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 Real Estate Investment Trust's Third Quarter 2024 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star two. Thank you. Speaking to you on the call this morning is 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.
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 from time to time, including the risk factors section of its annual information form for 2023 and Granite's management's discussion and analysis for the year ended December 31, 2023, filed on February 28, 2024.
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 a $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 two active expansion projects in Ajax, Ontario, and Weert, Netherlands, with leases commencing in the third quarter.
Partially offset by a new vacancy in Canada at the end of Q2 and a 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. FFO per unit in Q3 was 1.22, which is five cents higher relative to Q2 and 13 cents 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.
FFO-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 FFO-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 four-quarter average to come in at approximately 6%, which is at the lower end of the forecast range previously provided of 6%-6.5% as a result of updated vacancy and leasing assumptions.
And Kevan 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 non-cash compensation liabilities, which does not impact our FFO and AFFO metrics. For Q4, we continue to expect G&A expense that impacts FFO and AFFO of approximately $10 million, or roughly 7% of revenues. Interest expense and interest income for Q3 remain virtually flat relative to Q2. Post-quarter end, on October 4, Granite did complete $800 million of bond offerings in two series, being a $250 million five-year bond at a coupon of 3.999% and $550 million seven-year bond at a coupon of 4.348%.
The $250 million tranche maturing on October 4 was hedged with a cross-currency interest rate swap, resulting in an effective fixed rate of 3.494% for the five-year term of the bond. The net proceeds from this offering were used on October 4 to fully prepay without penalty Granite's 2025 term loan with a principal balance of $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 $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 U.S. $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 two 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 CAD 2.7 million, which is CAD 0.6 million higher than the prior year and CAD 0.1 million higher as compared to Q2. The move in the 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 tax is generated from its European region. For 2024, we are expecting current income taxes to remain at current levels at approximately CAD 2.7 million per quarter.
As in prior years, Granite may realize a credit to current income taxes of approximately CAD 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 our guidance does not factor in any tax provision reversals.
Regarding guidance, our 2024 estimates for FFO per unit remain unchanged at $5.30-$5.40. For AFFO per unit, we are increasing the forecast range by $0.05 on both ends to $4.65-$4.75 due to the reduced estimate in AFFO-related capital expenditures for the year from $28 million-$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 2024. The high assumption reflects a 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 of 1.43 and the Canadian dollar to U.S. dollar of 1.32, which at this point look unlikely.
Granite's balance sheet comprised total assets of $9.3 million at the end of the quarter, and it was positively impacted by approximately $42.6 million in fair value gains on Granite's investment property portfolio in the third quarter, largely due to a tenant's 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 and discounted 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 7 times, 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 tax treatment of this uncoupling event. I'll now turn over the call to Kevan.
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 look for the remainder of the year before taking your questions. As Teresa mentioned, our results for the quarter were once again in line with expectations, driven by higher NOI and stronger leasing spreads. NOI grew by CAD 3.1 million, or 2.4%, over the second quarter and represented the 13th consecutive quarter of NOI growth. As Teresa also mentioned, we maintained our FFO per unit guidance range for the year and increased slightly our AFFO per unit guidance on lower CapEx 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-property 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 rent rate of just over 30% on 1.6 million sq ft 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 on a number of our GTA and U.S. properties in the quarter, and highlight that our NAV now sits within a dollar of the high watermark recorded in the third quarter of 2022, supported by higher euro and USD rates versus cash, accretive unit buybacks funded by free cash flow, profits from several successful development stabilizations, 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 number one by GRESB 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 installed at our 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.
Thanks, Kevan, and good morning, everyone. I will begin my comments with a short update on our remaining active development projects. The 50,000 sq ft expansion in Ajax, Ontario, was substantially completed in the quarter, with our pre-lease tenant taking occupancy of approximately 30,000 sq ft and commencing their operations. Also, our 52,000 sq ft expansion in Weert, Netherlands was also substantially completed on schedule this quarter, and the tenant has committed to a 10-year lease extension on both the existing and expansion space, 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 sq ft.
