Granite Real Estate Investment Trust (GRP.U) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the MI Developments' fourth quarter and year-end results conference call. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star 0 for operator assistance at any time. I would like to remind everyone that this conference call is being recorded on Wednesday, March 3rd, 2005, at 10:00 a.m. Eastern.

I will now turn the conference over to Mr. John Simonetti, Chief Executive Officer. Please go ahead, sir.

Thank you, Connie. And good morning and welcome to our conference call. Joining me today is Doug Tatters, MID's Executive Vice President and Chief Financial Officer. Doug will be reviewing our financial results later on in the call.

Also joining us today is Richard Crofts, our Executive Vice President, Corporate Development, General Counsel and Secretary. I've asked Richard to participate in today's call and provide an overview of the process and timetable for our Special Committee of independent directors to consider the requisition made by one of our shareholders concerning the proposed disposition of our 59 percent equity stake in Magna Entertainment, and the proposed conversion of MID to a real-estate investment trust.

Our Board of Directors met yesterday and approved our financial results for the fourth quarter and year ended December 31, 2004. In addition, the Board declared a dividend of $0.9 per share for the fourth quarter, payable on or about April 15, 2005, to shareholders of record at the close of business on March 31, 2005.

This morning we issued a press release with our fourth quarter and full-year results. A copy of the press release is posted on our website at www.midevelopments.com. This conference call will include forward-looking statements within the meaning of applicable Securities Legislation. At this time, rather than reading our disclaimer referring to forward-looking statements, I'd like to refer you to this morning's press release, which includes the disclaimer at the end of the text.

The press release also includes a reconciliation of net income of our real-estate business to funds from operation. All currency numbers referenced in today's call are in U.S. dollars unless otherwise noted.

I will begin my discussion today by going over the fourth quarter highlights of our real-estate business, and on this front the fourth quarter was a very busy one for us. In particular, we continued to grow our core business with Magna, and in this regard I will take you through our operational highlights. We completed our first debt offering by issuing senior debentures in the amount of $265 million Canadian, and we agreed to provide $192 million of project financing for the development of 2 very key MEC facilities.

Turning first to our core Magna business, 2004 was a very strong year. With year-over-year growth in annualized lease payments, revenues, and funds from operations in the 11 to 13 percent range. During the year we brought on stream 1.2 million square feet of Magna-related developments. This includes 2 projects which came on stream in the fourth quarter, first in November we completed a 39,000 square foot expansion to our Sterling Heights facility in Michigan.

And secondly, just prior to the year end we completed definitive documentation to acquire and complete construction on the 938,000 square foot facility in Bowling Green, Kentucky, for Magna's Cosma Group. Approximately 700,000 square feet of this facility came on stream soon after the date it was acquired and we will complete construction and, therefore, expect the remaining square footage to come on stream in the 2005 first quarter.

At year end, and including the unfinished portion of the Kentucky facility, our construction group had 5 properties under development. 2 in Canada, and 1 each in the U.S., Mexico, and the Czech Republic. These projects totaled 630,000 square feet with a budgeted cost of $47 million, of which 31.5 million was spent at December 31st.

And finally, as discussed in our prior quarter conference call, we are still in discussions with Magna in respect of a purchase and subsequent lease for a 370,000 square foot facility located in Saltillo, Mexico. The purchase price for this facility is $12 million and we are hopeful to complete this transaction in the second quarter.

We continue to see steady demand for industrial facilities coming from our strong relationship with Magna. And I want to emphasize that we have and will continue to nurture that relationship. In my discussions of core Magna business, I have just finished outlining almost 1.8 million square feet of projects that we are working on or have come on stream in the fourth quarter. As I have stated in the past, as long as any Magna project meets our investment profile, we will continue to very actively pursue that business and we will not sacrifice any potential Magna-related investment to pursue other initiatives.

Now, moving on to my second highlight point, in December we completed our first offering of senior unsecured debentures for $265 million Canadian. As many of you are aware, when we were spun off from Magna we arrived on the public scene with an unleveraged balance sheet. Clearly a fortunate, and I want to stress that point, very fortunate, and enviable position to be in.

