Granite Real Estate Investment Trust (GRP.U) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the MI Developments first quarter results conference call.

All participants are in a listen-only mode. After the presentation we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for a question. If anyone has any difficulties hearing the conference, press star zero for operator assistance at any time.

I would like to remind everyone that this conference call is being recorded Wednesday May 12, 2004, at 9:00 A.M. eastern time. Now I'll will turn the call over to Mr. John Simonetti, Vice President and Chief Financial Officer. Please go ahead, sir.

Welcome to the 2004 first quarter conference call for MID. Good morning, everyone. I'm John Simonetti, Vice President and Chief Financial Officer of MID.

I'm joined by Brian Tobin, Chief Executive Officer. Our discussion today will focus on MID's real estate business. Brian will be discussing our overall real estate strategy and I will review our 2004 first quarter financial results and provide an overview of our current real estate development program. Following which we will open the phone for questions.

Unless otherwise noted, all numbers we will reference today are in U.S. dollars which is our reporting currency. At this time, rather than reading our disclaiming regarding forward-looking statements, I would like to refer you to yesterday's press release which includes a disclaimer at the end of the text.

I will now turn over the conference call over to Brian Tobin. Brian?

Thank you John. Good morning, everyone. Both John and I reported yesterday at the annual meeting in a rather hope not too lengthy fashion. I don't intend to repeat today everything that I had to say yesterday and I don't suspect that John will as well. So I'll keep my comments fairly brief.

Let me begin by reminding us that MID is less than a year old as a public company and let me say I am pleased with the most recent quarter's numbers and John will have more of those numbers in a few moments.

Suffice it to say, year over year, any time you have lease payments up by $16 million or 14.6%, that's a solid and positive result. Likewise with respect to the FFO, year over year we're up 16.5% and I think that that number speaks very well for itself. These are good numbers. This is a good blue chip business but it's conservative by nature.

The fact is 99% of the business we do is with Magna and with the Magna group of companies and both companies are experiencing by any objective measure very solid growth. In fact, we saw in recent days at the Magna annual general meeting in their report, growth in excess of 20% a year over the last number of years. And as they grow, we, quite frankly, expect to grow with them.

We should remind ourselves that Magna ten years ago was doing $1 billion dollars worth of business. Magna did $15.3 billion in business and while they don't give guidance, they certainly indicated they expect to see numbers this year in the area of $19-20 billion, so healthy numbers.

Look, there's no guarantee that we get the Magna work. We've got no contractual guarantee we get the work. Likewise we give no guarantee we'll always take their work.

We focus on the opportunities that are best for us and we think we've got a competitive advantage in doing business with Magna. That is borne out of the fact that we've got tremendous experience, more than 30 years of experience with Magna. Our management team knows their group exceedingly well, we understand their needs.

We understand how to do business with a customer that is responding often in short notice and short time frames to their OEM customer's requirements and not only having to respond to tight time frame but also having to respond to specialized plants and particular kinds of structures that require real expertise.

One of the tremendous advantages I think we enjoy, we're a transparent company. We don't gouge our customer. Our books are essentially open to them. We are looking for a 10% return and by definition the opportunity for us is solid, but it's low risk. If it's low risk, it means that the returns are low as well. More moderate.

The other part of our business is MEC. We, as you know, own 63 million shares in MEC. Currently has a value in the marketplace in excess of $300 million U.S. 59% of MEC's total market cap, in fact, is held by MID.

For all of those reasons, reasons I think are self evident, we take and should take a strong interest in the success of MEC. In fact, it's too important in terms of the potential to our bottom line, in particular bearing in mind the tremendous value of this package of underutilized land associated with MEC, for us to do anything less than to be committed in an appropriate fashion to MEC's bottom line success.

As you know last year the shareholders at Magna were presented with a proposal put to them by the Magna Management Board. Of course, the proposal was the work of an independent special committee of the Magna Board. It came after the consideration of independent legal opinion, independent financial advice and that proposal essentially said to the shareholders of Magna that it was time to unlock the tremendous potentials, tremendous synergies on realized value of both MID and MEC, and the shareholders responded in a positive fashion by giving that proposal in a 97% vote. At this time when we look at MEC, we are particularly interested as I said a moment ago, in MEC's underutilized lands and how it is appropriate and beneficial to shareholders in both companies and participate in development of those lands.

As you know Jim pointed out, they currently have agreements in the case of Florida Gulf Stream, with Forest City, one of the Premier retail developers in the United States and they have a letter of intent further to be developed with the Caruso group out of L.A. We think both those developments are exciting and if it's appropriate we'll look to participate in both developments.

