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Granite Real Estate Investment Trust
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Good morning, ladies and gentlemen, and welcome to the conference call of Granite REIT. Speaking to you on the call this morning is Kevan Gorrie, President and Chief Executive Officer; and Teresa Neto, Chief Financial Officer.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 as well as potential impact of COVID-19, 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 its annual information form for 2020 filed on March 4, 2020. Readers are cautioned not to place undue reliance on any of these forward-looking statements and forward-looking information. Granite undertakes no intention or obligation to update or revise any of these 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 standardized meaning under international financial reporting standards. Please refer to the Q3 2020 condensed combined unaudited financial results and management's discussion and analysis of 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 will now turn the call over to Kevan Gorrie.
Thank you, operator, and thank you, everyone, for taking the time to join us for our Q3 earnings call. I hope you're all doing well. As usual, I am pleased to be joined this morning by Teresa Neto, our CFO; Lorne Kumer, our Executive Vice President Real Estate; and Michael Ramparas, our Senior Vice President, Global Real Estate and Head of Investments. For our call this morning, Teresa will begin our discussion with a review of our financial highlights, and then I will provide an update on our operations, acquisitions, development and ESG and then open up the call to any questions that you may have. Teresa?
Thanks, Kevan, and good morning, everyone. Granite's third quarter delivered solid financial results with a continuation of the strong same-property NOI and FFO, AFFO per unit growth relative to prior year. FFO per unit in Q3 was $0.96, a $0.03 or 3% increase relative to prior year and $0.01 lower than Q2 2020. Included in this quarter's FFO is a severance charge of $1.1 million related to the departure of a senior management member. Excluding the severance item, FFO per unit would be $0.98 on a more comparable basis.Further, we continue to realize fair value losses related to the revaluation of trustee deferred stapled unit liabilities due to the increase in Granite's unit price, which negatively impacted the third quarter with a $0.5 million spends or close to $0.01 of FFO per unit. FFO this quarter has been positively impacted by strong same-property NOI growth, but was partially offset by net negative foreign exchange translation of our foreign based income representing over 85% of our FFO as the U.S. dollar weakened by 3.9%, while the euro strengthened 2% on average in Q3 relative to Q2.Part of this foreign currency translation loss was mitigated through Granite's hedging program, which utilizes derivatives that protects Granite against significant declines of both U.S. dollar and euro. The settlement of such foreign exchange derivatives resulted in approximately $0.3 million of net foreign exchange gains realized in the third quarter, partially offsetting the translation losses. In addition, FFO per unit this quarter continued to be impacted by the temporary dilutive impact of the $289 million equity offering completed in late in the second quarter, where the net proceeds have not yet been fully deployed, and the higher interest rate expense from the $500 million green bond also issued in June.Granite's AFFO on a per unit basis in Q3 was $0.91, which is $0.01 or 1% higher than prior year, but $0.02 lower than Q2. Excluding this impact of the severance expense previously mentioned, AFFO per unit on a more comparable basis for Q3 is $0.93, essentially flat to Q2. AFFO related capital expenditures, leasing costs and tenant incentives incurred in this quarter were light at $0.8 million, which was lower than $1.6 million incurred in the same quarter last year and lower than the $2 million incurred in Q2.For the fourth quarter, we are estimating total maintenance capital expenditures, leasing commissions and tenant allowances of approximately $2 million to $2.5 million for a total year estimate of about $5.9 to $6.5 million. This year's maintenance CapEx came in lighter than expected due to the delay of certain projects of the spring and summer months and is not reflective of forward maintenance CapEx trends. We are expecting maintenance Capex, tenant allowance and leasing cost to increase in 2021 to approximately $15 million or about $0.30 per square foot.AFFO also continues to be impacted by the temporary dilutive impact of the June equity and bond offerings mentioned earlier as well. As a result of a relatively low CapEx quarter and strong FFO performance, the AFFO payout ratio came in at 80% in the third quarter. NOI on a cash basis for the quarter increased $14.2 million or 23.5% from the same quarter last year and by $3.5 million or close to 5% from Q2. Same-property NOI for Q3 came in very strong relative to Q3 of last year, increasing 6% and on a constant currency basis, increased 3% driven by occupancy gains in the GTA, New Jersey and Oregon, contractual rent increases and rent from an expansion completed at one of our West Jefferson, Ohio properties. Excluding the expansion rents, same-property NOI for the quarter is 5.4% and on a constant currency basis, 2.4%.G&A for the quarter was $2.7 million higher than the same quarter last year and $0.6 million higher than Q2. The variance to last year is primarily due to the $1.1 million severance charge mentioned earlier and $1 million in higher fair value losses recognized related to unit-based compensation liabilities, due to again an increase in Granite's unit price this quarter. For the fourth quarter, we estimate G&A will come in approximately $7.50 million to $8 million, which includes approximately $1.6 million of non-cash compensation expense, but again assumes no fair value losses or gains associated with the increase or decrease in our compensation liabilities, which we cannot predict.With respect to current income tax for Q3 '20, current income tax was $2.2 million, up slightly about $0.1 million from Q2 due to the foreign exchange impact on euro-based current taxes. Current tax for Q4 should be consistent with Q3, excluding any current tax expected to be realized on the sale of the Spain assets. As mentioned on the first quarter earnings call, we have another potential reversal of $1.7 million of tax provisions in the fourth quarter, but cannot assess whether these tax assets can be realized at