Granite Real Estate Investment Trust

TSX:GRT.UN

Earnings Call Analysis

Granite REIT Reports Steady Growth Despite Minor Setbacks

Granite REIT's Q2 2024 results exceeded expectations, with NOI growing by $2.3 million or 2% over Q1. FFO per unit saw a 1.5% increase from Q1 and a 9.1% rise year-over-year. Despite a temporary vacancy, the company remains confident, updating its same-property NOI growth forecast to 6-6.5% for 2024. Leasing renewal rates stayed strong, with October rental rate hikes averaging 25%. The company repurchased 644,000 units and maintained a robust liquidity of $1.1 billion. Guidance for 2024 suggests an FFO per unit increase of 7-9%, signaling strong growth potential ahead【4:0†source】【4:7†source】.

Strong Financial Performance and Consistent Growth

Granite REIT reported solid financial results for Q2 2024, characterized by a strong growth in Net Operating Income (NOI) and Funds From Operations (FFO) per unit. FFO per unit rose to $1.32, representing a slight increase of 1.5% from the previous quarter, and a notable 9.1% growth compared to the same period last year. This growth was primarily driven by a robust 6% increase in same-property NOI on a constant currency basis, attributed to double-digit leasing spreads in both Canada and the U.S. The company achieved an average increase of 25% on rental rates for leases expiring this quarter, indicating a favorable market trend for Granite REIT. Despite high tenant turnover, the firm remains bullish on long-term growth opportunities.

Challenges and Adjustments to Guidance

However, there were notable challenges, including a tenant insolvency that impacted NOI growth expectations. Consequently, Granite adjusted their guidance for same-property NOI down to a range of 6% to 6.5% for 2024, a reduction from the previous estimate of 7% to 8%. Management highlighted that while the short-term outlook has been slightly dampened, they are optimistic about 2025, especially as in-place rents are below market rates in key locations, which bodes well for future growth.

Capital Management and Acquisition Strategy

Granite REIT also demonstrated prudent capital management, with over $100 million in cash and cash equivalents despite repurchasing approximately 644,000 units at an average price of $68.62 in the quarter. This reflects a disciplined approach to capital allocation, prioritizing investments that can enhance unit value over time. The company is actively pursuing selective capital recycling opportunities and remains focused on acquiring high-quality assets that fit within its growth strategy.

Operational Developments and Future Outlook

On the operational front, Granite is advancing its development projects, including a significant expansion in Ajax, Ontario, expected for completion in Q3 2024. The firm retains a strong liquidity position, supported by a total asset base of $9.3 billion. The weighted average cost of debt stands at 2.6%, with interest expenses projected around $21.7 million per quarter, indicating manageable leverage amidst ongoing development activities. Looking ahead, management projects FFO per unit growth of 7% to 9% for 2024 and anticipates continued NOI growth moving into 2025, underscoring their confidence in the firm’s long-term value.

Market Conditions and Leasing Activity

Leasing markets show signs of recovery, with demand strengthening across various sectors, particularly in e-commerce. Renewed tenant engagement indicates a potential acceleration in leasing velocity, which is crucial for improving occupancy rates. The management forecasts a 96% to 97% occupancy rate by year-end, supported by ongoing leasing negotiations for approximately 400,000 square feet of new leases and 800,000 square feet of renewals.

Final Thoughts and Investor Considerations

In summary, while Granite REIT faced some short-term headwinds, the overall financial health and growth trajectory of the company remain strong. Investors should take into account the strategic adjustments in guidance, continuous operational improvements, and management's proactive stance on capital management. The outlook for 2025 appears promising, backed by consistent performance metrics and a commitment to enhancing shareholder value. As always, a thorough examination of market conditions and Granite’s operational developments will be essential for potential investors.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning. My name is Todd, and I will be your conference operator today. At this time, I would like to welcome everyone to the Granite REIT Second Quarter 2024 Results Conference Call. [Operator Instructions]

Speaking to you on the 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.

[Teresa Neto, executive]

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 reflecting management's current expectations and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from forward-looking statements or information.

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

As usual, I'll commence the call and then turn it over to Kevan for his operational update.

Granite posted Q2 2024, results ahead of Q1 and in line with management's annual forecasting guidance, largely driven by strong NOI growth, partially offset by slightly higher interest costs. FFO per unit in Q2 was $1.32 representing a $0.02 or 1.5% increase from Q1 2024, and $0.11 or 9.1% increase relative to the same quarter in the prior year.

The growth in NOI this quarter is primarily derived from strong same property NOI growth enhanced by the double-digit leasing spreads in Canada and the U.S., the expiration of the free rent period of the recently completed development property in Brantford, and lease close out fees earned on a disposed property in Canada, partially offset by a new vacancy in the U.S. NOI growth was further enhanced by foreign exchange, as the U.S. dollar and the Euro were 1.4% and 0.6% stronger, respectively, in comparison to Q1.

AFFO per unit in Q2 was $1.17 which is $0.5 lower relative to Q1 and $0.8 higher relative to the same quarter last year, with the variances mostly tied to FFO growth, partially offset by higher 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 $7.1 million, which is an increase of $5.7 million over Q1 and $2.6 million over the same quarter last year. For 2024, we continue to expect maintenance CapEx, leasing costs, and tenant allowances to come in at approximately $28 million for the year, unchanged from our estimates last quarter.

Same property NOI for Q2 '24 was strong relative to the same quarter last year, increasing 6% on a constant currency basis, and up 7.3% when foreign currency effects are included. For 2024, we are updating our forecast for constant currency same property NOI based on a 4 quarter average to be in the range of 6% to 6.5%, a reduction from the previous forecast of 7% to 8% as a result of new vacancy commencing June 1, and some revised leasing assumptions on certain vacant properties. Kevan will provide some further color on the forecast of same property NOI later.