I said a moment ago, that with a return of about 9-10% perhaps a little better, that's the result of a solid business proposition, a solid business, but it's a low return. I can tell you in working as I have over most of the last year, both as a board member initially of MID and subsequently in recent weeks and the last two months as a CEO of this company with Frank Strife, Chairman. Our Chairman I don't believe has ever deliberately gone out and invested himself, his time, his energy and his focus in a business designed to return 9-10%, he looks for substantially more than that.

One of the messages we've received and one of the challenges we've taken up, as a management group, with a lot of enthusiasm, let me say, is the opportunity to begin to diversify this business. And that's something you can expect to see us talking about over the year ahead. Something you can expect us looking to realize over the year ahead.

Bottom line is we want to increase those returns, increase shareholder value and we look forward to the opportunity to do just that.

Let me now turn this conference call back to John to give us an overview of the numbers and then, of course, we're quite happy to take your questions as those occur. John?

Thanks, Brian. Right up front, I want to point out the first quarter results were significantly impacted by one-time settlement charges of $3.9 million. There is $3 million net of income taxes related to two executives. Pre-tax charge of $3.9 million is included in general and administrative expense and comprised of cash severance payments of $2.5 million or $1.6 million net of income tax and expenses related to outstanding stock options previously awarded to these executives of $1.4 million.

In accordance with Canadian accounting principles, 2004 is the first year we have expensed stock options awarded to management. Total stock option expense in the 2004 first quarter, including those related to former executives is $1.6 million and is included in our G&A expense. Annualized lease payments at March 31 2004 were $126 million or $16 million higher over the prior year representing an increase of 14.6%.

On a sequential basis, annualized lease payments decreased by $1 million from $127 million at the 2003 year end, as completed projects, ramp ups and new land leases during the quarter were more than offset by the foreign exchange impact of the strengthening of the U.S. dollar on our rents denominated in both the Euro and the Canadian dollar. In this regard, the change in our annualized rents from the 2003 fourth quarter include an increase of $1.8 million from the following financial drivers. Projects coming on stream, which were relatively minor in the quarter added $500,000 to our annual rents.

Annual CPI bumps of $800,000 were realized on approximately 5.9 million square feet of leasable area. One-time rent adjustments to compensate for land surrounding certain facilities leased by our tenants added $500,000 to annual rents. These positive financial drivers were offset by the foreign exchange impact which served to reduce our annual rents by $2.8 million.

In terms of our funds from operations, first quarter FFO is $22.4 million or 46 cents per share on a fully diluted basis. Excluding the effect of the employee settlement expenses, FFO increased to $24 million or 50 cents per share. per share. This represents an increase of 16.5% over the pro forma FFO of the 2003 first quarter of $20.6 million or 43 cents per diluted share.

On a sequential basis, first quarter FFO was $1.4 million or 3 cents per share higher than the 2003 fourth quarter FFO of $22.6 million or 47 cents per diluted share. This represents an increase of 6.2% in the quarter and is due to the following items. First reported revenues increased our FFO by $1.3 million.

On a same store basis, revenues increased $1 million driven by foreign exchange of $700,000 and rent increases of $300,000. New projects on stream contribute $100,000 in the change and the straight lining of our rents added $200,000 to the increase on our first quarter 2004 revenues.

The second item affecting the FFO was lower G&A expenses which served to increase funds from operations by $700,000. Excluding the impact of employee settlement expenses, first quarter G&A was $4.4 million. Included in this amount is $200,000 of non-cash stock option expense. And as a result for purposes of calculating FFO, G&A was $4.2 million or $700,000 lower when compared to the previous quarter.

The decrease in our G&A expense from quarter to quarter is primarily due to the timing of when G&A expenses were incurred in 2003. In particular, a disproportionately higher amount of the overall 2003 G&A expense was incurred in the fourth quarter.

The final two components affecting the quarterly change in FFO were cash taxes which were $4 million or $400,000 higher sequentially, and interest income which added $100,000 to our funds from operation.

Turning to the balance sheet, our cash balance at March 31, 2004 was $57.2 million. Our first quarter cash flow, sources of cash amounted to $33.9 million including $22.5 million from cash generated from operations, $9.4 million from changes in non-cash working capital and $2 million from the sale of one parcel of land and other items. Funds used in the quarter on capital expenditures were $6.3 million and foreign exchange reduced our cash balance by $.5 million.

