Granite REIT (TSX:GRT) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
Granite REIT reported Q3 2026 results with NOI growth driven by strong same property performance, favorable leasing spreads, and acquisitions in Houston.
FFO per unit increased to $1.60, reflecting an 8.1% year-over-year growth, while AFFO per unit rose to $1.45, supported by reduced maintenance capital expenditures.
The company maintained its guidance for 2026, expecting FFO growth of 7-8% and AFFO growth of 5-6%, and highlighted successful capital recycling and strategic acquisitions.
Granite’s balance sheet remains strong with net leverage at 32% and debt to EBITDA improving to 6.5 times, providing financial flexibility for future growth.
Management commented on strong leasing demand, particularly in the U.S. large-bay segment, and strategic expansion in key markets like Houston and the UK.
Full Transcript
OPERATOR
Hello everyone. Thank you for joining us and welcome to the Granite REIT conference call for third quarter 2026 results. After today’s prepared remarks, we will host a question and answer session. If you would like to ask a question, please press Star one to raise your hand. To withdraw your question, press Star one again. I will now hand the conference over to Teresa Netto, Chief Financial Officer. Teresa, please go ahead.
Teresa Netto (Chief Financial Officer)
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 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 information.
These risks, uncertainties, and material factors and assumptions applied in making forward looking information are discussed in Granite’s materials filed with the Canadian Securities Administrators from time to time, including the Risk Factors section of its Annual Information Form for 2025 and Granite’s management’s discussion and analysis for the year ended December 31, 2025, filed on February 25, 2026 and for the quarter ended September 30, 2026, filed on November 4, 2026.
Getting to the quarter, Granite delivered Q3 2026 results ahead of Q2 and in line with our expectations for annual forecast and guidance driven primarily by strong NOI and favorable foreign exchange. NOI growth in the third quarter was primarily driven by strong same property performance supported by leasing spreads of 35% and the lease up of two previously completed development vacancies in the U.S. Growth was further supported by the acquisition of two income producing properties in Houston, partially offset by the disposition of an income producing property in Canada during the quarter.
Favorable foreign exchange also contributed to NOI growth, with the US dollar and euro strengthening against the Canadian dollar by 1.2% and 0.1% respectively. FFO per unit in Q3 was $1.60, up 4 cents sequentially and up 12 cents or 8.1% compared to the same quarter last year. As discussed on our second quarter earnings call, Q2 included non recurring items related to a lease termination and an HST audit assessment which had a net negative impact of approximately $0.02 per unit. Excluding these items, Q2 FFO per unit would have been $1.58, resulting in Q3 FFO per unit being $0.02 higher on a normalized sequential basis.
AFFO per unit in Q3 was $1.45, up $0.19 sequentially and up $0.19 year over year, with the increase from Q2 primarily driven by lower maintenance capital expenditures and tenant allowances incurred. Excluding the non recurring items previously discussed, AFFO per unit in Q2 would have been $1.28, resulting in a 17 cent increase on a normalized sequential basis. AFFO related capital expenditures incurred in the quarter totaled 7.1 million, which is a decrease of 7.6 million over Q2 and a decrease of 3.4 million over the same quarter last year.
For 2026, we continue to expect our AFFO related capital expenditures to come in at approximately 40 million for the year and that is unchanged from our initial estimates. In the third quarter, same property NOI delivered strong growth, increasing 6.9% on a constant currency basis and 7.7% including the impact of foreign exchange. The continued momentum in same property NOI growth is a reflection of the successful execution on leasing and achievement on leasing spreads year over year. In the fourth quarter we will see a deceleration in same property NOI which will be partially impacted by the lease termination and new lease at Granite’s Locust Grove, Georgia property.
Although the new lease commences immediately at a leasing spread of over 70% relative to the terminated lease, the new lease includes four months of free rent commencing November 1st. Granite will recognize a termination fee of approximately 1 million in the fourth quarter as a result of this deal, positively impacting FFO. However, the termination fee is not included within same property NOI. We are maintaining our previously communicated outlook for the four quarter average constant currency same property NOI growth to be in the range of 6 to 6.5%.
G&A for the quarter was $7.2 million, down $6.9 million year over year and $11 million sequentially. The sequential decrease was primarily driven by an $8.8 million lower fair value adjustment on non cash compensation liabilities which does not impact our FFO and AFFO and the absence of 1.7 million non recurring HST expense recorded in Q2. The remainder of the variance reflects normal quarterly fluctuations across other G&A expense categories. For Q4, we will continue to expect G&A expenses that impact FFO and AFFO to come in and around 11 to 11.5 million or roughly 7% of revenues.
Interest expense was lower in Q3 relative to Q2 by 1.2 million while interest income was up 0.4 million. The reduction in interest expense is due to the absence of the 0.9 million of non recurring HST interest and penalties recognized in Q2 and the lower weighted average credit facility balance over the course of the quarter due to repayments made from the net proceeds of the July disposition and issuances under Granite’s ATM early in the quarter, partially offset by the draws made to fund the August acquisition.
