Good morning, and welcome to Granite REIT's first quarter 2023 results conference call. Please note that the call is being recorded. Speaking to you on the call this morning is Kevan Gorrie, President and Chief Executive Officer, and Teresa Neto, Chief Financial Officer. I would now like to turn the call over to Teresa Neto to go over certain advisories.
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, including, but not limited to, expectations regarding future earnings and capital expenditures, and that actual results could differ materially from any conclusion, forecast, or projection. These statements and information are based on certain material facts or assumptions, reflect management's current expectations, and are subject to known and unknown risks and uncertainties. These risks and uncertainties 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 2022, filed on March 8, 2023. Readers are cautioned not to place undue reliance on any of these forward-looking statements and forward-looking information.
The re-reviews of key assumptions regularly and may change its outlook on an ongoing forward basis if necessary. Granite undertakes no intention or obligation to update or revise its key assumptions, any forward-looking statements or forward-looking information, whether as a result of new information, future events, or otherwise, except as required by law. The remarks this morning may include financial terms and measures that do not have standardized meaning under international financial reporting standards. Please refer to the condensed combined unaudited financial results and management's discussion and analysis for the three-month period ending March 31, 2023 for Granite Real Estate Investment Trust and Granite REIT Inc., and other materials filed with the Canadian Securities Administrators and U.S. Securities and Exchange Commission from time to time for additional relevant information. I'll commence the call with financial highlights, Kevan Gorrie will follow with the operational update.
Granite posted Q1 2023 results exceeding expectations with strong NOI growth, compounded by the strengthening of the euro relative to the Q4, as well as the US dollar, partially offset by higher interest costs. AFFO per unit in Q1 was $1.25, representing a $0.05 or 4.2% increase from Q4 2022, and a 19% increase relative to the same quarter in the prior year. Strong NOI from acquisitions, developments, and expansions that came online since the first quarter of 2022 and same property NOI growth was enhanced by favorable foreign exchange movements, where the EUR was 4.7% stronger and the US dollar was flat relative to Canadian dollar in comparison to Q4.
In comparison to the prior year, the euro was 2% stronger and US dollar 7% stronger, resulting in a positive CAD 0.06 impact FFO per unit. Offsetting the favorable Q1 2023 NOI relative to Q4 is the effect of higher interest costs resulting from interest on Granite's secured construction facility, which commenced to being expensed in January 2023 upon the substantial completion of Granite's Houston development and foreign exchange on euro-denominated borrowings and current income tax. Lastly, in Q4 2022, we recognized a favorable CAD 0.7 million current income tax recovery and a CAD 0.7 million fair value gain, which did not recur in Q1.
Granite's AFFO on a per unit basis in Q1 2023 was $1.18, which is $0.13 higher relative to Q4 and $0.18 higher relative to the same quarter last year, with the variances mostly tied to FFO growth and lower capital expenditures, leasing costs, and tenant allowances incurred due to the timing of leasing turnover and weather. AFFO-related capital expenditures, leasing costs, and tenant allowances incurred in the quarter totaled $1.1 million. For 2023, we continue to estimate AFFO-related maintenance capital expenditures and leasing costs coming in at approximately $22 million for the year, with the increase relative to the past couple of years being a direct result of approximately 9.7 million sq ft of GLA turning over this year.
Same property NOI for Q1 2023 was strong relative to the same quarter last year, increasing 5.4% on a constant currency basis and 9.8% when foreign currency effects are included. Same property NOI growth was driven primarily by higher than previous year CPI adjustments, positive leasing spreads, contractual rent increases across all of Granite's regions, lease renewals in the U.S. and Canada, and includes the impact of a completed expansion in the GTA in Indiana. G&A for the quarter was CAD 14.7 million, which was CAD 6.3 million higher than the same quarter last year and CAD 6.1 million higher than Q4.
The main variance relative to the prior quarter and Q4 is the change in non-cash compensation liabilities, which generated an unfavorable CAD 6.7 million fair value swing relative to the same quarter last year, an unfavorable CAD 5.9 million fair value swing relative to Q4. As we recognized, fair value loss is on these liabilities due to the 19.6% increase in Granite's unit price during the quarter. These fair value adjustments do not impact our FFO or AFFO metrics. For the remainder of 2023, we expect G&A expenses of approximately CAD 9 million per quarter, or roughly 7% of revenues, excluding any amounts for fair value adjustments related to these non-cash compensation liabilities. On income tax, Q1 2023 current income tax was CAD 2.3 million, which is CAD 0.3 million higher than the prior year and CAD 0.8 million higher than Q4.
As mentioned earlier, Q4, we recognized the net impact of adjustments pertaining to prior tax years in our European region of CAD 0.7 million. Excluding the aforementioned adjustment in Q4, the increase in current tax over both Q1 2022 and Q4 is primarily attributable to the strengthening of the euro relative to the Canadian dollar, as virtually all of Granite's current income tax is generated from its European region. For 2023, on a run rate basis and factoring in a now stronger euro, we estimate current tax at approximately CAD 2.2 million per quarter before recognizing any reversals of tax pro-tax provision. Interest expense was higher in Q1 2023 relative to Q4 by CAD 1.1 million. This reflects interest on Granite's secured construction loan and foreign exchange.
