Granite Real Estate Investment Trust

TSX:GRT.UN

Q2-2025 Earnings Call

[Operator]

Good morning. My name is Jenny, and I will be your conference operator today. At this time, I would like to welcome everyone to Granite REIT's Second Quarter 2025 Results Conference Call. [Operator Instructions]

Speaking to you on the call this morning is Kevan Gorrie, President and Chief Executive Officer; and Teresa Neto, Chief Financial Officer.

I will now turn the call over to Teresa Neto to go over certain adversaries.

[Teresa Neto, executive]

Good morning, everyone.

Before we begin today's call, I would like to remind you that the statements and information made in today's discussion may constitute forward-looking statements and forward-looking information and that actual results could differ materially from any conclusion, forecast or projection. These statements and information are based on certain material factors or assumptions, reflect management's current expectations and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from forward-looking statements or information. These risks and uncertainties and material factors and assumptions applied in making forward-looking statements or information are discussed in Granite's material filed with the Canadian Securities Administrators and the U.S. Securities and Exchange Commission from time to time, including the Risk Factors section of its annual information form for 2024 and Granite's management's discussion and analysis for the year ended December 31, 2024, filed on February 26 and for the quarter ended June 30, filed on August 6, '25.

Granite posted Q2 '25 results in line with management's annual forecast and guidance, largely driven by strong NOI growth and positive accretion from NCIB unit repurchases, partially offset by unfavorable foreign exchange. FFO per unit in Q2 was $1.39, representing a $0.07 or 4.8% decrease from Q1 and a $0.07 or 5.3% increase relative to the same quarter in the prior year. In Q1, FFO included a number of nonrecurring items, including lease closeout revenue, a reversal of prior year bonus accruals and a favorable credit relating to a prior year German withholding tax reserve, all totaling $1.7 million, where if excluded, FFO per unit would have been $1.43. Therefore, Q2 '25 FFO per unit is $0.04 lower relative to a normalized Q1. However, in Q2, the U.S. dollar weakened by 3.6%, partially offset by the euro strengthening by 4%, which caused a further negative $0.04 to FFO -- negative impact of $0.04 to FFO per unit quarter-over-quarter.

In addition, Granite realized a foreign currency loss of $1 million on monetary items that was driven by the large changes in foreign currency rates and their impact on settling financial accruals. And the impact of -- if the impact of foreign currency are isolated and excluded, FFO per unit in Q2 is, in fact, slightly ahead of normalized Q1 by $0.01 due to NCIB accretion, offset partially by a small decline in NOI tied to new vacancies commencing in the quarter.

AFFO per unit in Q2 was $1.23, which is $0.18 lower relative to Q1 and $0.06 higher relative to the same quarter last year, with the decrease versus Q1 mostly tied to higher capital expenditures, leasing costs and tenant allowances incurred largely driven by strong leasing activity during the quarter, as previously mentioned. AFFO-related capital expenditures incurred in the quarter totaled $8 million, which is an increase of $7.3 million over Q1 and $0.9 million lower than the same quarter last year. For 2025, we continue to expect AFFO-related expenditures to come in at approximately $40 million for the year, unchanged from our estimates previously provided.

Same-property NOI for the second quarter was strong relative to the same quarter last year, increasing 4.6% on a constant currency basis and up 7.4% when foreign currency effects are included. Same-property NOI growth was driven primarily by CPI and contractual rent increases across all of Granite's regions, positive leasing spreads on lease renewals, primarily in the U.S. and Canada, the expiration of a free rent period associated with the completed development in the prior year in Canada and the lease commencement of 2 expansion projects in Canada and the Netherlands and a new lease commencing at a development project in the U.S. Given the strong leasing activity in the second quarter of '25 and the effects of removing assets held for sale, we are raising our guidance for the year for constant currency same-property NOI based on a 4-quarter average to be in the range of 5% to 6.5%, up from our previous estimate of 4.5% to 6%.

G&A for the quarter was $10 million, which was $2.3 million higher than the same quarter last year and $1.5 million higher than Q1. The increase relative to Q1 includes $0.3 million unfavorable fair value adjustments to noncash compensation liabilities, which does not impact Granite's FFO and AFFO. G&A expenses that do impact FFO and AFFO were approximately $1.2 million higher than Q1, which is mostly related to the absence of a reversal of the prior year bonus accrual recorded in Q1 and higher public entity costs due to seasonality relating to Granite's AGM in June and the 2024 ESGR report that was released yesterday. For 2025, we continue to expect G&A expenses that impact FFO and AFFO of approximately $10 million per quarter or roughly 7% of revenues.

Interest expense was higher in Q2 relative to Q1 by $0.4 million, while interest income decreased by $0.3 million compared to the first quarter, resulting in an increase to net interest expense. The increase in interest expense was primarily driven by draws on the credit facility to fund Granite's NCIB repurchases. The decrease in interest income was due to lower invested cash balances. Although net interest expense was higher, the impact to both FFO and AFFO per unit is more than offset by the accretion from repurchased units under the NCIB.

