Granite Real Estate Investment Trust

TSX:GRT.UN

Earnings Call Transcript 2024-Q3

[Operator]

Good morning. My name is Shelby, and I will be your conference operator today. At this time, I would like to welcome everyone to Granite REIT's Third Quarter 2024 Results Conference Call. [Operator Instructions] Speaking to you on the call this morning is Kevin Gori, President and Chief Executive Officer; and Teresa Neto, Chief Financial Officer. I will now hand the call over to Teresa Neto to go over certain advisories.

[Teresa Neto, executive]

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 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 time to time including the Risk Factors section of its annual information form for 2023 and Granite's management's discussion and analysis for the year ended December 23 -- December 31, 2023, filed on February 28, 2024.

So for Q3, Granite posted results ahead of Q2 and in line with management's annual forecast and guidance, largely driven by strong NOI growth. FFO per unit in Q3 was $1.35, representing a $0.03 or 2.3% increase from Q2 and an $0.11 or 8.9% 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 triple-digit leasing spreads in Canada, double-digit leasing spreads in the U.S. and the completion of Granite's 2 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 new vacancy in the U.S. during Q3.

NOI growth was further enhanced by foreign exchange as the euro was 1.7% stronger, partially offset by the U.S. dollar being 0.3% weaker in comparison to Q2. AFFO per unit in Q3 was 1.22, which is $0.05 higher relative to Q2 and $0.13 higher relative to the same quarter last year, with the variances in Q2 mostly tied to FFO growth and lower capital expenditures and tenant allowances incurred due to timing of leasing turnover, partially 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.

AFFO 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 $1.5 million over the same quarter last year. For the full year of 2024, we are expecting AFFO related capital expenditures to come in approximately $25 million, which is a reduction from our estimate last quarter of $28 million.

Same-property NOI for Q3 was strong relative to the same quarter last year, increasing 6.2% on a constant currency basis and up 8% 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 come in at approximately 6%, which is at the lower end of the forecast range previously provided of 6% to 6.5% and as a result of updated vacancy and leasing assumptions, and Kevin will provide some further color on his comments.

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 variance in noncash compensation liabilities, which does not impact our FFO and AFFO metrics.

For Q4, we continue to expect G&A expense that impact FFO and AFFO of approximately $10 million or roughly 7% of revenues. Interest expense and interest income for Q3 remained virtually flat relative to Q2. Post quarter end, on October 4, Granite did complete $800 million of bond offerings in 2 series being a $250 million 5-year bond at a coupon of 3.99% and $550 million 7-year bond at a coupon of 4.348%.

The $250 million tranche maturing on October 4 was hedged with the cross-currency interest rate swap, resulting in an effective fixed rate of 3.494% for the 5-year term of the bond. The net proceeds from this offering were used to on October 4 to fully prepay without penalty Granite's 2025 term loan with a principal balance of USD 400 million, which had a maturity date of September 2025.

The related interest rate swap was also terminated with a mark-to-market asset being settled. The remaining net proceeds from this offering are being held in short-term cash deposits until we fully repay Granite's 2024 term loan with a principal balance outstanding of USD 185 million, which is maturing on December 19, 2024.

As of September 30 and prior to the completion of the refinancing in October, Granite's weighted average cost of debt was 2.6% and weighted average term was 3.1 years. After refinancing, Granite's weighted average cost of debt is now 2.75% and the weighted average debt term to maturity is now extended to 4.6 years.

For the fourth quarter, Granite's interest expense is expected to increase to approximately $23.9 million due to the new October 2029 debentures being outstanding at the same time as our USD 185 million term loan. However, we expect to fully offset the additional interest expense with interest income as noted earlier.

With Granite's next maturity now in September 2026, we expect interest expense to remain stable over the next approximate 2 years at roughly $23.5 million per quarter, barring any new transactions. Interest income is expected to decline over the course of 2025 with central banks cutting in all of Granite's jurisdictions.

For income tax, Q3 current income tax was $2.7 million, which is $0.6 million higher than the prior year and $0.1 million higher as compared to Q2. The move 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 relative to the Canadian dollar as all of Granite's current income taxes generated from its European region.