The increase in interest income relates to the higher average cash balances in the quarter as compared to the prior quarter. Granite’s weighted average cost of debt is currently 2.62% and the weighted average term to maturity is 2.7 years. The 300 million senior unsecured debentures maturing on December 11th are expected to be refinanced through an unsecured term loan at an interest rate slightly below 4%. Therefore, we expect interest expense to moderately increase to approximately 23.5 million in Q4 and to normalize to approximately 25.2 million in Q1 of 2027.
Q3 2026 current income tax was 3.1 million, up 0.1 million year over year and down 0.1 million versus Q2. For the fourth quarter, we are expecting no material change to current income taxes. As in prior years, Granite may realize a credit to current income taxes of approximately 1.6 million in Q4 due to the reversal of prior year tax provisions. However, we cannot confirm the certainty of this credit until after December 31st and our guidance does not factor in any tax provision reversals for the remainder of 26.
Granite is maintaining its previously communicated guidance while further tightening the ranges provided in its August 5, 2026 outlook. The updated forecast reflects leasing activity, acquisitions, dispositions and financing transactions completed to date. It assumes no impact from additional acquisitions or dispositions for the balance of the year and incorporates the expected refinancing of the 300 million debentures maturing in December. We expect FFO to be in the range of 632 to 637, approximately still 7 to 8% growth over 2025.
For AFFO per unit, we expect a range of 550 to 555 reflecting the growth of approximately 5 to 6% year over year. As previously noted, the capital expenditures are expected to be 40 million in 26 compared to 34 million incurred in 25. Our guidance ranges have incorporated updated foreign currency rate assumptions only for the forecasted period in Q4 for the euro, US dollar and British pound. We expect to issue guidance for 2027 at next quarter’s earnings call.
Investment properties totaled 9.7 million at the end of the quarter, an increase of 130.7 million from Q2, and excludes 54.9 million related to an asset held for sale during the quarter. Movement in investment properties reflected the acquisition of the two income producing properties in Houston, Texas for 137.9 million, 10.1 million in maintenance, capital and leasing expenditures across the properties primarily in U.S. and Canada, and 9.4 million invested in development properties primarily related to our Houston development property that achieved substantial completion during the quarter.
These increases were partially offset by 21.5 million fair value losses and 7.4 million in unrealized foreign exchange losses primarily driven by the strengthening of the Canadian dollar against the euro. Relative to Q2, net fair value losses including an asset held for sale totaled 16.4 million and that mostly reflects higher discount and terminal capitalization rates at select European properties, lower fair market rents at select Canadian properties and a vacancy in a U.S. property, partially offset by the fair value gain on our asset held for sale.
Our overall weighted average cap rate on in place NOI is 5.7%, up only 1 basis point relative to Q2 and 12 basis points year over year. With respect to the asset held for sale totaling 54.9 million in value, the Trust did record a fair value gain of 5 million in the quarter on the asset and on October 1st completed the disposition of the 500,000 square foot property located in Plainfield, Indiana for a gross sale price of 55 million. Granite’s balance sheet remains strong with debt metrics continuing to improve each quarter. Net leverage this quarter ended was 32%, unchanged from Q2 and down from 35% at the end of 2025. Debt to EBITDA was 6.5 times, improving from 6.6 times in Q2 and 7.3 times at the end of 25. The continued improvement this quarter reflects strong EBITDA growth driven by same property NOI growth over the trailing four quarters. Ratios continue to trend as targeted by management, providing the balance sheet and financial flexibility to support future growth.
Our liquidity is currently approximately 993 million, representing cash on hand of 108 million and the undrawn portion of the operating line of 885 million. As of today, Granite has 112 million drawn on the credit facility and 2.5 million in letters of credit outstanding. And now I’ll turn the call over to Kevin.
Kevan Gorrie (President & Chief Executive Officer)
Thanks, Teresa. Good morning, everyone. Welcome to the call. Q3 results, as mentioned, were in line with our expectations, with normalized FFO per unit of 1.60, primarily as a result of higher same property NOI and partially offset by the sale of an asset in the GTA in the quarter. And the team obviously completed a number of strategic acquisitions that were telegraphed on our last call, which I will discuss later in my prepared comments. To begin on leasing, as you can see, turnover was higher in the third quarter as the team renewed roughly 1.6 million square feet of space, achieving an increase over expiry rents of roughly 35%. And to date, we have so far renewed just over 70% of our 2026 expiries by GLA on an average rent increase of 21% in line with our projection for an average increase of between 20% to 25% on overall expiries for the year, which is consistent with the average increase we achieved in 2024.