G&A for the quarter was $7.7 million, which was $1.2 million lower than the same quarter last year, and $2 million lower than Q1. The main variance relative to Q1 is the $2.5 million favorable fair value variance in non-cash compensation liabilities, partially offset by $0.9 million of corporate restructuring costs relating to the uncoupling of Granite stapled unit structure, both of which do not impact Granite's FFO or AFFO metrics.

G&A expenses that impact FFO and AFFO were approximately $0.2 million lower than Q1, which is mostly related to an approximate $0.7 million capital tax refund resulting from changes in tax regulation in the state of Tennessee and related to prior tax years, partially offset by cost pertaining to Granite's annual general meeting and other timing differences in expenses. For 2024, we do continue to expect G&A expenses that impact FFO and AFFO of approximately $10 million per quarter or roughly 7% of revenues.

Interest expense was higher in Q2 relative to Q1 by $0.6 million, while interest income also decreased by $0.2 million as compared to Q1. The increase in interest expense was primarily due to the reduction in capitalized interest as a result of the completion of the majority of development projects, together with the unfavorable impact of foreign exchange rates on foreign denominated debt. The decrease in interest income was a result of lower uninvested cash balances on-hand due to utilizing excess cash to repurchase units under Granite's NCIB program, together with a slight reduction in interest rates in Canada and Europe due to interest rate cuts.

Although interest income earned is lower from lower cash balances, the impact to both FFO and AFFO per unit is more than offset from repurchased units under the NCIB. Granite's weighted average cost of debt is currently 2.6%. For 2024, given that there is no debt maturing until late December, Granite's interest expense run rate is expected to remain at current levels of approximately $21.7 million per quarter, which will be offset by some interest income of approximately $1 million per quarter.

For income tax, Q2 current income tax was $2.6 million, which is $0.5 million higher than the prior year and $0.1 million higher as compared to Q1. The movement in current tax relative to Q2 last year is mostly attributable to increased taxable income in Europe due to the rental growth, together with the strengthening of the euro relative to the Canadian dollar, as all of our current income taxes generated from the European region. The increase in current tax relative to Q1 is mostly related to the strengthening of the euro relative to the Canadian dollar.

For 2024 we are expecting current income taxes to remain at current level of approximately $2.6 million per quarter. As in prior years, Granite may realize a credit to current income taxes of approximately $1.8 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 therefore, our item does not factor in any tax provision reversals.

Looking out to the 2024 estimates for FFO per unit, our guidance has been adjusted slightly from last quarter to narrow the range to $5.40 representing an increase of 7% to 9% versus 2023. Similarly, for AFFO per unit, we are narrowing our forecast range to $4.60 to $4.70, representing an increase of 2% to 4% versus 2023. The $0.05 reduction at the top end of the range is reflective of a slight reduction in NOI due mostly to 1 new vacancy in the U.S. and some revised leasing assumptions on certain vacant properties, offset by reductions in G&A expenses, most of which has been realized to date.

Granite has not made any changes to FX rate assumptions pertaining to the forecast period that will be in July to December of 2024. The high-end of the range continues to reflect FX rates of the Canadian dollar to euro of 1.48 and Canadian dollar to USD of 1.38. The low-end of the range continues to reflect FX rates of the Canadian dollar to euro 1.43 and Canadian dollar to USD of 1.32. As usual, we will continue to provide updates on our guidance each quarter as warranted.

Granite the balance sheet, comprising of total assets of $9.3 billion at the end of the quarter was positively impacted by $60 million of translation gains on Granite's foreign-based investment properties, primarily due to the 1.2% and 0.3% increases in the spot USD and euro exchange rates, relative to Q1, partially offset by approximately $0.8 million in fair value losses on Granite's investment property portfolio in the second quarter.

The Trust overall weighted average cap rate of 5.3% on in-place NOI increased 7 basis points from the end of Q1 and has increased 25 basis points since the same quarter last year. Our net leverage at the end of the quarter was 32%, and net debt-to-EBITDA dropped to 7.1x, which is lower than relative to Q1 and lower than Q2, 2023. As a result of the NOI growth, including the completion of stabilization of a good majority of the Granite's development properties.

Our current liquidity remains at $1.1 million, representing cash on hand of about $100 million and the undrawn operating line of $997 million. As of today, we have no borrowings under the credit facility, and there are $2.8 million in letters of credit outstanding. And lastly, during the second quarter, we did -- Granite did repurchase 644,300 stapled units under its NCIB at an average price of $68.62 for a total consideration of $44.2 million, excluding commissions and taxes on the net repurchases of stapled units.

Now I'll turn over the call to Kevan.

[Kevan Gorrie, executive]

Thanks, Teresa. I'll begin with a few introductory comments on our results. And then I'd like to turn it over to [ Lauren ] and Michael, to provide an update on our development and leasing activity and provide some perspectives on the investment markets in our jurisdictions. I will then finish with our outlook for the remainder of the year before opening up the floor to any questions.

As Teresa mentioned, our results for the quarter were in line with expectations despite the unplanned vacancy related to one of our tenants, and NOI grew by $2.3 million or 2% over the first quarter and represented the 12th consecutive quarter of NOI growth. As Teresa also mentioned, we lowered the upper end of our FFO per unit range, as is common to tighten the range, approaching the latter half of the year, and we also lowered our guidance for same-property NOI to 6% to 6.5% due primarily to the impact of the tenant insolvency, any period of free rent on a large renewal subsequent to quarter end, as Lauren will discuss some more in his comments.

With that said, same property NOI growth on a constant currency basis was strong in the quarter at 6%, led by gains in Canada and the U.S. at 12.5% and 5.1%, respectively. As outlined in our press release and MD&A, the team achieved an average increase in rental rate of 25% on our Q2 2024 maturities led by strong renewal spreads in the U.S. and the GTA.

