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Granite Real Estate Investment Trust
Earnings Call Analysis
Q3-2023 Analysis
Granite Real Estate Investment Trust
Granite presented its Q3 2023 earnings with robust results. The company's net operating income (NOI) experienced significant growth due to developments and expansions, impressive leasing spreads in North America, and inflationary increases in Europe. The remarkable 14.8% increase in FFO (funds from operations) per unit over the previous year demonstrates solid operational performance and strategic asset management. Investors will be encouraged by the 2.5% FFO increase from Q2 2023, which includes the positive impact of stronger foreign currencies and decreased interest expenses resulting from proactive refinancing efforts. These factors collectively underpin Granite's financial health and its capacity to deliver shareholder value.
Granite's adjusted funds from operations (AFFO) remained consistent in Q3 2023 compared to Q2, although it showed a notable $0.12 improvement from the same period last year. This stability speaks to disciplined financial management, despite higher capital expenditures incurred due to the timing of leasing turnover and seasonality. Gran's estimate for Q4 AFFO-related expenses sits between $7 million and $10 million, pointing to sustained investment in property maintenance and tenant attractions—a signal of enduring property value and attractiveness.
General and administrative expenses for the quarter were $8.4 million, down $0.5 million from Q2. This is attributed to lower noncash compensation liabilities, which do not affect FFO or AFFO. Looking ahead, the company expects G&A expenses to align with revenue at about 7.5% and anticipates a steady state of $9.5 million to $10 million per quarter in 2024. This forecast demonstrates prudent cost management and aligns with Granite's lean operational ethos.
Granite has revised its FFO guidance to a range of $4.93 to $5 per unit, signaling an anticipated increase of 11% to 13% over the previous year. AFFO per unit estimates have also been refined to $4.35 to $4.45, suggesting a healthy growth of 7% to 10%. These updates reflect a narrowed and more precise forecast as Granite heads into the final quarter. Investors can interpret this as a confident projection of the company's earning potential and financial trajectory through the end of 2023 and beyond.
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Good morning, and welcome to Granite REIT Third Quarter 2021 Results Conference Call. As a reminder, today's 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 will now turn the call over to Teresa Neto, to [indiscernible] Advisories. Please go ahead.
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 the 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 REIT reviews is the key assumptions regularly and may change its outlook on a going 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 3- and 9-month periods ended September 30, 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.
As usual, I will commence the call with financial highlights, and then Kevin will follow with the operational update. Granite posted Q3 2023 results ahead of Q2 and in line with expectations, supported by strong NOI growth, high interest income and lower G&A expenses. As a full per unit in Q3 was $1.24, representing a $0.03 or 2.5% increase from Q2 '23 and a 14.8% increase relative to the same quarter in the prior year.
The growth in NOI is derived from developments and expansions that came online since the third quarter of '22 and strong same-property NOI growth, enhanced by double-digit leasing spreads in Canada and the U.S. and inflationary increases in Europe. Partially offset by the disposition of two properties during the second and third quarters of '23 and some new vacancies in North America.
While foreign exchange was relatively flat overall compared to Q2 in comparison to the prior year, the Euro was 11% stronger and the U.S. dollar is 3% stronger, resulting in a $0.06 impact FFO per unit. Interest expense was also lower in Q3 '23 relative to Q2 due to the impact of lower interest costs resulting from the refinancing activity completed during the quarter and higher interest income as a result of incremental cash on hand that was invested in high interest income account.
In addition, due to the timing of certain activities, FFO-related G&A expenses were approximately $0.2 million lower than Granted AFFO on a per-unit basis in Q3 '23 was $1.09, which is flat relative to Q2 and $0.12 higher relative to the same quarter last year. with the variances mostly tied to FFO growth, offset by higher capital expenditures, leasing costs and tender allowances incurred due to timing of leasing turnover and seasonality. AFFO related capital expenditures, leasing costs and tenant allowances incurred in the quarter totaled $6.7 million which is an increase of $2.2 million and $0.1 million over Q2 and the prior year quarter, respectively.
