Granite Real Estate Investment Trust (GRTUN) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for joining us, and welcome to Granite REIT's Second Quarter 2026 Results Conference Call. [Operator Instructions] I will now hand the conference over to Teresa Neto, Chief Financial Officer. Teresa, please go ahead.

Thank you, operator. 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 and 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 the annual information form for 2025 and Granite's management's discussion and analysis for the year ended December 31, 2025, filed on February 25, '26, and for the quarter ended June 30, 2026, filed on August 5, 2026. Now getting to the quarter. Granite delivered Q2 2026 results in line with management's annual forecast and guidance, driven primarily by strong NOI growth and favorable foreign exchange. NOI growth in the second quarter was primarily driven by strong same-property performance, supported by leasing spreads of 7% and the lease-up of previously completed development vacancies in the United States, along with a favorable foreign exchange as the U.S. dollar and euro strengthened 0.9% and 0.2%, respectively. As advised last quarter, Granite did recognize 2 income statement items of a nonrecurring nature in the second quarter that impacted FFO and AFFO. Granite recognized approximately $1.3 million in termination and closeout fee revenue relating to the termination of a Magna lease at one of Granite's Vaughan properties. More than offsetting this amount was a $2.6 million provision relating to a 5-year HST audit at Granite's operating subsidiary, where the CRA has assessed Granite with denied input tax credits, interest and penalties that impacted G&A and interest expenses by approximately $1.7 million and $0.9 million, respectively. Granite has filed a notice of objection with the CRA to dispute the CRA's assessment. However, Granite has deemed it prudent to recognize such provisions at this time. The net negative impact of these 2 nonrecurring items was negative $1.3 million or approximately $0.02 to FFO and AFFO per unit for the quarter. FFO per unit in Q2 was $1.56, down $0.01 sequentially and up $0.17 or 12.2% compared to the same quarter last year. Excluding the nonrecurring items previously discussed, FFO per unit would have been $1.58, resulting in Q2 FFO per unit being $0.01 higher on a normalized sequential quarter basis. AFFO per unit was $1.26, down $0.15 sequentially and up $0.03 year-over-year, with the increase from Q1 primarily driven by higher maintenance capital expenditures, leasing costs and tenant allowances incurred. Excluding the nonrecurring items previously discussed, of course, AFFO would have been $1.28. AFFO-related capital expenditures incurred in the quarter totaled $14.7 million, which is an increase of $7 million over last quarter and an increase of $6.7 million over the same quarter last year. For 2026, we continue to expect AFFO-related capital expenditures to come in at approximately $40 million, unchanged from our estimates previously provided. In the second quarter, same-property NOI delivered very strong growth, increasing 8.3% on a constant currency basis and up 9.1%, including the impact of foreign exchange. The continued momentum in same-property NOI growth is a reflection of the successful execution on leasing, achievement on leasing spreads and the 220 basis point improvement in occupancy year-over-year. For 2026, we expect continued strong organic growth from our same-property portfolio, and have positively narrowed the range of our outlook for the 4-quarter average constant currency same-property NOI growth to a range of 6% to 6.5%. G&A for the quarter was $18.2 million, which is $8.2 million higher than the same quarter last year and $6.5 million higher than Q1. The sequential increase was primarily driven by $4.6 million higher fair value adjustments on noncash compensation liabilities, which does not impact Granite's FFO and AFFO metrics, and the nonrecurring HST expense recorded this quarter of $1.7 million. The remainder of the variance reflects normal quarterly fluctuations across other G&A expense categories. For 2026, we continue to expect G&A expenses that impact FFO and AFFO to average approximately $11.5 million per quarter or roughly 7% of revenues. Interest expense and interest income both decreased modestly in the second quarter, down $0.8 million and $0.2 million, respectively, compared to Q1. The reduction in interest expense is due to the full repayment of the September '26 term loan back in February '26 and the reduction in the credit facility balance over the course of the quarter using proceeds from the March disposition and the issuances under the Granite's ATM program. These positive impacts were partially offset by the impact of a stronger euro on Granite's foreign denominated debt and the nonrecurring HST interest and penalties recognized of $0.9 million, as previously mentioned. The reduction in interest income relates to a lower average cash balance in the quarter as compared to the prior quarter. Granite's weighted average cost of debt is currently 2.62% and the weighted average debt term to maturity is 2.9 years. With