And since the spin off we have listened to many of our shareholders views and their desire for us to finance our cash needs with debt, and let's face it, much of those discussions transpired because our shareholders were aware that we emerged from a corporate environment and philosophy at Magna International which promoted a conservative capital structure. There were concerns that this conservative philosophy may be carried over to MID despite the fact that our real estate business is not cyclical as is the automotive industry.

Let me say that changing one of the key philosophies that has made the businesses of Magna and MID the success they are today is not something that's undertaken lightly or without going through a careful thought process. Nevertheless, we are a Company that respects the views of our shareholders and we have been and are always willing to listen to them. Our introducing leverage to our balance sheet is proof of that and we will continue to monitor and prudently manage our capital structure going forward.

Turning now to my final fourth quarter highlight, we also announced in December $192 million of project financing for the reconstruction of MEC facilities at Gulfstream Park racetrack in Florida and The Meadows racetrack and slot facility in Pennsylvania. As we have previously stated, MEC is the owner of a large portfolio of prime urban real estate. In addition, significant initiatives on the alternative gaming front in the states of Oklahoma, Florida, and most recently in Maryland, have accelerated MEC's needs for real-estate development, which in turn benefits its core racing and alternative gaming businesses.

Since the time when the shareholders of Magna overwhelmingly approved the spin-off of MID together with Magna's equity interest in MEC, we've always viewed and described MEC as a strategic investment. Strategic because MEC has the potential of providing our real estate business with opportunities to participate in attractive developments and at the same time assist us in diversifying the makeup of our rental portfolio.

Our project financing of Gulfstream Parks and The Meadows is a good example of these opportunities for diversification, while at the same time providing us with an attractive return on our investment, coupled with an appropriate security and covenant package. We expect that other opportunities to participate in transactions with MEC will present themselves, and at the appropriate time, each of these opportunities will be carefully considered and reviewed by MID management and the MID Board of Directors and its Special Committee.

Doug will provide more details of the project financing transaction later in the call. But I want to point out that when these developments are fully on stream, our net cash flows will increase on an annualized basis by approximately $10 million.

I will now say a few words about our MEC investment. As we discuss our operating results we have always focused on the results of our real-estate business on the basis that MEC is a separate public company with its own Board of Directors and management team. And during this conference call we intend to continue that practice.

Notwithstanding, however, MEC reported their fourth quarter and year-end results last week. And without getting into the details of those results, I want to express our review, as the majority and controlling shareholder of MEC, that we fully recognize that they were disappointing. However, the fact remains that MEC is a young company that has a compelling vision for and has made significant investments in its core business.

MEC's investments in its business include investments in facilities, many of which were outdated and needed substantial renovation, investments in a national and international simulcast network and technologies to support MEC's strategies increasing wagering through greater distribution, and incurring costs together with other industry participants to obtain passage of alternative gaming legislation. Today fees, investments and costs in many cases have not provided any meaningful current revenues, and accordingly we are very supportive of the specific steps announced by MEC to improve profitability, or more precisely, to reduce its net cash outflows in the immediate short term.

We continue to believe in MEC's vision. However, let's not kid ourselves. 2005 will be a challenging year for MEC. Yet we take great comfort from the recent announcement by MEC that its executive management committee has been further expanded and is focused on meeting various operational and financial targets. At the end of the day, for so long as we are the majority and controlling shareholder of MEC, we have a strong and vested interest in seeing them through this difficult period and to ensure that they position themselves for long-term success.

I'm going to close my formal comments by saying a few words on the January 18th, 13-D filing by Greenlight Capital. As many of you are aware, Greenlight has requisitioned a meeting of shareholders to consider a proposed spinoff or sale of MID's interest in MEC and a proposed conversion of MID into an income-oriented REIT.

It is very important for us to communicate and explain to you, our shareholders, the process we have implemented to evaluate the Greenlight request and the related time line. And to assist me in this regard, I will now ask Richard Crofts to say a few words. Richard.