As you can see, same property NOI growth in the quarter was once again led by gains in the GTA and U.S. portfolios at 12.8% and 8.9%, respectively, and while occupancy fell from 98% to just under 97% in the third quarter, primarily related to a new vacancy as of October 1st at our 750,000 square foot property in Pennsylvania that we telegraphed for successive quarters, the asset in question is a state‑of‑the‑art facility with immediate access to the I‑78 located within a three‑hour drive of New York City, Philadelphia, Baltimore, and Washington, D.C., and the new rents upon stabilization are expected to exceed expiring by roughly 30%.
Staying on leasing, a few comments on relevant market data beginning in the U.S., based on published research. Leasing momentum continued to build broadly across the sector despite macroeconomic uncertainty, with demand remaining strongest in the large‑bay, Class A stock segment as tenants continue to prioritize modern, automation‑ready facilities in higher‑growth inland markets. With respect to our portfolio, data points to lower vacancy quarter over quarter in 11 of our 15 markets, led by posted vacancy declines in Atlanta, Cincinnati, Dallas–Fort Worth, and Columbus.
Net absorption exceeded 100 million square feet nationally in the quarter, the highest in approximately four years, and was positive across our entire portfolio once again in the third quarter, with our portfolio markets representing the top three and eight of the top ten markets once again in the U.S. year to date, led by Dallas–Fort Worth, Houston, Atlanta, and Chicago. Asking rental rate growth exceeded 4% nationally, marking the third consecutive quarter of acceleration, with year‑over‑year growth led by Dallas–Fort Worth again, Cincinnati, Columbus, and Chicago, all posting double‑digit rental rate growth.
Our weakest markets once again were the GTA and New Jersey, with asking rents down just under 5% year over year. Turning to Europe, vacancy in the UK fell 20 basis points to 6.6% nationally, the lowest in almost two years, as demand for larger, modern product drove strong leasing activity year to date, and prime asking rents rose by just under 5% year over year in the key Midlands distribution submarket. Net absorption in Germany and the Netherlands continued to improve, with year‑to‑date absorption coming in roughly 10% above last year’s pace. Market rent growth for major markets in both countries reached mid‑single digits.
In summary, to repeat, despite economic uncertainty, industrial demand continues to accelerate across our portfolio markets, particularly in the newer, large‑space segment having adequate power for automation. As you can see from the materials, we recently closed on the sale of an asset in the U.S., and the team achieved a sale price well above our unaffected IFRS value. To date, we have now disposed of approximately 210 million of non‑strategic assets this year at a normalized yield of 5.1%, over 15% on average above our unaffected IFRS value, enabling us to redeploy the proceeds accretively on strategic acquisitions in our target markets with strong growth profiles.
As announced in a press release, we also completed 270 million in acquisitions in our target markets in the Southeast U.S. and the UK at a weighted average going‑in yield of 5.5%. All of these acquisitions strongly complement our portfolio and reflect our strategy of investing in modern assets in premier locations in our Tier‑one target markets, and all possess attractive growth potential over the near and medium terms. The acquisitions have been funded by the dispositions year to date noted above and the issuance of roughly 140 million in equity in the second and third quarters.
As an update on our development program, as Teresa mentioned, our build‑to‑suit project in Houston has reached substantial completion and occupancy will commence on schedule in December, and in addition, the team has successfully negotiated the expansion of the build facility by 100,000 square feet with substantial completion scheduled by the end of the second quarter. As a general comment on the investment market, I think that there is general consensus that cap rates could expand in response to persistent levels of high Treasury yields, which is understandable, but I wanted to make the point that the impact will not be felt, in my opinion, uniformly across all assets and markets. Based on readily available transaction market data to date, there is no evidence of price deterioration for Class A product in key growth markets.
To that point, year to date, investment volumes in logistics are up 15% year over year in the U.S. and just under 10% in Europe as institutional investors continue to target high‑quality assets and portfolios in growth markets across our geographies. In summary, I would characterize the quarter as in line and positive despite lower occupancy than in the second quarter, albeit still one of the highest in the entire sector. NOI growth was strong and execution was excellent on key strategic objectives, with full‑year guidance maintained and tightened. This is notably inclusive of over 200 million in dispositions and the issuance of 140 million in equity. I would also like to highlight that we have increased FFO per unit year to date by roughly 9.5% year over year while reducing debt to EBITDA from 7.3 times to 6.5 times.
Looking forward, leasing fundamentals for modern, well‑located logistics properties remain positive and continue to strengthen despite economic uncertainty, as the leading demand drivers heading into this year across the portfolio markets remain intact. With respect to capital allocation, the combination of the disposition and ATM program activity have enabled us to effectively and efficiently fund the recently closed acquisitions while maintaining the strength and flexibility of our balance sheet.
