Granite Real Estate Investment Trust (GRP.U) 2024 Q1 法說會逐字稿

Good morning. My name is Madison, and I will be your conference operator today. At this time, I would like to welcome everyone to Granite REIT's first quarter 2024 results conference call. (Operator Instructions) Speaking to you on this call this morning is Kevan Gorrie, President and Chief Executive Officer, and Teresa Neto, Chief Financial Officer. I will now turn the call over to Teresa Neto to go over certain advisories.

Thank you, Madison, and 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, the material factors and assumptions applied in making forward-looking statements or information are discussed in Granite's materials filed with the Canadian Securities Administrators and the US Securities and Exchange Commission from time to time, including the risk factors section of its annual information form for 2023 and Granite's management's discussion and analysis for the year ended December 31, 2023, filed on February 28, 2024.

As usual, I will commence the call with financial highlights and then turn it over to Kevin with who will follow with operational updates.

Granite posted Q1 2024 results ahead of Q4, supported by strong NOI growth, partially offset by higher interest expense and higher current taxes.

FFO per unit in Q1 was $1.30, representing a $0.03 or 2.4% increase from Q4 2023 and a $0.05 or 4% increase relative to the same quarter in the prior year. The growth in NOI this quarter is primarily derived from the lease commencement at Granite newly developed property in Brantford, Ontario, along with strong same-property NOI growth, enhanced by double digit leasing spreads in Canada and Austria. Noi growth was negatively impacted slightly by foreign exchange as the USD and euro were 1% and 0.1% weaker, respectively in comparison to Q4.

AFFO per unit in Q1 was $1.22, which is $0.07 higher relative to Q4 and $0.04 higher relative to the same quarter last year with the variance is mostly tied to FFO growth and lower capital expenditures, leasing costs and tenant allowances incurred due to timing of leasing turnover and seasonality. AFFO related capital expenditures, leasing costs and tenant allowances incurred in the quarter totaled $1.4 million, which is a decrease of $4.6 million and $0.3 million over Q4 and Q1 2023, respectively.

For 2024. As noted in our outlook disclosure, we would we are expecting maintenance CapEx, leasing costs and tenant allowances to come in at approximately $28 million, with part of the upward increase tied to the timing of leasing and capital expenditures planned last year that were delayed into 2024.

In 2023, we had estimated capital expenditures of $25 million, but actuals came in lighter at approximately $18 million. Same-property NOI for Q1 24 was strong relative to the same quarter last year, increasing by 4.9% on a constant currency basis and up 5.1% when foreign currency effects are included.

Same-property NOI growth was driven primarily by CPI adjustments, positive leasing spreads, contractual rent increases across all of Granite's regions, lease renewals in the US, Canada and Australia, and includes the impact of a completed development incentive fee, which had free rent periods in the prior year, partially offset by vacancy at certain properties in the US.

For 2024, we continue to expect constant currency same-property NOI based on a four-quarter average to be within the range of 7% to 8%. G&A for the quarter was $9.7 million, which is which was $5 million lower than the same quarter last year and $0.3 million higher than Q4. The main variance relative to the prior year quarter is the change in noncash compensation liabilities, which generated a favorable $5.7 million swing relative to the same quarter last year. These fair value adjustments do not impact our FFO and AFFO metrics.

Stripping out the fair value adjustments, G&A expenses that impact FFO and AFFO were approximately $0.3 million higher than Q4, which is mostly related to salary increases effective at the beginning of the year and the timing of expenses. For 2024, we continue to expect G&A expenses of approximately $10 million per quarter or roughly 7% of revenues, excluding any amounts for fair value adjustments and corporate restructuring costs relating to the uncoupling of Granite's stapled unit structure.

Interest expense was lower in Q1 2024 relative to Q4 by $1.3 million, while interest income decreased by $3.1 million as compared to Q4. The decrease in interest expense was primarily due to the elimination of double interest costs related to carrying both the 2023 debentures and 2029 debentures for a six-week period in Q4.

The decrease in interest income was a result of the interest income earned in Q4 from the investment of the net proceeds of the 2029 debentures during the same six-week period last year. Therefore, on a net basis relative to Q4, net interest cost increased by $1.8 million, which really represents the full quarter effect of the higher cost 2029 debentures.