For 2024, we are expecting current income taxes to remain at current levels at approximately $2.7 million per quarter. As in prior years, Granite may realize the credit to current income taxes of approximately $1.8 million in Q4 due to the reversal of prior year tax provision. However, we cannot confirm the certainty of such credit until December 31, and our guidance does not factor in any tax provision reversal.

Regarding guidance, our 2024 estimates for FFO per unit remains unchanged at $5.30 to $5.40. For AFFO per unit, we are increasing the forecast range by $0.05 on both ends to $4.65 to $4.75 due to the reduced estimate in AFFO-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.

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. On the low end of the range, we continue to assume exchange rates of the Canadian dollar to euro 1.43% and the Canadian dollar to U.S. dollar 1.32%, which at this point looks unlikely.

Granite's 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's investment property portfolio in the third quarter largely due to attendance commitment received in the third quarter for a 2025 lease renewal in Mississauga, Ontario, together with fair market rent increases in select U.S. markets and partially offset by expansion in discount and terminal capitalization rates at select Granite assets in the U.S.

The trust's overall weighted average cap rate of 5.3% on in-place NOI decreased 6 points from the end of Q2 and has increased 13 points since the same quarter last year. Total net leverage at the end of the quarter was 32% and net debt to EBITDA was 7x, which is slightly lower relative to Q2 and lower than Q3 as well.

As a result of NOI growth, including the completion and stabilization of the majority of Granite's development properties. The Trust's current liquidity is approximately $1.4 billion, representing cash on hand of approximately $400 million and the undrawn line of $997 million. As of today, Granite has no borrowings under its credit facility, and there are 2.8 million in letters of credit outstanding.

Granite's recent refinancing will have no material impact on its net leverage, net debt-to-EBITDA and liquidity position once the term loan is repaid. On October 1, as you know, Granite 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 Granite's website under the Tax Information tab if you have any questions regarding the treatment of this uncoupling event. I'll now turn over the call to Kevan.

[Kevan Gorrie, executive]

Thanks, Teresa. I'll begin with a few general comments on our results, and I'll turn it over to Lorne to provide an update on our development and leasing activity. I will then finish with our outlook for the remainder of the year for taking your questions.

As Teresa mentioned, our results for the quarter were once again in line with expectations, driven by higher NOI and strong re-leasing spreads. NOI grew by $3.1 million or 2.4% over the second quarter and represented the 13th consecutive quarter of NOI growth.

As Teresa also mentioned, we maintain our FFO per unit guidance range for the year and increased slightly on our AFFO per unit guidance on lower CapEx spend than previously forecast. We also tweaked our guidance for same-property NOI to 6% due primarily to transitory vacancy at our redevelopment project in Utrecht and a short period of free rent related to the renewal and expansion of a tenant in Memphis, which Lorne will provide further detail on.

With that said, same brokery NOI growth on a constant currency basis was strong once again in the quarter at 6.2%, led by gains in Canada at just over 14%, Austria at 7.1% and the U.S. at 4.5%. Further, as outlined in our press release and MD&A, the team achieved an average increase in rental rate of just over 30% and of 1.6 million square feet of Q3 2024 maturities led by strong renewal spreads in the U.S. and GTA.

On that note, I wanted to mention the net fair value gains on our investment properties driven, as mentioned by the renewal rates achieved in a number of our GTA and U.S. properties in the quarter and highlight that our NAV now sits within one of a high watermark recorded in the third quarter of 2022 supported by 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 have effectively offset the significant upward adjustments we have applied to our discounted cap rates over that period.

Before I turn the call over to Lorne for an update on our leasing and developments. I also wanted to recognize a few key achievements from our ESG program. Granite was once again ranked #1 by [indiscernible] among our peer group of listed North American industrial REITs, quite an accomplishment, in my opinion.

In addition, the peak capacity of the solar PV systems and solder properties continues to grow and has now reached over 45 megawatts and we remain on track to meet our target capacity of 50 megawatts by the end of 2025. Finally, 44% of our properties have now successfully achieved green building certification and this number is expected to surpass 50% by the end of the year. I will now turn the call over to Lorne for an update on our development and leasing programs.

