Granite Real Estate Inc.

Good morning and welcome to Granite REIT's third quarter 2023 results conference call. As a reminder, today's call is being recorded. Speaking to you on the call this morning is Kevin Gorey, President and Chief Executive Officer, and Teresa Netto, Chief Financial Officer. I will now turn the call over now to Teresa Netto to go over some advisories. Please go right ahead.

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 grants materials filed with the Canadian Securities Administrators and the U.S. Securities and Exchange Commission from time to time, including the risk factor section of the Annual Information Forum 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 and Granted, it 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 standardized meaning under international financial reporting standards. Please refer to the condensed combined unaudited financial results in management discussion and analysis for the three and nine-month periods ended September 30, 2023 – 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. As usual, I will commence the call with financial highlights and then Kevin will follow with the operational update. Granite posted Q3 2023 results ahead of Q2 and in line with expectations supported by strong NOI growth, high interest income and lower G&A expenses. FFO per unit in Q3 was $1.24, representing a $0.03 or 2.5% increase from Q2-23 and a 14.8% increase relative to the same quarter in the prior year. The growth in NOI is derived from developments and expansions that came online since the third quarter of 2022 and strong same-property NOI growth enhanced by double-digit leasing spreads in Canada and the U.S. and inflationary increases in Europe. partially offset by the disposition of two properties during the second and third quarters of 23 and some new vacancies in North America. While foreign exchange was relatively flat overall compared to Q2, in comparison to the prior year, the Euro was 11% stronger and the US dollar 3% stronger, resulting in a positive 6 cent impact FFO per unit. Interest expense was also lower in Q3 23 relative to Q2, due to the impact of lower interest costs resulting from the refinancing activity completed during the quarter and higher interest income as a result of incremental cash on hand that was invested in high-interest income accounts. In addition, due to the timing of certain activities, FFO-related G&A expenses were approximately $0.2 million lower than Q2. Granted, the FFO on a per-unit basis in Q3-23 was $1.09, which is flat relative to Q2, and 12 cents higher relative to the same quarter last year, with the variances mostly tied to FFO growth offset by higher capital expenditures, leasing costs, and tenant allowances incurred due to timing of leasing turnover and seasonality. ASFO-related capital expenditures, leasing costs, and tenant allowances incurred in the quarter totaled $6.7 million, which is an increase of $2.2 million and $0.1 million over Q2 and the prior year quarter, respectively. For the fourth quarter of 23, we are estimating AFFO-related maintenance capital expenditures and leasing costs of approximately $7 to $10 million for approximately $20 to $23 million for the year. Looking out to 2024, we expect maintenance capex, leasing costs, and tenant allowances to remain in line with 2023 levels in and around $25 million for the year. Same property NOI for Q3 2023 was very strong relative to the same quarter last year, increasing 7% on a constant currency basis and up 12.2% 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 includes the impact of completed expansions in Indiana and completed developments in Fort Worth, Texas and Altbach, Germany, which had free rent periods and vacancy in the prior year, partially offset by a free rent period in the U.S. related to a lease renewal and vacancy in certain properties in the U.S. and Canada. G&A for the quarter was $8.4 million, which was $1.9 million higher than the same quarter last year and $0.5 million lower than Q2. The main variance relative to the prior quarter and Q2 is the change in non-cash compensation liabilities, which generated an unfavorable 1.3 million fair value swing relative to the same quarter last year and a favorable 0.3 million fair value swing relative to Q2. These fair value adjustments do not impact FFO or AFFO metrics. Stripping out these fair value adjustments, as mentioned earlier, G&A expenses that impact FFO and AFFO were approximately 0.2 million lower than Q2, which is mostly related to timing of professional fees and travel expenses. For the fourth quarter of 23, we expect G&A expenses to come in at approximately 9 to 9.5 million, or roughly 7.5% of revenues, excluding any amount for fair value adjustments related to non-cash compensation liabilities. Looking out to 24 for G&A expenses, we expect a run rate of approximately $9.5 to $10 million per quarter. On income tax, Q3 2023, current income tax was $2.1 million, which is $0.2 million higher than prior year and flat as compared to Q2. The movement in current tax relative to Q3 2022 is mostly attributable to the strengthening of the euro relative to Canadian dollar as all of Granite's current income tax is generated from its European region, as well as slightly higher taxes in the Netherlands due to depreciation limitations on a couple of assets. For the fourth quarter of 2023, we estimate current tax to remain flat relative to Q3 to Q2, assuming no significant change