Granite Real Estate Inc.

My name is Jenny, and I will be your conference operator today. At this time, I would like to welcome everyone to Granite Reads' second quarter 2025 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 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 Theresa Netto, Chief Financial Officer. I will now turn the call over to Theresa Netto to go over certain adversaries.

Good morning, everyone. Before we begin today's call, I would like to remind you that the 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 factors 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 Factor section of its Annual Information Forum for 2024 and GRANIT's Management Discussion and Analysis for the year ended December 31, 2024, filed on February 26, and for the quarter ended June 30, filed on August 6, 2025. Granite posted Q2 25 results in line with management's annual forecast and guidance, largely driven by strong NOI growth and positive accretion from NCIB unit repurchases, partially offset by unfavorable foreign exchange. FFO per unit in Q2 was $1.39, representing a $0.07 or 4.8% decrease from Q1 and a $0.07 or 5.3% increase relative to the same quarter in the prior year. In Q1, FFO included a number of non-recurring items, including lease closeout revenue, a reversal of prior year bonus accruals, and a favorable credit relating to a prior year German withholding tax reserve, all totaling $1.7 million, where if excluded, FFO per unit would have been $1.43. Therefore, Q2 25 FFO per unit is $0.04 lower relative to a normalized Q1. However, in Q2, the U.S. dollar weakened by 3.6%, partially offset by the euro strengthening by 4%, which caused a further negative impact of 4 cents to FFO per unit quarter over quarter. In addition, Granite realized a foreign currency loss of 1 million on monetary items that was driven by the large changes in foreign currency rates and their impact on settling financial accruals. If the impacts of foreign currency are isolated and excluded, FFO per unit in Q2 is in fact slightly ahead of normalized Q1 by one cent due to NCIB accretion offset partially by a small decline in NOI tied to new vacancies commencing in the quarter. FFO per unit in Q2 was $1.23, which is 18 cents lower relative to Q1 and six cents higher relative to the same quarter last year, with a decrease versus Q1 mostly tied to higher capital expenditures, leasing costs, and tenant allowances incurred largely driven by strong leasing activity during the quarter, as previously mentioned. AMFO-related capital expenditures incurred in the quarter totaled $8 million, which is an increase of $7.3 million over Q1 and $0.9 million lower than the same quarter last year. For 2025, we continue to expect AFO related expenditures to come in at approximately 40 million for the year unchanged from our estimates previously provided. Same property NOI for the second quarter was strong relative to the same quarter last year, increasing 4.6% on a constant currency basis and up 7.4% when foreign currency effects are included. Same property NOI growth was driven primarily by CPI and contractual rent increases across all of Granite's regions, positive leasing spreads on lease renewals, primarily in the US and Canada, the expiration of a free rent period associated with a completed development in the prior year in Canada, and the lease commencement of two expansion projects in Canada and the Netherlands, and a new lease commencing at a development project in the US. Given the strong leasing activity in the second quarter of 25 and the effects of removing assets held for sale, we are raising our guidance for the year for constant currency same property NOI based on a four-quarter average to be in the range of 5% to 6.5% up from our previous estimate of 4.5% to 6%. G&A for the quarter was $10 million, which was $2.3 million higher than the same quarter last year and $1.5 million higher than Q1. The increase relative to Q1 includes 0.3 million unfavorable fair value adjustments to non-cash compensation liabilities, which does not impact Granite's FFO and AFFO. G&A expenses that do impact FFO and AFFO were approximately 1.2 million higher than Q1, which is mostly related to the absence of a reversal of the prior year bonus accrual recorded in Q1 and higher public entity costs due to seasonality relating to Granite's AGM in June and a 2024 ESGR report that was released yesterday. 