Good morning, and welcome to Granite REIT's second quarter 2023 results conference call. As a reminder, the conference today is being recorded on Thursday, August 10th, 2023. 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 right now 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 conclusions, 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 materials 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 8th , 2023. Readers are cautioned not to place undue reliance on any of these forward-looking statements and forward-looking information.
The REIT reviews its 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. In addition, 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- and six-month periods ending June 30, 2023, for Granite Real Estate Investment Trust and Granite REIT Inc., and other materials filed in the Canadian Securities Administrators and U.S. Securities and Exchange Commission from time to time for additional relevant information.
I will commence the call as usual with financial highlights, and then Kevan will follow with an operational and strategy update. Granite posted Q2 2023 results below Q1, overall in line with management's annual forecast and guidance. Granite reported strong NOI growth, offset by higher interest costs and G&A expenses. FFO per unit in Q2 was CAD 1.21, representing a CAD 0.04 or 3.2% decrease from Q1 2023, and slightly below our own internal forecast of CAD 1.23, and is an 11% increase relative to the same quarter in the prior year. The growth in NOI is derived from acquisitions, developments, and expansions that came online since the second quarter of 2022, and strong Same Property NOI growth enhanced by double-digit leasing spreads in the US and inflationary increases in Europe.
While foreign exchange was relatively flat overall compared to Q1, in comparison to the prior year, the euro was 8% stronger and U.S. dollar 5% stronger, resulting in a positive CAD 0.07 impact to FFO per unit. Offsetting the favorable Q2 2023 NOI relative to Q1 is the impact of higher interest costs resulting from draws made on Granite's credit facility during Q2, and lower capitalized interest of approximately CAD 0.9 million relative to Q1 as a result of the substantial completion of the majority of Granite's active developments during Q1 and early Q2, as well as incremental foreign exchange losses on the settlement of foreign cash, which can fluctuate quarter-over-quarter. Due to the timing of certain activities, FFO-related G&A expenses were approximately CAD 1 million higher than in Q1.
Granite's AFFO on a per unit basis in Q2 2023 was CAD 1.09, which is CAD 0.09 lower relative to Q1 and CAD 0.05 higher relative to the same quarter last year, with the variances mostly tied to FFO growth, offset by higher capital expenditures, leasing costs, and tenant allowances incurred due to the timing of leasing turnover and seasonality. AFFO-related capital expenditures, leasing costs, and tenant allowances incurred in the quarter totals CAD 4.5 million, which is an increase of CAD 3.4 million and CAD 3 million over Q1 in the prior year, respectively. For 2023, we are estimating AFFO-related maintenance cap, maintenance capital expenditures, leasing costs coming in at CAD 25 million for the year, which is CAD 3 million higher than our forecast provided in Q1.
The CAD 3 million increase relates to a tenant allowance and leasing cost tied to a new lease on a previously vacant space at Granite's Novi, Michigan, property. The increase in maintenance, capital expenditures, tenant allowances, and leasing costs relative to the past couple of years is a direct result of the approximately 9.7 million sq ft of GLA turning this year. Same Property NOI for Q2 2023 was very strong relative to the same quarter last year, increasing 7.7% on a constant currency basis and up 13.2% when foreign currency effects are included.
Same Property NOI 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, a free-rent period in the prior year at our property in the U.S., and includes the impact of completed expansions in GTA and Indiana. G&A for the quarter was CAD 8.9 million, which was CAD 2.9 million higher than the same quarter last year and CAD 5.8 million lower than Q1. The main variance relative to the prior quarter and Q1 is the change in non-cash compensation liabilities, which generated an unfavorable CAD 2.1 million fair value swing relative to the same quarter last year, but a favorable CAD 6.8 million fair value swing relative to Q1.
as we recognize fair value gains on these liabilities due to a 5.7% decrease in Granite's unit price during the quarter. These fair value adjustments do not impact our FFO or AFFO metrics. Stripping out the fair value adjustments, as mentioned earlier, G&A expenses that impact FFO and AFFO were approximately CAD 1 million higher than Q1, which is mostly tied to costs pertaining to the AGM and timing of consulting and travel expenses, as well as higher compensation costs directly linked to non-cash compensation and the upward valuation of its Performance Stapled Units . For the remainder of 2023, we expect G&A expenses of approximately CAD 9.5 million per quarter, or roughly 7%-7.5% of revenues, excluding any amounts for fair value adjustments related to non-cash compensation liabilities.