Granite's weighted average cost of debt is currently 2.6% for 2024. Given that we have no debt maturing until December, our interest expense run rate is expected to remain at current levels of approximately $21.5 million per quarter, which will be offset by some interest income of approximately $1.5 million per quarter.

For income tax, Q1 came in current income tax of $2.5 million, which is $0.2 million higher than the prior year and $2.4 million higher as compared to Q4. In Q4, we recognized the reversal of tax provisions of $1.8 million that were not present in Q1. The majority of the remaining increase is a direct result of the higher revenues and the burn-off of TI amortization expense in Austria relating to the gross lease renewal, which commenced on February 1, increasing taxable income in that region.

For 2024, we are expecting current income taxes to remain at current levels of approximately $2.5 million per quarter. And then looking out to our 2024 estimate, for FFO per unit, our guidance remains unchanged from last quarter and remains in the range of $5.30 to $4.45, representing approximately 7% to 10% increase over '23.

For AFFO per unit, we are adjusting downward our forecast by $0.05 to a range of $4.60 million to $4.75 million, representing an increase of 2% to 6% versus 2023. The downward adjustment is reflective of the higher maintenance CapEx and leasing commissions and tenant allowances mentioned earlier. We have not made any changes to our FX rate assumptions from last quarter.

We will, Granite will provide updates to this guidance each quarter as warranted based on leasing activity executed to date. Granite's balance sheet comprising of total assets of $9.2 billion at the end of the quarter was positively impacted by approximately $13 million of fair value gains on Granite's investment property portfolio in the first quarter and was further enhanced by $117 million of translation gains on Granite's foreign-based investment properties, primarily due to the 2% increase in the spot USD exchange rate relative to Q4.

The fair value gains on brands. Investment property portfolio was primarily attributable to the stabilization of the development property in Brantford Canada, which was completed and transferred to income-producing properties during the first quarter, partially offset by the expansion in discount and terminal capitalization rates across very selective branded assets due to market conditions.

The trust's overall weighted average cap rate of 5.2% on in-place NOI increased only 2 basis points from the end of Q4 and has increased 25 basis points since the same quarter last year. Our net leverage as at the end of the quarter was 32% and debt to EBITDA was 7.2 times, which is slightly lower relative to Q4 and lower than Q1 as a result of the NOI growth, including the completion and stabilization of the majority of Granite's development properties.

Our current liquidity is approximately $1.1 million, representing cash on hand of $130 million and the undrawn operating line of $997 million. As of today, Granite has no borrowings under the credit facility and there are $2.8 million in letters of credit outstanding. And as noted in our disclosures on the March 27, Granite extended its credit facility for a new five-year term to March 31, 2029.

And then finally, subsequent to the quarter granted repurchased 375,600 stapled units under its NCIB at an average price of $69.39 for a total proceeds of $26.1 million, excluding commissions.

I'll now turn over the call to Kevin.

Thanks, Teresa. And I'm joined by Mike Ramparas and Lorne Kumer as usual. And Lawrence Clarfield on his prominence time calling in from the US. Certainly an in-line and strong quarter as NOI growth of $4.5 million over Q4, more than offset the increase in interest expense of three dimensions, resulting in a healthy 4.8% increase in FFO per unit over Q4 when excluding the reversal of the tax provision in that quarter.

As Teresa mentioned, we lowered our AFFO guidance by $0.05 to adjust for additional CapEx that was originally budgeted to occur in 2023. But we are reiterating our full year guidance for FFO per unit and same property NOI growth.

I'll begin with a brief update on our current development pipeline. As stated in our MD&A, our 409,000 square foot build to suit project for Barry Callebaut moved IPP in the quarter, our 50,000 square foot expansion Ajax remains on schedule with substantial completion by or near the end of the second quarter.

And similarly, the 52,000 square foot expansion of our property and where the Netherlands remains on schedule to date for substantial completion in the fourth quarter. As a reminder, all projects are expected to achieve certification in accordance with our published green bond framework.

And in addition to the projects just discussed, we have roughly 160 acres of land remaining for development in Bradford, Houston and Columbus, which could accommodate up to 2.4 million square feet of space once constructed.