We will, of course, continue to monitor market conditions, including the movement in interest rates. We are confident we will continue to selectively source strategic opportunities in our target markets that will both enhance our portfolio and our future growth profile. At this time, I would also like to mention that we have transferred a 355,000 square foot asset in the Netherlands from IPP to property under development in the quarter, and as planned, we expect to transfer a second asset in the UK from IPP to PUD in late 2027. Both will have a small negative impact on NOI and FFO for 2027, but these developments should drive higher growth and returns in 2028 and 2029. In closing, we are well positioned to once again deliver strong financial results and execute on all of our corporate objectives for the year.
And our focus remains on addressing current availability and executing on our capital recycling program, which we believe will continue to deliver attractive income and net asset value growth for unitholders. Operator, I’m happy to open up the call for questions.
OPERATOR
We will now begin the question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. Please pick up your handset when asking a question. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Tom Callahan with BMO Capital Markets. Your line is open. Please go ahead.
Tom Callahan (Analyst)
Thanks. Morning, Kevan and Teresa. Maybe just start, Kevan. Appreciate kind of the comments on the operational side there, and obviously you flagged kind of the downshift in growth relative to the first half the last few calls. Just curious, can you talk about how kind of you see occupancy trending in the next few quarters across ’27?
Kevan Gorrie (President & Chief Executive Officer)
Well, I will say just to the end of the year, I think we expect to finish right about where we are today, I think would be fair. I wouldn’t want to go beyond that because it can move, especially with the vacancy in Pennsylvania. It could move quite a bit if we were able to successfully lease that up early in 2027.
Tom Callahan (Analyst)
Okay, got it, got it. And then, you know, maybe just in terms of leasing discussions, you know, how would you characterize those today maybe versus the August timeframe we last talked? And I think at that point you’d mentioned, you know, over 500,000 of vacant space potentially under discussion. So just any update on that front would be great.
Kevan Gorrie (President & Chief Executive Officer)
Sure. I think consistent with my prepared comments, I think we’ve seen, you know, very strong demand in the large‑bay segment and the modern large‑bay segment. And to that point, through 2026, we really had no availabilities over 500,000 ft. We can focus on, I think our average size right now is just over 100,000 ft of availability. When you take out the new one in Pennsylvania, which just came back to us literally a month ago, I will comment on that.
What we have seen in that market is we have seen more activity in 400,000 to 500,000 ft and the million‑square‑foot plus. And so we have had engagement with prospects for our site in that 400,000 to 500,000 range. But at this point it just doesn’t make a lot of economic sense for us to demise the building. It can be, but we actually think a better deal will be a single tenant for the entire space. So we’re going to continue to wait for the right deal for that asset.
The activity overall has been strong across the markets.
Tom Callahan (Analyst)
Okay, appreciate the color. And maybe just second one, shifting gears on the capital recycling side. Sounds like from your comments that despite the rise in yields, still confident that the demand will be there for your type of product, and we could continue to kind of see that recycling into ’27. Is that a fair way to characterize it today?
Kevan Gorrie (President & Chief Executive Officer)
I think so. I think when you look at the 10‑year U.S. Treasury, when it went from 4.8 to 5.3, I think that was a shock to everyone’s system, and that has since calmed down, thankfully. But my comment on previous calls I think still stands, and that is, I think a lot of institutional investors looking at logistics markets — the right asset in the right market — are looking through this sort of short‑term volatility in the rates. They’re looking at the strengthening fundamentals, which are already good but getting better in the markets.
And they believe, I think long term, that the bond yields will calm down. And I think that that comment still stands today.
Tom Callahan (Analyst)
Okay, great, thanks. I’ll pass back.
OPERATOR
Your next question comes from the line of Kyle Stanley with Desjardins. Your line is open. Please go ahead.
Kyle Stanley (Analyst)
Thanks. Morning, everyone. I know 2028 is obviously still a ways away, but it is a big lease maturity year in the U.S. for the portfolio and I think over 8 million square feet. Looking at, if we back into where the average in‑place rate is, it’s in the kind of the mid‑four‑dollar per square foot range usually. I’m wondering, you know, you’ve kind of stuck with the 20% to 25% mark‑to‑market opportunity. Could there be upside to that in ’28 just given where the in‑place rate is, or is there something else pulling that down a bit?
Kevan Gorrie (President & Chief Executive Officer)
I think that’s a fair comment, Kyle. I think we’re going to stick with the 20 to 25% overall. But one comment is it’s going to depend on what market rent growth looks like over the next couple of years and it could be better than we expect and certainly that mark-to-market could be better than what we’re thinking it is today.
Kyle Stanley (Analyst)
Okay, fair enough. You now closed on the previously announced acquisitions. How should we think about future external growth as it sits here today? Are you seeing more opportunities? If so, which geographies? And I think you kind of gave this answer in the last question just in terms of pricing and any changes there given the move in rates, but I’d love your thoughts on, from an acquisition standpoint, what’s going on?