in the Euro FX rate. As with the past few years, Granite has the potential to recognize the reversal of tax provisions in Q4 relating to tax positions taken on taxation years, which will go statute-barred, totaling approximately 1.8 million. However, we cannot assess whether these reversals can be realized until after year-end. For 2024, we are expecting current income taxes to increase to approximately $2.4 million per quarter as a direct result of higher revenues and the burn-off of TI amortization expenses in Austria related to the grass lease renewal commencing February 1, 2024, increasing taxable income in that region. Interest expense was lower in Q3 2023 relative to Q2 by $0.4 million as a result of lower interest expense resulting from the refinancing of the high-interest construction loan in Houston in June 2023, with lower interest cost draws from the credit facility, and then was further improved by the Euro 70 million term loan that closed September 7, which resulted in the repayment of the credit facility with lower cost debt at an effective rate of 4.3325%. Post the quarter end on October 12, Granite completed a $400 million green bond and concurrently entered into a cross-courtesy interest rate swap exchange, exchanging the Canadian dollar denominated principal and interest payments for euro denominated payments, resulting in an effective fixed interest rate of 4.9285% for the five-and-a-half-year term of these 2029 debentures. The net proceeds from the offering will be used to repay Granite's 2023 debentures, with a principal outstanding of $400 million due on November 30, 2023. Prior to that repayment of these 2023 debentures, Granite is earning interest on the net proceeds from these 29 debentures at approximately 5% to 5.5%, which will be reflected in interest income in the fourth quarter. Therefore, for the fourth quarter, we do estimate interest expense to increase to approximately $23 million partially offset by interest income of approximately $4 million. Granted, the weighted average cost of debt at the end of the quarter was 2.27% and is expected to increase modestly to approximately 2.6% after the repayment of the 23 debentures. For 2024, given that we have no debt maturing until December next year, our interest expense run rate is estimated to drop to approximately $21 million per quarter which will be offset by some interest income of approximately half a million to a million per quarter. With respect to our 2023 estimates, Granite's guidance to FFO has been updated and narrowed as we approach this final quarter of the year. We estimate FFO per unit within a range of $493 to $5 in comparison to previous guidance of $490 to $505. This represents approximately 11 to 13% increase over 2022. For AFFO per unit, our guidance has also been narrowed, estimated at $4.35 to $4.45 in comparison to last quarter's guidance of $4.25 to $4.40, representing an increase of 7 to 10% over 2022. The foreign currency rates driving the high and low ranges have been amended slightly for the fourth quarter. For the high end of the range, we are assuming foreign exchange rates of the Canadian dollar to Euro of 1.48 and the Canadian dollar to USD of 1.39. On the low end of the range, we are assuming exchange rates of the Canadian dollar to Euro and Canadian dollar to USD of 1.44 and 1.35, respectively, reflective of the current Canadian dollar weakness relative to both currencies. The trust balance sheet comprising a total assets of $9.2 billion at the end of the quarter was negatively impacted by $53 million in fair value losses on Granite's investment property portfolio in the third quarter, which was offset by $87 million of translation gains on Granite's foreign-based investment properties, primarily due to the 2.3% increase in the spot USD exchange rate relative to Q2. The fair value losses on Granite's investment property portfolio were primarily attributable to the expansion in discount and terminal capitalization rates across selective Granite markets in response to rising interest rates, partially offset by fair market rent increases on multiple properties in the GTA, the U.S., Netherlands, and Germany. The Trust's overall weighted average cap rate of 5.14% on in-place NOI increased 5 points five basis points from the end of Q2 and has increased the total 46 basis points since the same quarter of last year. Total net leverage as at September 30th was 32% and net debt to EBITDA was 7.3 times, which has improved from Q2 and as a result of same property NOI growth as previously mentioned and the completion and stabilization of the majority of grants development properties. Granite continues to expect Its net debt to EBITDA to decrease to 7.2 times 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 $1.6 billion, representing cash on hand of about $600 million and the undrawn operating line of $997 million. As of today, Granite has no borrowings under the credit facility and there are $2.9 million in letters of credit outstanding. Granite's increased liquidity position from the end of Q3 is temporarily elevated due to the net proceeds obtained from the 29 debentures at the beginning of October. After repayment of the 23 debentures upon maturity and based on remaining development commitments, Granite estimates that it will end the year with approximately $120 million of cash on hand and no draws on the credit facility for a total liquidity of approximately $1.1 billion. I'll now turn over the call to Kevin.