As outlined in our press release and MD&A, the team achieved an average increase in rental rate of 10% on renewals for roughly 6.4 million square feet of leases that expired in the quarter, driven predominantly by a gross renewal increase. And I did want to say on just based on comments that we've received regarding a renewal increases moderating just to point out that renewal increases in each quarter will fluctuate and it can fluctuate quite significantly.

And so I wanted to emphasize the team also executed1.36 million square feet of renewals in the quarter associated leases, which were due to expire later in '24 and '25 and an average increase in rental rate of 35%. So you will see those increases flow through in future quarters.

With respect to our 2024 maturities, we have now renewed 7.8 million or 79% of our 9.8 million square feet of maturity at an average rate increase of approximately 16%, again muted by the grudge renewal. And as stated on our last call, we expect to renew 85% to 90% of our 2024 expiries.

As Teresa mentioned earlier, same-property NOI increased by 4.9% in the quarter on a constant currency basis, slightly above Q4 and in line with expectations for the quarter and wind was positive across all of our geographies on a constant currency basis, led by Canada at 11.3%, driven by renewal increases.

Same-property NOI across our US portfolio posted same property posted an increase of 3.2% down from Q4 as a result of vacancy and partially offset by strong renewal spreads. Of note, Austria Finally, carried some of the load. It posted a modest 3.6% increase by virtue of the gross renewal.

As you can see from our disclosure, we adjusted cap rates and market rents nominally in the quarter based on appraisal and relevant transaction data at our disposal and excluding the 2.5% strengthening of the US dollar from the March 31, the increase in IFRF. volume was driven primarily, as Tracy mentioned, from the stabilization of our brand for development.

As for a general market update leasing activity continues to be slow in the first quarter as higher interest rates and economic uncertainty continue to impact tenant activity broadly across the sector. On a comparative basis, our markets once again represented the majority of the top markets in the US for net absorption totaling roughly 21 million square feet for the quarter, which was similar to Q4 and representing well over half of the total US absorption in a quarter led once again by Dallas, Chicago, Houston and Atlanta.

Our portfolio markets, which experienced negative net absorption included Cincinnati, Memphis, Indianapolis and Columbus fall with less than 0.5 million square feet in total and the GTA at negative 2 million square feet, once again, our worst performing market for net absorption.

As for rental rates, Nashville, Atlanta and Columbus all saw positive rent growth over Q4, while rental rates fell between 1% and 2% from Q4. Across our remaining markets, we do not have relevant Q. one market data for European market yet. But our view at this time would be that the current pace of leasing activity in Germany and the Netherlands would be comparable to our North American markets, but that rent growth continues overall to be positive.

It is probably worth noting at this point that we have renewed just under 90% of the 950,000 square feet of 2025 expiring leases in Europe. The team also executed 300,000 square feet of new leases in the first quarter on our development properties in Houston, Nashville and Ajax at rates, which slightly exceeded budget for 2024, but also notably represented an increase of roughly 40% over our development profile.

As Teresa mentioned, and I do feel like I'm repeating myself here. We offer nice opportunistically utilize available cash on hand to purchase roughly 375,000 units at an average price of 69 39. As you know, unit buybacks are not our first choice for capital allocation. So we won't hesitate to capitalize when a unit price of subpar below now, and we have sufficient cash on hand.

In closing, our results were in line with expectations and Hawaiian cash and OI increased once again this quarter and our liquidity position remains very strong at roughly $1.1 billion in cash and available credit. I think it's worth noting as well. Our aniline has increased over 12 consecutive quarters at an average growth rate of 3.3% per quarter and almost 14% annually over that three year period.

So addressing our current availabilities and remaining 2024 maturities and preserving capital for future strategic opportunities remain our highest priorities, and we remain well positioned to deliver attractive NOI, FFO and AFFO growth once again in 2024. But before I open up the call for questions, I'd like to ask my friend Mike to provide an update for you in our view on the investment markets.

Thank you, Kevin, and good morning, everyone. With the macroeconomic uncertainty that precede a rising rate environment, occupiers and investors alike approach to industrial warehouse property deals with more scrutiny and caution which impacted leasing and investment volumes at activities. For the past 16 months, we have seen pricing contracts across our markets to varying magnitudes, dependent on factors such as market dynamics, asset quality and embedded rental growth.