Kevan Gorrie (President & Chief Executive Officer)
I think so. I mean I mentioned capital recycling. So we’re always mindful of our balance sheet and our capital ratios. We are in discussions on roughly 100 to 150 million Canadian dispositions right now. We are in discussions on roughly the same number of acquisitions in markets that we’ve mentioned before. So we’re still looking at the GTA, we’re still looking at Florida, we’re still looking at markets like Houston, the UK. Germany is a market we’re starting to pay more attention to in the right locations in Germany and in the major markets there.
So in terms of external growth, I don’t want to give a target, but I do think that we have the capacity on the balance sheet to complete more acquisitions into 2027, but I don’t want to put a number on it just yet.
Kyle Stanley (Analyst)
Okay, that checks out. And then just last one, again, obviously very early, but would love your initial thoughts on any potential changes to the operating environment as it relates to the midterm elections and maybe more specifically regarding future demand from the data center users that had been looking for more traditional warehouse space that was highlighted over the last quarter or two. Yeah. Any thoughts? That would be very helpful.
Kevan Gorrie (President & Chief Executive Officer)
Yeah, I think that’s a fair question. Obviously, this is very recent information. We certainly have not seen a change, but I will say a lot of users, if they are affected, were probably sitting on the sidelines already with the midterm election. If that mattered to them, they would have been waiting on the sidelines in advance of the elections, not waiting until after the election. So I don’t see a big change with respect to data centers. The one comment I want to make is, and I have mentioned that it’s a tailwind for the sector, but it’s not as though we have chased particular locations or assets to benefit directly from AI infrastructure. We are targeting the best locations in these markets not because we think AI is a huge tailwind in those markets, but because we believe in those markets. So the decisions that we’re making from an investment or operating perspective are not contingent on what goes on in the space.
I will say it’s a tailwind, which it is overall for these markets, but we do not necessarily need that tailwind from AI for our portfolio markets to perform or our assets in those markets to perform well. Does that answer the question?
Kyle Stanley (Analyst)
Yep. No, I think that’s good color. I will turn it back. Thanks very much.
Kevan Gorrie (President & Chief Executive Officer)
Thanks, Kyle.
OPERATOR
Your next question comes from the line of Brad Sturges with Raymond James. Your line is open. Please go ahead.
Brad Sturges (Analyst)
Hey, good morning. Maybe just starting on the distribution increase. I think this is the second year in a row of 4% and it’s around half of your FFO growth. Just curious on the thinking of whether that’s a good run rate in terms of the amount of growth you’re willing to pay out through distribution increases or if there’s specific thinking or logic on how you got to 4% this year.
Teresa Netto (Chief Financial Officer)
I think we talked about this last year. This is the 16th year of consecutive distribution increase. We had always done $0.10 since 2011, and we had a lot of discussion at the Board last year about what the right number was. So if we had stayed with 10 cents it would have been under a 3% increase. And just based on our performance and growth in income, I think we felt this was the right time to move. And of course the payout ratio is quite low. And I think it was some consideration, if we don’t start increasing the distribution, will we be forced to increase the distribution at some point in the near future?
So we felt what was really important to us is if we increase from 10 to 15, of course we don’t need to move by 5 cent increments, but if we are going to do that, will our growth exceed that and will we be able to maintain a 15% distribution increase over the next few years without compromising our payout ratio and our balance sheet? And, you know, at the end of the day we’re retaining, Brad, 120 million in cash a year and the extra 5 cents is roughly 3 million a year.
So we felt that 15 cents was the right move last year. And as long as we were able to sustain that each year or put ourselves in a position to decide to sustain that, that was the important consideration for us.
Brad Sturges (Analyst)
I guess you don’t have a specific target in terms of like percentage of FFO growth that you’re willing to pass along. It’s more case by case, year by year basis.
Teresa Netto (Chief Financial Officer)
Yeah, that’s a consideration, but it is a case by case and year by year decision. What was important to us, though, is not to compromise that from year to year and have to go back down to 10, for example. It was important that we felt the confidence that we could sustain a 15 cent increase each year.
Brad Sturges (Analyst)
In terms of, I guess you’re going to move a couple properties into PUD, how should we think about expectations around capital spend for development next year and would there be, beyond the new intensification or expansion opportunity that just came about, is there anything else in the pipeline that could be added into PUD for next year?
Teresa Netto (Chief Financial Officer)
No, I think those are the only two for PUD. I don’t think we have a large expenditure. I think we’re thinking it would probably be in the sort of 10 to 20 million range next year related to the program. Yeah, it’s really just the expansion that we just announced that’s kind of the bulk of it, and then the rest is really just continuation of site preparation on the existing other land that we have. But we’re not budgeting at this point any spec project in development. It’s really just known development, which is the expansion, and just continuation of site servicing on the existing land held for development.