In 2Q 2023, Granite intends to repay in full the secured construction loan withdraws from the credit facility, lowering the borrowing rate. On a run rate basis, we estimate interest expense will run approximately CAD 18.5 million per quarter before factoring any new debt or additional credit facility draws other than that draw for the repayment of the construction loan. When Granite refinances its upcoming CAD 400 million debenture maturing November 2023, we expect our interest expense run rate will increase to approximately CAD 22 million per quarter. All of Granite's debt is fixed rate debt for cross-currency and interest rate swap hedges, with the exception of the credit facility, which is at a variable rate and subject to increases in underlying Treasury rates. Currently, Granite's weighted average cost of debt sits at 2.29%.
Looking out to 2023 estimates. Granite's guidance provided on the March eighth call remains unchanged, which estimates FFO per unit within a range of CAD 4.90-CAD 5.05 per unit or approximately 11%-14% increase over 2022. For AFFO per unit, the forecasted range remains CAD 4.30-CAD 4.45, representing an increase of 6%-10%. Based on current foreign currency trends, we are projecting to achieve results closer to the higher end of the guidance. The foreign currency rates driving the high and low ranges remain virtually unchanged. For the high end of the range, we are assuming foreign exchange rates of the CAD to EUR of 1.48 and CAD to of $1.37.
On the low end of the range, we are assuming exchange rates of the Canadian dollar to euro and Canadian dollar to of $1.42 and 1.32 respectively. At this time, there are no significant changes to our operational forecast that would drive changes to our estimates. Granite will provide updates to guidance each quarter as warranted based on leasing activity ex-executed to date as well as any changes to foreign exchange rate assumptions. The Trust's balance sheet, comprising of total assets of CAD 9.3 billion at the end of the quarter, was negatively impacted by CAD 73 million in fair value losses on Granite's investment property portfolio in the first quarter, offset by CAD 33 million of translation gains on Granite's foreign-based investment properties, particularly due to the 1.7% increase in the spot euro exchange rate relative to Q4.
The fair value losses on Granite's investment property portfolio were primarily attributable to the expansion in discount and terminal cap rates across all of Granite's markets in response to rising interest rates, partially offset by fair market rent increases across the GTA and selected U.S. and European markets, the renewals of 3 special purpose properties in Austria and Germany, and the stabilization of 3 properties under development in Houston, Texas, which were completed and transferred to income-producing properties during the first quarter. The Trust's overall weighted average cap rate of 5.01 increased 14 basis points from the end of Q4 and has increased 71 basis points since the same quarter last year. Total net leverage at March 31st was 32%, and net debt to EBITDA was 7.8 times, which is slightly inflated due to Granite partially funding its significant development program with debt.
Granite expects its debt to EBITDA to decrease to the low 7 times by the end of the year and to improve thereafter into 2024 as the EBITDA from completed developments come online throughout this year. The Trust's current liquidity is approximately CAD 1.1 billion, representing cash on hand of about CAD 110 million and the undrawn operating line of CAD 990 million. As of today, Granite has CAD 5 million drawn on the credit facility, and there are CAD 4.2 million letters of credit outstanding. We continue to monitor the market conditions in the coming months to look to refinance our 2023 debentures which come due in November. I'll now turn the call over to Kevan. Thanks.
Thanks, Teresa. Good morning, everybody. I will be brief. As usual, we spoke roughly 60 days ago. We provided an outlook for 2023 at that time. I would echo Teresa's comments that results exceeded expectations due primarily to the pace of development stabilizations in the quarter and the continued strengthening in income from our European portfolio. I will begin my prepared comments on our development program where we have been focusing our capital deployment now for the past few quarters.
As you can see from our press release in MD&A, we achieved substantial completion on our 690,000 sq ft design build distribution center in Houston for e-commerce user Chewy for a term of just under 11 years, which commenced on February 1st. We also achieved substantial completion of the 2 buildings totaling 669,000 sq ft, which comprise phase one of the site, and we have executed 2 leases totaling 521,000 sq ft to third-party logistics providers for 5 and 7-year terms. In addition, we achieved substantial completion in January of our 329,000 sq ft expansion of our existing property in Whitestown, a suburb of Indianapolis, and the lease has been extended for 10 years in the entire building.
Further, we achieved substantial completion of our development project in Lebanon, a suburb of Nashville, Tennessee, comprising roughly 500,000 sq ft over 3 buildings on April 6th. Finally, we completed the development of our 221,000 sq ft property in Bolingbrook, a suburb of Chicago, on April 12th, and the building is fully leased for a 12-year term. Collectively, these projects and stabilizations are expected to contribute strongly to NOI and cash flow growth in future quarters, and all are expected to achieve green building certification in accordance with our published green bond framework. To date, approximately 1.8 of the 3.4 million sq ft of development space delivered year to date has been leased, leaving just under 1.6 million sq ft remaining to be leased.