Granite's weighted average cost of debt is currently 2.71% and the weighted average debt term to maturity is 3.9 years. With Granite's net debt maturity now in September 2026, we continue to expect interest expense to remain stable over the next approximate 12 months or roughly $24 million per quarter, barring any other new transactions. Q2 '25 current income tax was $3 million, which is $0.4 million higher as compared to the prior year and $0.5 million higher as compared to Q1. The increase in current tax relative to Q1 is mostly related to the strengthening of the euro relative to Canadian dollar and the absence of the $0.2 million credit related to the German withholding tax reserve we recognized in Q1. For the remainder of 2025, we are expecting current income taxes to come in at approximately $2.8 million per quarter.

Regarding '25 estimates. Granite is increasing its '25 guidance. Granite's current outlook reflects lease renewals and new leasing of vacant space completed year-to-date. The acquisition of the Florida properties we completed on June 30 and excludes any potential impact from the disposition activity of the 5 assets that Granite has classified as assets held for sale since the timing of such dispositions can't be determined at this time. The outlook also factors year-to-date financing and NCIB activity.

For FFO per unit, we are raising guidance from last quarter to the range of $5.75 to $5.90, which represents an approximate 6% to 9% increase over '24. For AFFO per unit, we are increasing our guidance to the range of $4.90 to $5.05, which represents an increase of 1% to 4% over 2024, partially impacted by higher maintenance capital expenditures, which we discussed in prior calls.

Granite's forecast was updated this quarter to assume a range on foreign currency of U.S. dollar to Canadian dollar of $1.35 to $1.39. That was previously $1.37 to $1.42 and the range for the euro, Canadian dollar of $1.56 to $1.61, previously $1.52 to $1.58. Granite will continue to provide updates on guidance each quarter based on leasing and any other transaction activity.

Our balance sheet comprises of investment properties of $9 billion at the end of the quarter, and that was reduced by the approximate $310.5 million due to the classification of 5 assets as held for sale, consistent with our messaging from the last quarter, which Kevan will discuss further. This was further reduced by $189 million foreign exchange translation losses on Granite's foreign-based investment properties mostly driven by the 5.3% decrease in the U.S. spot exchange rate relative to Q1, partially offset by a small gain of $16.8 million on the portfolio and the [ $49.5 million ] increase due to the Florida acquisition. The trust -- or the REIT's overall weighted average cap rate of 5.5% on in-place NOI increased 13 basis points from the end of Q1 and has increased 21 basis points since the same quarter last year.

Net leverage at the end of the quarter was 36%, which is an increase of 4% from the last quarter at 32%. Net debt to EBITDA was 7.1x, a slight increase from 6.8 in Q1 and consistent relative to the second quarter of '24. The increase in Granite's key leverage ratios is primarily due to the classification of the 5 assets as held for sale as they are excluded from the investment property value, resulting in a decrease in the denominator of the net leverage ratio. In addition, Granite has increased unsecured debt due to drawing on the credit facility to fund repurchases of units under the NCIB, resulting in an outstanding balance of $91 million at the end of the second quarter. Granite expects these ratios to normalize lower when asset sales are completed.

Our liquidity is approximately $1 billion currently, representing cash on hand of about $86 million and the undrawn operating line of $914 million. As of today, Granite has $95 million drawn on the credit facility and $2.4 million in letters of credit outstanding. We do expect to reduce the outstanding balance on the credit facility throughout 2025 with free cash flow from operations, barring any other major transactions. And as noted in our disclosures, we have been taking advantage of the significant discount to NAV, and we repurchased year-to-date 2.2 million units on average with unit cost of $67.01 for a total consideration of about $145 million.

I'll turn over the call now to Kevan. Thank you.

[Kevan Gorrie, executive]

Thanks, Teresa. Good morning, everyone.

As Teresa mentioned, the Q2 results more or less were in line, obviously impacted negatively by the weakening of the U.S. dollar in the quarter. And as mentioned, excluding the negative impact of FX and favorable onetime items in the first quarter, Q2 was slightly ahead of the first quarter with a slight drop in NOI of $0.01, offset by a roughly $0.02 net positive impact from unit buyback activity in the first and second quarters. And as you can see from our Q2 guidance, we expect our financial performance to continue to strengthen over the remainder of the year.

As shown in the MD&A, occupancy in the quarter was assisted by the listing of one of our vacant assets for sale in Indie, but new vacancy in the quarter was more than offset by strong leasing activity as the team executed on roughly 1.3 million square feet of renewals related to 2026 expiries and 1.1 million square feet of new leases since the first quarter call. These new leases are expected to contribute over $10.5 million in gross rent in the portfolio in the first year.

