Choice Properties Real Estate Investment Trust

the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one a second time. Thank you. And I would now like to turn the conference over to Erin Johnson, Senior Vice President of Finance. You may begin.

Thank you. Good morning and welcome to the Choice Properties Q1 2024 conference call. I'm joined here this morning by Rail Diamond President and Chief Executive Officer, Mario Barifato, Chief Financial Officer, and Nile Collins, Chief Operating Officer. RIO will start the call today by providing a brief recap of our first quarter performance and provide an update on our transaction and development activity in the quarter. Nile will discuss our operational results, followed by Mario, who will conclude the call with a review of our financial results before we open the lines for Q&A. Before we begin today's call, I would like to remind you that by discussing our financial and operating performance and in responding to your questions, we may make forward-looking statements, including statements regarding choice properties, objectives, strategies to achieve those objectives, as well as statements with respect to management's beliefs, plans, estimates, intentions, outlook, and similar statements concerning anticipated future events, results, circumstances, performance, or exceptions that are not historical facts. These statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from the conclusions in these forward-looking statements. Additional information on the material risks that can impact our financial results and estimates and the assumptions that were made in applying and making these statements can be found in the recently filed Q1 2024 Financial Statements and Management Discussion and Analysis, which are available on our website and on CDAR. And with that, I will turn the call over to Rael.

Thank you, Erin. Good morning, everyone, and thank you for joining us today. Overall, we had a very positive start to the year. Our portfolio maintained near full occupancy at 97.9%. We achieved solid same-asset cash NLR growth of 2.4%, impressive renewal spreads of 22.9%, and strong FFO growth of 6.1 percent. Last quarter, we discussed the need for a strong balance sheet as we continue to face significantly high borrowing costs and overall uncertainty due to market volatility and recession . While there are a lot of market participants that are hoping that interest rates will abate, this has not come to fruition. The 10-year bond is 18 basis points higher than it was when we released results in February and 65 basis points higher than the start of 2024. We remain committed to our prudent approach to financial management and believe that our industry-leading balance sheet combined with the strong underlying fundamentals in each of our asset classes will continue to be a real differentiator in this environment. We will weather this volatility better than most. This past quarter, our business once again demonstrated resilience, and our team remained focused on executing our strategic framework. Despite continued interest rate pressures, the investment market is still active on a local level for quality assets with strong fundamentals. During the first quarter, we completed approximately 61 million in total real estate transactions, including approximately 38 million of acquisitions and 23 million of dispositions. We continued to buy high-quality assets from Loblaw, and during the quarter, we acquired a retail property located at Bathurst in St. Clair, Toronto, for a purchase price of approximately $38 million, with a lease term of 15 years and annual rent increases of 2.25%. This property is a high-performing Loblaw store, turning approximately 75,000 feet, and is a great addition to our portfolio. The asset is exceptionally well located in the heart of Midtown Toronto and benefits from current and future densification in the surrounding node as well as direct access to public transit. This transaction is another example of the benefits of our relationship with Love Law as retail assets of this quality rarely come to market. In terms of dispositions, we sold an industrial property located at 379 Arenda Road in Brampton for approximately $16 million and a retail property located in Edmonton for approximately $7 million. We advanced our development profit on the Q1, completing approximately $75 million of development projects at a weighted average yield of 5.1%. In addition to a retail development in Georgetown, Ontario, which consisted of an expansion of an existing lease to a national retailer with a cost of 8% and a yield of 8.8%, we also transferred a residential development at Mount Pleasant Village in Brampton, Ontario, in which we own a 50% interest. This development offers a unique rental community in the heart of Brampton, consisting of 302 residential units. The building is currently 58% leased and is expected to stabilize over the next 12 months. In addition to developing the rental building to a stabilized yield of 4.7%, we have developed 142 condominium units, which are expected to generate $7 million a share of total condominium profits, of which $6.6 million has been recognized to date. There are only 12 units remaining, which are expected to close in the second quarter. As we look at our development accessibility for the remainder of 2024, our teams are on track to complete the first phase of our industrial development in Caledon, Ontario, in addition to delivering an additional 120,000 square feet of retail space. Before I hand it over to Niall, I want to take a minute to acknowledge the release of our 2023 Environmental, Social, and Governance Report. This year's report summarizes many of CHOICE's successes over the last year and truly showcases our commitment to ESG and the great work being done by teams across the business. The report can be found in the sustainability section of our website, and I encourage you to take a read. With that, I'll pass it over to Niall to provide more color on our operational results. As you all hear, our operating performance was strong, and across our portfolio, we observed strong tenant demand from our necessity-based properties. Additionally, our industrial portfolio experienced significant rental rate increases on lease renewals. Niall?