More recently, we have been encouraged as there has been an increased demand and in fact are seeing some deals in the market achieve strong pricing, especially for high quality assets with near-term mark-to-market rent opportunities are which are priced at attractive discounts to replacement costs. These deals are seeing deep bidder list at times in excess of 20 rigs which implies a significant amount of opportunistic capital in the market.

Looking for quality deals, the buyer pool remains largely private capital, such as global institutional funds, private equity sovereigns, high net worth private. And conversely, many of the res open-ended funds and generally leveraged buyers have been quite due to higher weighted average cost capital. Our team continues to underwrite that have reasonably pursue select opportunities in our target markets.

Some fundamental themes have emerged recently for being increased focus on yield and buyer shying away from longer term negative lender shares groups are rightly looking to see more positive returns sooner rather than later.

In terms of deal size, we continue to see small to mid-sized deals having most volume and liquidity in the marketplace. We also are encouraged on the debt side as we're starting to see that liquidity reemerge from namely life companies and more recently bank lenders participating in the capital stack on institutional quality assets and borrowers. If this trend continues and the availability of debt improves, that will likely bode well for the investment market and price as we look forward to the balance of the year.

On the investment side, we will continue to focus on opportunities that will complement our current portfolio of high-quality assets and remain prepared to transact on the right deal and indicate that we think fundamentals will also look to capitalize on any disruption or price in our projections that may arise.

With that, I'll pass it back to Kevin.

Thanks, Mike. So operator, at this point, we'll open the floor for question.

(Operator Instructions) Sam Damiani, TD Cowen.

Thank you and good morning, everyone. First off, just wanted to maybe to continue on the topic that Mike was just discussing. I guess just I guess the question really is with the transaction market is starting to percolate while others are starting to deploy capital? What is it that Granite is waiting for or two in order to sort of participate like is there a different sort of macro view that you're expecting over the next year or two versus some of these players? I'm just wondering where you're where you guys are thinking in terms of when to pull the trigger and how.

Well, I'll start and certainly invite Mike to build on whatever comments he had, Tom, I think we have to be aware of our capital situation. And Sam, to be honest with you, like we've said, if there's something that's truly compelling an opportunity in our target markets, I don't think we would hesitate, we transact on it and we will figure out a way to whether it's selling assets. We would figure that out. But we haven't seen anything that's really that compelling.

And again, I'll ask Mike to provide his comments on US specifically, but we also have to be aware of that and we have cash on hand. We have development commitments. I don't think we're interested in taking on a significant amount of additional debt to fund those acquisitions. So there are constraints there from a financial perspective that we have to be aware of that might lead them to want to stay on the market to the office.

No, like I said in my commentary, we are pursuing select opportunities. And again, half of the deals we find very attractive. A lot of other players do as well to help out the pricing that we would be looking to transact. That opportunities aren't there at the moment and I think further to Kevin's point, the preservation of our capital situation is always paramount.

Thank you. And the other the other question, I wanted to ask and then I'll turn it back is just on the very modest tweak to the same property NOI growth guidance. I'm just I guess I'm kind of curious why you kind of bothered to do that? It's it seems like there's a small thing, but it is mostly related to just delays on the leasing that you referred to in your opening comments or is some of it also related to the rents that you expect to realize on that lease-up?

No, not rented on a timing of lease-up and it's a good question. We actually got internally whether or not we get solved and we didn't think it would be that they have per se, but it's there. But we thought it was worth just pointing out that we've extended the estimate lease up of a couple of our availabilities and tweak it a little bit, but no impact on rental rate that we've seen.

Okay. And I think last quarter you gave a range of targeted occupancy in the portfolio for the end of the year. How much is that different today?

It has not. And again, I think with respect to occupancy, particularly, I think it's early was because we did. So you have 1.9 million listed Utrecht out of it because we have, I think, 150,000 short-term leases that continually roll there. So taking that out of it, we have roughly 1.9 billion of expiries remaining we expect to lease up probably around 1 million to 1.2 million of that. So we would expect to see 700,000 square feet of space come back to us.

