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.

Thank you, Kevin, and good morning, everyone. With the macroeconomic uncertainty and the preceding rising rate environment, occupiers and investors alike have approached industrial and warehouse property deals with more scrutiny and caution, which has impacted leasing and investment volumes and activities. For the past 16 months, we have seen pricing contracts cross our markets to varying magnitudes, dependent on factors such as market dynamics, asset quality, and embedded rental growth. More recently, we have been encouraged as there has been an increased demand and in fact are seeing some deals in the market achieve strong pricing, especially for high-quality assets with near-term marked market rent opportunities or which are priced at attractive discounts or replacement costs. These deals are seeing deep bidder lists at times in excess of 20 groups, which implies a significant amount of opportunistic capital in the market looking for quality deals. The buyer pool remains largely private capital, closed-end institutional funds, private equity, sovereigns, high net worth privates, and conversely, many of the REITs, open-ended funds, and generally leveraged buyers have been quiet due to higher weighted average cost capital. Our team continues to underwrite and have recently pursued select opportunities in our target markets. Some fundamental themes have emerged recently, being increased focus on yield and buyer shy away from longer-term negative leveraged trades. Groups are rightfully looking to see more positive returns sooner rather than later. In terms of deal size, we continue to see small to mid-sized deals having the most volume and liquidity in the marketplace. We also are encouraged on the debt side as we're starting to see debt liquidity reemerge from namely life companies and more recently bank lenders participating in capital stocks on institutional quality assets and borrowers. If this trend continues and the availability of new debt improves, it will likely bode well for the investment market and pricing. As we look forward to the balance of the year on the investment side, we will continue to focus on opportunities that will complement our current portfolio of high-quality assets and remain prepared to transact on the right deal. And in the case of weakening fundamentals, we will also look to capitalize on any disruption or crisis that may arise. With that, I'll pass it back to Kevin.

Thanks, Mike. So operator, at this point, we'll open up the floor for questions.

Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of Sam Damiomi with TD Cohen.

Thank you, and good morning, everyone. first off, just wanted maybe to continue on the topic that Mike was just discussing. And I guess just, I guess the question really is with the transaction market starting to, you know, percolate, you know, others are starting to deploy capital, you know, what is it that Grant is waiting for to, in order to sort of participate? Like, is there a different sort of macro view that you're over the next year or two versus some of these players. I'm just wondering where you guys are thinking in terms of when to pull the trigger and how.

Well, I'll start and certainly invite Mike to build on whatever comments he has. I think we have to be aware of our capital situation, Sam, to be honest with you. Like we've said, if there's something that's truly compelling and opportunity in our target markets, I don't think we would hesitate to transact on it and we would figure out a way to whether it's selling assets we would we would figure that out but we haven't seen anything that's really that compelling and again i'll ask mike to provide his comments on that specifically but we also have to be aware that we have cash on hand we have development commitments i don't think we're interested in taking on a significant amount of additional debt because fund mills acquisition So there are constraints there from a financial perspective that we have to be aware of. But Mike, anything you want to say on the markets, any opportunities?

No. Like I said in my commentary, we are pursuing select opportunities. Again, as happens, the deals we find very attractive. A lot of other players do as well, too. So at the pricing that we would be looking to transact, the opportunities aren't there at the moment. And I think For Kevin's point, preservation of our capital situation is always paramount with us.

I hope that answers the question.

It does. Thank you. And the other question I wanted to ask, and then I'll turn it back, is just on the very modest tweak to the same property in a wide growth guidance. I guess I'm kind of curious why you kind of bothered to do that. It seems like such a small thing. But is it mostly related to just delays on the leasing that you referred to in your opening comments, or is some of it also related to the rents that you expect to realize on that lease up?

No, not rents, just timing of the lease. I mean, it's a good question. We actually discussed internally whether it was worth doing that. We just felt we didn't think it would be that big a deal, to be honest, Sam. But we thought it was worth just pointing out that we've extended the estimated lease up of a couple of our availabilities and tweaked it a little bit, but no impact on rental rates as we've seen yet.

I think last quarter you gave a range of targeted occupancy in the portfolio for the end of the year. How much has that differed today?