In terms of development outlook, during the quarter we added 5 new development projects with the Magna group representing 275,000 square feet of leasable area once completed. At the end of the first quarter, our construction group had a total of 7 projects under development, 2 each in Canada and the U.S. and 1 each in Austria, Germany and the Czech Republic. These developments include expansions to existing facilities and when completed will add almost 500,000 square feet to our income producing portfolio. A total anticipated cost related to these projects of $26 million of which $12.5 million was spent as of the end of the first quarter.

In addition, as Brian announced at yesterday's annual meeting, MID is under contract for the development of a 900,000 square foot facility in Bowling Green, Kentucky for the Magna group. The terms of which are currently being negotiated.

Looking at MEC related developments, as Brian just noted, during the first quarter, MEC and [Ford ]City Enterprises, jointly announced the predevelopment [Magin] agreement concerning the planned development of the village of Gulf Stream, an 80-acre mixed use retail, entertainment, and residential project. In addition, MEC announced a major redevelopment of it's Gulf Stream Park racetrack. The redevelopment project is budgeted to cost approximately $120 million. MEC will take a write-down of approximately $25 million in the second quarter of 2004 in connection with the redevelopment.

We believe there are opportunities for us to participate in these Gulf Stream projects and the possible development of MEC's underutilized land at Santa [Manito] and Golden Gate fields in California and other redevelopments of existing MEC racing facilities and in the development of [new and received] facilities. There are many options to structure our participation in these projects which are currently being considered by a special committee of independent directors formed by our Board of Directors. No viant agreements have been entered into at this time. That now concludes my presentation and Brian and I will be pleased to answer questions.

Thank you. One moment, please. Ladies and gentlemen, we will now conduct a question and answer session. If you have a question, please press the star followed by the 1 on your touch tone phone: You will hear a 3-tone prompt acknowledging your request. Your questions will be polled in the order they are received. Please be sure you lift the handset if you are using a speaker phone before pressing any key. One moment please for your first question. Your first question comes from Sam Damani from TD Newcrest. Please go ahead, sir.

Good morning. How are you?

Good.

Great. First your comments, Brian, at the outset were, something we've heard a couple of times in the last little while about not really guaranteed to get Magna's business. Just one question, are you trying to give us a different impression than we heard last summer when the road show was on the go in terms of how much business you're likely to get of Magna's growth?

No. Not at all. What I'm really trying to do, Sam, is make the point that, and fully in the sense that Magna would want this point made as well, and Magna operates as a separate public company from MID. Magna has a separate board, separate management team, a mandate to get the best possible suppliers at the best possible cost, and the best possible quality on behalf of the various plants and all I'm saying is, we are doing this in a very business-like fashion. We have to be competitive.

We have to earn the right to do their work and we are very confident we can do that . But certainly not sending you any kind of a signal of a diminished expectation to the contrary.

What I would say to you is with our 30 years of experience and our very good knowledge and understanding of them, of their culture and of their needs, we are probably very strong. In fact, we know we are very strongly competitively placed. We want to make clear that we don't take them for granted at all.

We approach them as a customer and we also take the approach that we've got to earn the right to do the work that we anticipate is out there. Look, they are growing over 20%, tremendous growth. We think that gives us tremendous opportunities and we want to capitalize on those and are confident that we will.

Is there any change to the targeted returns you are getting from those deals at Magna? 9% in Europe and 10% in North America?

Not really. Fundamentally as you've heard Frank say many times, we don't gouge them, it's not our intent. Everything about us is well known, we are transparent. That's one of the attractive things, not only do we do good work, on time, on budget. But the relationship is, we expect about a 10% or so return, somewhere in that neighborhood. They know that and one of the great positives for them in doing business with us. No change in guidance at all with respect of what we look for in the way of returns.

Maybe on the Cosmo deal.

Let me add, Sam, as I said earlier in my comments, that's a conservative business, a low risk business. We regard those returns as positive for the business we are in. Don't misunderstand me, we want more of it. Overall as a company we'd like to do better than 9-10%. That's what we are talking about and talking to. We'll get back to that about the opportunities with MEC. So, sorry, go ahead.

You bring up that point, I view MID as certainly a lower risk entity than MEC is. Clearly to get returns in to the low to mid-teens, you need to take a little more risk than your deals with Magna would produce. Is it still the plan to keep most of the operating risk within MEC and structure deals with MEC especially that MID really is mitigating a great deal of that risk?

I'll ask John to step in.

Sam, you're right. Our business with Magna is low risk and returns accordingly are favorable for that. We're not running the MEC operations. All we're doing is looking at in the context of real estate, there are some opportunities there that we can help them out with.