We are 95.4% occupied and committed. So overall, that was require us to complete another 1.3 million to 1.5 million square feet of leases before the end of the year, and we think that that's entirely achievable now. Is that a certainty? Absolutely not, but we think it's achievable and it's within our expectations.

So for now we're not we don't see I need based on the activity that we're seeing within our portfolio and a bit of a pickup of the activity we're seeing overall in the markets and in our markets in particular, it is necessary to move that guidance for occupancy.

Thank you, and I'll turn it back. Appreciate it.

Mike Markidis, BMO.

Thank you, Kevin. Just a quick one for me. I guess you pointed out and I agree with your 0.1 quarter doesn't make a trend on leasing spreads, but you pointed out I didn't come during the quarter, there was 1.36 million square feet of leases, I guess or at I-RES in late 24%, 25% that were done at an average rate of 35%. Is that is that or how do we how do we read that? So I'm just looking at your lease maturity scheduling in MD&A, and I see that your committed rate for 2024 went up. I guess you're seven the another 500,000 square feet there but I don't see anything 2025. So that sort of also including subsequent quarter activity, that's maybe not reflected?

No, the one in which it was done in the quarter. It was the large one in the Netherlands. It should be in there for 2025.

It depends on though it had any role this quarter. It may not be showing but I have to look at the specifically what we're looking at.

Yes. So there was a large one in the Netherlands. There was to the US And there was one in the UK.

Yes. So I guess some of that maybe isn't being reflected.

Okay, that's fine.

I can circle back offline on that. And then just to confirm the 35%, that's not going to just a pure renewal number or is there likely the new leasing that you would have done because 200 some thousand commitments on vacant space that you do show?

No, that's a pure renewal further for renewal. Yes, you have enough use and Mike will talk to that for your talk of the renewals, the actually executed for each type of renewals related to expiries in that quarter. So in the press release, we're trying to keep it really straightforward. It's just renewals that are expiring that quarter.

So I almost hesitate to talk about renewables, how we're doing that relate to future expiries. But I just wanted to make that point because we did receive some comments asking why the renewal increases were falling and everyone understand that growth of 10% will impact that number within this quarter.

But I just wanted to make that point and emphasize that there will be a fluctuation in the renewal increases, obviously from quarter to quarter, and it can be quite significant, as you know.

Yes. Okay. I mean, I'm not sure that hesitancy, but maybe I'm missing something about it going forward to be useful to talk about both the leases signed and leases that commenced. I think that the real number for that's it for me. Thank you.

Kyle Stanley, Desjardin.

Thanks. Good morning, everyone, and it was encouraging that the outlook really didn't change to materially since we last spoke, especially just given some of the commentary out of your US peers earlier this earnings season. Just curious, you know, if you take a step back, high-level of what are you seeing from a supply demand perspective in your portfolio of specific geographies that gives you that comfort in the outlook? And as may be differing from what some of your peers may have disclosed?

Well, I think first of all, on the US, some of the commentary we've heard at the US rates for the first quarter is consistent with what I've been saying for three quarters, a slowdown in leasing activity. So I have I don't listen to all the calls in on those specifically, but just reading some of the commentary, I think we've been very straightforward about what we've been seeing in the markets for a number of quarters.

So when we went into 2024 I think we were quite realistic with our expectations on the leasing side. I won't use the word conservative because we've tweaked some of the timing. But actually, I think that we were more realistic than some on what we're expecting for 2024, while why I remain confident that we can execute on 1 million to a 1 million, 1.3 million to 1.5 million of leasing. It's just based on activity that we're seeing within our portfolio.

You know, again, there's no certainty about it, but we are responding to our peers or removing paper we're in discussions and roughly 1.2 million square feet of space within our portfolio. And then again, I'm not saying that Applebee's that will be executed as certainly all those won't be executed. But the point is we are seeing decent activity and even on our big stuff on our big availabilities. So it's very much I think, within our expectations that we'll see future leasing activity this year in 2024.

Okay, great. Thank you for that. I maybe two just quick questions. Teresa, I think you mentioned and some potential costs on the kind of the restructuring side. Just wondering if you have an idea of what that might be and the timing of that flowing through?

As you know, it's going to be hard to estimate because it's really all legal time. But the heavy loads going to happen in Q 3 for sure, Q2 Q3 will be probably our more significant amounts.