Granite's next debt maturity not until December, we continue to expect interest expense to remain stable over the next couple of quarters at around $23.5 million per quarter, assuming no new transactions. Q2 '26 current income tax was $3.2 million, up $0.2 million year-over-year and $0.1 million from Q1. The year-over-year increase is primarily due to an increase in rental revenues in Europe and the United Kingdom and the impact of a stronger euro on Granite's primarily euro-denominated tax expenses, the effects of which were partially offset by the recognition of a withholding tax reserve reversal in Germany in the prior year. For 2026, we continue to expect current income tax expense to remain at approximately $3.2 million to $3.3 million per quarter. Looking out to our '26 estimates, Granite is updating its guidance to positively narrow the ranges. Our current outlook reflects lease renewals and new leasing, dispositions and financing transactions completed year-to-date. In addition, our outlook assumes the disposition of the assets currently held for sale, which in Q2 were approximately $66 million and new acquisitions totaling $195 million to be executed by early Q4, and these will be financed by net proceeds from the dispositions, draws on the credit facility, and cash on hand. We are not assuming any further ATM issuances in the forecast at this time. The outlook assumes no material changes to its assumptions regarding the remaining leasing activity for the year, operations, and capital expenditures. We expect FFO per unit to be in the range of $6.30 to $6.40, approximately 7% to 8% growth over 2025. For AFFO per unit, we expect a range of $5.45 to $5.55, reflecting growth of approximately 4% to 6% year-over-year. As previously noted, AFFO-related capital expenditures are forecasted at $40 million for '26 compared to $34 million incurred in '25. Our guidance has been updated for foreign exchange rate assumptions for the U.S. dollar and British pound for the second half forecast period. We will continue to provide updates on our guidance each quarter as appropriate based on leasing and transaction activity executed and the market conditions at that time. Investment properties totaled $9.6 billion at the end of the quarter, a modest increase from the prior quarter and excludes the $66.2 million related to the 2 assets held for sale. During the quarter, movements in investment properties reflected the foreign exchange gains of $112.6 million, driven by the strengthening of the U.S. dollar and the euro against the Canadian dollar over the period by 1.8% and 0.9%, respectively. Additionally, capital and leasing expenditures including development spend at the Houston construction site, maintenance capital projects and leasing activity-related costs, increased value by $32.9 million. These positive impacts were partially offset by the net fair value losses recorded in the quarter of $20.6 million on our IPP portfolio, driven by expansion in the discount and terminal capitalization rates of select European properties due to market conditions, and decreases in fair market rents at select properties in Canada, partially offset by increases in fair market rents at select properties in the United States. Our overall weighted average cap rate of 5.7% on in-place NOI increased 10 basis points relative to Q1 and has increased 20 basis points since the same quarter last year. With respect to the assets held for sale of $66.2 million, the Trust recorded a net fair value gain of $5.2 million in the quarter on these assets. And on July 20, we completed the disposition of the 41,200 square foot property located in Canada for a gross sale price of $15.5 million. The remaining asset for sale located in the U.S. is expected to be sold in the third quarter of 2026. Granite's balance sheet remains strong, and its debt metrics have shown notable strengthening from last quarter. Net leverage ratio at the end of the quarter was 32%, an improvement from 33% in Q1 and 35% at the end of 2025. Debt to EBITDA was 6.6x, also improved from 6.8x in Q1 and 7.3x at the end of '25. The continued improvement in Granite's debt metrics is reflective of a reduction in debt using the proceeds from issuance of equity under Granite's ATM program and free cash flow from operations, together with the quarterly growth in Granite's EBITDA rooted in same-property NOI growth achieved in each of the trailing 4 quarters. Ratios continue to trend as targeted by management, providing financial flexibility for future growth. Year-to-date, you will see that Granite issued 1.4 million units under its ATM program at an average price of $96.61 for gross proceeds of approximately $138.4 million, excluding issuance costs. Our liquidity is currently $1.2 billion, representing cash on hand of about $165 million and a nearly completely undrawn operating line of $997 million. As of today, Granite has no borrowings under the credit facility and only $2.8 million in letters of credit outstanding. We expect to utilize its existing liquidity and free cash flow from operations to fund the assumed acquisitions net of dispositions throughout the remainder of '26. And now I'll turn over the call to Kevan.