Thanks, Teresa. and it's certainly an inline quarter for us driven by higher NOI and lower net interest expense, as mentioned. I'll begin with a brief update on our current development projects. Our 410,000-square-foot build-to-sue project for Barry Calvo continues to progress on schedule, with substantial completion expected in the first quarter of 2024. Similarly, the 50,000-square-foot expansion of our existing property in Ajax is underway with substantial completion also scheduled for the first quarter of next year. As a reminder, these projects are expected to achieve certification in accordance with our published green bond framework. In addition to the projects just discussed, we have 160 acres of land remaining for development in Brantford, Houston, and Columbus, which could accommodate up to 2.4 million square feet of space once constructed. As outlined in our press release in MD&A, the team executed renewals on three leases comprising roughly 1.9 million square feet involving two maturities in 2024 and one 2026 maturity at an average increase in rental rate of 33%. With respect to our 2024 maturities, we have now renewed 7.4 million or 75% of our 9.7 million square feet of maturities and an average increase in rental rate of 14%, with that increase primarily driven by the 10% increase on the garage renewal. Further, we anticipate achieving roughly a 20% increase in rental rate on our remaining maturities in 2024. As Theresa mentioned, same property NOI increased by 7% in the quarter on a constant currency basis, within expectations. Same property NOI was positive across all of our geographies, on a constant currency basis, exceeding 6% with the exception of our Austrian portfolio, driven partially by strong renewal spreads in North America, development stabilizations, and strong CPI increases year-to-date in Europe, offset by lower occupancy in our U.S. portfolio. We expect same-property NOI to moderate in Q4, as mentioned, and now project same-property NOI to average in the low to mid 6% range over the four quarters in 2023, due to higher vacancy and lower CPI increases in Europe in the fourth quarter versus budget. We will provide specific FFO and same property NOI guidance on our Q4 call, but for now we can state that we expect same property NOI growth to be higher for 2024. As you can see from our disclosure, we adjusted cap rates and discount rates nominally in the quarter based on relevant transactional data in the U.S. and the Netherlands. Excluding FX movement, the roughly $270 million in negative fair value adjustments associated with terminal cap rate and discount rate adjustments year-to-date has been partially offset by $120 million in gains from a combination of development stabilizations, an increase in value resulting from the long-term renewal of three properties in Austria and Germany, and an increase in the fair market value of our land for development in Brantford. Sorry, one second. Looking forward, we will continue to monitor comparable transactions in our markets and further adjustments may be appropriate. But at this point, it is difficult to estimate the direction of asset pricing. Recent optimism among investors that the pause in central bank increases will be sustained and reductions potentially on the horizon may incent buyers to return to the market but liquidity issues and limited access to credit could impair buyer prospects and asset values in the short term. As for a general market update, leasing activity continued to slow in the third quarter as higher interest rates and economic uncertainty continued to impact tenant activity broadly across the real estate sector. On a comparative basis, our markets once again represented eight of the top nine markets in the U.S. for net absorption, totaling 22 million square feet for the quarter, and over 100 million square feet year-to-date led by Dallas, Chicago, and Houston. So despite the increase in vacancy, the data illustrates that the logistics and manufacturing sectors continue to invest and grow in our key markets due to a combination of a strong business climate and labor force, critical logistics infrastructure, and proximity and connectivity with a large percentage of the U.S. population. These are characteristics that we believe will continue to attract tenants and drive growth over the long term. As for rents, the data suggests that market rents increased roughly 3% on average over the second quarter across our U.S. markets, led by the 7881 corridor, Savannah, and Louisville, all in double digits. Only Indianapolis posted a slight decline in rents at negative 1.6% quarter over quarter. Year over year, rent growth across the U.S. markets averaged roughly 15%, similar to the GTA. Although Q3 broker data for European markets is not yet available, our records of comparable transactions indicate year over year growth in the Netherlands and Germany coming in at roughly 7% and 12% respectively. So although new supply continues to outpace demand in the short term, new starts, for example, in the U.S. are currently at multi-year lows. and when combined with a significant increase in the cost of development for new products, should support rent stabilization and potential rent growth in the latter half of 2024 and into 2025. I will provide a more fulsome update on our ESG program in the fourth quarter, but I did want to mention that we were recently notified that we received the top ranking from Grespi among the listed North American peer group and further received the score of 94% for public disclosure ranking us second in the U.S. Industrial Real Estate Group. Both excellent results. In closing, results were in line with expectations. NOI continued to increase, as Theresa mentioned, despite lower occupancy, and we are maintaining our FFO and AFFO guidance for 2023, which has remained unchanged from our initial guidance provided on our Q4 call in March. Our upcoming $400 million Maturity on November 30th has been fully refinanced at a very competitive rate of 4.93% for five and a half years, and our liquidity position remains very strong at almost $1.2 billion post repayment of the bond in cash and available credit. In addition, we announced our 13th consecutive annual distribution increase to $3.30, which continues to reflect our philosophy of delivering consistent distribution growth for our unit holders while maintaining conservative capital ratios and sufficient free cash flow with which to reinvest in the business. I also wanted to mention that we are in the process of renewing our base shelf prospectus, which expired this month. This is simply a formality and is being renewed in normal course to facilitate any potential actions we may contemplate over the next 25 months. Addressing our current leasing availabilities and 2024 maturities and preserving capital for future opportunities remain our highest priorities. And we believe we are very well positioned to deliver industry-leading NOI, FFO, and AFFO growth once again in 2024. And on that, operator, I will open up the floor for any questions.