Looking at our current construction pipeline, our development projects in Brantford and Ajax totaling roughly 450,000 sq ft continue to progress well, with completion scheduled for the first quarter of 2024. The first phase of the Brantford site, comprising a single 410,000 sq ft building, has been fully leased for a 20-year term and will generate an unlevered development yield of approximately 6.8%. The 50,000 sq ft expansion of our Beck asset in Ajax is being constructed on a speculative basis and is expected to generate an unlevered development yield of roughly 7.5%. As mentioned previously, we are in the approval process for the next phase of our Brantford development, a single 730,000 sq ft building with potential commencement in late 2023.
Operationally to date, we have renewed roughly 8.1 million or 85% of the 9.6 million sq ft of lease maturities in 2023 at an average increase of roughly 20%, and we anticipate achieving an average increase of 28% on the remaining maturities, an increase of roughly 4% in our estimate from the previous quarter. As mentioned on our last call for 2024, we have renewed roughly 55% of the 9.6 million sq ft of maturities at an average increase of 9.4%, primarily due to the 10-year Graz renewal announced earlier this quarter. At this point, we expect to achieve an average increase of 20%-22% on the outstanding maturities in 2024.
I think it is worth repeating that our renewals in the quarter at Graz and Oberhausen in Germany totaling almost 5 million square feet in total required no investment from Granite for TIs, landlord work, or leasing commissions. There was no CapEx associated with either renewal. As Teresa mentioned, same-property NOI increased by 5.4% in the quarter on a constant currency basis within expectations. Same-property NOI was positive across all geographies on a constant currency basis, led by our portfolios in the GTA and the Netherlands at 8.3% and 6.3% respectively, followed closely by the U.S. at 6.1% and Germany at 5%, driven partially by strong CPI increases in Q1 at a number of our properties in the GTA, Germany, and the Netherlands.
We expect same-property NOI growth to improve over the coming quarters. At this time we are reiterating our range of guidance for 2023 same-property NOI growth at 6.5%-7.5%. As you can see from our disclosure, we adjusted cap rates and discount rates further in the quarter. The resulting CAD 160 million in fair value losses associated with TCR and DR adjustments, a modest reduction from the CAD 230 million adjustment in Q4, was more than offset by development stabilizations, substantial completion of the development in Indianapolis on a forward purchase basis, foreign exchange gains, as well as an increase in value from the long-term renewal of our properties in Graz, Austria, and Oberhausen, Germany.
As for a general market update, I would characterize leasing activity in the first quarter as lower than in the past 2 years, but in line to slightly above the 10-year average across our markets. Fundamentals remain strong, with sentiment appearing somewhat more cautious among tenants in the face of greater economic uncertainty. Net absorption across our markets ranged from a low of negative 300,000 sq ft, ironically in the GTA, to a high of almost 9 million sq ft in Dallas. Availability rose in most of our markets in North America, but not all, as new supply outpaced demand in the first quarter. We expect this trend to continue for the next 2 to 3 quarters as the backlog of current projects are delivered to the market.
We project that availability will begin to fall sometime in early 2024, as the pace of new starts has already began to decelerate acutely from past quarters. In most of our markets, we are witnessing a drop of 50%-75% in starts from the first quarter of 2022. As for rents, data suggests that market rents increased roughly 3% on average in the fourth quarter across our markets, with Dallas and Atlanta leading the way at 8% and 7% respectively. I would add that most of the net absorption has occurred in the newer product segment, so there's an obvious flight to quality theme underway.
Although demand is expected to moderate off exceptional highs of 2021 and even 2022, the spread to market on in-place rents continued to widen in the 1st quarter, and the abrupt cessation in new supply should support continued rent growth over the near to medium term. With respect to investment market conditions, I won't go into much detail. It won't surprise anyone that volume slowed drastically in the second half of 2022, and today volumes appear to remain roughly 50% below the 1st quarter of 2022. The bid-ask spread continues to exist, but is narrowing as vendors slowly adjust to the current cost of market capital.
That being said, industrial continues to be one of the preferred sector destinations for investor capital, and flows appear to be improving, with active buyers, including private investors concentrated on smaller transactions in certain markets and private equity funds which have capital allocation and deployment needs. We're happy to discuss in more detail if needed. In closing, I would like to thank our team for another strong quarter, and we remain exceptionally well-positioned to execute on our plan for 2023, and once again, deliver strong results for unitholders. Moderator, on that, I will open up the floor for any questions.
Thank you, sir. If you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. Once again, it's one-four if you would like to register for a question. Our first question comes from Mike Markidis with BMO Capital Markets. You may proceed with your question.