Brad Sturges (Analyst)
Okay, I think just last question. Just on the Houston acquisitions, any comment on what the contractual rent bumps look like? I think the comment in the press release was strong, but was curious how that would compare to the rest of the portfolio. North of three. Okay, I’ll turn it back. Thank you.
Teresa Netto (Chief Financial Officer)
They’re north of three.
OPERATOR
Your next question comes from the line of Sam Damiani with TD Cowen. Your line is open. Please go ahead.
Sam Damiani (Analyst)
Thank you. Good morning. Maybe just first off, in reference to the Netherlands and UK projects going into PUD, did I hear clearly that there’s no intention to go vertical on those in the near term? It’s more just some normal-course pre-development site prep and stuff. Is that right?
Kevan Gorrie (President & Chief Executive Officer)
The one in the UK is under lease contract through right until the end of the third quarter next year. That’s why I said late in 2027, Sam. The one in the Netherlands, yes, we could start going vertical next year. That would be the expectation. And there will be some development spend around that. I don’t think it would be too material. Offhand, I think we’re budgeting roughly 45 to 50 million total development spend in 2027. And that would include the PUD in the Netherlands.
We’re not allocating or expecting a large development spend for the UK PUD in 2027. That would be more of a 2028 spend.
Sam Damiani (Analyst)
Okay, good. And those both contributed rent and NOI in the third quarter? Both those projects? Switching over to, I guess, just sort of Europe tenant demand generally. What’s driving the demand? Are you seeing any adverse impacts just from macro volatility, etc.? Any update on what key sectors are supporting demand or detracting from the market demand right now?
Kevan Gorrie (President & Chief Executive Officer)
Yeah, I mean thankfully we’re 100% occupied, so we’re not as close to the leasing market in a lot of our markets because we’re fully occupied, which is a good thing, obviously. But defense spending is really starting to kick up in Germany and it’s having an impact just overall in the logistics sector. 3PLs are very active. The growth of Asian 3PLs in the UK and in mainland Europe are having an impact. There is more e-commerce spending as a percentage of the overall demand in Europe than there is in North America.
So those remain very important demand drivers for our markets in the UK and in Europe.
Sam Damiani (Analyst)
So you’re not seeing any sectors really pulling back or delaying decisions.
Kevan Gorrie (President & Chief Executive Officer)
I mean, as we said, I don’t think back. I think the trends that we talked about for the past couple of years now still remain intact, and that is flight to quality and consolidation. And so we are seeing a lot of strength in the large-bay segment, in the newer large-bay segment. One stat that I saw through the third quarter that was staggering to me is if you look at the U.S., of the 210 to 250 million of year-to-date net absorption, roughly 200 million of that are in buildings built this decade, so buildings built after 2020, which is really a staggering number and it shows you the sort of flight to quality that’s going on and obviously the consolidation.
So there’s a lot of strength in the large-bay segment and obviously that’s having a negative impact on smaller and mid-bay older product. And that’s a trend that we continue to see across our markets.
Sam Damiani (Analyst)
Okay, great. Last one for me is just on the dispositions. Kevin, I think you said there’s 100 to 150 million worth in discussions right now. Last quarter, I think you mentioned there were some discussions going on with respect to some non-core assets or some assets in Europe, in Austria, Germany, perhaps. Are those discussions continuing? Just wondering if that’s still kind of in the mix.
Kevan Gorrie (President & Chief Executive Officer)
That’s fair, that’s fair. They are ongoing. But when I mention these discussions, we’re in advanced discussions on roughly 150 million Canadian. So the ones that I had referenced before in Europe we are, but certainly not as advanced as the ones we’re having right now. And these are two U.S. assets.
Sam Damiani (Analyst)
Perfect, thank you. I’ll turn it back.
OPERATOR
Your next question comes from the line of Himanshu Gupta with Scotiabank. Your line is open. Please go ahead.
Himanshu Gupta (Analyst)
Thank you and good morning. So on acquisitions, you’ve been active in Houston. What do you like about the Houston market and where do you see the upside?
Kevan Gorrie (President & Chief Executive Officer)
Oh, we’ve liked Houston for a long time and when you look at the markets that we’re in, we’ve been in Houston now for a number of years via our development site there. So it’s a market we’ve always liked and it’s a market where we didn’t have, frankly, a lot of concentration. So it’s a natural fit for us. In terms of the fundamentals, it’s been one of the strongest markets in the U.S. for the past number of years and it doesn’t deal with the same supply issues as some other markets.
So it’s a market we’ve been monitoring and involved with for many years. We’ve had a lot of success with our development site there, and so it was a natural fit for us. And we continue to think it will outperform. It will be one of the top performers in the U.S. over the next five to ten years.
Himanshu Gupta (Analyst)
Got it. And then if I look at the cap rates on the Houston acquisitions, let’s call it low to mid five. Are you underwriting above-average market rent growth for that market, in the context of the 10-year Treasury at like 5-ish percent, to justify the investment?