Thank you, Rayl, and good morning, everyone. As Rayl mentioned, we delivered strong operation results for the quarter. We continue to see strong demand across our three asset classes and remain at near full occupancy, ending the quarter at 97.9%, a slight decrease of 10 basis points compared to the last quarter. Overall, during the quarter, we had approximately 700,000 square feet of lease expiries with 71% retention and renewals of a half a million square feet at average rents negative absorption of 71,000 square feet, which was mainly driven by two industrial property vacancies in Alberta and Ontario. Occupancy in our necessity-based retail portfolio remains stable at 97.7% with retention of 84%. During the quarter, we had 399,000 square feet of expiries and completed 335,000 square feet of lease renewals with rent spreads of 10.1% above expiry. Our Q1 renewals concluded strong rental growth in certain categories, such as fashion, large-format fitness, value retailers, and certain beer and liquor locations. In the quarter, we also completed 31,000 square feet of new retail AC. Vacancies in the quarter from underperforming tenants have been replaced with stronger covenant tenants, focusing on grocery, pharmacy, banks, and stronger restaurant brands. Retail demand for our space continues to be strong. For example, Tenants are seeking out forward-looking deals to get ahead of the market or quickly taking space from break-having tenants. With this context, available retail space is becoming increasingly hard to find and reinforces our competitive advantage that choices retail is very well located, well anchored, has desirable co-tenancies, and is of superior quality. While demand is strong, the current economic environment is putting pressure on certain tenant categories. These at-risk tenants represent a very small part of our portfolio, significant impact on our 2024 performance. For the remainder of 2024, we are confident in our lease renewal pipeline and expect to see rent renewal threads in line with our Q1 results. In addition to our leasing activity in Q1, we generated $2.5 million in lease surrender revenue related to a partial surrender of a Loblaws grocery store in Markham, Ontario. The grocery store underwent a size optimization surrendered space was backfilled by a new tenant at higher rental rates. This is our second store optimization with Loblaws, and another example of how our team continues to optimize the portfolio and collaborate with Loblaw. Our industrial portfolio occupancy decreased slightly by 20 bits to 98.8%. We had 295,000 square feet of lease expires in the quarter and renewed 158,000 square feet, with strong rent renewal spreads averaging The lower tenant retention was primarily driven by known vacancies, including an industrial warehouse property in Ontario and distribution properties in Alberta. We also completed 89,000 square feet of new leasing with 41,000 square feet in Ontario and 48,000 square feet in the Western portfolio. Looking at the industrial asset class, our teams are seeing an overall leveling off of the market with different impacts across regions and asset types. mainly in large bay assets. Rents continue to trend upwards on small to medium bay sizes. In terms of our portfolio, we still have a significant embedded rental growth with an average in-place rental rate of $9.16. We expect industrial occupancy to remain stable for the remainder of 2024. We need to achieve strong rental rate growth on our renewals, particularly in Ontario and the Atlantic regions. I'll now pass it over to Mario to discuss our financial performance.