Thanks, John. As previously disclosed, and as described in our press release, the Company has called an annual and special meeting of shareholders to be held on May 4th, 2005. In addition to customary annual meeting matters, the shareholders will have the opportunity to consider the proposals by Greenlight Capital that the MID Board consider having MID dispose of its 59 percent equity stake in Magna Entertainment and convert into a real-estate investment trust.

The Company takes the views of shareholders very seriously and is carefully reviewing and considering these proposals. The proposals are being considered by a Special Committee of independent directors of MID, comprised of Douglas Young as Chairman, Philip Fricke, and Manfred Jakszus, each of whom has been determined by the MID Board to be independent of Magna Entertainment, MID management, and MID's controlling shareholder, Frank Stronach.

The Special Committee has retained Goodmans LLP as its independent legal advisor and CIBC World Markets Inc. as its independent financial advisor. In addition, MID management has retained Davies Ward Phillips & Vineberg LLP as its legal advisors and BMO Nesbitt Burns Inc. as its financial advisors.

The recommendations of the Special Committee and the MID Board, with respect to proposals, will be sent out in the management information circular that will be mailed to MID shareholders in advance of the annual and special meeting. We currently anticipate mailing the circular in early April.

As the Special Committee and Board process has not yet concluded, it would be premature for us to provide any additional comment on this matter at this time. And accordingly, we will not be responding to any questions on this matter during today's conference call.

I will now turn the call back over to John. John?

Thanks, Richard. Now before I hand the conference call over to Doug Tatters, I want to emphasize that as a public Company we take shareholders matters very seriously. As you can see from Richard's comments, we have been and will continue to devote significant time and resources to thoroughly evaluate the Greenlight proposal.

This ends my formal comments and I will now pass the call over to Doug. Doug?

Thanks, John. And good morning, everyone. Before I begin, I would like to remind you that my discussion will focus on MID's real-estate business. Let me begin by pointing out that our results include $9.7 million of unusual charges at the pretax income level in the first 3 quarters of 2004, including $7 million of employee settlement costs and $2.7 million of costs associated with the proposed MEC privatization.

As well, the Company recorded a net $1.4 million tax expense in fiscal 2004 due to the impact of tax rate reductions related to certain of our European operations, which required the Company's future tax assets and liabilities to be revalued. Such changes in tax rates resulted in a $2 million charge in the second quarter, which was partially offset by a $0.6 million recovery recorded in the fourth quarter. In summary, all of these unusual items combined represent an after-tax charge to earnings of $8.7 million in fiscal 2004.

In order to provide a more meaningful basis to compare our results on a sequential or year-over-year basis, the balance of my discussion will focus on MID's fourth quarter and year-end results excluding the impact of these unusual items. Annualized lease payments at the end of 2004 were $141.9 million, or $14.9 million higher than the prior year. Representing an increase of approximately 12 percent.

Projects coming on stream and contractual rent increases increased annual rent by $7.3 million and $2.5 million respectively. While vacancies and other rent adjustments had a negative impact of $0.8 million. Foreign exchange had a positive impact of $5.9 million as the U.S. dollar weakened against the euro and the Canadian dollar when the 2004 and 2003 year-end closing rates are compared.

On a sequential basis, annualized lease payments increased 8 percent or $10.1 million, from $131.8 million at the end of the third quarter of 2004. 2 projects representing 756,000 square feet came on stream in the quarter increasing annual rent by $4.4 million. Contractual rent increases contributed $0.3 million, while vacancies and other rent adjustments had a negative impact of $0.8 million. Foreign exchange contributed $6.2 million of the increase in annualized lease payments in the fourth quarter of 2004.

Looking at our funds from operations, our 2004 fourth quarter FFO was $27.3 million, or $0.57 per share on a fully diluted basis. This represents an increase of 20 percent over the fourth quarter of 2003 of $22.7 million, or $0.47 per diluted share. Sequentially, fourth quarter FFO increased $3 million, or $0.07 per diluted share over FFO in the third quarter, excluding unusual items.