In turn, that helps them with the way they want to run their operations. We can't lose sight of the fact that there's good business in there for us from the real estate side, but we also have to look at the fact that if that helps them in the way they run their business, and in terms if they can improve their business, that in turn will improve their stock price and we can't overlook the fact that we have a significant investment there and that should also translate into better returns for MID shareholders.

Although we're not involved in the day-to-day operations, we can't lose sight of the fact that the overall operations of MEC does have an impact on our stock price.

Just a comment. Look, you remember MEC as a slightly higher risk and that's a very fair comment. It is a slightly higher risk. But the opportunity, the up side of MEC is also higher. When you look at this business, look, I sit on the MEC board and have for just a short period of time. Look at the basic proposition, you make the right kind of investments now, there's a growing period.

Don't forget MEC has bought tracks that are 50-plus years old. They require some capital investment. But the opportunity there to have a substantial return on investment I think is very real. And to the extent that's where the industry management and board are going, we think that's positive and to the extent it's appropriate and a win for both companies for us to look at participating in some of the projects, be they underutilized lands or be they tracks themselves. Those are opportunities we certainly will look to.

I guess we'll have to wait and see when the first transaction with MEC is formalized and announced to really understand. On the timing of that, MEC is making progress at Gulf Stream on two fronts. At what stage does MID get involved? Are the boards looking at assessing different structures with transactions right now? What's going on with the timing here?

Right now, Sam, what we've done because we are related parties, we put in place an independent committee of the MID board, who stand ready to assess any proposal coming to the table.

Likewise on the MEC side, they've done exactly the same and that's appropriate. One of the mandates we've gotten from the Chairman is to make sure we meet and/or exceed all the requirements of good governance, but for the moment we don't have a specific proposal before us.

As you know, MEC has announced that they are going to proceed with the redevelopment of Gulf Stream. We've had some very preliminary discussions at this point in time. As you'd expect, but beyond that we don't have a specific proposal on the table or one we can talk about. It just isn't there. Not that we are refusing to talk about but, just not at that stage of the game. How likely is it that MEC goes through with these things without MID's involvement?

I can't answer that. I would simply say to you that we think there are some real opportunities. As I look at where MEC is today, and look at the projects, look at the kind of world class partners they are attracting. Forest City, it's got about $2 billion of other work on the book today out there. Wouldn't be partnering with MEC to develop an 80-acre site at Gulf Stream where there's not one of the Premier attractions in the United States today.

Likewise the Caruso group out of LA, again, absolutely world class developer, first class, at the table, they've not gotten to the point where they've finalized an agreement but moving towardS that. He's there and that group is there because this is a world class opportunity. So at the end of the day, how likely is it we'll be there? I wouldn't want to assess it.

I'd simply say that we'd like to participate if it makes sense for MEC, make sense for us because we think this is a positive opportunity.

Let me just add to that, that MEC at their annual meeting in their conference call did point out there's a number of avenues that they have and looking at to finance the possible transactions. One of which is the possibility of MID participating. But there are other avenues they have to finance. Are they likely to move ahead without us? I think the answer to that is yes, and they have started. If we participate, great. If not, they've got other resources.

I think, just to expand briefly for Sam, and then take over questions on John's point, we are operating as separate companies, they are going to do what's in the best interest of their shareholders, they are going to cut the best deal they can. We would do on our side exactly the same. We have independent committees who will ensure the proper governance process is fulfilled. But if you're asking me as CEO, are we interested in opportunities there? Yes, we are. Just as we'd be interested in other good opportunity. See what happens.

I'll requeue in and let others ask questions. Last time we spoke there was plans to add a couple members to the board and secondly did you name the members of the independent committee assessing company transactions both at MID and MEC?

Yes, I can. They are Barry Byrd, Phil Fricke and they are Manfred Jakszus.

With respect to adding members, that is something we are actively looking at. The governance committee, led by Bill Davis on our board, is currently assessing potential candidates. They'll be discussing all of that with our Chairman, Frank [Strife], and with other members of the board so I think that over the next period of time, I don't want to put a time frame on it. That's a matter we'll address. We are certainly committed to having a majority of independent members on this board, that's a mandate the chairman has proposed and the board has accepted and that will occur. It's something we announced publicly as an objective we would fulfill. Rest assured, that is the direction in which we are going and going in the near term.

And who where the independent committee members at MEC?

At MEC, let me come back to you on that because I want to double check.

Thank you.

The next question from Ross O'Riley from CIBC World Markets. Please go ahead.

Thanks very much. Turning to financial issues, what is appropriate rate to assume for the G&A on the quarterly basis going forward given the distortions in the first quarter?