As Teresa discussed and it feels like de javu all over again, we opportunistically utilized cash-on-hand to purchase roughly 644,000 units at an average price of $68.62. As I have stated previously, unit buybacks are not our first choice for capital allocation, but we will not hesitate to capitalize when the unit price is that far below now. It's also worth noting that despite allocating over $44 million on those unit buybacks in the quarter, in addition to funding the ongoing development and CapEx programs, we managed to finish the quarter with over $100 million in cash and cash equivalents, which I think speaks to the power of preserving conservative capital ratios and generating free cash flow to drive accretion per unit cash flow.

In conjunction with our quarterly results, we are also pleased to announce the release of our annual ESG report for 2023, which I think summarizes well our activities and achievements against a number of our key targets and objectives. There are, frankly, too many highlights to discuss here, but I invite you all to review the report, which is now available on our website.

At this point, I would like to turn the call over to Lauren for an update on our development and leasing programs, followed by Michael's comments on the investment market.

[Lawrence Clarfield, executive]

Thanks, Kevan, and good morning, everyone. I will begin my comments with a short update on our remaining development projects. As mentioned in our past quarter, the lease on our 409,000 square foot building in Brantford, Ontario, has commenced. We are completing the finishing touches to the base building and the exterior landscaping commenced last week. The ongoing 50,000 square foot expansion in Ajax, Ontario is expected to be substantially completed in Q3, 2024 with our pre-leased tenant of approximately 30,000 square feet, taking possession in the same quarter. Lastly, our 52,000 square foot expansion in Weert remains on schedule for a Q3, 2020 -- sorry, 2024 delivery.

As a reminder, we also have approximately 160 acres of land capable of delivering 2.4 million square feet of space once constructed. While we continue to move some of these developments forward from a permitting perspective, to ensure we are as ready as possible to entertain build-to-suit opportunities, we are not contemplating any speculative construction at this time.

On the leasing front, leasing markets in general started off the first half of 2024 with some relatively positive momentum. In the latter half of 2023, we saw users starting to study the market with limited deals progressing past that stage. After back-to-back historical net absorption years in 2021 and 2022, markets entered 2023 with fears of a recession, lender caution, increased construction costs and softer supply/demand fundamentals. It is not surprising that tenants decided to pause on long-term capital commitments and assess their current and future corporate needs.

The impacts of the economic uncertainty were felt mostly in the first half of 2023. By the start of 2024, it started to feel like tenants were back in the market and prepared to make some leasing decisions again, creating a more optimistic outlook for 2024. So far, we are encouraged with the year-to-date U.S. and Europe leasing statistics, but less so with the GTA figures. The hyper leasing pace we saw in '21 and '22 has not returned, but we think the market is moving to a normalized state. That being said, tenants continue to take their time to evaluate their real estate decisions, much like they did prior to the pandemic.

As you would expect, we are seeing a general flight to quality assets of locations, and encouraged to see that big box activity is starting to gain traction again. A pickup in decision-making at the C-suite level, coupled with the significant construction slowdown should lead to a stronger demand market. The [ 3PL ] companies continue to have the most dominant share of tenant demand, followed by the general retailers and the F&B industries. Notably, e-commerce segment has been showing strength again recently with stronger absorption numbers.

With the U.S. representing over 50% of our portfolio and where most of our short-term leasing initiatives are occurring, we are further encouraged with the generally improving leasing statistics. While the U.S. net absorption numbers increased in Q2 from Q1, again, it's important to understand the numbers are still down from recent highs. As a reminder, Granite's markets accounted for 7 of the 10 highest net absorption locations for the first half of 2024, which represented approximately 72% of the overall net absorption across the entire country.

Asking rents within the Granite portfolio remained relatively stable, and we reiterate a strong mark-to-market opportunity on both the ITP and development pro forma lease-ups. Vacancy rates have generally been increasing over the past several quarters, but seem to be moderating due to the significant slowing of new construction completions, coupled with improved leasing activity. If these dynamics continue, we believe we may be approaching peak vacancy rates in most markets.

During Q2 of 2024, Granite achieved average rental rate expense, as previously mentioned, about 25% over expiring rents, representing approximately 890,000 square feet of new and renewal leasing completed in the quarter, led by renewals in the U.S. and GTA. With respect to the 2024 lease maturities, we have renewed or extended approximately 89% of the 9.8 million square feet expiring at an approximate 16% increase in rental revenue, again, an increase, which is muted by the [indiscernible] renewal.

We continue to believe that we will achieve over a 90% retention rate on the overall 2024 expiries, which we believe is a strong outcome. With respect to the 2025 maturities, while it is still early days, we have renewed or extended approximately 23% of the 5.5 million square feet, and continue to believe that we will achieve greater than 30% renewal spreads on these expiries.

As it relates to our occupancy, we dipped slightly by 50 basis points from 95% in Q1 due to an unforeseen tenant bankruptcy in the U.S. and known vacancy here in the GTA. Subsequent to quarter end, we completed a blend and extend with a tenant in Indianapolis, whereby we coterminously extended the lease on 400,000 square feet expiring in 2024, and an additional 197,000 square feet expiring in 2025 to the end of September 2029 now. This simplified the lease structure and resulted in an immediate overall increase in rent of approximately 18%.

Currently, we are in advanced discussions on approximately 400,000 square feet of new leasing and 800,000 square feet of renewals. With that said, our leasing teams continue to work very hard and are encouraged by the level of engagement and activity we're experiencing and believe it will lead to stronger occupancy in the upcoming quarters.

And with that, I will hand it over to Mike.

[Michael Ramparas, executive]

Thank you, Lawrence, and good morning, everyone. Investment markets continued to show relative strength and stability in Q2 based on transaction data particular for new and higher quality offerings, in part due to availability relative to vast amount of opportunistic capital in the market allocated for industrial deployment. Results in year-to-date investment volumes, generally speaking, are flat to trailing North America and up in Continental Europe when comparing to those numbers from the same period in 2023, but however, are significantly of peak numbers in '21 and '22.