Thank you, operator. Morning, Kevan and Teresa. Kevan, just thanks for your comments on what you expect to see in terms of supply of patient demand over the next couple of quarters. I'm interested to just get your take on your portfolio, the current occupancy level. I realize this quarter was the slippage was a function of the forward purchase that you executed on. How do you see your portfolio performing from an occupancy perspective over the next 2 to, you know, call it 12- 18 months versus where you expect the market to go?
I mean, barring any unforeseen circumstances, I think we're expecting all of our turnovers this year to be leased or at least committed to be leased by the end of this year. We should finish the year close to 99%. I think that's our expectation. In 2024, I'd have to think that through a little bit, but again, I don't think we're expecting occupancy to move that much off of that sort of 98%-99% range.
Okay, great. Are you just on that, ending the year at close to 99%, are there any significant non-renewals that you're aware of or just stuff that hasn't been locked down on the normal course yet, getting some cautious optimism on transitional down things?
I think that that's fair. I don't think that there's anything, I think out there that we think we'll be surprised at. There's 1 300,000 sq ft in Memphis at the end of September that we're in discussions with a tenant. That's still kind of up in the air, but I think the discussions have been pretty constructive. At this point, we think that it will be a renewal, but that could be an additional 300,000 sq ft on top of the expected 1 million sq ft that we're working through right now. I would say, I think on those particular spaces, the activity's been very good. In some cases, we're dealing with adjacent tenants to take that space as well. I think that that's going. I would characterize that as going well overall.
Okay. Last one for me, just before I turn it back. Maybe if you could just provide some incremental activity on the color that you're seeing on the asset you just bought, and then on the development that you just delivered that's still open for tenants. Thank you.
Yeah. That's the main one I think that we're focused on in Indianapolis. Those are the two buildings that we just delivered in Avon, which is very close to our AllPoints asset. I think I mentioned on the last call, we've seen good activity. I think for us, we're focusing on a certain size of tenant, and we're focused on what we believe to be a premium rent in the market based on the location. Although we've seen good activity on it, we just haven't seen, I think, the right tenant and the right fit for the size of buildings that we have in that market. Hopefully we'll have some positive updates on our next call on that. There's been quite a bit of activity in that market.
Okay, that's great. Thanks. I'll turn it back.
Our next question comes from Himanshu Gupta with Scotiabank. You may proceed with your question.
Thank you, good morning. Kevan, just to follow up on your last comment on Indianapolis, leisure property. You mentioned you're seeing good activity. Would you say the tenant activity is comparable to the last two years, or is it more comparable to 2019 and earlier years?
Well, I would compare it... I mean, I think it's a bit unfair to compare it to 2021 and part of 2022, because those really were exceptional years. I would characterize the market as being strong. I'm not sure, 2019 was a while back. It does feel like there's a lot of tenants floating around, but clearly tenants are taking more time to decide on the space. I would say it seems like they're delaying their decisions and not so much not needing the space. I just think that they're taking more time to do it. If you were to push me on, are we closer to 2019 or closer to 2021, we're somewhere in between both of those in terms of level of activity.
Got it. In terms of, you know, tenants delaying their decisions, do you think the delay is more on larger spaces, or is it more on the smaller spaces? I mean, which demand is it?
Yeah. In terms of, in terms of the delay, I'm not sure there'd be that much of a difference. I would say we're seeing more activity in the 300,000-500,000 foot range than we are in the 600 -800 million foot range. There's a lot more activity in that sort of 3-7 than there is above the 7 right now. I think 2022 characterized as really a lot of the 700,000-1 million. There was an abnormal amount of activity in that range. Now it seems to be more reverting to the norm of that sort of 3 to sort of 5, 300,000-700,000 foot range of tenant.
Okay. Thank you. Thank you. Thank you. And then in terms of capital allocation, you know, acquisition versus development, has cap rates expanded enough in the U.S. for you to come back to acquisitions rather than, you know, grow the development pipeline at this point of time?
I think it's a great question. I think the short answer is, I don't think that there are too many compelling opportunities for us from a cap rate basis. One of the things we've discussed internally, and I think I mentioned on the last call, is, you know, we have a development pipeline we want to keep active, we're looking at select development opportunities. Although we have seen land costs come off in most markets, including the GTA to an extent, I don't think that we believe that they have moved enough to make the performance work financially for us to an appropriate level. I think that there's from our perspective, before we were to move, this is assuming we have liquidity to do it, that's, again, that's a question mark.
If we did, I think we would expect to see a little more movement, before those opportunities become more compelling for us.
Got it. Fair enough. Last question, in terms of fair value adjustments, I mean, if I look at your Canada portfolio, I think it has hardly seen any negative adjustment. I mean, in fact, positive last year and largely flat in Q1 as well. Do you think, you know, market rent growth in GDA has more than offset any impact of, you know, high interest expenses there?