this time.The trust balance sheet comprising total assets of approximately $5.9 billion at the end of the third quarter was positively impacted by approximately $62 million in fair value gains to Granite's investment property portfolio offset by approximately $19 million in translation losses on Granite's foreign based investment properties, where the U.S. dollar weakness exceeded the impact of the strength in euro. The fair value gain of Granite's investment property portfolio is attributable to fair value gains in the Trust GTA and U.S. properties as well as the Trust's modern distribution warehouse assets in Germany due to increases in fair market rent assumptions and declines in capitalization rates, partially offset by fair value reductions in a few of the Trust Austrian assets.The Trust's overall weighted average cap rate of 5.8 decreased 20 basis points from the end of Q2. Total net leverage at September 30 was 24%, only slightly higher by 1% from Q2 and the Trust's current liquidity is approximately $1 billion, representing cash on hand of about $540 million and the undrawn operating line of $499 million. Pro forma, we announced Atlanta acquisition, liquidity will -- is estimated to be just over $900 million.I will now turn the call over to Kevan. Thank you.
Thanks, Teresa. As always, I'll keep my comments brief as I trust you've had an opportunity to review our MD&A and press release. I'll first echo Teresa's comments on our quarter. Our FFO and AFFO were impacted by the dilution from the equity offering in June and partially offset by lower CapEx. But overall, a very solid quarter operationally. Rent collection continues to be very strong across our portfolio. And the only comment I would make is probably unnecessary. We only have one rent outstanding as of today related to a small space in Poland. The tenant is a very large global creditworthy tenant that is permitted under this particular lease to pay their rent in arrears. So we expect the rent for October to be collected anytime now.So we are effectively 100% collected through October. So that's a testament again to the quality of our tenants and our team involved in rent collection. In the quarter, we closed on 3 previously announced acquisitions in Columbus and the Netherlands, and we closed as mentioned on 3 smaller acquisitions in the GTA. As outlined in our press release and MD&A, we are now firm on the acquisition of the 1 million square foot newly constructed distribution facility in Atlanta for roughly CAD 107 million. The facility is 100% leased to PVH Corp with a remaining lease term of approximately 15 years and serves as our primary distribution and e-commerce facility for the U.S. East Coast.The pace of our acquisitions to date has admittedly been slower than expected. But frankly, that has been more a factor of the swift increase in pricing for good assets in our target markets during the second and third quarters than a lack of opportunities. At this time, I would characterize our acquisition pipeline as being very active, and we expect to commit a good portion at least of our cash on hand by the end of the year.On the development front as outlined in our press release and MD&A, our development in Bleiswijk in the Netherlands was completed as scheduled on September 1 and the tenant, Ahold Delhaize, a global food retailer has expedited their fit-out of the space to meet significant grocery e-commerce demand, and they have already began to operate out of the facility months ahead of schedule. Site work is now substantially complete on our Houston development, and we continue to evaluate market conditions for a potential commencement of construction of the first 2 buildings in 2021. We should have more information on this in the fourth quarter call.We have now repriced our development project in Altbach, Germany and expect to commence construction of the 300,000 square foot building in the first quarter of next year. We have also submitted for site plan approval on our 600,000 square foot Village Creek development in Fort Worth, Texas, and expect to commence construction in the second quarter of 2021. Finally, we are finalizing the scope still of the planned expansion of the Congebec facility at 2095 Logistics Drive in Mississauga. And subject to final building permit, we now expect to commence construction in the second quarter of 2021.From a leasing perspective, 2.4 million square feet of leases were scheduled to expire in 2020. To date, we have negotiated extensions on new leases on roughly 2.1 million square feet at an average increase in rental rate of approximately 7.5%. The remaining 250,000 feet of expiries in 2020 are not expected to renew, and the spaces in Europe and the U.S. are currently being marketed for lease. Of the 626,000 square feet of current vacancy, we are finalizing terms on a new lease for roughly 300,000 square feet in Memphis. And as a result, we expect our occupancy at year-end to be in line with this quarter.For 2021, 1.9 million square feet or roughly 4% of our leases by GLA are scheduled to expire. And to date, we have renewed roughly 1.3 million square feet of those expiries at an average rate increase of roughly 3%. As Teresa mentioned earlier and as disclosed in our MD&A, same-property NOI increased by 3% on a constant currency basis and 2.4% excluding expansions in line with our expectations for the quarter and year-to-date. At this point, we expect same-property NOI for the fourth quarter to be in line with this quarter.At this time, I would like to provide an update on the use of funds for our $500 million Green Bond, which we completed in June. To date, we estimate that we have completed or committed roughly $350 million in qualifying green projects comprised mostly of certified green buildings. And by virtue of our planned development program, we expect to add approximately $100 million in qualifying projects to that total in 2021. So we are making excellent progress on the application of the Green Bond proceeds which should also enable Granite to issue green bonds in future.With respect to the distribution increase, as I've stated in the past, our objective at Granite is to put ourselves in a right position to be able to increase distributions and maintain a conservative payout ratio. Notwithstanding the potential risks associated with COVID and related restrictions, which were considered, the Board agreed that an increase in the targeted annual distribution for 2021 to $3 was appropriate and that we can continue to maintain that balance of higher distributions and a conservative payout ratio.On that note, I will now open up the floor for any questions.
