Q3 2024 Granite Real Estate Investment Trust Earnings Call
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Speaker Change: Please press Star zero.
Shelby: Good morning, My name is Shelby and I will be your conference operator today.
Speaker Change: At this time I would like to welcome everyone to granite REIT third quarter 2024 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session.
Speaker Change: If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star two. Thank you speaking to you on the call. This morning is Kevin Gori, President and Chief Executive Officer Anne.
Speaker Change: Teresa No Chief Financial Officer, I will now turn the call over to Teresa Neto to go over a certain advisories.
Teresa Neto: Thanks, operator, good morning, everyone before we begin today's call I would like to remind you that statements and information made in today's discussion may constitute forward looking statements and forward looking information and the actual results could differ materially from any conclusion forecast or projection. These statements and information are based on certain material facts or assumptions reflect managements.
Teresa Neto: 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 are material factors and assumptions applied in making forward looking statements or information are discussed in granites materials filed with the Canadian Securities administrators, and the U S Securities and.
Teresa Neto: Exchange Commission from time to time, including the risk factors section of its annual information form for 2023, and granite managements discussion and analysis for the year ended December 23 at December 31, 2023 filed on February 28th 'twenty 'twenty four.
Teresa Neto: So for Q3 granted posted resolved ahead of Q2 and in line with management's annual forecasting guidance largely driven by strong NOI growth.
Teresa Neto: Per unit in Q3 was $1.35, representing a three cent or two 3% increase from Q2, and an 11% or eight 9% increase relative to the same quarter in the prior year the growth in NOI. This quarter, it's primarily derived from strong same property NOI growth enhanced by triple digit leasing spreads in Canada.
Teresa Neto: Deep digital leasing spreads in the U S and the completion of Grand It's two active expansion projects in Ajax, Ontario, and Netherlands with leases commencing in the third quarter, partially offset by a new vacancy in Canada at the end of Q2 and your vacancy in the U S. During Q3 NOI growth was further enhanced by foreign exchange of the year.
Teresa Neto: ROE was 1.7% stronger partially offset by the U S dollar being 23% weaker in comparison to Q2.
Teresa Neto: If it's one per unit in Q3 was one point to two which is five cents higher relative to Q2, and 13 cents higher relative to the same quarter last year with the variance is in Q2, mostly tied to episode growth and lower capital expenditures and tenant allowances incurred due to timing of leasing turnover harsher.
Teresa Neto: We offset by higher leasing costs, primarily related to leasing activities, including an early lease renewal for a property in the U S and increases in straight line rent due to free rent offered on new leases commencing in the third quarter.
Teresa Neto: Do you have a full related capital expenditures leasing costs and tenant allowances incurred in the quarter totaled $5 2 million, which is a decrease of $1 9 million over the second quarter, and one and a half million over the same quarter last year.
Teresa Neto: For the full year of 2024, we are expecting and so really two related capital expenditures to come in approximately $25 million, which is a reduction from our estimate last quarter of $28 million.
Teresa Neto: Same property NOI for Q3 was strong relative to the same quarter last year, increasing six 2% on a constant currency basis.
Teresa Neto: And up 8% with foreign currency effects are included.
Teresa Neto: For 2024, we are updating our forecast for constant currency same property NOI based on a four quarter average to come in at approximately 6%, which is at the lower end of the forecast range previously provided of six to six 5% as a result of updated vacancy leasing assumptions and Kevin will provide some further color on it.
Speaker Change: His comments.
Teresa Neto: G&A for the quarter was $13 2 million, which is 4.8 million higher than the same quarter last year and $5 5 million higher than Q2. The main reason for the variance relative to Q2 is $5 6 million of unfavorable fair value variants and noncash compensation liabilities, which does not impact our episode has its own metric.
Teresa Neto: For Q4, we continue to expect G&A expense that impact episodes in F O of approximately $10 million or roughly 7% of revenues.
Teresa Neto: Interest expense and interest income for the for Q3 remain virtually flat relative to Q2.
Teresa Neto: Post quarter end on October four it's granted did complete $800 million of bond offerings in two series being a 250 million five year bond at a coupon of 399, 9% and $550 million seven year bond at a coupon of 4.3 or four 8%. The 250 million tranche maturing on October 4th was hedged with a cross currency interest rates.
Teresa Neto: Swap, resulting in an effective fixed rate of 3.4, 94% for the five year term of the bond.
Teresa Neto: The net proceeds from this offering were used to on October for us to fully prepaid without penalty granted 2025 term loan with a principal balance of 400 million U S, which had a maturity date of September 2025.
Teresa Neto: The related interest rate swap with also terminated with the Mark to market I said being settled the remaining net proceeds from this offering are being held in short term cash deposits until we fully repaid granted 2024 term loan with a principal balance outstanding of U S $185 million, which.
Teresa Neto: Which is maturing on December 19, 2024.
Teresa Neto: As of September 30th and prior to the completion of the refinancing in October graduate granites weighted average cost of debt was two 6% and weighted average term was three one years after refinancing granite weighted average cost of debt is now $2 75 per cent and the weighted average debt term to maturity is now extended to four six years.
Teresa Neto: For the fourth quarter granted interest expense is expected to increase to approximately $23 9 million due to the new October 'twenty 'twenty nine debentures being outstanding at the same time as our U S $185 million term loan. However, we expect to fully offset the additional interest expense with interest income as noted earlier.
Teresa Neto: With granites next maturity now in September 2026, we expect interest expense to remain stable over the next approximate two years at roughly 23, and a half a million per quarter barring any new transactions.
Teresa Neto: Interest income is expected to decline over the course of 2025 with central banks cutting and all of granites jurisdictions.
