Granite Real Estate Inc.

Good morning. My name is Shelby and I will be your conference operator today. At this time, I would like to welcome everyone to Granite Reef's third 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 1 on your telephone keypad. If you would like to withdraw your question, press star 2. 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 advisories.

Thanks, operator. 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 the 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 material filed with the Canadian Securities Administrators and the U.S. Securities and Exchange Commission from time to time, including the risk factors section of its annual information form for 2023 and GRANIT's management discussion and analysis for the year ended December 23, December 31, 2023, filed on February 28, 2024. So for Q3, granted posted results ahead of Q2 and in line with management's annual forecast and guidance, largely driven by strong NOI growth. FFO per unit in Q3 was $1.35, representing a 3 cent or 2.3% increase from Q2 and an 11 cent or 8.9% 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 triple digit leasing spreads in Canada double digit leasing spreads in the U.S. and the completion of granted two active expansion projects in Ajax, Ontario and Vert, Netherlands with leases commencing in the third quarter, partially offset by a new vacancy in Canada at the end of Q2 and new vacancy in the U.S. during Q3. NOI growth was further enhanced by foreign exchange as the Euro was 1.7% stronger, partially offset by the U.S. dollar being 0.3% weaker in comparison to Q2. ASFO per unit in Q3 was 1.22, which is 5 cents higher relative to Q2, and 13 cents higher relative to the same quarter last year, with the variances in Q2 mostly tied to FFO growth and lower capital expenditures and tenant allowances incurred due to timing of leasing turnover, partially offset by higher leasing costs, primarily related to leasing activities, including an early lease renewal for a property in the U.S. and increases in straight-line rent due to free rent offered on new leases commencing in the third quarter. AFFO-related capital expenditures, leasing costs, and tenant allowances incurred in the quarter totaled $5.2 million, which is a decrease of $1.9 million over the second quarter and $1.5 million over the same quarter last year. For the full year of 2024, we are expecting AFFO-related capital expenditures to come in approximately $25 million, which is a reduction from our estimate last quarter of $28 million. Same property on a Y for Q3 was strong relative to the same quarter last year, increasing 6.2% on a constant currency basis and up 8% when foreign currency effects are included. For 2024, we are updating our forecast for constant currency same property on a Y based on a four-quarter average to come in at approximately 6%. which is at the lower end of the forecast range previously provided of 6 to 6.5% as a result of updated vacancy and leasing assumptions. And Kevin will provide some further color on his comments. G&A for the quarter was $13.2 million, which is $4.8 million higher than the same quarter last year and $5.5 million higher than Q2. The main reason for the variance relative to Q2 is $5.6 million of unfavorable fair value variance in non-cash compensation liabilities which does not impact our FFO and AFFO metrics. For Q4, we continue to expect G&A expense that impact FFO and AFFO of approximately $10 million, or roughly 7% of revenues. Interest expense and interest income for Q3 remain virtually flat relative to Q2. Post-quarter end on October 4th, Granite did complete $800 million of bond offerings in two series, being a $250 million five-year bond at a coupon of 3.999%. and $550 million seven-year bond at a coupon of 4.348%. The $250 million tranche maturing on October 4th was hedged with a cross-currency interest rate swap, resulting in an effective fixed rate of 3.494% for the five-year term of the bond. The net proceeds from this offering were used on October 4th to fully prepay without penalty granted 2025 term loan with a principal balance of $400 million U.S., which had a maturity date of September 2025. The related interest rate swap was also terminated with a mark-to-market asset being settled. The remaining net proceeds from this offering are being held in short-term cash deposits until we fully repay Granite's 2024 term loan with a principal balance outstanding of U.S. $185 million, which is maturing on December 19, 2024. As of September 30th and prior to the completion of the refinancing in October, Granite's weighted average cost of debt was 2.6% and weighted average term was 3.1 years. After refinancing, Granite's weighted average cost of debt is now 2.75% and the weighted average debt term to maturity is now extended to 4.6 years. For the fourth quarter, Granite's interest expense is expected to increase to approximately $23.9 million due to the new October 2029 debentures being outstanding at the same time as our U.S. $185 million term loan. However, we expect to fully offset the additional interest expense with interest income as noted earlier. With Granite's next maturity now in September 2026, we expect interest expense to remain stable over the next approximate two years at roughly 23.5 million per quarter, barring any new transactions. Interest income is expected to decline over the course of 2025 with central banks cutting in all of Granite's jurisdictions. For income tax, Q3 current income tax was $2.7 million, which is $0.6 million higher than the prior year and $0.1 million higher as compared to Q2. The movement in current tax relative to the prior year is mostly attributable to increased taxable income in Europe due to rental growth, together with the strengthening of the Euro relative to the Canadian dollar as all of Granite's current income tax is generated from its European region. For 2024, we are expecting current income taxes to remain at current levels at approximately 2.7 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 our guidance does not factor in any tax provision reversals. Regarding guidance, our 2020 investments for FFO per unit remains unchanged at 530 to 540. For AFFO per unit, we are increasing the forecast range by 5 cents on both ends to 465 to 475. due to the reduced estimate in AFFO-related capital expenditures for the year from 28 million to 25 million. Granite has made a small modification to the foreign currency exchange rate assumptions pertaining to the Euro for the forecast period October to December 24. The high assumption reflects foreign currency exchange rate of 1.5, which was previously 1.48 for the Canadian dollar to Euro, and the 1.38 for the Canadian dollar to U.S. dollar exchange rate remains unchanged. On the low end of the range, we continue to assume exchange rates of the Canadian dollar to Euro of 143 and the Canadian dollar to US dollar of 132, which at this point look unlikely. Granite's balance sheet comprised of total assets of 9.3 million at the end of the quarter, and it was positively impacted by approximately 42.6 million of fair value gains on Granite's investment property portfolio in the third quarter, largely due to a tenant's commitment received in the third quarter for a 2025 lease renewal in Mississauga, Ontario. together with fair market rent increases in select U.S. markets and partially offset by expansion in discounted terminal capitalization rates at select credit assets in the U.S. The Trust's overall weighted average cap rate of 5.3% on in-place NOI decreased 6 points from the end of Q2 and has increased 13 points since the same quarter last year. Total net leverage at the end of the quarter was 32% and net debt to EBITDA was seven times, which is slightly lower relative to Q2 and lower than Q3 as well, as a result of NOI growth including the completion and stabilization of the majority of Granite's development properties. The Trust's current liquidity is approximately $1.4 billion, representing cash on hand of approximately $400 million and the undrawn line of $997 million. As of today, Granite has no borrowings under its credit facility and there are $2.8 million in letters of credit outstanding. Granite's recent refinancing will have no material impact on its net leverage, net debt to EBITDA and liquidity position once the term loan is repaid. On October 1st, as you know, Granite completed the uncoupling of its stapled unit structure by replacing it with a conventional REIT trust unit structure. We do encourage you to refer to Granite's website under the Tax Information tab if you have any questions regarding the tax treatment of this uncoupling event. I'll now turn over the call to Kevin.