[Operator Instructions] Our first question comes from Chris Couprie with CIBC.
Just given the fact that you have very limited lease expirations this year and next, any commentary at all on what the organic growth may look like in 2021?
Yes. Thanks, Chris. 2021, it's still early for us, but we expect it will be in the 2.5% to 3% range for 2021. And that is on average per quarter for next year.
Okay. So it's 2.5%. Excluding expansion, it's 3% with?
Yes.
Okay. And then just on the Series 2 debentures that are maturing next year, any kind of early thoughts on refinancing plans there? And what type of rate you think you might be able to achieve relative to the existing swap rate?
Yes. So Chris, yes, that is on our mind, and we're watching a timing on that. Again, we're careful as far as the prepayment penalty. So it is something we'll be looking at truly in the first quarter. Right now, the bond markets are quite favorable. And so refinancing that just on a Canadian coupon 10 years, we could be in the 2.5% range, 7-year around 2%. And swapping that would be lower, and around 1.5% if we go 10 years, so about a 1% lower than what we currently have it swapped in right now for the 2021.
The next question comes from Sam Damiani with TD Securities.
Just want to start off with your comment, Kevan, about the -- I guess the valuations in the sector accelerating during the second and third quarters. So could you maybe provide a little bit of color on sort of the dynamics of some of your negotiations that were going on? Did the vendors kind of pull the properties back off the market and hoping to get sort of higher prices later on? Or did they -- is the retrading going on? Like what's -- sort of what's happening real time I guess when you -- in your acquisition pursuits?
Well, Sam, I'll speak more to the second quarter than the third. In the second quarter, there was certainly a downturn. And depending on the market, it was brief to briefer. And you saw the 3 acquisitions that we announced in the GTA. And to us, it felt -- and I'll speak to those acquisition is kind of lead into market conditions. But during that time, we saw a number of opportunities that crossed our radar in the GTA. And we like these opportunities because they were really good locations. They had a good growth profile, and we felt that pricing was impacted by COVID. So on a per square foot basis cost replacement, we felt comfortable.In the U.S., it was a different story. The investment market, market fundamentals to a degree, but particularly the investment market snapped back much faster. And there were new entrants and pricing competition was higher across our target markets anyways. And so it wasn't so much that vendors were pulling assets. I think that the volume of opportunities continue to grow later in the second quarter and into the third. It's just that pricing had gone up in our minds quite considerably and cap rates had fallen. And so you're seeing that in terms of our IFRS values, but we certainly were seeing that in the markets.We potentially mistakenly thought that there would be more value opportunities out there as a result of COVID, but there was just too much capital chasing good products, good industrial products in our target markets and pricing became much more competitive, much faster than we expected.
That's helpful. So is it fair to assume that Granite may have pulled back a little bit on some sort of some negotiations and just to sort of take a bit of a pause and see where things set because I think the commentary last quarter was that you hope to have the bulk of the liquidity deployed by year-end?
Well, I think that's just -- that's fair, but I think it just validated our strategy at the whole time. If there is a large portfolio or even a large asset and is fully marketed, it can get very competitive. All it takes is for one group to want to place capital quickly, and it can move the market for that asset. Where I think we're having success most recently is we continue to have access to off market deals. And so I think the comments I made about our pace of acquisition in the fourth quarter is accurate. We are in active discussions on a few strategic opportunities. And I think that we'll get those done. It just again reminds us where there are modern assets or portfolios that are fully marketed. We're just probably not going to have success taking a lot of those down just because where pricing tends to end up in this market.
