Granite Real Estate Inc.

Good morning. My name is Todd and I will be your conference operator today. At this time, I would like to welcome everyone to the Granite REIT second 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, please press star two. Thank you. 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 to Teresa Netto to go over certain advisory.

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 grants and 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 Grants Management's Discussion and Analysis for the year-end of December 31, 2023, filed on February 28, 2024. As usual, I'll commence the call and then turn it over to Kevin for his operational update. Granite posted Q2 2024 results ahead of Q1 and in line with management's annual forecast and guidance, largely driven by strong NOI growth, partially offset by slightly higher interest costs. FFO per unit in Q2 was $1.32, representing a $0.02 or 1.5% increase from Q1 2024, and an 11 cent or 9.1% increase relative to the same quarter in the prior year. The growth in NOI this quarter is primarily derived from strong same property NOI growth, enhanced by the double-digit leasing spreads in Canada and the U.S., the expiration of the free rent period of the recently completed development property in Brantford, and lease closeout fees earned on a disposed property in Canada, partially offset by a new vacancy in the U.S. NOI growth was further enhanced by foreign exchange as the US dollar and Euro were 1.4% and 0.6% stronger, respectively, in comparison to Q1. AFFO per unit in Q2 was $1.17, which is 5 cents lower relative to Q1 and 8 cents higher relative to the same quarter last year, with the variances mostly tied to FFO growth, partially offset by higher 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 $7.1 million, which is an increase of $5.7 million over Q1 and $2.6 million over the same quarter last year. For 2024, we continue to expect maintenance capex, leasing costs, and tenant allowances to come in at approximately $28 million for the year, unchanged from our estimates last quarter. Same property NOI for Q2-24 was strong relative to the same for last year, increasing 6% on a constant currency basis and up 7.3% when foreign currency effects are included. For 2024, we are updating our forecast for constant currency same property NOI based on a four-quarter average to be in the range of 6% to 6.5%, a reduction from the previous forecast of 7% to 8% as a result of new vacancy commencing June 1st and some revised leasing assumptions on certain vacant properties. Kevin will provide some further color on the forecast of the same property on OI later. G&A for the quarter was $7.7 million, which was $1.2 million lower than the same quarter last year and $2 million lower than Q1. The main variance relative to Q1 is the $2.5 million favorable fair value variance in non-cash compensation liabilities partially offset by $0.9 million of corporate restructuring costs relating to the uncoupling of Granite's stapled unit structure, both of which do not impact Granite's FFO or AFFO metrics. G&A expenses that impact FFO and AFFO were approximately $0.2 million lower than Q1, which is mostly related to an approximate $0.7 million capital tax refund resulting from changes in tax regulation in the state of Tennessee and related to prior tax years. partially offset by costs pertaining to Granite's annual general meeting and other timing differences and expenses. For 2024, we do continue to expect G&A expenses that impact FFO and AFFO of approximately $10 million per quarter or roughly 7% of revenues. Interest expense was higher in Q2 relative to Q1 by $0.6 million, while interest income also decreased by $0.2 million as compared to Q1. The increase in interest expense was primarily due to the reduction in capitalized interest as a result of the completion of the majority of development projects, together with the unfavorable impact of foreign exchange rates on foreign-denominated debt. The decrease in interest income was a result of lower uninvested cash balances on hand due to utilizing excess cash to repurchase units under Granite's NCIB program, together with a slight reduction in interest rates in Canada and Europe due to interest rate cuts. Although interest income earned is lower from lower cash balances, the impact to both SFO and ASFO per unit is more than offset from repurchased units under the NCIB. Granite's weighted average cost of debt is currently 2.6%. For 2024, given that there is no debt maturing until late December, Granite's interest expense run rate is expected to remain at current levels of approximately $21.7 million per quarter which will be offset by some interest income of approximately $1 million per quarter. For income tax, Q2 current income tax was $2.6 million, which is $0.5 million higher than the prior year and $0.1 million higher as compared to Q1. The movement in current tax relative to Q2 last year is mostly attributable to increased taxable income in Europe due to the rental growth together with the strengthening of the euro relative to the Canadian dollar. as all of our current income taxes generated from the European region. The increase in current tax relative to Q1 is mostly related to the strengthening of the Euro relative to the Canadian dollar. For 2024, we are expecting current income taxes to remain at current levels of approximately 2.6 million per quarter. As in prior years, Granite may realize a credit to current income taxes of approximately 1.8 million in Q4 due to the reversal of prior year tax provisions However, we cannot confirm the certainty of such credit until December 31st, and therefore, our guidance does not factor in any tax provision reversals. Looking out to the 2024 estimates for AFFO per unit, our guidance has been adjusted slightly from last quarter to narrow the range to 530 to 540, representing an increase of 7% to 9% versus 2023. Similarly, for AFFO per unit, we are narrowing our forecast range to 460 to 470, representing an increase of 2% to 4% versus 2023. The 5 cent reduction at the top end of the range is reflective of a slight reduction in NOI due mostly to one new vacancy in the U.S. and some revised leasing assumptions on certain vacant properties, offset by reductions in G&A expenses, most of which have been realized to date. Granite has not made any changes to FX rate assumptions pertaining to the forecast period that will be July to December of 2024. The high end of the range continues to reflect FX rates of the Canadian dollar to Euro of 1.48 and Canadian dollar to USD of 1.38. The low end of the range continues to reflect FX rates of the Canadian dollar to Euro of 1.43 and Canadian dollar to USD of 1.32. As usual, we will continue to provide updates on our guidance each quarter as warranted. Granite's balance sheet, comprising of total assets of $9.3 billion at the end of the quarter, was positively impacted by $60 million of translation gains on Granite's foreign-based investment properties, primarily due to the 1.2% and 0.3% increases in the spot USD and euro exchange rates. relative to Q1, partially offset by approximately $0.8 million in fair value losses on Granite's investment property portfolio in the second quarter. The Trust's overall weighted average cap rate of 5.3% on in-place NOI increased seven basis points from the end of Q1 and has increased 25 basis points since the same quarter last year. Our net leverage at the end of the quarter was 32%, and net debt to EBITDA dropped 7.1 times, which is lower relative to Q1 and lower than Q2 2023, as a result of the NOI growth, including the completion of stabilization of a good majority of the grant's development properties. Our current liquidity remains at $1.1 million, representing cash on hand of about $100 million, and the undrawn operating line of $997 million. As of today, we have no borrowings under the credit facility, and there are $2.8 million in letters of credit outstanding. And lastly, during the second quarter, Granite did repurchase 644,300 stapled units under its NCIB at an average price of $68.62 for a total consideration of $44.2 million, excluding commissions and taxes on the net repurchases of stapled units. Now I'll turn over the call to Kevin.