Teresa Neto: For income tax Q3 current income tax was $2 7 million, which is point 6 million higher than the prior year and point 1 million higher as compared to Q2. The movement in current tax relative to the prior year is mostly attributable to increased taxable income in Europe due to rental growth together with the strengthening of the euro.
Teresa Neto: Relative to the Canadian dollar as olive granted current income taxes generated from its European region.
Teresa Neto: For 2024, we are expecting current income taxes to remain at current levels at approximately $2 7 million per quarter.
Teresa Neto: As in prior years granted me realize a credit or a current income taxes of approximately one 8 million in Q4 due to the reversal of prior year tax provisions. However, we cannot confirm the certainty of such credit until December 31, and our guidance does not factor in any tax provision reversals.
Teresa Neto: Regarding guidance, our 2020 for estimates for ethical per unit remained unchanged at $5 30 to 544 BOE per unit, we are increasing the forecast range by five cents on both ends to 465 to 475.
Teresa Neto: I'm doing two due to the reduced estimate and are people related capital expenditures for the year from 28 million to $25 million granite has made a small modification to the foreign currency exchange rate assumptions pertaining to the euro for the forecast period October to December 24.
Teresa Neto: The high assumption reflects foreign currency exchange rate of 1.5, which was previously 1.48 for the Canadian dollar to Euro and the 1.38 for the Canadian dollar to U S. Dollar exchange rate remains unchanged.
Teresa Neto: On the low end of the range, we continue to assume exchange rates of the Canadian dollar to Euro at $1 43 in the Canadian dollar to U S. R 132, which at this point look unlikely.
Teresa Neto: Granites balance sheet comprised of total assets of $9 3 million at the end of the quarter and it was positively impacted by approximately $42 6 million of fair value gains on granite investment property portfolio in the third quarter largely due to a tenant's commitment received in the third quarter for 2025 lease renewal in Mississauga, Ontario, together with for fair market.
Teresa Neto: Rent increases in select U S markets, and partially offset by expansion in discount in terminal cap light capitalization rates at select rented assets in the U S.
Teresa Neto: The trust overall weighted average cap rate of five 3% on in place NOI decreased six points from.
Teresa Neto: From the end of Q2 and has increased 13 point since the same quarter last year.
Teresa Neto: Total net leverage at the end of the quarter was 32% and net debt to EBITDA was seven times, which is slightly lower relative to Q2 and lower than Q2 Q3 as well as a result of NOI growth, including the completion and stabilization of the majority is granted development properties. The trust's current liquidity is approximately $1 4 billion.
Teresa Neto: And cash on hand of approximately $400 million and the Undrawn line of $997 million.
Teresa Neto: As of today granite has no borrowings under its credit facility and there are $2 8 million in letters of credit outstanding.
Teresa Neto: Granted recent refinancing will have no material impact on its net leverage net debt to EBITDA and liquidity position once the term loan is repaid.
Speaker Change: On October 1st as you know granted completed the uncoupling of its stapled unit structure by replacing it with a conventional REIT Trust unit structure. We do encourage you to refer to granites website under the tax information tab. If you have any questions regarding the tax treatment of this uncoupling event I will now turn over the call to Kevin. Thanks.
Kevin Gori: Thanks Teresa.
Kevin Gori: I'll begin with a few general comments on our results and I'll turn it over to Loren to provide an update on our development leasing activities. I will then finish with our outlook for the remainder of the year, we're taking your questions.
Kevin Gori: As <unk> mentioned our results for the quarter were once again in line with expectations driven by higher NOI on strong releasing spreads.
Kevin Gori: NOI grew by $3 1 million or two 4% over the second quarter and represented the 13th consecutive quarter of NOI growth.
Speaker Change: Through for Ultra mentioned, we maintain our effort Oprah unit guidance range for the year and increased slightly our difficult per unit guidance on lower capex spend than previously forecast.
Speaker Change: We've also tweaked our guidance for same property NOI of two 6% due primarily to transitory vacancy at our redevelopment project in the U S.
Speaker Change: The trucks and.
Kevin Gori: In a short period of free rent related to the renewal and expansion of a tenant in Memphis with more and will provide further detail.
Kevin Gori: With that said same property NOI growth on a constant currency basis was strong once again in the quarter at six 2% led by gains in Canada, just over 14%, Austria at seven 1% in the U S at four 5%.
Kevin Gori: Further as outlined in our press release and MD&A. The team achieved an average increase in rent rate of just over 30% of one 6 million square feet of Q3, 2024 maturities led by strong renewal spreads in the U S and GTA.
Kevin Gori: On that note I wanted to mentioned the net fair value gains on our investment properties driven as mentioned by the renewal rates achieved in a number of our GTA in U S properties in the quarter and highlights that our NAV analysis within a dollar is a high watermark recorded in the third quarter of 2022 supported by.
Kevin Gori: Higher euro and USD rates versus CAD accretive unit buybacks funded by free cash flow profit from several successful development stabilization and significant increases in NOI and market rents across our portfolio, which has effectively offset the significant upward adjustment we have acquired through.
Kevin Gori: Discounted cap rate over that period.
Speaker Change: Before I turn the call over to norm for an update on our leasing and development.
Kevin Gori: Also wanted to recognize a few key achievements from our ESG program.
Kevin Gori: <unk> was once again ranked number one by Rusty among our peer group of listed North American Industrial Reits quite an accomplishment in my opinion.
Kevin Gori: In addition, the peak capacity of the solar PV systems installed at our properties continues to grow and it has now reached over 45 megawatts and we remain on track to meet our target capacity of 50 megawatts by the end of 2025.
Kevin Gori: Finally, 44% of our properties have now successfully achieve green building certification and this number is expected to surpass 50% by the end of the year.
Speaker Change: I'll now turn the call over to warrant for an update on our development and leasing programs.
Speaker Change: Thanks, Kevin and good morning, everyone.