Good question, Ross. Last quarter, my comments were we would be over 20. Going to change that and say we'll be under 20, though we're not going to give specific guidance where we are going to be. We are at 4.4 in the quarter. roughly 18 million on an annualized basis. Between 18-20 is a good number right now, Rosa. To the extent we do proceed with MEC-type developments and add bodies there that might go higher. I would assume if we start projects, they'll have the ability to capitalize some of those costs. I think we'll hold under 20 for now.

The straight line adjustment, rent adjustment going forward? What should we be modeling in for that?

The straight lines we're slowly going to be reversing. It will keep reducing right now. There's a little bit of an anomaly with what happened between the fourth and first quarter. I think they went the opposite ways. We had some adjustments we had to do in the fourth quarter. The straight line adjustment right now is relatively insignificant but should start reversing itself going forward. About $200,000 a year right now.

So on an annualized basis, about $200,000?

No, We're about $200,000 on the quarter. On an annualized basis, we'll be under a million.

Thanks very much.

The next question comes from Tim Rice from Rice Bellcor. Please go ahead.

Good morning. I don't want to belabor the issue with MEC, but there is one thing I'm still unclear on. MEC, obviously, is facing some daunting capital expenditures from here and I believe you made reference to the potential for sale and lease back arrangements at the MID annual meeting.

Could you comment on whether this is conceptually something that both companies have agreed looks interesting and maybe just give some indication what the potential might be there. Obviously it would involve a major investment on MID's part and would also solve a major problem for MEC.

You're referring now just so I'm clear, to the possibility of MID getting involved in financing, for example, and rebuild.

Exactly.

And the tracks themselves.

Exactly.

I think we wouldn't be honest if we didn't say to you that that is something we discussed initially with MEC. Frankly we would do the same kind of prudent assessment with MEC that we would do with one of the customers in the Magna group of companies.

Just as if we build a plant for one of the members of the group, [Cosmo, Donley, Inseer], whoever it happens to be and we expect to be paid a reasonable return on the lease over an extended period of time. If we could achieve turns very similar in a lease arrangement on a track or track facility development or redevelopment, we'd look at it. Again the appropriate word here is prudent.

And the other appropriate thing to say is that we would follow the right process and that is we would have any kind of related party transaction looked at by independent committees of both boards. I should just point out that I was asked earlier if I could add this now, who were the members of the independent committee on the MEC side, and those members are Bill [Menier] on the MEC board. Bill is the Chairman of the audit committee and former senior executive of the Bank of Nova Scotia, Jerry Campbell out of the US, formerly with the Bank of Detroit, and Lou [Betife], former Bill [Menier] on the MEC board. Bill is the Chairman of the audit committee and former senior executive of the Bank of Nova Scotia, Jerry Campbell out of the US, formerly with the Bank of Detroit, and Lou [Betife], former VP of Ford, Dean of the Business School at Boston University. of Ford, Dean of the Business School at Boston University.

With respect to the three names I gave you earlier with respect to MID, you can read fully all their information on our web site. Manfred Jakszus, the president of real estate at Bank of Austria, Barry Byrd is our real estate lawyer based out of Florida, and Phil Fricke, interestingly enough, you'll enjoy this, is a former auto analyst based out of New York.

Brian, I had a second question, if I can. I know sometimes titles mean something, sometimes they don't. What are we to read into the fact in addition to being the director you are now Vice President of the board of MEC?

Just a reflection of the fact that we have a substantial investment there. As I was saying earlier, if you look at the value of our investment current with what MEC is currently trading at in access of $300 million at U.S., that's a substantial number, represents on a fair value basis in access of 20-25% of our market cap. at's substantial. The notion that we would ever be disinterested in what's happening at MEC would be wrong. We would be failing as management and I also say to myself as CEO here at MID, let me be clear.

They have their own superb and strong management group, their own board. They are an independently traded company, but we have a significant investment there. I say to myself there's no question, if we can see over time as their plan for growth is realized, the bottom line of MEC improved, that has a tremendously positive impact on our bottom line as well. So you should read nothing more than 59% shareholder and CEO of the company that holds those shares, it's appropriate I should be there at the table.

Thanks very much.

Thank you.

Next question comes from Vineet Sethi from Greenlight Capital. Please go ahead.

I'd like to follow up on the question. Did you say that achieving less than $20 million of annual G&A reflects a normal level of development activity for a company or a subnormal level. I guess just a follow-on to that, what do you see as the outlook for annual G&A beyond 2004?

Hi, Vineet. This is John.

How are you?

Whether it's normal or subnormal for a real estate company, I can tell you for our company that's where I think we're going to be. It's normal for us. I'll answer that question in that respect.