On income tax Q2, 2023, current income tax was CAD 2.1 million, which is CAD 0.2 million higher than the prior year and CAD 0.2 million lower than Q1. The movement in current tax relative to Q2 last year is mostly attributable to the strengthening of the euro relative to the Canadian dollar, as all of Granite's current taxes generated from its European region, as well as slightly higher taxes in the Netherlands due to depreciation limitations on certain assets. The decrease in current tax relative to Q1, 2023, is mostly related to the timing of accruals. For the remainder of 2023, we estimate current tax to run approximately CAD 2 million per quarter, assuming no significant change in the euro FX rate, which is slightly lower than the past two quarters due to lower required provisions on tax positions taken going forward.
As with the past few years, Granite has the potential to recognize the reversal of tax provisions in Q4 relating to tax positions taken on taxation years, which will go statute-barred , totaling approximately CAD 1.8 million. However, we cannot assess whether these reversals can be realized at this time. Interest expense was higher in Q2 2023 relative to Q1 by CAD 1.4 million as a result of borrowings made on Granite's credit facility to fund development, interest on the secured construction loan, which was repaid in full late in Q2, and lower capitalized interest by approximately CAD 0.9 million due to the substantial completion of the majority of Granite's developments. The draws on the credit facility in Q2 were higher than we had anticipated last quarter due to the delay in cash repatriation from Europe that was resolved in July.
For the remainder of 2023, we are assuming no additional draws on the credit facility and that the CAD 400 million debenture maturing November 2023 will be refinanced and swapped to EUR at the beginning of Q4, with an estimated interest rate of 4.75%. Therefore, for the third quarter, we estimate interest expense consistent with Q2, and interest expense will increase to approximately CAD 21.5 million in Q4. Granite's weighted average cost of debt is currently 2.27% and is expected to increase modestly to approximately 2.6% pro forma the 2023 debenture refinancing. Looking now to our estimates, our 2023 estimates.
Granite's earlier guidance to FFO remains unchanged, which estimates FFO per unit within a range of CAD 4.90-CAD 5.05. We are currently expecting to be closer to the midpoint of this range. This still represents an approximately 11%-14% increase over 2022. For AFFO per unit, we are lowering the forecast range by CAD 0.05 to CAD 4.25-CAD 4.40, representing an increase of 5%-9% over 2022. The CAD 0.05 reduction is entirely due to the increase in forecasted AFFO-related ex, capital expenditures discussed earlier due to the leasing of vacant space at our Novi, Michigan, property. The foreign currency rate driving the high and low ranges remain unchanged from last quarter.
For the high end of the range, we are assuming foreign exchange rates of the Canadian dollar to euro of 1.48 and Canadian dollar to USD 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 USD of 1.42 and 1.32 respectively. Lastly, our forecast assumes that approximately 20% of the forecasted stabilized NOI relating to our recently developed properties in Houston, Phase One, Nashville, and Indianapolis will be realized mostly throughout Q4. Granite will provide updates to guidance next quarter as warranted, based on new leasing activity executed, as well as any changes to foreign exchange assumptions.
The trust balance sheet, comprising of total assets of CAD 9.1 billion at the end of the quarter, was negatively impacted by CAD 14 million in fair value losses on Granite's investment property portfolio in the second quarter, and was further compounded by CAD 142 million of translation losses on Granite's foreign paid, foreign-based investment properties. That was due to a 2.1% and 1.8% decrease in CAD, USD and euro exchange rates, respectively, relative to Q1. The fair value losses on Granite's investment property portfolio were primarily attributable to the expansion in discount in terminal capitalization rates across selected Granite markets in response to continued rising interest rates, partially offset by fair market rent increases across the GTA and selected U.S. and European markets.
as well as the renewal of one industrial property in Germany, and the appreciation of land values at Granite development properties and land held for development in Brantford, Ontario. The stabilization of four properties under development in the US, which were completed and transferred to income-producing properties early on in the second quarter of 2023. The Trust's overall weighted average cap rate of 5.09% on in-place NOI , increased eight basis points from the end of Q1, and has increased 59 basis points since the same quarter last year. Total net leverage as of June 30, 2023 was 32%, and net debt-to-EBITDA was 7.6 x, which has improved from Q1 and Q4 as a result of the completion and stabilization of the majority of Granite's development properties.
Granite continues to expect its debt to EBITDA to decrease to low 7x by the end of this year, and to improve thereafter into 2024 as the EBITDA from completed developments comes online. The Trust's current liquidity remains at CAD 1 billion, representing cash on hand of approximately CAD 120 million, and the undrawn operating line of CAD 910 million. As of today, Granite has CAD 87 million or EUR 59 million drawn under the credit facility, and there are CAD 2.7 million in letters of credit outstanding. I'll now turn over the call to Kevan.