In terms of mark-to-market on renewal, we have now renewed roughly 80% of our 2025 expiries at a weighted average increase of over 40%. And that excludes the new lease in Atlanta, where the team achieved an increase in rental rate of 58% over the expiring rent at the end of the first quarter. In addition to the contribution from new leasing, the renewal increases that we have achieved on our 2025 expiries will also contribute strongly to further NOI growth in the third and fourth quarters. To illustrate this point, the 5 largest renewal increases by dollar value represent roughly $13 million in additional rent annually. Those 5 renewal increases commenced in order of magnitude from largest to smallest on October 1, on January 1, 2026, on September 1, May 1 and August 1. So only one of those increases occurs in the first half of the year and the obvious point being that the increases are significantly weighted to the latter part of the year as we have discussed on previous calls.

A few comments I would make on relevant market data. 8 of our 15 markets in North America reported flat or a decline in market vacancy from the first quarter, with Savannah and Memphis reporting the largest quarter-over-quarter increases in vacancy. The majority of our markets reported positive net absorption in the second quarter with the exception of Toronto and New Jersey. The GTA was once again our weakest market in terms of demand, posting negative 900,000 square feet in net absorption following a positive print in the first quarter. Dallas and Houston saw the strongest net absorption in the second quarter at 5.6 million and 2.7 million square feet, respectively.

With respect to market asking rents, Broward County, a key submarket of the Miami market and home to our new acquisition, posted the strongest quarter-over-quarter growth in asking rent at 3.4%, followed by Nashville at 3%. Conversely, Dallas and Toronto posted the weakest quarterly asking rent growth at negative 6.7% and 1.2%, respectively. So while leasing conditions continue to slowly improve across our portfolio and our leasing performance was obviously strong in the quarter, net absorption overall remains below the 10-year average and conditions remain competitive generally.

In Europe, vacancy in Germany and the Netherlands was flat to slightly below first quarter levels and remains below 5%. Similarly, market rent growth, although subdued, remained positive quarter-over-quarter and year-to-date in the low-to-mid single-digits. Net absorption or take-up remains healthy across both markets, with Germany and the Netherlands recording well over 10 million square feet of positive net absorption, respectively, year-to-date. For comparison, there was roughly 4.5 million square feet of positive net absorption in all of Canada over that same period.

Concurrent with our second quarter results, I'm once again pleased to announce the publication of our corporate sustainability or ESG+R report, which summarizes our activities and progress against targets for 2024, including now achieving roughly 50 megawatts of peak rooftop solar capacity within our portfolio, achieving green building certification on 63 properties or roughly half of our portfolio and being ranked first in our peer group of North American listed industrial companies for ESG performance by GRESB. Sustainability is an important area for Granite, and I invite you to read a report now posted to the website.

I don't have a lot of comments on our quarterly IFRS value. As Teresa mentioned, the roughly $70 million positive impact of leasing activity, rent growth and the addition of 2 new assets in Florida was more than offset by the negative impact of FX, primarily or all related to the significant weakening of the U.S. dollar versus the Canadian dollar since the end of the first quarter.

Moving on to capital allocation. The list of assets held for sale, combined with the announcement of our new acquisition in the Miami market and our NCIB activity reflect our priorities as a company to fund strategic acquisitions our build-to-suit development program and unit buybacks on an opportunistic basis to retain cash and the sale of select noncore assets. We have obviously used our line of credit to fund the new acquisition and NCIB activity in the near term, but the objective remains to fund our growth on a debt-neutral basis, thereby maintaining our conservative capital ratios and the strength of our balance sheet. At this time, I don't wish to telegraph individual market -- target markets for new acquisitions, but I can tell you that the team is currently active on new opportunities. And as I have commented in the past, we will look to deploy capital in select core markets in Europe, Canada and the U.S.

In closing, the team's achievements on new leasing and renewals year-to-date have positioned us very well for continued strong organic growth in the coming quarters. And as evidenced by our announced acquisition and list of assets held for sale, successful execution of the disposition program and effective capital redeployment will be a focus of ours for the remainder of this year and into 2026.

And on that, I will turn the call over for questions.

[Operator]

[Operator Instructions] Our first question is from Fred Blondeau from Green Street.

[Frederic Blondeau, analyst]

Two questions from me for Kevan. Kevan, you touched on the capital allocation. Just to clarify, is it fair to say that you seem to be a little bit more -- your appetite has improved in terms of acquisitions on an opportunistic basis. Does that mean that you'll be focusing a little bit more on acquisitions versus the NCIB or your view will remain quite balanced between the 2 at this stage?

