Granite Real Estate Inc.

Ladies and gentlemen, thank you for joining us and welcome to Granite REIT's second quarter 2026 results conference call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Teresa Netto, Chief Financial Officer. Teresa, please go ahead.

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 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 information. These risks and uncertainties and material factors and assumptions applied in making forward-looking information are discussed in Granite's material filed with the Canadian Securities Administrators from time to time, including the risk factors section of the Annual Information Form for 2025 and Granite's management discussion and analysis for the year ended December 31, 2025, filed on February 25, 26, and for the quarter ended June 30, 2026, filed on August 5, 2026. Now getting to the quarter, granted delivered Q2, 2026 results in line with management's annual forecast and guidance driven primarily by strong NOI growth and favorable foreign exchange. NOI growth in the second quarter was primarily driven by strong same property performance supported by leasing spreads of 7% and the lease up of previously completed development vacancies in the United States, along with a favorable foreign exchange as the US dollar and Euro strengthened 0.9% and 0.2% respectively. As advised last quarter, Granite did recognize two income statum items of a non-recurring nature in the second quarter that impacted FFO and AFFO. Granite recognized approximately $1.3 million in termination and closeout fee revenue relating to the termination of a magna lease at one of Granite's bond properties. More than offsetting this amount was a $2.6 million provision relating to a five-year HST audit at Granite's operating subsidiary where the CRA has assessed Granite with denied input tax credits, interest and penalties that impacted G&A and interest expenses by approximately $1.7 million and $0.9 million respectively. Granite has filed a notice of objection with the CRA to dispute the CRA's assessment. However, Granite has deemed it prudent to recognize such provisions at this time. The net negative impact of these two non-recurring items was negative $1.3 million or approximately $0.02 to FFO and AFFO per unit for the quarter. FFO per unit in Q2 was $1.56, down $0.01 sequentially and up $0.17 or 12.2% compared to the same quarter last year. Excluding the non-recurring items previously discussed, FFO per unit would have been 158, resulting in Q2 FFO per unit being 1 cent higher on a normalized sequential quarter basis. AFFO per unit was $1.26, down 15 cents sequentially, and up 3 cents year-over-year, with the increase from Q1 primarily driven by higher maintenance capital expenditures, leasing costs, and tenant allowances incurred. Excluding the non-recurring items previously discussed, of course, AFFO would have been $128 million. AFFO-related capital expenditures incurred in the quarter totaled $14.7 million, which is an increase of $7.1 million over last quarter and an increase of $6.7 million over the same quarter last year. For 2026, we continue to expect AFFO-related capital expenditures to come in at approximately $40 million, unchanged from our estimates previously provided. In the second quarter, same property NOI delivered very strong growth, increasing 8.3% on a constant currency basis and up 9.1%, including the impact of foreign exchange. The continued momentum in same property NOI growth is a reflection of the successful execution on leasing, achievement on leasing spreads, and the 220 basis point improvement in occupancy year over year. For 2026, we expect continued strong organic growth from our same property portfolio and have positively narrowed the range of our outlook for the four-quarter average constant currency same property NOI growth to a range of 6% to 6.5%. G&A for the quarter was $18.2 million, which is $8.2 million higher than the same quarter last year and $6.5 million higher than Q1. The sequential increase was primarily driven by 4.6 million higher fair value adjustments on non-cash compensation liabilities, which does not impact Grants FFO and AFFO metrics, and the non-recurring HSD expense recorded this quarter of 1.7 million. The remainder of the variance reflects normal quarterly fluctuations across other G&A expense categories. For 2026, we continue to expect G&A expenses that impact FFO and ASFO to average approximately $11.5 million per quarter, or roughly 7% of revenues. Interest expense and interest income both decreased modestly in the first quarter, down $0.8 million and $0.2 million respectively, compared to Q1. The reduction in interest expense is due to the full repayment of the September 26 term loan back in February of 26, and the reduction in the credit facility balance over the course of the quarter using proceeds from the March disposition and the issuances under the Granite's ATM program. These positive impacts were partially offset by the impact of a stronger Euro on Granite's foreign denominated debt and the non-recurring HSC interest and penalties recognized at 0.9 million as previously mentioned. The reduction in interest income relates to a lower average cash balance in the quarter as compared to the prior quarter. Granite's weighted average