[Lorne Kumer, executive]

Thanks, Kevan, and good morning, everyone. I will begin my comments with a short update on our remaining active development projects. The 50,000 square foot expansion in Ajax, Ontario was substantially completed in the quarter. with our pre-lease tenant taking occupancy of approximately 30,000 square feet and commencing their operations. Also, our 52,000 square foot expansion in Weird Netherlands was also substantially completed on schedule score and the tenant has committed to a 10-year lease extension on both the existing and expansion space, which will commence in September 1 of this year.

As a reminder, we also have approximately 160 acres of land capable of developing approximately 2.4 million square feet. 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 and are not contemplating any speculative construction at this time.

On the leasing front, leasing market fundamentals during Q3 behave generally similar to last quarter. Vacancy rates among our markets were mixed with roughly half increasing, albeit at smaller magnitude and the remaining markets either remain steady or slightly decreasing. It feels like we are close to peak vacancy in these markets, but the next few quarters should provide a clear picture.

Average asking rents during the quarter generally remained stable in most of our markets. And those that did experience slight declines in published rates will not affect us based on where in-place rents are for the assets we own in those markets. Absorption across the majority of our markets increased quarter-over-quarter and again represented some of the nation's top performers.

But nominally, year-to-date metrics are still low when compared to historical averages. We remain encouraged with the slowly improving leasing atmosphere. We continue to see a flight to quality and location. Tenants are clearly differentiating between Class A and Class B offerings. Premium building specifications and core locations should attract more interest as tenants look to improve the quality of their supply chains.

As mentioned last quarter, tenants continue to take their time to evaluate their real estate decisions, much like they did prior to the pandemic and seemingly more particular to large capital decisions. With the U.S. election behind us, e-commerce adoption continuing to increase and interest rates and construction started decreasing, the environment should make for an easier decision-making process at the corporate level and in turn, result in stronger demand market.

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. Granite's markets accounted for 6 of the 10 highest net action locations for the first 3 quarters of 2024, which represented approximately 53% of the overall net absorption across the country. Properties under construction and construction starts continue to decline, holding well for '25 and through 2026.

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. In Q3, Granite achieved average rental rate spreads of 55% over expiring rents, representing approximately 3.3 million square feet of new leasing and renewals completed in the quarter led by deals in the GTA and the U.S.

This includes the approximately 600,000 square feet of season in Indianapolis that was renewed subsequent to Q2 and mentioned during my remarks in the previous quarter. Subsequent to Q3, approximately 300,000 square feet of vacant space in our Memphis market was leased.

Also, we renewed an additional 530,000 square feet in Indianapolis at approximately 40% over expiring rent. With respect to the 2024 lease maturities, we have renewed or extended all of our remaining lease maturities with an approximately 16% increase or the expiring rents, which was muted by the contractual Brad Austria renewal.

This represented a retention rate of just over 94%, which we are very pleased with. With respect to the 2025 maturities, we continue to make good progress, having now renewed or extended approximately 55% of the 5.5 million square feet and continue to believe that we will achieve greater than 30% average renewal spreads on these expiries.

As it relates to our occupancy, we did slightly by 20 bps from 94.5% in Q2 due primarily a result of a known vacancy in Memphis and the addition of the remaining vacant space coming on stream at our Ajax development. Committed occupancy is 94.7% as a result of the new lease at one of our vacancies in our Memphis market.

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% to 97% previously forecasted. On October 14, one of our tenants true value company advised that it had 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 at Best Corp, including our facility. True 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. 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, I'll hand it back over to Kevan.

[Kevan Gorrie, executive]

Just a few more comments from me on the quarter and the outlook before we open up the call for questions. I think what's in it for me when I read our press release and MD&A was the amount of progress we have made in a number of key fronts since our last call from the transition of our stapled unit structure to a concessional REIT trust unit structure to refinancing roughly $800 million very timely by the way of 2024 and 2025 debt maturities for 5 and 7 years at 3.5% and 4.35%, respectively.

And as Teresa mentioned, extending our weighted average remaining term from 3.1 to 4.6 years to delivering 2 expansions in the GTA in the Netherlands to renewing over 90% of our 2024 expiries and executing over 3 million fees of lease extensions in the quarter at an average rent increase of 46%.

