Granite Real Estate Inc.

Good morning, my name is Sylvie and I will be your conference operator today. At this time, I would like to welcome everyone to Granite REIT's first quarter 2025 results conference call. Note that 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. And if you would like to withdraw from the question queue, please press star followed by the number two. Thank you. Speaking to you today on the call this morning is Kevin Gorey, President and Chief Executive Officer, and Theresa Netto, Chief Financial Officer. I will now turn the call over to Theresa Netto to go over certain advisories.

Thank you, 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 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 and granted some material filed with the Canadian Securities Administrators and the U.S. Securities and Exchange Commission from time to time, including the risk factor section of its annual information form for 2024. Granite's management discussion and analysis for the year ended December 31, 24, filed on February 26, 2025, and for the quarter ended March 31, 2025, filed on May 7, 2025. So Granite posted Q1 2025 results in line with management's annual forecast and guidance, largely driven by strong NOI, favorable foreign exchange, and positive accretion from NCIB unit repurchases, partially offset by higher net interest expense. FFO per unit in Q1 was $1.46, representing a 1 cent or 0.78% decrease from Q4 2024, and a 16 cent or 12.3% increase relative to the same quarter in the prior year. In Q4 2024, FFO included non-recurring items for the reversal of tax provisions, foreign currency gains on monetary items, capital tax savings, and a negative NCI adjustment, where if excluded, FFO per unit would have been $1.41. Therefore, Q1 2025 FFO per unit is 5 cents higher relative to a normalized Q4 24. The growth in NOI this quarter is primarily derived from strong same-property NOI growth enhanced by double-digit leasing spreads, along with the lease closeout revenue earned on a previously terminated U.S. lease and a terminated lease in Utrecht, Netherlands, totaling 0.8 million. In addition, Granite earned holdover rent from one tenant at a property in Indianapolis where the tenant will be vacating in Q2 for $0.2 million. NOI growth was further enhanced by foreign exchange as the U.S. dollar and the euro were 2.6% and 1.2% stronger, respectively, in comparison to Q4. As has been previously communicated, in Q2, we have two known vacancies commencing in Atlanta and Indianapolis. These vacancies, in addition to the end of holdover rent previously mentioned and no further closeout fees to be recognized, we are forecasting lower NOI in the second quarter relative to Q1, with NOI recovering through the second half of the year, mostly as a result of releasing spreads on maturing leases. ASFO per unit in Q1 2025 was $1.41, which is 16 cents higher relative to Q4, and 19 cents higher relative to the same quarter last year, with the increase in Q4 mostly tied to lower capital expenditures, leasing costs, and tenant allowances due to timing of leasing turnover and seasonality. ASFO-related capital expenditures incurred in the quarter totaled only $0.7 million, which is a decrease of $10.6 million over Q4, and 0.7 million over the same quarter last year. For 2025, we continue to expect AFFO-related capital expenditures to come in approximately 40 million unchanged from our previous estimates. Same property NOI for Q1 was strong relative to the same quarter last year, increasing 4.7% on a constant currency basis and 9.3% when foreign currency effects are included. Same property NOI was driven primarily by CPI and contractual rent increases across all granite regions, positive leasing spreads, lease renewals, primarily in the U.S. and Canada and Austria, and the lease commencement of four completed development and expansion projects in Canada, the U.S. and Netherlands. For 2025, we continue to expect constant currency same property NOI based on a four-quarter average to come in within the range of 4.5% to 6%. which excludes any potential impact from disposition activity, which Kevin will elaborate further on. G&A in the quarter was $8.5 million, which is $1.2 million lower than the same quarter last year and $0.2 million higher than Q4. The slight increase relative to Q4 includes $8.7 million unfavorable fair value adjustment to non-cash compensation liabilities that was fully offset by the reduction in corporate restructuring costs incurred in Q4. related to the unstapling of our stapled unit structure. Both do not affect Granite's FFO and AFFO metrics. G&A