 2022. For AFFO per unit, we are forecasting a range of $4.30 to $4.45, representing an increase of 6% to 10%. We -- the high and low ranges are driven by foreign currency rates where for the high end of the range, we are assuming foreign exchange rates of the CAD to euro of 1.47 and CAD to USD of 1.37. On the low end of the range, we are assuming exchange rate of the Canadian dollar to euro and CAD to USD of 1.42 and 1.32, respectively.

We continue to estimate that a $0.01 movement in the Canadian dollar relative to the U.S. dollar impact, FFO and AFFO per unit annually by $0.02 and a $0.01 movement in the Canadian dollar relative to the euro result in a $0.01 impact to FFO and AFFO per unit. Granite will provide updates to guidance each quarter as warranted based on leasing activity executed to date. The trust's balance sheet comprising total assets of $9.3 million at the end of the quarter was negatively impacted by $230 million in fair value losses on Granite's investment property portfolio in the fourth quarter, offset by $80 million of translation gains on Granite's foreign-based investment properties, particularly due to the 7.5% increase in the spot euro exchange rate relative to Q3.

The fair value losses on Granite's investment property portfolio were primarily attributable to the expansion in discount rates in certain assets and the 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, U.S. and selected European markets reflecting current market fundamentals. The Trust's overall weighted average cap rate of 4.87% increased 17 basis points from the end of Q3 and has increased 37 basis points since the same quarter last year. Since the high at the end of Q1 2022, our weighted average cap rate has increased a total of 57 basis points.

Total net leverage as of December 31 was 32% and net debt-to-EBITDA was 7.9x, which is slightly inflated due to grant partially funding a significant development program with debt. Granite expects its debt to EBITDA to increase -- to decrease the rate to the low 7x by the end of this year and to improve thereafter into 2024 as the EBITDA from completed developments come online throughout the year. The Trust's current liquidity is approximately $1.1 billion, representing cash on hand of about $130 million and the undrawn facility of $997 million. As of today, Granite has no amounts drawn and the credit facility, there are $3.5 million of letters of credit outstanding. Granite will continue to monitor the market conditions in the coming months to look to refinance its 2023 debentures, which come due in November. And lastly, in other financing activities for the year ended December 31. Granite did repurchase approximately 2.165 million staple units under its NCIB at an average price of $71.81 for a total of $155.5 million, excluding commissions. I'll now turn over the call to Kevan.

Thanks, Teresa. Building on Teresa's comments, I would begin by saying that I would frankly characterize our results for the quarter as being in line with expectations, although very much at the high end. And frankly, it was the strongest quarter in my time with Granite, both from a financial and operational standpoint as strong same-property NOI growth and development stabilizations in the quarter drove outperformance in FFO and AFFO. I also hope you found on the level of disclosure would be helpful and fortunately for you that leaves me with less to say on the call. As you can see, there was no acquisition activity in the quarter as we continue to focus capital on funding our ongoing development program.

With respect to set development, as you can see from our MD&A and press release, our new development property in the Murfreesboro just outside of Nashville was completed in the fourth quarter, and the 844,000 square foot building has been fully leased to a single tenant term of roughly 10 years commencing on December 1. Subsequent to the quarter, we achieved substantial completion of our 690,000 square foot design build distribution center in Houston for e-commerce user Key for a term of just under 11 years, which commenced on February 1. We expect to achieve substantial completion of the 2 buildings totaling 670,000 square feet currently under construction on the Houston site by the end of this month, and we have signed 2 leases totaling 520,000 square feet proximately to third-party logistics providers for 5- and 7-year terms.