Kevan Gorrie (President & Chief Executive Officer)
Well, I think we have mid-three contractual rent escalations on both those assets. And yes, we do expect market rent growth to remain strong there. We’re not projecting even as strong as they’ve had the last few years. We are expecting there to be continued strong market rent growth for Houston and that certainly will position us for future growth with those assets even upon expiry in the next few years. I think it would be, I think, you know, 200 basis points would be a fair characterization of where we see stabilized yields there. Would we do more at that level? It would depend on the opportunity itself and the tenant and the prospect, but that remains a pretty attractive number for us.
A bit of both. The in-place markets certainly were low for the market. The tenant had been there a number of years. It was one of the reasons why we acquired this asset was the in-place rents and the cost basis, the resulting cost basis from it. But rents in Atlanta and in this part of Atlanta, this submarket, have moved very strongly. And so I would tell you, if this deal were done two years ago, the new rent would probably be 75 cents below where it is today.
So it’s been a combination of already low in-place rents versus market rents that have strengthened significantly in this part of the Atlanta market over the last few years. I think you would assume a rent of probably 4.25 to 4.50 on that. I just want to give some context on it. I haven’t really talked about this because I wanted to wait until the close. But this asset was constructed in 1999, so roughly 27 years of age, 30-foot clear, high office. I think about 105,000 square feet of office, so roughly 22% office content, low door ratio. A little bit of a challenging configuration. So for us, in terms of the value, we would have applied a high TI to re-lease that space.
So for us, the end user sale was probably the best outcome and a welcome one for us. And so that was the sort of strategy that we followed with that asset. And I think the price that we achieved was strong with all those circumstances being considered.
Teresa Netto (Chief Financial Officer)
Yeah. We haven’t decided what we’ll do yet. We’re going to kind of see where the markets are, where the bond markets are. But I think if you’re going to want to model, I would at least model 4.25% for that one, which the expiring bond is just under 3, so about a 100 to 125 basis point difference.
OPERATOR
Your next question comes from the line of Matt Kornack with National Bank of Canada Capital Markets. Your line is open. Please go ahead.
Matt Kornack (Analyst)
Hi, guys. We don’t spend a ton of time on Canada in your portfolio, but you do have some space available. Can you give us a sense as to what discussions look on that? Obviously you’ve been getting some really good lease spreads on the stuff that’s renewed, but yeah. Any indication there? Looked like Toronto had a good Q3, but obviously we’ve had the trade tension. So trying to understand this market a bit better.
Kevan Gorrie (President & Chief Executive Officer)
You mean in terms of the availability, Matt?
Matt Kornack (Analyst)
Yeah, just in terms of your vacancy. Are you seeing some traction on that space from tenants, and if so, what kind of type of tenants are looking in the Toronto market?
Kevan Gorrie (President & Chief Executive Officer)
Yeah, we’ve seen some traction. I mean, they’re on the smaller side, and that again has been a bit soft in that there’s a lot of competition in that segment. The one in Vaughan that came back to us, the one thing that we’re also considering is there could be the potential to increase the power to the site quite substantially. So we do have decent activity on that asset, but at the same time we’re also sort of working through the ability to increase the potential of that asset.
So I think that’s one we want to proceed with carefully. There’s been decent interest in it. It’s a great location and the power is already high at 5,000 amps, but there could be the ability to increase the power substantially. And the other thing, too, we’re doing is we’re also working with a third-party firm to assess the feasibility of some data center conversions on a few of our sites in the GTA, and this would be one of them as well. So we’re working through a number of things and levers on this asset, and hopefully we’ll have more to talk about early in 2027. But overall the interest across our availabilities in the GTA has been good, but there’s also quite a bit of competition in those size ranges.
Matt Kornack (Analyst)
Okay, fair enough. That’s interesting content you mentioned earlier. Just with regards to the asset in Pennsylvania, maybe you can expand this beyond that single asset, but can you walk through kind of the economics of demising a space and why you would be inclined to do so? Is there a rent uptick for a smaller bay, or do you just think that the asset’s better off being a large single-bay asset longer term?
Kevan Gorrie (President & Chief Executive Officer)
It depends on the market, Matt. And it’s interesting that way. When we had the availability in Louisville and Conestoga and we had 620,000 ft available, we could demise that building. But at the same time, rents in the 600,000-plus range were higher than rents in the 300,000 to 400,000 range. So again, it made no sense for us to do it other than you’d be able to partially lease up the building sooner. The same thing goes here. There is no rent benefit to us, rental rate benefit to going down in the smaller segment. And frankly, as I mentioned, there are some requirements circling in a million square foot and above which we cannot accommodate. And rents in that segment have been healthy. So it’s not just the cost of demising the building, it’s also, are you going to achieve a rent premium by going down in the size range? And for this asset we don’t believe that that’s the case.
So it makes better economic sense for us to continue to look at the sort of 750,000 square foot range.