Thanks, Teresa, and welcome, everyone, to our call. Q2 results, as Teresa mentioned, were in line with management's expectations, with normalized FFO per unit at $1.58, excluding onetime items, primarily as a result of higher same-property NOI, partially offset by nonrecurring G&A items, as Teresa mentioned, an increase of just over 12% year-over-year on a constant currency basis. NOI in the quarter was also negatively impacted by the disposition of a large asset in Atlanta late in the first quarter. To begin, as you can see, turnover was lower in the second quarter as the team renewed roughly 250,000 square feet of leases and closed on a new lease at one of our Nashville developments. The rather muted increase in the quarter was impacted by a month-to-month extension of an existing tenant at expiring rent while finalizing a fixed-term lease on expanded space within the building at a higher rental rate. The team has since renewed and expanded the tenant and the increase will be recorded in the third quarter. To date, we have so far renewed roughly 65% of our 2026 expiries by GLA at an average rent increase of 21%, and we continue to expect to achieve an average increase of between 20% to 25% on our overall expiry for the year, which is in line with our average increase for 2024. As you can see, same-property NOI in the quarter was led by the GTA and the U.S. portfolios at 20% and 9%, respectively. And while leasing activity across our smaller vacancies was slower over the first half, activity has increased, and the team is currently negotiating new leases on over 500,000 square feet of vacant space. Staying on leasing, a few comments on relevant market data. Based on published research, leasing momentum remains positive across the bulk of our sector with vacancy stabilizing or declining broadly across our markets, led by vacancy declines in Indianapolis, Dallas-Fort Worth and Houston. Net absorption was positive across our entire portfolio in the second quarter, and our portfolio markets once again represented the top 3 markets and 8 of the top 10 in the U.S., led by Dallas-Fort Worth, New Jersey and Atlanta at 9.9 million, 6 million and 5.9 million square feet, respectively. Asking rents rose once again across the majority of our markets, led again by Dallas-Fort Worth, Miami and Columbus, with year-over-year growth ranging from just under 10% to 14.5%. Our weakest markets were once again the GTA and New Jersey, with asking rents down just under 5% year-over-year. In the U.K., net absorption topped 12 million square feet in the second quarter, a roughly 40% increase over the first quarter, leading to an 8% drop in availability, representing the largest quarter-over-quarter decrease in vacancy since the fourth quarter of 2021 and supporting just under 4% year-over-year growth in asking rents for Class A large and mid-bay space. Data for the second quarter in the Netherlands is not yet available, but net absorption was strong in the first quarter at roughly 9 million square feet or up 10% year-over-year. Net absorption in Germany was very strong in the first half of this year, topping 35 million square feet, an increase of 23% year-over-year, with space over 200,000 square feet, representing the strongest segment to date. Market rent growth in the Netherlands was more or less flat year-over-year, and Germany posted an increase of just under 5%. So in summary, I would characterize the tone in the leasing market as constructive with an element of cost sensitivity to be sure and a continued bias in occupier demand for larger, modern and well-located space in lower-cost inland markets. The positive impact of the near- and onshoring of production continues to be seen with demand related to manufacturing activity outpacing 3PL demand in the U.S. for the first time in modern history, led by markets in California, Texas, the Midwest and the Southeast. Additionally, data center-related demand for logistics space continues to strengthen, led by leasing activity in Texas, Arizona and parts of the Midwest. This increase in