Investors continue to favor high-quality asset deals in prime locations with inherent rental growth opportunities as evidenced by deep bidding pools and ultimately sharp pricing. We are seeing this broadly across our global markets regardless of any local supply-demand differentials. The buyer profile continues to be largely dominated by private capitals, such as close-end institutional funds, private equity, sovereign and high net worth products.

As there are significant dry powder and liquidity strengthening, we are starting to see appetite for larger sized deals and well-located high-quality core offerings. That being said, we do and have been expecting to see select opportunities to acquire mis-capitalized projects where developers, for example, need an exit for low-rate leverage assets that require refinancing.

With Canada and the ECB already cutting interest rates and the U.S. Fed projected to start imminently, this forward economic environment should be generally embraced by the real estate sector and viewed as a stimulating and positive period. Deal pricing, investment volumes and quality publicly traded real estate companies should benefit from meaningfully lower rates. Deal liquidity continues to improve as spreads tighten and treasuries continue to recede.

At this time, both the Canadian and the U.S. 10-year bonds have come in at least 50 basis points in the last 90 days, compressing coupon rates for core loans. Also, there are seemingly more active lenders bidding for deals, and while the landscape is still dominated by Lifecos and debt funds, banks are selectively reemerging for quality deals and sponsors alike.

With our balance sheet, liquidity and leverage metrics always top of mind, and as mentioned last quarter, our team continues to underwrite and pursue selective opportunities that feature quality, growth and value as key focal points. We continue to be disciplined and patient in our deployment, ensuring our next acquisition is meaningful on strategy drives accretion, and we are optimistic this is not far in the future.

With that, I'll hand it back over to Kevan.

[Kevan Gorrie, executive]

Thanks, Mike, and thank you, Lawrence, for your comments. So overall, our results, again, were in line with expectations. NOI and cash NOI increased once again this quarter, and our liquidity position remained very strong at over $1.1 billion in cash and available credit at this time. The tenant insolvency was unfortunate news for us and will negatively impact our same property NOI growth for at least 2 quarters. But the fact that the in-place rent is well below market, combined with the quality of the asset location should positively impact NOI growth for us in 2025. Similarly, the free rent on the large renewal in the quarter that Lawrence spoke about, will further mute NOI growth in Q3 but will help drive strong NOI growth in Q4 and subsequent quarters.

In closing, I do want to say that at Granite we've never lost sight on what's important. And we're frankly comfortable living with the high expectations that are placed on us by others because we hold ourselves to a very high standard, which is to generate actual returns over the long term for our unitholders while maintaining a very strong balance sheet. To that end, we have delivered NOI growth of just over 45% in the past 3 years since the second quarter of 2021, representing an average increase of over 13% annually. Similarly, we have generated growth in FFO per unit of just over 33% over that same period or 10% per year on average, including 9% year-over-year this quarter. And equally as important, we remain very well positioned to continue to deliver on our growth targets for 2024 and 2025.

And on that, I will open up the line for questions.

[Operator]

[Operator Instructions] Our first question will come from Sam Damiani with TD Cowen.

[Sam Damiani, analyst]

The extensive commentary was very much appreciated. So thank you, thank you very much for that. With the quarter and sort of change in near-term outlook, change in guidance, how are you feeling about 2025 today versus 90 days ago?

[Kevan Gorrie, executive]

I don't think that there's any difference. I think, like I said, I think the insolvency we had as a bit of a hiccup. It's a minor setback. But it's -- you're talking about a rent. I don't want to say the specific market. We're talking about a rent that's below $4 a square foot in a market that's north of $5 a square foot. So I think -- from that aspect, I think there's huge potential to drive growth in NOI in the future. So it has no impact on our view of 2025 at this time.

[Sam Damiani, analyst]

And then I think last quarter in the guidance commentary or maybe in the Q&A, I can't remember, there was some occupancy targets set for the year-end. I didn't see that, and I apologize if I missed it, in the disclosures. Do you have an updated view as to where the committed and in-place occupancy will likely be at the end of 2024?

[Kevan Gorrie, executive]

Yes, Sam, on that, we don't disclose it in the MD&A or the press release. I think it came up on the call last quarter. And I think we said, including committed, we expect to be between 96% and 97%. That has not changed. I think just based on Lawrence's comments about deals that are active right now and the activity that we're seeing, we're still confident we will finish the year, including committed between 96% and 97%.

[Sam Damiani, analyst]

And then last one for me. I guess, Mike, given your comments on the investment market seems to be kind of recovering a bit here. It's more liquidity coming in, interest rates are a tailwind, hopefully, going forward. Does Granite look at any opportunities to recycle capital in this environment? Just given, I guess, everything on the table, including unit price that's still well below NAV.

[Michael Ramparas, executive]

Yes, Sam. We're always looking at opportunities to recycle capital. But again, it's got to be the right opportunity, the right transaction for us. We're not forced to sell anything at the moment, and we have to make sure that we get the right transaction.

[Operator]

Our next question will come from Brad Sturges with Raymond James.

[Bradley Sturges, analyst]

Just following up on Sam's line of questions, and I appreciate some of the commentary you've already given to the '25 lease maturities. Would you -- at this stage, I know it's probably, in some cases, a little early to talk about all the [indiscernible]. But would you be expecting generally a similar retention rate or renewal rate for '25 as what you're expecting for '24?

[Kevan Gorrie, executive]

I'll let Lawrence chime in, and I'd just to say, I mean, I think like Lawrence said, anything over 90% is rather exceptional. And I think it is early days, although we seem to be encouraged by the, sort of, level of discussions we're having already on those. But would you say 80% to 90% we'll still be comfortable with?