Speaker Change: I will begin my comments with a short update on our remaining active development projects.
Speaker Change: <unk> thousand square footage fashion, and Ajax, Ontario was substantially completed in the quarter with our pre leased tenant taking occupancy of approximately 30000 square feet and commencing their operations.
Kevin Gori: Also our 52000 square foot expansion and where Netherlands was also substantially completed on schedule this quarter and the tenant has committed to a 10 year lease extension on both the existing and expansion space.
Kevin Gori: Which will commit which will commence in September.
Kevin Gori: The first of this year.
Kevin Gori: As a reminder, we also have approximately 160 acres of land capable of developing approximately two 4 million square feet.
Kevin Gori: While we continue to move some of these developments forward from a permitting perspective and in the case of Houston. Some infrastructure improvements, we want to remain ready to entertain build to suit opportunities, but are not contemplating any speculative construction at this time.
Kevin Gori: On the leasing front leasing market fundamentals during Q3 behave generally similar to last quarter.
Kevin Gori: You can see rates among our markets for mixed with roughly half increasing albeit at smaller magnitudes and the remaining markets either remained steady or slightly decrease.
Kevin Gori: It feels like we are close to peak vacancy in these markets, but the next few quarters should provide a clearer picture.
Kevin Gori: Average asking rents during the quarter generally remained stable in most of our markets.
Kevin Gori: We also experienced slight declines in published rates will not affect us based on where in place rents are for the assets. We all in those markets.
Kevin Gori: Absorption across the majority of our markets increased quarter over quarter, and again, representing some of the nation's top performance.
Kevin Gori: Normally a year to date metrics are still low when compared to historical averages.
Kevin Gori: We remain encouraged with the slowly improving leasing atmosphere, we continue to see a flight to quality and location.
Kevin Gori: Clearly differentiating between class, a and class b offerings.
Kevin Gori: Premium building specifications and core locations should attract more interest as tenants look to improve the quality of their supply chains.
Kevin Gori: As mentioned last quarter tenants continue to take their time to evaluate their real estate decisions.
Kevin Gori: Much like they did prior to the pandemic and seemingly more particular to large capital decisions with.
Kevin Gori: The U S election behind Us e-commerce adoption, continuing to increase as interest rates and construction start decreasing the environment should make for an easier decision, making process at the corporate level and in turn result in stronger demand market.
Kevin Gori: With respect to our U S market, where most of our short term leasing initiatives are occurring we are further encouraged with the generally improving leasing fundamentals.
Kevin Gori: <unk> markets accounted for six of the 10 highest net absorption locations for the first three quarters of 2024, which represented approximately 53% of the overall net absorption across the country.
Kevin Gori: Properties under construction and construction starts continue decline boding, well for 25 and for 2026.
Kevin Gori: Asking rents within the granite portfolio remained generally stable and we continue to see a strong mark to market opportunity on both the IPP and development pro forma lease ups.
Kevin Gori: In Q3 granted achieved average rental rate spreads of about 55% over expiring rents representing approximately three 3 million square feet of new leasing and renewals completed in the quarter led by deals in the GTA in the U S.
Kevin Gori: This includes the approximately 600000 square feet of space in Indianapolis that was renewed subsequent to Q2 and mentioned during my remarks in the previous quarter.
Kevin Gori: Subsequent to Q3, approximately 300000 square feet of vacant space in our Memphis market was lease.
Kevin Gori: Also we renewed an additional 530000 square feet in Indianapolis at approximately 40% over expiring.
Kevin Gori: With respect to the 2024 lease maturities, we have renewed or extended all of our remaining lease maturities with approximately 16% increase over the expiring rents, which was muted by the contractual Graz, Austria renewal.
Kevin Gori: This represented a retention rate of just over 94%, which we're very pleased with.
Kevin Gori: With respect to the 2025 maturities, we continue to make good progress, having now renewed or extended approximately 55% to five 5 million square feet and continue to believe that we will achieve greater than 30%.
Kevin Gori: Average renewal spreads on these expires.
Kevin Gori: As it relates to our occupancy we did slightly by 20 bps from 94, 5% in Q2 due primarily result of a known vacancy in Memphis and the addition of the remaining vacant space coming on stream at our Ajax development.
Kevin Gori: Committed occupancy is 94, 7% as a result of the new lease at one of our basic vacancies in our Memphis market.
Kevin Gori: We were in advanced discussions with a potential full building user at our vacancy in Louisville that did not materialize and as a result, we are now expecting occupancy to end the year closer to 95% than the 96%, 97% previously forecasted.
Kevin Gori: On October 14th one of our tenants true value company advised that it had voluntary voluntarily filed for chapter 11 proceedings in the U S. Bankruptcy Court. In addition, the company entered into an agreement to sell substantially all of its business to do it best Corp, including our facility true.
Kevin Gori: Value remains current on their rental obligations and while we are following this matter closely it is too early to provide any further clarity on the outcome.
Speaker Change: In closing we are pleased with the results of our 2024 lease maturities and our progress on the 2025 maturities. Our leasing teams continue to work hard and remain encouraged by the level of engagement and activity, we are experiencing and with that ill hand, it back over to Jeff.
Speaker Change: Thanks Laurent.
Jeff: Just a few more comments from me on the quarter and the outlook before we open up the call for questions.
Speaker Change: Think what sort of for me when I read a press release and MD&A was the amount of progress we have made a number of key fronts since our last call.
Speaker Change: From the transition of our Staples unit structure to a confessional REIT Trust unit structure to refinancing roughly $800 million very timely by the way of 2024 and 2025 debt maturities.
Speaker Change: For five and seven years of three 5% and 435%, respectively and as Teresa mentioned, extending our weighted average remaining term from three 1% to four six years.