manufacturing and data center activity is expected to drive further demand for logistics as materials and equipment continue to be positioned closer to production hubs and consumers. I'll comment briefly on the changes to our IFRS values, which were effectively flat quarter-over-quarter before accounting for the positive impact from a higher U.S. dollar and euro versus CAD. As you can see from the materials, we also closed on the sale of a small asset in the GTA, and the team achieved a sale price well above our unaffected IFRS value. Further, assuming we successfully conclude the disposition of the final remaining asset held for sale, we will have disposed of over $210 million of nonstrategic assets this year at a normalized yield of 5.1%, enabling us to redeploy the proceeds accretively on strategic acquisitions in our target markets. Staying on strategy and capital allocation. As mentioned in our press release, we have roughly $195 million in new acquisitions pending in our target markets in the U.S. and Europe. And as an update on our development program, our build-to-suit project in Houston continues to progress on budget and schedule for completion in the fourth quarter. Also, as disclosed, we have issued roughly 1.4 million units to date for net proceeds of $138 million, which, of course, will be used to fund the aforementioned acquisitions. As a general comment on the investment market, cap rates appear to be holding for the most part across our portfolio of markets. Bond yields have risen in recent weeks, but it appears that global institutional capital continues to increasingly favor the logistics sector based on strengthening fundamentals and sectoral tailwinds, with first half investment volumes up roughly 50% year-over-year in the U.S. and between 10% to 30% in the U.K. and Western Europe, and as evidenced by recent large-scale M&A activity involving logistics REITs in the U.S., the U.K., and Continental Europe. Further, the data suggests that the average price in the U.S. is up almost 7.5% year-over-year, reaching an all-time high of $160 per square foot with strong activity in Dallas, L.A., Houston, Atlanta, Chicago and Southern Florida. Investment volume in Germany topped EUR 2 billion in the first half, which is up 10% year-over-year and yields for Class A product appear to be holding steady at 4.5% to 5%. In summary, I would characterize the quarter as positive, led by continued strong operating results with industry-leading occupancy and selective and effective execution of our capital allocation strategy, with full year guidance tightened and raised slightly on stronger-than-expected NOI growth. This is notably inclusive of over $200 million in dispositions and the issuance of almost $140 million in equity. As Teresa mentioned, I would also like to highlight that we have increased FFO per unit year-to-date by almost 10% year-over-year, while reducing debt to EBITDA from 7.3x to 6.6x. Looking forward, leasing fundamentals in our portfolio markets for modern, well-located logistics properties, remain positive. Consistent with my comments from the first quarter, while energy prices and instability may negatively impact the macro environment and occupier decision-making to be sure, the data continues to suggest that trade policy shifts and ongoing geopolitical uncertainty appear to support continued expansion of inland supply chain. And for the U.S. specifically, this trend is particularly benefiting markets in the Midwest, Texas, and the Southeast, while negatively impacting demand in higher cost coastal markets. On the capital allocation front, the combination of the disposition and ATM program activity have enabled us to effectively and efficiently fund the pending acquisitions while maintaining the strength of our balance sheet. 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 active asset management and effective capital allocation, which we believe will deliver attractive income and net asset value growth for unitholders. And on that, operator, I'll open up the line for questions.