I don't know. We're kind of estimating maybe 1.5 million to 2 million and then so Q2, Q3, Q4, but I say Q3 probably the heaviest quarter. And that's not an answer for that yet, but we'll be stripping that out as you see in the schedule, right?

Fair enough. And then the last question, just on the brand for delivery this quarter. I'm just wondering on timing of the delivery and maybe how much NOI was generated this quarter, just for modeling purposes, going forward.

Look, we've got a $7.7 million annually annually. Yes. Hopefully that helps. I think it's $7.7 million.

Okay. Thank you very moderate.

After that three to five that are long (audio impairment)

Okay, no problem. Thank you very much. I'll turn it back.

Brad Sturges, Raymond James.

Good morning. Just wanted to follow up on the acquisition commentary, I think last call, Kevin, you talked about maybe the potential for some distress opportunities to arise in the coming months. But just curious to get updated thoughts on whether that's something you still think could be the case and kind of what you're seeing from that perspective today?

I mean, we keep talking about it. I think it we still expect to see some level of distress. I think every quarter we go through, I think our hopes of finding that unicorn are falling, to be honest with you, but Tom and I did your commentary on from a US industrial re saying that they had gotten a number of calls, the distress development deals.

Those are certainly on our radar. I don't think we have seen it not that they haven't. They probably have seen things that we haven't seen. And that I think, yes, I think we still expect to see opportunities out there through distress. We have not seen anything that's really compelling yet today our growth.

Okay. So I guess near term capital allocation, if you're deploying capital, it sounds like that given where the stock prices and TIB. is probably going to be at least a use of some cash proceeds in the short run?

Yes, in the short term, I don't think that will be that busy on the acquisition side.

Yes. And then in the quarter, the first half of the year?

Yes. And maybe just one last one. Just on the leasing side of things in terms of your broader discussions and particularly with existing tenants in the portfolio is how is the appetite for expansion, some opportunities within the portfolio is that. Are you seeing any improvement or indicators that that's starting to tick up?

It was a little bit ticked up, but I don't know if it's ticked down either or I think we're in discussions with with a few tenants on potential expansions. Again, they I think they're taking longer to explore other options and make financial commitments. And so we're in discussion with them one in the US on expansion.

And we're in discussions with one in the GTA, and we're in discussions with one in Europe. So and I think that's been pretty steady over the years in R&D in our portfolio. So I don't think that it has ticked up. I don't think it has ticked down.

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

Himanshu Gupta, Scotiabank.

Thank you and good morning. But just on the Indianapolis community, a one property under lease, what kind of response you have received so far and mean, is there a lot of products you are competing with? Are raising demand is a bit less in that size of category?

No, I think most I think the first or maybe it was the fourth quarter. I think we saw more activity on the smaller one and the larger one. I'd say most recently we've got more activity on the larger one we are responding to and to RFPs. And I think, Tom, I don't want to provide too much detail but I think the sort of margin characteristics of our building at a location has put us on a few lists that many others that are on.

So we seem to be captured by all our peers by virtue of the location and just the characteristics of the building. So that's the way I would characterize it right now as we sit here today, there's more activity on the larger building than there is in the small.

Okay. And then looking at the activity, I mean, looks like progress was on Nashville and Houston and do you think, you know, the mix would have been in close or maybe Memphis or lose,

It's tough. I definitely would agree. I think I think we've got more activity in Houston and Nashville. I would probably put you at the after that and Louisville and Memphis or Memphis and Louisville. So she's a great degree, Tom, but you're right, I think Houston and Nashville, there continues to be a lot of activity in those markets.

In general, I think they are stronger markets in India. We are seeing more activity in a larger building, which is encouraging to us and e-commerce users and in Louisville and Memphis behind that, not to say that that I mean, the net absorption continues to be positive comp I think, but not as strong as the end markets.

So would you say, you know, Memphis is probably the toughest market in your portfolio right now?

I don't know. I mean, your 600,000 feet of vacancy? We're in discussions on 300 other right now. I don't think I wouldn't use the word tough.

Okay. Okay. Fair enough. And then you know the broader comments on the leasing activity pickup in the US, do you still think we will see a second half recovery or is it getting even pushed out and our people.