Thank you, Niall, and good morning, everyone. We're pleased with our financial performance in the first quarter of 2024. Our business remains strong operationally, and we continue to deliver high occupancy and strong same-asset NOI and SFO growth. Our reported funds from operations for the first quarter was 187.2 million, or 25.9 cents per unit. In the quarter, we had net one-time items of 4.5 million, including 2.5 million of lease termination income, related to the right-sizing of the Loblaw store in Markham that Niall mentioned. An income of $2 million related to our Mount Pleasant Village development, where we sold our ownership interest in 36 condominium units. On a per-unit diluted basis, our FFO for the first quarter was $0.259, an increase of approximately 6.1% from the first quarter of 2023. This was driven by strong C-method and a wide growth, highly surrender revenue, condo gains, and higher interest income. partially upset by higher interest expense. Leasing activity contributed to overall same-asset cash-in-a-why growth of 5.6 million, or 2.4%, compared to the first quarter of 2023. Retail same-asset cash-in-a-why increased by 4.6 million, or 2.5%. The increase was primarily driven by higher base rent on renewals, new leasing, and contractual rent steps, and higher capital and operating recoveries. industrial same-asset cash NOI increased by approximately $1.1 million, or 2.8%. This increase was primarily due to higher rental rates and higher capital recoveries. The year-over-year growth was viewed at this quarter due to lower volume and rent-free fixed-frame periods. For the remainder of the year, we should see industrial same-asset cash NOI revert back to the high single-digit growth it experienced last year. Now, turning to our balance sheet, our IFRS NAV for the quarter was $1,300, an increase of $14.4 million over the last quarter. Our NAS growth was driven by a contribution of $45.7 million from operations, which was partially upset by fair value losses of $3.6 million on our investment properties and $29.6 million in our investment in allied properties, where we're required under IFRS to mark the market this investment to its trading price at each period end. Our fair value loss on investment properties in the quarter is largely driven by a 20 basis point cap rate expansion in our industrial portfolio. resulting in overall portfolio cap rate expansion of four basis points. In our retail portfolio, we reported a fair value gain related to cash flow growth and cap rate adjustments. In our industrial portfolio, we recorded a fair value loss primarily due to cap rate expansion on certain properties with longer-term leases. This was partially offset by gains from cash flow growth as leases roll over to market levels. In our mixed use in residential portfolio, we recorded a gain in the quarter driven by cash flow growth on our recently completed element residential property that continues to lease up, as well as rental rate growth in the remainder of our residential portfolio. Turning to our financing activities, once again, we ended the quarter in solid financial position with strong debt metrics and ample liquidity. We repaid our $200 million series need to venture at 4.293% upon maturity with funds from the repayment of the allied promissory note during the fourth quarter of 2023. We further lowered our long-term debt balance by repaying $50 million of mortgages upon maturity in the first quarter. Our debt to EBITDA ratio net of cash was 6.9 times, and we have $1.5 billion available on our facility. This is further supported by approximately $12.9 billion of unencumbered properties. So overall, our business is strong. With the strength of our balance sheet and the stability of our portfolio, we are well positioned to deliver on our 2024 outlook. And with that, Rayl, now Erin and I will be glad to answer your questions.

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, press star one a second time. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, it is star one if you would like to ask a question and join the queue. And we will take our first question from Mark Rothschild with Canaccord. Your line is open.

Thanks, Dan. Good morning. Ray, you started off talking about how rates don't appear to be coming down or haven't come down like some expected. Are you seeing this impact at all, properties being offered for sale on the market, transactions, and maybe the values as well? How does this lead to the way people were looking at cap rates or yields on properties?

Look, I think, Mark, firstly, I think what we've been seeing over the last call it 18 months, is more and more groups are, if we go back 18 months ago, groups were saying, look, I'm quite comfortable with negative leverage because this is all going to reverse itself. Today, people need to see either positive leverage or the ability to see positive leverage in a very, very short period of time. So they're not going to wait, you know, call it three to five years with a negative carry. And the asset classes that, you know, are getting, you know, impact that would be called the lower cap rate assets, obviously, first. And then the second thing is, you know, financing availability. So, groups are definitely more cautious as they are looking at investments to make sure that they have the capital available and can get bank financing. So, you've seen it clearly a slowdown in the volume of transactions. So we think it has impacted, and we've adjusted our cap rates over the last 18 months accordingly as we've seen market transactions.