[Kevan Gorrie, executive]

Well, I think the NCIB activity depends very much on the price of the unit, to be fair. On the acquisition side, we do expect to be more active. I think we find pricing for core assets and development in our target markets to be attractive. And I think we find the spread between those markets or Tier 1 markets and markets that we're in, such as Indie and Columbus to be quite -- that spread is quite low, and I think it's lower than we've seen in many years. So I think it's a good opportunity for us to continue our rotation into those core markets, the ones that we're targeting. So I do expect us to be active on that. Hopefully, we're not active on the NCIB based on the price of the unit, but it always remains an option if we find pricing to be very compelling on the NCIB side.

[Frederic Blondeau, analyst]

Got it. And secondly, is it fair to say that Germany is performing below your expectations so far this year? Or do you feel like the underperformance is related to more short-term specific factors in the country?

[Kevan Gorrie, executive]

Well, we don't have a lot of leasing activity to point to, Fred, to see that it's underperforming our expectations. I think it has slowed. Activity has slowed, but vacancy has sort of held in there at a very low level. And we continue to see market rent growth, which is more than we can say for a lot of markets, including the GTA. So if you were to characterize Germany as being weak, I would wonder what your view of the Toronto market would be.

[Operator]

And your next question is from Sam Damiani from TD Cowen.

[Sam Damiani, analyst]

Kevan, just with the big surge in leasing this quarter, 3 sizable leases covering some vacant space. I wonder if you could just touch on what's changed? What allowed you to sort of come to terms with these 3 tenants that really wasn't available 6, 12 months ago?

[Kevan Gorrie, executive]

I don't know, Sam, if there's any clear catalyst that I can point to. I mean, as we've said, we have seen activity pick up across our portfolio. And I think what we're finally starting to see is maybe we're seeing more activity than other portfolios out there, which isn't really a shock to us. As to why they're actually signing leases today, I can't point to a clear one. I just think we were due certainly for a few of these leases. I can tell you on the lease in Louisville, there were multiple prospects on that. So I think what we're finally starting to see is the delays in leasing decisions that tenants are making, they can no longer delay those decisions, and they're moving forward. And so I would say right now, we probably have another 300,000 to 350,000 feet under lease negotiation.

So the activity continues to be good. But I will tell you, tenants continue to be cautious. And not that you're asking about tariffs, particularly, but when we look at our U.S. portfolio, I think there's a general consensus that tariffs will ultimately be good for the U.S. portfolio because it is going to drive more U.S. production, domestic U.S. production. But I think right now, there remains an uncertainty about what the rules of the game really are. And we can see that. We can see that tenants probably need more space. They're just not sure how to proceed with the uncertainty around what these tariffs are going to look like from various countries. So that's where we are today. And I think slow and steady improvement in the market is what we would look to over the coming quarters overall.

[Sam Damiani, analyst]

That's great. And would you say the rents that you achieved with these 3 leases kind of in line with what you were expecting, again, 6, 12 months ago or.

[Kevan Gorrie, executive]

I think they were stronger. Stronger.

[Sam Damiani, analyst]

Yes. That's great. Okay. Maybe just moving on, on the -- I guess, the outlook for the year-end committed occupancy. There's been a lot of change since the last quarter with assets held for sale and this leasing. How would you characterize your or update your outlook for year-end committed occupancy?

[Kevan Gorrie, executive]

I think we would expect our occupancy to be between 96.5% and 97% at the end of the year. And so roughly 100 basis points over what we were expecting at the end of the first quarter.

[Sam Damiani, analyst]

And sorry, that's committed. How much of that would be...

[Kevan Gorrie, executive]

Yes. I would say most of it would be in 2025.

[Operator]

And your next question is from Mike Markidis from BMO.

[Michael Markidis, analyst]

Just with the $300-some-odd million of assets held for sale, I think they're fully occupied or close to it and most of them in the U.S. Are you able to give us some sort of range of income attached to those assets?

[Kevan Gorrie, executive]

The majority are occupied, just the one is vacant. There's 2 assets in Indie, 2 in Columbus, 1 in the Netherlands. The income that's attached to those.

[Teresa Neto, executive]

Yes. We have a schedule in the MD&A. It's $14.8 million of annualized revenue associated with those assets.

[Michael Markidis, analyst]

I missed that. Okay. And just, Kevan, with your respect to comment, obviously, you don't want to get into the markets, et cetera, that you're targeting for acquisitions and the team seems active. Are you able to give us sort of like a quantum of opportunities that's being considered or underwritten today?

[Kevan Gorrie, executive]

We have roughly CAD 65 million in negotiation right now, both in Europe and probably -- I would -- this would be a guess right now, Mike, but I would say probably another $100 million to $150 million that we're pursuing early days.

[Michael Markidis, analyst]

Okay. Got it. And then spec development, I guess, being -- sorry, not spec development, build-to-suit development, I should say. I know you've got the one project in Houston that's underway. Is it reasonable to think -- like are you close to getting anything else done on the development side on the build-to-suit? Or is that something that just...