This represents an increase of 12 percent and is due to the following items. Reported revenues combined with the change in the straight lining of rents increased FFO by $2.9 million. Higher general and administrative expenses and lower interest income reduced FFO by $300,000 and $100,000 respectively. And lastly, lower cash taxes increased FFO by $500,000.

In terms of our tax provision, in the fourth quarter we reported a total tax provision of $3.9 million, or $4.5 million adjusted for unusual items, for an effective tax rate of approximately 21 percent compared to $4.4 million or 22 percent in Q3, 2004. Our cash tax effective tax rate in the quarter was approximately 17 percent compared to 19 percent on a full-year basis. Excluding unusual items, our cash tax effective rate was approximately 20 percent for fiscal 2004. For 2005, we expect to see our cash tax rate fall below 20 percent as a result of adding interest expense in Canada with the completion of our debenture offering.

On a year-to-date basis, funds from operations, adjusted for unusual items, were $98.8 million, or $2.05 per share on a fully diluted basis. This is an increase of $11.5 million, or 13 percent over the pro forma FFO for 2003 of $87.3 million, or $1.81 per share, and is due to an increase in revenues, including the impact of straight-lining rent of $15 million, an increase in interest income of $1 million, partially offset by increases in G&A expenses and cash taxes of $3.4 million, and $1.1 million respectively.

The increase in G&A expenses on a year-over-year basis is primarily due to the additional public company costs and related additional staffing expenses not included in the pre-spin-off pro forma G&A expenses for the 9 months ended September 30th, 2003.

Turning to the balance sheet, the net book value of our real estate properties at the end of fiscal 2004 was $1.4 billion, including $1.2 billion of income-producing properties, $137 million of properties under and held for development, and $31 million of properties held for sale. In December 2004, we agreed to provide subsidiaries of MEC project financing for the reconstruction of facilities at Gulfstream Park racetrack in Florida of $115 million, and The Meadows racetrack and slot facility in Pennsylvania of $77 million.

The project financing facilities contain cross-guarantees, cross-default, and cross-collateralization provisions. The facilities have terms of 10 years from the relevant completion dates of the construction project, which we expect to be in early 2006 for Gulfstream, and late 2006 for The Meadows. After the relevant completion date, each facility will bear interest at a fixed rate of 10.5 percent per annum compounded semiannually.

Prior to January 1st, 2008, payment of interest will be deferred. Commencing January 1st, 2008, we will receive monthly blended payments of principal and interest based on a 25-year amortization period. At year end, our real-estate business had advanced $26 million related to the Gulfstream Park financing. As John discussed, we believe the project financing provides our real-estate business with solid returns combined with an appropriate security package, which includes the expected strong cash flows from The Meadows slots facility and the underlying value of the land at Gulfstream.

Also in December 2004 we completed our first public debt offering of 6.05 percent senior unsecured debentures in the amount of 216 million, or Canadian, $265 million. With a debt-to-total capitalization ratio at year end of 14 percent, our conservative balance sheet continues to provide us considerable financial flexibility in assessing future investment and other opportunities.

I would also like to point out that we decided to raise debt denominated in Canadian dollars since it acts as a natural hedge against our Canadian dollar revenue and FFO. At year end $41 million, or 29 percent of our annualized lease payments, were denominated in Canadian dollars.

Our cash balance at the end of 2004 was $229 million, which is up $158 million from the end of the third quarter of 2004 and up $199 million from the beginning of the year. The increase in our cash balance is primarily due to the debentures issued at the end of December, 2004. The cash will be used for ongoing construction projects for the Magna Group, the MEC project financing, and for other general corporate purposes.

Now, looking at our cash flows, on a year-to-date basis, $327 million of cash was generated from operating activities, which contributed $107 million, sale of land for $2.5 million, the issuance of shares upon the exercise of stock options, which contributed $1.5 million, foreign exchange, which contributed $3.5 million, and the issuance of the debentures, which generated $213 million. Cash used in 2004 was $128 billion, which includes capital expenditures for $84 million, dividends of $17 million, and advances to MEC under the project financing of $26 million.