In terms of your next question of where we are going forward?

Yes.

I think it's going to hold probably where we are, maybe slightly higher. Again to the extent we get involved in MEC developments and we need to add some bodies, we'll have to do that. I would assume I can foresee we probably have the ability to capitalize those costs. I think where we are today now is probably a good run rate.

I should say we both in calls like this one and some of you as shareholders we pay particular attention to your comments to keep G&A as lean as we can keep it, and we got the same mandate from our chairman and our board about being careful and conscious to run this place lean and make sure all our senior people are carrying a full load. Let me just say as a general comment, we are very committed to keeping costs on the G&A side down.

Thank you, guys.

You're welcome.

Your next question comes from Kevin Sage from Interest Capital. Please go ahead.

Two questions. One, I just wonder if you could elaborate, Brian, if you look at this company say, three years from now, what percentage of the assets and what percentage of the lease stream will be coming from Magna versus MEC so investors have a idea of what they are buying here.

I don't want to give the impression you can expect to see a radical shift in our book if I can put it that way. The blunt reality is 99% of our book today is with Magna and the Magna group of companies, and we want to grow the opportunity with those companies. You ask me down the road how it might change, something in the order of 70/30 might be an appropriate description of where we are. 70% still being with the Magna group. 30% representing diversification down the road. Again, I wouldn't want to give that as hard guidance.

Because at the end of the day, I can tell you and I want to stress this and please pay attention to this, the name of the game for us is to increase the return on capital investment. Right now we've got a good number, a conservative number, a solid number, it's lower risk. We don't want to depart from a solid set of books year over year over year. We'd like to improve that number. I'm not kidding you when I tell you, that I don't think Frank [Stranick] has ever gone into business to earn 9 or 10% return and I don't think a management group does its job if it sits there and says that's pretty good, that's all we're going to do. We are going to be out there looking to diversify the portfolio perhaps where appropriate with MEC.

I want to stress again, beyond the Magna group of companies, there may be opportunities and if we see some that make sense after all appropriate diligence is done, all prudence is exercised. Remember something, we are sitting on $1.2 billion of equity. Virtually debt-free, $7 million. I think we've got room to go and increase in a prudent way, some measure of the risk we take with some of that capital, in order to search for higher returns overall in the balance of our portfolio.

Okay. And given that you have a billion of unlevered equity and given if I look at your business and I back out the book value of land that you have that's not earning anything, the net cash and your stake in MEC, and your real estate assets are trading at an implied cap rate north of 18%. Given that and given your concerns about earning great risk adjusted returns, what are your thoughts on buying back stock?

We get asked that question a lot of times. You always have to look at what is the best way to put your money. We have to be cognizant of the fact we look ahead of us and see a lot of development opportunities and we want to be sure first and foremost that we are able to meet those financing needs we have going forward.

I think we're still at the stage where we're still trying to assess how much capital we are going to deploy in the next two to three years and then at that point if a share buy back makes sense, maybe we'll have to look at that. We feel there's a lot of progress ahead of us and shifting through them to see which is the best ones to pursue. So in the short term right now, I think that buying back stock, although we think about it, because we are asked that question by shareholders, that's really not at the top of our list.

Okay.

Next question?

Your next question from Steve Ravel from Botti Brown Asset Management. Please go ahead.

It's actually John Botti. I guess I struggle with the idea in your commentary about unwillingness to buy stock. I know you are assessing the landscape in development opportunities. But as I remember the slated rate of return on even the MECCA development project is more in the 13-15% range. If you could buy and I don't know if that 18 cap rate is right, but if you could buy back your real estate assets by buying stock at even a 15 cap, it's significantly lower risk than anything that you would do in the MECCA project and it's absolutely the best thing for shareholders.

Steve, I hear your point. And it may be the best thing for shareholders. First and foremost, our goal as a management team is to grow our business. And we feel there are a lot of opportunities ahead of us.

Magna is growing. They're in constant need of capital and factories. We see some great opportunities at MEC. I'm going to be blunt and say we'll look first and foremost at how to grow our business internally and hopefully the stock price will fix itself. When we get to that point if it doesn't happen, we seriously may have to consider something like a stock buy back. Right now if you're sitting where we are sitting, you see a lot of opportunities out there on where to deploy our funds and we like to correct that anomaly in our stock price in our returns, by our underlying business and that is the first approach we'll take a crack at.

I want to reinforce John's message. Our business is to grow and grow this entity. Expand this business and diversify in our appropriate way this business. Frankly, we are not looking at this stage of the game at buying back shares and I think we should be pretty clear about saying that. Is that something we might consider down the road? Perhaps, but it's not something that we're interested in today.