It has not. Again, I think with respect to occupancy particularly, I think it's early to tweak it. We have 1.9 million. Let's take Utrecht out of it because we have, I think, 150,000 short-term leases that continually roll there. So taking that out of it, we have roughly 1.9 million of expiries remaining. We expect to lease up probably around 1 to 1.2 million of that. So we would expect to see 700,000 to 800,000 square feet of space come back to us. We are 95.4% occupied and committed. So overall, that would require us to complete another 1.3 to 1.5 million square feet of leases before the end of the year. And we think that that's entirely achievable. Now, is it a certainty? Absolutely not. But we think that it's achievable and it's within our expectations. So for now, we don't see a need based on the activity that we're seeing within our portfolio. and a bit of a pickup of the activity we're seeing overall in the markets, in our markets in particular, that it's necessary to move that guidance for bureaucracy.

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

Thank you. Your next question comes from the line of Mike Markitis with BMBMO.

Thank you. Kevin, just a quick one for me. I guess you had pointed out, and I agree with your point, one quarter doesn't make a trend on leasing spreads, but you pointed out, I think during the quarter there was 1.36 million square feet of leases. I guess for spy reason, late 24 and 25 that were done at an average rate of 35%. Is that all? How do we read that? I'm just looking at your lease maturity schedule and your NMDNA. And I see that you're committed rate per 24 went up. I guess you're at seven. You got another 500,000 square feet there, but I don't see anything in 2025. So is that like sort of also including subsequent quarter activity that's maybe not reflected?

No, the one in, it was done in the quarter. It was the large one in the Netherlands. It should be in there for 2025.

It depends, although if it didn't roll this quarter, it may not be showing, but I have to look at the specifically what we're looking at.

Yeah, so there was a large one in the Netherlands. There was two in the US and it was one in the GTA.

OK, yeah, so I guess. I guess some of that maybe isn't being reflected. OK, that's fine. I can circle back offline on that and just to confirm the 35%. That's that's not. Is that just a pure renewal number, or does that include the new leasing that you would have done? Because there's 273,000 commitments on vacant space that you do show.

No, that's a pure renewal. Those are four renewals. Yeah. Yeah, and not to confuse you, Mike, we've talked about this before. You talked about renewals. You actually executed a quarter. You're talking about renewals related to expiry in that quarter, so. In the press release, we try and keep it really straightforward. It's just renewals that are expiring that quarter. So I almost hesitate to talk about renewals that we're doing that relate to future expiries. But I just wanted to make that point because we did receive some comments asking why the renewal increases were falling. And everyone understands that growth to 10% will impact that number within this quarter. But I just wanted to make that point and emphasize that There will be a fluctuation in the renewal increases obviously from quarter to quarter, and it can be quite significant, as you know.

Yeah, okay. I mean, I'm not sure of the hesitancy. Maybe I'm missing something, but I think going forward it would be useful to talk about both, you know, the leases signed and then leases that commenced. I think that would be really helpful. Right. Right. That's it for me. Thank you.

Thank you. And we will take our next question from Kyle Stanley with Desjardins.

Thanks. Morning, everyone. You know, it was encouraging that the outlook really didn't change too materially since we last spoke, especially just given some of the commentary out of your U.S. peers earlier this earnings season. Just curious, you know, if you take a step back high level, you know, what are you seeing from a supply demand perspective in your portfolio specific geographies that, you know, gives you that comfort in the outlook and is maybe differing from from what some of your peers may have disclosed?

Well, I think, first of all, the U.S., some of the commentary we've heard out of the U.S. reads for the first quarter is consistent with what I've been saying for three quarters, a slowdown in leasing activity. So I don't listen to all the calls in on those specifically, but just reading some of the commentary. I think we've been very straightforward about what we've been seeing in the markets for a number of quarters. So when we went into 2024, I think we were quite realistic with our expectations on the leasing side. I won't use the word conservative because we've tweaked some of the timing, but I think that we were more realistic than some on what we were expecting for 2024. While why I remain confident that we can execute on a million two to a million, a million three to a million five of leasing, it's just based on activity that we're seeing within our portfolio. Again, there's no certainty about it, but we're responding to RFPs or removing paper. We're in discussions in roughly 1.2 million square feet of space within our portfolio. And again, I'm not saying that that will be executed, and certainly all of those won't be executed. But the point is, we are seeing decent activity, and even on our big stuff, on our big availabilities. So it's very much, I think, within our expectations that we'll see future leasing activity this year in 2024.

Okay, great. Thank you for that. Maybe two just quick questions. Theresa, I think you mentioned some potential costs on the kind of the restructuring side. Just wondering if you have an idea of what that might be and the timing of that flowing through.