For the fourth quarter of '23, we are estimating AFFO-related maintenance capital expenditures and leasing costs of approximately $7 million to $10 million for approximately $20 million to $23 million for the year. Looking out to 2024, we expect maintenance CapEx, leasing costs and tenant allowances to remain in line with 2023 levels in and around $25 million for the year. Same-property NOI for Q3 2023 was very strong relative to the same quarter last year, increasing 7% on a constant currency basis and up 12.2% when foreign currency effects are included. Same-property NOI growth was driven primarily by higher than previous year's CPI adjustments, positive leasing spreads, contractual rent increases across all of Granite's regions, lease renewals in the U.S. and Canada, and it includes the impact of completed expansions in Indiana and completed developments in Fort Worth, Texas and Altbach, Germany, which had free rent periods and vacancy in the prior year. Partially offset by a free rent period in the U.S. related to a lease renewal and vacancy at certain properties in the U.S. and Canada.
G&A for the quarter was $8.4 million, which was $1.9 million higher than the same quarter last year and $0.5 million lower than Q2. The main variance relative to the prior quarter and Q2 is the change in noncash compensation liabilities, which generated an unfavorable $1.3 million fair value swing relative to the same quarter last year, and a favorable $0.3 million fair value swing relative to Q2. These fair value adjustments do not impact FFO or AFFO metrics. Stripping out these fair value adjustments. As mentioned earlier, G&A expenses that impact FFO and AFFO were approximately $0.2 million lower than Q2, which is mostly related to timing of professional fees and travel expenses.
For the fourth quarter of '23, we expect G&A expenses to come in at approximately $9 million to $9.5 million or roughly 7.5% of revenue. excluding any amount for fair value adjustments related to noncash compensation liabilities. Looking out to '24. For G&A expenses, we expect a run rate of approximately $9.5 million to $10 million per quarter.
On income tax, Q3 2023 current income tax was $2.1 million, which is $0.2 million higher than prior year and flat as compared to Q2. The movement in current tax relative to Q3 2022 is mostly attributable to the strengthening of the euro relative to Canadian dollar, all of Granite's current income taxes generated from its European region. As well as slightly higher [indiscernible] in the Netherlands a depreciation limitations on a couple of assets.
For the fourth quarter of 2023, we estimate current tax to remain flat to relative to Q2, assuming no significant change in the euro FX rate. 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 board, totaling approximately $1.8 million. However, we cannot assess whether these reversals can be realized until after year-end. For 2024, we are expecting current income taxes to increase to approximately $2.4 million per quarter as a direct result of higher revenues and the burn-off of TI amortization expenses in Austria related to the gas lease renewal commencing February 1, 2024, increasing taxable income in that region.
Interest expense was lower in Q3 2023 relative to Q2 by $0.4 million as a result of lower interest expense resulting from the refinancing of the high interest construction loan in Houston in June 2023 with lower interest cost draw from the credit facility and then was further improved by the EUR 70 million term loan that closed September 7, which resulted in the repayment of the credit facility with lower cost debt at an effective rate of 4.3325%.
Post the quarter end, on October 12, Granite completed a $400 million green bond and concurrently entered into a cross-currency interest rate swap exchange in the Canadian dollar-denominated principal and interest payments for euro-denominated payments, resulting in an effective fixed interest rate of 4.985% for the 5.5-year term of these 2029 debentures. The net proceeds from the offering will be used to repay Granite's 2023 debentures with a principal outstanding of $400 million due on November 30, 2023. Prior to that repayment of these 2023 debentures Granted is earning interest on the net proceeds from these 29 debentures at approximately 5% to 5.5%, which will be reflected in interest income in the fourth quarter.
Therefore, for the fourth quarter, we do estimate interest expense to increase to approximately $23 million, partially offset by interest income of approximately $4 million. Granite's weighted average cost of debt is at the end of the quarter was 2.27% and is expected to increase modestly to approximately 2.6% after the repayment of the '23 debentures.
For 2024, given that we have no debt maturing until December next year, our interest expense run rate is estimated to drop to approximately $21 million per quarter which will be offset by some interest income of approximately $0.5 million to $1 million per quarter. With respect to our 2023 estimates, Granite's guidance to FFO has been updated and narrowed as we approach this final quarter of the year.
We estimate FFO per unit within the range of $4.93 to $5 in comparison to previous guidance of $4.90 to $5.05. This represents approximately 11% to 13% increase over 2022. For AFFO per unit, our guidance has also been narrowed estimated at $4.35 to $4.45 in comparison to last quarter's guidance of $425 million to $440 million. Representing an increase of 7% to 10% over '22.