Speaker Change: To delivering to expansion in the GTA the Netherlands.
Speaker Change: To renewing over 90% of our 2024 Expiries.
Speaker Change: And executing over 3 million feet of lease extensions in the quarter at an average rent increase of 46%.
Speaker Change: And so far in the fourth quarter.
Speaker Change: Lauren mentioned the team has renewed one lease totaling 533000 feet in the U S and an increase of roughly 40% and sign a new lease which is more mentioned we've talked about in our last call and Oh, Yes, we increased our annual distributions for the 14th consecutive year.
Speaker Change: In closing I wanted to highlight our financial performance and provide a little context, if I may.
Speaker Change: We discuss year over year ethical per unit growth in quarter over quarter, NOI growth, but I wanted to expand on that some more to highlight the strong discrepancy between actual performance and our unit growth are.
Speaker Change: Our Q3 of <unk> per unit is up roughly 9% year over year and has increased 25% over the past two years.
Kevin Gori: <unk> per unit, which to me is a relevant metric for granted given the positive impact the NTIC activity.
Kevin Gori: Not on NOI growth per se, but in terms of per unit metrics has performed even better.
Kevin Gori: NOI per unit is up 12, 4% year over year and has increased over 30% over the past two years as a result of development stabilization and strong same property growth.
Kevin Gori: This is significant growth by any measure and correspondingly during that period, we reduced our total debt to EBITDA from seven 9% to seven two times and our <unk> payout ratio currently sits at 68%.
Speaker Change: I'm pausing for factor.
Speaker Change: Yes.
Kevin Gori: For our outlook as Lorne outlined there appears to be an inflection point of vacancy in a number of our markets but.
Kevin Gori: But the recent economic and political uncertainty, we believe a contributor to a delay in occupier decisions regarding new space.
Kevin Gori: But we believe the conditions should continue to improve overall as we look forward to 2025, albeit slowly.
Kevin Gori: In the meantime, as you have heard the team has made excellent progress so far in 2025 maturities, having already renewed our four largest expires representing over $2 8 million square feet of space at <unk>.
Kevin Gori: Weighted average increase of approximately 60%.
Kevin Gori: We finished the quarter with approximately $133 million in cash an increase of over $30 million from the second quarter.
Kevin Gori: And with one of the strongest balance sheets in payout ratios in the sector, we remain well positioned to execute on our business plan for 2024, and deliver strong NOI and cash flow growth moving forward.
Speaker Change: And on that operator open up the call for any questions.
Speaker Change: At this time I would like to mind, everyone in order to ask a question. Please press Star then the number one on your telephone keypad.
Speaker Change: We'll pause for just a moment to compile the Q&A roster.
Speaker Change: And we'll take our first question from Mike Marchita with BMO capital markets. Your line is open.
Mike Marchita: Thanks, operator.
Speaker Change: Good morning, good morning, everybody.
Speaker Change: Just wanted to start off so first of all congrats on some of that strong.
Speaker Change: Neural activity that you executed over the past quarter.
Speaker Change: Loren I think you mentioned there was a 500000 square foot lease and Andy that you renewed.
Speaker Change: I was just curious if you could remind us what property of bad news.
Speaker Change: $14 51, all the points.
Speaker Change: All points okay.
Speaker Change: And then I guess you.
Speaker Change: Broker listings are correct you got it.
Speaker Change: Maybe a known vacate our unexpected vacate at aerotech coming up would that be correct.
Speaker Change: As it stands right now that that is correct. They are extended into the new year, we still haven't got us clients when they are leaving.
Speaker Change: But their intention is definitely to leave at the end of <unk>.
Speaker Change: At the end of their lease.
Speaker Change: Okay and does that property at all compete with.
Speaker Change:
Speaker Change: Better and Scott.
Speaker Change: Kind of a different size actually I mean, it's kind of in the middle of what we have but it's not really competing directly unless you were to put the larger a larger space.
Speaker Change: And that's something we've we've really contemplate at this time.
Speaker Change: Okay got it and then just maybe last one for me before I turn it back I know you kind of gave us a blended average on your expires.
Speaker Change: Expiries that you've heard of the renewals that you secured for the 2025 expires. Just curious can you give us a little bit more color on the Mississauga, where normally the securities.
Kevin Mike: It's Kevin Mike.
Speaker Change: Kent I think.
Speaker Change: We are bound by the conditions of the renewal agreement, we can't disclose what the actual rent was I can just tell you that.
Speaker Change: I think we did I think the team did an excellent job with this one and I think we keep rents above expectations, hence part of the reason for the lift in volumes in the quarter.
Speaker Change: Okay.
Speaker Change: That's perfect thanks, very much for that.
Speaker Change: Thank you we'll take our next question from Carl Stanley with Chardan. Your line is open.
Speaker Change: Yes.
Speaker Change: Thanks, Good morning, everyone.
Speaker Change: Just on the.
Speaker Change: Looking at the Trump presidency.
Speaker Change: Maybe the expectation of more national policy stance. There has been discussion that this could drive inventory building ahead of tariffs and several other potential positive demand drivers for the industrial space. Obviously incredibly early you need to see how this all plays out but initially how are you guys thinking about.
Speaker Change: Trump presidency.
Speaker Change: <unk> seen any.
Speaker Change: We are in discussions with tenants change are or where they holding off in advance of this just curious to hear your thoughts.
Speaker Change: I definitely I think we mentioned we were definitely seeing.
Speaker Change: A little more careful deliberation and.
Speaker Change: Delays in tenant decisions, but I cant per se say that it was actually related to one candidate or the other I think there was just a lot of uncertainty about what policies may come out of the election results.
Speaker Change: And we do expect we do expect that to relax a little bit not necessarily because of Trump just because of the now there is a known outcome in the election.