While we continue to move some of these developments forward from a permitting perspective, and in the case of Houston, some infrastructure improvements, we want to remain ready to entertain build-to-suit opportunities but are not contemplating any speculative construction at this time. On the leasing front, leasing market fundamentals during Q3 behaved generally similar to last quarter. Vacancy rates among our markets were mixed, with roughly half increasing, albeit at smaller magnitudes, and the remaining markets either remaining steady or slightly decreasing. It feels like we are close to peak vacancy in these markets, but the next few quarters should provide a clearer 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 normally 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 things, 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 starts 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 six of the 10 highest net absorption locations for the first three quarters of 2024, which represented approximately 53% of the overall net absorption across the country. Properties under construction and construction starts continue to decline, holding well for 2025 and for 2026. Asking rents within the Granite portfolio remain 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 sq ft 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 sq ft of space in Indianapolis that was renewed subsequent to Q2 and mentioned during my remarks in the previous quarter. Subsequent to Q3, approximately 300,000 sq ft of vacant space in our Memphis market was leased. Also, we renewed an additional 530,000 sq ft 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 over the expiring rents, which was muted by the contractual Graz, 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 sq ft and continue to believe that we will achieve greater than 30% average renewal spreads on these expiries. As it relates to our occupancy, we dipped slightly by 20 basis points from 94.5% in Q2 due primarily to the result of a known vacancy in Memphis and the addition of the remaining vacant space coming online 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. Closer to 95% than the 96%-97% previously forecasted.
On October 14, one of our tenants, True Value Company, advised that 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. Level engagement and activity we are experiencing. And with that, I'll hand it back over to Kevan.
Thanks, Lorne. Just a few more comments from me on the quarter and the outlook before we open up the call for questions. I think what stood out for me when I read our press release and MD&A was the amount of progress we had made on a number of key fronts since our last call. From the transition of our stapled unit structure to a conventional REIT trust unit structure to refinancing roughly USD 800 million, very timely, by the way, of 2024 and 2025 debt maturities for five and seven years at 3.5% and 4.35%, respectively, and as Teresa mentioned, extending our weighted average remaining term from 3.1- 4.6 years to delivering two expansions in the GTA and the Netherlands, to renewing over 90% of our 2024 expiries and executing over 3 million feet of lease extensions in the quarter at an average rent increase of 46%.
So far in the fourth quarter, as Lorne mentioned, the team has renewed one lease totaling 533,000 sq ft in the U.S. and an increase of roughly 40% and signed a new lease, which, as Lorne mentioned, we talked about on the last call. Oh yeah, 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 two 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 two 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- 7.2 times, and our AFFO payout ratio currently sits at 68%. I'm pausing for a sec here. For our outlook, as Lorne outlined, there appears to be an inflection point in vacancy in a number of our markets, but the recent economic and political uncertainty we believe has contributed to a delay in occupier decisions regarding new space.
But we believe the 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 in our 2025 maturities, having already renewed our four largest expiries, representing over 2.8 million sq ft 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 payout ratios in the sector, we remain well-positioned to execute on our business plan for 2024 and deliver strong NOI and cash flow growth moving forward. And on that, Operator, I'll open up the call for any questions.
At this time, I would like to remind everyone in order to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster, and we'll take our first question from Mike Markidis with BMO Capital Markets. Your line is open.
Thanks, Operator. Good, yeah, still morning, good morning, everybody. Just wanted to start off, so first of all, congrats on some of that strong renewal activity that you executed over the past quarter. Lorne, I think you mentioned there was a 500,000 sq ft lease in Indy that you renewed. I was just curious if you could remind us what property that is.
1451 All Points.
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?
As it stands right now, that is correct. They've extended into the new year. We still haven't got a final date of when they're leaving, but their intention is definitely to leave at the end of their lease.
Okay. And does that property at all compete with the stuff that you have on Veterans Drive?
Kind of a different size, actually. I mean, it's kind of in the middle of what we have, but it's not really competing directly unless we were to split the larger space, but not something we've really contemplated at this time.