It's helpful. Just switching over to, I guess the comment on the 250,000 square feet of roll in the fourth quarter that you do not expect to renew. And then I guess there was a vacancy in Austria in the third quarter. Are the bulk of these Magna facilities by chance?
No, they are not. Actually, the 250,000 includes the vacancy in Austria that you mentioned. So that's one and then the other one is in Savannah. So that one was not Magna. So we are looking to renew that space in Austria to a new tenant. And then the one in Savannah, we're pretty confident on in terms of the releasability. We were in discussions with the prospect, I'm not sure where we are in that. So we don't expect that vacancy to last a long time, but that's the 2 that I was referring to the 250,000 feet in total.
And I guess the Austrian asset is a piece of a larger building that Magna has got a -- has partial occupancy of? Or is it a single tenant for --
Yes. Magna is one of the tenants, and this vacancy is not related to Magna. This was another tenant.
Our next question comes from Howard Leung with Veritas Investment Research.
And I want to return back to that question about acquisitions. Kevan, you mentioned -- you pointed out some of the sale leasebacks that were done this quarter. Were they off market deals? And do you see more sale leasebacks in the near future or in the pipeline as maybe some owners also need capital because of over expansion?
Well, generally, I do expect to see sale leaseback opportunities increase, to your point. And it's very important for us and for all owners looking at these opportunities to make sure you're underwriting the tenant in the space very carefully, which we do. So we do expect to see more of the ones that we announced. There were 2 that I would characterize as off-market or very selectively marketed, and there was one that was more broadly marketed. And then frankly, I think that the one that was more broadly marketed was probably the best pricing just because of the timing. It was so early on in April and COVID that we felt pricing was obviously impacted significantly by the conditions around COVID and the concerns, and that provided us the opportunity to add this to our portfolio at a good price.
That's helpful. I just want to turn to the leasing vacancies. I think in the U.S. portfolio, there was a vacancy beginning of the year, 402,000 square feet. Is that -- I think you mentioned that you are in discussions to lease something in Memphis. Is that bulk in the Memphis? The bulk of the vacancy --
That's right. Yes. So there is 2. There was one in Novi, Michigan. And just to make a point to Teresa's on the CapEx for next year, that's accurate, but that does include about a 1/4 of that's related to our Novi, Michigan asset, which is effectively an office asset. It's a legacy asset. We do want to -- it's not a core asset of ours, but we do think that there is value to add by re-leasing that space, and then looking to sell with. There is CapEx associated with that. It makes up almost a 1/4 of our expected spend next year. That's 90,000 feet, and the remainder 312,000 square feet is Memphis. And that's the one that I was referring to in terms of negotiating a lease on that space.
Okay. No, that's great. That puts good color. And then just a question on your weighted average lease terms. I guess we have kind of seen it tick down a bit. I think maybe that's a side effect of selling something Magna properties. It's below 6 years now. Do you -- I guess how does that kind of relate with your view on any potential long-term recession effects from COVID? I guess other than mean that you think that it might not last much longer and you're not too worried about the kind of lease term shorten?
Well, it's a good question. I think a big part of it though was the portfolios we added in the Midwest and Memphis. Those were shorter. And we actually -- we love the -- we like the markets. We like the quality of the assets, and we felt that they provided strong growth potential. So we were willing for the average weighted lease term to go down and capture some growth because we believe in the quality of those assets in the location. That being said, we are mindful of the lease term in the current environment in which we're in. And so as you can see, I felt like we paid market for the PVH asset because that provides good credit and a long term on a large asset that's brand new in the Atlanta market.So I would just put it this way. Where we feel we can capture growth and we have confidence in the market and in the asset, we're willing to take a shorter lease term. But at the same time, we are mindful of the overall weighted average remaining lease term. And to us, stability is a very important consideration. And I just -- I'll make that point. So I think because of PVH and other acquisition opportunities we're looking at, I do expect that weighted average lease term to tick up slightly in the coming quarters. I just that the point I would make is we're mindful of it, particularly in the current environment in which we're in.
For sure. Yes. There is kind of a need to balance both sides. And then just maybe another one, I kind of saw contractual adjustments. They seem to improve as a percentage of base rents. I guess with the number, I think some of the acquisitions you're announcing, they'd also have contractual adjustments or step ups in there as well. Do you expect to see that being a stronger contributor to organic growth? Or is it actually kind of be similar to what we have seen in fiscal '20?