Speaker Change: But I think last time when you look at 2016 to 2020, I mean I wouldn't sit here I think I've said this before I wouldn't sit here and say tariffs are good for anybody's business.
Speaker Change: Including ours, however, it didn't have a big impact.
Speaker Change: Other than it did cause more near shoring and onshoring. So we do expect that trend I'm looking around the room and everything we.
Speaker Change: We do expect that trend to continue so I don't expect it to have a negative impact on our business per se and if anything I think would accelerate the sort of onshoring that we've been seeing particularly on the manufacturing side, which is not necessarily our cup of tea, but in the end it takes up space it take.
Speaker Change: Sub space in our sector and it drives up demand overall, which is positive for us obviously.
Speaker Change: Okay Fair enough, yes, youre asset support.
Speaker Change: Big increase in manufacturing, so I think that.
Speaker Change: Kind of makes sense.
Speaker Change: Just one more for me.
Speaker Change: I saw recently Volkswagen announcing plant closures in Germany, obviously, that's that's more related to what's going on within Volkswagen, but just would love your thoughts on.
Speaker Change: Concerns on potential read throughs for Magna within the context of your portfolio.
Laurent: Yes, it's Laurent.
Speaker Change: The most of all our all of our plants that magna actually leases.
Speaker Change: Probably.
Speaker Change: A dozen customers for Volkswagen is just one of many and those so they are pretty diversified.
Speaker Change: So as it stands right now we don't see any concerns with respect to <unk>.
Speaker Change: <unk> to the table.
Speaker Change: Okay. Thank you very much I'll turn it back.
Speaker Change: Thank you we'll take our next question from Fred Blondell with Green Street. Your line is open.
Fred Blondell: Thank you and good morning.
Fred Blondell: Just one question from me just adding to karl's questions in terms of capital allocation you guys have been a bit more into capital preservation mode. As that recently, so I guess is that today, how would you compare fundamentals in the U S.
Fred Blondell: It's just you were up in Canada from here.
Speaker Change: I guess, Ken do you see any factors that could incentivize you to become a bit more active in.
Ken: In one particular market or are you intend to remain more conservative.
Fred Blondell: Fred as Kevin.
Speaker Change: In terms of the fundamentals I think we're still feeling pretty positive on Europe right. Now I think they are going through the same sort of moderation in North America going through for sure but rent growth has been more positive in Germany in the Netherlands that has been in a number of markets here by the way when we look at the markets that we're in.
Fred Blondell: The only markets, where we saw asking rents decrease.
Fred Blondell: Our savanna in New Jersey, and the GTA so.
Fred Blondell: So we continue to see decent rent growth in Germany, and the Netherlands, and we believe that that's going to continue for a number of reasons. So we do continue to lag Europe and if you ask me today.
Speaker Change: And Loren can add to this you asked me today, where I think there's going to be stronger rent growth in 2025, Oh definitely in Europe.
Speaker Change: I would say our markets in the U S in the GTA.
Fred Blondell: In terms of capital allocation you're right.
Fred Blondell: Think we have said and I'll be consistent here.
Fred Blondell: We are open to the right deal it has to be compelling given where our cost of capital is today and.
Fred Blondell: And we just haven't seen that but we continue to pursue selective deals.
Fred Blondell: And very selective markets in North America included GTA and markets in Europe. So we'll continue to evaluate those opportunities.
Fred Blondell: But we remain in no rush to do so.
Fred Blondell: So it looks like despite being a bit more.
Fred Blondell: Optimistic on your Opex that you would come to their deals pretty much anywhere right.
Speaker Change: The right conditions.
Speaker Change: The right deal I would say so.
Fred Blondell: Coronary flex margins, but again I don't want to disclose exactly what markets were looking at that.
Fred Blondell: Certainly tier one markets our focus right now.
Fred Blondell: But it's not necessarily in Europe, or North America, it's not necessarily just wanted it to.
Speaker Change: Got it thank you so much.
Fred Blondell: Yes.
Speaker Change: Thank you we'll take our next question from Matt <unk> with National Bank Financial Your line is open.
Speaker Change: Hey, guys, Kevin just as a follow up to that I mean.
Fred Blondell: You're trading at almost 6% some implied or over 6% implied cap rate on essentially current NOI can.
Fred Blondell: Can you give us a sense.
Fred Blondell: You have free cash flow you have cash on the balance sheet, where your pecking order of putting capital to use would be acquisitions and CIB or development. At this point I know you have a few projects that are ready to go but I didn't get a sense as to whether you're putting shovels in the ground on those at this point.
Speaker Change: I don't think that there is a clear number one in our set of priorities. We are looking at retiring some debt in the short term and CIB could come back into play depending on what happens over the next couple of months.
Fred Blondell: And development, Yes, we are we are pursuing a few.
Fred Blondell: Build to suit opportunities and if the economics are right definitely that would certainly be of great interest to us and again these sort of.
Fred Blondell: Special or specific acquisition opportunities out there. So there is no clear winner I can say right now amount I think everything's on the table is the best way I could put it okay.
Speaker Change: Okay fair enough.
Speaker Change: And Loren I think you mentioned true value in your.
Speaker Change: Prepared remarks can you give us some sense theres a longwall to on that.
Speaker Change: The range of potential outcomes would be and I mean, if you were to get it back which doesn't sound like it's the case, where where rents would be relative to market and whether that's a.
Speaker Change: Highly leasable asset.
Speaker Change: Sure.
Speaker Change: Yes.
Speaker Change: We've done some work on it and it's obviously early days, but we've got some overlays that are trying to see where that do invest locations are relative to ours. There was an announcement that true value made back in the summer that our property was going to become the northeast regional distribution center for true value.
Speaker Change: As a result, they were shutting down other operations so.