[Lawrence Clarfield, executive]

Yes. I still think it's early days, Brad. But I think as Kevan said, we're encouraged by what we've had so far. I really don't want to put an exact percentage on it right now. I think maybe in the next quarter or 2, we'll have a little bit better clarity. But I do think it will be a very strong outcome based on what we've experienced to date.

[Bradley Sturges, analyst]

And of the -- I guess, the re-leasing that you've already done, the 23% of those '25 maturities. How do those re-leasing spreads compared to your overall expectations of maybe over 30% for the lease rollover exposure next year?

[Kevan Gorrie, executive]

I just want to -- it's Kevan. I just want to chime in on that, Brad. I think it is consistent but keep in mind, even if it wasn't, our sort of forecast of 30% to 35% for the year takes it into account. So I'm not even sure what the number really is, but I don't know how consequential that is to the guidance because it would be built in. So I think it's consistent, but I like to say 30% to 35% for the year is the guidance for next year.

[Bradley Sturges, analyst]

And no change to the committed occupancy range that you're expecting by year. And I guess I'm curious to dig in a little bit to the Midwest in terms of the availability you have there, in terms of leasing velocity or just general market conditions? Are you seeing any incremental change from the last quarter on Indianapolis and maybe in Louisville?

[Lawrence Clarfield, executive]

I think we're encouraged in that there still is activity that we're seeing at both locations. I'd say probably Louisville, I'd say, is a little bit more encouraging at this time, but we are seeing activity at both locations. I'd say in Indie, probably a little bit more activity on the smaller building than a larger building. But there is activity at both locations.

[Kevan Gorrie, executive]

Yes, which is funny because I think last quarter, we felt our activity in the large one right now seems to be on the smaller one. And it can fluctuate from quarter-to-quarter, but that's a fair point.

[Bradley Sturges, analyst]

And just remind me, is there other availability on the larger box side? Or is there -- is it fairly -- is there limited availability on some of the larger boxes within those 2 markets right now?

[Lawrence Clarfield, executive]

I think Indie -- again, one of the things you got to think about is, yes, there is more availability in big box. We are in a submarket that has a much tighter vacancy than the overall vacancy in Indie. In Louisville, we are one of one over 600,000 feet. So we're well positioned. And there really is very little supply there. So it's a pretty tight market. So I think we're well positioned in Louisville for a large user.

[Kevan Gorrie, executive]

And I think just to add to that, Brad, those are very good points that Lawrence brought up. And just on Indie location we're in, which you know is, kind of, I would compare it to Mississauga across the street from the airport, it's never going to be the lowest cost option in that market nor do we want it to be. So I think it has to be the right deal for us and big differences and not just in Indie, but in any market, there are big differences between submarkets, availability rates between submarkets. And certainly, that's what we're seeing in Indie between our market and the markets to the Southeast for example.

[Operator]

Our next question will come from Kyle Stanley with Desjardins.

[Kyle Stanley, analyst]

In the prepared remarks, you mentioned seeing maybe a bit more renewed demand for big box space. I know, obviously, what we're just talking about on Indie, maybe seeing that shift a little bit, maybe, towards the smaller space. But just generally, can you talk about maybe what's driving some renewed demand in that big box space right now?

[Lawrence Clarfield, executive]

I think -- I mean, there's lots of different drivers in it. I think that one of the things that's just happening is that there was probably a takedown of a lot of space over the pandemic, and I think that's rationalized now. E-commerce is still growing. And so there is a renewed interest in those type of larger spaces. And as well, I just think that, when I look at one quarter we could be telling you which market do we see the most activity and then they're flip-flopping all over the place.

But right now, Louisville stakes to be also taking advantage of the airport right nearby, and there's some renewed interest there as well. So I just think it's probably -- I think some of the companies, the C-suite people, as I mentioned in my earlier remarks, I think people are realizing that it's time to move on, and they need to start to make commitments based on their business plans. And so that's what we're at least experiencing at this time.

[Kevan Gorrie, executive]

Yes. Definitely, I would say too, on top of that, we are seeing consolidation -- a fair amount of consolidation. So it is sort of Peter robbing from Paul, smaller sort of spaces consolidating into a larger space. I don't think that's a big part of it. I think it's more of what Lawrence's talking about. But certainly, we've seen a couple of deals involving prospects that are consolidating into larger spaces, which is normal.

[Kyle Stanley, analyst]

Maybe just my last question. I mean I think you guys have mentioned it a few times in recent calls, and it was mentioned a bit earlier today. What is it that you're seeing in the kind of leasing environment in the GTA that does make that be the market that maybe you're less constructive on current lever versus some of your other markets?

[Kevan Gorrie, executive]

I'll start with it. I think if you look at the absorption, I mean, we understand as much as anybody supply -- the supply-demand dynamics in the market. But when you look at Toronto, you have negative, I think, 6 million feet over the past 5 quarters. I mean this has been successive quarters of negative -- 0 to negative absorption. So that tells me is the occupied space itself is going down, and demand is going down.

When you look at some markets that have high supply, I'll use Dallas, has a lot of supply and it makes the market more competitive to be sure. But it's still generating 7 million square feet a quarter or more in that absorption. So that's telling us that businesses and our customers are continuing to move and invest in those markets. But when you see Toronto where there's been no growth, Montreal, I think it's had 5 or 6 quarters of negative absorption.

Now there's a question about where the demand is going to come from? And where that level of investment is going to come from? So that's sort of our view of Toronto in the context of our portfolio.

[Kyle Stanley, analyst]

Maybe just adding to that, like, in your opinion, maybe what is the driver of the demand replenishment that we've seen? Obviously, we've seen a bit of a pickup in supply in some nodes. But generally, it seems like what's going on in Canada is a little more on the demand side as opposed to the U.S., the issue has been more on the supply side. So just curious if you have a high-level thought there?

[Lawrence Clarfield, executive]

I think in terms of the -- I think everyone looks at the U.S., I think in terms of the U.S., which has a much more active market, the thing that I would say is we are still continuing to see investment in electrification, if I could call it that, that is attracting manufacturing, which, of course, we don't build manufacturing sites, but they can use our building, it's rather generic that way.

