Granite Real Estate Inc.

Your program is about to begin. If you need assistance during your conference today, please press star zero. Good morning. My name is Madison and I will be your conference operator today. At this time, I would like to welcome everyone to Granite REIT's first quarter 2024 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star two. Thank you. Speaking to you on this call this morning is Kevin Gorey, President and Chief Executive Officer, and Teresa Netto, Chief Financial Officer. I will now turn the call over to Teresa Netto to go over certain advisories.

Thank you, Madison. 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, 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 that could cause actual results to differ materially from forward-looking statements or information. These risks and uncertainties and material factors and assumptions applied in making forward-looking statements or information are discussed in GRANIT's materials filed with the Canadian Securities Administrators and the U.S. Securities and Exchange Commission from time to time, including the Risk Factors section of its Annual Information Form for 2023 and GRANIT's Management Discussion and Analysis for the year ended December 31, 2023, filed on February 28, 2024. As usual, I will commence the call with financial highlights and then turn it over to Kevin who will follow with operational updates. Granta posted Q1 2024 results ahead of Q4, supported by strong NOI growth, partially offset by some higher interest expense and higher current taxes. FFO per unit in Q1 was $1.30, representing a $0.03 or 2.4% increase from Q4 2023. and a 5 cents or 4% increase relative to the same quarter in the prior year. The growth in NOI this quarter is primarily derived from the lease commencement at Granite's newly developed property in Brantford, Ontario, along with strong same-property NOI growth enhanced by double-digit leasing spreads in Canada and Austria. NOI growth was negatively impacted slightly by foreign exchange as the US dollar and Euro were 1% and 0.1% weaker respectively in comparison to Q4. AFFO per unit in Q1 was $122, which is $0.07 higher relative to Q4 and $0.04 higher relative to the same quarter last year, with the variances mostly tied to FFO growth and lower capital expenditures, leasing costs, and tenant allowances incurred due to timing of leasing turnover and seasonality. AFFO-related capital expenditures, leasing costs, and tenant allowances incurred in the quarter totaled $1.4 million which is a decrease of $4.6 million and $0.3 million over Q4 and Q1 2023 respectively. For 2024, as noted in our outlook disclosure, we are expecting maintenance capex leasing costs and tenants allowances to come in at approximately $28 million, with part of the upward increase tied to the timing of leasing and capital expenditures planned last year that were delayed into 2024. In 2023, we had estimated capital expenditures of $25 million, but actuals came in lighter at approximately $18 million. Same property NOI for Q124 was strong relative to the same quarter last year, increasing by 4.9% on a constant currency basis and up 5.1% when foreign currency effects are included. Same property NOI growth was driven primarily by CPI adjustments, positive leasing spreads, contractual rent increases across all of Granite's regions, lease renewals in the US, Canada, and Austria, and includes the impact of a completed development in Tennessee, which had free rent periods in the prior year, partially offset by vacancy of certain properties in the US. For 2024, we continue to expect constant currency same property NOI based on a four-quarter average to be within the range of 7% to 8%. G&A for the quarter was $9.7 million, which was $5 million lower than the same quarter last year and $0.3 million higher than Q4. The main variance relative to the prior year quarter is the change in non-cash compensation liabilities, which generated a favorable $5.7 million swing relative to the same quarter last year. These fair value adjustments do not impact our FFO and AFFO metrics. Stripping out the fair value adjustments, G&A expenses that impact FFO and AFFO were approximately $0.3 million higher than Q4, which is mostly related to salary increases effective at the beginning of the year and the timing of expenses. For 2024, we continue to expect G&A expenses of