Fred Blondell: Obviously, I can't comment beyond that but.
Fred Blondell: I would say the options are either they assume the lease space they could come back and renegotiate or are they could they cannot assume the lease book would be the three and we'll find out but I think our stance right now we've seen reasonably optimistic that Theres no reason why they would want to.
Fred Blondell: To keep the building, it's a great building, it's a great location and.
Fred Blondell: And would fit in well with.
Fred Blondell: With the combined companies.
Fred Blondell: Yes, the other thing I would add Matt is that the rents are below market are pretty firmly in a low market.
Fred Blondell: And the other thing I would add too is the building can be pretty effective that wafer utilizing so it can be right sized whatever is needed for that market.
Fred Blondell: At the time.
Fred Blondell: And does it open the option for you to get that below or can they just assume it on the terms that were being paid before.
Fred Blondell: I would assume it on the terms.
Fred Blondell: Okay.
Fred Blondell: And then just quickly last one.
Speaker Change: And it's a technical one but on straight line rent Teresa.
Speaker Change: It went up a bit I know you guys have finished an expansion outlets and there may be something else on the leasing side, but how should we think of that going forward.
Speaker Change: Yeah, So you're right.
Speaker Change: Some new leasing we did in the third quarter, but we had about $3 5 million for $24 million. This quarter right now, we're actually projecting that to go down by $1 million for Q4, and then after that in all honesty, it's going to really depend on leasing and 25. So I think really steady state you can look at $2 million to $3 million.
Speaker Change: Then of course as we lease up.
Speaker Change: That could go as high as like four to 5 million a quarter, but.
Fred Blondell: At this point in time, I think all I can really give you fourth quarter, it's looking about $2 5 million.
Speaker Change: That's helpful. That's helpful for cash NOI and getting it to that works. Thanks.
Speaker Change: No problem.
Speaker Change: Thank you we'll take our next question from Paul <unk> with RBC capital markets. Your line is open.
Speaker Change: Thanks, everyone.
Speaker Change: I just wanted to maybe step back can you just maybe remind us where the bulk of the vacancy in the U S portfolio farmer.
Speaker Change: If I recall I think Indianapolis as it.
Fred Blondell: Maybe a bigger piece of it and maybe some national assets, but maybe just remind us where.
Fred Blondell: Kind of spreads out.
Fred Blondell: Yes.
Speaker Change: Yes, Indianapolis, we have also the large vacancy in Louisville, and then really after that it's a it's a spattering of this a little bit of a GTA.
Speaker Change: There is a little bit of Nashville.
Speaker Change: There's a little bit in Chicago, and there's a little bit in Memphis.
Speaker Change: In vitro and in Utrecht has.
Speaker Change: Kind of go short term for us on that one is in Utrecht Netherland, just a note on <unk> because it can be annoying for me personally you try it goes up and down it's a redevelopment site we've applied for redevelopment.
Fred Blondell: And we're not really sure what we're going to do long term with the asset. So the tenancies there tend to be shorter term they go up and down quite a bit. So it does cause some noise from quarter to quarter.
Speaker Change: Got it yes, that's helpful.
Speaker Change: Thinking along the lines of the again the U S assets here.
Speaker Change: Any update on traction at a veterans' drive.
Speaker Change: And then or some of the national vacancies.
Speaker Change: Yes, listen we continue to.
Speaker Change: Issued proposals there is interest here and there nothing that's at an imminent stage at this time, we also have good Turing at our Louisville property in Nashville has been consistently.
Speaker Change: Busy as far as traffic in and Thats building in all honesty, we've had some very close kind of one yard liners on leasing up that space, but it remains <unk> remains a very good active.
Speaker Change: Market for Us Nashville.
Speaker Change: And maybe just coming back to last quarter, I think the Ohio vacancy or the bankruptcy from that tenant.
Speaker Change: What.
Speaker Change: The update there.
Speaker Change: Again really good activity on it.
Speaker Change: There is some some interest in it for sure we've had over a half a dozen tours. So really good activity to date, but nothing nothing eminent at this moment.
Speaker Change: Okay.
Speaker Change: I guess, if you put all that together, Kevin I think I think.
Speaker Change: I think you mentioned today that okay occupancy kind of holds steady yet.
Speaker Change: Our 95% sorry for for this year.
Speaker Change: By year end.
Speaker Change: When you think about all the traction that youre getting in the commentary made in I guess, we're not sure what happens with true value, but just how does the 2025 outlook shape up at this point from an occupancy standpoint.
Speaker Change: I would think of it more from a sort of permanent stabilized basis, and I think look we feel this portfolio should be somewhere 96, and a half 98%. So if you were to assume 97% for us.
Speaker Change: Somewhere in that range I think that that would be fair, that's kind of how we would look at.
Speaker Change: Got it thanks, very much I'll turn it back.
Speaker Change: Thank you we'll take our next question comes from ISC with CIBC. Your line is open.
Speaker Change: Thanks, Good morning, just.
Speaker Change: To start off with a more higher level question, but for I'm, sorry for Kevin, but just wondering what kind of catalyst do you think it takes for occupiers to move from being hesitant when it comes to taking space and the coming are adopting a more active stance.
Speaker Change: As we move into 2025.
Speaker Change: Gosh I wish I knew the answer to that.
Speaker Change: Who knows what's on the right, but but I will say look I've said.
Speaker Change: This on previous calls too when it comes to sort of a slowdown.
Speaker Change: And in the economy. It does feel to me like we have been in somewhat of a good recession now for a while.
Speaker Change: I think it's sort of been masked by the sort of service sector and I think that that is actually beginning to to change.
Speaker Change: So I think with interest rates falling with the political uncertainty in the U S out of the way I don't think we necessarily need to see very strong economic growth for there to be a resumption in higher demand from tenants I think a lot of the uncertainty has sort of been taken out of the system.