In summary, in our first full year as a public company, we have achieved solid financial results. Our full-year FFO, excluding unusual items, increased 13 percent over the prior year pro forma amount. We completed project financing for 2 strategic redevelopments at MEC and we completed our first public debt offering.

This concludes our formal remarks. Thank you for your attention. Connie, we would now open the lines for questions.

Thank you. (Operator Instructions). Your first question comes from Himalaya Jain from Scotia Capital. Please go ahead.

Good morning, guys.

Good morning.

In your press release you had talked about vacancies costing you about half a million dollars. Does that relate to the Anotech facility?

No, it doesn't, Himalaya.

Okay. What does it relate to then?

It relates to facilities that became vacant last year and particularly our Tillsonburg facility over in -- well, in Tillsonburg, our facility over in Tillsonburg.

And 1 small facility in the GTA area that became vacant in 2004.

And they became vacant because their lease expired and Magna didn't renew, or were these third-party leases?

No, that's just the former. They were Magna leases, and they didn't renew.

Okay. And what is your plan as far as that space goes? Would you be looking at selling that space, or are you looking for new tenants?

In terms of the Tillsonburg facility, we have that up for sale right now, but we're also open to have it leased, but right now it's included in properties held for sale.

Can you give us an update on the Anotech facility? What is going on there?

We have still a number of years left in that lease. It's in a fabulous location in the greater Toronto area, and we need space in the greater Toronto area, so right now, Decoma is on the hook to pay us rent for the remaining term, which I think runs for approximately another 10 years. So that's what's going to happen there. So they're going to continue to pay rent unless we can try to help them out and put another Magna company in there.

Okay. I see. So they're still paying you the rent, but they have vacated the plant?

That's right.

Okay. And, Doug, on the straight-line adjustment amount, can you tell us what's going on there? It looked like there was a negative amount this quarter.

There was about a $200,000 year-to-date adjustment I think reflected in the straight line amount, Himalaya. I think going forward as we talked about, it's going to be less than -- we've kind of turned the corner now where we're now receiving more cash than we're booking rent, so it has changed during the year, and we continue to expect it to be in the range of a couple hundred thousand dollars per quarter, not a large amount.

Okay. So that's a big change from, I guess, '03 where you were booking significantly less than what you -- sorry, more than what you were receiving in cash.

That's correct.

Going forward, do you see that trend continuing as what you experienced in '04?

In Q3 and Q4 '04, that's correct.

Okay. Great. Thank you.

Your next question comes from Brett Sycoff [ph] from Performance Capital. Please go ahead.

Hi, guys. It's actually Brian Warner. I just want to state publicly, because it's sort of topical now, that considering the myriad possibilities for your business as well as the business of Magna Entertainment, it really seems deleterious to shareholder value to either not combine entirely or fully separate these 2 business.

It just strikes me as considering all your various options this could really sort of constrain certain possibilities, and I just want to sort of say for the record as a shareholder of MI as well as Magna that the existing structure just doesn't seem to make any sense to me. So, to whatever extent that can seriously be considered by the Board I would appreciate it.

Well, Brian, thanks for your comments. Just to ensure you that the Special Committee is not only considering the proposals put fourth in the Greenlight requisition, but they're also exploring all other alternatives with respect to MEC and the corporate structure of MID. So I'll just thank you for your comments and we'll move on to the next question.

Thank you.

Your next question comes from Sam Damiani from TD Newcrest. Please go ahead.

Thanks very much. Just a few questions on your comments. Near the outset of the call, John, I think it was you that mentioned when the MEC loans are fully lent and the projects were on stream it would add $10 million to annual cash flows. How do you get that with a 10 percent rate at $200 million? A little higher than that, shouldn't it?

10.5 percent, but, Sam, as you know, the interest for the first couple of years or so is capitalized, so the 200 million loan moves up to about 230, 240 million. So you take 10.5 percent on that and just our margin on the -- our debt financing, which is around 6 percent.