The foreign currency rate driving the high and low ranges have been amended slightly for the fourth quarter. For the high end of the range, we are assuming foreign exchange rates of the Canadian dollar to Euro of 1.48 and the Canadian dollar to USD 1.39. On the low end of the range, we are assuming exchange rates of the Canadian dollar to euro and Canadian dollar to USD of 1.44 and 1.35, respectively, reflective of the current Canadian dollar weakness relative to both currency.
The trust's balance sheet comprising of total assets of $9.2 billion at the end of the quarter was negatively impacted by $53 million in fair value losses on Granite's investment property portfolio in the third quarter which was offset by $87 million of translation gains on Granite's foreign-based investment properties, primarily due to the 2.3% increase in the spot USD exchange rate relative to Q2. The fair value loss of Granite's investment property portfolio were primarily attributable to the expansion and discount terminal capitalization rates across selected Granite markets in response to right interest rate. partially offset by fair market rent increases from multiple properties in the GTA, the U.S., Netherlands and Germany.
The Trust's overall weighted average cap rate of 5.14% on in-place NOI increased 5 points -- 5 basis points from the end of Q2 and has increased a total of 46 basis points since the same quarter of last year. Total net leverage as of September 30 was 32% and net debt to EBITDA was 7.3x, which was -- has improved from Q2 and and as a result of same-property NOI growth, as previously mentioned, and the completion and stabilization of the majority of brands development properties.
Granite continues to expect its net debt-to-EBITDA to decrease to 7.2x by the end of this year and to improve thereafter into 2024 as the EBITDA from completed developments come online throughout the year. The trust's current liquidity is approximately $1.6 billion, representing cash on hand of about $600 million and the undrawn operating line of $997 million. As of today, Granite has no borrowings under the credit facility, and there are $2.9 million in letters of credit outstanding. Granite's increased liquidity position from the end of Q3 is temporarily elevated due to the net proceeds obtained from the 29 debentures at the beginning of October. After repayment of the 23 debentures upon maturity and based on remaining development commitments, Granite estimates that it will end the year with approximately $120 million of cash on hand and no draws on the credit facility for a total liquidity of approximately $1.1 billion. I'll now turn over the call to Kevin.
Thanks, Teresa. Certainly, an in-line quarter for us driven by higher NOI and lower interest net interest expense, as mentioned. I'll begin with a brief update on our current development projects. Our 410,000 square foot build-to-suit project for Barry Cable continues to progress on schedule with substantial completion expected in the first quarter of 2024. The Similarly, the 50,000 square foot expansion of our existing property in Ajax is underway with substantial completion also scheduled for the first quarter of next year. As a reminder, these projects are expected to achieve 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 in Branford, Houston and Columbus which could accommodate up to 2.4 million square feet of space once constructed.
As outlined in our press release and MD&A, the team executed renewals on three muses comprising roughly 1.9 million square feet involving two maturities in 2024 and one 2026 maturity at an average increase in rental rate of 33%. With respect to our 2024 maturities, we have now renewed $7.4 million or 75% of our 9.7 million square feet of maturities at an average increase in rental rate of 14% and with that increase primarily driven by the 10% increase on the garage renewal. Further, we anticipate achieving roughly a 20% increase in rental rate on the remaining maturities in 2024.
As Teresa mentioned, same-property NOI increased by 7% in the quarter on a constant currency basis within expectations. Same-property NOI was positive across all of our geographies and on a constant currency basis, exceeding 6% with the exception of our Austrian portfolio, driven partially by strong renewal spreads in North America, development stabilization and strong CPI increases year-to-date in Europe offset by lower occupancy in our U.S. portfolio. We expect same-property NOI to moderate in Q4 as mentioned, and now project in property NOI to average in the low to mid-6% range over the four quarters in 2023, due to higher vacancy and lower CPI increases in Europe in the fourth quarter versus study. We will provide specific FFO and same property NOI guidance on our Q4 call. But for now, we can state that we expect same-property NOI growth to be higher for 2024.
As you can see from our disclosure, we adjusted cap rates and discount rates nominally in the quarter based on relevant transactional data in the U.S. and the Netherlands. Excluding FX movement, the roughly $270 million in negative fair value adjustments associated with terminal cap rate and discount rate adjustments year-to-date has been partially offset by $120 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 Germany and an increase in the fair market value of our land for development in Brentford.