expenses that do impact FFO and AFFO were approximately $0.2 million higher than Q4, which is mostly related to the absence of a $0.5 million capital tax refund, which we recorded in Q4. For 2025, we 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 lower in Q1 relative to Q4 by $2.2 million, while interest income decreased by $2.4 million as compared to Q4, resulting in an increase to net interest expense. The reduction in interest expense was primarily driven by several refinancing activities previously announced. One was the refinancing of the 2025 term loan with the 2031 debentures at a lower rate, which we closed on October 4th, resulting in savings of $0.5 million. The repayment of the 2024 term loan on December 19th, contributing $0.2 million in savings. and the refinancing of the December 2026 turn loan with our 2026 debentures at a lower rate in February, yielding net savings of $0.2 million after accounting for accelerated amortization of deferred financing costs of $0.2 million. These savings were partially offset by $0.7 million net increase in interest expense due to the strengthening of the U.S. dollar and the euro relative to Granite's foreign-denominated debt. The decrease in interest income was due to interest earned in Q4 from the temporary investment of net proceeds of our October 29 debentures. Granite's weighted average cost of debt is currently 2.67%, and the weighted average debt to maturity is 4.1 years. With Granite's next maturity window in September 2026, we continue to expect interest expense to remain stable over the next approximate 18 months, at roughly $23.5 million per quarter, barring any new transactions. For income tax, Q1 2025 current income tax was $2.5 million, remaining relatively flat as compared to the prior year, and $1.6 million higher as compared to Q4. In Q1, Granite did recognize a favorable credit relating to German withholding tax reserves of $0.2 million pertaining to a prior tax year. The increase compared to Q4 is primarily due to the 1.6 million credit to current income taxes recorded in Q4 resulting from the reversal of prior tax prior year tax provisions. For 25 we are expecting current income taxes to remain at approximately 2.7 million per quarter. In terms of our 2025 estimates, Granite is keeping guidance unchanged. Granite's current outlook does not significantly change assumptions relating to new leasing of of vacant space, which continues to be projected primarily later in the second half of 25 and also reflects our year-to-date financing and NCIB activity. We continue to forecast FFO per unit within the range of $5.70 to $5.85, representing an approximate 5% to 8% increase over 24. For AFFO per unit, we are continuing to forecast the range of 4.80 to 4.95, representing a change of minus 1% to 2% over 24, driven by the higher maintenance capital expenditures we communicated in the prior quarter relative to the prior year. Granite's forecast was updated this quarter to assume a range of US dollar to CAD of 137 to 142 and a range of Euro CAD of 152 to 158. Granite will continue to provide updates on our guidance as warranted based on leasing activity and any other changes. As far as our balance sheet, it's comprised of total assets of 9.6 billion at the end of the quarter. It was positively impacted by approximately 83.5 million of translation gains on our foreign-based investment properties, primarily due to the 4.1 increase in the spot euro exchange rate relative to Q4, partially offset by movement in the fair value valuation of grants portfolio of a net fair value loss of $48.2 million. Our overall weighted average cap rate is 5.4% on in-place NOI, which increased nine basis points from the end of Q4 and has increased 15 basis points since the same quarter last year. Net leverage at the end of the quarter was 32% and net debt to EBITDA was 6.8 times, which remained consistent relative to Q4 and lower than Q1 2024, primarily as a result of NOI growth. Our liquidity is approximately $1.1 billion, representing cash on hand of about $120 million and the undrawn operating line of $946 million. As of today, Granite has $52 million drawn on the credit facility and $2.4 million in letters of credit outstanding. We do expect to repay the outstanding balance on the credit facility by the end of 2025 with free cash flow from operations barring any other major transactions. We've continued to be very active on our NCIB and on a year-to-date basis in 2025, we have purchased just over 1.4 million units at an average cost of $66.60 for a total consideration of 95.1 million. And I'll turn the call over to Kevin.