Okay, great. Maybe just connected on that point, you have a large bank of development projects, some that are longer term, very large projects. Does this maybe push some of them out even further or just take more off the table for what you would start in the near term?

Yeah, look, so right now we focus very much so on commercial, and we're trying to hopefully get residential commenced. You know, our real focus at the moment on development is more on the industrial side. So for us, we don't believe there is a change. But look, we're going to have to monitor where the markets are before we commence any new construction.

Okay, great. Maybe just one last question regarding guidance. Is there any expectation for the industrial space that was vacant to be leased during the year in getting to your guidance, or is it more just based on rent growth that you expect to see?

It's a combination of both, Mark. Yeah, we do expect there to be strong rental rate growth, and we do expect the vacancy in Q1 to be leased up later in the year. That's correct, Mario.

Okay, great. Thanks so much.

we will take our next question from mike marquitas with bmo capital markets your line is open thank you operator good morning everybody well you talked about um you know just the dynamics you're seeing in the market on the back of mark rothschild's question um i think last quarter you talked about maybe being optimistic i don't know if you had actually seen evidence of this but optimistic that perhaps industrial land that was transacted at a peak pricing back in 21 or maybe early 2022 that maybe just given the slowdown in the market, particularly on the big box side, that there might be some opportunities to shake something loose there. Is that still the case, or would that be a sufficient comment in terms of reasons for optimism on that side for your industrial portfolio?

Yeah, look, I think we're optimistic on two fronts. So firstly, groups that are well capitalized should be able to hopefully pick up great quality assets that otherwise may not trade if, you know, groups with weaker balance sheets can't hold on to those assets. And you clearly are seeing, you know, I don't call it distress, but you clearly are seeing cracks on, you know, residential land and definitely on the industrial land. The second reason we are optimistic is because we have a very low land cost, and we never underwrote with significant rental rate increases continuing. So for us, As you could saw the last quarter, I think we announced two quarters ago, we announced another building on our Caledon project. And, you know, if rents are at that level, even slightly below that level, we can continue to go. Whereas those groups, who bought land at, you know, $3 million an acre that was unserviced, you know, they need low $20 rents to make the economic pencil out. So I think from our point of view, we just think we're well positioned. A, we can be opportunistic if they're a great product to buy, and B, we can continue to build out our development pipeline just given our land cost base. And we think other groups are going to be stuck. So there's lots of, and maybe Niall can comment, you know, there's lots of pending supply coming on the industrial side. We just don't think all of it's going to come to fruition just given some of the group's land cost.

We're seeing a lot of asking rents. They're, you know, north of 20, as you mentioned, and construction costs haven't come down quick enough. So their performance aren't lining up. So we're in a very good position.

Got it. Thanks for the color. Small one here, a little granular, but it did catch my eye. Just on the sale of the property, the industrial property on Arenda, it looks like the basis is pretty low relative to what we've seen on different comps. So is there anything specific to that asset that would yield the one, I think it was 146 per square foot on the sale price?

Yeah, look, it's a low price per foot, but what the color is that essentially the existing tenant has very low rents for another 20 years. So you couldn't really capture that market rent growth. And then also the building configuration is not, it used to be an old Western foods bakery. So it's not a typical industrial building. So from our point of view, very low growth, very tight cap rate, and we can redeploy their capital elsewhere.

Got it. Okay. And this is a bit of a Hail Mary from my side, but I'll give it a shot anyways. I guess recently there's been a little bit of excitement about a potential or at least the government's desire to get a new international grocer into the fold here in Canada. I'm just curious on your thoughts on that. A, given the retail real estate situation in Canada, if that's even possible. And if it was, would that be a good or bad thing for choice properties?

Look, I think we can't comment on, you know, other grocers coming to the country, obviously. But, you know, we are open to lease space to groups that, you know, are willing to lease space from us.

Okay, that's fair. Thanks very much. I'll turn it back.

And we will take our next question from Lauren Calmar with Desjardins. Your line is open.