I think so. I was just looking back, actually. If you look at Q1 of 2022 and where we are today, the ingoing cap rate, which again takes into account rent growth now it's moved, we have it moving roughly 50 basis points in Canada or in the GTA, 75 in the U.S., and 50 in Europe. Again, that's a function of TCRs and DRs moving substantially but being offset by rent growth. In Europe, I think another part of the story is there's rent growth to be taken into account on our modern distribution assets. For the legacy assets that we have, the Magna assets, we haven't seen that much movement in terms of cap rate and discount rate on those assets.
There hasn't been as much movement per se in the resultant cap rates in Europe as we've seen in the U.S.
Got it. Thank you, Kevan. I'll give it back.
Our next question comes from Sam Damiani with TD Securities. You may proceed with your question.
Thanks. Good morning, everyone. Just on the on the Europe portfolio, setting aside the Magna property, the special purpose property specifically, what sort of same property growth are you getting out of the, you know, the newer assets you've acquired, there in recent years?
I think we've seen kind of in the low teens. That takes into account too that there are leases where the increases are fixed. If I can, Sam, I just want to address this because I've seen a couple of comments last night on our results pointing to a lease in the U.S. on renewal where it, the renewal rent was the same as the expire rent. Just to point out to everybody to clarify this point, these types of leases are common in all portfolios, and not just ours. When we talk about our mark-to-market or our expected increases on renewal, for 2023 or in any given year, we take it into account.
I say that because I understand that there might be other REITs that when they disclose a mark-to-market or an increase in rent, sometimes they exclude assets where the renewal rent is the same as the expire rent. In this case, it wasn't a renewal, it was a tenant waiving their termination notice. They had a termination right, which was waived. There was no rent adjustment. Technically, I wouldn't call it a renewal, but we put it in there, I think, to be conservative. Just to say, when we provide... for example, 20% increase in 2024, that would include any renewals in North America or Europe where the rent was fixed or flat, that takes into account in our estimates.
That's helpful. That actually was gonna be my next question, so thank you for answering that. I guess, you know, that asset, I believe, was just acquired a couple years ago. I mean, you know, has that sort of termination rate waiver played out the way you expected, I guess, when you bought the asset?
Yes, because the rents on that asset, that's in Cincinnati. It's 678,000 sq ft or thereabouts, that's a $2.94 rent. Yes, I think they're in there for 3 years. There's no adjustment this year. Our thesis for that is, you know, that was roughly, I think, a 5.5 cap on $2.94 rents, I think we were roughly in the mid-$50s per sq ft. The cost basis for that asset in that location was very attractive. It, it is playing out. Would we have hoped it didn't? Yes. We didn't go in expecting that this tenant, it's a good covenant tenant, that this tenant was not going to waive their termination rate.
We were hopeful, but we weren't expecting that to happen.
Got it. Last one for me. Just on the, you know, on the development side, which it sounds like still, is the priority for in terms of capital allocation, what is the expectation for building up the land portfolio over in the near term to facilitate a continued, you know, active development plan over the next few years?
Well, if I look at just what we have and what we've been talking about, I mentioned that we could move ahead with 730,000 sq ft in Brantford. We could potentially add another building there. That would be in the sort of 900,000 sq ft range in Brantford. If we decide that it makes sense to move forward with the next phase of Houston, that could be roughly 1 million. That could be 2 million in 2024, depending on market conditions at the time, obviously. On top of that, we would have to add more land. As I mentioned before, it's something we're looking at on a selective basis. I think it fits in with our long-term strategy. We're not seeing any forced selling.
We're not seeing any real distress in our sector, that may not be a surprise to anybody. At the same time, I think for us to move forward, we wanna see a little bit more of an adjustment in development performance before we buy additional land or move into a sort of development play. For now, we think we could build 2 million CAD next year. I'm not sure about building more. That will depend on any new development opportunities we feel make sense for us.
Okay. That's great. Thank you, and I'll turn it back.
Our next question comes from Kyle Stanley with Desjardins Capital Markets. You may proceed with your question.
Thanks. Morning, everyone. just kind of sticking with that same line of questioning, and you did kind of answer it there, but I'll ask it anyway. you know, would you say your view of progressing with a new spec development versus, you know, looking for a tenant to pre-lease has changed? My question just comes from your, I guess, your commentary on tenants maybe being a bit more cautious in this environment.
It may depending on the market and the flexibility you have in the land. Like for example, we have 13 acres in Columbus. That to us doesn't make sense to build on spec. I think that that truly is a design build. On Brantford, depending on the size of building we have the ability to build, it may make sense to do design build. For example, that site would have a combination of design build opportunities and spec development, and I think that that would fit. For a 730,000 sq ft building, we wouldn't wait for a design build opportunity there. I think we would move forward. That's measuring just the availabilities in the market at that size and where we think the market is going. It depends.