Thank you very much. And if you'd like to register a question, please press the 1 or by the 4 on your telephone. Your three-tone prompt, acknowledge requests. If a question has been answered, to draw your registration as the one, fill in the three. One moment, please, for our first question. And we'll get with our first question on the line from Brad Sturgis with Raymond James. Go right ahead.

Hey, good morning. Congrats on the 2024 lease agreement. how much you've already addressed, 75% already, and it sounds like still expecting good uplift on what's left to do. Just wanted to get a little bit more color on, I guess, a little bit over 2 million square feet left to do. Would that be more back-end weighted to next year, and then just a little bit more color in terms of what's left to address in terms of where that would be in terms of size of boxes and location?

No, I think there's a couple to do in Toronto, but the bulk of it is in the U.S., and it is back-end loaded of that, what did you say, 2.4 million square feet? I think over a million is actually expiring on December 31, 2024. So it is back-end loaded for the year. I think there are a few in the second quarter, but the bulk is the second half of the year towards the end.

And the U.S. that are expiring December 31, is that broken down by a couple different locations, or is that weighted towards one specific property?

I think it's in a few, but I think the bulk of it's in Memphis and in Indianapolis.

Okay. That's helpful. Just in terms of what's left to do this year, I think it's you're less than 400,000 square feet. Just any update on what you're expecting for the remaining 23 maturities?

I think the maturities in 2023 have been spoken for. Yeah, there's nothing to report on those.

Okay. Just based on your comment around leasing velocity has slowed down a little bit. I guess it depends on the type of size and location, but Any general comments of where you're expecting occupancy to trend next couple of quarters?

Well, I think right now we're in advanced discussions on about 2 million feet of both new leasing and 2024 maturities. So the activity is strong, but it is taking us longer. So I think we'll have a better update on the next call in March. But we're expecting occupancy to bounce back quite strongly in 2024, just based on the activity that we're seeing and the strength in those parts of the markets that we expect to see in 2024. Okay.

I'll turn it back to Nicole.

Thank you very much. We'll get to our next question on the line from Michael Mercatus with Beable Capital Markets.

Go right ahead. Thank you, operator. Kevin, just on the 2024 maturities in the U.S., are you able to give us what the expected increase would be just for that bucket?

Yeah, it's about 20%, Mike.

20% for that. Okay, perfect.

The maturities we've done are 14%, as I mentioned, and that was driven, you know, a lot by the 10% increase at Grotz. Yeah. Nice. Hold it down to 14% and 20% on the remaining.

Okay, good segue actually for me. A modeling question here, Teresa, but with the 10% increase, that's cash on cash from GRAS, but is the FFO impact, once that commences, going to be materially different just because of non-cash items, or how should we be thinking of that?

No, that's pure cash. That 10% is all revenue. Yeah. So it goes, yes.

Well, because of the TIs.