Speaker Change: And Lauren mentioned this again when we look at our portfolio of consolidation is really another sort of a positive catalyst for us and our friends we've started to see that.
Speaker Change: And I'll go a little further.
Speaker Change: Where we are active in the leasing market, including the GTA, we're now truly seeing a bifurcation in asking rents between modern product and P&C products. So we're starting to see that separation and I think we want to see.
Speaker Change: If it if it means a decline overall in market rents that's fine we've always been conservative in our outlooks in our projections, particularly to the market, but we want to see tenants choose quality offer quality and we're starting to see that and I think that that will benefit us on a relative basis overall so.
Speaker Change: We are starting to see more of a consolidation activity, we're starting to see better activity in the larger bay formats as well E. Commerce is sort of rearing its head again, Amazon starting to make more of these decisions. So I think we're starting to see that mostly because a lot of the uncertainty in terms of borrowing costs economic uncertainty.
Speaker Change: Et cetera has sort of been been alleviated.
Speaker Change: Okay, and then I guess on that point, which markets are you feeling fast about from a supply and demand perspective.
Speaker Change: Do you think would lag or take longer to come back to seeing rent growth.
Speaker Change: Well I mean, I think I think a little bit sort of negative around half the markets, we actually saw.
Speaker Change: And see sort of I think flatten or improve and I think almost two thirds of our markets. So as Warner mentioned at Nashville, It's hard to really get worried or Nashville has been a strong market Louisville has been strong.
Speaker Change: Chicago has been surprisingly strong I think actually in terms of demand absorption Houston has surprised us.
Speaker Change: Very strong markets Dallas has a lot of supply demand continues to lead the nation. There so not a lot of concerns there when I look forward in terms of supply and we're I think rents are growing probably ironically. The GTA is one that worries us a little bit because I think when we looked at a number of our markets in the U S for the first.
Speaker Change: I'm in over 10 years, some of them had no construction starts.
Speaker Change: So thats sort of grip on supply, which is good for us has taken place, but I think the GTA is going to see pretty strong supply continue.
Speaker Change: Through 2025 and into 2026, and what that means for the market as it is a bit of a question for us notwithstanding we have very strong rent spreads and better restaurants in place. So again, we're not that worried about it but just as we look out to the markets, how theyre going to perform in 'twenty five 'twenty six.
Speaker Change: As of the marks I think for us that are going to perform strongest in North America.
Speaker Change: Okay.
Speaker Change: And then just I guess two more specific questions you did the olive branch lease pulse.
Speaker Change: Quarter, just wondering where rents came in there versus your expectations and then secondly, just I guess for the Ajax expansion you just had about <unk> <unk>.
Speaker Change: 20000 feet left to lease wondering what prospects you are seeing for that space.
Speaker Change: How do we come into your expectations.
Speaker Change: So solid solid solid.
Speaker Change: Based on our expectations and we have really good activity on the.
Speaker Change: Remaining 20000 feet and <unk>, it's got great clear highest brand new buildings got lots of parking.
Speaker Change: Someone's looking in that 20000 foot range I mean as far as for class a new generation space. That's that's it.
Speaker Change: Yes.
Speaker Change: Okay. Thanks, I'll turn it back.
Speaker Change: Thank you.
Speaker Change: We'll take our next question from Brad Sturges with Raymond James Your line is open.
Speaker Change: Yeah.
Speaker Change: Hey, there.
Speaker Change: Just on the comment around.
Speaker Change: The consideration around starting build to suit opportunities on your existing land Big is there a particular return profile that you're looking to achieve before you would.
Speaker Change: Break ground or is it very site specific.
Speaker Change: It's market specific and site specific I mean, obviously stabilized values not a lot, but I think in terms of spreads we do.
Speaker Change: <unk> got pretty tight in 2021 and into 2022 and they have certainly expanded and so our expectations around returns over stabilize.
Speaker Change: Have expanded commence relief, but Brad as the hard to point it depends on it depends very much on the market.
Speaker Change: Yes makes sense.
Speaker Change: And.
Speaker Change: As potential buyers come back into the.
Speaker Change: We ended the investment market would that open up opportunities for capital recycling at this point within the portfolio.
Speaker Change: I think we're I think we're always open to that for non core assets I don't think we've got anything on the horizon right now and look at a number of these assets, we see very strong rent lifts as well so that is compelling to us as part of the consideration. So we are open to it in our markets with noncore assets, but nothing.
Speaker Change: Thats nothing thats eminent but if your question is are you willing to of course, we are.
Speaker Change: Okay makes sense I'll turn it back.
Speaker Change: Thank you.
Speaker Change: We will take our next question from Himanshu Gupta with Scotiabank. Your line is open.
Speaker Change: Thank you and good morning.
Speaker Change: So just on capital allocation.
Speaker Change: When do you <unk> acquisition activity there.
Speaker Change: On the acquisition capital approaching six in many of our markets.
Speaker Change: On your cost of financing is like more than what you just did.
Speaker Change: So how wide investment spend need to be before you.
Speaker Change: Before you go ahead with any acquisition.
Speaker Change: I don't know if it's necessarily a spread.
Speaker Change: The issue them onto your absolutely right and we are we are looking at those markets as well, where we see continued strong growth prospects over the medium to long term and cap rates have expanded to a point, where it's become attractive but again I'll just repeat.
Speaker Change: Yes, we could use that to do it yes, we could use our line of credit to do it but we also have considerations over our entire capital structure, which includes equity capital. So that's an important consideration for us and just to point out if there is a very compelling deal in one of our focused market today, we would do it but it may require us to recycle capital.
Speaker Change: <unk> asset sales et cetera, So we would do it but.