Thanks, Teresa. Morning, everyone. Thank you for joining our Q2 call. As usual, Teresa and I are joined by Lorne Kumer and Michael Ramparas. I would concur with Teresa's characterization of our results being more or less in line with our internal expectations when accounting for FX and some timing related issues in the quarter. I will be brief in my formal comments as usual. As before, I'll provide an update on our current development pipeline, our ESG program, and our leasing program year to date. Provide an overview of the leasing and investment market fundamentals we're seeing across our business before taking your questions. Beginning with development activity in the quarter, we achieved substantial completion of our development project in Lebanon, a suburb of Nashville, Tennessee, comprising roughly 500,000 sq ft over three buildings on April 6th.
To date, we have executed two leases totaling approximately 180,000 sq ft at rates roughly 30% above our original underwriting and 6% ahead of budget for 2023. We also completed the build-to-suit development of our 220,000 sq ft property in Bolingbrook, a suburb of Chicago, on April 12, and as you can see, the building is fully leased for a 12-year term. Our current construction pipeline includes two projects in Brantford and Ajax. Firstly, the 410,000 sq ft build-to-suit project for Barry Callebaut continues to progress on schedule, with substantial completion expected in Q1 of 2024. Similarly, the 50,000 sq ft expansion of our existing property in Ajax is underway, with substantial completion scheduled also for Q1 of next year.
I'd like to note that, as disclosed in the MD&A, our projected unlevered return for the small expansion project has been reduced considerably to 5.6% due to a combination of higher construction costs, additional scope, and the incorporation of some major base-building improvements in the expansion project. As per our MD&A, we are in the approval process for the next phase of our Brantford development, which will include a single 730,000 sq ft building to enable us to efficiently respond to suitable build-to-suit opportunities that may arise in the market. We currently do not have any plans to commence with the construction of the building on a speculative basis.
As mentioned previously, 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 . In addition to the projects just discussed, we have 160 acres of land remaining for development across Brantford, Houston, and Columbus, which can accommodate up to 2.4 million sq ft of space once constructed. As outlined in our MD&A, six lease maturities representing just over 1.9 million sq ft that occurred in the quarter were renewed at an increased, average increase of 15%. Keep in mind that that included the expiration of a termination right by a tenant in the U.S. and the renewal of a Magna facility in Germany.
Excluding those two properties, the average rent increased by 23% on average. As of this call, we have also executed renewals on 735,000 sq ft of subsequent 2023 expiries and 2024 maturities at a weighted average increase in rents of 34%. Included in the numbers I just mentioned are extensions on 645,000 sq ft of Magna leases across three properties, one located in the GTA and two in Austria, at an estimated average increase in rents of roughly 22%. As a reminder, we do not anticipate any leasing costs or CapEx associated with these renewals.
We are also finalizing lease extensions on another 1.1 million sq ft of 2024 maturities, which, when combined with our renewals to date, would represent over 70% of our 9.7 million sq ft in overall maturities in 2024. At this point, we expect to achieve an average increase of 20%-22% on the outstanding maturities in 2024. As Teresa mentioned, Same Property NOI increased by 7.7% in the quarter on a constant currency basis, within expectations. Same Property NOI was positive across all of our geographies once again, led by our portfolios in the U.S. and Germany, driven by strong renewal spreads in North America, development stabilizations, and strong CPI increases year-to-date in Europe.
We expect Same Property NOI, NOI growth to moderate slightly in Q3 and Q4, and will likely come in at the lower end of our range of guidance, our Q1 forecast guidance for 2023 Same Property NOI growth at 6.5%-7.5% as we re-lease our current availabilities. Vacancy increased to 3.7% from 2.2% last quarter, due to the addition of the 630,000 sq ft space in Louisville, as was expected, and the addition of roughly 500,000 sq ft of new development space in Nashville. 180,000 sq ft of space, of which has been since been leased, as mentioned earlier, and I'm happy to answer specific questions on leasing following my comments.
We have now published our corporate ESG+R Report for 2022. As you will see, we have made significant progress in a number of key initiatives of our program, including significant reductions in energy and GHG emissions intensity within our portfolio. Additionally, as at December 31st of 2022, we had achieved operational or new construction green-building certification on roughly 24% of our portfolio. We have achieved green-building certification on an additional 21 properties, totaling 11.3 million sq ft so far this year. We have made a number of improvements to the report, and invite all of you to review it at your convenience, as posted on the sustainability section of our website. As you can see from our disclosure, and as mentioned, we adjusted cap rates and discount rates further, but only slightly in the quarter.