[Operator Instructions] Your first question comes from the line of Sam Damiani with TD Cowen.

First of all, congrats on a great quarter on the leasing front. And as you mentioned, Kevan, solid FFO growth while reducing debt. It's always a nice thing to do. Maybe my first question, just on the trend of market rent, the sort of realized spreads that you're getting, not only on the leases taking effect, but also on the leases that you're signing. That spread, I assume, is starting to narrow as you're capturing that mark-to-market. And I know there's going to be some unusual things with the Samsung lease, and then comparing to the Wayfair bump in the rent last year. But just purely on a sort of a rental spread basis, that contribution to same-property NOI growth, how do you see that aspect kind of evolving into 2027 and 2028?

I think, Sam -- it's a great question. I think it is going to be lumpy. I will remind everyone that 2025 was a rent lift of almost 50% on it. So it is going to fluctuate from quarter-to-quarter and from year-to-year. I will say this, though, and point out, I believe if you go back a few years ago with the height of the market, say, 2022, middle of 2022, I think I would have characterized the true mark-to-market on in-place rents versus market rents probably around 25% overall, including Europe. And today, where I sit, I think that it's very close to that. So -- and I think the product of that has been positive movement in market rents in Europe over that time and positive movement in market rents in most of our markets in the U.S. As I've stated, I think the GTA market rents have pulled back quite a bit and then the major coastal markets in the U.S., New Jersey, New York and L.A. being the ones that are top of mind, and the U.K. as well. So higher cost markets, coastal markets have pulled back. But for the most part, market rent growth has been positive, in some cases, very positive across our market. So that's what I continue to see. What gets in the way of it sometimes, and we're not the only portfolio, are contractual increases on renewals that come up. In some years, it impacts us more than others. And so I don't want to say anything for 2027, but I do want to emphasize the fact that this year, we feel that the mark-to-market on the expiries, including Samsung, is in that 20% to 25% range. And over the long term, say, over the next 5 years, I think that, that would be a fair characterization of the mark-to-market. Let's say, over the next 5 years, if that helps, Sam.

That's really helpful. So lots to ask, but I'll defer -- one more question, and then I'll turn it back. Just on the acquisitions that you've teed up, any further detail you can share at this point?

I will say, yes, I think we're far enough along in this. We have acquisitions in the U.K. and in the Southern U.S., in Southern Texas, put it that way.

Okay. Okay. That was quick, Kevan. So maybe I'll -- just one more. The acquisition you made early in the year in the U.K., the first one, it was sort of a 2-year development start. Is that still on track to achieve that redevelopment plan...

Yes, as far as we know, I think we're in for planning and entitlement right now on the asset. So nothing new to report. But yes, that 2-year program is still in place and our original plans are intact.

We will now move on to the next question coming from the line of Brad Sturges with Raymond James.

Just following along the lines of Sam's questions, just looking at your '27 lease maturities, a lot of it is rolling in the U.S., and I think you've got a bit in Austria as well. I guess, would most of the U.S. then be like free market expiries where you could take rent to market? And then would Austria still be kind of a fixed rate renewal if it is exercised?

Yes, I think that that's fair, Brad. Yes. So the ones in Europe -- and I will make this comment, and I think it's obvious to everyone that a lot of our lease renewals in Europe are contractual or fixed. Those do burn off over time. And so we do have a number of leases that there will be a renewal option at a fixed increase. But one of the reasons why we like these assets and acquire these assets is that there will be an opportunity at some point in the future in the next 5 years to really move those assets to market rent. And there is a sizable opportunity there. We just have to be patient with them to be sure. And the time will come where we'll really be able to move rents on our European assets.

And for the leases that you can take to market, those would be consistent with that comment around a mark-to-market of 25% for next year?

I'd have to look at it, Brad. I think that that's fair, but I would have to -- I have not looked exactly what that is, but I think that, that would be fair on the mark -- on the leases where we have -- where we're able to move them to fair market rent, correct.

Okay. And then I guess my last question would be, in your preamble, it seems been pretty consistent like you called out the GTA multiple quarters of kind of being one of your weaker markets. Are we getting closer to a turnaround enough in the GTA where maybe that market moves up your relative performance list? Or is it just there a large enough delta between some of your other U.S. markets or Europe versus the GTA that there's still a gap there?