Speaker Change: And I am going to exaggerate to make this point to grow just to capture higher cap rates today, I think ignores the fact that our current cost of capital overall, and that's always a consideration for us.
Speaker Change: Okay.
Speaker Change: The leverage kind of in the near term.
Speaker Change: This compelling opportunity here.
Speaker Change: Okay.
Speaker Change: And then yes.
Speaker Change: Hi, good morning.
Speaker Change: That's fair.
Speaker Change: Okay. Okay.
Speaker Change: Then on the leasing activity and thanks to all of the pent up provided.
Speaker Change: First on the move in property large property, obviously it looks like you were closing in on it.
Speaker Change: Did not materialize so what was the issue.
Speaker Change: And then I'll take you to come to them at same story or is it like the pricing issue as well.
Speaker Change: And also <unk>.
Speaker Change: I'll start just on the two is actually a clean energy a global clean energy company that was looking to expand in the U S and it.
Speaker Change: It pulled back I think just because of uncertainty made it something to do with the U S election, we have no idea but.
Speaker Change: But it's not as though they went to another property or another market, they've just sort of delayed their plans for expansion at this time.
Speaker Change: That's fair.
Speaker Change: Okay, So same store tenants not ready to commit yet.
Speaker Change: Okay Fair enough and then overall it.
Speaker Change: It looks like the expectation is 95% occupancy model compared to obviously, 96% to 97%.
Speaker Change: So as you get into the next year.
Speaker Change: I'll be looking to modify the approach.
Speaker Change: <unk> so all of the assets.
Speaker Change: We just you know leading global macro to pay out I'm going to go ahead with the same strategy.
Speaker Change: Alright, thank you.
Speaker Change: It's funny because no one.
Speaker Change: People, who are critical I think of our high occupancy we weren't pushing rents hard enough in our occupancy has fallen and now we're not [laughter] we.
Speaker Change: We sort of somehow forgotten how to lease.
Speaker Change: I don't think our approach changes at the end of the day, what we care very much about this long term value of the properties and long term returns I don't think we would change anything in the short term just to satisfy.
Speaker Change: Someone's expectation.
Speaker Change: Occupancy I mean, obviously, we seem to talk about it a lot.
Speaker Change: And it's important to us because changes in cash flow seem to matter per.
Speaker Change: Per quarter, and we understand that but I don't think there's anything that's going to change our we're not going to do.
Speaker Change: We're not going to make a poor real estate decision.
Speaker Change: Just to solve occupancy in the short term, it's not sort of answering your question, we're not going to change our approach as we head into 2020, but obviously, we recognize we're in a different environment, it's more competitive we've been able to hold or not.
Speaker Change: Not only asking rents for the most part we've been able hold through rent we've been able to hold <unk>.
Speaker Change: <unk>.
Speaker Change: Very acceptable levels, which is good if the market changes or if conditions change in a particular market we have to respond accordingly.
Speaker Change: Shortly we will but it will be because it's the right decision in that market for that asset and we will have very little to do with sort of managing occupancy levels from quarter to quarter.
Speaker Change: Alright, thank you.
Speaker Change: And then on the <unk>.
Speaker Change: And then watch list when you spoke about I think true value.
Speaker Change: Last quarter I think it was the Ohio.
Speaker Change: Property I think.
Speaker Change: Is it normal to see disclaimer.
Speaker Change: Bankruptcies in your tenant.
Speaker Change: Base.
Speaker Change: Or is it something you're watching out for the remaining quarters as well.
Speaker Change: I think it's normal in the sector I think it is and again this is a pretty critical asset. So we're not trying we're just trying to provide updated information to the market, but at this point, we're not overly concerned.
Speaker Change: This is normal.
Speaker Change: In the sector and I think as normal in all sectors frankly, so I don't think it's anything to do right now at this time.
Speaker Change: And I don't expect there to be major changes as we head into 2025.
Speaker Change: Got it and on the.
Speaker Change: Same subject I think the Mississauga lease was done.
Speaker Change: It's still this is lee.
Speaker Change: So any any thoughts on the quality of the government.
Speaker Change: On wafer and no.
Speaker Change: Yes.
Speaker Change: No no no changes at this time.
Speaker Change: Okay. Okay.
Speaker Change: The last last question here.
Speaker Change: On the van can spread you know you mentioned four largest expiring led to 60% rent spread.
Speaker Change: Would you say that this mississauga and these will be closer to the 60% average.
Speaker Change: To be above there.
Speaker Change: Okay fantastic.
Speaker Change: Thank you.
Speaker Change: <unk>.
Speaker Change: Thank you and again, if you'd like to ask a question Press Star then the number one on your telephone keypad.
Speaker Change: We'll take our next question from Sam Damiani with TD Cowen Your line is open.
Speaker Change: Thank you and good.
Speaker Change: Good morning, still everybody just I think we all my questions have been asked but I guess just one last one you mentioned true value is there any any other other known or likely move outs in the next couple of years.
Speaker Change: At this time that Youre aware of.
Speaker Change: No nothing stands out.
Speaker Change: Okay, and just finally <unk> talked about this a few times, but I guess, just just directionally do you have a view on how same property NOI growth would be different next year versus 2024.
Speaker Change: We're not providing guidance on that too, but similar to this year I think that would be fair.
Speaker Change: But again, we'll provide a little more detail on our Q4 call.
Speaker Change: Okay, great congrats on the progress over the quarter end.
Speaker Change: The rest of the day.
Speaker Change: Thank you and it appears that we have no further questions. At this time I will now turn the program back over to our presenters for any additional or closing remarks.
Speaker Change: Thanks, operator, thanks, everyone for joining us on the Q3 call and we look forward to speaking with you on our Q4 call in I guess monitoring starting in February and talk to you then.
Speaker Change: This concludes today's conference call you may now disconnect.
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