Granite Real Estate Investment Trust (GRP.U) 2005 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the MI Developments third quarter 2005 results conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Wednesday, November 9, 2005. I would now like to turn the conference over to John Simonetti, Chief Executive Officer of MI Developments. Please go ahead, sir.

Thank you and good afternoon. Welcome to our third quarter conference call. Our Board of Directors met yesterday and approved our financial results for the third quarter of 2005. In addition, the Board declared a dividend at $0.15 per share for the third quarter, payable on or about December 15, 2005 to shareholders of record at the close of business on November 30, 2005.

This morning we issued a press release with our third 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 meaning of applicable securities legislation. At this time, rather than reading our disclaimer referring to forward-looking statements, I would 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. I'm going to ask Doug to take you through our third quarter results. After that Richard will provide you with a brief update on the status of our litigation with Greenlight Capital. And I will then make some remarks before we open the lines for your questions.

Now at this point I'm going to turn the conference call over to Mr. Tatters.

Good afternoon everyone. Before I begin I would like to remind you that my discussion will focus solely on MID's real estate business. I would also like to point out that the results for the third quarter of 2004 include $5.8 million or $4.3 million net of income taxes of unusual items related to employee settlements and the previously proposed MEC privatization. In order to provide a more meaningful basis to compare our results, the balance of my discussion will exclude the impact of these unusual items.

Annualized lease payments at the end of the third quarter were $145.7 million or $13.9 million higher than the prior year, representing an increase of 11%. On a sequential basis, annualized lease payments increased 3% or $4.3 million from $141.4 million at the end of the second quarter of 2005. The U.S. dollar weakened at the end of the quarter relative to the Canadian dollar, so the foreign exchange impact increased annualized lease payments by $2.3 million.

A 253,000 square foot facility acquired and then significantly expanded in Mississauga, Ontario, and two smaller expansions representing 12,000 square feet came on stream in the quarter, adding $2 million of annualized lease payments.

Now looking at our funds from operations, our 2005 third quarter FFO was $32 million or $0.66 per share on a fully diluted basis. This includes the recognition of a $3.1 million current tax recovery with an offsetting future tax expense related to accelerated tax depreciation the Company qualified for with respect to certain properties acquired prior to 2005.

We were able to take advantage of a bonus depreciation tax incentive program in the U.S. related primarily to our Bowling Green, Kentucky property that was acquired on December 30, 2004.

After completing detailed cost allocation studies, bonus tax depreciation was claimed on our 2004 income tax return, which was filed in September 2005, resulting in a reduction in income taxes. Excluding this item, FFO was 28.9 million or $0.60 per share on a fully diluted basis. This represents an increase of 20% or $0.10 per share over the third quarter of 2004.

On a sequential basis, excluding the $3.1 million current tax recovery, third quarter FFO increased $2.5 million or $0.05 per share over the second quarter of 2005. In the third quarter of 2005 FFO was impacted by an increase in reported revenues of $1.9 million, primarily related to projects coming onstream, and interest and other income generated from MEC, and a $600,000 decrease in G&A expenses due primarily to the timing of certain public company costs, which are typically higher in our second quarter due to the holding of our AGM, issuance of our annual report, and other documents.

In terms of our tax provision in the third quarter we reported a total tax provision of $4.2 million, for an effective tax rate of approximately 18%, a slight decrease from the second quarter of 2005 effective tax rate, excluding the gain on disposal of real estate recognized in the second quarter. Excluding the current tax recovery from accelerated depreciation in the third quarter, and the gain on disposal of real estate in the second quarter, our cash tax effective rate in the third quarter was approximately 14% compared to approximately 15% in the second quarter of 2005.

Turning to the balance sheet, the net book value of our real estate properties at the end of September 2005 was $1.3 billion, including $1.2 billion of income producing properties, $106 million of properties under and held for development, and $26 million of properties held for sale.

Our cash balance at the end of September 2005 decreased $36 million from the end of June 2005 to $188 million. Reviewing our cash flows, our sources of cash in the third quarter amounted to $42 million, including $33 million of cash from operations, and $9 million of other items.