But also there's a lot of near-shoring from Asia to Mexico, and that is positively impacting a number of our markets, I think. That's one thing that we're seeing clearly. It's positively impacting Houston. It's positively impacting Dallas right through the Midwest. And is that a dynamic that'd continues? I don't know. But that certainly is a sort of tailwind in terms of absorption and demand for our markets that we're seeing.

[Operator]

Our next question will come from Mike Markidis with BMO.

[Michael Markidis, analyst]

I just wanted to just focus in, again, on the committed occupancy target of 96%, 97%. So I guess you guys were 94.5% committed at the end of the quarter. And I think Lawrence has spoke to 400,000 square feet of discussions of new leasing currently underway. Were there any other new leases that have been signed [indiscernible] the quarter that I might have missed?

[Kevan Gorrie, executive]

Is there anything that's been signed in the quarter? You're talking about new leases, Mike? So not renewals, just new leases?

[Michael Markidis, analyst]

Yes.

[Kevan Gorrie, executive]

I'm not sure we had anything subsequent to the quarter.

[Teresa Neto, executive]

Not subsequent. Not subsequent, during the quarter.

[Michael Markidis, analyst]

No, I was asking subsequent to the quarter.

[Teresa Neto, executive]

Sorry, I thought you meant in the quarter. Apologies. Nothing subsequent, right?

[Kevan Gorrie, executive]

No.

[Teresa Neto, executive]

No.

[Michael Markidis, analyst]

So -- okay. So 400,000 square feet. And then from an -- just looking towards your 2025 maturities. I guess you said 30% to 35% was the anticipated spread overall, if I'm not mistaken? I think you got a pretty significant from bigger contribution or waiting to Canada or the GTA in 2025. So how would we break that out between sort of the GTA and your expectations for the U.S. you're seeing the change in the amount coming through in GTA?

[Kevan Gorrie, executive]

I can't remember where exactly we had the list in the GTA. I think we talked about it on the last call, Mike, and I don't think anything has changed in terms of the splits and what we expect from each one of the geographies.

[Michael Markidis, analyst]

And then last one for me, just on the U.S. And again, I think we talked about this last call, but can you refresh us, I think the cadence of the U.S. expiries [indiscernible] 2025 are somewhat back-end loaded. Is that the case? Is it concentrated to a few specific ones at the end of the year? Or is it pretty consistent?

[Kevan Gorrie, executive]

I think it's more consistent. I think it is back-end loaded -- or sorry, second half end loaded, not the first half, and that includes actually the GTA as well. So I think the majority of our leasing is in the second half of 2025, not the first.

[Michael Markidis, analyst]

In the U.S.?

[Kevan Gorrie, executive]

Overall.

[Michael Markidis, analyst]

Overall. Okay.

[Operator]

Our next question will come from Matt Kornack with National Bank Financial.

[Matt Kornack, analyst]

You seem to have pretty high confidence in the rate for Canada. Are you relatively confident that the tenants, I guess, 1.2 million square feet will renew in that space in Toronto?

[Kevan Gorrie, executive]

Yes. I think we're relatively confident. Yes, no promises at this point, obviously, but I think discussions indicate to us that we should be relatively confident that they would renew.

[Matt Kornack, analyst]

So presumably, their business and everything is going fine. I don't know if you can provide who it is actually that's maturing in 2025 in Canada?

[Kevan Gorrie, executive]

No. We can't. Sorry.

[Matt Kornack, analyst]

Okay. No. All good. And then, I guess, broadly speaking, and taking a bit of a step back, obviously, the Canadian consumer has been under more pressure than the U.S. consumer, but this recent route in the markets, there was some talk about maybe the U.S. is seeing a bit of pressure. Do you think that will translate into some demand-side issues going forward? Or how should we think about that from a fundamental standpoint? And presumably lower rates help everybody. But in Canada, I think lower rates are probably going to have maybe a bit more economic cloud, hopefully?

[Kevan Gorrie, executive]

Yes. I mean I think that that's fair. And I mean, to be clear, we don't believe the recession is good for anyone. The REIT has seemed to trade more with interest rates and not with GDP and consumer behavior, which we always pay attention to. The one thing I would say is, let me get back to one of Lawrence's points, it does feel like we have been in a bit of a good recession for a while. And I think really, the shoe to drop here is more on the service side and not on the good side. So we -- from that aspect, we're not -- I don't think we should be as discouraged about GDP or recessionary pressures as some other sectors of the economy.

But that being said, to Lawrence's point, what it feels like, and I had -- we had a very long conversation with a leading broker in Europe. And I think there's a similar dynamic. Because of the economic pressures and the uncertainty, CFOs and executive teams have been load to make financial commitments and that's understandable. And -- but what we're seeing on the ground is they have the real estate need. It is there. They're just delaying the decision. And our conversations objectively with people in Europe are exactly the same. Those needs have come to the forefront, and the delays can no longer be tolerated.

So companies are -- I don't want to use the word reluctantly or begrudgingly, but they're making the decisions they've had to make. They've delayed it long enough and now they have to make that decision. And so recessionary pressures, for sure, could have an impact on that moving forward. But in real time, what we're seeing is that these tenants are in need of the space. And we expect, over the coming quarters, that activity will be better than it is today and certainly better than it has been in the past few quarters.

[Lawrence Clarfield, executive]

And I guess -- sorry.

[Matt Kornack, analyst]

Sorry, I missed that. We've got the benefit of touring some of the assets that you guys own and there were clearly certain tenants that have invested significantly into their space. Has it through this, I mean you had some occupancy grind. Obviously, some of it was new development. But for the tenants that are leaving, would you characterize them as tenants that haven't invest space? And maybe can you give us a sense as to the breakdown between those very stable tenants that have invested significantly versus maybe more generic space in the portfolio?