Okay. Got it. And then just maybe last one for me before I turn it back. I know you kind of gave us the blended average on your expiries that you've or the renewals that you've secured for the 2025 expiries. Just curious if you could give us a little bit more color on the Mississauga renewal that you secured.
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 can just tell you that I think we did, I think the team did an excellent job with this one, and I think we achieved rents above expectations, hence part of the reason for the lift in values in the quarter.
Okay. That's fair. Thanks very much. I'll turn it back.
Thank you. We'll take our next question from Kyle Stanley with Desjardins. Your line is open.
Thanks. Morning, everyone. Just on a, you know, looking at the Trump presidency and, you know, maybe the expectation of more nationalist policy stance, you know, there's been discussions that this could drive inventory building ahead of tariffs and, you know, 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, you know, a Trump presidency? Have you seen any, you know, discussions with tenants change or were they holding off in advance of this? Just curious to hear your thoughts.
I definitely, I think we mentioned, I think we were definitely 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 candidate 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, but just because of the, you know, now there's a known outcome in the election, but I think last time, when you look at 2016- 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, it takes up space in our sector and it drives up demand overall, which is positive for us, obviously.
Okay. Fair enough. Yep. Your assets support, you know, the big increase.
Fred, Green Street. Your line is open.
Thank you, and good morning. Just one question for me, just adding to Kyle's question in terms of capital allocation. You guys have been a bit more into capital preservation mode as of recently. So I guess as of 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 today that could incentivize you to become a bit more active in one particular market, or do you intend to remain more conservative?
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 as going through, for sure, but rent growth has been more positive in Germany and the Netherlands than it 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 decrease were Savannah, 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 like Europe.
And if you ask me today, and Lorne can add to this, if you ask me today where I think there's going to be stronger rent growth in 2025, I would definitely say Europe, and I would say our markets in the U.S. and the 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.
It looks like despite being a bit more optimistic on Europe, that you would consider deals pretty much anywhere, right, for the right conditions?
Yeah. The right deal. I would say so. Various lesser markets, but again, I don't want to disclose exactly what markets we're looking at, but certainly tier one markets are our focus right now, but it's not necessarily in Europe or North America. It's not necessarily just one of the two.
Got it. Thank you so much.
Thank you. We'll take our next question from Matt Kornack with National Bank Financial. Your line is open.
Hey, guys. Kevan, just as a follow-up to that, I mean, you're trading at almost a 6% implied or 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 your pecking order of putting capital to use would be acquisitions and CapEx or development at this point? I know you have a few projects that are ready to go, but I didn't get a sense as to whether you're putting shovels in the ground on those at this point.
I don't think that there is a clear number one in our set of priorities. We are looking at retiring some debt in the short term. 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 on that. I think everything's on the table, the best way I could put it.
Okay. Fair enough. And Lorne, I think you mentioned True Value in your prepared remarks. Can you give us a sense? There's a lot to 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, where rents would be relative to market and whether that's a highly leasable asset.
Sure. Yeah. I mean, we've done some work on it. It's obviously early days, but we've done some overlays and trying to see where the Do it Best locations are relative to ours. There was an announcement that True Value made back in the summer that our property was going to become the Northeast Regional Distribution Center for True Value, 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 options are either they assume the lease, they could come back and renegotiate, or they could not assume the lease. Those would be the three, 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 was to happen.
Yeah. The other thing I would add, Matt, is that the rents are below market, are pretty firmly below market, which I think helps us. And the other thing I would add too is the building can be demised. It's pretty effective that way for demising. So it can be right-sized, whatever is needed for that market at the time.
Does this open the option for you to get at that below, or can they just assume it on the terms that were being paid before?
They would assume it on the terms.
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?
Yeah. You're right. It was because of some new leasing we did in the third quarter. But so 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 2025. So I think really steady state, you could look at $2 million- $3 million. But then, of course, as we lease up, that could go as high as like $4 million or $5 million a quarter. But at this point in time, I think all I can really give you is fourth quarter, it's looking about $2.5 million.