And we are I don't know if I said it would be a 2024 recovery. I think we feel it's a 2025 recovery as a 2024 is going to remain competitive through the year would be my estimation.

So in that case, the peak vacancy is more likely to be in the back half of the year or probably early next year.

Agreed.

Okay. Fair enough. And maybe just one last question I had.

Yes, on the valuation and I know you have already provided some comments and any specific comments related to the cap rates you're seeing in your US portfolio, what kind of CapEx are we talking like sixes, fives or even in a high sixes. Any comment there

I think you see our overall cap rate, it depends on the product. I think everyone saw recently the deal involved with DRA, and I'll provide a few comments on that with respect to our valuations, and Mike is closer to it than I am, but you have a portfolio a significant size portfolio and a significant deal with Brookfield being the buyer at $89 or $90 a foot on average.

But these are older assets and I don't think they're comparable in terms of quality to our portfolio. I don't think anyone would say that. And also the one thing that struck as I think everyone we've spoken to is quite surprised that the deal was broken up.

That was transacted as a single portfolio. And you would have to I mean, I think everyone would agree a portfolio discount somewhere around 5% would probably apply to that because it was taking down the single portfolio in as many geographies as there were. So I think the pricing that we saw and I've seen a six cap from around, I think would be supportive of where our cap rate is for our assets in those markets.

And I think the final thing I would say, and it made us actually look at it a little bit to one of the things that it doesn't sound like it's a big impact, but there's a couple of assets in our portfolio that can skew the per square foot. And the one is one of them that jumps to mind for me is the current data site in South Dallas that we own and that's a 200,000 foot building on 180 acre site.

So the price per square foot is very high at three, 15-year three client foot. And that skews our per square foot number. And it doesn't reflect the average price that we have, which is well below $90 for four for our portfolio in the US. So I hope that answers the question on cap rates, but I do think there's discussion around this DIRTRA. transaction, which I think fully supports our IFRS values in the US.

No. Thanks, Kim. That was very helpful. And clearly agree that the DRD preferred Proginet transactions going on kind of a good read through for your evaluation as well, so I'll turn it back to expenses.

Matt Kornack, National Bank Financial.

Looking at your free cash flow profile, you actually are adding to your cash balance pretty much every quarter between now and the end of our forecast period. And should we expect that you continue to kind of pick away on the NCIB., I mean, you don't have any you have debt maturities, but no, nothing drawn on the facility. So you can't necessarily pay down debt immediately? Or should we just expect that your cash balance is going to kind of continue to move higher?

When I talk about why we definitely did pick away at it. Obviously, as you know, we used $26 million. So, you know, assuming that if our unit price obviously falls, as Kevin mentioned, you know, below levels that are significantly below and that we will pick away with free cash flow. But, you know, the reality, if you don't build, you know, slowly every month.

So yes, we do have some capacity to continue to do that, but not on a large scale. And then yes, you know, we'll accumulate more cash and then, you know, we can apply some of that to the end of the year Wyndham's, usually we when our term loan matures. So I think that's kind of like how we see it running through the rest of the year have turned off when the meantime any Jorg will invest, Ray will invested above 5%.

Right. And Kevin, would you entertain for some of the projects that you already have kind of in process developing at this point? Or are you holding off until market demand returns?

Yes, yes, I think on a speculative basis, there's less than that. We're looking at doing. I know in the MD&A. And I think we actually combined land held for development now with all properties under development and we are moving through the application and approval process for branch originated in Houston and the point is not to move ahead and speculate a bit just to be ready to respond to any build-to-suits that are appropriate for us.

So and that's the other thing too, that Teresa mentioned, there are things that are on our mind with respect to the use of cash and proceeds. One is the maturing debentures this year, there is the NTIB. potential. And there's also some remaining development commitments and future development commitments, which could include build-to-suits as well.

So these things are on our mind on. But right now no plans to move speculatively on any of our remaining land. And I think that that will be the case through the year. Again, we'll respond if there are interesting build-to-suit opportunities, but otherwise.

No, no, that makes sense. Phil, I'm just looking at your top 10 tenants. The only one that stands out as CFO having a 0.8 year maturity; is that a '24, '25 maturity? And before you have any color as to what would happen there potentially?