There's no TI. But, you know, in the previous last 10 years, there was a TI, but that goes away because we didn't have one for this renewal. So that 10% is a pure cash lift.

And from an FFL perspective, would it be greater or less?

Oh, it would be greater.

It would be greater. Okay. Okay.

Did I misunderstand that? Like you're asking about FFOs.

PI burning off. Is FFO higher?

Oh, yes. Sorry. I see what you're asking. So FFO, yes, it is higher by both the PI that has burned off and the 10% increase. And actually it's close to, I believe, $8 million for the year.

From an FFO perspective?

Yes.

Awesome.

Thanks. Yeah, FFO, that's right. That's right.

That is very helpful. Thank you.

Okay.

And then the last one for me before I turn it back, just on the CapEx and Leasing Positive. If I heard you guys correctly, I think $20 to $23 million is this year's forecast and a similar amount next year. If you think about that, how much of that amount for next year is expected to be from new leasing as opposed to just dealing with 2024 maturities?

No, the new leasing, actually, so any of the new leasing related to the development, that wouldn't be part of the ASFO CapEx. I'd say a good majority of that $25 million is related to maintenance CapEx in this regard. Yeah, I think it's roughly half. About half, right? And then half is for just renewal leasing of existing properties.

Got it. Okay, so it's not that your TIs are going higher necessarily because your grottos are Your leases maturing next year are actually slightly higher, but Cross doesn't have a TI. So it's not that your TIs are going up on a per square foot basis. Your maintenance capex is going up. Is that how we should interpret that?

That's right, yes.

That's a fair comment. Okay. That's all I got. Thanks very much. Thank you.

And we'll get to our next question on the line. It is from Himanshu Gupta with Scotiabank. Go right ahead.

Thank you, and good morning. So just on the leasing activity in the quarter, you know, pretty strong. If I look at the U.S., 900,000 square feet done at, I think, 40% plus spread. Can you talk which market it was done?

Of the 1.9 million, the 2026, sorry, The 2024s were?

Cincinnati, Columbus, and Memphis.

Yeah, Cincinnati, Columbus, and Memphis.

Okay. And all these three were 2024 lease expires, right?

No, two were 2024, and one was actually a 2026, but there will be an increase in rents beginning in 2024. So that was an early renewal.

Okay. Okay. And, Kevin, did the tenant approach you or did you approach for those, you know, early renewal for the next year?

I think the 2026 was incoming. It came into us. The 2024s was dialogue from the team.

Okay. Okay. Fair enough. And then in terms of, you know, those lease up on properties that you're working on, you how would you rank them in terms of who will, you know, which one will get done first? You know, between, like, Nashville, Indianapolis, and Louisville?

Well, there's been activity. It's really hard to say at this point. I don't think I really have an answer. I think right now we've had activity, and I don't want to basically say to the market which properties we're effectively in advanced discussions on for competitive reasons. But we've been active in both in all of Nashville, Louisville, and Indianapolis. At this point, I do have a feeling which ones will come first, but I don't want to say.

Okay, fair enough. And then maybe I can ask that I think there was around 400,000 square feet vacancy this quarter. Which market can you identify that?

I think K-Power was in Memphis, and that was a 3PL where there was still a question. We almost expected them to renew based on the contract that they received. They weren't able to land that contract. Was that Chicago? Oh, the other one was Chicago. Yeah, the other one was just a tenant that stayed in the space but downsized. And then there was a 3PL in Memphis that were not able to renew their 3PL contract, and so they vacated.

Got it. Okay. And then maybe the last, it's a broad question, and obviously you have a pretty global view, you know, U.S., Canada, and Europe. What is your strongest market and what is your weakest market in your portfolio as you look into next year?

I've been asked this, maybe you asked it on previous calls. It's difficult to say in Europe because we have not had the leasing activity yet. We've seen – so Europe has been very steady for us. We have been doing some leasing in Utrecht, which is a smaller asset, which has been going well. So I would say that Europe has been very steady for us. The markets that we're dealing with right now, there has been a very broad moderation in demand across all our markets. So it's very difficult for me to look at North America and say, well, the GTA has been the strongest, because it really hasn't. in terms of net absorption. You know, as I've said on previous calls, I point out the net absorption because I think vacancy and new supply are obviously factors you want to look at. But over the long term, you want to know which markets are attracting investment and are attracting growth. And when we rank our markets year to date in terms of net absorption, in North America, Toronto is one of the worst, one of the lowest. So where are we seeing the most activity? I think it's been a few of our markets in the U.S., but there hasn't been any standout that has been the strongest. I think the moderation of demand, as I mentioned, has been very broad-based across all of the markets.