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 higher in Q2 relative to Q1 by $0.4 million, while interest income decreased by $0.3 million compared to the first quarter, resulting in an increase to net interest expense. The increase in interest expense was primarily driven by draws on the credit facility to fund Granite's NCIB repurchases. The decrease in interest income was due to lower invested cash balances. Although net interest expense was higher, the impact to both FFO and AFFO per unit is more than offset by the accretion from repurchased units under the NCIB. Granite's weighted average cost of debt is currently 2.71%. and the weighted average debt to terms and maturity of 3.9 years. With Granite's net debt maturity now in September 2026, we continue to expect interest expense to remain stable over the next approximate 12 months, or roughly $24 million per quarter, barring any other new transactions. Q2 25 current income tax was $3 million, which is $0.4 million higher as compared to the prior year, and $0.5 million higher as compared to Q1. The increase in current tax relative to Q1 is mostly related to the strengthening of the Euro relative to Canadian dollar and the absence of the 0.2 million credit related to the German withholding tax reserve we recognized in Q1. For the remainder of 2025, we are expecting current income taxes to come in at approximately 2.8 million per quarter. Regarding 25 estimates, Granite is increasing its 25 guidance Granite's current outlook reflects lease renewals and new leasing of vacant space completed year-to-date, the acquisition of the Florida properties we completed on June 30th, and excludes any potential impact from the disposition activity of the five assets that Granite has classified as assets held for sale since the timing of such dispositions can't be determined at this time. The outlook also factors year-to-date financing and NCIB activity. For FFO per unit, we are raising guidance from last quarter to the range of 575 to 590, which represents an approximate 6% to 9% increase over 24. For AFFO per unit, we are increasing our guidance to the range of 490 to 505, which represents an increase of 1% to 4% over 2024, partially impacted by higher maintenance capital expenditures, which we discussed in prior calls. Granite's forecast was updated this quarter to assume a range on foreign currency of US dollar to Canadian dollar of 135 to 139. That was previously 137 to 142. And the range for the Euro Canadian dollar of 156 to 161, previously 152 to 158. Granite will continue to provide updates on guidance each quarter based on leasing and any other transaction activity. Our balance sheet comprises of investment properties of $9 billion at the end of the quarter, and that was reduced by the approximate $310.5 million due to the classification of five assets as held for sale, consistent with our messaging from the last quarter, which Kevin will discuss further. This was further reduced by $189 million foreign exchange translation losses on Granite's foreign-based investment properties, mostly driven by the 5.3% decrease in the U.S. spot exchange rate relative to Q1, partially offset by a small gain of $16.8 million on the portfolio and the $49.2 million increase due to the Florida acquisitions. The REITs overall weighted average cap rate of 5.5% on in-place NOI increased 13 basis points from the end of Q1 and has increased 21 basis points since the same quarter last year. Net leverage at the end of the quarter was 36%, which is an increase of 4% from the last quarter at 32%. Net debt to EBITDA was 7.1 times, a slight increase from 6.8 in Q1, and consistent relative to the second quarter of 24. The increase in grants key leverage ratios is primarily due to the classification of the five assets as held for sale, as they are excluded from the investment property value, resulting in a decrease in the denominator of the net leverage ratios. In addition, Granite has increased unsecured debt due to drawing on the credit facility to fund repurchases of units under the NCIB, resulting in an outstanding balance of $91 million at the end of the second quarter. Granite expects these ratios to normalize lower when assets sales are completed. Our liquidity is approximately $1 billion, currently representing cash on hand of about $86 million and the undrawn operating line of $914 million. As of today, Granite has $95 million drawn on the credit facility and $2.4 million in letters of credit outstanding. We do expect to reduce the outstanding balance on the credit facility throughout 2025 with free cash flow from operations, barring any other major transactions. And as noted in our disclosures, we have been taking advantage of the significant discount to NAV, and we repurchased year-to-date 2.2 million units on average with unit cost of $67.01 for a total consideration of about $145 million. I'll turn over the call now to Kevin. Thank you.