Funds used in the quarter totaled $78 million, including capital expenditures of $10 million, dividends of $7 million, and advances related to MEC's financings of $61 million.

As discussed on our second quarter conference call, in July 2005 we provided a 13 month bridge loan to MEC of up to $100 million. To date, $75 million has been made available, of which $56 million has been drawn. The remaining tranche of $25 million can become available on January 16, 2006, subject to the satisfaction of certain conditions that are tied to the implementation of the MEC recapitalization plan.

Also, in July of 2005 we agreed to amend the project financing facilities provided to subsidiaries of MEC in December 2004 for construction at MEC's racetracks 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 Remington Park Racetrack in Oklahoma.

In October 2005 we agreed to amend the Gulfstream Park financing to recognize that MEC has increased the capital budget for the redevelopment of Gulfstream Park by $26.5 million from 145 million to 171.5 million to permit certain changes to the contractor arrangements for the Gulfstream construction project, and to establish an escrow account that will be applied against future Gulfstream Park construction cost.

In order for MEC to fund the increased budget for Gulfstream Park, certain terms of the bridge loan agreement between MID and MEC, as well as certain terms of MEC's credit facility with a third-party bank were amended. Under the existing terms of the bridge loan and the bank credit agreement, MEC was required to use the net proceeds from the sale of Flamboro to pay down the principal amount, owing under the two facilities in equal portions. Both the bank and MID agreed in principle to mutually waive this repayment requirement, subject to certain other amendments and the execution of definitive agreements.

During the third quarter of 2005 we were not eligible to purchase shares under our normal course issuer bid, as a result of securities law restrictions due to various potential transactions with and by MEC, including those that had been recently announced. Depending upon 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. And I will now turn the call back over to John.

Now I think it's a good idea that our shareholders are kept informed about the status of the time of the Greenlight litigation. So I will now ask Richard to provide you with an overview of that matter.

As most of you are aware, Greenlight Capital filed an oppression application with the Ontario courts on August 2, 2005, including an affidavit sworn by Mr. Einhorn of Greenlight. The respondents to the application are MID, as well as certain of MID's current and former directors and officers. Responding affidavits were provided to Greenlight by John, Mr. Douglas Young, Mr. Frank Stronach, and Mr. Brian Tobin on September 30, 2005. The affidavits of John, Mr. Young and Mr. Stronach have been filed with the court and are available on MID's website.

On October 17, 2005 Mr. Einhorn served a reply affidavit on the respondents. Greenlight has filed copies of its application and Mr. Einhorn's affidavits on EDGAR, the U.S. Securities and Exchange Commission's electronic filing system. Mr. Einhorn's reply affidavit is the final affidavit at this stage of the application process, and the respondents do not file any further affidavits at this point.

The various parties will be conducting cross-examinations of the persons who have sworn affidavits and certain other persons during the next several weeks. After that, Greenlight and the respondents will file their respective written factual and legal arguments and related documents with the court. These documents will become publicly available when they are filed with the court.

The hearing of the application is currently scheduled for the week of December 19, 2005. Although it is possible that the judge hearing the application will render a decision immediately, it is likely that the judge will not render a decision until sometime in the new year.

As we have stated previously MID continues to believe that the Greenlight application is without merit, and we will continue to vigorously defend against the application. As the matter is before the courts, MID will not be making any further comment on these issues at this time. And we will not be responding to any questions relating to this matter today.

I will now turn the call back over to John.

Let me begin by stating that, although I obviously appreciate the importance of properly responding to the Greenlight application, defending it has taken up extraordinary amounts of my time, as well as the time of my management team. Further, we have incurred significant legal and advisory fees. And on a year-to-date basis, the costs that we have incurred to deal with the Greenlight matters amount to $3.5 million, and the tab is still running. That is all I'm going to say about the litigation.

In response to concerns about MID's relationship with Magna Entertainment, we have taken specific steps to assist MEC management in their efforts to strengthen MEC's balance sheet by providing the bridge loan we announced in July 2005, and by participating in the development of MEC's recapitalization plan. We continue to be of the view that concerns about our MEC relationship are best addressed by MEC helping itself as best that it can under the circumstances.

And by helping itself, we mean that MEC must continue to sell non-strategic assets with the proceeds being used to pay down debt, and more importantly, begin generating strong positive cash flows in its core racing and alternative gaming operations.

MEC issued their third quarter results in press release this morning and highlighted the significant steps it has taken since the announcement of the recapitalization plan. These include the sale of its Flamboro Downs Racino for proceeds of approximately 66 million, the sale of its Colonial Downs management contract for 10 million, and agreement to sell 157 acres of excess land located next to its Palm Meadows' training facility for $51 million. And finally, in a separate press release issued this morning, MEC announced that it has entered into an agreement to sell The Meadows Racetrack for proceeds of $225 million.

Once these transactions are completed, MEC will have received aggregate proceeds from the sale of assets amounting to approximately 350 million, providing strong evidence that MEC is committed to strengthening its balance sheet. At yesterday's closing stock prices, MID's investment in MEC had a market value of approximately $475 million. This represents an increase of $214 million, or 82%, from the time of our spin off from Magna. Clearly, we at MID continue to have a strong interest in assisting MEC through its recapitalization process.

Now in terms of our core real estate business, we received four new projects in the third quarter, totaling approximately 186,000 square feet. All these projects are expansions to existing facilities. Three other expansion projects totaling approximately 265,000 square feet were brought on stream in the quarter.

At September 30, 2005, including carryover projects from Q2, we had seven projects under development, three in Canada, two in Austria, and one each in the U.S. and the Czech Republic. Once completed, these expansions will add approximately 420,000 square feet to our income producing portfolio. The total anticipated cost of these projects is approximately $30.7 million, of which approximately $9.4 million was spent at the end of the third quarter.

Yesterday Magna International issued its press release concerning its third quarter results. And despite distress in the automotive supply base, it continues to post healthy results. Further, Magna commented that they believe that the relative weakness of some of their competitors will provide business opportunities for them, given their strong financial position and ongoing profitability.

As I have stated before, MID is very fortunate that our main tenant is strong, is in strong financial shape to weather these difficult times in the automotive industry. In its public disclosure Magna discussed the facility rationalization strategy that may include plant consolidations, sales and/or closures. We have not yet had any detailed discussions with Magna in this regard, but we're prepared to work with them, keeping in mind the best interests of MID and its shareholders.

Now that ends my formal comments for today. And we will now open the lines for your questions.

(OPERATOR INSTRUCTIONS). Steve Velgot with Cathay Financial.

Would you say there has been any progress in exploring non-Magna developments?

When you say non-Magna do you mean non-Magna International and non-MEC?

Right.

What we're doing is not necessarily exploring with third-parties right now, but we are in the process of entitling some land that we own at MID that we will seek to develop either in a commercial, and more likely on a residential basis. And do that on our own, and either have third-party tenants and sell off some lots. But we're not actively pursuing right now transactions with pure third-parties.

Peter Sklar with Nesbitt Burns.

John, can you just go through the three loans or financings you have with Magna Entertainment and the amount you had outstanding at the end of the quarter, and if they have changed much since the end of the quarter? You did provide it for the bridge. I believe you said 56 million. I wasn't too sure if that was today or at the end of the quarter.

And I wanted to know what was outstanding against the Gulfstream financing and the Remington Park financing?

I'm going to have Doug just give you the -- those numbers.

In the quarter we advanced approximately $61 million to MEC. 48 million related to the bridge loan, and approximately 13 million related to the long-term loans with Gulfstream Park and Remington.

That was advanced during the quarter. So what is the total outstanding now?

The total at the end of September, the bridge loan is about 48 million and the long-term loan is about 61 million.

Has that changed much since the end of the quarter?

There has been a few draws on it, but not significantly.

It’s John. They continue to push ahead with the Gulfstream redevelopment, right. They're hoping to get that done, at least most of it, by the end of the year, to get it ready for the upcoming meet. So they're going to continue to draw on that, and we expect more to be -- there will probably be another 40 to 50 million drawn by the end of the year.

The Remington Park alternative gaming facility is expected to open in late November. So substantially all of the $34 million earmarked for that project is expected to be advanced this quarter.

So effectively by the end of the quarter you should have all of the Gulfstream Park and Remington funds will be advanced?

I think all of the Remington will be, but with the Gulfstream there would probably be a residual of about 20 million left that will get drawn sometime in January, February of next year.

With the announcement today of Magna Entertainment’s sale of the Meadows, what is the arrangement with respect to their obligation to repay the bridge out of the funds that they will hopefully receive sometime next year when they close?

I'm going to have Doug answer that question for you.

They are obligated on the closing of The Meadows transaction to repay the bridge loan.

Is all of the proceeds available for the bridge loan or is some of it carved out for other uses?

The bridge loan will have to be repaid in full on the closing of the Meadows.

Sam Damiani with TD Newcrest.

Just on the business that was brought on during the quarter, the $20.8 million, what was the average yield that that earned?

What came on in the quarter, I think on average -- just looking at a slide here, would have been somewhere around 9.5%.

And would that have come on toward the beginning of the quarter, the middle, or the end?

Most of it was toward the end of the quarter.

How about the stuff that is on the books under development, would the yield also be in the 9.5% range?

We don't give specific comments or guidance generally, as you know, on our cap rates. But you know we talked about this last quarter, and we said that the range of the cap rates generally right now is in the 9 to 9.5% level.

So just no reason to think of anything differently here?

No.

I did get on the call a little late, so maybe you covered this. But the tax recovery, is that something that is sort of all done now, or is there more of this type of recovery potentially there in subsequent quarters?

It is done now, completed. That program ended January 1, 2005.

What is your outlook for your cash tax rate in 2006?

Sam, we don't give forward-looking statements in terms of what our cash tax rate is. But just let me say the comment, as we continue to fund the MEC developments in the U.S. and receive earnings from there, we would expect our cash tax rate to continue to drop.

What would it have been in Q3 if not for this recovery?

On a normalized basis it was about 15% -- 14% as I mentioned in the call.

I missed that. So it would have been 14, 15%?

Right, which is -- 14% this quarter, 15% last quarter.

In the financial results for the real estate business, I'm looking on page 3 of your release here, you talk about the effect of subsidies and other items which resulted in a $700,000 increase in revenues. What does that mean, the subsidies?

It is primarily related to a number of our European operations. We often are eligible for subsidies related to certain projects. That is what it primarily relates to -- and other minor lease adjustments. As we go through each period, we have increases based on CPI changes and things like that. And often they are sometimes fine tuned with the tenant in terms of coming to a final agreement on the amount.

Is that a onetime kind of a thing there or --?

Sorry, we missed that question.

I am just trying to -- is that $700,000 kind of a onetime thing that won't be there next quarter?

It’s a hit and miss. It is not something you may see every quarter.

It has been there sometimes and sometimes it is not.

That's correct.

The arrangement fee on the bridge loan, $1 million, was received in the third quarter, I presume?

That's correct.

And included in interest income?

We're amortizing it over the term of the bridge loan.

How much of that was in the third quarter then?

A little less than 200,000.

(OPERATOR INSTRUCTIONS). Steve Velgot.

I know that you're not addressing questions about the litigation, but I just wanted to know if as a matter of course the -- there is an arbitration process at all, or it is just as it was described by Richard that there is no arbitration process?

There is no arbitration process contemplated at this time.

Gentlemen, I'm showing no further questions at this time. Please continue with your presentation.

I'm pleased to see third quarter results that were strong. We're pushing ahead in our core business as best we can, given everything that is on the go right now. Shortly we plan to have our discussions with Magna International and get a further update on what their plans are in rationalizing some of their operations. And if and when we do have further information, we will announce it at the right time. But I just wanted to thank everybody for participating in this conference call. And we will talk to you next quarter. Thank you.

Ladies and gentlemen, this does conclude the MI Developments third quarter 2005 results conference call. You may now disconnect. And thank you for using AT&T Teleconferencing.