Transactional data suggests that pricing has begun to firm up broadly across our markets in the US and Europe, more so, I think, than we anticipated. Excluding FX movements, the roughly CAD 210 million in negative fair value adjustments associated with TTR and discount rate adjustments year to date, has been partially offset by CAD 116 million in gains from a combination of development stabilizations, an increase in value resulting from the long-term renewal of three properties in Austria and one in Germany, and an increase in the fair market value of our land for development in Brantford. For a general market update, I would once again characterize leasing activity in the second quarter broadly as lower than in the past two years, which was exceptional, but in line with 2019 or pre-COVID levels.
Notably, our markets represented the top eight markets in the US for net absorption, totaling just under 46 million sq ft, with Dallas once again leading the country at 9.2 million sq ft of net absorption. Net absorption also turned positive in the GTA in Q2 at 2 million sq ft, but still well below the 10-year quarterly average, similar to the Netherlands and Germany. Availability rose in most of our markets in North America as new supply outpaced demand in the quarter. We do expect this trend to continue for the next two to three quarters as the backlog of current projects are delivered.
We project that availability will begin to fall in early 2024, as I said on the first quarter call, as the pace of new starts has already begun to decelerate acutely from past quarters, and a number of planned deliveries this year are being delayed. In most of our markets, we are witnessing a drop of 40%-75% in new starts from Q2 versus Q2 of 2022. As for rents, the data suggests that market rents increased roughly 5% on average over the first quarter across our US markets, with the I-78/81 corridor in Louisville leading the way at a staggering 19% and 11% respectively, quarter-over-quarter. Quarter-over-quarter rent growth in the Netherlands and Germany came in at 6.7% and 5.9% respectively.
Although demand has reverted to pre-COVID levels, the spread to market on our in-place rents continued to widen in the quarter. A substantial contraction in new starts, we believe should support continued rent growth over the near to medium term. Correspondingly, although the delayed completion of our developments in Indianapolis and Nashville to the second quarter of this year may result in a longer stabilization period, the expected rents today are frankly much higher than they were at underwriting and even one year ago. With respect to investment market conditions, transaction volumes remain lower year-over-year, but are beginning to recover, particularly in the U.S. and the Netherlands, and data suggests that prices have begun to stabilize.
Logistics clearly continues to be one of the preferred sector destinations for investor capital. Flows appear to be improving, with private equity funds, save obviously for the $3 billion Prologis acquisition of the Blackstone portfolio, remaining as the most active buyers both in North America and Europe. In closing, I think that Teresa outlined our financial performance very well. Save for minor timing issues, FX movement, as mentioned, non-cash compensation for value adjustments, our results were in line with our expectations for the quarter, as our Indianapolis and Nashville developments reached substantial completion. The associated costs, such as interest, TMI, et cetera, are now being expensed.
In addition, I realize that the drop in occupancy to 96.3% was noticeable, but it was in line with our expectations, given the addition of vacancy in the short term from the delivery of the Nashville and Indianapolis developments and the expected turnover of 600,000 sq ft in Louisville, and in no way does it alter our trajectory. Looking forward, as Teresa mentioned, we are maintaining our FFO guidance for 2023, and that is based on the projections for FX and leasing activity for the remainder of the year. I'll repeat, once stabilized, the new developments will of course be a strong driver of NOI and cash flow growth for us in future quarters. I will now turn the mic over for questions.
Thank you very much. Once again, I'll do remind, if you would like to register your question, please press one followed by four on your telephone. You will hear a tone prompt that acknowledge your request. If your question has been asked or to draw your registration, press one followed by three. One moment please, for our first question. We'll get to our first question on the line from Sam Damiani, TD. Go ahead.
Thank you. Good morning, everyone. Thank you for the thorough overview, both Teresa and Kevan. That was very, very helpful. Just getting onto, I guess, the topic of the availabilities in the current portfolio. Kevan, you alluded to it, but I wonder if you could give us a little more color on how, I guess, discussions are going on Louisville and Nashville and any other larger sort of availabilities in the portfolio today and the timing on getting the occupancy back toward 99%.
Yeah, happy to, Sam. They're different availabilities, obviously, from market to market. Louisville, 600,000 sq ft, just became vacant. I would characterize the sort of level of activity being strong, but not for the full 630,000 sq ft. Based on the location and the quality of building that we have, we're looking at opportunities and the right prospects for the building. We've seen more activity in the 200,000-400,000 sq ft range of prospects. As of now, we think it would be better to wait for a single tenant for that building. That's how we're approaching, I think, that availability. Nashville, a number of prospects, across all three buildings, I believe, of different sizes.