And so far, in the fourth quarter, as Lorne mentioned, the team has renewed one lease totaling 533,000 feet in the U.S. and an increase of roughly 40% and signed a new lease, which as Lorne mentioned, we talked about on our last call. And yes, we increased our annual distribution for the 14th consecutive year.

In closing, I wanted to highlight our financial performance and provide a little context, if I may. We discussed year-over-year FFO per unit growth and quarter-over-quarter NOI growth, but I wanted to expand on that somewhat to highlight the strong discrepancy between actual performance and our unit price.

Our Q3 FFO per unit is up roughly 9% year-over-year and has increased 25% over the past 2 years. NOI per unit, which, to me, is a relevant metric for Granite given the positive impact, the NCIB activity has had not on NOI growth per se, but in terms of per unit metrics has performed even better.

NOI per unit is up 12.4% year-over-year and has increased over 30% over the past 2 years as a result of development stabilizations and strong same-property growth. This is significant growth by any measure. And correspondingly, during that period, we reduced our total debt to EBITDA from 7.9 to 7.2x and our AFFO payout ratio currently sits at 68%.

I'm pausing for effect here. For our outlook, as Lorne outlined, there appears to be an inflection point of vacancy in a number of our markets. the recent economic and political uncertainty, we believe have contributed to a delay in prior decisions regarding new space.

But we believe that conditions should continue to improve overall as we look forward to 2025, albeit slowly. In the meantime, as you have heard, the team has made excellent progress so far at 2025 maturities having already renewed our 4 largest expiries, representing over 2.8 million square feet of space at a weighted average increase of approximately 60%.

We finished the quarter with approximately $133 million in cash, an increase of over $30 million from the second quarter. And with one of the strongest balance sheets and tail 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. And on that, operator, I'll open up the call for any questions.

[Operator]

[Operator Instructions]

I will take our first question from Mike Markidis with BMO Capital Markets.

[Michael Markidis, analyst]

Just wanted to start off. So first of all, does on some of that strong renewal activity that you executed over the past quarter. Lorne, I think you mentioned there was a 500,000 square foot lease in India that you renewed. I was just curious if you could remind us what the property that is.

[Lorne Kumer, executive]

1,451 all points.

[Michael Markidis, analyst]

All points. Okay. And then I guess you -- if broker listings are correct, you've got maybe a known vacate or an expected vacate at AirTech coming up. Would that be correct?

[Lorne Kumer, executive]

As it stands right now, that is correct. They've extended into the new year. We still haven't got a final [indiscernible] on when they're leaving, but their intention is definitely to leave at the end of their lease.

[Michael Markidis, analyst]

Okay. And does that property at all compete with the stuff that you have on better in stride?

[Lorne Kumer, executive]

Kind of a different size, actually. I mean it's kind of in the middle of what we have, but not really competing directly unless we were with the larger space with not something we've really contemplated at this time.

[Michael Markidis, analyst]

Okay. Got it. And then just maybe last one for me before I turn it back. I know you kind of gave us some blended average on your expiries that you or the renewals that you secured for the 2025 expiries. Just curious if you could give us a little bit more color on the Mississauga right now you secured.

[Kevan Gorrie, executive]

It's Kevan, Mike. We really can't. I think we are bound by the conditions of the renewal agreement. We can't disclose what the actual rent was. I could just tell you that 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 values in the quarter.

[Operator]

Thank you. We'll take our next question from Kyle Stanley with Desjardins.

[Kyle Stanley, analyst]

Just on -- looking at the Trump presidency and maybe the expectation of more national policy stands, there has been discussions 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 a Trump presidency have you seen any discussions with tenants change? Or were they holding off in advance of this? Just curious to hear your thoughts.

[Kevan Gorrie, executive]

I guess, I think we mentioned we were seeing a little more careful deliberation and delays in tenant decisions. But I can't per se, say that it was actually related to one Canada or the other. I think there was just a lot of uncertainty about what policies may come out of the election results.

And we do expect that to relax a little bit, not necessarily because of Trump just because of the -- now there's a known outcome in the election. 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, including ours.

