Granite Real Estate Investment Trust (GRTUN) Earnings Call Transcript

I second the motion.

Is there any discussion on this matter? I will now call for a vote on the motion. All in favor, please signify by raising your hand. Thank you. Withheld votes, if any? I declare the motion carried. We will now move to the next item of business, which is a consideration of the nonbinding advisory resolution on Granite's approach to executive compensation. As described in the Management Information Circular dated April 12, 2023, and made available to holders of stapled units, unitholders are being asked to approve the resolution of Granite's approach to executive compensation. Our Board values the opinion of Granite unitholders. Although the vote is nonbinding, the Board and its committees will take into account the outcome of the vote when considering Granite's compensation philosophy. Granite will disclose the voting results of the say on policy -- say-on-pay policy as part of its report on voting results for the meeting. The advisory resolution is set on Pages 20 and 21 of the management information circular. May I have a motion on the advisory resolution?

I so move.

And may I have the motion seconded?

I second the motion.

Is there any discussion on this matter? I will now call for a vote on the motion. All in favor, please signify by raising your hand. Thank you. Opposed, if any? I declare the motion carried. Is there any other formal business that may be properly brought before these meetings? There being no further business, that concludes the formal business of the meeting. I will now ask for a motion to end the formal part of these meetings.

I so move.

May I have the motion seconded?

I second the motion.

I will now call for a vote on the motion, all in favor, signify by raising your hand. Opposed, if any? I declare the motion carried. And we will now have a presentation from Kevan Gorrie, Granite's President and CEO. Thank you very much.