Looking forward, we will continue to monitor comparable transactions in our markets and further adjustments may be appropriate. But at this point, it is difficult to estimate the direction of asset pricing. Recent optimism among investors that the pause in central bank increases will be sustained and reductions potentially on the horizon may incent buyers to return to the market. the liquidity issues and limited access to credit could impair by our prospects and asset values in the short term. As for a general market update, leasing activity continued to slow in the third quarter as higher interest rates and economic uncertainty continue to impact tenant activity broadly across the real estate sector.
On a comparative basis, our markets once again represented eightof the top line markets in the U.S. for new absorption totaling 22 million square feet for the quarter and over 100 million square feet year-to-date, led by Dallas, Chicago and Houston. So despite the increase in vacancy. The data illustrates that the logistics and manufacturing sectors continue to invest and grow in our key markets due to a combination of a strong business climate and labor force, critical logistics infrastructure and proximity and connectivity with a large percentage of the U.S. population. These are characteristics that we believe will continue to attract tenants and drive growth over the long term.
As for rents, the data suggests that market rents increased roughly 3% on average over the second quarter across our U.S. markets, led by the 78/81 Corridor, Savanna and Louisville, all in double digits. Only Indianapolis posted a slight decline in rents at negative 1.6% quarter-over-quarter. Year-over-year rent growth across our U.S. markets averaged roughly 15%, similar to the GTA. Although Q3 broker data for our European markets is not yet available, our records of comparable transactions indicate year-over-year growth in the Netherlands and Germany, coming in at roughly 7% and 12%, respectively. So although new supply continues to outpace demand in the short term, new starts, for example, in the U.S., are currently at multiyear lows. And when combined with a significant increase in the cost of development for new products, should support rent stabilization and potential rent growth in the latter half of 2024 and into 2025.
I will provide a more fulsome update on our ESG program in the fourth quarter, but I did want to mention that we were recently notified that we received the top ranking of Respi among the listed North American peer group and further receivable of 94% for public disclosure, ranking us second in the U.S. industrial real estate group, both excellent results. In closing, results were in line with expectations and I want to continue to increase, as Teresa mentioned, despite lower occupancy, and we are maintaining our FFO and AFFO guidance for 2023, which has remained unchanged from our initial guidance provided on our Q4 call in March.
Our upcoming $400 million maturity on November 30 has been fully refinanced at a very competitive rate of 4.93% for 5.5 years. And our liquidity position remains very strong at almost $1.2 billion post repayment of the bond in cash and available credit. In addition, we announced our 13th consecutive annual distribution increase to $3.30, which continues to reflect our philosophy of delivering consistent distribution growth for our unit holders while maintaining conservative capital ratios and sufficient free cash flow with which to reinvest in the business.
I also wanted to mention that we are in the process of renewing our base shelf prospectus, which expired this month. This is simply a formality and is being renewed in normal course to facilitate any potential actions we may contemplate over the next 25 months. Addressing our current leasing availabilities and 2024 maturities and preserving capital for future opportunities remain our highest priorities. And we believe we are very well positioned to deliver industry-leading NOI, FFO and AFFO growth once again in 2024. And on that, operator, I will open up the floor for any questions.
[Operator Instructions] And we'll get our first question on the line from Brad Sturges with Raymond James.
Congrats on the 2024 lease -- how much have you already addressed 75% already and it sounds like still expecting good uplift on what's lot to do. Just wanted to get a little bit more color on I guess, a little bit over 2 million square feet left to do, would that be more back-end weighted to next year? And then just a little bit more color in terms of what's left to address in terms of where that would be in terms of size of boxes and location?
I think there is a couple to do in Toronto but the bulk of it is in the U.S., and it is back-end loaded. Of that, what did you say, a 2.4 million square feet, I think over 1 million is actually expiring on December 31, 2024. So it is back-end loaded for the year. I think there are a few in the second quarter, but the bulk is the second half of the year towards the end.
And that the U.S. that are expiring December 31, is that broken down by a couple of different locations? Or is that weighted towards one specific property?
I think it's in a few, but I think the bulk of it is in Memphis Indianapolis.
Okay. That's helpful. Just in terms of what's left to do this year, I think it's -- your less than 400,000 square feet. Just any update on what you're expecting for the remaining '23 maturities?
I think the maturities in 2023 have been spoken for, yes, there's nothing to report on that.
Okay. Just based on your comment around leasing velocity has slowed down a little bit. I guess it depends on the type of size and location. But -- any general comments on where you're expecting occupancy to trend the next couple of quarters?