So I, I think that that is, is going quite well, and I think we have, you know, a strong prospect for probably I would characterize as about 150,000-180,000 sq ft of prospects there. Indianapolis. More activity on the smaller building, the 300,000 sq ft building than the seven. We have one prospect for the larger building, but that's very early discussions. I would say that there's two to three decent prospects for the smaller building. Again, early days, but we're looking at both multi-tenanting the smaller building or a single tenant, and that's for the larger one, too. All of the buildings that we develop and frankly acquire, Sam, we prioritize the ability to demised the building. So all of our buildings can accommodate multiple tenants.
We're just trying to find that sweet spot to maximize returns and the long-term value of the property and what makes, what makes sense. Despite the increase in vacancy, and I, I've already seen some negative comments around it, I, I think we've earned the right to be patient, to find the right tenant, that's gonna maximize the value, the long-term value of the asset. We're being somewhat selective. I'm not suggesting that we're turning away tenants. That would be a, a gross mischaracterization, but we are being selective in how we would divide up any of our buildings. It would have to be the right tenant, the right credit, the right rent, frankly, based on the premium location of these assets, and has to fit for us. That's how it's going on the, on the availability side.
I hope that answers your question.
That is helpful. I mean, you, you know, the, the reported occupancy rate of 96.3%, it doesn't necessarily reflect some leases that would be commencing post-quarter end. Is there sort of meaningful spread between what you reported and what would be a committed occupancy rate at the, at this time?
No, I, I think it would be best just to wait till the next quarter. We certainly don't want to put the cart, the cart before the horse. Also pointing out that we are in the middle of the summer, so we've already seen activity begin to pick back up after a slow July. I, I think it would be better for us just to have a more meaningful conversation on this on our next call in Q3.
Okay. Last one from me, just on the transaction market, which it certainly was interesting to hear a sense of it stabilizing. As the market sort of evolves over the next six to 12 months, do you see capital allocation becoming more compelling? If so, do you see acquisitions becoming incrementally more compelling versus development, sort of a reversal of the last two years?
I'm not sure we see anything that's really compelling for us right now in terms of... Like, as I said, we were a bit surprised by the strengthening in pricing. I think particularly based on a few deals in Europe for at-market assets and newer assets, the sort of core pricing has really come in a lot more tightly than we thought. From that perspective, I don't think we see anything that's truly compelling to us. In terms of use of capital, I think we have enough in front of us for the next six months. I don't forecast us being in the market by the end of the year. I think 2024, we're quite-...
optimistic that market conditions will improve both from I wouldn't say, I, I don't want to say leasing perspective because I think we're in a strong leasing market right now, but I think 2024 will be a, a strong leasing market. I also think it will be a more compelling market for us from an investment perspective and hopefully from a cost of capital perspective as well. We always have to keep that in mind. I think it's gonna be from a capital allocation investment perspective, Jan, it's going to be a relatively quiet second half of the year.
Thank you, I'll turn it back.
Thank you very much. We'll get our next question on the line. It is from Himanshu Gupta with Kotak Bank. Go right ahead.
Thank you, good morning, and Kevan Gorrie, thanks for the color on the vacancies covered, by the way. Just, you know, on the same lines, in your FFO Same Property NOI growth guidance, do you expect backfilling of Louisville and Indianapolis vacancies?
Sorry, can you repeat that, Himanshu?
Kevan, question is, I mean, you obviously put out your FFO guidance and Same Property NOI growth guidance as well. Do you expect, like, you know, Louisville vacancy will be backfilled by the year-end, in that guidance and also on your Indianapolis vacancy?
Sorry, what are you saying?
Are you saying, Himanshu, are you asking is, are we assuming that the Indy lease-up and the Louisville lease-up are in the guidance for the FFO? Is that what you're asking?
That's, that's exactly what I'm asking. Thank you.
I'm trying to think. Well, from a FFO perspective, there is some contribution both from Louisville and from very late, and from Indianapolis. From the Same Property NOI perspective, only Louisville would impact that. And again, it's not a large contribution. We're not anticipating a large contribution to Same Property NOI from Louisville in 2023.
Okay. Okay, fair enough. Then on the 1.5 million sq ft leasing in the U.S., done in the quarter, I think the rental spread was 19%. Was it in line with your expectations, or were you expecting even higher rent there?
It's the lease turn for the 19%. I think it was more in line with expectations.
Yeah, absolutely.
Definitely in line with expectations, Himanshu.
Absolutely.