In January, we also achieved substantial completion of our 330,000 square foot expansion of our existing property in Whitestown, summer with Indianapolis and the lease has been extended for 10 years on the entire building. In summary, we have completed 6 development and expansion projects comprising 2.8 million square feet that commenced in late 2021 and early 2022 in the U.S., Germany and the GTA, all now fully leased and generating an average unlevered development yield of 6.4%. We have a further 2.6 million square feet currently under construction, which is expected to generate an average unlevered yield of 6.25%. To date, we have leased 930,000 of the 2.6 million square feet currently in progress and activity continues to be strong on our remaining availabilities in Houston, Indianapolis and Nashville. Collectively, these stabilizations will continue to strongly contribute to NOI cash flow and NAV in 2023, and I look forward to providing an update on our first quarter call.

Looking towards 2023, with the successful stabilization of the majority of our development pipeline, which I just mentioned, we have applied for approval to build a 730,000 square foot building on our site in Branford. We are targeting an unlevered development yield of roughly 7% and hope to commence construction later this year. We are also finalizing plans for the next phase of our Houston development site, which would accommodate 1 to 2 buildings totaling up to 1 million square feet, a projected yield of roughly 6.25%, and pending final design, we may be able to commence construction again in late 2023. Finally, we have commenced a 50,000 square foot expansion of our existing property in Ajax, which is scheduled for delivery in early 2024 and an expected yield of 7.5%. And beyond the projects currently being contemplated, as just mentioned, we own an additional 35 acres in Grandpuits and 65 acres in Houston and Columbus, which could accommodate up to 1.6 million square feet of future development. Hence, we will continue to search for the right land opportunities to expand our development pipeline moving forward.

Operationally, 2022 finished and 2023 started on a positive note. As per our MD&A, we renewed or re-leased roughly 6 of the 6.1 million square feet of leases, which matured in 2022 and an average increase in rent of just over 19%. To date, we have renewed 7.7 million or 81% of 9.6 million square feet of lease maturities in 2023 and an average increase of roughly 20%, and we anticipate achieving an average increase of 24% on the remaining maturities or outstanding maturities.

As mentioned on our last call, we expect to renew roughly 90% overall release maturities in 2023. For 2024, we have renewed 5.3% or 55% of the 9.6 million square feet of maturities at an average increase of 9.4% primarily due to the 10-year Graz renewal announced earlier this quarter. At this point, we expect to achieve an average increase of 20% to 22% on the outstanding maturities for 2024. I think it is worth highlighting that our renewals at rot and Oberhausen in Germany, totaling almost 5.8 million square feet required full investment from Granite for TI's landlord work or leasing commissions. There was no CapEx associated with either renewal -- as Teresa mentioned, San (inaudible) increased by 6% in the quarter on a constant currency basis, at the high end of our expectations, driven by contractual annual escalations and strong re-leasing spreads overall.

Same-property NOI was positive across all of our geographies on a constant currency basis, led by our portfolios in Germany and the Netherlands at 10.9% and 8.3%, respectively. The increase in same-prop NOI was partially driven by strong CPI increases in those jurisdictions, which reached as high as 14% in the fourth quarter and the first quarter of this year. We anticipate that these markets will be a strong contributor to our organic growth in 2023.

And I think as mentioned, 3 tenants representing roughly 1 million square feet will not be renewing their space with this year, which will impact same-property NOI growth from quarter-to-quarter. But at this time, we are increasing our guidance for 2023 same-property NOI growth slightly from 6% to 7% originally to 6.5% to 7.5%. I -- as you can see from our disclosure, as Teresa I spoke about, we adjusted cap rates and discount rates further in the quarter. The resulting $230 million in negative fair value adjustments was partially offset by $71 million in development spend and stabilizations and roughly $75 million foreign exchange gains driven by the strong recovery of the euro in the quarter, offset by a slightly weaker U.S. dollar compared to Q3.