Effectively, it's the end of the year as well. No, no, color at this time. And we certainly don't want to we're in discussions on on on both bases with them. So we don't want to tip our hands in any way on those.

And then just back to Kyle's question, I don't know if I'm if you answered it, the timing, would it would the full quarter impact have been so players or is that kind of in straight-line rent and then we'll transfer over to grab.

Those are very, very favorable at this time and yet their straight-line rent number in the first quarter yet and that's a great thing.

Pammi Bir, RBC Capital Markets.

Thanks. Good morning. Kevin, I just wanted to clarify your comments on the occupancy and I think it was roughly that 97% target that was some cited last quarter. Is that is that a committed figure that you expect to sort of become cash producing next year or do you think you can will that translate actually into cash flow or income in 2024 towards the end of the year?

That's a good question, Ami. No, that would include cash in 2025. So you're right, that would be, I guess, occupied and committed to be fair.

Okay. And then just and not to nitpick here, but on the in-place side, where do you see? I mean, it's nice to see a bit of progress after the quarter on some of the US leasing. Does that get to like 96-ish or kind of hold that where it is as of may, I guess?

No, I think the 90-ish is fair, and I'm not sure that I think come I mean, there's entirely a chance that we see rent this year as well. But I think if you assume 96 were in place to think about the fare sale kind of.

Got it, and then just kind of sticking with the US leasing. I'm just curious, have you changed the strategy at all on some of the deals that you have been able to execute more recently? And obviously, you did change some of your maintenance CapEx and TI assumptions, but have there been any change at all in terms of maybe what you're offering from an incentive standpoint, free rent or anything of that nature?

No, I think two things I would say about that is that, again, the increase in the CapEx was because of stuff from 2023 when we scrub the numbers and realize it's not as though we're doubling TRAs on our new leases and renewals. So we're not just to be clear on that. That's a big carryover from the previous year, but that's why the increase with respect to TIs and free rent on deals, we are always open and willing to respond to market conditions and do whatever we have to do to execute on these deals.

But that being said, the deals that we have done so far this year and the deals that we are working on. We have not seen a material movement from our budget assumptions for Tia. Then I don't want to get into details of the TAs that we're assuming because we're in discussions with tenants on them and brokers as well. But there has not been a major change in TIs and free rent periods from our expectations for 2024 so far. But if those conditions change, we will respond accordingly and to execute on those deals.

That's helpful. Thanks for that. Last one, just on the lease that was done in Nashville fitting with one of levinal properties, which property was that of the three that are there?

With the middle number just for that month that things are back on one of our new member.

I can't remember this building through Piltel one building for talking.

Got it thanks very much, and I'll turn it back.

Sumayya Syed, CIBC.

Thanks.

Good morning. I want to ask about on the plan for development and the lease up there to start

Wondering if you can share what was the free rent period included with that lease and also what's the standard you're seeing being offered in the GTA market more broadly these days, if someone?

Yes, I think it, I think it's a four month free rent period Sumayya. So that'll run like into April and then we'll be cash from April 15 onwards, more or less.

Okay. And then just switching to the demand side.

I guess if you could qualify in terms of by industry vertical or user type? Where would you say there is the most hesitation or delay in terms of making a decision today?

In terms of teacher development?

Just addressing current vacancies and the types of users and what who's doing the most versus who's the haven't changed?

It is tough. I mean, 3PLs are still carrying the day. As far as we can see, it sounds like in the US anyway, automotive has been active. Food has been active. Pharmacy has been active. I think these are things that continued from last year.

E-commerce is starting to come back and we're seeing them more and more in our markets, not that they have done leases that we're aware of anyways but we're starting to see activity there starting to underwrite space more than we've seen it certainly in 2023 and not as good growth, too, because it typically involves larger space. So I'm not sure the color you were looking for, but that's kind of what we're seeing on the ground so far. So progress here.

Okay. That's helpful. And that's all I have that.

Thank you. There are no further questions at this time. I would like to turn the call back over to the presenters.

Okay. Well, on behalf of the trustees and the management team here at Granite. Thank you for participating in the call today, and we look forward to speaking with you again in August.

This concludes today's conference call. You may now disconnect.