approximately $10 million per quarter or roughly 7% of revenues, excluding any amounts for fair value adjustments and corporate restructuring costs relating to the uncoupling of granted Stable Unit Structure. Interest expense was lower in Q1 2024 relative to Q4 by $1.3 million, while interest income decreased by $3.1 million as compared to Q4. The decrease in interest expense was primarily due to the elimination of double interest costs related to carrying both the 2023 debentures and 2029 debentures for a six-week period in Q4. The decrease in interest income was a result of the interest income earned in Q4 from the investment of the net proceeds of the 2029 debentures during the same six-week period last year. Therefore, on a net basis relative to Q4, net interest costs increased by $1.8 million, which really represents the full quarter effect of the higher cost 2029 debentures. Granted, weighted average cost of debt is currently 2.6%. For 2024, given that we have no debt maturing until December, our interest expense run rate is expected to remain at current levels of approximately $21.5 million per quarter, which will be offset by some interest income of approximately $1.5 million per quarter. For income tax, Q1 came in current income tax was $2.5 million, which is $0.2 million higher than the prior year and $2.4 million higher as compared to Q4. In Q4, we recognize the reversal of tax revisions of $1.8 million that were not present in Q1. The majority of the remaining increase is a direct result of the higher revenues and the burn-off of TI amortization expense in Austria relating to the grass lease renewal, which commenced on February 1st, increasing taxable income in that region. For 2024, we are expecting current income taxes to remain at current levels of approximately $2.5 million per quarter. And then looking out to our 2024 estimates, FFO per unit, for FFO per unit, our guidance remains unchanged from last quarter and remains in the range of 530 to 445, representing approximately 7% to 10% increase over 23. For AFFO per unit, we are adjusting downward our forecast by 5 cents to a range of 460 to 475, representing an increase of 2% to 6% versus 2023. The downward adjustment is reflective of the higher maintenance capex and leasing commissions and tenant allowances mentioned earlier. We have not made any changes to our FX rate assumptions from last quarter. Granite will provide updates to its guidance each quarter as warranted based on leasing activity executed to date. Granite's balance sheet, comprising of total assets of $9.2 billion at the end of the quarter, was positively impacted by approximately $13 million of fair value gains on Granite's investment property portfolio in the first quarter and was further enhanced by $117 million of translation gains on Granite's foreign-based investment properties, primarily due to the 2% increase in the spot USD exchange rate relative to Q4. The fair value gains on grants investment property portfolio was primarily attributable to the stabilization of the development property in Brantford Canada, which was completed and transferred to income producing properties during the first quarter. Partially offset by the expansion in discount and terminal capitalization rates across very selective granite assets due to market conditions. The trust's overall weighted average cap rate of 5.2% on in-place NOI increased only two basis points from the end of Q4 and has increased 25 basis points since the same quarter last year. Our net leverage at the end of the quarter was 32% and debt to EBITDA was 7.2 times, which is slightly lower relative to Q4 and lower than Q1 as a result of the NOI growth, including the completion and stabilization of the majority of Granite's development properties. Our current liquidity is approximately $1.1 million, representing cash on hand of $130 million and the undrawn operating line of $997 million. As of today, Granite has no borrowings under the credit facility and there are $2.8 million in letters of credit outstanding. And as noted in our disclosures on March 27, Granite extended its credit facility for a new five-year term to March 31, 2029. And then finally, subsequent to the quarter, Granbury purchased 375,600 stapled units under its NCIB at an average price of $69.39 for a total proceeds of $26.1 million excluding commission. I'll now turn over the call to Kevin.