Well, I think if you're asking me about the trajectory of rents in the GTA, I do think that we are near a bottom. It does lag. It always lags. So even if occupancy were to begin improving, there will be a lag where rents are. And we've -- I think we've taken that view for years now. You've heard calls talk about that. It's the higher cost markets. Toronto, they're all hit for different factors and multiple factors. At the end of the day, there is a consistency globally that the highest cost markets have been hit the hardest. And as people are sort of moving their supply chain inland and potentially doing that for economic reasons as well. And the GTA falls into that category as a higher cost market. So we are seeing improvements in the GTA, certainly in demand for larger bay product. It does feel like it will take a few more quarters for rents to bottom out. Certainly, we've seen the decrease -- the pace of decreases has fallen, and so that will start to flatten. But I think you made a comment about the U.S. market. Like, let's keep in mind, I think people would -- the narrative on the sector, particularly in the U.S. was probably negative for a few years from late 2022 through to 2025. But during that time, market rents continue to increase across the majority of our markets. In some of our markets, it was quite strong, Savannah, Nashville, even Dallas, which was dealing with the supply overhang, rents moved strongly upward over that time. And that's why I made the comment about our true mark-to-market being, for the most part, maintained since the top of the market in early 2022.

We will now move on to your next question coming from the line of Mark Rothschild with Canaccord.

Kevan, you haven't been shy about expressing frustration with the unit price when you thought that it was lagging, especially compared to how the FFO growth had been. When we look at the use of the ATM, to what extent is this a comment on opportunities you're seeing or maybe just a little more comfortable with where the value is relative to private market value?

Thanks, Mark. I think it has -- it's always somewhere in the middle, but I think it has more to do with the opportunities that we're seeing. And just so everyone is aware, when we look at -- when we're using equity at all, and in this case, remember, we're financing new acquisitions, not only with ATM activity, but also with dispositions, which we've talked about rebalancing remains an important part of our investment strategy moving forward. But I will make the comment that we -- whenever we're using equity even partially, we run analysis, accretion analysis on any time we put money out the door, and we use actual equity issuance and all costs, and we use -- on a debt-neutral basis, we assume new debt at prevailing market rates that we have available to us. So we always run that analysis. And what is, I think, notable to us is we are able to step into assets in these leading Tier 1 markets with strong growth prospects at yields we haven't seen in several years and able to manage, like, to step into these assets at virtually negligible dilution to our 2026 AFFO per unit. So we're able to step in with very little to 0 dilution and to us generate the potential for stronger future growth, both on the income and the capital side from these assets. And so I think it is really, Mark, more opportunity-driven. So as we look forward, look, we're fully -- we feel we're -- the capacity that we have to close on these acquisitions is there, probably to do a little more on the acquisition side without doing anything else. And if there are future opportunities, we'll have to balance that with where the unit price is because where it is today, I would not be comfortable utilizing the ATM. So you have to balance those things. And I think we've been quite disciplined and selective in how we're using the ATM and how we're pursuing acquisitions. And I think we're going to continue to do that.

We will now move on to your next question coming from the line of Himanshu Gupta with Scotiabank.

So on Magna, for Austria lease coming due next year, by when do you start the process of renewing it? And do you see Magna doing any consolidation in Europe based on your conversations?

The answer to that is we are in pretty constant dialogue with Magna. I won't disclose anything we have with respect to specific assets. But I will say we have no indication -- no indication that Magna intends to vacate the space when the lease expires next year. And in terms of consolidation, no, we have not had those discussions with Magna. We continue to see them make investments in the assets that are within our portfolio anyways. And I think also it's a very -- these are very difficult assets to replicate in today's world. And so activity remains strong across our portfolio with Magna in Austria and Germany.