And, uh, I think-
Himanshu, Himanshu, let me, let me just clarify this because I've, I've seen some, I've seen some things written that, that there seems to be more confusion. Is it a true mark-to-market? I'm not sure that it is. When we have a lease in place where the in-place rents are truly 30%, 40% below market, but the tenant, but the renewal increase is set, we, our mark-to-market, as we disclose it, is the renewal increase, is, is the terms of the lease. When we look at that, when you look at it and you say 19%, that's based on what we're actually achieving on, on the renewal increases, and that does include some contractual limitations, whereas it may not reflect a true mark-to-market on the rent.
What it does reflect is if we can get it at the fair market value or the fair market rent, then it would and what we achieve, but it really is based on what we achieve on renewal and not necessarily a theoretical mark-to-market.
Okay. Thanks for the clarification. Just on 2024 lease expiries, I think it looks like you're saying 70% are all done or almost there. Do you have a sense of what could be the change to NOI growth next year? Will it look very similar to this year as well?
Yeah, I, I, we're expecting it to be similar. I think we're expecting it to be as strong as, as we sit here today. Just to clarify, the I mentioned 1.1 million sq ft . We're, we're finalizing the lease. Everything looks good, but we don't have we, we do not have signed renewals yet for that. Assuming that that's successful, and we, we assume that it will be, obviously, we'd be at roughly 73%. Yes, we expect the Same Property NOI to be consistent with this year.
Awesome. Thank you. Just last question, I think, for Teresa. CAD 400 million debentures, did, did you mention you're doing EUR swapping at 4.75%?
Yes.
Is that like secured financing on European assets?
No, no, they're not secured. It's all unsecured, but we just based on where swap rates are today, we're estimating as high... Well, that's what's in my forecast, is a 4.75% swap EUR fixed rate . No, they, they remain always unsecured.
Okay, awesome. Thank you so much. I'll turn it back.
Thank you. We'll get our next question on the line from the line of Matt Kornack with National Bank of Canada. Go right ahead.
Hey, guys. With regards to development spend, you haven't been kind of replacing as projects have rolled off. Are you less inclined to put additional capital into the ground at this point? I guess subsequent to that, as you lease some of the existing space in the development that has been delivered, would you then look to deploy more proceeds into development?
Well, I think we're certainly in a wait-and-see approach, even in Brantford. I think we have the opportunity to move forward with that, potentially be in the ground at the end of this year. I think it makes more sense for us to be patient. If there's a build-to-suit opportunity in Brantford, we will take it. For now, I think, we're taking a wait and see until 2024, at the earliest. I think I mentioned on either the Q4 call or the Q1 call that we were looking at potentially moving forward with the next phase in Houston as well, because we're very close to full stabilization of the first two phases there.
Again, I, I think despite it being a, a strong market, I think it makes more sense to us, particularly in Houston, given we're not really sure what we are going to build. We could build in excess of million sq ft in a single building or multiple buildings. I think it makes more sense for us to continue to monitor the market, and wait until at least 2024 and decide what we wanna do. For now, we're not planning to move forward with any additional development there.
Okay, makes sense. Then I guess with regards to your commentary around asset pricing firming and, and more incremental demand from investors, has that changed your thought process around capital recycling at this point? At this point, is there a place that you would wanna direct funds to relative to, to your existing portfolio exposure? Are you happy with where you are at, at this point?
I mean, we'll always look at opportunities. We, we continue to look at opportunities in the GTA, but I think for now, one of the things I would say about capital allocations and prices firm up, I think the Prologis acquisition of the Blackstone portfolio was very interesting. That was a very, two wise, that was a very tight cap rate, and I think 55% of that portfolio was in our markets. I think that that was a very interesting data point, and I think one of the comments that was made, I don't want to put words in anybody's mouth, but one of the comments that was made by Prologis is that it was below replacement cost. There's also this...
There's a lot of pressure on costs, not just on land, which, which is somewhat malleable, but construction costs are higher, and they're not falling. The economic rents continue to rise, and it puts pressure on new supply, et cetera, and we have to take that into account. If there are opportunities in, in our markets and we have liquidity, adequate liquidity, in our opinion, it may make more sense to buy stabilized assets. We'll see, and I think that's been consistent with our message all along, that we're willing to look at new developments if we feel the returns are compelling. We're also willing to, you know, switch a little bit and focus more on stabilized assets if, if we feel that they're truly below replacement costs and offer better returns.
Okay, that makes sense. I mean, you made an interesting comment. You guys have been at 99% occupancy. I, I don't know if we should view 99% occupancy as a stabilized occupancy figure for any real estate portfolio, but as, as you think out, like is the goal to get back to that, or is there always gonna be kind of a bit of vacancy and, and pricing?