Well, I think it's -- I think we have seen it contribute to our organic growth, and I think we'll continue to. And again, like the weighted average lease term, the growth in the contractual rents is important to us. It is a consideration. If there is an asset we really like and it's flat rent for 7 years, what we're willing to pay for that asset matters. So all of the acquisitions we've announced have contractual rent escalations. And we expect to see that on the vast majority of acquisitions that we make. And certainly, any lease deal we're involved with. It's a very important consideration. You mentioned COVID though. So I think at one point, the expectation on the annual rent escalation was getting quite high. Whether that moderates somewhat in this environment would be a fair question, I think. But rent escalations are an important consideration for us anytime we make an acquisition or make any leasing decisions.
Right. And just on that, for the rent escalations, are you signing more fixed rent escalations these days? Or is it still linked to CPI? And what's the mix right now between your rent escalations, like how much is it linked to inflation? How much is mix?
Vast majority are fixed rent escalations, and that's a North American thing. We have CPI indexed in our acquisitions and developments in the Netherlands, and that's typical in the Netherlands. And you see that very much in Germany. In North America, it's much less common, although we do have a number of Magna assets that our CPI index, including Modatek and Karmax, 2 large assets in Milton. Those are CPI indexed. But overall of our 100-plus properties, the majority are fixed annual increases.
Okay. Great. And I guess even in -- because you've been able to renew leases, and there hasn't been any kind of pushback during COVID about these kind of fixed escalations?
No. In terms of existing tenants? No. No, there has not been -- to be fair, I should say to date, there has not -- that has not been a focus in our portfolio anyways.
The next question comes from the line of Matt Kornack with National Bank Financial.
With regards to -- just a follow-up to Howard's questioning there on lease term and stability versus rent increases. Are your competitors or the market more generally pricing lease term and stability differently than mark-to-market potential? Or is it market specific? Or generally, are there any trends there?
Yes. I think that's fair. I think when you're in a really strong market, tenant credit tends not to matter. And we saw that I think in the fourth quarter of 2019 and frankly, the first quarter of 2020. And then COVID hit also in tenant credit matters. And we -- it was always an important part of our underwriting. I can assure you of that. And I think when you look at our rent collection, it's hard to say that as we've acquired and developed so much that it hasn't been part of our DNA and our modus operandi. So it has become a greater interest to buyers. We've seen that. I'm not sure I can quantify how much that is. But we have seen deals with -- to me, very low CAGR on medium to long-term leases with credit that have gone for prices that have really surprised us. So that would suggest to me that tenant credit in today's market matters more than it did 9 to 12 months ago.
That makes sense. With regards to the PVH acquisition, is that -- or sorry, was there a rent step provided in any of the disclosure? Or can you provide that?
We didn't -- we have to be careful, Matt, under the terms of the lease what we disclose, but it does have annual rent escalations.
Okay. Fair enough. And then Teresa, on straight line rent, I apologize if I missed it in your comments. But the uptick in this quarter, what would that have related to? And how should we think of it going forward?
I didn't mention it, but yes, there were 2 assets. So the AllPoints development, which came online in June 15 -- on June 15 last quarter. That does have free rents up till November. So that will wear off in Q4. And the Tilburg asset in the Netherlands, which we closed in on July 1, that will have free rent until next year. So we'll be cash producing in next year. So that's where that uptick is coming from.
Okay. And in terms of the quantum that we should expect sort of in Q4 and then what it would go to into next year, can you provide that?
If you don't mind, can I get back to you on that?
Yes. I'm fine. Sure. Absolutely.
The next question comes from Fred Blondeau with Industrial Alliance Securities.
I'll be quick. I was wondering if you could give us a bit color on the strong same-store NOI growth in Canada this quarter? And what would be the drivers?
I think we had -- yes. I think, yes, there were a few -- there was some leasing done last year, Fred, that contributed pretty heavily, including Tesma, in Vaughan, which was released through Amazon. That was a contributor. And we had a rent increase in our [ Clearvale ] asset with Magna, which kicked in I believe in the second quarter of this year or actually maybe it was July 1. So there were a few assets that contributed quite a bit in the quarter.
But isn't fair to say that it was somewhat an abnormal type of growth or that growth you would expect for the next 2 quarters or something?
I think it will go down a bit in the GTA in terms of -- I mean we have one that we expect to come up in the fourth quarter, and we have Tesma, the same-property NOI growth, where we expect that to go down to moderate in the fourth quarter. So I think it will be lower in the fourth quarter, still positive obviously, but lower in the fourth quarter as it grows. So I think it's fair to say it will moderate in the fourth quarter moving forward.
That's great. And second, just on the disposition of these Magna facilities in September and October. Could you remind us what would be your ultimate target exposure to Magna in your expected time line from here?