Thanks, Theresa. As usual, I'll keep my prepared comments brief, preferring, of course, to engage in dialogue during the question period. As mentioned, results for the quarter came in slightly ahead of expectations, driven probably by FX gains and one-time items that Theresa highlighted. I also think it's worthwhile at this point to elaborate on Theresa's comments regarding FFO and NOI moderating in the second quarter. Just to say that the reduction was as expected and is due to the timing of expected move-outs at the end of the first quarter or close to it, and the fact that the bulk of our renewal increases, which is a key driver of our same property NOI growth in 2025, occur late in the third quarter, which of course should position us well for continued NOI growth into 2026. As a result, NOI and FFO are expected to recover in a third and fourth quarters. And more importantly, we are maintaining our guidance on all target KPIs, including FFO and AFFO per unit, as Theresa mentioned. Same property NOI growth of 4.5% to 6%. A renewal rate of 80% to 85% on our 2025 expiries at a weighted average rate increase of 35%, approximately. and committed vacancy of 95.5% to 96% at the end of the year. I should also mention once again that one should not pay too much attention to the renewal increase related to expiries in a particular quarter. The 10% increase was primarily driven by a contractual renewal increase at one of our U.S. properties that we've actually discussed on previous calls. But as I have said, the increase can fluctuate significantly from quarter to quarter, and does not necessarily signal a movement in the spread between market and in-place rents in the portfolio. On that, year to date, the team has renewed 78% of our 2025 expiries at a weighted average increase of 48%. And as mentioned, we expect to achieve or exceed our guidance of 30 to 35% for 2025. As an update on the leasing markets, We don't yet have data on our European markets, but I can supply some key statistics in our North American markets. Dallas and Savannah led the U.S. in net absorption in the first quarter at 4 and 3.9 million square feet respectively, and net absorption turned positive in the GTA at just over 2 million square feet. Vacancy rates are up in roughly half of our markets and flat or slightly down in the others, and new supply is now close to historical low. Rental rate growth continues to be strongly positive in a number of our markets, including Nashville at 17%, Houston at 11%, Dallas and Chicago at 7%, and the largest year-over-year declines in market rates occurred in the GTA and Savannah at roughly 5% and 3% respectively. Before I speak about strategy, I'm sure there will be questions on tariffs and the potential impact on our portfolio. which are happy to answer and engage in a dialogue on the subject. But I did want to preface the discussion with a few comments on our portfolio, perhaps Magnus specifically, and we're really focusing on the Canadian part of our portfolio. We have spoken with several tenants of various sizes, and I think a common theme we are hearing firstly is that there is not a firm understanding of the tariffs and their impact on businesses. And so most are continuing to operate their business in normal course, and instead implementing minor changes to their operations to preempt the impact of tariffs where they can, and this particularly applies to smaller tenants. Magna specifically, and as I think they discussed in their call, the complexity of the existing supply chain and the cost to increase or move capacity would be extremely significant and take years to implement. Conversely, we expect Magna to continue to operate their Canadian business as they have and take any necessary steps to optimize their compliance with the CUSMA arrangement. One last comment on our MAGNA assets is to highlight the fact that we dispose of all of our MAGNA assets that were located in secondary markets in Canada. This included Windsor and Woodstock over the past few years. Our existing MAGNA assets are all located in prime nodes in the GTA market, including Branton, Mississauga, Vaughan, and Milton, and we believe would remain in demand if Magnet were ever to choose not to renew their lease. I'll end my prepared comments on strategy. We now plan to be active on the capital allocation front. In addition to funding our Houston development project, as Theresa mentioned, we have repurchased roughly 1.4 million granite units for $95 million in financial consideration, and we expect to continue to be active on our NCIB program. The team has also identified two acquisition opportunities in our current target markets in the U.S. and Europe, totaling roughly 100 million Canadian. And to fund this potential deployment, we have identified roughly 100 to 200 million in disposition targets in Canada, the U.S., and Europe that we will be focusing on over the next few quarters. And on that, operator, I will open up the line for questions.