cost of debt is currently 2.62%, and the weighted average debt term to maturity is 2.9 years. With Granite's next debt to maturity not until December, we continue to expect interest expense to remain stable over the next couple of quarters at around $23.5 million per quarter, assuming no new transactions. Q2 26 current income tax was $3.2 million, up $0.2 million year-over-year, and $0.1 million from Q1. The year-over-year increase is primarily due to an increase in rental revenues in Europe and the United Kingdom and the impact of a stronger Euro on Granite's primarily Euro-denominated tax expenses, the effects of which were partially offset by the recognition of a withholding tax reserve reversal in Germany in the prior year. For 2026, we continue to expect current income tax expense to remain at approximately 3.2 to 3.3 million per quarter. Looking out to our 26 estimates, Granite is updating its guidance to positively narrow the ranges. Our current outlook reflects lease renewals and new leasing, dispositions and financing transactions completed year to date. In addition, our outlook assumes the disposition of the assets currently held for sale, which at Q3 were approximately $66 million, and new acquisitions totaling $195 million to be executed by early Q4. and these will be financed by net proceeds from the dispositions, draws on the credit facility and cash on hand. We are not assuming any further ATM issuances in the forecast at this time. The outlook assumes no material changes to its assumptions regarding the remaining leasing activity for the year, operations and capital expenditures. We expect FFO per unit to be in the range of 630 to 640, approximately 7% to 8% growth over 2025. For AFFO per unit, we expect a range of 545 to 555, reflecting growth of approximately 4% to 6% year over year. As previously noted, AFFO related capital expenditures are forecasted at 40 million for 26 compared to 34 million incurred in 25. Our guidance has been updated for foreign exchange rate assumptions for the US dollar and British pound for the second half forecast period. We will continue to provide updates on our guidance each quarter as appropriate based on leasing and transaction activity executed and the market conditions at that time. Investment properties totaled $9.6 billion at the end of the quarter, a modest increase from the prior quarter and excludes the $66.2 million related to the two assets held for sale. During the quarter, movements in investment properties reflected the foreign exchange gains of $112.6 million driven by the strengthening of the US dollar and the Euro against the Canadian dollar over the period by 1.8% and 0.9% respectively. Additionally, capital and leasing expenditures including development spend at the Houston construction site, maintenance capital projects and leasing activity related costs increased value by 32.9 million. These positive impacts were partially offset by the net fair value losses recorded in the quarter of 20.6 million on our IPP portfolio, driven by expansion in the discount in terminal capitalization rates at select European properties due to market conditions and decreases in fair market rents at select properties in Canada, partially offset by increases in fair market rents at select properties in the United States. Our overall weighted average cap rate of 5.7% on in-place NOI increased 10 basis points relative to Q1 and has increased 20 basis points since the same quarter last year. With respect to the assets held for sale of $66.2 million, the trust recorded a net fair value gain of $5.2 million in the quarter on these assets. And on July 20th, we completed the disposition of the 41.2 square 41.2 thousand square foot property located in Canada for gross sale price of $16.5 million. The remaining asset for sale located in the U.S. is expected to be sold in the third quarter of 2026. Granite's balance sheet remains strong and its debt metrics have shown notable strengthening from last quarter. Net leverage ratio at the end of the quarter was 32% and improvement from 33% at Q1 and 35% at the end of 2025. Debt to EBITDA was 6.6 times, also improved from 6.8 times in Q1 and 7.3 times at the end of 2025. The continued improvement in Granite's debt metrics is reflective of a reduction in debt using the proceeds from issuance of equity under Granite's ATM program and free cash flow from operations, together with the quarterly growth in Granite's EBITDA rooted in same property NOI growth achieved in each of the trailing four quarters. Ratios continue to trend as targeted by management providing financial flexibility for future growth. Year to date, you will see that Granite issued 1.4 million units under its ATM program at an average price of $96.61 for gross proceeds of approximately $138.4 million, excluding issuance costs. Our liquidity is currently $1.2 billion, representing cash on hand of about $165 million and a nearly completely undrawn operating line of $997 million. As of today, Granite has no borrowings under the credit facility and only $2.8 million in letters of credit outstanding. We expect to utilize its existing liquidity and free cash flow from operations to fund the assumed acquisitions net of dispositions throughout the remainder of 26. And now I'll turn over the call to Kevin.