Houston is a bigger question for us, obviously. That is still continues to be a strong market. I think it's in the sort of low to 4% availability range. We're trying to decide if we move forward with the next phase. The first two phases went very well, obviously, and part of that was the design build. The 690,000 was a design build, which kicked off the site. The next phase, we have the flexibility to go up to 1.2 million sq ft on one pad, or we could do two buildings. It could be a combination of design build and speculative. It all depends on our conviction in the market and where we think we could fit in a certain size building within the pipeline.
I'm not really answering your question because I think it's on a case-by-case basis and on a site-by-site basis.
Yeah. No, I think that makes a lot of sense. You commented on, I guess, the strong kind of fundamentals you're seeing in Texas then, you know. I'm just curious, you know, what do you think is really contributing to maybe the improved performance we're seeing in those southern markets? What type of tenant is maybe driving that incremental demand in the Midwest and Southern U.S. right now?
I just think overall, these are markets that tenants do wanna be in. There's more labor availability. I think the labor markets in general are more positive. Also you're seeing, we talked about before, a shift in the supply chain away from the West Coast to the East Coast and markets right through Texas and the Port of Houston, et cetera. The other thing I would say is, The investment by the U.S. government in onshoring certain industries back into the U.S. is a real thing, and we're seeing it. 3PLs continue to be the largest single occupier in the market right now looking for space, but manufacturing is playing a part as well. That's taking up space, and that's not the type of tenant per se that we're targeting.
It certainly is fulfilling a part of the demand in those markets, particularly in Texas and some of the other markets that we're in.
Okay, great. Just one last one. You saw the small disposition this quarter with another asset held for sale. Do you have a, you know, disposition target that you might be looking at, which would help you achieve your goal of reducing leverage? You know, is that mostly just going to be achieved with development deliveries?
I think mostly the development deliveries. We didn't really have. We have one building in the GTA that we're working through a sale right now. We do expect to close this quarter. We don't have anything imminent on top of that. It may happen just depending on the opportunity, but that's all we have in terms of expectations for this year.
Okay, great. I will turn it back. Thanks for the color.
Our next question comes from Matt Kornack with National Bank of Canada. You may proceed with your question.
Hey, guys. Kevin, I don't know if you can provide these details or if you have them at your fingertips. You mentioned the 20% spread was inclusive of some of the renewals or rights that were waived that are at no spread. What would be kind of the number on kind of market renewals? Maybe as a tangent to that, when you approach leasing, it sounds like you're particular in terms of the tenants that you go after, but do you also leave a bit of meat on the bone with regards to the mark-to-market that you're achieving in those negotiations?
Yeah, we do leave meat on the bone. I think we're talking about the same thing. For sure. Just to get back to the Indianapolis one too. I think we walked into this knowing we can afford to be patient. This is a location that we think should command a higher rent. We've seen some deals get done, not exactly in the size range we're looking for, but east of the market that we're in, for example, at lower rents. We feel this should command higher rents. We think the best thing to do is be patient and wait for the right tenant and the right opportunity. I think what we projected to the market is on the conservative side of what we can achieve.
I think we're talking about the same thing. In terms of the mark-to-market, there is some subjectivity to this whole exercise, and we talked about it internally, and I think the best thing to do is to be conservative on it. For example, getting back to the Cincinnati asset. That's a $294 rent in a $450-$480 market. The mark-to-market on that asset is truly 50%. We have it in our projections of what we're telling you is 0, because we can't get at that rent, at least for 3 years, and probably longer. I don't know what the renewal is after 3 years. Just to say, if we can't get at that rent, we don't show that as a mark-to-market of 50%.
I hope that answers your question, but let me know if you.
Yeah, yeah. It's, I guess it's maybe even for the remaining leases, that would be, coming due for the remainder of the year, because obviously that 0 on a pretty sizable amount of square footage, if you're gonna get to 20, presumably the mark-to-market spread on the remainder is 30+, if not...
Yeah. I think what we said was we originally had 24% on the remaining 1.5 million sq ft, and now we're saying that's roughly 28%.
Okay, that's all.
Okay.
Teresa, just, I don't know how much color you can provide with regards to the straight-line rent side of things. Understandably, you're delivering some development assets. There may be some pre-rent periods in the earlier phases of those. How should we think of both straight-line rent and where it trends over the balance of the year?
Yeah. I was looking at that, and you're right, this quarter was CAD 4.6 million. A bit of that is de-development and free rent associated. I think for this year, Matt, I would take that number and that'll be pretty consistent for the next 3 quarters, in that CAD 4.5 million range for the rest of the year.
Okay. Then next year, I guess as those convert to cash rents or I guess and grass would be an issue maybe on the straight-line rent front as well at some point, but.
Actually, grass, no, because on a CPI lease, we don't do straight-line rent.
Okay.
It'll adjust. There won't be an effect. You could see more, I guess, normalized, which, you know, more in that CAD 2 million range-ish per quarter. Yeah, it's a little bit elevated because of the new developments.