You know, it's going to be hard to estimate because it's really all legal time, but the heavy loads are going to happen in Q3 for sure. Q2, Q3 will be probably our more significant amounts. I don't know, we're kind of estimating maybe a million and a half to two million. And then so Q2, Q3, Q4, but I'd say Q3 probably the heaviest quarter.

And that's non-SFL.

And that, yeah, but we'll be stripping that out as you see in the SFL schedule, right? Yeah.

Yeah, fair enough. And then the last question, just on the brand for delivery this quarter, just wondering on timing of the delivery and maybe how much NOI was generated this quarter, just for modeling purposes going forward.

I think we've got NOI at $7.7 million annually.

Annually, yes, yes, yes.

Yeah, hopefully that helps. I think it's $7.7 million annually. And by the way, after this, if Theresa finds that I'm wrong, which I'm wrong, it's about $5.50.

Straight line.

Straight line.

OK, we'll clear it up if I'm wrong.

Yeah.

OK, no problem. Thank you very much. I'll turn it back.

Thank you. Your next question comes from the line of Brad Sturges with Raymond James. Your line is open.

Hey, good morning. Just wanted to follow up on the acquisition commentary. I think last call, Kevin, you talked about maybe the potential for some distress opportunities to arise in the coming months. Just curious to get updated thoughts on whether that's something you still think could be the case and kind of what you're seeing from that perspective today.

I mean, we keep talking about it. I think we still expect to see some level of distress. I think every quarter we go through I think our hopes of finding that unicorn are falling, to be honest with you. And I did hear commentary from a U.S. industrial REIT saying that they had gotten a number of calls about distressed development deals. Those are certainly on our radar. I don't think we have seen it. Not that they haven't. They probably have seen things that we haven't seen. Yeah, we still expect to see opportunities as they're through distress. We have not seen anything that's really compelling yet to date on that graph.

Okay, so I guess near-term capital allocation, if you're deploying capital, it sounds like it's getting more than stock prices, and CIB is probably going to be at least a use of some cash proceeds in the short run.

Yeah, in the short term, I don't think that we'll be that busy on the acquisition side. Yep.

And maybe just one last one just on the leasing side of things. In terms of your broader discussions, and particularly with existing tenants in the portfolio, how's the appetite for expansion opportunities within the portfolio? Are you seeing any improvement or indicators that that's starting to tick up?

I don't know if it's ticked up, but I don't know if it's ticked down either. I think we're in discussions with a few tenants on potential expansions. Again, I think they're taking longer to explore their options and make financial commitments. So we're in discussions on one in the US on an expansion, and we're in discussions with one in the GTA, and we're in discussions with one in Europe. And that, I think, has been pretty steady. over the years in our portfolio. So I don't think that it has ticked up. I don't think it has ticked down.

Okay. That's helpful. I'll turn it back. Thanks.

Thank you. Your next question comes from the line of Himanshu Gupta with Scotiabank. Your line is open.

Thank you and good morning. So just on the Indianapolis, you know, the A1 property under lease up, What kind of response you have received so far? And I mean, is there a lot of product you are competing with or, you know, raising demand is a bit less in that size of category?

No, I think most, I think the first, or maybe it was the fourth quarter, I think we saw more activity on the smaller one than the larger one. I'd say most recently we've got more activity on the larger one. We are responding to RFPs, and I think, you know, I don't want to provide too much detail, but I think the sort of modern characteristics of our building and location has put us on a few lists that many others aren't on. So we seem to be captured by all RFPs by virtue of the location and just the characteristics of the building. So that's the way I would characterize it. Right now, as we sit here today, there's more activity on the larger building than there is in the small one.

Okay. And then looking at the activity, I mean, it looks like progress was done on Nashville and Houston. And do you think the next will be Indianapolis or maybe Memphis or Louisville?

I mean, that's tough. I definitely would agree. I think we've got more activity in Houston and Nashville. I would probably put Indy after that. And then Louisville and Memphis or Memphis and Louisville. So shades of gray to a degree. But you're right. I think Houston and Nashville, there continues to be a lot of activity in those markets in general. I think they are stronger markets. In Indy, we are seeing more activity in the larger building, which is encouraging to us and e-commerce users. And then Louisville and Memphis behind that. Not to say they're bad. I mean, the net absorption continues to be positive, I think. but not as strong as the other markets.

Got it. And would you say, you know, Memphis is probably the toughest market in your portfolio right now?

I don't know. I mean, you know, 600,000 feet of vacancy, we're in discussions on 300 of it right now. I don't think. I wouldn't use the word tough.