Thanks, Teresa. I'll begin with a few general comments on our results, and I'll turn it over to Lauren to provide an update on our development and leasing activities. I will then finish with our look for the remainder of the year before taking your questions. As Theresa mentioned, our results for the quarter were once again in line with expectations, driven by higher NOI and strong releasing spreads. NOI grew by 3.1 million or 2.4% over the second quarter and represented the 13th consecutive quarter of NOI growth. As Theresa also mentioned, we maintain our FFO per unit guidance range for the year, and increased slightly our ASFO per unit guidance on lower capex spend than previously forecast. We also tweaked our guidance for St. Farapiana Y to 6%, due primarily to transitory vacancy at our redevelopment project in Utrecht, and a short period of free rent related to the renewal and expansion of a tenant in Memphis, which Lorne will provide further detail on. With that said, St. Brophy NOI growth on a constant currency basis was strong once again in the quarter at 6.2%, led by gains in Canada at just over 14%, Austria at 7.1%, and the US at 4.5%. Further, as outlined in our press release in MD&A, the team achieved an average increase in rent rate of just over 30% of 1.6 million square feet of Q3 2024 maturities led by strong renewal spreads in the US and GTA. On that note, I wanted to mention the net fair value gains on our investment properties, driven as mentioned by the renewal rates achieved on a number of our GTA and US properties in the quarter, and highlight that our NAV now sits within a dollar of the high watermark recorded in the third quarter of 2022, supported by higher Euro and USD rates versus CAD accretive unit buybacks funded by free cash flow, profit from several successful development stabilizations, and significant increases in NOI and market rents across our portfolio, which have effectively offset the significant upward adjustments we have applied to our discounted cap rates over that period. Before I turn the call over to Lorne for an update on our leasing and developments, I also wanted to recognize a few key achievements from our ESG program. Ranit was once again ranked number one by Grespi among our peer group of listed North American industrial REITs, quite an accomplishment in my opinion. In addition, the peak capacity of the solar PV systems installed at our properties continues to grow and has now reached over 45 megawatts. And we remain on track to meet our target capacity of 50 megawatts by the end of 2025. Finally, 44% of our properties have now successfully achieved green building certification and this number is expected to surpass 50% by the end of the year. I will now turn the call over to Lorne for an update on our development and leasing programs.