Okay. One more just in terms of the development. How much of the projected NOI that these are supposed to contribute do you anticipate coming on this year? It can be a rough % versus what would be to release up that may come in next year.
It's gonna be a pretty small amount. I'm gonna say like 20%. Is that fair? Yeah. Maybe.
Yeah, maybe.
I think 20% maybe is a good number.
Yeah.
For this year.
20%. Okay, there's significant upside then to next year as well on the development.
Yes.
Okay. Fair enough. Thanks, guys.
Our next question comes from Gaurav Mathur with iA Capital Markets. You may proceed with your question.
Thank you, good morning, everyone. Just, you know, looking ahead from an acquisition viewpoint, are you anticipating any dislocations or distressed asset sales in any of your markets going forward?
I think we were expecting it already, and maybe we shouldn't be surprised that we're not seeing as much in our sector. The short answer is, I think we've seen very little. Do I expect that we will see some distressed opportunities? Yes. I think, part of the reason we hesitate is there is a lot of capital looking for the same opportunities in this sector. I mentioned before, we're seeing some recovery in deal flow. I think in a lot of cases, buyers are jumping the gun a little bit on this. All to say, we think that there will be more distress just generally in the market, which should open up opportunities for us, but there's a lot of capital chasing it.
That is part of the reason why I talk about select development opportunities because that's where I feel those would fit our program and probably not have as immediate competition from large private equity funds who have capital deployment requirements.
Great. you know, that's a great segue into my next question because, you know, when you're looking at term, you know, term cap rates and discount rates, are you expecting further adjustments, to the year ahead given the volume of capital that's chasing these assets as well?
I think we've remained very data dependent from quarter to quarter, I would say it's possible, but I definitely think we're near the end of it. That's assuming that, you know, the Fed is close to being finished, Bank of Canada is close to being finished, et cetera. The macroeconomic sort of themes are stabilizing. That being said, assuming that pace, we think that, if we're not done, we're very close to the end.
Okay. Great. Just last question from me. On your comments of onshoring by the U.S. government. Apart from the 3PLs, are you seeing any renewed tenant demand from, you know, any other tenants in the market that you possibly weren't sort of witnessing a year ago?
I think it falls more into the manufacturing side. I think that anything related to EV, anything vehicle production in general and EV and solar panels, those tenants are very active. We've seen them across our sites in particular. There's a lot of competition there right now. I think that's where we've seen the biggest change from, say, a year ago or 2 years ago. 2 years ago, it was all about e-commerce. Last year, we started to see a shift into the wholesaler, distribution, retailers, and 3PLs. Right now it's been the 3PLs and the wholesale distribution that have been most active in the markets. Further behind that would be manufacturing.
Okay, great. Thank you for the color, Kevan. I'll turn it back to the operator.
Our next question comes from Pammi Bir with RBC Capital Markets. You may proceed with your question.
Thanks. Good morning. Kevin, maybe just coming back to the Avon property that you know, you mentioned being patient. What can you share just in terms of the types of tenants that you are talking to, and then perhaps the timing of when you're actually hoping to have that, or aiming to have that, leased up as opposed to hope?
Yeah. Well, I was going to interject when Teresa said 20%. What we're forecasting the market and what our expectations are internally are far two different things. Let's be clear about that.
Right.
I think what we're seeing, I mentioned before, we're seeing a lot of activity in that sort of 3- 5. When you think about it, anything over 3 is too large for our 300,000 foot building. Anything close to 5 could be a fit for the larger building, but with conditions. That's where we've seen the most activity in the market. For us, I think we just need to be selective. In terms of timing, it's our expectation that those buildings are fully leased by the end of the year. Are we counting on cash flow? We may not, but our expectation is, you know, before the end of the year, those buildings are fully leased. That is our expectation.
Okay, thanks. Yeah, that would sort of be the next part of that question as far as cash flow producing. Maybe just you coming back to your comments on EV, you know, manufacturing. You know, just on that Volkswagen EV battery plant that I guess that's coming in St. Thomas, still a few years away, are you seeing any pickup and interest at all in at the Brantford site? You know, I realize it's, you know, call it an hour's drive, I'm just curious if that, you know, has seen some pickup in activity at all.
Well, that was in the mix. Certainly, it was a site that was considered, it was a market that was considered. I would say pick up from that particular deal, no. I think that there's a lot of interesting industries that are circling out right now, and Brantford is near the top of the list for what a lot of these sectors are looking for.
Thanks very much. I'll turn it back.
Our next question comes from Brad Sturges with Raymond James. You may proceed with your question.
Hi there. Just to touch on your comment on the flight to quality that you're seeing, I guess within leasing and at risk of, I guess, this being more of a market specific answer, but I guess if you were to generalize, is there kind of a sweet spot in terms of the I guess the property kind of amenities or characteristics that, you know, you would point towards in terms of where you're seeing kind of the most demand or flexibility in terms of diverse groups of types of users that you're seeing or would feel I guess would be more the type of asset to kind of show where the I guess the demand is trending towards right now?