All right. Thank you, Kelly, and welcome, everyone, to our 2022 AGM. Thank you for attending. As Kelly mentioned, I will take you through a brief presentation of our 2022 results. I will discuss our priorities for 2023, and we can open up the floor for any questions. Just a note, this presentation will be uploaded sorry, to our website following the meeting. So you can look at it at your convenience at any time. I'm not going to read that. Okay. So let's start with what you effectively own. So as unitholders of Granite, which is Canada's largest industrial REIT, you own a portfolio of approximately 60 million feet of income-producing properties and 12 development sites located in key distribution markets in the GTA, in the U.S., the Netherlands, Germany and Austria, having a value at year-end of roughly $9 billion. And I'll go into, obviously, our performance in future slides, but just to say we had a very strong year operationally and financially as a company. And obviously, as you can see, that was offset by very weak market conditions in 2022. So this is the slide we've had for years, and I continue to like it because I think what it speaks to is the sort of methodical, purposeful transformation of our portfolio from one that was concentrated in manufacturing to today, what I would describe as one of the high-quality industrial and logistics portfolios in the industry. And An important thing is not only did we grow in scale, as you can see quite significantly, but we also successfully grew cash flow and grew net asset value for unitholders over that period. So I think with all the uncertainty, everything that happened in 2022, I think it's appropriate to start with capital allocation. And as a reminder, 2022 started as 2021 left off. There was this sort of supreme demand for e-commerce and industrial space from users and investors partially driven by ultra-low interest rates and availability to capital. And in that context, we closed on $450 million roughly of new acquisitions in the GTA, the U.S., Germany and the Netherlands. And fast forward to the middle of 2022, and now we're facing significant headwinds in terms of rising inflation and rising interest rates. And I want to speak about specifically how do we respond to that. So we took an immediate pivot from growth to capital preservation and also to very strategic allocation of capital. So we see some acquisition program and we instead focused on our development program. And as you can see from points 2 and 3 -- or sorry, you can see from points 3 and 4, how rapidly the market deteriorated in 2022. We issued stock at almost $99 and bought back stock at well under $80 in the same period, in the same quarter. That's how rapidly the market has deteriorated. We also took steps to bolster our already very strong liquidity position. We issued a new USD 400 million debenture last year, and we extended the maturity on our $1 billion line of credit and finished the year with $1.1 billion in liquidity, probably the best in the industry. So moving on to the execution of our portfolio strategy. As I mentioned, we acquired 8 properties, representing almost 3 million feet in the first part of the year. I do think it's worth mentioning that all of those acquisitions, although they close in 2022 started in 2021 and a few of them were well advanced at year-end in 2021. And as you can see, I mentioned we pivoted to development. You can see from points 2 and 3, just how critical development has become to our portfolio strategy to our story. So if you combine those, you have 14 individual projects representing almost 6 million feet, 10% of our overall portfolio and representing an investment of roughly $700 million in 1 year. So it shows you how critical it has become to our story at Granite. And we completed 4 properties in 2022, representing roughly 2 million feet, all are fully leased and now generate annual NOI north of $14 million. Also as part of our sort of continuous portfolio optimization program, we disposed of 2 noncore assets, our only asset in the Czech Republic and 1 asset in Poland and an interesting note on the sale of the asset in Poland, it closed 1 week before the invasion of Ukraine. So timing is sometimes important. So I really like this slide because it talks about the relevant financial performance in the year and also shows you the cash flow growth over 5 years, which is something we're laser-focused on. So I'll begin with the information on the left and our financial performance in 2022. As you can see, we grew FFO and AFFO comparable FFO and AFFO per unit by 11% and 8%, respectively, year-over-year, a very strong number. That was driven mainly by NOI, higher NOI from acquisitions, development stabilizations and same-property NOI growth. And as you can see, the team completed over 12 million feet of leasing through renewals and new leases, some of them related to maturities in 2023 at an average increase in rental rate of 26%. So very strong, and that will serve to support future same-property NOI growth in 2023. There's a lot to unpack in point 3. But I think in a way, it speaks to the uncertainty and the volatility that we faced in 2022, not only in terms of the movement in capitalization rates and discount rates but also foreign exchange where we saw the euro drop almost 20% on the invasion in the Ukraine and the Canadian dollar strengthened against the U.S. dollar and the euro based on higher energy costs, but both U.S. dollar and euro recovered nicely in the second half of the year and in the end, contributed positively to our net asset value as did development stabilizations in the year. So we made good progress on a number of our ESG objectives for 2022. I think too many to list here, but we have highlighted a few of our major achievements. We were highlighted by GRESB, which is the leading global sustainability benchmark framework, say that 5x fast benchmark framework for the real estate industry. As being a leader in our peer group for ESG and ESG-related disclosure and I would point out that peer group is North American listed REITs. These are some of the largest, most sophisticated industrial real estate companies in the world. Point 2 is something I'm very proud of. I think in today's climate governance gets overlooked far too often. And we were once again ranked the top Canadian REIT by the Globe and Mail Board review for corporate governance, and we are ranked fourth overall among 220 of Canada's largest public companies, so very elite company indeed for governance. And point 3, I think, speaks to our commitment. We're a developer. We're a manager of real estate, we're a developer, but it speaks to our commitment to sustainable development and all of our development projects, at least those ones that we control are required to meet a minimum green building certification, as outlined in our Greenville -- green framework -- Green Bond Framework published in 2020. So these are a few of our green building certifications that we achieved recently. The reason for highlighting this is, it shows that our commitment to sustainable development applies across our entire platform and our entire portfolio. So you have DGNB which is the relevant green building certification in Germany, and you have Green Globes or LEED in North America, and you have BREEAM in the Netherlands. These are the certifications that we follow in our respective markets. So we provided in this presentation 2 case studies of green buildings that we achieved in 2022. One here as you can see in Tilburg, the Netherlands and one on the following page in Dallas, Fort Worth. There are differences to be sure in the standards of green buildings between jurisdictions. But for the most part, they're very, very similar. And what I would highlight on this project, as you can see is the level of rooftop solar at this property. The rooftop panels and arrays virtually cover the entire footprint of the building. And this will be a strong contributor to our commitment to generating 25 megawatts of renewable solar power in our portfolio by the year 2025. And this is our new development in Dallas, just outside of Fort Worth, 600,000 square feet, which achieved 2 Green Globes. It is now fully leased to a single tenant for a period of 10 years. And just to note that all of our remaining developments that I mentioned in one of the previous slides, are expected to achieve green building certification similar to what we've done in the past. So unitholder return. This is my fifth year doing this. Hopefully, I get another chance next year. And each year, I've been up here, we've outperformed the TSX REIT index over that year. And this is the first year where we've underperformed, as you can see, minus 32% versus minus 17% for the REIT index. But we were in line with our direct peers because the lower-yielding sectors in the REIT index, namely industrial, multifamily, suffered more than the other sectors as investors viewed lower-yielding stocks as being more sensitive to interest rate increases than other sectors. I'm actually going to take a very self-serving moment here, and I want to read something to you. These are from my comments at last year's AGM. And this is in regards to total return for 2021. We are very focused on long-term growth and total returns for unitholders. So what happens in a single year, I don't think, is relevant. A relative performance over 3 years and 5 years is stronger than over 1 year, and it is my hope to stand up here every year and point to that outperformance over the longer term. So just to say, none of us at Granite are pleased or proud of our unit performance last year. But when you look at our performance over 3 years, 5 years and over 10 years since inception, as a REIT, we continue to outperform the index strongly over those periods. And that's the important thing. The other note I would mention here on this slide is, late last year, we announced our 12th consecutive annual distribution increase. And I'm not sure the exact number, but I think we're among very few Canadian REITs that can make that claim. And I think when you look at the payout ratio at under 80%, we continue to position ourselves to consider future annual distribution increases, and that's an important part of our philosophy. So before I open up the floor for questions, I just wanted to take you through our priorities, our listed priorities for 2023. This is, as outlined in our annual report. And to be honest, these priorities are more or less consistent from year-to-year. That only makes sense. But I think this year, they also reflect reality that we find ourselves in. So we're going to continue to really strategically allocate capital focus on our development program, focus on our leasing availabilities and upcoming availabilities, address our upcoming debenture maturity later this year. And hopefully position ourselves, which I think that we have position ourselves to pursue strategic opportunities later on this year and into 2024. And as you can see from the right, we have made a lot of early progress against those priorities for 2023. So on behalf of the senior leadership team at Granite, on behalf of our Board of Trustees and on behalf of our entire team at Granite, thank you for attending your 2022 AGM. Look forward to reconnecting with you next year. I'll now open up the floor for questions. Andrea, any questions? No. Okay. All right. Thanks again, everyone, and we'll talk soon.