[Kevan Gorrie, executive]

We are -- we have activity on our Branford site, and we have some further activity on our Houston site, but early days. So nothing that's close. Maybe we'll have a little bit more information on our third quarter call.

[Operator]

And your next question is from Mark Rothschild from Canaccord Genuity.

[Mark Rothschild, analyst]

Kevan, I heard your comments just now from an earlier question on tariffs and some positive -- there is some positive leasing news that you had. But your tone overall maybe just sounds a bit cautious still. I recognize that market vacancy in the U.S. has increased, but there's so much news about companies expanding operations in the U.S. Are we possibly heading into a time when fundamentals can improve meaningfully in the U.S.? And is that something you think about as you consider capital allocation decisions?

[Kevan Gorrie, executive]

Yes. I think what you're hearing, Mark, is a fair comment. I think our leasing has been strong, leasing activity and traffic in our portfolio is positive, but it's against a more cautious backdrop in the market. And that's what I'm hoping comes through. I think our portfolio is performing well, probably better than most in the market.

In terms of the tariffs, I have to think that once the agreements are signed and people understand what the tariffs are and hopefully, they're as low as possible. But I think what people are waiting for is just certainty around what the deals are. And I think that, that will -- I don't want to say it will unleash a significant movement in leasing, but I think it will be a positive catalyst for the leasing market once the certainty -- once the uncertainty around the impact, the extent of the tariffs is removed.

[Mark Rothschild, analyst]

Maybe this just isn't the type of business you're in, but are you seeing opportunities to buy assets with vacancy with a more positive outlook? Or is it just -- that's not your core business?

[Kevan Gorrie, executive]

I think that's on the table for us to buy a vacant asset, and we have pursued those at the right price. I mean, cost basis remains probably the most important thing that we pay attention to. Obviously, location, quality of asset, it has to be in a market that we like. That's definitely on the table for us. But I will tell you, to your point, we can't seem to get there on pricing because sellers probably have the same level of confidence in the future of the market that we do. So the opportunities are there.

We just can't seem to shake them loose at pricing that we want, which is not a surprise to us. And by the way, one of the assets we have for sale has vacancy. We're going to take the same approach to that. I don't think we're interested in any sort of compromise sales because it's vacant. We have enough confidence in the market that we're going to want to achieve pricing on the sell side as well.

[Operator]

And your next question is from Kyle Stanley from Desjardins.

[Kyle Stanley, analyst]

One of your U.S. peers earlier in earnings season kind of mentioned an element of FOMO, it seems like from occupiers that may have been contributing to the recent pickup in demand for space. Just love to hear your thoughts on that comment. And could that help explain maybe the more recent leasing demand you've seen maybe since June?

[Kevan Gorrie, executive]

Well, I think we saw it in real time, Kyle, in Louisville, where we actually had a competition for the space. And I think that advanced the time line on it. So yes, and I also think an important element of all of this that I think gets overlooked is we renewed over 90% of our expiries last year. This year, we will renew between 80% and 85%. And I hope everyone appreciates that those are very strong numbers. And I think one of the things that we are seeing in the market is although a lot of tenants may be hesitant to expand their space, they certainly don't want to lose it. And I think part of it is, and this is becoming a bigger factor in the U.S. is fear of losing out on workforce. And so that is becoming a really important element for tenants. And I think that will lead into that sort of formal comment that you're referring to. We expect to see that probably later this year, early into 2026 for sure.

[Kyle Stanley, analyst]

Okay. No, that's very helpful context. Just with regards to the Louisville asset, I think going back to when it was vacated, I believe, in 2023, you'd highlighted a potential 20% gain to lease opportunity. Obviously, a lot has changed in the market since then. I'm curious to know if you can disclose how did that work?

[Kevan Gorrie, executive]

Yes, I think we are right in line with that.

[Kyle Stanley, analyst]

Okay. That's encouraging.

[Kevan Gorrie, executive]

I can tell you we achieved better rents than we thought at the time.

[Kyle Stanley, analyst]

Okay. Great. And then just the last one. Obviously, looking at your assets held for sale, you disclosed kind of the locations of them. What's the private market like? What's demand like for those types of assets today? And who are the buyers that are active?

[Kevan Gorrie, executive]

Well, I think going out to the market on these, we have seen a lot of interest coming in, i.e., signing NDAs. So the level of activity on the NDAs has been high, which would suggest to us that there's a fair amount of capital on the sidelines looking for assets in these markets. So we think that is strong. We will see. I think we're pretty disciplined on pricing both ways. So there's pricing that we want to achieve here. But so far, the level of interest that's come in on those assets has been strong.

[Operator]

And your next question is from Brad Sturges from Raymond James.

[Bradley Sturges, analyst]

Just following up on Kyle's question there. Just I think last quarter, you talked about even being open to selling in Toronto. I guess, at this point, it's more a function of where you're seeing the best demand with these 5 assets? Or is there something you're thinking around the softness in the Toronto market that -- or there's leasing that needs to be get done that would make it maybe less of an ideal time to maybe sell a little bit out of Toronto right now?