We are interested in today bottom line is to create new and expanded shareholder value and we think we can do that by taking this growth and diversification approach as opposed to buying back stock.

The only thing I would say is there is a perception there. I don't think you are doing a particularly great job of changing people's minds of that perception, that you are committed potentially to doing projects with MECca that might not be in the best interest of shareholders. When you say you are absolutely committed to not buying back stock and that you want to grow the business with higher risk projects, then what would be entailed to buying back stock. I think you're doing a very poor job of changing the perception which has taken the MID stock from 30 down to 24.

First of all, let me reinforce and I want to go back and say it again because I don't want to mislead anybody in this call. Look, 99% of our book is with the Magna group of companies. I was asked the question, what would happen over the next number of years, you can't give guidance, we're not giving guidance, we might move to something in the order of 70/30 in terms of the split in the business between the traditional low risk solid returns but low return business and a higher risk business. The bottom line, we intend to continue to grow this Magna business.

We are going to aggressively go after it. We think we are best placed to achieve that. With respect to Mecca, your commentary is the perception we are going to go out and do business with a lower rate of return for shareholders.

Our intention is to dissipate in what we think are real strong opportunities at Mecca. The test of the opportunity is the fact that people like Forest City are stepping into those opportunities, people like Caruso are stepping into those opportunities. Would seem in fact strange to me, that people of that caliber, I think we can objectively agree, these are people of real caliber in the business, would step in to these opportunities, and we, on the other hand who own 59% of the shares of MEC would ignore them.

I think the test of the validity of the opportunity there is the fact that you have some world class players in that space and, as appropriate, we look at the space as well. But we do so on a very prudent basis. John, you wanted to add something?

We can't lose sight of the fact and I mentioned it earlier, there's great opportunities there on the real estate side, and there's no question. That's why companies like Forest City and Caruso want to partner up and hopefully we'll join in with them.

We cannot lose sight of the fact we own 63 million shares, and there are some shareholders out there that say if you can somehow find a way to assist MEC and their operations through real estate and get the share price up where people think it should be, it will benefit us as well, so when we say we're going to look at higher returns, it's a combination of what we can achieve on the real estate side and what we can achieve in terms of our direct investment in MEC represented by 63 million shares. It's a big [nut], we can't lose sight of that.

One last question, just 63 million shares and two very very different business models, in some ways, even diametrically opposed, one, I won't get into that, would you, have you and will you consider ultimately spinning off your shares in MEC?

No. That's not something we've given any consideration to at this stage of the game. Couldn't give you any guidance or comment.

Okay. Thanks very much.

Your next question comes from John Licorettesor from Hoplight. Please go ahead.

Question was asked and answered. Thank you.

We have a follow-up question from Sam Damiani. Please go ahead.

Thank you. Just on the, Brian, your comment that the business mix might evolve to 70/30? That's a change from sort of a 10-15% maximum MEC exposure we heard from the management team last summer, last fall? What's changed and why?

John is here and would have been one of the people last fall. Let me get John to comment, John?

I must admit 10-15% seems like a low number. I think what we said, 20-30% in the next few years is quite feasible. What we've always said with the MEC developments is they are there right now and right to do. What I have said is in the short-term, it may appear as if we may be doing more MEC or an equal amount of MEC as we do with Magna, it's only because there's more MEC stuff ready to go in the facilities.

At the same time we are doing a lot of Magna work. That continues to come. On average in the last three years, we did $110 million of work and particularly with the Kentucky facility coming on, should we undertake that project ourselves instead of assisting Magna just on the construction side, we'll be north of $100 million of Magna work.

We get that work, I want to say every year, but pretty much guaranteed every year to the extent we are doing it. So we're growing our portfolio $100 million+ a year with Magna, and in the next 2-3 years, we are doing $3-400 million of MEC work just to throw out a number. That's a 50/50 relationship.

However, in the long-term I've said that the MEC work is somewhat capped because we are looking at only the Premier racing facilities. Five years out, as long as we continue to do our Magna work, we can see our portfolio being at a 70/30 mix.

Let me add a comment if I can. I want to stress again something I said at the top of the call. I said it so strongly I passed some concerns as somebody asked are you trying to send us a signal. We have no guarantee of the Magna work. We have to earn that work. We have to compete for that work. We're very confident we can and will do that. We are confident that nobody can do it better than we can.

And so to go back to your earlier comment or question, 70/30, first of all I was asked a question. I might have been prudent and not answered the question at all, but what do you expect the portfolio to look like and the question was three or four years down the road and I said you might see a 70/30 balance in the portfolio.