Thanks, Teresa. I'll begin with a few introductory comments on our results, and then I'd like to turn it over to Lauren and Michael to provide an update on our development and leasing activity and provide some perspectives on the investment markets in our jurisdictions. I will then finish with our outlook for the remainder of the year before opening up the floor to any questions. As Teresa mentioned, our results for the quarter were in line with expectations. Despite the unplanned vacancy related to one of our tenants, And NOI grew by 2.3 million, or 2%, over the first quarter and represented the 12th consecutive quarter of NOI growth. As Teresa also mentioned, we lowered the upper end of our FFO for unit range, as it's common to tighten the range approaching the latter half of the year. And we also lowered our guidance for St. Croix BNY to 6% to 6.5% due primarily to the impact of the tenant insolvency. and a period of free rent on a large renewal subsequent to quarter end, as Lorne will discuss somewhat in his comments. With that said, same property NOI growth on a constant currency basis was strong in the quarter at 6%, led by gains in Canada and the US at 12.5% and 5.1% respectively. As outlined in a press release in MD&A, the team achieved an average increase in rent rate of 25% on our Q2 2024 maturity, led by strong renewal spreads in the US and the GTA. As Teresa discussed, and it feels like deja vu all over again, we opportunistically utilize cash on hand to purchase roughly 644,000 units at an average price of 68.62. As I have stated, previously, unit buybacks are not our first choice for capital allocation, but we will not hesitate to capitalize when the unit price is that far below now. It's also worth noting that despite allocating over $44 million on those unit buybacks in a quarter, in addition to funding ongoing development in CapEx programs, we managed to finish the quarter with over $100 million in cash and cash equivalents, which I think speaks to the power of preserving conservative capital ratios and generating free cash flow to drive accretion per unit cash flow. In conjunction with our quarterly results, we are also pleased to announce the release of our annual ESG report for 2023, which I think summarizes well our activities and achievements against a number of our key targets and objectives. There are frankly too many highlights to discuss here, but I invite you all to review the report, which is now available on our website. At this point, I would like to turn a call over to Lorne for an update on our development leasing programs, followed by Michael's comments on the investment market.