[Kevan Gorrie, executive]

Yes. I mean we have assets listed for sale or lease in the Toronto market, and we have assets in Europe that we're working through leasing, et cetera, and we would consider a sale on. These are ones that we have identified for a formal marketing process and moving forward with. And part of it is market concentration. We've talked about rotation in markets we want to be in and markets where we could probably afford to trim and free up some capital for deployment. So that's why these ones were sort of chosen as ones to formally market and which we expect to dispose of within the next 12 months. That doesn't mean that there aren't other noncore assets within our portfolio that we're in discussions on or may sell or at least consider selling that are not listed as assets held for sale.

[Bradley Sturges, analyst]

But I guess to expand the program further, you need to see line of sight on the acquisition side or use of capital for that to expand beyond what you've done?

[Kevan Gorrie, executive]

Yes. We're always trying to balance the timing of it. But as you can see, we didn't hesitate to use the line of credit on the acquisition in Florida nor do we hesitate to use the line of credit on the NCIB activity. Now there is a limit to that, but we're retaining cash. So we have confidence, as Teresa mentioned, we will pay down that line of credit. And we're trying to balance sort of assets going out and assets coming in, but it's never easy to sort of balance those. So I wouldn't say -- I would say that the pace of disposition or successful disposition will be a consideration for us. But I don't think we would hesitate to make the right acquisition at the right time, even if it's a portfolio and use the line of credit to execute on that. If that answers your question, Brad.

[Bradley Sturges, analyst]

Yes. Last question, just going -- circling back to Louisville real quick. I think that 20% gap that you kind of highlighted, is that a gross basis? Or how would that look like on a net effective? Would it be similar? Like it would have been more like a standardized TI package that would have been used?

[Kevan Gorrie, executive]

Well, the one thing I will say if you're talking about free rent and that, I don't want to get into the specifics of it. But if you look at the lease term in terms of months, you can kind of get a guess -- you can kind of guess and see the amount of free rent that's in the term of the lease. And it gives you an idea. But in this case, I mean, we bought this building occupied. So it's hard for us to look back and see what the net effective rent was when the deal was first done, which is the way you really should do it to compare apples-to-apples. So I don't have an answer for you on that, but I would just say that I think that the net effect of rent over the expiring rent is very close to the rent because I think that the free rent within the term was quite nominal.

[Operator]

And your next question is from Himanshu Gupta from Scotiabank.

[Himanshu Gupta, analyst]

So just looking at the acquisitions in Florida, going in cap rate of 5%, how do you get that 15% increase you mentioned in the next 2 years? I mean, considering the WALT is like 6 to 7 years?

[Kevan Gorrie, executive]

Yes, there's contractual escalations built into the leases, and that's what gets us up in the next couple of years.

[Himanshu Gupta, analyst]

Okay. And then I mean, bigger picture wise, as you resume your acquisition program, is 5% to 6% cap rates going in is what you're targeting? I mean, anything in mind there?

[Kevan Gorrie, executive]

Well, I don't think the going-in cap rate is sort of the most important thing that we're targeting. We really are more long-term IRR driven. But I think if you were to use a number, I think 5% to 6% would be fair overall.

[Himanshu Gupta, analyst]

Okay. And for the $300 million dispositions, sub-5 cap rate on your in-place NOI, fair to say that, I mean, based on your $14.8 million in-place NOI, so something in that range?

[Kevan Gorrie, executive]

I think that's fair.

[Himanshu Gupta, analyst]

Yes, the math is 4.8. Okay. Fair enough. And then, Kevan, on the acquisition program coming back there, I mean, as you resume your program here, are there -- were there any discussions to go for like a relatively smaller bay assets or multi-tenant properties?

[Kevan Gorrie, executive]

Yes. I think we're always looking at what best fits our portfolio. In terms of small bay, no. I can tell you that, that is something that is not on our radar. Now something that's -- well, I think infill is used rather irresponsibly at times. But the smaller to mid-bay, yes, as long as it's logistics focused, we have. I will tell you the small bay for us has a lot of -- and I've talked about this many times before has a lot of concerns for us and a lot of drawbacks. And so that is not on our radar, that's sort of small multi. But anything that's small to -- sorry, midbay, whether it's a multi or single as long as it's really functional logistics that's well located in our markets is on our radar.

[Himanshu Gupta, analyst]

Okay. Fair enough. And then just turning to Indianapolis lease, which got done. Did you demise that second property? And I think only a portion of that 290,000 square feet got done. That's the idea.

[Kevan Gorrie, executive]

Yes, 290,000 feet, which is being demised as we speak. And I think we listed 178,000 of the 290,000, which is -- which I think our original underwriting, we had 2 tenants in there. So this is very much in line with our original pro forma and expectations for the building.