It's been really hard to see a clear pattern, I think, emerge, Brad. I think, like you always go into these things trying to be everything to everyone. You're trying to build the best building and appeal to the largest group of users. You are agnostic to a degree, you just want it to be, you just want it to fit the most state-of-the-art standards, that are out there in the market. We're not really seeing anything. We're seeing activity in our markets. I wouldn't say it's location agnostic. That's not true. I think location has continued to matter. But a lot of these tenants, just when you think that 700,000 feet is a sweet spot, then it's 5. When you think it's 5, then it's 7.
There has been no pattern that's really emerged to show us that there's a particular size or characteristic of building other than clear height. You know, all those functionality sort of characteristics that are important to us, access to highways, access to infrastructure, all these things remain important. There's been no clear pattern emerged yet that's in this market as to the right size or particular characteristic that matters most.
Okay. That makes sense. Going back to your comment that you're expecting maybe to see a little bit of stress that hasn't happened. You know, in terms of who is actually executing on the vendor side from a asset sale point of view, is there a particular group that's emerged that has been a little bit more active in terms of, you know, is it private REITs that you're seeing selling the liquidity opportunities with industrial or into other types of sellers that are actually executing on a little bit more on the asset sale side?
I think on the asset sale side, I would just say it looks like some of the pension funds are selling some assets or selling into strength and probably diversifying a little bit. That's one thing that I would put out there. Certainly portfolio sales have been challenged, we're seeing smaller portfolios and single assets on the market. From a buyer side, it depends on the market, but there's no other market like Toronto in terms of individual or private buyers just by the nature of this market. There's been a lot of activity among private buyers here whose cost of capital is known only to them and probably don't require debt to close these transactions.
We've seen that sort of dynamic play out here, whereas in the U.S., we've seen some private family buying in some of our markets in the Southwest. In Europe, it's predominantly been the private equity funds that have been active and have been actively allocating capital in those markets. Probably a little bit more, I think, I'm not sure I would use the word distressed, but we have seen, you know that the private equity funds have a life as well, and they've been probably the most active sellers of product and portfolio, at least in our sector, in the markets.
Okay. That's helpful. I'll end that. Thanks a lot.
We do have a follow-up question from Mike Markidis with BMO Capital Markets. You may proceed with your question.
Thanks. Just a quick follow-up. Just, Kevan, on your comment that land costs haven't adjusted enough to pencil or make the math work. Does that mean, just to clarify, would you be willing to do development at the similar yields relative to what you have on in active today? Or is it that your yield threshold has gone up?
No, I think our yield threshold has gone up. Remember, I mean, when we're talking about yields in Brantford of 6%-8%, I'm not sure we'd be very okay with that today. Just based on the land value and our cost to develop, that yield's okay. In the U.S., I mean, obviously we've seen terminal cap rates move, our yield expectations have moved in those markets. Fortunately for us, in our developments that have been delivered, we have seen an increase in yield. We've been able to maintain the profitability of those sites. We're assuming so for Indianapolis, obviously, if we achieve the rents that we expect to achieve.
We're achieving yields that are much higher than our pro forma, but we're obviously employing a stabilized cap rate that's higher in our pro forma as well. When I say, for example, something's got to give on the land side in a lot of these markets, we're seeing development opportunities where they need to underwrite. This is also based on the cost of construction, which has been sticky. We do expect it to moderate, but so far it has continued to be very high.
We've seen economic rents on those or what are being pro formad on those to be, you know, 15%-20% above what we think market rents are. Until such time that the market rent expectations come down, or the land prices adjust to a point where it makes economic sense for us, I don't think we feel any urgency to step into any of those opportunities. I guess part of it is you're hearing it in my voice. We're waiting for the right opportunity, and I think we're positioned for it, which is important, but we don't have any urgency to do it. If we don't find the right opportunity this year, that's fine. We have a lot on our plate, obviously, that keeps us busy.
We don't feel any need to do a deal for the sake of doing a deal. We do believe that something has to give, and a lot of these smaller developers will need to recapitalize. We'll face a wall, need to recapitalize, and I think that's when we'll probably find some compelling opportunities.
Yeah. Got it. We seem to be in this very, very slow-moving period of adjustment here. Just to finish off on that topic, Kevan, if you were to start something in the U.S., let's say Houston, like where would you what would you need to see for a stabilized yield all else equal today?
Well, we achieved a yield, I think, of the high sixes on what we did. I think we would have to achieve a similar yield, if not higher, on future development.
Got it. That's it for me. Thanks so much.
Okay.
We have no further phone questions at this time. I will now turn the call back over to you. Please continue with your presentation or your closing remarks.
Okay. Thank you, moderator. On behalf of management and trustees at Granite REIT, thank you for taking the time for our Q1 call and look forward to speaking with you again in August.
That does conclude the conference call for today. We thank you for your participation. We ask that you please disconnect your lines.