Matt Kornack (Analyst)
Okay, that makes a ton of sense. Thanks.
OPERATOR
Your next question comes from the line of Pami Burr with RBC Capital Markets. Your line is open. Please go ahead.
Pami Burr (Analyst)
Thanks. Good morning. Just did want to come back to the Locust Grove. That lease there, pretty decent outcome. I’m just curious, was the prior tenant looking to exit, or anything you can share just on the background of maybe how that deal evolved?
Kevan Gorrie (President & Chief Executive Officer)
The prior tenant had, I think, five years remaining on the lease, but they had lost their contract. So they were a 3PL, a well-funded 3PL, so we weren’t worried about their ability to continue to pay rent, but we were aware, as the market was aware, that they weren’t utilizing the space. And so we received interest from another tenant, another occupier for the space. This has been probably 16 months of negotiations and we reached a point where the team was able to negotiate a favorable surrender of the lease and transfer to the new tenant.
And again, as Teresa mentioned, we bring it up only because it will impact Q4 same property NOI, but at the same time it positions us for better growth in 2027 and over the term of the lease. It’s definitely a win-win for us.
Pami Burr (Analyst)
Yeah, for sure. No, that’s good to see. Okay. And then just maybe a follow-up on the Samsung space. It sounds like there is good interest, but you know, you try to line up the right tenant. I’m just curious how much availability there is in that particular node of the market.
Kevan Gorrie (President & Chief Executive Officer)
I would think there is, in our immediate size range, I think we’re aware of one other. So I think in that market you can say that we’re down to two, and the other one is a relatively new development, so a new entrant to the market. We’re not aware of any new supply or imminent new supply coming on. So there is one other availability, and I think we’re very well positioned and, frankly, in terms of the ability to do a certain rent in that market, I think we’re better positioned than our competition.
Pami Burr (Analyst)
Okay. And then I guess, along that thinking, is it fair to assume that you should have cash rents at this site toward the second half of next year, or is that too early to call?
Kevan Gorrie (President & Chief Executive Officer)
Yeah, that’s our expectation. Yes.
Pami Burr (Analyst)
Okay. And then just maybe lastly, on looking at the 2027 lease maturities that you’ve already addressed or committed, where have the spreads come in to date? And then if there’s anything else that might be known in terms of any known vacancies coming back to you.
Teresa Netto (Chief Financial Officer)
21% year to date.
Pami Burr (Analyst)
On the 2027 maturities. Right.
Teresa Netto (Chief Financial Officer)
Oh, on the 2027, those ones that I talked about. We have, this year is rather unique to us. About a third of our expiries next year are contractual rent increases, which is way above what it normally is. Now, one of that in Italy is a MAGNA facility in Austria. So, so far, I don’t want to give the actual percentage, but we have those contractual rent increases. Outside of that, for two-thirds of our expiries for next year, we would expect a lift similar to what we are projecting for this year.
Pami Burr (Analyst)
Okay, that helps. And the second part of that question was, anything known in terms of what might be coming back to you from the vacancy standpoint next year? Okay, great. Thanks very much. I’ll turn it back.
OPERATOR
Your last question comes from the line of Dean Wilkinson with CIBC. Your line is open. Please go ahead.
Dean Wilkinson (Analyst)
Thank you. Morning, everybody. I’ll keep this quick, Kevin. We saw something out of Granite with the quarter that we haven’t seen in a long time in the REIT world: that’s the split, you know, largely a function of the success of the units over time. But what was the thinking around there? And is this something, and you and I have talked about this a little before, an effort to expand the broader ownership base and perhaps get retail a little more involved?
Kevan Gorrie (President & Chief Executive Officer)
Well, I appreciate the question, Dean. First of all, we don’t know if this is really going to help or not. Our thinking on this was, the leadership team and myself have met with institutional investors for many years, and I think the one concern or challenge that was expressed to us by our largest unitholders was they wanted better liquidity, and it was from a good spot, meaning because we’re highly institutionally held, sometimes our unitholders, if they wanted to increase their holdings in Granite, they just didn’t feel there was enough liquidity in the market in order to do that because the other unitholders weren’t selling.
So that’s something that we heard directly from our unitholders and investors over the past number of years. And looking at the institutional ownership or lack of retail ownership, we felt that this would be a good opportunity to try and split the stock and see if we can improve access to our units by retail investors. And again, we don’t know if it will work, but based on the feedback we received, we thought it was worth the effort, and we’ll see.
All right. Thanks.
OPERATOR
There are no further questions at this time. I will now turn the call back to Kevan Gorrie for closing remarks.
Kevan Gorrie (President & Chief Executive Officer)
All right. Thank you, operator. Thank you, everyone, for joining us on the Q3 call. We hope you can make it on the Q4 call and have a great day.
OPERATOR
This concludes today’s call. Thank you for attending. You may now disconnect.
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