Fair enough. And maybe, you know, if you talk about product categories, you know, lots have been mentioned about, maybe weakness in big bulk versus, you know, small bay and mid bay doing better. Would you agree with that statement? And is that something you're seeing as well?

I think that that's more market specific. I mean, I think it depends on the market. If you look at some of our markets in the U.S., some of the assets that have come in, 800,000 foot plus have done very well. The three to seven has been quiet, but that can really move from quarter to quarter. So it depends very much on the market that you're in. I think it's not fair to make that general statement across all the markets. Definitely, as we mentioned, in Indianapolis, a market where 700,000 feet has been very strong historically and has seen some recent weakness, but I don't think that that's something that will be sustained over the coming years.

Fair enough. Thank you. And maybe, you know, just last one for Teresa on balance sheet. Is it fair to say your next debt maturity is, I think, coming in December or November of next year? Is it updated? It's December 19th. December 19th. Okay, fantastic. Thank you so much, and I'll turn it back. Okay.

Thank you. We've got our next question on the line from Frederick Blondeau, Lurchin Bank Securities. Go right ahead.

Thank you, and good morning. I just wanted to discuss capital allocation. Kevin, last time we spoke, you were more into capital preservation mode. I was wondering what are your views for 2024 on that front?

I think it remains the same, Fred. We had talked about taking advantage of any market dislocation or distress, and it's hard to see How exactly that goes, as I mentioned, I think there's a little more optimism about the direction of interest rates, but there's also much tighter access to credit. And I think that that, if anything, will impact smaller developers more than anyone else because, frankly, looking at stabilized industrial assets, they've actually held up pretty well, their values. So we don't see a lot of loans being necessarily underwater like you may see in the office sector. So we're willing to be patient and wait for that Where our price is right now, I think the NCIB is completely on the table for us and something that we'll consider in the short term. So we think that, but we have to also balance that with, I think, our desire to maintain our capital for future use at some point in 2024. That's great.

You answered my three questions and one question. So thank you so much. That's it for me.

Thank you. We'll get to our next question on the line. This is from Kyle Stanley with Desjardins Capital Markets. Go right ahead.

Thanks. Good morning, everyone. Kevin, just on your comment about same-property NOI growth being higher in 2024 versus 2023, would that include lease-up of the development properties? I'm thinking about Indy specifically. If so, if you were to exclude that, what kind of impact would that have on your same-property NOI outlook for the existing portfolio, I guess?

It's tough to say off the top of my head, but it is definitely a part of our same-property NOI projections for next year. And I think one of the things I would point out is we were very – the CPI increases that we had in Europe late last year and into this year in 2023 were very strong. It's hard to say where those will be. But we do have some rent lifts that we've secured for next year that will be a strong driver of growth. But, of course, we think that the lease up of the development properties will also be a part of that growth for next year.

Okay, thank you for that. Obviously, a small sample size, but the leasing that you did in the quarter in the GTA, 206% spread. Can you just talk about the dynamics of that lease and how the tenant accepted that significant increase?

Well, I think they were coming off a $7 rent, and I think our average rent in the GTA off the top of my head is around $10, so well below market, but we do have a number of leases Frankly, coming up over the next couple of years that are in that sort of $7 to $8 range.

Okay. No, that makes sense. Last one for me. Any other vacancies that you're aware of maybe in Q4 or into 2024 at this point? No. Perfect. I'll turn it back. Thank you.

Thank you very much. We'll get to our next question on the line. It is from Matt Cornack with National Bank of Canada. Please go right ahead.

Hey, guys. Most of what I was going to ask has been answered. But just quickly, with regards to the same property in OIGAR this quarter, can you speak to what component of that may have been expansion space? And then maybe secondary to that, with regards to straight line rent, I think there was a sequentially down a million dollars that adds to cash NOI. But can you give us a sense as to what is the floor level as to how much of that would be kind of free rent periods for existing leasing?