Well, I'm, I'm glad you mentioned it, because I, I think some people have been critical with 99 being, you know, too high, and all we care about is occupancy, and I, I would kind of tend to agree with that. I think the nature of our portfolio is very stable. We have newer assets. We have major tenants. Magna is a tremendously stable tenant. If a normal portfolio, logistics portfolio is 97%, we should probably be 98%-99%, just based on the stability characteristics of our portfolio. That being said, occupancy is not a driver for us. It really is growing NOI and net effective rent. That's really a driver. Do we need to be 99%? Absolutely not. Where will we kind of shake out?
Probably more in the, as I said, more in the 98% range, just because of the nature of our portfolio. Really, You're absolutely right. I think 99% + is just a, an arbitrary number and very hard to attain over a long period of time.
Yeah. No, fair enough. Maybe last, small detail from Teresa. I don't know if you have it, in front of you, but do you know the Same Property NOI, what it would've been including and excluding kind of the expansion activity?
Yeah. Excluding the expansion, it's 6.8% for the quarter.
The 6.5% guidance, that's, I should know this, but that's in functional currency, not currency adjusted, or, or is it currency adjusted?
No, that's constant currency.
Okay.
Correct. Yeah.
Okay. Thanks so much.
Thank you very much. Looking at our next question on the line. This is the line of Kyle Stanley with Desjardins Capital Markets. Go right ahead.
Thanks. Morning, everyone. Maybe just going back to, kind of the leasing environment. I'm just wondering, in your discussions with tenants now, as you're kind of working through the leasing, you know, maybe what's changed? Are you seeing them negotiate more? Obviously, they are aware of kind of the dynamics at play in the market, but I'm just curious on, on how your discussions have maybe changed in, in the last maybe six months or so relative to what we saw, you know, in the post-COVID frenzy. Then just specifically with kind of your leasing in the US, what would you be getting, in terms of a contractual rent escalation?
Well, number one, I, I think for the negotiations or discussions that we've, that we've been involved with, the financial terms seem to be intact. We haven't had anyone push back for more free rent or more TIs, and rents, as you've seen, beginning to climb. Put in perspective, just looking at the statistics. We had five markets in the US that had stronger rent growth than Toronto, two of them were actually almost double the rent growth in Toronto. Dallas was 40%, for example. I think Louisville was 30-something. Indianapolis was 30%, right? There's still a, I, I think we're in a still a very strong position as a landlord on the rent side.
I think what we've seen, though, is the sort of hesitancy at the corporate level to make financial commitments. I talked about this in the Q1 call, and we're certainly seeing a continuation of that. Deals are taking longer because companies are just a little more uncertain about economic conditions, and that makes sense. There hasn't really been a pushback on the economic terms of the deal, I, I would say. I hope I mentioned in my formal comment, when we look at Nashville, I think we underwrote, I want to say $6 rents, $0.05 listed. $6 rents, we're achieving $7.25+ right now. From a timing perspective, maybe the delay, maybe the delay in deliveries has not been positive for us, but it's certainly helped us from a yield perspective and from a rent perspective.
I think the second question is, what escalations are we achieving? What would you say? Anything, anything sort of-
Yes.
Yeah, roughly 4%. Yeah.
Okay. Fair-fairly consistent with what, you're kind of seeing in the GTA. That makes sense. I think your, your commentary obviously is, is, interesting about the, the rent growth being higher in some of those US markets, namely Dallas and Louisville, Indianapolis, like you mentioned. You know, what would you say is driving that right now? You know, historically, maybe the rent growth in kind of the Midwest and the, and the southern, areas of the US had not been quite as strong as what you were seeing out of the coastal, but we, we've obviously seen that shift a little bit. In your view, you know, what is really contributing to that?
Well, I think to be fair, a lot of the net absorption that we've seen is newer product that's coming online. I think, number one, most of the leasing that we've seen has been in newer products. I think I didn't look at it this quarter, but in Q1, I think it was over 80% of all leasing was in newer products. Certainly, I think what we're seeing is that sort of rent premium for newer products. Another trend I would say that we're, we're just starting to notice is tenants are now actively inquiring on sustainability features in the building, which is a good thing for us because we're, we're way ahead of the curve there in terms of the characteristics of our buildings. That's another trend that we're seeing where they're looking for that.
To the degree that they'll pay for it, not quite sure, but it seems that there's a little more openness to paying a higher rent, on buildings that are modern like ours and have those, have those characteristics.
Okay. No, that makes perfect sense. Just the last one, I thought your, your comments on pricing in Europe firming maybe a little quicker than expected was interesting. You know, what do you think is, is driving that, and have you seen, you know, any specific buyer or interested party become, become more active in the European markets lately?