However, it didn't have a big impact other than it did cause more nearshoring and onshoring. So we do expect that trend. I'm looking around the room and everybody. 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 in our sector, and it drives up demand overall, which is positive for us, obviously.

[Operator]

With Green Street, your line is open.

[Unknown Analyst]

Just one question from me. Just adding to Kyle's question in terms of capital allocation. You guys have been a bit more into capital preservation mode. -- as that recently. So I guess, as at today, how would you compare fundamentals in the U.S. versus Europe and Canada from here? And I guess, second, do you see any factors that could incentivize you to become a bit more active in one particular market? Or you intend to remain more conservative?

[Kevan Gorrie, executive]

Fred, it's Kevan. 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 and the Netherlands that has been in a number of markets here.

By the way, when we look at the markets that we're in, the only markets where we saw asking rents decreased were Savannah, in New Jersey and the GTA. 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 lay Europe.

And if you ask me today, and Lorne can add to this, he asked me tell you where I think it's going to be stronger rent growth in 2025. I'll definitely say Europe, I would say, our markets in the U.S. and GTA. In terms of capital allocation, you're right. I think we have said, and I'll be consistent here that we are open to the right deal. It has to be compelling given where our cost of capital is today.

And we just haven't seen that. But we continue to pursue selective deals in very selective markets in North America, including GTA and markets in Europe. So we'll continue to evaluate those opportunities but we remain in no rush to do so.

[Unknown Analyst]

So it looks like despite being a bit more optimistic on Europe that you would consider deals pretty much anywhere, right, from the right conditions.

.

[Kevan Gorrie, executive]

Yes The right deal, I would say so. [indiscernible] yes, I don't want to disclose exactly what markets we're looking at. But certainly, Tier 1 markets are our focus right now but it's not necessarily in Europe or North America. It's not necessarily just one of the 2.

[Operator]

We'll take our next question from Matt Kornack with National Bank Financial.

[Matt Kornack, analyst]

Kevin, just as a follow-up to that, I mean, you're trading at almost a 6% implied you're over a 6% implied cap rate on essentially current NOI. Can you give us a sense, you have free cash flow, you have cash on the balance sheet, where you're packing order of putting capital to use would be acquisitions, 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.

[Kevan Gorrie, executive]

I don't think that there is a clear #1 in our set of priorities. We are looking at retiring some debt in the short term. NCIB could come back into play depending on what happens over the next couple of months. And development, yes, we are. We are pursuing a few 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 special or specific acquisition opportunities out there. So there's no clear winner, I can say right now that, I think everything is on the table is the best way I could put it

[Matt Kornack, analyst]

Okay. Fair enough. And Lorne, I think you mentioned true value in your prepared remarks. Can you give us a sense there's a long wall on that, what 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 like where rents would be relative to market and whether that's a highly leasable asset?

[Lorne Kumer, executive]

Sure. Yes. I mean we've done some work on it. It's obviously early days, but we've got some overlays on trying to see where the do-it best locations are relative to ours. There was an announcement that TruValue made back in the summer that our property was going to become the Northeast regional distribution center for TruValue.

And as a result, they were shutting down other operations. So I mean, obviously, I can't comment beyond that. But I'd say the Austrians are either they assume the least, they could come back and renegotiate or they cannot assume the -- those would be 3 and we'll find out. But I think as it stands right now, we seem reasonably optimistic that there's no reason why they wouldn't want to keep the building. It's a great building. It's a great location and would fit in well with the combined companies if that's going to happen.

[Kevan Gorrie, executive]

Yes. And the other thing I would add, Matt, is that the RINs are below market are pretty firmly below market we think helps. And the other thing I would add too is that the building can be [indiscernible] pretty effective that way for [indiscernible]. So it can be rightsized whatever is needed for that market at the time.

[Matt Kornack, analyst]

And does this open the option for you to get that below? Or can they just assume it on the terms that were being paid before?

[Kevan Gorrie, executive]

I would assume it on the terms.

[Matt Kornack, analyst]

Okay. And then just quickly, last one and it's a technical one, but on straight-line rent, Teresa, it went up a bit. I know you guys have finished some expansion assets and there may be something else on the leasing side. But how should we think of that going forward?