Got it. And then on that subject, any update on the Vaughan property, which got vacated in April?

In Vaughan, we've had a lot of activity. We've had a number of tours, but no, nothing to report on the asset in Vaughan at this time.

Yes. And Kevan, do you have a better sense of like the CapEx involved now to lease up that asset compared to like 3 months ago?

Well, I think Teresa mentioned the onetime termination fee that we got. So that will help to fund a lot of the restoration work that we're doing at the property. So it currently looks very good. In terms of CapEx for a new tenant, I think it will be very manageable. I don't think it would be out of the ordinary for any new lease that we're working on with tenants in North America or Europe.

Yes. And you continue to expect the rents being much higher than what was the expiring rent at the time?

That's correct. That's correct. And I will tell you, anytime -- particularly in our sector, anytime you have an asset come vacant, as an asset manager, as a manager of assets, particularly in this sector, it is important to always review with an objective eye the future of this asset. Do you want to continue to hold this asset? Or do you want to look at selling this asset? To us, the location of this asset and the excess land that this has in its location, I think it's a tremendous value. So this is an asset that we will -- and I will say, look, in this market, user sales, as you know, are quite common and can be quite accretive. And so we would look for the right deal to sell this asset to a user if that makes the most sense to us. But we would prefer to keep it just because of the quality of this location and the property itself. So we're looking -- we would prefer to re-lease the space, and we think that we will have success this year. But just pointing out that user sales are very common in this market, particularly in this submarket, and that could be an option as well.

Great color there. Moving on, on same-property NOI growth, obviously strong in the first half. In terms of second half, fair to say that Q3 could be somewhere similar to the first half and then we'll see some deceleration in Q4 due to tough comps?

I think this is going to be same-property NOI from year-to-year goes up a little bit down. And from quarter-to-quarter, it can fluctuate. So I think what would be fair to say is this year, same-property NOI will be stronger in the first half of the year and weaker in the second. Next year, we anticipate it will be weaker in the first half of the year and stronger in the second half of the year. So it will decelerate through this year and then 2027 will be a year of acceleration of same-property NOI.

Awesome. Okay. And the last question, perhaps for Teresa here. Balance sheet, there's a maturity coming up in December. Any thoughts? What are the ways to mitigate the interest headwind there?

Yes. So we are considering a number of options. Like, I'm not necessarily tied to doing a 5-, 6-year bond at this point in time, especially where underlying treasury yields have gone. But we have some options. We can do some shorter-term either term debt or frankly, on the credit facility. I can refi and be well below, like, we could be in the 3.5% range if I keep it short-term, which is something I'm considering at this time. So we've got a few options. And frankly, I'm probably favoring going a little bit more short-term right now.

We will now move on to your next question coming from the line of Kyle Stanley with Desjardins Capital Markets.

So Kevan, you had previously mentioned maybe a bit of concern on the smaller bay leasing environment in 2026. But then I guess your remarks earlier today indicated that seems to be abating somewhat. So I'm just curious what's changed maybe over the last few months to see renewed strength in that segment of the market?

Yes. That's a great question. And yes, it was just -- most of the activity we had in the first half of this year and late last year was around our larger availabilities. And we did notice that they -- there was much more activity on the over 200,000 feet -- over 250,000 feet than it was under, and that's what we're left with today. I would say, I think the theme that has been most noticeable in the last few years is consolidation and flight to quality. And I know it sounds cliche. We've been talking about it for years, but show me any data that refutes that. We have seen the larger bay space and modern being the 2 characteristics that have been the most active and in the most demand basically across all of our markets, broadly speaking. What I do think is that as these larger spaces are being taken up, there is a spillover effect. So there is less options for an occupier to consolidate into space, and then they have to start looking at smaller space. Now that's a very broad comment, Kyle. But I do think that that's something that's feeding into this. I think there's just a spillover effect and now that's driving demand for smaller spaces within our markets.