Thanks, Theresa. Good morning, everyone. As Theresa mentioned, the Q2 results more or less were in line obviously impacted negatively by the weakening of the U.S. dollar in the quarter. And as mentioned, excluding the negative impact of FX and favorable one-time items in the first quarter, Q2 was slightly ahead of the first quarter with a slight drop in NOI of $0.01 offset by a roughly $0.02 net positive impact from UnifyVac activity in the first and second quarters. And as you can see from our Q2 guidance, we expect our financial performance to continue to strengthen over the remainder of the year. As shown in the MDA, occupancy in the quarter was assisted by the listing of one of our vacant assets for sale in Indy. The new vacancy in the quarter was more than offset by strong leasing activity, as the team executed on roughly 1.3 million square feet of renewals related to 2026 expiries and 1.1 million square feet of new leases since the first quarter call. These new leases are expected to contribute over $10.5 million in gross rent in the portfolio in the first year. In terms of mark-to-market on renewal, we have now renewed roughly 80% of our 2025 expiries and a weighted average increase of over 40%. And that excludes the new lease in Atlanta, where the team achieved an increase in rental rate of 58% over the expiring rent at the end of the first quarter. In addition to the contribution from new leasing, the renewal increases that we have achieved on our 2025 expiry will also contribute strongly to further annual growth in the third and fourth quarters. To illustrate this point, the five largest renewal increases by dollar value represent roughly $13 million in additional rent annually. Those five renewal increases commence in order of magnitude from largest to smallest on October 1st on January 1st of 2026, on September 1st, May 1st, and August 1st. So only one of those increases occurs in the first half of the year, and the obvious point being that the increases are significantly weighted to the latter part of the year, as we have discussed on previous calls. A few comments I would make on relevant market data. Eight of our 15 markets in North America reported flat or a decline in market vacancy from the first quarter, with Savannah and Memphis reporting the largest quarter-over-quarter increases in vacancy. The majority of our markets reported positive net absorption in the second quarter, with the exception of Toronto and New Jersey. The GTA was once again our weakest market in terms of demand, posting negative 900,000 square feet in net absorption following a positive print in the first quarter. Dallas and Houston saw the strongest net absorption in the second quarter at 5.6 and 2.7 million square feet respectively. With respect to market asking rents, Broward County, a key sub-market of the Miami market and home to our new acquisition, posted the strongest quarter over quarter growth in asking rent at 3.4%, followed by Nashville at 3%. Conversely, Dallas and Toronto posted the weakest quarterly asking rent growth at negative 6.7% and 1.2% respectively. So while leasing conditions continue to slowly improve across our portfolio and our leasing performance was obviously strong in the quarter, net absorption overall remains below the 10-year average and conditions remain competitive generally. In Europe, vacancy in Germany and the Netherlands was flat, slightly below first quarter levels and remains below 5%. Similarly, market rent growth, although subdued, remained positive quarter over quarter and year-to-date in the low to mid-single digits. Net absorption, or take-up, remains healthy across both markets, with Germany and the Netherlands reporting well over 10 million square feet of positive net absorption, respectively, year-to-date. For comparison, there was roughly 4.5 million square feet of positive net absorption in all of Canada over that same period. Concurrent with our second quarter results, I am once again pleased to announce the publication of our corporate sustainability or ESG plus R report, which summarizes our activities and progress against targets for 2024, including now achieving roughly 50 megawatts of peak rooftop solar capacity within our portfolio, achieving green building certification on 63 properties, roughly half of our portfolio, and being ranked first in our peer group of North American listed industrial companies for ESG performance by Graspi. Sustainability is an important area for Granite, and I invite you to read a report now posted to the website. I don't have a lot of comments on our quarterly IFRS value. As Theresa mentioned, the roughly 70 million positive impact of leasing activity, rent growth, and the addition of two new assets in Florida was more than offset by the negative impact of FX primarily or all related to the significant weakening of the US dollar versus the Canadian dollar since the end of the first quarter. Moving on to capital allocation, the list of assets held for sale combined with the announcement of our new acquisition in the Miami market and our NCIB activity reflect our priorities as a company to fund strategic acquisition our build-to-suit development program, and unit buybacks on an opportunistic basis to retain cash and the sale of select non-core assets. We have obviously used our line of credit to fund the new acquisition and NCIB activity in the near term, but the objective remains to fund our growth on a debt-neutral basis, thereby maintaining our conservative capital ratios and the strength of our balance sheet. At this time, I don't wish to telegraph individual markets, target markets for new acquisitions, but I can tell you that the team is currently active on new opportunities. And as I have commented in the past, we will look to deploy capital in select core markets in Europe, Canada, and the US. In closing, the team's achievements on new leasing and renewals year-to-date have positioned us very well for continued strong organic growth in the coming quarters. And as evidenced by our announced acquisition and list of assets held for sale, successful execution of this position program and effective capital redeployment will be a focus of ours for the remainder of this year and into 2026. And on that, I will turn the call over for questions.