We -- I think we said at the end of this year, we expect it to be around 35% and hope to be below 35%. And again, I will emphasize that we're very fortunate to have Magna as a major tenant during a period of time like this. They have been very professional through this. They haven't missed rent. As Lorne always reminds me, they didn't miss any rent in 2008 and 2009 as well. So they provided that stable cash flow that we thought that they would. But just to repeat, there are noncore assets obviously that don't fit in with our investment criteria today. So we want to -- or expect to get under 35% this year. And for next year, probably somewhere below 30% would be a target.And just to say, to remind everyone, a lot of our portfolio with Magna is in the GTA. Say somewhere between 15% and 17% of our total portfolio is in the GTA. Those could be long-term holds just by virtue of the location and where we think land values are. And then in Austria, again, these are all mission critical facilities with Magna. And we feel that there continues to be the opportunity to add value through these extensions et cetera. And there will be a time where we will look at a possible disposition of those assets, but we can afford, we believe to be patient with that. So I don't want to look longer term, Fred, than maybe 2021. And hopefully, that helps.
No. Absolutely. And lastly, what would be the profile of the buyers of these facilities, generally speaking?
Definitely, I think we've seen this isn't just a 2020 thing, but I think it's accelerated in 2020. What we see in the past couple of years is private equity buyers have been interested in long-term leases with good covenants. And we've seen those buyers get more aggressive each year. And I think COVID has probably accelerated that. So I wouldn't say anything specific, but definitely, what we have seen is an increase in interest with facilities related to good credit with term. And that's -- I think that's kind of where the world is going in terms of cash flow stability. It's becoming more valuable to investors than maybe it was 2 or 3 years ago.
Our next question comes from Joanne Chen with BMO Capital Markets.
I got a couple of quick ones real quick. Just given the strength of the rent collection obviously to date and the previous discussion with regards to an ongoing rent escalation, you did say that Q4 [ has been like ] probably trending the same direction as Q3. Perhaps, would you give us a little bit of color in terms of what you're thinking in terms of in for the next year? Do you expect some kind of momentum to carry through from 2020 into 2021?
In terms of leasing do you mean or organic growth?
In terms of organic growth?
Yes. I think the question was asked too. We think we guided this year to 3% to 4%, 3% without expansions, 4% with expansions. We think next year will probably be 1% or maybe a little less below that because we have less role in the GTA that happened in 2018, 2019 into '20. Then we do for next year. So slightly lower than this year in terms of organic growth. And in terms of occupancy, pending what happens, we expect occupancy to remain relatively stable from where it is today into 2021.
Okay. Great. And I guess, just shifting gears to what we were saying in terms of the deployment of your existing liquidity by year-end, do you think -- would it be kind of a balance between development or stabilized assets, given your previous discussion with regards to the kind of pricing environment that you're seeing right now? And then maybe perhaps if you could elaborate on whether there are certain geographies where you're more focused on at this point?
Yes. In terms of stabilized versus development and the assets that we -- in 2 of the 3 assets we announced anyways in the GTA, we see as is real value-add and providing a little bit better growth for us. As we look forward in the fourth quarter, right now, what's in our pipeline is more stabilized assets than say value add, although I want to -- I would possibly characterize as a combination of core and value add. We don't have any development land currently in our immediate pipeline. And we have somewhere between probably $140 million next year planned for development. Would we look at new development opportunities? Absolutely. In terms of the markets, we do expect to continue to be busy in our target markets in the U.S. and in Europe.Obviously, there are restrictions now on travel. In Europe, there could be restrictions on travel in the U.S., which could impair the team's ability to pursue acquisitions in certain markets. So we will see, but we do expect to have a pretty active year in 2021. In terms of acquisitions, I would say we do want to add more development land to our portfolio in 2021.
Okay. Great. And I guess, maybe just real quickly on that development front with respect to the [indiscernible] development. What sort of tenant are you looking at for that property?
Well, when we did the first go around before COVID hit, we were in discussions. I mean there are some dominant -- I don't need to mention names, but there are some dominant companies in the Stuttgart area that we're in discussions and looking in that asset. There was also a global e-commerce provider that was looking at the asset, and there was also a food distributor. So it's very broad. It's kind of across all users. And in terms of what -- who we're targeting, we're not really targeting anyone. I think we build the best generic box we can. And we want to make sure that it could be used for e-commerce. It could be used for last stop or last mile or it could be used for conventional distribution. Where we're not building is the manufacturing building, that's for sure. So we're not exactly targeting a tenant. We're just trying to build the best distribution logistics facility. And then we'll see -- the market will decide what the best tenancy is for that space.
Okay. Great. And maybe just one last one for me and perhaps putting the fixed income hat on. Given how attractive the financing environment, is the thought still for grant to maintain your leverage kind of around that 7x range?
Yes, Joanne, we definitely are committed to keeping it in and around that level. So right now, like on the debt to EBITDA, we're obviously close to like closer to 5. But our target is around 6.5 to say 7x. So we are still committed to doing that.