[Teresa Neto, executive]

Yes. So you're right, which isn't a -- some new leasing we did in the third quarter. But like we had about $3.5 million, $3.4 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 in '25. So I think really steady state, you can look at $2 million to $3 million. But then, of course, as we lease up that could go it probably is like $4 million or $5 million a quarter. But it's -- at this point in time, I think all I can really give you fourth quarter looking about $2.5 million.

[Operator]

We'll take our next question from Pammi Bir with RBC Capital Markets.

[Pammi Bir, analyst]

I just want to maybe step back. Can you just maybe remind us where the bulk of the vacancy in the U.S. portfolio sits. If I recall, I think Indianapolis, is it maybe a bigger piece of it and maybe some Nashville assets, but maybe just remind us where -- how it kind of spreads out?

[Lorne Kumer, executive]

Yes. Indianapolis, we have also the large vacancy in Louisville. And then really after that, it's a sadder and there's a little bit in the GTA. There's a little bit in Nashville. And it's a little bit in Chicago and it's a little bit of Indianapolis...

[Kevan Gorrie, executive]

And Utrecht.

[Lorne Kumer, executive]

And Utrecht has -- we kind of go short term back and fourth on that one and you track network.

[Kevan Gorrie, executive]

Just a note on Utrecht too because it can be annoying for me at times personally. Utrecht goes up and down. It's a redevelopment. It's a site we've applied for redevelopment 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 to go up and down quite a bit. So it does cause some noise from quarter-to-quarter.

[Pammi Bir, analyst]

Got it. Yes, that's helpful. Just thinking along the lines of the -- again, the U.S. assets here. Any update on traction at Veterans Drive and then -- or some of the Nashville vacancies?

[Lorne Kumer, executive]

Listen, we continue to issue proposals. There is interest here and there, nothing that at an imminent stage at this time. We also have good touring at our Louisville property, and Nashville has been consistently busy as far as traffic in a building. And in all honestly, we've had some very close kind of 1 yard liners on leasing up that space, but it remains a very good active market for us Nashville.

[Pammi Bir, analyst]

And maybe just coming back to last quarter, I think the Ohio vacancy or the encrpapcy from that tenant. What -- any update there?

[Lorne Kumer, executive]

Again, really good activity on it. There is some interest in it, for sure. We've had over a half a dozen tours. So really good activity to date, but nothing imminent at this moment.

[Pammi Bir, analyst]

Okay. I guess if you put all that together, Kevan, I think -- and I think you mentioned today that, okay, occupancy kind of holds steady at -- or 95%, sorry, for this year by year-end. When you think about all the traction that you're getting and the commentary made and I guess we're not sure what happens with true value. But just how does the 2025 outlook kind of shape up at this point from an occupancy standpoint?

[Kevan Gorrie, executive]

I would think of it more from a sort of permanent stabilized basis. And I think, look, we feel this portfolio should be somewhere 96.5%, 98%. So if you were to assume 97% for us, somewhere in that range. I think that, that would be fair. That's kind of how we would look at it.

[Operator]

We'll take our next question from Sumayya Syed Hussain with CIBC.

[Sumayya Hussain, analyst]

Just to start off with a more higher level question for Kevan. But just wondering what kind of catalyst do you think it takes for occupiers to move from being hesitant like comes to taking space and becoming -- or adopting a more active stance as we move into 2025?

[Kevan Gorrie, executive]

Gosh, I wish I knew the answer to that. Who knows it's on the way. But I will say, look, I've said this on previous calls, too, when it comes to sort of a slowdown in the economy. It does feel to me like we have been in somewhat of a good recession now for a while. And I think it's sort of been masked by the sort of service sector. And I think Tata is actually beginning to change.

And 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 where there could be a resumption and higher demand from tenants. I think a lot of the uncertainty has sort of been taken out of the system.

And Lorne mentioned this, again, when we look at our portfolio, consolidation is really another sort of positive catalyst for us and a friend. We've started to see that, and I'll go a little further where we're active in the leasing market, including the GTA, we are now truly seeing a bifurcation in asking rents between modern product and P&C products.