[Kevan Gorrie, executive]

It just feels more like we're more in a sort of normal state. To Lawrence point, probably a bit lower than that, but it seems to be getting -- hopefully, by the end of this year, we're getting back to that level. But remember, a lot of these spaces in general, the needs of the tenants and the retailers and wholesalers in general can change. They may want to consolidate in one market for whatever reason. It depends on whether manufacturing or customer base is as well.

So I think these are just normal decisions that are made. But I mean, over 98% renewal rate is crazy. It's crazy. And I think it's going to be positive next year as well. And I think that speaks to, as I said before, the relative quality of the portfolio and the stability of our channels.

[Operator]

Our next question will come from Gaurav Mathur with Green Street.

[Gaurav Mathur, analyst]

Now just staying on that line of questioning for the moment. Would it be fair to say that the occupancy pressures that are felt in the GTA and the U.S. market are comparatively higher than what would be felt in Europe at this point in time?

[Kevan Gorrie, executive]

I think that, that would be fair. I think in general, I mean in Europe for a number of reasons, barriers, entry, et cetera, is generally lower than what we're seeing. I mean, the availability rate in the GTA is just over 5%. It's where it was in 2012, to be honest with you. So in Europe, it feels like it would be in the sort of depending on the individual market you're in somewhere between 3% to 5%. So it would be lower, certainly lower than what we're seeing in the U.S. And that's the long historical norm for us in our sector.

[Gaurav Mathur, analyst]

Okay. And given that there are quite a few macro concerns in Europe itself, you're not seeing a pullback -- you're not seeing that availability rate rise just yet?

[Kevan Gorrie, executive]

No, it has gone up. And I think leasing has slowed down. Again, this is sort of a demand thing and not supply thing. It has slowed down, but rental rates have continued to rise across most of our markets, and we haven't seen a big uptick in availability.

[Gaurav Mathur, analyst]

Okay. And just last question. I want to switch gears here to the acquisition market, but any opportunities that we could potentially see being executed on in the second half of the year? And how should we think about balancing back with the NCIB activity?

[Kevan Gorrie, executive]

I don't think anything has changed in the real look. As Mike pointed out, we have pursued select acquisitions, nothing that's too large. And frankly, I think -- and Mike can add to this. I don't think we've seen anything that's that compelling to us, to be honest. But we would not hesitate, I think, to move forward with the transaction. I'm not saying anything that would be so transformational. But if it was the right deal, we would move forward and we would figure out how to capitalize without compromising the balance sheet.

So in terms of the NCIB, again, this is why we love to have the liquidity that we have that we can take advantage of those situations. It doesn't feel good, but we can take advantage of what we do. So no comment really on any future plans for the NCIB. There's nothing set in stone. But I think it would be my personal preference and our preference to do an acquisition or to do a design build, for example, one of our sites and add value that way. But in the absence of that, if we have cash on hand, then the NCIB at the right price is -- remains an option for us, obviously.

[Operator]

Our next question will come from Himanshu Gupta with Scotiabank.

[Himanshu Gupta, analyst]

So there was a new vacancy, I think, starting from 1st June, which market was that? I mean, it looks like there was a tenant insolvency.

[Kevan Gorrie, executive]

I'll say it was in Ohio. It's one of our assets in Ohio. We don't want to provide much more comment on that. We're certainly now marketing the space.

[Himanshu Gupta, analyst]

And any other tenants on the watch list, Kevan?

[Kevan Gorrie, executive]

Nothing material, Himanshu. I mean, there's -- we always keep a close eye on mostly our smaller tenants, and I mean quite small tenants under 50,000 feet. So nothing material at this time. This surprises in that through the process, we were under the impression that even though there was going to be a restructuring, they're going to continue to use that space. And only found out in May that they would not be continuing their occupancy in the space and move out at the end of May. So it was a bit of a surprise for us. But again, we're very comfortable that we will be able to earn a very decent mark-to-market on that rent when it's released, and we're very comfortable with the location and the quality of that asset.

[Himanshu Gupta, analyst]

And then just moving on the leasing side. How is the progress on Memphis vacancies? I mean is that the one where you are in advanced discussions on that 400,000?

[Kevan Gorrie, executive]

Yes, we can't -- it's not -- we're not trying to be evasive. We don't want to provide any specific locations in any of these discussions. We're in active discussions, and we don't want to do anything that compromises that. So all I would say is in terms of Memphis, we see decent activity and we continue to see decent activity in that market.

[Himanshu Gupta, analyst]

Maybe another broader question, what is tougher here, like leasing up the new development in Indianapolis or like the older assets in Memphis or Louisville, for example?

[Kevan Gorrie, executive]

That's a great -- that's a great question. And I think, as Lawrence's pointed out, it changes from quarter-to-quarter. And it's still -- it remains a sort of mystery and interesting to me how real estate decisions can be made so quickly in such large cases in our sector, but that's what we continue to see. So if I said to you, right, now there seems to be more activity on even second-generation space in Memphis versus first-generation space in Indie. That certainly won't be the case in the next quarter.

So -- but this is one of the reasons why we embarked on such an ambitious development program the way that we did, is the newer generation spaces are going to be very competitive, and we're going to be okay. And so if you ask me what would I rather own today, I'd rather own new generation in Indie then I would a second generation in Memphis.

[Himanshu Gupta, analyst]

And how would you answer in the context of the asking rents? I mean would you say the asking rents are much higher on the new development compared to the older ones? And probably that's why it's taking a bit more longer to lease up those assets?

[Kevan Gorrie, executive]

I think that, that would be fair. And I think one of the good things for us is that the way land costs and construction costs have appreciated so much over. I don't think there's a lot of wiggle room for owners of real estate, particularly newer real estate to move down in rental rates and asking rates. And that's what we're seeing. We're seeing asking rates for the most part, price of market holding up very well, some even went up over the first quarter. So I think there's going to be a lot of continued pressure to keep rents and face rates where they are, at least for the next number of quarters.