Well, I think right now, we're in advanced discussions on about 2 million feet of both new leasing and 2024 maturity. So the activity is strong, but it is taking us longer. So I think I think we'll have a better update on the next call in March, but we're expecting occupancy to bounce back quite strongly in 2024. Just based on the activity that we're seeing and the strength in those parts of the markets that we expect to see in 2024.
We'll get our next question on the line from Michael arcades with BB Capital Markets.
Thank you, operator. Kevin, just on the 2024 maturities in the U.S., are you able to give us what the expected increase would be just for that bucket?
Yes, it's about 20%, Mike.
20% for that. Okay. Perfect.
The maturities we've done are 14%, as I mentioned, and that was driven a lot by the 10% increase at gross down to 14% and 20% on the remaining.
Okay. Good segue actually for me, modeling question here. [indiscernible], with the 10% increase, that's cash on cash from [indiscernible], but is the FFO impact when that commence is going to be materially different, just because of noncash items? Or how should we be thinking of that?
No, that's pure cash. That 10% is all revenue.
Well, because of the TIs is there...
There's no TI. So -- but in the previous last 10 years, there was a TI, but that goes away because we didn't have one for this renewal. So that 10% is a pure cash lift.
And from an FFO perspective, would it be greater or less?
Would be greater.
It would be great Okay.
Did I misunderstand that? You're asking about FFO.
TI burning off, is FFO higher.
Oh, yes. Sorry. I ask you to FFO, yes, it is higher by both the TI that has burned and the 10% increase in actually it's close to, I believe, $8 million for the year.
From an FFO perspective?
Yes. Yes, FFO. That's right. That's right. .
That is very helpful. Okay. And then last one for me before I turn it back. Just on the CapEx and we see positive. If I heard you guys correctly, I think $20 million to $23 million is this year's forecast and a similar amount next year. If you think about that, like how much of that amount for next year is expected to be from new leasing as opposed to just dealing with 2024 maturities?
No, the new leasing, actually, so any of the new leasing related to the development, that wouldn't be part of the AFFO CapEx I'd say a good majority of that $25 million related to maintenance CapEx in this regard.
Yes, I think it's roughly half.
About half, right? And then half is for just renewal leasing of existing properties.
Got it. Okay. So it's not that your TIs are going higher necessarily because you're cross your leases maturing next year are actually slightly higher but across those TI. So it's not that your TIs are going up on a first square-foot basis to your maintenance CapEx is going up. Is that how we should cover that? .
That's right. Yes. .
It's a fair comment.
We'll get our next question on the line is from Himanshu Gupta with Scotiabank.
Thank you, and good morning. So just on the leasing activity in the quarter, pretty strong. If I look at the U.S., 900,000 square feet done at, I think, 40% plus spread. Can you talk which market in first half?
Of the $1.9 million, the 2026 -- sorry, the 2024 is...
Cincinnati [indiscernible] and Memphis.
Yes, Cincinnati, Columbus and Memphis.
Okay. And all these three were 2024 lease expires, right?
No, we were '24 and one was actually a 2026, but there will be an increase in rents beginning in 2024. So that was an early renewal.
Okay. And Kevin, did the tenant approach you or did you approach for those early renewals for the next year?
I think the 2026 was incoming. It came into us, the 2024s was dialogue from the team.
Okay. Okay. Fair enough. And then in terms of those lease-up on properties, which you're working on, how would you rank them in terms of who will -- which one will get done first between like Nashville, Indianapolis and local?
It's really hard to say at this point. I don't think I really have an answer. I think right now, we've had activity. And I don't want to basically say to the market, which properties were effectively in advanced discussions on for competitive reasons. But we've been active in both. In all of Nashville Louisville in Indianapolis. At this point, I do have a feeling which ones will come first, but I don't want to say.
Okay. Fair enough. And then maybe I can ask that. I think there was around 400,000 square feet vacancy this quarter. Which market can you identify that?
I think [ Kay Power ] was in Memphis, and that was a 3PL where there were still a question. We almost expected them to renew based on the contract that they received. They weren't able to land that contract was that a all the other one with Chicago. Yes. The other one was just a tenant that stayed in the space but downsized. And then there was a 3PL in Memphis that were not able to renew their 3PL contract and so they vacated.