Our next question comes from Himanshu Gupta with Scotiabank.
Just a follow-up on the Magna dispositions, 2 properties in Ontario and one in Spain. What was the lease term left on these properties? And are there any more Magna dispositions in the near term you are working on, especially given that you mentioned that the private equity capital is available for these type of Magna covenant?
Yes, there was the few things -- because of these assets, they were all less than 5 years. And these particular assets, the tenant Magna has 5-year renewal option. So you'll never have more than 5 years on those. What was the second question, Himanshu?
Are you working on any more Magna dispositions in the near term? I mean looks like the capital is available for these kind of assets in the market?
Well, we expect -- we're working on nothing in the near term. And we expect in 2021 in terms of dispositions to be near the $50 million mark in total. So that's what we expect in 2021. And beyond what we've announced, we don't have anything immediate in terms of dispositions.
Got it. And then just turning on the acquisitions in the GTA. You made 3 small acquisitions. Are you looking to buy only one by one? Or are you willing to do some portfolio acquisitions as well? And in general, how is the acquisition pipeline in the GTA?
Well, I mean, it is -- it continues to be quiet in the GTA. There is just everyone that owns good assets and the GTA wants to hang on to those assets in the GTA. So there isn't a lot of velocity or volume there. Your question about portfolios, we're always happy to look at the portfolio, but I will remind everyone that it is our experience, particularly in Canada that portfolios attract higher pricing and typically have assets in the portfolio that we don't necessarily want. So we just had more success looking at smaller portfolios or single assets because we can evaluate better if they meet our investment criteria or not. So we're open to it, but we are mindful of the quality of the assets within the portfolio and the pricing of the portfolio. And so far, we've had more success in our minds pursuing single asset acquisitions rather than portfolios.
Yes. And what kind of portfolio premium do you think these portfolios will require to be traded? Any sense there --?
I mean, I think that would be fair. It's hard to point to any real data set in Canada because you're not -- if you're seeing a portfolio, it could be small bay industrial tertiary market. So it's really hard to point to. In some ways, you could say that there is a discount. If you're saying it's going to be a portfolio of 1 million square feet and its modern product, that's a different story. I think 25 basis points would be very fair. We do see more of those deals in the U.S. And the larger the portfolio, higher the premium. And that may be because the larger portfolio, the better the quality. But again, you will still end up with 20% to 30% of the portfolio that's not as high quality of the others, and it could be in markets that are not in your target market set. And we've definitely seen at least 25 basis point premiums on those types of portfolios. So probably best for us, for our shareholders, not for us to spend too much time looking at those opportunities.
Absolutely. And now just turning attention to the Atlanta property. You bought 1 million square feet, 4.4 cap rate, pricing looks strong. How much do you think market has moved since the beginning of the year? And what is the investment case here? I mean, are you also baking in any intensification potential as the -- I think the property is situated on a very large piece of land?
Yes. So one, I think you've mentioned a couple of things. One is Atlanta has been on our radar for a while. We think it is a very important logistics market. There is a lot of supply, but demand to date has continued to keep up with it. And we think with the continued emergence of the Savannah port, you know we like the Savannah market. We think Atlanta is going to continue to be a very strong critical distribution market for the U.S., particularly the East Coast of the U.S. So we like that market. This asset is a fully conditioned asset, which I think gives it advantages in the market. It is a long-term lease with a credit worthy tenant. And so for us, it made sense. And there are rent escalations, as I mentioned. So there is decent growth out of this assets for the next number of years. It was a good fit for us. It's a good entrance into the Atlanta market, and we don't believe that we're done in the Atlanta market. We want to continue to find opportunities and grow our footprint in that market.
Got it. And then just on developments, especially the acquisition markets was strong in the U.S., we just saw at Atlanta. Do you think -- how is the development shaping up in Dallas and Houston? And especially the pricing has moved, would you accelerate the development there on both of those projects?
Yes. I think just a further point to start on Atlanta, and we've been asked this question recently. It feels like there has been very strong -- strong to very strong cap rate compression across most of the U.S. markets. We've certainly seen it very strong in our Midwest markets like Louisville, Cincinnati et cetera. The markets -- the core markets or the Tier 1 markets like L.A. and Miami, there has probably been cap rate compression, but what we've seen is the very large secondary markets. The compression has brought those cap rates closer to L.A. in our view. So Atlanta has been one of those markets. It would typically have been for newer product in the high 4 cap range. It's certainly now in the low 4 cap range, and we have seen 4 flat deals in Atlanta for the right product. So cap rates have compressed more in Atlanta, Louisville. Dallas continues to fall. Then maybe some markets like L.A. That's something we've observed.The developments that we have, I would say, Dallas, we are very comfortable in that location. It's a 7-minute drive from Downtown Fort Worth. We are very comfortable moving ahead with spec, and that will be the plan once we get approval to move ahead with that 600,000 square foot facility. Houston, long term, we still really like that market, but Houston has been hit not only by COVID, but by oil prices. So we certainly observe that there has been more softness in Houston than our other markets. So we prepped the site. The plan is to wait until the New Year, evaluate the market and decide when to go. So it's a tale of 2 cities. To be honest with you, we do expect conditions to improve in Houston probably by the second half of the year and maybe move ahead. But as of now, we're going to continue to evaluate that market before making the go decision on Houston. But Dallas, for sure, will go as soon as we are able to go.