Okay. Okay. Fair enough. And then, you know, the broader comments around the leasing activity pickup in the U.S., do you still think we will see a second half recovery or is it getting even pushed out?

I don't know if I said it would be a 2024 recovery. I think we feel it's a 2025 recovery. I think 2024 is going to remain competitive through the year would be my estimation.

So in that case, the peak vacancy is more likely to be you know, back half the year or probably early next year in that case.

Yeah, agreed.

Okay, fair enough. And maybe just one last question I had. Yes, on the valuation. And I know you have already provided some comments. Any specific comments related to the cap rates you're seeing in your U.S. portfolio? You know, what kind of cap rates? Are we talking like sixes, fives, or even, you know, high sixes? Any comment there?

No, I mean, I think you see our overall cap rate. It depends on the product. I think everyone saw recently the deal involved with DRA, and I'll provide a few comments on that with respect to our valuations, and Mike is closer to it than I am. But you have a portfolio, a significant-sized portfolio and a significant deal with Brookfield being the buyer at $89 or $90 a foot on average. But these are older assets. And I don't think they're comparable in terms of quality to our portfolio. I don't think anyone would say that. And also the one thing that struck us, I think everyone we've spoken to is quite surprised that the deal wasn't broken up. That was transacted as a single portfolio and you would have to. I mean, I think everyone would agree a portfolio discount somewhere around 5% would probably apply to that because it was taken down as a single portfolio in as many geographies as there were. So I think the pricing that we saw, and I've seen a six cap thrown around, I think would be supportive of where our cap rate is for our assets in those markets. And I think the final thing I would say, and it made us actually look at it a little bit too. One of the things that, it doesn't sound like it's a big impact, but there's a couple of assets in our portfolio that can skew the per square foot. And one of them that jumps to mind for me is the Carvana site. in South Dallas that we own. And that's a 200,000 foot building on a 180 acre site. So the price per square foot is very high at 315 or 320 a foot. And that skews our per square foot number. And it doesn't reflect the average price that we have, which is well below $90 for our portfolio in the US. So I hope that answers the question on cap rates, but I do think there's discussion around this DRA transaction. which I think fully supports our IFRS values in the U.S.

Thanks, Kim. That was very helpful and clearly agree that the DRA transaction, you know, kind of good for your valuation as well. So, yeah, I'll turn it back. Thanks for that.

Thank you. Your next question comes from the line of Matt Kornack with National Bank Financial. Your line is open.

Hey, guys. Just looking at your free cash flow profile, you actually are adding to your cash balance pretty much every quarter between now and the end of our forecast period. Should we expect that you continue to kind of pick away on the NCIB? I mean, you don't have any debt maturities, but nothing drawn on the facility, so you can't necessarily pay down debt immediately, or should we just expect that your cash balance is going to kind of continue to

Well, we definitely did pick away at it, obviously, you know, we used the $26 million. So, you know, assuming, you know, if our unit price obviously falls, as Kevin mentioned, you know, below levels that, you know, are so significantly below an app, we will pick away with free cash flow. But, you know, the reality is, you know, it builds, you know, slowly every month. So, yes, we do have some capacity to continue to do that, but not on a large scale. And then, yeah, you know, we'll accumulate some more cash and then, you know, we can apply some of that to the end of the year when our term loan matures. So I think that's kind of like how we see it running through the rest of the year.

Okay, fair enough.

In the meantime, any excess we'll invest, right? We'll invest it above 5%.

Right. And Kevin, would you entertain for some of the projects that you already have kind of in process developing at this point? Are you holding off until market demand returns, I guess?

Yeah, I think on a speculative basis, there's nothing that we're looking at doing. I know in the MD&A, and I think we actually combined land held for development, now it's all properties under development, and we are moving through the application and approval process for Grant Road and maybe Houston. And the point is not to move ahead on a speculative basis. It's just to be ready to respond to any build-to-suites that are appropriate for us. And that's the other thing, too, that Theresa mentioned. There are things that are on our mind with respect to the use of cash and proceeds. One is the distance during the venture this year. There is the NCIB potential, and there's also remaining development commitments and future development commitments, which could include build-to-suits as well. So these things are on our mind. But right now, no plans to move speculatively on any of our remaining land. And I think that that will be the case through the year. Again, we'll respond if there are interesting bill-to-suit opportunities, but otherwise, no, not at this time.

Makes sense. Just looking at your top 10 tenants, the only one that stands out is SEVA having a 0.8-year maturity. Is that a 24 or 25 maturity? And do you have any color as to what would happen there potentially?