Thanks, Theresa, and welcome everyone to our call. Q2 results, as Theresa mentioned, were in line with management's expectations. with normalized FFO per unit at $1.58 excluding onetime items, primarily as a result of higher same-property NOI, partially offset by non-recurring G&A items, as Theresa mentioned, an increase of just over 12% year-over-year on a cost and currency basis. NOI in the quarter was also negatively impacted by the disposition of a large asset in Atlanta late in the first quarter. To begin, as you can see, turnover was lower in the second quarter as the team renewed roughly 250,000 square feet of leases and closed on a new lease at one of our national developments. A rather muted increase in the quarter was impacted by a month-to-month extension of an existing tenant at expiring rent while finalizing a fixed-term lease on expanded space within the building at a higher rental rate. The team has since renewed and expanded the tenant and the increase will be recorded in the third quarter. To date, we have so far renewed roughly 65% of our 2026 expiry by GLA and an average rent increase of 21%. And we continue to expect to achieve an average increase of between 20 to 25% on our overall expiry for the year, which is in line with our average increase for 2024. As you can see, same property NOI in the quarter was led by the GTA and the U.S. portfolios at 20% and 9% respectively. And while leasing activity across those smaller vacancies was slower over the first half, activity has increased and the team is currently negotiating new leases on over 500,000 square feet of vacant space. Staying on leasing, a few comments on relevant market depth. Based on published research, leasing momentum remains positive across the bulk of our sector, with vacancy stabilizing or declining broadly across our markets, led by vacancy declines in Indianapolis, Dallas-Fort Worth, and Houston. Net absorption was positive across our entire portfolio in the second quarter, and our portfolio markets once again represented the top three markets and eight of the top ten in the U.S. led by Dallas, Fort Worth, New Jersey and Atlanta at 9.96 and 5.9 million square feet respectively. Asking rents rose once again across the majority of our markets led again by Dallas, Fort Worth, Miami and Columbus with year over year growth ranging from just under 10% to 14.5%. Our weakest markets were once again the GTA and New Jersey with asking rents down just under 5% year over year. In the UK, net absorption topped 12 million square feet in the second quarter, a roughly 40% increase over the first quarter, leading to an 8% drop in availability, representing the largest quarter-over-quarter decrease in vacancies since the fourth quarter of 2021, and supporting just under 4% year-over-year growth in asking rents for Class A large and mid-bay space. Data for the second quarter in the Netherlands is not yet available. The net absorption was strong in the first quarter at roughly 9 million square feet, or up 10% year over year. Net absorption in Germany was very strong in the first half of this year, topping 35 million square feet, an increase of 23% year over year, with space over 200,000 square feet, representing the strongest segment to date. Market rate growth in the Netherlands was more or less flat year over year, And Germany posted an increase of just under 5%. So in summary, I would characterize the tone in the leasing market as constructive, with an element of cost sensitivity to be sure, and a continued bias in occupier demand for larger, modern, and well-located space, and lower cost inland markets. The positive impact of the near and on-shoring of production continues to be seen. with demand related to manufacturing activity outpacing 3PL demand in the US for the first time in modern history, led by markets in California, Texas, the Midwest, and the Southeast. Additionally, data center related demand for logistics space continues to strengthen, led by leasing activity in Texas, Arizona, and parts of the Midwest. This increase in manufacturing and data center activity is expected to drive further demand for logistics as materials and equipment continue to be positioned closer to production hubs and consumers. I'll comment briefly on the changes to our IFRS values, which were effectively flagged quarter over quarter before accounting for the positive impact from a higher US dollar in Euro versus CAD. As you can see from the materials, we also closed on the sale of a small asset in the GTA and the team achieved a sale price well above our unaffected IFRS value. Further, assuming we successfully conclude the disposition of the final remaining asset held for sale, we will have disposed of over $210 million of non-strategic assets this year at a normalized yield of 5.1%, enabling us to redeploy the proceeds accretively on strategic acquisitions in our target market. Staying on strategy and capital allocation, as mentioned in our press release, we have roughly $195 million in new acquisitions pending in our target markets in the US and Europe. And as an update on our development program, our Build-A-Suit project in Houston continues to progress on budget and schedule for completion in the fourth quarter. Also as disclosed, We have issued roughly 1.4 million units to date for net proceeds of $138 million, which of course will be used to fund the aforementioned acquisitions. As a general comment on the investment market, cap rates appear to be holding, for the most part, across our portfolio markets. Bond yields have risen in recent weeks, but it appears that global institutional capital continues to increasingly favor the logistics sector based on strengthening fundamentals and sectoral tailings. with first-half investment volumes up roughly 50% year-over-year in the U.S. and between 10% to 30% in the U.K. and Western Europe, and as evidenced by recent large-scale M&A activity involving logistics reefs in the U.S., U.K., and continental Europe. Further, the data suggests that the average price in the U.S. is up almost 7.5% year-over-year, reaching an all-time high of $160 per square foot, A strong activity in Dallas, LA, Houston, Atlanta, Chicago, and Southern Florida. Investment volume in Germany topped 2 billion euros in the first half, which is up 10% year over year. And yields for Class A products appear to be holding steady at 4.5% to 5%. In summary, I would characterize the quarter as positive, led by continued strong operating results with industry-leading occupancy. and selective and effective execution of our capital allocation strategy, with full year guidance tightened and raised slightly on stronger than expected NOI growth. This is notably inclusive of over $200 million in dispositions and the issuance of almost $140 million in equity. As three to mention, I would also like to highlight that we have increased FFO per unit year to date by almost 10% year over year while reducing debt to EBITDA from 7.3 times to 6.6 times. Looking forward, leasing fundamentals in our portfolio markets for modern, well-located logistics properties remain positive. Consistent with my comments from the first quarter, while energy prices and instability may negatively impact the macro environment and occupy our decision-making to be sure, the data continues to suggest that trade policy shifts and ongoing geopolitical uncertainty appear to support the continued expansion of inland supply chains. And for the U.S. specifically, this trend is particularly benefiting markets in the Midwest, Texas, and the Southeast, while negatively impacting demand in higher cost coastal markets. On the capital allocation front, the combination of the disposition and ATM program activity have enabled us to effectively and efficiently fund the pending acquisitions while maintaining the strength of our balance sheet. In closing, we are well-positioned to once again deliver strong financial results and execute on all of our corporate objectives for the year, and our focus remains on active asset management and effective capital allocation, which we believe will deliver attractive income and net asset value growth for Uniholders. And on that, operator, I'll open up the line for questions.