[Himanshu Gupta, analyst]

And for the bigger piece, and you're exploring demising that property too as well, the bigger property?

[Kevan Gorrie, executive]

Yes. We have responded to RFPs for the entire building. We've responded to RFPs for a portion of the building. So there are -- there is activity on the building. I don't want to say what size range right now, but we are open to demising the large one as well. And that probably would have been in our original pro forma as well.

[Himanshu Gupta, analyst]

Okay. Maybe just one last quick question here. I mean 2025 lease expiries is almost done now. I mean, as you shift focus on 2026, any space expected to come back or any chunky deals you're expecting?

[Kevan Gorrie, executive]

Yes. I think we talked about the one in Pennsylvania, 750,000 feet with Samsung. We are expecting that to come back to us. I think it's in the latter part of 2026. But I think we discussed it on the previous call. It's a very strong location on I-78 within a 2.5-hour drive of what New York, Philly, Baltimore, Washington. So that one, we are expecting to come back. And again, we're sort of running the leasing process right now, and we expect there to be some decent activity over the coming quarters.

[Operator]

[Operator Instructions] And your next question is from Matt Kornack from National Bank Financial.

[Matt Kornack, analyst]

Can you just provide a bridge as to kind of where in-place and like rent paying occupancy would be today to kind of your 96% to 97% end of year. It sounds like there's still a lot to be captured potentially into 2026 on that front as well. I'm just trying to gauge kind of how it comes in on an economic basis versus a straight-line basis because it's a pretty big number of GLA.

[Kevan Gorrie, executive]

I'm trying to understand the question. Sorry, Matt, was looking at...

[Teresa Neto, executive]

Well, I think we have committed occupancy. I think he was trying to get at like where is the -- I guess by the end of the year, we're at least going to be at 96.5% in place, right? Like we know that for sure.

[Kevan Gorrie, executive]

No, no, no, by the fourth quarter.

[Teresa Neto, executive]

Yes. I say before the end of the year, by the fourth quarter -- sorry, by the fourth quarter, we'll hit 96.5%. Yes.

[Matt Kornack, analyst]

Okay. And then I mean -- so the full benefit will be felt in...

[Kevan Gorrie, executive]

Matt, if I could, like I said -- like I pointed out before, look at the lease term in months and you get a sense of the free rent.

[Matt Kornack, analyst]

Okay, we'll do that. But needless to say, the setup is very positive for '26 growth. Is there anything in other than the Pennsylvania asset in '26 that you've got any concern about? Or at this point, is it pretty locked? I know you haven't done much in the committed for next year, but would you think that you'd get kind of in that 80% to 90% retention ratio again?

[Kevan Gorrie, executive]

Yes, I don't want to throw a number out there. If your question is, do we have any particular concerns? No, we don't. We know we have 750,000 feet coming back, but we think the mark-to-market there is probably 15% to 20%. So we're encouraged by sort of the prospects there to drive rents in the future, but don't have any specific concerns about '26 at this time.

[Matt Kornack, analyst]

And I think you highlighted it last quarter and achieved a good rent spread in the U.S. this quarter. Can you give us a sense as to kind of where mark-to-market sits for the geographies at this point or what you'd expect? I know Europe was kind of low-single digits, but it sounded like there were some fixed renewal aspects there as well.

[Kevan Gorrie, executive]

Are you talking about 2026 specifically?

[Matt Kornack, analyst]

Maybe just in terms of the balance of '25 and then how '26 is shaping up.

[Kevan Gorrie, executive]

I don't have that for you. I think we'll make a point on the Q3 call to have more specific numbers. And the only reason I'm hesitating is we've moved rents so much on these assets that I'd rather wait for another quarter and give you a better idea of our viewpoint.

[Matt Kornack, analyst]

And then the last one for me. Toronto, like you've done well in your portfolio in the Toronto market. Is it at this point, do you feel good with what you own in the market?

[Kevan Gorrie, executive]

I think I lost you for a bit there. You had mentioned that we have done well in Toronto. Are we happy with the portfolio in Toronto? Is that the question?

[Matt Kornack, analyst]

No. Would you look to -- as you kind of expand into, I guess, gateway markets, I don't know if the pricing is attractive in Toronto at this point or more attractive, but would you look to add in Toronto or any other Canadian market for that matter?

[Kevan Gorrie, executive]

Yes, I think we would. I think what's really important to us when we underwrite is the strength of the market, what we think the market is going to do and how it's going to perform over the next 5 to 10 years. And I think -- and that's how we base our pricing on it as well. And I think for us, we think some markets will outperform Toronto, and therefore, we adjust our pricing accordingly. So we do want to continue to grow in the GTA market. I think right now, we just probably have a different view than most on where rents will be in the market in a couple of years from now, and that obviously impacts our pricing on those assets. So we will -- I am confident we will grow in the Toronto market. I just think we're going to remain very disciplined on pricing on what we buy.