Thanks. Good morning, everybody. Just on the Loblaws side, with the recent announcements to the immigration policies, based on your communication with them, has that impacted their expansion plans, or were they never kind of assuming a 3% population growth in perpetuity?

Look, recently they announced a desire to keep expanding their footprint

um and based on conversations with them we we continue to see them needing more more space and um you know in full space okay and then um on the acquisition you guys did at uh bathurst and st clair i was just wondering if you could at least give us maybe an idea of the cap rate just to get sort of a uh you know a range on you know where these types of assets are trading and in this current market?

Look, it's a unique transaction given, obviously, it's a unique transaction given the asset both has the income-producing component and then long-term development potential, particularly where the Joe Fresh is. It's approximately a six cap. But we do share in the development upside with Loblaw when and if it's intensified. So it's a slightly unique transaction from that point of view.

Okay. And then just to kind of a ticky tacky one, I think it was on Building H at Caledon. I think the leased area came down a little bit. It was 100% last quarter and now down to about 64, 65. Can you give any color on what happened there?

Yes, essentially, and I may get the numbers slightly wrong, but the quality of the building is 900,000 feet in total. The tenants are initially taking 600,000 feet with an option to expand to the 900,000 feet. We're only building the 600,000 feet initially, so the part that we're building is 100% leased, but if you look at the entire footprint of the building, that's that leased percentage. When they exercise the expansion right, we'll build the remaining footage.

Oh, okay. I got it. So you're still .

I think last quarter they included the option and this quarter we excluded the option.

Okay. Got it. And then just the last one from me. Just wondering if you guys have any updated thoughts on what you're going to do with the allied properties units.

Okay. Our view hasn't changed. We'll continue to be patient and, you know, monitor. You know, monitor the investment and then monetize it when we need the capital.

Okay. Thanks so much. That's all from me.

And we will take our next question from Himanshu Gupta with Scotiabank. Your line is open.

Thank you and good morning. So just on the seems to NOI industrial, a bit light in Q1, but you expect to, you know, get back to high single digit for the rest of the year. Are you assuming any further occupancy slippage for the rest of the year? And maybe, you know, can you elaborate on the industrial leasing environment in general?

So, Himanshu, yeah. So, I mean, Q1 clearly was just based on low volumes and some extreme periods. So, yeah, right now, we aren't expecting any slippage. We have some leases that are coming to you later in the year. So, you will see it get back to a normal run rate. Now,

And just on the pipeline, we're about a half a million square feet to do for the balance of the year. And two transactions represented by 50% of that that are well underway and under negotiation. And we feel good about them.

Got it. Thank you. And maybe, you know, like if I look at the broker reports, you know, absorption was a lot weaker in Q1 across Canada. Are you also seeing that, you know, when you speak to the tenants? And are you seeing any subleasing activity as well in the industrial land now?

Look, vacancies are still over a 10-year timeline, still very low, and there's still a lot of demand driving, like for good assets in good locations. So we're not seeing any fall-off. Our rent spreads are actually, we're hoping to do even a little better than Q1. So for our assets, we feel confident that we're going to be able to maintain those spreads and the demand for those assets is strong.

And we don't have any significant sublease activity in our portfolio.

Okay. Okay. Thank you. Uh, and maybe just on the balance sheet, uh, Mario, I think $5, $15 million unsecured adventure coming due in September, I think. So any thoughts, you know, where the financing rate, uh, today, I know, you know, have been quite volatile. Yeah.

Um, so yeah, it's, it's come to do September. Yeah. The rates have been volatile. Um, what we've been focused on lately is, um, just other sorts of the capital. And so right now, our spread for unsecured relative to others is pretty low. It's about 190 basis points. And we've been doing other financing on the mortgage side, the commercial mortgage side. We've actually been able to get financing at spreads that are either as good as the unsecured or even tighter. And so that's been our focus now, finding patches of financing that are better than the current benchmark for the unsecured. As far as the 550 goes, again, we have time, and we'll go to market later in the year when the time is right. But right now, there's a bit too much volatility, so it's not our first priority.