Got you. And you mentioned in your comments something about the [ KPA ] markets like L.A. Are you willing to look at that market, if you get something in the similar pricing like Atlanta, like in mid-4 cap rate? And how is the rent growth differential between let's say L.A. and some of the other markets?
Well, we're very IRR driven here. So and that's our thesis, as I've mentioned for Europe -- for European markets. It's not necessarily the 3.5 or 4 cap. I don't want to scare anybody, but it's not necessarily the going in yield that scares us. It's the coming out yield. And what the IRR is, like we're long-term holders of real estate. And so we do look at L.A. Markets. We look at Seattle. We look at even San Francisco, that market around Oakland. And if there are compelling growth opportunities there, then absolutely, we would carefully consider opportunities in that market. But to us, we see decent rent growth prospects in the markets we're in now, and we're seeing going in yields that are still higher than L.A. So we do look at that. It just to us makes more sense for us to continue to look at the target markets that we're in today.
Sure. And maybe just finally one for me. On the maintenance CapEx guidance for next year, I think Teresa, you mentioned $15 million or $0.30 per square feet. Is that a go forward annual run rate? Or do you think there is some catch up from 2020 as well, which was on the lower side?
I think probably because we do have about almost $4 million in there that's allocated specifically to the Novi asset, which is more of an office type asset. Perhaps you should be looking at more something along the lines of like the $12 million or so. And I think, yes, you would -- we should be looking at as more of a trend going forward in that $0.25 range to $0.30 range per square foot.
Our next question comes from Mike Markidis with Desjardin Capital Markets.
Yes. And you mentioned that you had really good color on the pricing snapback that you saw in the U.S. and maybe that's why you focused a little bit more there with your recent acquisition. If I'm mistaken, I didn't hear much about Europe. So maybe just give us a comparison or contrast to what you've seen here over the last 3 or 4 months?
Well, Europe has been quieter. It is getting busier now. But for example, what we saw was transaction volume or acquisition opportunity volume drop sharply in late March and April in the U.S. And I would say by June or July, it had come back. And clearly, there was a lot of demand for product. And part of it maybe was there was a lot of demand for product. In acquisition opportunities, we're just starting to ramp up. So there was too much demand for too little product in the second quarter. And by the third quarter, transaction volume in the U.S. had returned almost to normal. In Europe, that didn't happen. So July, August was quiet, and that is partly a European thing. It is very quiet in the summer. You don't expect to see transaction opportunities to happen before the fall. So I think that's really why we just didn't see them much transaction volume in Europe because that's typically what you don't see in the summer.We are seeing greater volume now, but again, we're heading into a period of potential restrictions. So it will -- in that case, I would not be surprised to see vendors pull certain opportunities because a lot of parties will not be able to physically underwrite those assets. So we'll see if that has an impact on the European market late in this quarter and early in 2021.
Okay. And then just following on the [indiscernible].
Sorry, we didn't hear that, Mike.
Sorry, I just -- I think you mentioned you got a couple of things that you're working on now. I was just curious if any of that is in Europe or if it's on North America?
Yes. No. No, there are a couple of opportunities in Europe that we're moving down the road on, hopefully.
We have a follow-up question from Sam Damiani with TD Securities.
Just wanted to touch on the lease expiry schedule. It did look like your 2024 roll has come down a bit. You seem to have addressed one more leases there. Perhaps that was a Magna lease that was renewed. And just wondering, should we -- like are you prioritizing some of that lease roll in '24 to be addressed within the next sort of 12 months and this kind of ties to the questioning earlier about special purpose properties as well?
Sorry, Sam. You mean 2021 or 2024?
'24. I think the '24 roll came down by about 10% quarter-over-quarter.
Yes. It must be the sale of the assets.
Right.
I'm looking at the team. It must be the sale of those assets in --
Thank you. I am showing no further questions at this time.
Thank you, operator. So on behalf of the trustees and management team here at Granite, thank you again for participating in our call today. And to our unit holders, thank you for your continued trust and support, and a special shout out to our team in Vienna. Hang in there. And [ Christian ], rest in peace.
Thank you. That concludes our conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a good day.