Got it. Okay. And then maybe the last -- it's a broad question. Obviously, you have a pretty global view, U.S., Canada and Europe. What is your strongest market? And what is your weakest market in your portfolio as you look into next year.
I've been asked this maybe you asked it on previous calls, it's difficult to say in Europe because we have not had the leasing activity we've seen. So Europe has been very steady for us. We have been doing some leasing in Utrecht, which is a smaller asset, which has been going well. So I would say that Europe has been very steady for us. The markets that we're dealing with right now, there has been a very broad moderation in demand across all the markets. So it's very difficult for me to look at North America and say, well, the GTA has been the strongest because it really hasn't in terms of net absorption.
As I've said on previous calls, I point out the net absorption because I think vacancy and new supply are obviously factors you want to look at. But over the long term, you want to know which markets are attracting investment and are attracting growth. And when we rank our markets year-to-date in terms of net absorption in North America, Toronto is 1 of the worst, one of the lowest. So where are we seeing the most activity? I think it's been a few of our markets in the U.S. But there hasn't been any standout that has been the strongest. I think the moderation of demand, as I mentioned, has been very broad-based across all of the markets.
Fair enough. And maybe if you talk about product categories, lots being mentioned about maybe weakness in big bulk versus small bay and Midway doing better. Would you agree with that statement? And is that something you're seeing as well?
I think that that's more market specific. I mean, I think it depends on the market. If you look at some of our markets in the U.S. some of the assets that have come in, 800,000-foot plus have done very well. The 3% to 7% has been quiet, but that can really move from quarter to quarter. So it depends very much on the market that you're in. I think that's -- it's not fair to make that general statement across all the markets. Definitely, as we mentioned in Indianapolis, a market where 700,000 feet has been very strong historically and has seen some recent weakness. But I don't think that, that's something that will be sustained over the coming years.
Fair enough. And maybe just last one for Teresa. On balance sheet. Is it fair to see your next debt maturity is, I think, coming in December or November of next year? Is it a fast rate?
It's December '19.
December '19. Okay.
We'll get our next question on the line from Frederic Blondeau, Laurentian Bank Securities.
I just wanted to discuss capital allocation. Kevin, last time we spoke, you were more into capital preservation mode. I was wondering what are your views for 2024 on that front?
I think it remains the same, Fred. We had talked about taking advantage of any market dislocation or distress. And it's hard to see how exactly that goes. As I mentioned, I think there's a little more optimism about the direction of interest rates, but there's also much tighter access to credit. And I think that, that, if anything, will impact smaller developers more than anyone else because frankly, looking at stabilized industrial assets, they've actually held up pretty well their value. So we don't see a lot of loans being necessarily underwater like you may see in the office sector. So we're willing to be patient and wait for that. where our price is right now. I think the NCIB is completely on the table for us. It's something that we'll consider in the short term. So we think that -- but we have to also balance that with I think our desire to maintain our capital for future use at some point in 2024.
We'll get our next question on the line is from Kyle Stanley with Desjardins Capital Markets.
Kevin, just on your comment about same corporate NOI growth being higher in 2024 versus 2023. Would that include lease-up of the development properties, I'm thinking about any specifically? And if so, if you were to exclude that, what kind of impact would that have on your same-property NOI outlook for the existing portfolio, I guess?
It's tough to say off the top of my head, but it is definitely a part of our same-property NOI projections for next year. And I think one of the things I would point out is we were very -- the CPI increases that we had in Europe late last year and into this year in 2023 were very strong. It's hard to say where those will be. But we do have some rent lifts that we've secured for next year that will be a strong driver of growth. But of course, we think that the lease-up of the development properties will also be a part of that growth for next year.
Okay. Obviously, a small sample size, but the leasing that you did in the quarter and the GTA 206% spread. Can you just talk about the dynamics of that lease? And how the tenant accepted that significant increase?
Well, I think they were coming off a $7 rent. And I think our average rents in the GTA off the top of my head is around so well below market, but we do have a number of leases, frankly, coming up over the next couple of years that are in that sort of $7 to $8 range.
Okay. No that makes sense. Last one for me. Any other vacancies that you're aware of maybe in Q4 or into 2024 at this point?
No.
We'll get to our next question on the line. It is from Matt Kornack with National Bank of [indiscernible].
Most of what I was going to ask has been answered. But just quickly, with regards to the same property NOI growth this quarter, can you speak to what component of that may have been expansion space? And then maybe a secondary to that, with regards to straight line rent, I think there was a sequentially down $1 million of that adds to cash NOI. But can you give us a sense as to what is the floor level as to how much of that would be kind of free rent periods for existing leasing?