Got it. And is the unsecured rate still tighter than the secured rate? Just clarifying that.

It depends. It depends. I mean, the unsecured rate, again, with our credit rating, our pricing, it's tighter relative to others.

it's where we can take advantage of it but um but it just depends on the lender okay okay thank you uh last question is on the retail using environment i mean last time we spoke it was very very strong is it still the same or any cracks or any changes in any major categories overall our retail are

Necessity-based retail is very strong. I think it's the discretionary goods where we're seeing weakness, but overall our tenants are eager. We're not seeing any challenges, and we don't hear any worries from the candidate. Nothing material.

Anything on the watch list? Any tenants you are watching or something in particular?

It's a very, very small proportion of our portfolio.

Okay, fair enough. Maybe I'll turn it back. Thank you, guys. Thank you.

And we will take our next question from Pommy Burr with RBC Capital Markets. Your line is open.

Thanks. Good morning. Just coming back to the St. Clair retail acquisition, I think you mentioned a 2.25% rent step in that lease term. Was that unique, again, to that specific site, or is this maybe – something we may see more of on some of the Loblaw leases.

Yeah, over the last year, we've generally been getting more than 1.5%. But, I mean, we just, at the end of the day, we work with Loblaw to figure out what's the best starting rent, what value makes sense, what's the right growth rate. So, I would say it's a little more bespoke on each transaction, but generally, we'll be getting more than 1.5%. on vendings over the last 12 months or so.

Got it. Coming back to that Markham store rightsizing again, can you just talk about how much space was given up there and that you released? And then, you know, are there other parts of the portfolio where we might see some more of this?

Yeah, so firstly, from a macro point of view, we've been working with Loblaw where our leasing team has strong tenant demand for a site, and Loblaw's in the process of potentially investing capital to refresh their store, and it's a win-win. They can refresh their store, and we can find, you know, an adjacent tenant. which is complementary to Loblaw and pays us higher rent. In the Markham one in particular, it was about 35,000 feet, and the rents were about 7% higher than what Loblaw was paying. And it's a fitness user, good fitness user.

Got it. And then maybe just from a, I want to actually just come back to the industrial commentary, and maybe just thinking again about the development pipeline in Caledon and East Gwillimbury. Can you maybe just talk about the appetite for additional development there? What are you seeing? Any imbalance? Any change?

We are feeling inquiries and continuing to respond to RFP. So there is activity given the location. The size varies and they're strong user groups. So yeah, we're getting inquiries.

But I think it's fair to say more inquiries in Caledon. East Gwillimbury, we're currently using the land, you know, to complete some of the work for Love Law, so it's not really available yet to lease. We'll be starting to market it shortly.

And then just in terms of the broader economic picture and, you know, I guess the expectation at some point we may see some rate cuts, is that influencing some of the tenant decision-making, any timelines in industrial in terms of leasing? I'm just curious if there's any changes on that side.

Look, I think deals are taking a little bit longer. People are pausing and looking at the economy overall. But at the same time, a lot of the RFPs we're seeing are consolidations from older space looking for newer space with different efficiencies and objectives around that. So it's taking a little longer, but the capital goals, I feel, are still the same for these users.

Thanks for that. Okay, last one for me. Just from a transaction standpoint, can you maybe talk about what's in the pipeline for acquisitions at this stage and then from a disposition standpoint as well?

Yes, so from an acquisition point of view, again, going back about a year ago, Love Law announced their plan to disclose of assets over, call it a three to five-year period. So there are some vending assets that we continue to look at that are very high-quality assets similar quality to what we just purchased this past quarter. And then from a dispositions point of view, you know, we always sell, we've always been active on the capital recycling point of view. I think over the last five years or so, six years or so, we've done about four and a half, you know, billion of transactions, both buying and selling. And we're just selling a few smaller assets, generally, you know, call it more power sensor type assets. But, you know, we would transact in our minds at a slight premium to our book value. And, you know, they're not bad assets. They're good assets. They just have a lower growth profile than the rest of our portfolio.