Further adjustments may be required in the first quarter to terminal cap rates and discount rates. But at this point, we believe that any further negative adjustments to cap rates or discount rates moving forward will continue to be at least partially mitigated by development stabilizations and increases in NOI and market rents throughout the year. With respect to ESG, our major activities and accomplishments are outlined in my lever to your holders, so I will not repeat them all here. But I wanted to say that we continue to execute strongly on our ESG program, placing second among our North American peer group for (inaudible) and receiving the highest grade available for public disclosure. We have also finished in first place among Canadian REITs, and fourth overall among Canada's largest 220 public companies for governance in 2022, this according to the Global Mail achieving a score of 95%.

Strong governance continues to be a part of our DNA, and it's satisfying to be recognized for our efforts. Before I open up the call for questions, I'd like to take a minute or so to reflect on our performance over the past 5 years. This is the first time in my tenure in doing this, but I hope it will provide a level of perspective on our business and performance, which some of you may find helpful. We finished 2017 with just over $3 billion in assets and which is over 71% of those properties being tenanted by Magna. We generated per unit FFO and AFFO of $325 and $309 million, respectively, and our leverage at the time is 25%.

In comparison, we finished 2022 with just over $8.8 billion in assets, an increase of over 280% this despite the sale of $980 million of Magna-tenanted properties over that period. Leverage increased to 32% as we utilize some of our balance sheet capacity to fund acquisitions and the development of modern logistics products. At 443 and 405 for 2022, -- we grew FFO and AFFO per unit by 36% and 31%, respectively, over that period, all while reducing our Magna concentration from 71% to 26% by revenue. Our team demonstrated the ability to diversify our tenant base and build a truly institutional quality logistics portfolio while generating strong cash flow and distribution growth and maintaining one of the strongest balance sheets in the Canadian REIT sector. In spite of the turbulence in the market and higher rates, I feel as confident as ever in our ability to deliver growth in NOI and cash flow for unitholders. And finally, I'd like to acknowledge our team for their great quarter. On that, I will open up the floor for any questions.

(Operator Instructions) We do have a question from the line of Bradley Sturges with Raymond James.

Just on the fair value changes. You highlighted that there might be a little bit more to do in Q1. But should we start to be thinking about a little bit moderate pace of change in terms of those fair value changes and you've kind of got the bulk of those adjustments done for now?

Well, I think that's possible, Brad. I think at this point, we just, I think, want to be on the conservative side and give us some flexibility. I would say, I think as much or more than any other REIT we have recognized the changes in terminal cap rates and discount rates. And I will reiterate, we use TCRs and discount rates because we run 10-year models of all of our real estate, all of our assets. I'm not sure that everybody does. When we talk about adjustments in cap rates, we're taking almost 100 to 125 basis points in adjustment, but that hasn't resulted in an equal adjustment to the overall cap rate or going in cap rate because higher NOI and market rents have mitigated some of those adjustments. So I'm unsure what Q1 looks like at this point. I think we'll need to look at precedent deals in the market. But I would say, let's not forget, with respect to our NAV, we have a number of development stabilizations that are going quite well that should mitigate that -- any further adjustments in cap rates and discount rates.

Okay. That's helpful. Just on the November maturity. Just based on your discussions with your various debt counterparties there. Just curious on what you think the financing rates might look like if you were to tap the unsecured market.

Yes. So just based on current pricing right now, we could either do like a 6-year, maybe a 10-year on that. And remember that, that $400 million is swapped to euros. So we're going from like a rate of 2.43& to probably something that looks like about 4.9% or so to maybe 5%. We're kind of assuming 5% just in our forecast right now.

Okay. That's helpful. And then just on the -- I guess, pro the organic growth in 6 to 7.5%. Just curious of how that would break down by market or region.

I think we provided sort of the leasing spreads on the regions. And so I think we're -- when you look at our turnover for 2023 is predominantly in the U.S., we have very little rolling in Canada and in Europe. So I think more than 2/3 of that, roughly 70% is in the U.S. So most of that same-property NOI will be in the U.S. I would say, and I did point out, we do have 1 million feet, which we expect to turn over. So we've renewed 90%, 10% will be vacating. So there will be some vacancy related to that turnover. But obviously, that's built into our projections for the year.