[Operator]

And your next question is from Tal Woolley from CIBC Capital Markets.

[Tal Woolley, analyst]

Teresa, I was just wondering if I'm reading my charts here correctly, you're sort of -- if you were looking to float unsecured right now, you're probably looking at a rate in the 4s, low 4s?

[Teresa Neto, executive]

Yes, that's right. I would say right around 4%, especially looking at the deal that Choice did yesterday and that brought in spreads quite a bit. So that would be on the Canadian front. If we were to go like to swap to euro, which is, of course, we do most of our debt that way, we would be looking at 3.5.

[Tal Woolley, analyst]

Okay. Perfect. And then I guess, Kevan, let's assume for a moment, I'm a representative from a pension plan here in Canada. And I come to you say, I've got a couple of billion dollars I'd like Granite to manage for me and invest in industrial real estate. First of all, are you interested in that proposition?

[Kevan Gorrie, executive]

Well, that is a loaded question. Understanding the strings attached and the conditions, probably not, I would say. Well, we're not a fee driver. We are open to the right strategic partnerships, I would say that. So I wouldn't say no forever. I just feel -- our focus is on building the portfolio and the business in the right way. And there will be a time, I think, for JV partnerships, but those have to be on the right terms. And you have to be very aligned. And I think the last few years will show you that will put partnerships and alignment under a lot of pressure, right? I think it has been constructive to go through the challenges that I think all REITs and all companies have gone through over the past few years. So I think anyone coming out of this would look at partnership opportunities carefully. And so to answer your question, under the right conditions, absolutely.

[Tal Woolley, analyst]

Okay. So let's say we can come to mutually agreeable terms. Where would you expect -- if you can maybe do it on a percentage basis, how much would you look to buy in Europe versus Canada versus the U.S. right now?

[Kevan Gorrie, executive]

Well, I mean, I think for us, I think Europe is providing more compelling opportunities today, and that can change. And I think as you've seen, we like certain markets in the U.S., and there's always opportunities in the U.S. There are fewer, although I say compelling, there is not as much transaction volume in Europe, but the opportunities we are seeing today are more compelling in Europe. And I think for now that's going to continue. So if you look at our activity, and this is just an opinion of mine at a point in time today, I would say we'll probably be more active in Europe and select markets in the U.S. and less so in Canada over the next 12 months based more on opportunities and pricing that we see on those opportunities.

[Tal Woolley, analyst]

And sorry, your reason for calling Europe compelling is that your -- the returns you think you can get upfront are materially better than what you can get elsewhere?

[Kevan Gorrie, executive]

Not materially. I mean it's very -- the market is very efficient, believe me. And we're not the only ones that are trying to place capital. If you look at the quantum of private equity capital, institutional capital pursuing these types of assets is very large. And it is a challenge for a company like Granite to find the right opportunities that fit for us in a very competitive capital environment right now, but that's what we do. We've been successful through the years doing just that. So I'm confident we'll continue to be successful. But to me, I just feel that there will be better performance overall in Europe than we will see in markets in the U.S. And again, that can change, and it depends on pricing. It depends on the denominator as well.

[Tal Woolley, analyst]

And in fact when you -- are you factoring in the cost of financing there, too, with Europe as well? Is that part of what makes it compelling?

[Kevan Gorrie, executive]

It can, but that will be a consideration and that wouldn't be a major consideration. When we underwrite most deals, we do it on a leverage-neutral basis and a gross basis, i.e., without leverage, right? So that's -- the acquisition and the asset has to stand on its own without the benefit of leverage and pricing on the debt.

[Operator]

And your next question is from Pammi Bir from RBC Capital Markets.

[Pammi Bir, analyst]

Kevan, you've made some good leasing progress, but you've also mentioned or maybe emphasize a bit of caution still among tenants. Are you seeing any pressure on any of the tenant base at the moment or anything that maybe gives you some concern either by segment or by market?

[Kevan Gorrie, executive]

No, I don't think we have any immediate concerns. And I didn't think I came by that. I didn't think I sort of sounded that negative, but I guess I did. But no, and I think everyone is sort of reading too much into this, and we think that there's this sort of shoe to drop. We're not aware of any immediate concerns with our tenant base, if that's the sort of question.

[Pammi Bir, analyst]

Okay. And then just lastly, any notable changes in terms of bad debts?

[Teresa Neto, executive]

No, nothing right now.

[Pammi Bir, analyst]

Or provisioning.

[Teresa Neto, executive]

No, we provisioned nothing, Pammi, and no credit watch at the moment.

[Operator]

Thank you. There are no further questions at this time. Please proceed.

[Kevan Gorrie, executive]

All right. Well, thank you, everyone, for being on the call today and look forward to hopefully speaking with you again in Q3.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines.