Granite Real Estate Investment Trust (GRP.U) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the MI Developments second quarter 2005 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.

(OPERATOR INSTRUCTIONS).

I would like to remind everyone that this conference call is being recorded on Friday, August 5, 2005 at 11 AM Eastern time. I will now turn the conference over to Mr. John Simonetti, Chief Executive Officer. Please go ahead, Mr. Simonetti.

Thank you, operator, and good morning. Welcome to our conference call. Our Board of Directors met yesterday and approved our financial results for the 2005 second quarter. In addition the Board declared a dividend of $0.15 per share for the second quarter, payable on or about September 15, 2005, to the shareholders of record at the close of business on August 31, 2005.

This morning, we issued a press release with our second quarter 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 meanings of applicable securities legislation. At this time rather than read our disclaimer referring to forward-looking statements I'd like to refer you to this morning's press release which includes a disclaimer at the end of the text.

The press release also includes a reconciliation of the net income of our real estate business to funds from operations.

Joining me today is Doug Tatters, MID's Chief Financial Officer and Richard Crofts, our General Counsel. We are going to switch our typical order of agenda items for our quarterly conference calls. At this point I'm going to ask Doug to take you through our second quarter results after which I will make some prepared comments before we open the lines for your questions. Doug.

Thanks, John, and good morning, everyone. Before I begin I'd like to remind you that my discussion will focus solely on MID's real estate business. Annualized lease statements at the end of the second quarter were $141.4 million or $12.9 million higher than the prior year, representing an increase of 10%.

On a sequential basis annualized lease statements decreased 2% or $3.1 million from $144.5 million at the end of the first quarter of 2005. The U.S. dollar strengthened at the end of the quarter, relative to the euro and the Canadian dollar. So the foreign exchange impact lowered annualized lease payments by $4.3 million.

Three plant expansion projects representing 134,000 square feet came onstream in the quarter increasing annual rent by $1.4 million. The combination of rent increases, subsidies and other items had a negative impact of $0.2 million.

Looking at our Funds From Operations, our 2005 second quarter FFO was $26.4 million or $0.55 per share on a fully diluted basis. This represents an increase of $3.1 million or 13% over the second quarter of 2004. Our FFO per diluted share increased 15% from $0.48 to $0.55 per share. Of note, we have not included in our second quarter of 2005 FFO calculations the gain on disposal of real estate of $6 million after-tax.

Sequentially second quarter FFO was virtually unchanged from the first quarter of 2005 at $26.4 million or $0.55 per share. In the second quarter of 2005, FFO was impacted by a decrease in reported revenues of $300,000 primarily related to foreign exchange. An increase in cash taxes of $200,000; a $300,000 decrease in G&A expenses -- which I want to point out includes $800,000 in costs before tax related to the review of a shareholders proposal compared to corresponding costs in the first quarter of 2005 of $1.8 million. Lastly FFO was positively impacted by $100,000 lower net interest expense.

In terms of our tax provision in the second quarter, excluding the taxes on the gain on disposal of real estate, we reported a total tax provision of $3.9 million for an effective tax rate of approximately 19%. Virtually unchanged from the first quarter of 2005. Our cash tax effective rate in the quarter, excluding the gain on disposal, was approximately 15% compared to approximately 14% in the first quarter of 2005.

Turning to the balance sheet, the net book value of our real estate properties at the end of June 2005, was $1.3 billion including $1.1 billion of income-producing properties, $121 million of property under and held for development, and $25 million of properties held for sale. During the second quarter, 2 properties were disposed of for total proceeds of $16 million resulting in a pre-tax gain of $9 million. The properties consisted of a 58,000 square foot income-producing property in Michigan -- no longer required by Magna -- and a 40-acre parcel of vacant land located near Toronto's main airport which was previously included in properties held for sale.

Our cash balance at the end of March 2005 decreased $5 million to $224 million at June 30, 2005.

Looking at our cash flows our sources of cash in the second quarter amounted to $35 million including $19 million of cash from operations and $60 million of proceeds on disclosure of real estate. Funds used in the second quarter totaled $40 million including capital expenditures of $16 million, dividends of $12 million, advances related to the MEC project financing of $9 million, and $3 million related to foreign exchange and other items.

On July 22, 2005, we announce that in connection with a recapitalization plan of MEC, MID had agreed to provide a 13-month bridge loan to MEC of up to $100 million. $50 million of the MEC bridge loan is available for drawdown by MEC, of which $30 million has been drawn to date and the remaining $50 million can become available in equal traunches of $25 million on October 17, 2005 and January 16, 2006 -- subject to the satisfaction of certain conditions that are tied to the implementation of the MEC recapitalization plan.

We also announced that we agreed to amend the existing project planning facilities provided to subsidiaries of MEC for construction at MEC's racetrack at Gulfstream Park in Florida and the Meadows in Pennsylvania by -- among other things -- terminating the facility at the Meadows in the amount of $77 million and replacing it with a facility in the principal amount of up to $34 million for capital expenditures related to the alternative gaming facility being built at the Remington Park racetrack in Oklahoma.

Also since the alternative gaming facility is anticipated to be operational in November 2005, we further announced that the time when we will begin receiving principal and interest payments on amounts advanced under both the existing facility at Gulfstream Park and the Remington Park project financing will now begin on January 1, 2007, rather than January 1, 2008 under the prior arrangements for Gulfstream.

Specifically, relating to the bridge loan, the interest rates and fees reflect our assessment with the benefit of advice from our financial advisers of the credit risks associated with MEC, taking into consideration -- among other things -- MEC's revised business plans pursuant to the recapitalization plan and the security package for the loan. MEC has the right to choose between a floating or fixed interest rate, subject to a minimum of 9% bridge loan must be repaid with and the commitment will be reduced by amounts equal to all net proceeds raised by MEC from asset sales and equity or debt issuances, pursuant to the recapitalization plan, subject to amounts required to be paid to MEC's existing lenders.

I would like to remind you that each of the above MEC loans was reviewed by the MID Special Committee with the benefit of advice from its independent financial and legal advisers and was constructured on commercially reasonable terms.

During the second quarter, we filed a normal course issuer bid with the Toronto Stock Exchange which was accepted on May 19, 2005. Under the terms of the bid we may purchase for cancellation (ph) up to approximately 4 million Class A subordinate voting shares. During the second quarter of 2005 we were not eligible to purchase shares as a result of securities law restrictions as a result of our recently announced transaction with MEC.

Pending on future price movements and other factors, we continue to believe that our Class A subordinate voting shares may from time to time represent an attractive investment alternative and a desirable use of any available funds.

This concludes my formal remarks. I will now turn the call back over to John.

I am going to begin my comments by reminding everyone that, earlier this week, Greenlight Capital filed an application with the Ontario Courts against MID and certain of its officers and directors. We believe that Greenlight's application is without merit and we will vigorously defend against it. Given that this matter is now before the courts, we do not believe that it is appropriate to comment any further at this time on the application itself or on the issues underlying the dispute.

I would now like to refer back to the 2 resolutions from Greenlight that were voted on at our annual special meeting of shareholders that took place on May 4, 2005. As you will recall, one of the resolutions proposed that MID sell or spin off its 59% in Magna Entertainment, while the other resolution proposed that MID convert into a REIT or REIT-like structure. MID management with the assistance of financial and legal advisers and a special committee of MID's Board of Directors with the assistance of its own independent financial and legal advisers conducted an extensive review of these proposals.

Based on this review MID's Board recommended that voting against the proposals was in the best interest of MID and all the shareholders at that time. The background of and reasons for the Special Committee's recommendations and Board's determinations were discussed in our 2005 management information circular. Further I, along with Doug and Richard, went out on the road and had an opportunity to meet with many of our shareholders to explain in more detail the reasons behind MID's thinking.

Now I will not go through the details of the results of the votes except to point out that neither of the resolutions passed. Since the annual and special meeting we have been continuing to review our relationship with MEC, in light of MEC's financial situation and prospects and in light of comments received from our shareholders. At the same time, however, our immediate priority was resolving the short-term liquidity issues facing NEC.

Doug has taken you through the details of the bridge financing that we recently entered into with MEC. In our view in addition to deciding what the form of the financial assistance would take, we believe that it was important for MID shareholders to receive a clear message that we are not prepared to simply write MEC a blank check.

As a result, we structured the bridge financing with an appropriate security covenant package and will take out provisions that should allow us to be repaid more quickly.

More importantly, however, we seized the opportunity to work closely with MEC management and help them develop a recapitalization plan that has been adopted by the MEC Board. By selling assets and reducing debt in accordance with the recap plan, we believe that MEC will establish a more stable capital structure for itself that should allow it to execute its strategic plan.

As I stated in our press release when we announced the bridge financing, MEC will need time to achieve financial strength. And in this regard we have provided MEC with the bridge financing in order to address their immediate liquidity issues and given that time so that their recap plan can be implemented prudently. And from the perspective of MID shareholders, we believe that the MIC recapitalization plan is a significant positive step as it should also helped eliminate the perception that MID might have to fund MEC indefinitely.

Allow me to end this part of my remarks by saying that we have not ruled out any of our options with respect to our relationships with MEC and the bridge financing does not limit our options with respect to our core real estate business or our investments in MEC.

At this point, I want to turn my discussion over to our real estate business. We received 5 new projects in the second quarter totaling 264,000 square feet. This includes 1 greenfield facility in the U.S. for 150,000 square feet and 4 expansion projects. Two of these expansion projects totaling 40,000 square feet were actually started and brought onstream in the quarter. At June 30, 2005, including carryover projects from Q1 we had 5 projects under development -- 1 each in Canada and the U.S. and 3 expansion projects in Austria.

Once completed, these developments will add 495,000 square feet to our income-producing portfolio. The total anticipated cost of these projects is $38 million, of which 20 million was spent at the end of the second quarter.

I believe that these results demonstrate continued good growth for our real estate business. However, I must say that all the noise about how we should be running our business or how we should be structured has in my mind created a degree of uncertainty for our real estate business.

The primary driver of MID's success in the past has been our affiliation with Magna and our ability to share in Magna's growth and success. And I am personally concerned about the possible impact this uncertainty may have on our relationship with Magna International.

Now I will conclude my remarks this morning by stating that, despite everything else that is happening, MID has continued to post strong financial results and grow our cash flows. And we will continue to work hard in order to build long-term value for all of our shareholders.

Now as I stated at the beginning of my remarks, given that the Greenlight application is now before the courts we do not believe that it is appropriate to comment any further at this time on the application itself or on the issues underlying this dispute. As such, we are not in a position to answer any questions on those matters during today's question and answer session.

With that said, I thank you for listening to our remarks today and we will now open the lines for your questions.

+++ q-and-a.

(OPERATOR INSTRUCTIONS) Peter Sklar from Nesbitt Burns.

John, you mentioned during your comments that you're personally concerned about the fact that the uncertainty related to the Greenlight litigation could have a negative impact on your relationship with Magna International and your ability to secure business. Can you talk a little bit about if there have been any projects that you are aware of that Magna has gone forward with, that has not been awarded to MI Developments?

You know, Peter, as I said in my comments because the application is now before the courts and clearly that is one of items that is in the application I am going to have to politely state that I cannot respond that question.

The other thing I wanted to talk about is where is the Company in its efforts to secure development projects from tenants other than Magna international? I would think that your time has been somewhat consumed, you've probably not made as much progress in that area as you had hoped but maybe you could update us there?

The reality, we have a lead management team here and since our spinoff, we have done some good business with Magna and we've also done some good business with MEC. We haven't been actively pursuing building industrial or other facilities for other third parties. Although, I have got to say we have been -- a lot of projects have been taken to us and we are vetting them, but there hasn't really been anything that has crossed my desk compelling enough for us to push forward. I think that's all I have to say on that, Peter.

Lastly, I don't know if you can answer this question or not but if you could try is, assuming that the recapitalization plan for Magna Entertainment is successful and the Company can clearly stand on its own two feet without further support. Would the spin out of your 59% interest in Magna Entertainment -- is that something that MI Developments would like to do under those circumstances?

You know, Peter, we know what the results of the votes were. Nevertheless we undertook to examine those -- reexamine those results and we haven't really finished our review of that. So I'm really not in a position right now comment on what the special committee and/or the Board would recommend under that situation.

Steve Velgot from Cathay Financial.

I had a question about your general and administrative expenses. I noticed that you attribute about $800,000 to -- it looks like one-time type expenses. Would you expect that there might be a similar -- let's say -- or litigation-type expenses that would be included going forward in, say, third and fourth quarter? Or should we really look at that number as kind of one-time in nature?

Well, Steve, we call it one-time in nature. We had those costs in Q1, again in Q2. They all relate to responding to the proposals that Green Light put forward and now we're going to incur additional costs as we -- with the application being filed in the court. So, certainly, we're going have costs in Q3 and likely in Q4 until this matter is resolved.

Although you can't talk about any sort of details, is there any timeframe at least that you have in mind for -- or maybe a precedent other cases that you are aware of and how long they may have taken before the court?

We are not aware of any precedents and how long they take. The application was filed earlier this week so in terms of timing, I really don't have any specific timing for you but certainly we will try to move forward as quick as we can.

Sam Damiani from TD Newcrest.

Just a few questions actually. To one that was asked earlier, John you didn't answer it but maybe I'll try to ask it a little differently and hopefully you will be able to answer the question. You say you're concerned about this -- the uncertainty and how it might impact Magna's view of giving you business in the future. Could you just explain what -- how Magna's decision making process would change in that regard, given what you are experiencing and the uncertainty. I'm just trying to understand what the dynamic is.

Sam, I respect that you've got that question perhaps in a different way, but I am going to respond the same way and because that's part of the items in the application filed by Greenlight I think it's best if I just not respond to your question.

Okay, but I think even before this week's announcements you had expressed and I think Frank Stronach had even maybe hinted at this issue in the past before this was before the courts. So just let's pretend that this latest application doesn't exist. Like what gives you reason to be concerned that you may get less Magna business just given you've got obviously a shareholder wanting you to do things a little bit differently?

Let me just say I'm not sure what Frank said. I know what I said in the past. But what I can't do is pretend that the application is not filed. So even if those comments were made prior to the application being filed, Sam, at this point I think I've got to err on the prudent side and not, again, respond to that question.

You said that you would not write MEC a blank check. Can I take that to mean if they were to do an equity issue or rights offering that you would not participate in that?

I wouldn't say that. I just think at this point, given the facts and given where MEC is right now in their business and their financial state, I think we've taken the opportunity to really look at their business hard and their assets and to the extent that there are some assets there that they can monetize and help themselves out and clean up their balance sheet. I think they should try to do that first. But like I said they need time and we have to help them through that. So I think given the facts of where we are today we weren't prepared to write a blank check.

Now if an equity issue comes out, I don't know when, we'd have to assess the fact at that time and see if we would participate but that is something I can't really answer right now. It will depend on the facts at that time.

You talked about the normal (indiscernible) that you weren't eligible I guess because I guess the bridge loan was under discussions. But if that wasn't there you implied that you might have actually executed on that normal course history bid. Is that the case?

You know, Sam, we did the filings. We are ready to buy back stock to the extent we have an open window and we're not blacked out. We said we're going to do it as long as the price of our shares are attractive. That is our intention.

Are the shares attractive to you at this price?

I knew you were going to ask me but I am not going to answer that one.

And are you open -- is the window open now? Or after the Q2 results are out of the way?

I'm looking at my general counsel and he's saying, I can't answer that.

So you cannot answer that?

Cannot answer that right now. There are other transactions we are always looking at and we are going to make a decision shortly of whether or not we are still blacked out.

What kind of transactions?

Sorry, Sam. Next question.

You sort of laid IT out for me there. Okay just back to some nuts and bolts here. There was a small property that Magna, I guess, gave up in Michigan. What happened there? Was the lease up or did they get out of the lease early?

No. That lease came up a couple of years ago. It was one of the facilities in their Mirrors (ph) Group I think they just consolidated a plant at that point and it came free. As a matter fact, Sam, that lease didn't actually come up. We had it for sale but Magna was obligated to pay rent and to the extent possible we sold it, we got a decent price for. So that is what we did. They didn't really need the plant anymore.

So it's not as if there was an ongoing lease obligation that they got out of? That the lease obligation had expired previously?

With that particular plant it didn't. It didn't but that's part of the relationship we have with Magna, right, to the extent that they don't need a facility anymore. They still owe us the rent but if we can do something to mitigate the rent cost whether that means put another Magna entity in the or another Magna group. Or in fact we could sell it, then, as long as it's attractive to us we will do that.

But the property would have been more -- worth more with the lease in place.

Sam, there was only a couple of years left on the lease on that property at that time.

Again, Sam, you really have to look at it as part of the relationship we have with Magna and that's why they are comfortable in doing business with us. We will help them when we can and it goes both ways.

Just a couple of final nitty-gritty ones here. The stuff you got on the books and brought onstream during the quarter, what sort of yield did you achieve on those developments on cost?

Those -- similar to what we received in the past, anywhere between 9.5, 10%.

Given the view as to where that yield is going to go on future deals you kind of talked that down last quarter. Is that still the case?

I think it still is. Interest rates are still very low. In fact they probably come -- they've come up (ph) since last time we had our conference call. It all, again, depends on where the facility is located, the term we get and the longer the term generally the lower the cap rate. Also what it's going to cost us to build the facility. The larger Cosma (ph) facility you are building at much higher rates per square foot which then translates into a higher cap rate. But all in all if you look at the economic conditions I still say the cap rates are -- they are lower. They're closer to 9 to 9.5% these days.

Finally your outlook for new business with Magna, relative to that historical 100 to $120 million average annual rate. Do you see it sort of being on the low side over the next year or so?

We have always said that our Magna business is chunky. So a lot of stuff can come out of that -- once, there could be a lull sometimes. So it's difficult to gauge where we expect to be. We don't give guidance so just let me leave it at that. It's difficult to really gauge where we're going to be in the next year or so.

Himalaya Jain from Scotia Capital.

Going forward do you suspect any further properties where Magna may not need the premises anymore? The prospect of further asset sales down the road? Anything on the horizon?

That's really a decision Magna has to make in their business. And I'm not comfortable answering that. It may be better if you get on one of their conference calls and ask that question. But we should leave that one up for them.

And the Michigan property that was sold, can you be a bit more specific about how many years were left on the lease?

There was only a couple of years left, Himalaya.

A couple meaning 2?

It was between 2 and 3. I am not sure exactly.

And no lease termination payment was made by Magna International. Is that right?

They didn't make -- they did not lease (ph) termination payment but there were certain costs that we incurred in selling that facility and we made sure that they picked them up.

As far as the buyback goes, would it be affected by the application that Green Light has filed in terms of your ability to execute on the normal course?

I don't really know what the answer that question is. I'd rather defer to counsel. I'm looking at Richard.

The fact that the application has been filed does that tie your hands as to your ability to buy back your shares?

The mere fact that the application has been filed by itself probably will not affect whether or not we are in a position to buy back shares under the plan. We can't really say anything beyond that.

Thanks Richard.

Again without getting into any specifics of the actual application but what are the next steps? Can you lay those out for us?

I will ask Richard to respond.

We will reply to the application and at that point then the parties of both, there will likely be some exchange of court documents and beyond that it's difficult to tell at this point what the timing will be or exactly what the next steps will be. But I think as John has pointed out we'd like to get this over as quickly as possible but the litigation is clearly important and we will take the time necessary to ensure that we defend it properly and that we move things along in the appropriate fashion.

And when you say as quickly as possible, are you talking about by year-end this year or do you think it could go into next year?

You know what Himalaya? It's very early. We have outside counsel helping us and I'm sure we will have a better feel for the time frame within the next week but I really don't have an answer for that right now.

Mark Lee (ph) from Contrarian Capital.

Quick question for you. I'm just trying to reconcile your segment data with your consolidated data in your press release; and your G&A numbers don't seem to add up. Is there -- am I missing something?

What's your question in particular?

If you look at your general and administrative cost. You have a section of your press release that breaks them out real estate and Magna Entertainment. You add us 2 numbers together and they don't come up to the consolidated number. I was wondering what I was missing.

You know what it is? We clearly incurred some costs in terms of the bridge financing with -- MEC outside advisers and the such. On the segment basis we don't include that in the real estate business G&A because they are picked up by MEC. I'll ask Doug to answer this question.

Because of that financing transaction MEC will eventually -- once the loan commences amortize goes in their segment results but from the consolidated point of view because the loan was a subsidiary of MI Developments we have to expense those costs as we go.

So it doesn't show up on real estate and it doesn't show up in Magna Entertainment but it does show up in Consolidated.

That's correct.

It will show up in MEC as they amortize that cost over the 13 months.

And it's about $3 million. Is that right? $2 million? Something like that?

Yes in that 2 to $2.5 million range.

(OPERATOR INSTRUCTIONS). There are no further questions at this time. Please continue.

Thank you. Thanks once again, everyone, participating on the conference call. Clearly a lot of things have happened this quarter and we are going to try to run our business as if things are quite normal. And we hope to see you and hear from you in our third quarter conference call. Thank you very much. Bye-bye.

Ladies and gentlemen, this concludes the conference call for today.