So without the expansions, on a constant currency basis, it's 6.4%. And it's 11.6% with the FX in there. You're right, straight line rent dropped. The free rent piece of that was about $400,000 of that million. Yeah, so straight line rent is going to fall, continue to fall, but I expect it to increase again when we do lease up those developments that recently came online. because obviously anticipating some free rent as we lease those out. So at some point in the second quarter, third quarter, you'll see probably a pop-up in straight-line rent.

Okay, so we should expect to see, before it would contribute to same-property NOI growth, it'll contribute to FFO growth in the form of straight-line rent.

Exactly, yeah.

Okay, thanks, guys. Appreciate it.

Thank you very much. And once you're on the phone, if you'd like to ask a question, that is the 1-4 on your telephone keypad. And our next question on the line is from Sam Damiani with TD. Go right ahead.

Thanks, and good morning, everyone. First question, just to sort of continue on the balance sheet discussion from earlier, with the rate move over the last 18 months, what would be your sort of updated target leverage range, either on a debt-to-assets or debt-to-EBITDA basis going forward versus what it was a couple years ago?

Well, Sam, I think we're kind of operating with like that 32% right now. And I think like next year, for example, that's kind of what I'm forecasting for the year.

And that's what you're expecting to sort of target going forward?

Yeah, until we see kind of values change a little bit, right? I mean, so for now, I mean, as you know, we used to operate in the high 20s. But it's been a series of fair value losses, and we have increased slightly in our debt because we were funding our development program. So on a debt to asset value, it has creeped up. And I think in that 30% to 32% range, it's probably normal going forward.

Okay, okay. And I just see Houston, the acreage there is being sort of moved up into the sort of active development pipeline, at least on a preliminary basis. Okay. Any updates on tenant discussions there that could drive an actual construction start in that market for granite?

Well, there is potential for that, Sam. The reason why we moved both Brantford, I think the land in Brantford, and in Houston to PUD, to PUD, is just to facilitate any potential build-to-suit opportunity. So we are servicing and going through the zoning process on that land. So we moved them into PUD. No intention or plan to commence construction on a speculative basis, but it does facilitate discussions around built-in opportunities, and we have had discussions in Houston in that regard, but nothing to report at this time. Early discussions.

Okay, last question for me, and I know it's been at least touched on earlier in the call, but At some level, can you give us any update on the sort of pace or volume of leasing discussions on the vacant spaces that you have in the U.S. that we saw on the tour last month?

Yeah. I mean, there has been progress. But, again, early days, and as I characterized it previously, we're in advanced discussions on roughly 2 million feet, including some renewals as well. But the bulk of that is new leasing. Okay. Hopefully, we'll have deals completed by the end of the year, but at this point, we can't confirm that.

Okay. Thank you, and I'll turn it back.

Thank you. We'll get our next question on the line from Sumaya Syed with IBC Capital Markets. Go right ahead.

Thanks. Good morning. Just to follow up a bit more around your development leasing and wondering what's your appetite to doing a more multi-tenant approach on some of the new assets and, you know, if you'd be seeing more interest in the MySpace?

If you're talking about demising, I think we're always, as we said, we're always open to that. We've always sort of designed our buildings to accommodate demising. So I will just tell you that on all of our buildings, we have received interest from both multi-tenant sizes and entire buildings. So it just depends on what deal materializes the fastest for us and what deal makes the most economic sense. So just to confirm, any one of our buildings can be demised. They were designed that way, and it just depends on which tenant steps up first on the best economic terms.

Okay. Okay. And you mentioned a bit earlier about the 3PL activity, the one vacancy in the quarter. How much does that reflect broader activity that you're seeing from your existing 3PL tenants, or was that just more of a one-off?

Well, I mean, it's a $65 million portfolio. This happens. You know, usually 30% to 40% of industrial portfolios are 3PLs. And a 3PL contract is typically three to five years. And so this is just normal course of business. And I will tell you a lot of the sort of availabilities that we're working on are 3PLs that are looking to expand and have to move out of their existing building to accommodate newer and larger contracts. So these things happen. So I would call it a one-off, but it's just normal course of business for us.

Okay, thank you. I'll turn it back to you.

Thank you very much. And, Mr. Gorey, there are no further questions at this time. I'll turn the call back to you.

All right. Thank you, Operator. Well, thank you, everyone, for being on the call, and we look forward to speaking to you on our next call in March.

Thank you very much, and thank you, everyone. That does conclude the conference call for today. We thank you for your participation. I should disconnect your lines. Have a good rest of the day, everyone.