It's the end of the year as well. No colour at this time. We're in discussions on both bases with them, so we don't want to tip our hands in any way on those.

Just back to Kyle's question, I don't know if you answered it, but the timing, would the full quarter impact have been felt? Or is it kind of in straight line rent, and then we'll transfer over to Catherine? Are you trying to go for Barry Caldwell?

There's straight line rent number in this first quarter, yes.

Okay. That's it for me. Thanks.

Thank you. Again, if you would like to ask a question, please press the star, then the number 1 on your telephone keypad. Your next question comes from the line of Pammy Burr with RBC Capital Markets. Your line is open.

Thanks. Good morning. Kevin, I just wanted to clarify your comments on the occupancy, and I think it was roughly that 97% target that was cited last quarter. Is that a committed figure that you expect to sort of become cash-producing next year, or do you think you can – Will that translate actually into cash flow or income in 2024 toward the end of the year?

That's a good question, Tommy. No, that would include cash in 2025. So you're right. That would be, I guess, occupied and committed, to be fair.

Okay. And then just not to nitpick here, but on the in-place side, where do you see, I mean, it's nice to see a bit of progress after the quarter on some of the U.S. leasing. Does that get to like 96-ish or kind of hold at where it is as of May, I guess?

No, I think that 96-ish is fair. And I'm not sure. I think, I mean, there's entirely a chance that we see rent this year as well. But I think if you assume 96 were in place, I think that that would be fair.

Okay, got it. And then just come, you know, sticking with the US leasing, I'm just curious, have you changed the strategy at all on some of the deals that you have been able to execute more recently? And, and, you know, obviously, you did change some of your maintenance capex and TI assumptions, but have there been any change at all in terms of maybe what you're offering from an incentive standpoint, free rent or anything of that nature?

No, I think two things I would say about that is, again, the increase in the capex was because of stuff from 2023 when we scrubbed the numbers and realized it's not as though we're doubling TIs on our new leases and renewals. So we're not. Just to be clear on that. That's about carryover from the previous year. That's why the increase. With respect to TIs and free rent on deals, we are always, always open and willing to respond to market conditions and do whatever we have to do to execute on these deals. But that being said, the deals that we have done so far this year and the deals that we are working on, we have not seen a material movement from our budget assumptions for TIs. And I don't want to get into details of the TIs that we're assuming because we're in discussions with tenants on them and brokers as well. But there has not been a major change in TIs and free rent periods from our expectations for 2024 so far. But if those conditions change, we will respond accordingly to execute on those deals.

That's helpful. Thanks for that. Last one, just on the lease that was done in Nashville, I think it was one of the Lebanon properties. Which property was that of the three that are there? The middle one, number two.

back one yeah i think it's the back one the one at the back and you remember i can't remember this building three building one it's building three okay got it thanks very much i'll turn it back thank you your next question comes from the line of samaya syed with cibc your line is open thanks good morning i want to ask about um the branford development and the lease up there just uh wondering if you can share

what was the free rent period included with that lease, and also what's the standard you're seeing being offered in the GTA market more broadly these days?

I think it's four months. Yeah, I think it's a four-month free rent period, Samaya. So that'll run, like, into April, and then we'll be cashed from April 15 onwards, more or less.

Okay. And then just switching to the demand side, I guess if you could qualify in terms of by industry, vertical, or user type, where would you say there's the most hesitation or delay in terms of making a decision today?

In terms of future development?

Or just addressing current vacancies and the types of users and who's delaying the most versus whose demands haven't changed.

It's tough. I mean, 3PLs are still carrying the day as far as we can see. It sounds like in the US anyways, automotive has been active, food has been active, pharmacy has been active. I think these are things that continued from last year. And e-commerce is starting to come back and we're seeing them more and more in our markets. Not that they have done leases that we're aware of anyways, but we're starting to see activity. They're starting to underwrite space more than we've seen certainly in 2023, and that is good for us too because it typically involves larger space. So I'm not sure if that's the color you were looking for, but that's kind of what we're seeing on the ground so far this year.

Okay, yeah, that's helpful. And that's all I have. I'll turn it back.

Thank you. There are no further questions at this time. I would like to turn the call back over to the presenters.

Okay. Well, on behalf of the trustees and the management team here at Granite, thank you for participating in the call today, and we look forward to speaking with you again in August. Have a good day.

This concludes today's conference call. You may now disconnect.