Well, as, as we said before, with private equity, there's certainly this sort of need to put money out the door. That's why, that's why we believe, and I think there's a consensus out there, that a lot of this is just private equity funds needing to allocate capital. Even, you know, Cadillac Fairview through Zaporya, Boreal, is active, CBRE is active. A lot of the open-end funds in Germany are, are back in the market. There's a number of them, and that, that's been consistent, I think, so far this year. I think that need to allocate capital and the preferred destination, particularly in Europe, I think year-to-date, industrial is 40%-50% of all investment volume. It remains the
Okay.
sort of sector of choice for investors.
Okay, no, that, that makes sense. Maybe I said last question, but just building on that a little bit. I mean, obviously, historically, there have been discussions of monetization, some of the Magna assets, Graz, I think we discussed earlier in the year, just given the lease renewal that was completed. Do you think, you know, transaction markets firming in Europe, would that make you reevaluate that at a certain point?
Well, I mean, we're always, we're always open. We're always thinking about it. I think what we said is just I don't know if I would characterize the market conditions as being there yet for that. And just to get back to the comment about why do we think that prices are stabilizing, I think the one thing that's interesting to us, most interesting to us, and I mentioned newer buildings with at-market rents or very close to market rents, with long-term leases, are trading, to me, well below financing costs in Europe. We're seeing these types of deals occurring at a 4.5% yield, when borrowing costs are probably closer to 5.5% in those markets.
I think what that indicates is this sort of deep conviction that market rents are will continue to grow strongly in Europe, and the cost basis will make sense in a few years, even if it's not accretive to their financing costs. That's what we're seeing. In that context, I think that market conditions continue to improve, and if there's the right opportunity for us, with Graz or any of the other assets, we're certainly open to it, and we will be prepared for it.
Perfect. That's it for me. I'll turn it back. Thanks very much.
Thank you very much. Our next question on the line is from the line of Pammi Bir, RBC Capital Markets. Go right ahead.
Thanks, good morning. Kevan, just maybe sticking with the US, it sounds like you, you've made some progress on leasing there. Frankly, you know, vacancies, again, not such a bad thing, just given where rents are. Overall, as, as we think about next year, are there any vacancies coming that you're aware of, call it over, over the next 18 months or so?
Yeah, well, there's a few, but I'm trying to think. I don't think there's anything too-
Nothing chunky.
-significant to us, too chunky. No, I don't think so. 2024.
Okay.
I put it in... Let me put it another way. I think we are 86%, 87% retention this year. I think it would be a similar number for next year. I'm looking at Mike and Warren here, and I think would be similar next year in terms of expectations for retention, if that, if that helps.
Yep. Then just maybe coming back to the Louisville vacancy, I'm just curious, how does the market rent compare to the prior in place? Anything you can share just in terms of, you know, what drove that vacancy? You know, did the tenant outgrow the space, or they're looking for something else, or was it financially driven?
Well, a quick answer there. One, I think we're anticipating rents about 20% over expiring rents, and two, the tenant was GameStop.
Okay, got it.
To remember, this was an expected move, though. We had talked about this for the past couple of quarters, that GameStop had advised us that they were downsizing, obviously. So this was completely expected. To your question about are they going somewhere else? I think, I believe they're consolidating in their existing portfolio. That would be my guess.
Okay. Then just last one. On the Ajax development, you know, it is a small project overall, but I'm just curious, you know, was there an opportunity to maybe revisit the rents there or any discussions with the tenant, just given the increase in the cost?
Well, this is a speculative expansion, I will tell you how we kind of got caught with this. When we were moving forward with the Brantford development, the build-to-suit, you know, obviously, we have time obligations there. We ordered steel because we were in a market where the lead time on delivery of steel was up to 12 months. We made the decision to pre-order the steel for this expansion at the same time. When we did that, and we found that pricing came in above, and there was, you know, additions to the scope that were... Some were our, you know, decision to make, and some were imposed on us by, by the city. At that point, we had already ordered the steel, we were moving ahead with this project.
Then we decided to incorporate some base-building improvements , which are now, which are part of this project, which drove up the cost a little more. That's kind of how that happened. Again, the main point is that we had pre-ordered the steel for this in conjunction with the Brantford project, so it was kind of a unique situation that we found ourselves in there.
Got it. Thanks very much. I will turn it back.
Thank you very much. Mr. Gorrie, we seem to have no other questions queued up. I'll turn it back to you for any closing remarks.
Okay. Well, thank you everyone for participating in our call. Look forward to speaking with you again in November on our Q3 call. Have a good day.
Thank you very much. That concludes the conference call for today. We thank you for your participation. You may disconnect your lines. Have a good day, everyone.