Oh, okay, sorry. I thought that was revenue -- interest revenues, but you're netting it off the interest charge. All right. You mentioned cash taxes would fall below 20 percent in '05. Any more specific guesses as to where that's going to pencil out?

Sam, we're not going to provide specific guidance on that, but Canada is one of the countries where we're still paying a fair amount of cash taxes. Now that we've added the interest expense to our income statement in Canada, and related tax deductions, our Canadian cash taxes will decline, and that's what's going to drive down the rate.

What portion of the cash taxes in '04 came from your Canadian cash flows?

In '04, I would say approximately 50 percent of it did.

And that could fall to, what, half of that?

Well, Sam, it's easy to do the math. 265 million of debt at 6 percent, 36 percent tax rate in Canada. So you can figure that one out.

So it is as straightforward as that. Okay.

Yes.

Okay. Decoma. Any other possible vacancies you're worried about on the Decoma or any other part of Magna?

Sam, in the next 2 to 3 years there's very little leases rolling over and the ones we have rolling over in the short term we're very confident that all of them will be renewed. They're key facilities, so we're confident that there's likely going to be no vacancies in the next few years.

Just finally -- actually, 2 more questions. Any guess as to what the total Magna facility growth CapEx is going to be for MID in '05, including, I guess, the stuff you've already identified for the first and second quarters? Will it be sort of above the average or below the average? What do you think?

Sam, we don't give specific guidance on that, as you know, but if you look at the last 5 years, the average is somewhere around $100 million. So I would think it's reasonable to use something around that range.

But nothing you're seeing that would cause you to think that it would be materially different from that at this point?

Sam, we're not going to answer that question, we don't give guidance. The average is what the average is. Like I said in my comments, the demand is steady. Magna keeps growing. So we'll take it from there.

Final question. Your comment, Doug, on the balance sheet, you considered it, quote, conservative. At what level would you no longer view your balance sheet as conservative? I'm just trying to get a sense of where could you guys take the leverage under the current structure?

Well, Sam, it's John, I've always talked in the past that we can see our leverage going up to 30 to 40 percent of assets, and, in fact, if you look at the terms of our debentures, we do have a covenant in there that would restrict us from going north of 40 percent of assets.

On a total debt, total capitalization ratio, is a 40 percent covenant in our debentures.

You also talked about a sort of, this new use of leverage as a philosophical change in the way you run the Company. When you say 30 to 40 percent, is that saying, well, we still to have get through our philosophical discussion and conclusion, or is that you're sort of already there and you're ready to get up to that level when the need arises?

No, I think we're there, Sam. If the need arises, we'll get there.

Ready to get there. Okay. Thanks very much.

Your next question comes from Rossa O'Reilly of CIBC World Markets. Please go ahead.

While on the topic of general policy, I wonder if you might revisit for us the policy with respect to currency exposure and hedging that you might take either formal or indirect through borrowing in one currency and investing in another.

Sure, Rossa. As you can see we raised our debt in Canadian dollars which, as Doug mentioned in his comments, provides a natural hedge against our Canadian revenues going forward, if we need to raise more funds via debt I think we're going to be looking to raising that debt denominated in euros. Quite simply, as long as we match our liabilities with our revenue stream that's probably the safest way and best way to hedge our portfolio against the U.S. dollar.

So basically it's to have debt service cost more or less in proportion to rental income and by currency.

That's correct, Rossa.

Thank you.

(Operator Instructions). Gentlemen, there are no further questions at this time. Please continue.

Well, I'd like to thank everyone for participating in this conference call. As you can see, 2004 was a very busy year for us. I think we ended the quarter on a strong note by accomplishing a number of things. In the meantime, we're going to endeavor to finish our thorough review of the proposals that were put forth by one of our shareholders, and we will ensure that we will fully communicate what the results of that -- those studies and what the results of the Special Committee are in our proxy circular. And we hope to see many of you at our shareholders meeting which will be in May. So thanks again for participating on this conference call.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.