And can you remind me, when does that -- when do you get that space back? And what are you projecting in terms of downtime with the space?

Primarily, there's 2 spaces. One, I think, is the end of August. And the other one is, I think, a similar time line, maybe a little bit before 1 or 600,000 feet, one is roughly 3%. We would anticipate downtime let's say, 2 months on that. Lorne, I right? Is that a little more? Yes.

Our next question is from Mark Rothschild with Canaccord Genuity.

Kevan, as you look at the market where it's difficult to figure out the pricing for buying stabilized properties with the this, you just talk a little bit about your confidence and ability to continue buying raw land for development and how you're looking at new speculative development that might still take a few years to reach a point where you can lease it.

Yes. I think we're in an interesting time, Mark. I think we are seeing some compelling opportunities in our target markets. And frankly, I think we're talking about this internally. I think there's always a lot of questions about what markets we're looking at. I think at this point, we don't really want to disclose the markets where we're really focused on right now because there are compelling opportunities out there, both for land for development and for IPP.

So we don't want to -- I think we have conviction in certain markets in which we want to pursue select opportunities. We just don't want to talk about it. But we're also mindful of the balance sheet and where our leverage is, where our limitations are.

So all to say, if we see opportunities out there, both on the development side and the IPP side, I'm not sure how much access we will have to equity this year. So we're also looking at rebalancing opportunities within our portfolio. I think that -- listen, I would say ever characterize granted as being buyers in this market, more than sellers in this market. So I think as we look forward, I don't think our plans for investing in land or IPP at this point in time are too ambitious. I certainly think that they're manageable. And if we have to dispose of noncore assets to fund that growth, we're happy to do that and prepare to do that. I hope that answers okay.

No, that does maybe lead into one more question. Obviously, you've had some good growth. How do you think about -- when you talk about looking to sell assets, assets that might be more slower growth or fully leased now? And maybe you don't want to talk specifically about Graz, but it's obviously going to give you a very stable income for many years, but if you could turn that into something that's more value creation. Is that something that's more interesting to sell now than maybe a year ago?

Yes. I think it's -- I think that's a great question. I would put it this way without being too detailed and that is I think there is enough embedded growth in our business over the next couple of years that we're not concerned about selling a higher cap asset to buy a lower cap asset, we're not. There's obviously limitations to that. But that doesn't intimidate us. And as we think through as in Austria, though, we've always said we want to optimize the conditions to give us the right options to consider about any action with that. And we did that through the extension.

And I think we've significantly improved the financeability of a number of these larger assets in Europe, which would, in our minds, increase the number of suitors for some sort of potential transaction. But at the same time, pricing certainty is not strong right now in the market. And I don't think market conditions are particularly strong for any sort of major disposition -- and I mentioned in my comments, and I want to highlight this, I think it's very important because I was going through the math this morning with the team.

Between Graz and Oberhausen, 5.8 million feet, if that had been a normal distribution building of that scale in anyone's portfolio, the releasing costs associated with that much space would have been EUR 15 million to EUR 20 million. But because of the nature of the leases associated with those assets and the relationship that we have with the tenants, the cost to us was 0 -- so that NOI growth goes straight to the bottom line, and that's something that we find valuable. And so although we would look to rebalance our portfolio and that could involve the number of noncore assets. To us, I think it's important to recognize how valuable that cash flow and that cash flow stability is to us. But all to get to your main point, Mark, we are not worried about selling higher-yielding assets to buy lower-yielding assets if it's the right return growth profile for us at the end of the day.

Our next question is from Himanshu Gupta with Scotiabank.

So just only 1 million square feet space, which is coming back, is it all U.S.? Or is it German news well?

It's U.S.