But the fact of the matter is given the success that we have on the Magna side, we have to be pretty darn good to achieve that kind of balance. We want to achieve that kind of balance, we want to diversify this portfolio, but given our confidence we'll be able to grow our Magna work, we have to be a pretty good and effective team to get that kind of change in the balance of the portfolio that I've speculated, might be possible. If we achieve that, it will be because we are motivated by and we expect to achieve a higher rate of return for the shareholders. We want to create shareholder value.

Just one question or comment on the share buy back. Your balance sheet could easily support a billion dollars of debt and free cash flowing roughly $80 million a year and grows as your portfolio grows. Seems there's more than sufficient capital available for whatever projects might come up conceivably over the next few years even with a meaningful share repurchase program. I'm curious if there is a potential for multiple hundreds of millions of investment in any one year to make you not want to sacrifice your capital at this point.

Sam, it's John. As CFO of this company, I will be much more comfortable to think about a share buy back program once we're in the midst of some of these developments we are talking about. Sure, it's very easy to step back right now and say you have a whole bunch of cash flow coming in, no debt, do to share buy back. I'd rather than wait until we are in the middle of doing a lot of these projects. Assess our situation at that point and where stock price is, and think about it at that time.

I want to stress again, the issue is not that a share buy back would never come on the table or not something we would consider. You asked, 'Are you considering it right now?' and the truth is we are not giving consideration to that notion right now.

One other point I want to make just as we come closer to the end of this call, and that is that all of the culture model the Magna companies, the managers are paid in part on the performance of the individual business units, and the lump reality is, if we don't as a management team here at MID, if we don't produce positive results, we don't produce reasonable and good compensation for ourselves. One is tied directly to the other.

I want to assure all of you in this call, that as a management team on behalf of all management teams, any and every decision we make with respect to bringing forward to the board proposals for investments, are going to be ones that improve shareholder value, but frankly ones that are motivated in part by our desire to have a good performance and to be compensated for what we do. Because one is tied directly to the other.

Thank you. I guess a couple numbers questions here, the cash tax rate was 20% in the last couple quarters down from 22% in the middle of last year. Is 20% now a good run rate?

A good run rate. That might actually come a little bit lower. We tracked 20% for the entire year last year. I think 20% I'm comfortable with that right now. It may come in a tad lower going forward.

Just on the annualized lease payments, can we talk about the some of the influences come on that over the next little while here in terms of scheduled bumps for the balance of the year?

We don't give guidance on that. We did tell you the projects we have on the go right now, generally come on stream within 6-12 months, so some of those should be coming on stream shortly. On rent bumps, if you factor in 2% on an annual basis, you are kind of there.

I apologize, did you mention the annualized lease payments from the projects coming onstream?

No, I didn't. We give you the spend which is $26.5 million of the projects right now.

Should we model 10% or are there some expansion projects there to generate 10-12% at all?

If you're going to model, model on the conservative side. Take a blended rate of what we had in the past, 9.5-10%.

On the Kentucky deal there, I read one news item early in the year that said that Magna was under contract to buy the land for that site. Wondering what the status of that land purchase is and what is the process to get it over to MID over the next short while here?

Kentucky is the first real large project we have with Magna, post spinoff. And Magna has first and foremost product lines requirements it needs to meet. They are going to be producing Ford's frames out of this which is a very high margin product for Ford, so they want to make sure they'll meet that production.

Having said that, because it's the first large project, we are going to make sure that the pricing [is aren't blank] , Magna's special committee is going out and getting third party quotes on this and we are doing the same thing. It's taken some time to really negotiate the lease terms as we've done in the past.

But to assist Magna because first and foremost we have to keep their customer happy. We have agreed to help them with the construction. And worst comes to worse, we will get a construction fee out of this, because we are managing the project. What that entails now is, Magna bought the land, so we didn't, and they are funding the development cost right now. Should we agree to take it on, whatever costs are there at that time we'll pick up and lease it back to them but we haven't arrived at an agreement yet on that.

Thank you very much.

We'll take one more question.

If there are any additional questions at this time, please press the star followed by the 1. As a reminder if using a speaker phone, please lift the handset before pressing the key. Gentleman, there are no further questions at this time. Please continue.

Thank you very much, everybody. Look forward to chatting with you again in the future in the days ahead. Of course, there are individual calls that have come in and we will return those as we can over the next few days. Thank you all very much.

Ladies and gentlemen. This concludes the conference call today. Thank you for participating and please disconnect your lines.