Thanks, Theresa. And I'm joined by Michael Rumparis and Lorne Coomer, as usual, but Lorne's on the phone this time, calling in from the U.S. Certainly an inline and strong quarter, as NOI growth of $4.5 million over Q4 more than offset the increase in interest expense, as Theresa mentioned, resulting in a healthy 4.8% increase in FFO per unit over Q4 when excluding the reversal of the tax provision in that quark. As Theresa mentioned, we lowered our ASFO guidance by $0.05 to adjust for additional capex that was originally budgeted to occur in 2023. but we are reiterating our full-year guidance for FFO per unit and same-property analyte growth. I'll begin with a brief update on our current development pipeline. As stated in our MD&A, our 409,000-square-foot build-to-suit project for Barrie-Calvo moved to IPP in the quarter. Our 50,000-square-foot expansion in Ajax remains on schedule for substantial completion by or near the end of the second quarter. And similarly, the 52,000 square foot expansion of our property in Werth, the Netherlands, remains on schedule to date for substantial completion in the fourth quarter. As a reminder, all projects are expected to achieve certification in accordance with our published green bond framework. And in addition to the projects just discussed, we have roughly 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 achieved an average increase in rental rate of 10% on renewals for roughly 6.4 million square feet of leases that expired in a quarter, driven predominantly by the gross renewal increase. And I did want to say, just based on comments that we've received regarding renewal increases moderating, just to point out that renewal increases in each quarter will fluctuate. and they can fluctuate quite significantly. And so I wanted to emphasize the team also executed 1.36 million square feet of renewals in the quarter associated with leases which were due to expire later in 2024 and 2025, and an average increase in rental rate of 35%. So you will see those increases flow through in future quarters. With respect to our 2024 maturities, We have now renewed 7.8 million, or 79%, of our 9.8 million square feet of maturity, and an average rate increase of approximately 16%, again, muted by the garage renewal. And as stated on our last call, we expect to renew 85% to 90% of our 2024 expiry. As Theresa mentioned earlier, same property NOI increased by 4.9% and a quarter on a constant currency basis. slightly above Q4 and in line with expectations for the quarter. NOI was positive across all of our geographies on a constant currency basis, led by Canada at 11.3%, driven by renewal increases. Same property NOI across our US portfolio posted an increase of 3.2%, down from Q4 as a result of vacancy and partially offset by strong renewal spreads. Of note, Austria finally carried some of the load, and posted a modest 3.6% increase by virtue of the gross renewal. As you can see from our disclosure, we adjusted cap rates and market rents nominally in the quarter, based on appraisal and relevant transaction data at our disposal, and excluding the 2.5% strengthening of the U.S. dollar from December 31st to March 31st, the increase in IFRS value was driven primarily, as Teresa mentioned, from the stabilization of our grant redevelopment. As for a general market update, leasing activity continued to be slow in the first quarter, as higher interest rates and economic uncertainty continued to impact tenant activity broadly across the sector. On a competitive basis, our markets once again represented the majority of the top markets in the U.S. for net absorption, totaling roughly 21 million square feet per quarter, which was similar to Q4, and representing well over half of the total U.S. absorption in a quarter, led once again by Dallas, Chicago, Houston, and Atlanta. Our portfolio markets which experienced negative net absorption included Cincinnati, Memphis, Indianapolis, and Columbus, but all with less than half a million square feet in total, and the GTA at negative two million square feet, once again, our worst performing market for net absorption. As for rental rates, Nashville, Atlanta, Columbus all saw positive rent growth over Q4, while rental rates fell between 1% and 2% from Q4 across the remaining markets. We do not have relevant Q1 market data for European markets yet, but our view at this time would be that the current pace of leasing activity in Germany and the Netherlands would be comparable to our North American markets, but that rent growth continues overall to be positive. It is probably worth noting at this point that we have renewed just under 90% of the 950,000 square feet of 2025 expiring leases in Yerba. The team also executed 300,000 square feet of new leases in the first quarter on our development properties in Houston, Nashville and Ajax at rates which slightly exceeded budget for 2024, but also notably represented an increase of roughly 40% over our development profile. As Theresa mentioned, and I do feel like I'm repeating myself here, we opportunistically utilize available cash on hand to purchase roughly 375,000 units at an average price of $69.39. As you know, unit buybacks are not our first choice for capital allocation, but we won't hesitate to capitalize when a unit price is that far below NAS and we have sufficient cash on hand. In closing, our results were in line with expectations. NOI and cash NOI increased once again this quarter, and our liquidity position remains very strong at roughly $1.1 billion in cash and available credit. I think it's worth noting as well, our NOI has increased over 12 consecutive quarters, and an average growth rate of 3.3% per quarter, and almost 14% annually over that three-year period. So addressing our current availability and remaining 2024 maturities, and preserving capital for future strategic opportunities remain our highest priorities. And we remain well-positioned to deliver attractive NOI, FFO, and AFFO growth once again in 2024. But before I open up the call for questions, I'd like to ask my friend Paris to provide an update for you and our views on the investment market.