Obvious, okay. And then, Kevan, of several new supply is coming to some of your U.S. markets. I mean, as you continue on the raising funds, is that a topic of discussion at all video channels? I mean do you see the balance of power changing from landlord to tenants and down to?

Well, when you say any time soon, I think you're asking me where we sit today, and I think our leasing spreads increased, I think, 3% from Q3 to Q4. So as we sit here today, in our opinion, the market rents have continued to go up. And I will say we have 1 million feet in Indianapolis development that's coming online soon, and the leasing activity has been very strong. And I always get this mixed up in Nashville, but I think we have 6 or 7 RFPs that we're currently responding to in those 2 buildings in India. And in Nashville, I think it's as high as 10 on the space there. So we are not seeing much of a slowdown in those markets and our remaining availabilities, the activity and that continues to be strong. And again, as I said, the leasing spreads in Q4, in our opinion, are higher than they were in Q3.

And then you mentioned market trends continue to go up. And thanks for the new disclosure on in-place tones across regions. That was very helpful by the way so how would you compare the interest loans in U.S. versus the market rents today?

I think we've got them in there, I think, on the remaining, it's roughly 24% in 2023. And in 2024, it's 20%. And we have -- I don't know what the point would be to look beyond that. So for the next 2 years, 24% on a remaining and 20% for 2024, probably 20% to 22%. And I think one of the things I would point out is in Europe, market rents have really moved in the Netherlands and Germany as well. And so we've seen strong growth there. And obviously, we've talked about the CPI, the contribution from the CPI growth across our portfolio. So I would remind everybody, I think Europe is going to be a real contributor to our growth in 2023.

Okay -- next question is, I mean in terms of balance sheet, can we say that cash in hand should take care of all development commitments this year? And then you'll have to come to unsecured market for the $400 million reduction in Nava. Is it fair to say, right?

I think we might need to borrow a little bit just to cover the remaining development. I'm going to say between $25 million to $50 million.

Okay. (inaudible) FFO per unit guidance.

That's correct.

Is that correct? Okay. And my last question is on development plan. Kevan, you pointed out as one of the opportunities. So we have been hearing some adjustments on the land pricing side of the U.S., much more than stabilized properties. So do you see that as an opportunity? I mean is it trying to build some land bank? Or it's still early. I mean you expect more adjustments on the NAND pricing here?

Well, I think it is a good opportunity, and we are looking to increase our land bank to sustain a higher level of development on a stabilized basis. But again, as I was mentioning to Mark, part of that is going to depend on our liquidity and our ability to fund the acquisition of land and development. So that's the question that we have this year, but I think that I think that the price adjustments that we've seen across our markets, not just for land, but for IPP, we would like to continue to grow in our target markets, but we will, of course, be limited by the capital that we have to deploy.

Our next question is from Sam Damiani with TD Cowen.

Kevan, you started referencing the strategic plan that was put out shortly after you joined the REIT in 2018. And I think we can all agree that, that was largely met over the last 5 years. As we sit today, do you have a different direction or an updated view as to where you see the REIT or the Board sees the REIT evolving over the next 5 years?

Well, we have been in discussions at the end of this year, you know how Boards are thinking to want a new plan. And we've been working on that and taking stock. And we do have some observation. I won't share, obviously, all of them with you. We do have some observations. And I think -- when you saw us pivot strongly in 2021 towards development, it really was sort of a recognition that we had a lot of long-term strong covenant tenant cash flow assets in our portfolio. And as I've mentioned before, maybe we had too many bonds and not enough equities in our portfolio.

But I stand by all the acquisitions we made, and I think we pursue growth in a very disciplined manner. But what we begin to recognize is that we were building this platform to add value, which included development, and we needed to start demonstrating that commitment. And so it was a very strong pivot on the development side. I think the board was very supportive of that. We had to put forward a plan, of course. But the board was very supportive of that. So looking forward, I think we're heading into a different -- I think our outlook over the next 24 months is obviously different today than it was a few years ago. it's a different environment, and I think people will view risk very differently.