[Himanshu Gupta, analyst]

And then just turning on the guidance, FFO guidance, Teresa, USD and euro has moved a bit compared to Canadian dollars.

[Teresa Neto, executive]

Yes.

[Himanshu Gupta, analyst]

And just to clarify that you do not consider that in your midpoint. So there could be an upside to your midpoint, just from an FX point of view?

[Teresa Neto, executive]

That is true. That is true. So we've baked in a more favorable FX certainly in Q2 than we were originally forecasting. But you're right, that there could be upside just given where the euro and USD are trading today. That's fair.

[Himanshu Gupta, analyst]

And then lastly, just talking about the balance sheet. I mean it looks like leverage will come down further once these lease-ups are done. So can you qualify for a credit rating upgrade down the line? I mean I know it's already high, but is that a possibility here?

[Teresa Neto, executive]

I'd say that's very low possibility. I think certainly with DBRS, we would have to sustain, I think, debt-to-EBITDA is in the 5x range, and that's just not going to happen. And certainly, with Moody's, just even given our size and it would take -- we would have to be, again, quite low, probably closer to the low 5x, high 4x on debt to EBITDA on a sustained basis in order to get an upgrade. So no, it's not in the cards in the future.

[Himanshu Gupta, analyst]

Last question, and I know I'm between you and lunch. So on asset valuation. I mean cost of debt financing has improved a bit in the last 3, 4 months, call it. So Kevan, is the cap rate expansion cycle almost over or it's over? And do you see CapEx moving down from here?

[Kevan Gorrie, executive]

I'm looking at Michael as I'm kind of saying this, but I think I was asked this question on the last call, just the movement of the bond rate and some of the deals that we're seeing in the market suggests that there's more money coming into the market and our last transactions are picking up. We're now seeing a return of large portfolios transactions taking place. We've seen a couple of high-profile ones in the U.S. So it feels like cap rates have stabilized and are continuing to strengthen.

And I do want to point to it, I think it was mentioned, maybe Teresa did, in terms of the cap rate versus a year ago. Remember that also depends very much on asking rents where rents are and where NOI is. So if you were to look last year, and we've discussed it, if you were to look at an average cap rate last year and say, okay, it's move 10, 15 basis points to this year, it doesn't seem like that much. Keep in mind that also what impacts that is where rates have gone, rental rates have gone since that period of time. So you could have a larger movement in cap rates, but it's moderated by the growth in market rent and the growth in NOI. So I just want to make that clear because I've seen that in certain analysis or that doesn't take into account how rents have moved from year to year. So it certainly feels like there's been a stabilization. Mike, anything to add on the cap rates.

[Michael Ramparas, executive]

No. that's fair. I think we have -- we are seeing sort of the peak of the expansion on the cap rates, as much as you've mentioned, and where the curve goes from here, all depends.

[Kevan Gorrie, executive]

Yes.

There are no more questions [indiscernible].

[Operator]

Our next question will come from Pammi Bir with RBC Capital Markets.

[Pammi Bir, analyst]

Well, sorry, I look like I might be able to squeeze one in here. Kevan, I wanted to come back to your comments on the capital deployment. You mentioned you wouldn't hesitate if the right opportunity surface. But I'm curious where would you want to raise your exposure either from an acquisition standpoint or if you were prepared to kick-start a development?

[Kevan Gorrie, executive]

I wouldn't want to name a specific market, Pammi. But I would point out, I think we have discussed in the past, certain markets, the GTA continues to be a really important market for us. Now we have not seen anything at a pricing level that's really compelling for us. But this is a market we will continue and always continue to focus on.

There are select markets in Europe and the U.S. that we like and have mentioned those target markets in the past, that we're paying attention to if the right deal comes along. But they would be new markets for us. They have -- we have discussed them in the past, but they would not be necessarily in the existing markets that we're in today. I hope that helps.

[Pammi Bir, analyst]

Last one. I just wanted to clarify, that 96% to 97% committed occupancy that you mentioned, you expect to get to by year-end. Does that assume the re-leasing of that bankruptcy in Ohio? And as we think about next year, any larger known vacancies coming back to you?

[Kevan Gorrie, executive]

No, it doesn't -- it's not predicated on the lease-up of the Ohio asset and for -- I'm sorry, what was the second part of the question, is it 2025?

[Pammi Bir, analyst]

Yes. Any known vacancies that might be coming back to you next year?

[Kevan Gorrie, executive]

Known vacancies? No, not at this time.

[Operator]

We do have a follow-up question from Sam Damiani with TD Cowen.

[Sam Damiani, analyst]

I just wanted to maybe tie together some commentary that we've heard over the last hour. We've got pretty good renewal spreads next year. We've got a pretty -- it sounds like a pretty short watch list of tenants that might give back space. You're talking about higher retention without putting a number to it potentially next year. Like is there any reason we shouldn't expect same-property NOI growth to notably accelerate in 2025 versus 2024?

[Kevan Gorrie, executive]

I think the way I would put that, Sam, is I think I was asked this question last year, and I'll just repeat my answer to it, and I don't think anything has changed. At this point, I think last year, 2023, I said that I expected same growth NOI to accelerate through 2025. So 2024 should be higher than '23, and '25 should be higher than '24. I don't think anything has changed in our expectations on that basis.

[Operator]

Thank you. At this time, there are no further questions in queue. I will turn the call back to Kevan Gorrie, for any additional or closing remarks.

[Kevan Gorrie, executive]

All right. Thank you, moderator. Just on behalf of the management team and trustees here at Granite, thanks again for being part of our Q2 call, and we look forward to touching base with you again in November for our Q3 call. Thank you.

[Operator]

This does conclude today's conference call. You may now disconnect.