So without the expansion on a constant currency basis, it's 6.4%. And it's 11.6% with the FX in there. You're right, straight-line rent dropped. The free rent piece of that was about $400,000 of that $1 million. Yes. So like straight-line rent is going to fall, continue to fall, but I expect it to increase again when we do lease up those developments that were recently came online. Because obviously anticipating some free rent as we lease those up. So at some point in the second quarter, third quarter, you'll see probably a pop-up in straight-line rent.
Okay. So we should expect to see before it would contribute to same property NOI growth that will contribute to FFO growth in the form of straight line rents on the [indiscernible].
Exactly, yes.
[Operator Instructions] Our next question on the line is from Sam Damiani with TD .
First question, just to sort of continue on the balance sheet discussion from earlier. With the rate move over the last 18 months, what would be your sort of updated target leverage range either on a debt to assets or debt-to-EBITDA basis going forward versus what it was a couple of years ago?
Well, Sam, I think we're kind of operating with like that 32% right now. And I think like next year, for example, that's kind of what I'm forecasting for the year.
And that's what you're expecting to sort of target going forward?
Yes. until we see kind of -- until we see kind of values change a little bit, right? I mean, so for now, I mean, it's -- as you know, we used to operate in the high 20s. But it's been a series of fair value losses, and we have increased slightly in our debt because we're funding our development program. So on a debt sorry, that asset value sorry, debt to asset value has creeped up. And I think in that 30% to 32% range is probably normal going forward.
Okay. And I just see Houston, the acreage there is being sort of moved up into the sort of active development pipeline at least on a preliminary basis. Any updates on tenant discussions there that could drive an actual construction start in that market for grant?
Well, there is potential for that, Sam. The reason why we moved both Branford, I think Alan and Branford and Houston to PUD to PUD is just to facilitate any potential build-to-suit opportunities. So we are servicing and going through the zoning process on that land. So we moved them into PUD. No intention or plans to commence construction on a speculative basis, but it does facilitate discussions around build-to-suit opportunities, and we have had discussions in Houston in that regard, but nothing to report at this time. Early discussion.
Okay. Last question for me. And I know it's been -- we've touched on earlier in the call, but at some level, can you give us any update on the sort of pace or volume of leasing discussions on the on the vacant spaces that you have in the U.S. that we saw in the tour last month.
Yes. I mean, there has been progress. But again, early days. And as I characterize it previously, we're in advanced discussions on roughly 2 million feet, including some renewals as well. But the bulk of that is new leasing. And hopefully, we'll have deals completed by the end of the year. But at this point, we can't -- we can't confirm that.
Our next question on the line from Sumayya Syed with CIBC Capital Markets. .
To follow-up a bit more around your development leasing. I'm wondering what's your appetite to doing a more behind approach on some of the new assets and you'll be seeing more interest in the mice space? .
If you're talking about the [indiscernible], I think we're always -- as we said, we're always open to that. We've always sort of designed our buildings to accommodate the mining. So I would just tell you that on all of our buildings, we have received interest on both -- from both multi-tenant sizes and entire building. So it just depends on what deal materializes the fastest for us, what deal makes the most economic sense. So just to confirm, any one of our buildings can be demised. They were designed that way. And it just depends on what tenants gets up first on the best terms.
Okay. And you mentioned a bit earlier about the 3PL activity, the one we can see in the quarter. How much does that reflect broader activity that you're seeing from your existing 3PL tenants? Or was that just more of a one-off?
Well, I mean, it's a $65 million portfolio this happens. Usually 30% to 40% of industrial portfolios are 3PLs. And a 3PL contract is typically 3 to 5 years. And so this is just normal course of business. And I will tell you a lot of the sort of availabilities that we're working on are 3 PLs that are looking to expand and have to move out of their existing building to accommodate newer and larger contracts. So these things happen. So I would call it a one-off, but it's just normal course of business for us.
So there are no further questions at this time. I'll turn the call back to you.
All right. Thank you, operator. Well, thank you, everyone, for being on the call, and we look forward to speaking to you on our next call in March.
Thank you very much, and thank you, everyone. That does conclude the conference call for today. We thank you for your participation. I have to disconnect your lines. Have a good rest of the day, everyone.