So I state that openly what's the best decision. Is it to pursue riskier assets and drive growth? Or is it to pay a lot more attention to tenant covenant and lease term. And I don't know the answer to that. I think it obviously will always be a combination of both. But we're going through that process right now, Sam. And I think looking back over the past 5 years, it's been very educational and instructive for us. And moving forward, one thing for sure, I can tell you is we're going to continue to leverage the strength of our platform, and that means value-add, that means development, all those things. But the sort of I think, focus or obsession we have with institutional quality assets, I think is going to play out very well for us over the next 2, 3, 4, 5 years because I think there's going to be a lot more attention paid by investors to the quality of the real estate within portfolios and the quality of the tenants. That's our view today, but we're obviously working through the details of the new plan, which will put in place for 2024 through 2028.

Got it. And that makes sense, certainly a different environment today than it was over the last year or 2. Just on the disclosed weighted average lease term from Magna was as of year-end. Would it be fair to say that today it would be about 7.5 years given the gross renewal?

6.8, I think, is kind of where we were coming...

6.8...

Yes. We actually did pro forma in our -- 7.8% is with the gross renewal in there.

Okay. And then the LMS renewal in Oberhausen, did I hear that, that was achieved on that was done and what term?

It is. It is. So you and I don't have to talk about this in renewed at the end of February. 12 years, and it's subject to a CPI increase, which I think comes up very soon.

Excellent. And just last quick question. There's a loan receivable sort of separated on the balance sheet for $69 million. Any color behind that you can share in terms of how that will play out over -- as that development reaches completion?

Yes. So that loan will be obviously paid out when we purchased the asset. So it will be netted against the purchase price of the asset. So it moves into IPP effectively.

Our next question is from the line of Pammi Bir with RBC Capital Markets.

Just thinking back to some of the past Magna related dispositions in the portfolio. Was gross ever part of those conversations. And I'm just curious if there's been any perhaps expressions of interest post the extensions that were recently done.

I won't provide the details, but just to say there have been discussions, and there have been expressions of interest on a number of the major Magna assets.

And Kevan, anything you can share just in terms of maybe the types of parties that you maybe have expressed interest?

Yes, they've been private equity at times. And also, there have been buyers that are not -- that are more net lease buyers and not so much real estate buyers. So there's been a combination of both.

Okay. Just on the NCIB, again, it was fairly active in Q4 and over the course of last year. But just how are you feeling about buybacks at this point, particularly just given the focus that you've spelled out with respect to development?

Well, certainly, at this level, we're not planning to buy back stock. I think, as Teresa mentioned, I think the average was around 71, 72. Part of it is liquidity that we have. And I think we felt comfortable in the fourth quarter to move forward with it. So there are a number of factors whether we would execute on the NCIB. I would just point out, our liquidity is still very strong, but not the same as it was in Q4. And two, it's very price dependent. And where it is today, we don't plan to be active on the NCIB.

Okay. And then just in terms of -- I guess, maybe coming back to your comments around maybe the 5-year outlook from here. Where does the balance sheet fit into that conversation in terms of the leverage that you perhaps are targeting? And any color you can share on that?

Yes, Pammi, I don't think it really changes. We're really trying to maintain our targets, which are -- is really between 30% to 35% and frankly, like it closer to 30%. And the other real -- but the focus that we mostly center on is debt to EBITDA. And I think that EBITDA at the height of where we're comfortable right now. And we'd like to get that into the low 7s and even below 7x. -- like that's really what's going to drive how we lever our balance sheet.

Okay. Yes, it all makes sense and I would agree on the debt-to-EBITDA metrics. Just on the -- maybe the last one for the Indiana acquisitions, I think you've -- or you've got a loan structure there, I think, on the $115 million or so. Where does leasing stand on those projects? And what point do those get acquired?