And these are major market assets or in terms of the dispositions or, you know, kind of scattered?

A few of them are major markets, but the rest are scattered.

Thanks very much. I'll turn it back.

And we will take our next question from Sam Damiani with TD Securities. Your line is open.

Thank you. I think most of my questions have been answered. But just going back to the same property, NOI growth, on the retail portfolio, the pace did tick down a little bit in Q1. I'm just wondering if that is indicative of a trend you're expecting for the rest of 2024. And just on that point, you kept your guidance intact, but are you biased to a little bit sort of lower point within that guidance range given the Q1 print?

Yeah, so, so stand for the retail, I mean, it still performs well, it's just coming off a high base and that's why just percentage wise. It's lower than we've seen the last year, but it's still pretty strong and, you know, remember our targets always been 1 and a half to 2% for retail. So it is performing. Well, the core business right now, if you look at the results in Q1, it takes us to the lower end of our. And as we go through the rest of the year, as we see potentially upside, we can get to the higher range. But right now, the core business is set up to hit the low range without a lot of risk.

Okay, that's helpful. And then just on the industrial, it's been talked about a bit, but is Choice more hesitant to start the next project on spec, maybe a little bit more interested in waiting for a pre-leasing before starting construction? How are you thinking about that? And is there a view to expanding the industrial development strategy into other markets across Canada?

Yeah, look, first down from a market point of view, we've actually been building in Alberta. We built in Vancouver last year and in the GTA. So we will continue to build in each of the markets we are active in. You know, there's actually a lot of work. The main side is calendar. There's a lot of work going on, which is, you know, finishing the lot more deliverables, you know, building the building for that national tenant, which we spoke about earlier, and then all the site work and the internal road work. So there's a lot of work going on. The earliest we could actually start vertical construction on a spec building would be, call it late Q1 or Q2 next year. And we'll have to assess where things stand. But right now, as we spoke about earlier, we just feel we're in a very good competitive point relative to the other options in the market. and we expect to continue to build so we can attract tenants on our sides.

Okay, that's helpful. And just back to Lauren's question about the, I guess, the tenant that has an option for an extra 300,000 square feet. Was the change in disclosure in any way linked to, I guess, a little less probability in your minds that the option would be exercised?

No, we do believe the option will be exercised, but the reality is that it's not leased right now. And, you know, we just clarify the option. Gotcha.

Okay. That's helpful. I'll turn it back. Thank you.

We will take our next question from Somaya Sayed with CIBC. Your line is open.

Thanks. Good morning. So staying with the industrial theme, sounds like things are going well and holding in. In the disclosures, there was a bit of commentary around turnover and some free rent. Was that specific to a lease? And has there been a change in the average free rent period associated with your industrial leasing?

I wouldn't say it's anything out of the ordinary. It's typical for the markets we were operating in, but it's more just timing.

Okay, great. And then on the Bathurst and St. Clair acquisition, just wondering where that falls on your development ladder, and if there's near-term plans for rezoning and any expectations of density at the site you would have at this point in time?

At the moment, we have no plans to push ahead with a development density. There is some activity locally, and we're going to keep an eye on it and see how the market performs. But it's not an immediate-term development project.

Okay. And lastly, just a modeling question looking at the capitalized interest came down a bit. Is it fair enough to use the Q1 number as a run rate going forward?

Yeah, you can use it, Samaya, but I would increase it a bit. I can follow up with you offline. It came down because of projects coming online late last year and in Q1, but as we continue to service Caledon, it will come back up a little bit.

Okay, great. That's all I had. Thank you.

And as a reminder, if you would like to ask a question, press star 1. And there are no further questions at this time, so I will now turn the conference back over to Mr. Ray L. Diamond for closing remarks.

Thank you, Abby, and thank you, everyone, for joining us this morning. Our annual general meeting will follow at 11 o'clock this morning, and we hope you can join us. Thank you.

Ladies and gentlemen, this concludes today's call and we thank you for your participation. You may now disconnect.