So we are starting to see that separation, and I think we want to see that. If it means a decline overall in market rents, that's fine. We've always been conservative in our outlook and 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 we are starting to see more of that consolidation activity. We're starting to see better activity in the larger data formats as well. E-commerce is sort of rearing its head again. Amazon is 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, et cetera, has sort of been alleviated.

[Sumayya Hussain, analyst]

Okay. And then I guess on that point, which markets are you feeling best about from a supply and demand perspective? And what do you think would lag or take longer to come back to seeing rent growth?

[Kevan Gorrie, executive]

Well, I mean, I think Lorne's being a little bit sort of negative around half the market. We actually saw vacancy sort of, I think, improve in I think almost 2/3 of our market. So I want to mention that Nashville, it's hard to really get worried about Nashville. It's been a strong market. Louisville has been strong. Chicago has been surprisingly strong, I think, actually, in terms of demand absorption. Houston has surprised us as a very strong market. Dallas has a lot of supply, but demand continues to lead the nation there.

So not a lot of concern there. When I look forward in terms of supply, where I think retiring, probably, ironically, the GTA is one that worries a little bit because I think when we look at a number of our markets in the U.S. for the first time in over 10 years, some of them had no construction starts. So that sort of grip on supply, which is good for us, has taken place, but I think GTA is going to see pretty strong supply continue through 2025 and into 2026.

And what that means for the market is a bit of a question for us. Notwithstanding, we have very strong rent spreads embedded restaurants in place. So again, we're not worried about it. But just as we look out to the markets, how they're going to perform in '25 to '26. Those are the markets, I think, for us that are going to perform strongest in North America.

[Sumayya Hussain, analyst]

Okay. And then just, I guess, 2 more specific questions. You did the Olive Branch lease post the 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 20,000 feel left to lease. Wondering what prospects you're seeing for that space?

[Kevan Gorrie, executive]

We'll have to come in to expectations on all solid based on our expectations. And we have really good activity on the remaining 20,000 feet at Ajax. I mean it's got great, clear height brand-new building. It's got lots of parking. So if someone's looking in that 20,000 foot range. I mean as far as for Class A new generation space, that's it.

[Operator]

We'll take our next question from Brad Sturges with Raymond James.

[Bradley Sturges, analyst]

Just on the comment around the consideration around starting build opportunities on our existing land bank. Is there a particular return profile that you're looking to achieve before you would break ground? Or is it very site specific?

[Kevan Gorrie, executive]

It's market-specific and site specific. I mean obviously stabilized values [indiscernible] I think in terms of spreads, we they got pretty tight in 2021 and into 2022 and they've certainly expanded. And so our expectations around returns over stabilized have expanded commensurately. But Brad, it will be hard to point. It depends on -- it depends very much on the market.

[Bradley Sturges, analyst]

Yes. Makes sense. And as potential buyers come back into the investment market, would that open up opportunities for capital recycling at this point within the portfolio?

[Kevan Gorrie, executive]

I think we're always open to that for noncore 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 and part of the consideration. So we are open to it in our markets with noncore assets, but nothing that's imminent. But if your question is, are you willing to? Of course, we are.

[Operator]

We'll take our next question from Himanshu Gupta with Scotia Bank.

[Himanshu Gupta, analyst]

so just on capital allocation. I mean, when do you resume the acquisition activity there? I mean, acquisition carries are approaching 6 in many of our markets and your cost of debt financing is like low 4%, I mean, what you just did. So how wide the investment spend need to be before you go ahead with any acquisitions?

[Kevan Gorrie, executive]

I don't know if it's necessarily a spread issue, Himanshu. You're absolutely right. 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 Yes, we could use debt 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's a very compelling deal in one of our focus markets today, we would do it, but it may require us to recycle capital, asset sales, et cetera. So we would do it.

But -- and I'm going to exaggerate to make this point to grow just to capture higher cap rates today, I think ignores the fact of our current cost of capital overall, and that's always a consideration for us.

[Himanshu Gupta, analyst]

Committed to leverage kind of in the near term, unless it's a compelling opportunity there. Okay. So on -- and then -- sorry, go ahead, Kevan.

[Kevan Gorrie, executive]

Yes, I'm sorry.