Nope. That's helpful. It's helpful for cash and getting it right now. So that works. Thanks.
No problem.
Thank you. We'll take our next question from Pammi Bir with RBC Capital Markets. Your line is open.
Thanks. Hi, everyone. I just want to maybe step back. Can you just remind us where the bulk of the vacancy in the U.S. portfolio sits? If I recall, I think Indianapolis is maybe a bigger piece of it and maybe some national assets, but maybe just remind us how it kind of spreads out.
Yeah. Indianapolis. We have also the large vacancy in Louisville. And then really after that, it's a smattering. There's a little bit in the GTA, there's a little bit in Nashville, and there's a little bit in Chicago, and there's a little bit in Memphis.
And Utrecht.
Utrecht, we kind of go short-term back and forth on that one in Utrecht, Netherlands.
Just a note on tenancy 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 assets. So the tenancies there tend to be shorter-term. They go up and down quite a bit. So it does cause some noise from quarter to quarter.
Got it. Yeah. That's helpful. Just thinking along the lines of, again, the U.S. assets here. Any update on traction at Veterans Drive and then or some of the Nashville vacancies?
Yeah. Listen, we continue to issue proposals. There is interest here and there. Nothing that's at an imminent stage at this time. We also have good touring at our Louisville property. And Nashville's been consistently busy as far as traffic in and at the building. And in all honesty, we've had some very close kind of one-yard liners on leasing up that space, but it remains a very good active market for us, Nashville.
Maybe just coming back to last quarter, I think the Ohio vacancy or the bankruptcy from that tenant. Any update there?
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.
Okay. I guess if you put all that together, Kevan, I think, or 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?
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.
Got it. Thanks very much. I'll turn it back.
Thank you. We'll take our next question from Sumayya Syed with CIBC Capital Markets. Your line is open.
Thanks. Good morning. Just to start off with a more higher-level question, but for Kevan, but just wondering what kind of catalyst do you think it takes for occupiers to move from being hesitant when it comes to taking space and becoming or adopting a more active stance as we move into 2025?
Gosh, I wish I knew the answer to that. Who knows what's on their mind? 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 that that 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 for there to be a resumption in higher demand from tenants. I think a lot of the uncertainty has sort of been taken out of the system. And Lorne mentioned this.
Again, when we look at our portfolio, consolidation is really another sort of positive catalyst for us and a trend. 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 B and C product. We're 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 outlooks and our projections, particularly to the market. We want to see tenants choose quality, opt for quality. We're starting to see that, and I think that will benefit us on a relative basis overall. We are starting to see more of that consolidation activity.
We're starting to see better activity in the larger bay formats as well. E-commerce is sort of rearing its head again. Amazon's 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, etc., has sort of been alleviated.
Okay, and then I guess on that point, which markets are you feeling best about from a supply and demand perspective, and which do you think would lag or take longer to come back to seeing rent growth?
I mean, I think Lorne's being a little bit sort of negative around half the markets. We actually saw vacancy sort of, I think, flatten or improve in, I think, almost two-thirds of our markets. Lorne mentioned it. Nashville, it's hard to really get word of it. Nashville's been a strong market. Louisville's 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. Not a lot of concerns there.
When I look forward in terms of supply and where I think rents are growing, probably ironically, the GTA is one that worries us a little bit because I think when we looked at a number of our markets in the U.S., for the first 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 the 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 and better rent spreads in place. So again, we're not that worried about it.
But just as we look out to the markets, how they're going to perform in 2025 and 2026, those are the markets, I think, for us that are going to perform strongest in North America.
Okay, and then just, I guess, two 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 sq ft left to lease. Wondering what prospects you're seeing for that space.
How did we come into expectations on Olive Branch?
Solid, solid, solid based on our expectations and we have really good activity on the remaining 20,000 sq ft at Ajax. I mean, I'd say it's got great clear heights, brand new buildings. It's got lots of parking so if someone's looking in that 20,000-sq-ft range, I mean, as far as for Class A, new generation space, that's it.