Oh, you're talking about substantial completion. I think is later this month, maybe early in the second quarter and no leasing yet, but the 2 things I would point out is I mentioned that leasing activity has been pretty robust on that. I mean we're responding to a number of RRPs. So there's a lot of activity in the market, and we really like the location obviously there. So we expect to have more to report at the end of the first quarter on those and substantial completion at some point later this month forward in April.

Okay. Sorry, one last one. Just in terms of the total development spending. You've got a few projects that continue to progress along for 2023. So how should we think about just the total spend, thinking about perhaps some of the new starts that -- or new phases that you mentioned as well for this year in terms of the total development spend?

I think for this year, Pammi, we're estimating about $170 million to complete all of our developments and some of the developments that are going to be going into 2024, for example, Branford. So it's about $170 million.

Our next question is from Gaurav Mathur with iA Capital Markets.

Kevan, just when you're thinking about future development initiatives, how have development you've changed across your markets when compared to a year ago?

Certainly not as high as a year ago. I mean there was a lot of commitment at one period of time. So we've always said we would like roughly 5% of our capital, 5% to 10% of our capital at work on development. So we were hoping to or we are hoping to develop roughly 2 to 3 or 2 million to 4 million square feet of space each year. Obviously, the 2022s are leaking into 2023. With 2024, right now, as we look at this point, would be in that sort of $2 million range. So again, we are looking to buy back some of that land for development to give us the ability to increase that pipeline if we want to. But that's what we're targeting would be that 2 to 4 million feet on average per year being developed.

Okay. Great. And then just lastly, thinking about capital allocation and your focus on development. I mean how should we think about the pivot from development to acquisitions to potential NCIBs in 2023?

Well, I think what's interesting to us is -- and let's be clear on the development side. The land has to make sense. And I think we see in some markets, there may be an opportunity where IPP is trading below replacement cost. So all these things factor into your capital allocation decision. I certainly hope we're not in a position to buy back stock, to be honest with you, it doesn't feel good. It may be good for your FFO and AFFO per unit. But we don't -- we're certainly not anticipating tapping into the NCIB in 2023. Hopefully, that is behind us. So we focus on growth opportunities involving select acquisitions and development. And we'll see, again, we are -- we will go where our liquidity takes us, and we will focus on the opportunities that are going to provide the best long-term total returns for us.

And we have a question from Mike Markidis with BMO Capital Markets.

Just a couple of quick ones on my end. With respect to the guidance, I may have missed it, but is there any assumption of any net acquisition activity? Or is it just based on the existing assets at the end of Q4 and the developments that are expected to launch through?

No new acquisitions are being assumed for the guidance. So just our existing portfolio and development completions.

Okay. Awesome. And then the $18 million run rate, I think you threw out there to resin the interest expense. Presumably, that will -- is that like an average for the year because presumably that's going to scale higher as you get interested capitalization through the year, correct?

Yes. That's the average, just based on current run rate. And then I mentioned like depending on timing, but when we do execute and refinance the $400 million debenture, then it's going to creep up to $20 million per quarter. So it's just a matter of when that happens.

Yes. Okay. Fair enough. And just the straight line rent ticked up again this quarter. And I imagine it's just due to the leasing activity that you guys have plus the delivery of Murfreesboro on December 1. So is it safe to say that, that number remains fairly elevated relative to historical over the next sort of several quarters before maybe coming back down to what was more a typical level in 2024?

Yes, exactly. So it's probably mostly tied to the developments and the new leases and some free rent periods in there that you're seeing, and that's why it's elevated. So you're right, it should come down in a few quarters.

Okay. That's it for me. Congrats on such a strong and new year.

And there are no further questions at this time.

Great. Thank you, operator. So on behalf of the management team and trustees at Granite, thank you for taking the time today and look forward to speaking to you on the Q1 call in May. Have a good day.

That concludes the conference today. Thank you for your participation and ask that you please disconnect your line.