[Himanshu Gupta, analyst]

Okay. Okay. And then on the leasing activity, and thanks for all the color provided. First on the Louisville property, it's a large property. Obviously, looks like you were closing in and it did not materialize. So what was the issue like tenant not ready to commit on the same story? Or is it like the pricing issue as well?

[Kevan Gorrie, executive]

I'll start just on that, too. It's actually a clean energy, a global clean energy company that was looking to expand in the U.S. and pulled back, I think, just because of uncertainty. Maybe not has something to do with the U.S. election, we have no idea. But it's not as though they went to another property or another market. They have just sort of delayed their plans for expansion at this time.

[Himanshu Gupta, analyst]

Yes. Okay. So same-store tenants not ready to commit yet. Okay. Fair enough. And then overall, it looks like the expectation is 95% occupancy now compared to, obviously, the 96% to 97%. So as we get into the next year, I mean, are you looking to modify the approach shift, like demising some of the assets? Or are we just willing for the macro to play out and go ahead with the same strategy?

[Kevan Gorrie, executive]

I think it's funny because no one -- people were critical and they think of our high occupancy, we weren't pushing rents hard enough, and now our occupancy is falling and now we're not -- we sort of somehow forgotten out a lease.

I don't think our approach changes. At the end of the day, what we care very much about is the 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 someone's expectation of occupancy. I mean, obviously, we seem to talk about it a lot. And it's important to us because changes in cash flow seem to matter 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 a -- we're not going to make a poor real estate decision just to solve occupancy in the short term. Is that sort of answering your question? We're not going to change our approach as we head into 2025.

Obviously, we recognize we're in a different environment. It's more competitive. We've been able to hold not only asking rents for the most part, we've been able to hold through rent. We've been able to hold TIs very, very acceptable levels, which is good. If the market changes or if conditions change in a particular market, we have to respond accordingly, absolutely, we will, but it will be because it's the right decision in that market for that asset, and we'll have very little to do with sort of managing occupancy levels from quarter-to-quarter.

[Himanshu Gupta, analyst]

Got it. And then on the tenant watch list, I mean, you spoke about, I think, TruValue. Last quarter, I think it was the growth property, I think. Is it very normal to see this kind of kind of bankruptcies in your tenant base? Or is it something you're watching out for the remaining quarters as well?

[Kevan Gorrie, executive]

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 up-to-date information to the market. But at this point, we're not overly concerned that this is normal in the sector, and I think it's normal in all sectors frankly. So I don't think it's anything to do right now at this time. And I don't expect there to be major changes that we had into 2025.

[Himanshu Gupta, analyst]

Got it. And on the same subject, I think the Mississauga lease was done. I think it's the Wayfair lease. So any thoughts on the quality of the government there.

[Kevan Gorrie, executive]

On Wayfair? No.

[Himanshu Gupta, analyst]

On Wayfair.

[Kevan Gorrie, executive]

Yes, no, no changes at this time.

[Himanshu Gupta, analyst]

Okay. Okay. And this is the last question here. So on the rental spread, you mentioned 4 largest expiries that led to a 60% rental spread. Would you say that the Mississauga lease will be closer to the 60% average?

[Kevan Gorrie, executive]

It'll be above there.

[Operator]

[Operator Instructions]

We'll take our next question from Sam Damiani with TD Cowen.

[Sam Damiani, analyst]

And still everybody. Just -- I think basically, all my questions have been asked, but I guess just one last one. You mentioned true value. Is there any other known or likely move-outs in the next couple of years at this time that you're aware of?

[Kevan Gorrie, executive]

No, nothing stands out, Sam.

[Sam Damiani, analyst]

Okay. And just finally, and talked about this a few times, but I guess just directionally, do you have a view on how same-property NOI growth would be different next year versus 2024.

[Kevan Gorrie, executive]

We're not providing guidance on that, too. But similar to this year, I think that would be a fair sort of some. But again, we'll provide a little more detail on the Q4 call.

[Sam Damiani, analyst]

Okay. Great. Congrats on the progress over the quarter.

[Operator]

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.

[Kevan Gorrie, executive]

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, March?

[Lorne Kumer, executive]

February.

[Kevan Gorrie, executive]

In February. Talk to you then.

[Operator]

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