Yeah.
Okay. Thanks. I'll turn it back.
Thank you. We'll take our next question from Brad Sturges with Raymond James. Your line is open.
Hey there. Just on the comment around the consideration around starting to build a few opportunities on your 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?
It's market-specific and site-specific. I mean, obviously, stabilized value is not a lot. But I think in terms of spreads, they got pretty tight from 2021 and into 2022, and they've certainly expanded. And so our expectations around returns over stabilized have expanded commensurately. But Brad, it'd be hard to point. It depends very much on the market.
Yeah. 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?
I think we're always open to that for non-core assets. I don't think we've got anything on the horizon right now. And look, a number of these assets, we see very strong rent lifts as well. So that is compelling to us and part of the consideration too. Of course, we are.
Yeah. Makes sense. I'll turn it back.
Thank you. We'll take our next question from Himanshu Gupta with Scotiabank. Your line is open.
Thank you and good morning. So just on capital allocation, I mean, when do you resume the acquisition activity there? I mean, acquisition capital is approaching six in many of your markets, and your cost of that financing is like low four. I mean, what you just did. So how wide the investment spread need to be before you go ahead with any acquisition?
I don't know if it's necessarily a spread issue, Himanshu. You're absolutely right, and 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, etc., so we would do it, 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 the current cost of capital overall, and that's always a consideration for us.
So coming to leverage kind of in the near term, unless it's compelling opportunity there. Okay. So on the.
Yeah.
And then that's all you guys, Kevan.
That's fair.
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 come with? I mean, same story, or is it like the pricing issue as well?
I'll start just on that too. It's actually a global clean energy company that was looking to expand in the U.S. and pulled back, I think, just because of uncertainty. Maybe it had 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've just sort of delayed their plans for expansion at this time. Is that fair?
Yeah.
Yeah.
Okay, so same story. Tenant not ready to commit yet. Okay. Fair enough. And then overall, looks like the expectation is 95% occupancy now compared to, obviously, 96%-97%. So as we get into the next year, I mean, are we looking to modify the approach here, like demising some of the assets, or are we just waiting for the macro to play out and go ahead with the same strategy?
I think it's funny because now people were critical, I think, of our high occupancy. We weren't pushing rents hard enough, and now our occupancy is falling, and now we're not. We've sort of somehow forgotten how to 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.
I don't think there's anything that's going to change. We're not going to make a poor real estate decision just to solve occupancy in the short term. If that's 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 at 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.
We'll have very little to do with sort of managing occupancy levels from quarter to quarter.
Got it. Thank you. And then on the tenant watch list, I mean, you spoke about, I think, True Value. Last quarter, I think it was Ohio, the Groveport property, I think. Is it very normal to see this kind of bankruptcies in your tenant base, or is it something you're watching out for the remaining quarters as well?
I think it's normal in the sector. I think it is, and again, this is a pretty critical asset, so we're just trying to provide up-to-date information to the market, but at this point, we're not overly concerned, but 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.
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 covenant there?
On Wayfair?
Yes.
No.
On Wayfair, yeah.
Yeah. No. No changes at this time.
Okay. And this is the last question here. So on the rental spread, you mentioned four largest expiry led to 60% rental spread. Would you say that this Mississauga lease will be closer to the 60% average?
It'd be above that.
Good job. Okay. Fantastic. Okay. Thank you, guys. I'll turn it back.
Thank you. And again, if you would like to ask a question, press star, then the number one on your telephone keypad. We'll take our next question from Sam Damiani with TD Cowen. The line is open.
Thank you. And good morning 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?
No. Nothing stands out at hand.
Okay. And just finally, we've 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?
We're not providing guidance on that too, but similar to this year, I think that would be a fair sort of assumption. But again, we'll provide a little more detail on a Q4 call.
Okay. Great. Congrats on the progress over the quarter, and have a great rest of the day. Thanks.
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.
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.
February.
In February. Talk to you then.
This concludes today's conference call. You may now disconnect.