Granite Real Estate Investment Trust (GRP.U) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the MI Developments 2006 first-quarter conference call. (OPERATOR INSTRUCTIONS). I would like to remind everyone that this conference call is being recorded on Wednesday, May 3, 2006 at 1:30 PM Eastern time.

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

Thank you, operator, and good afternoon, everyone. Welcome to our conference call. Joining me are Doug Tatters, our Chief Financial Officer, and Richard Crofts, our General Counsel.

This morning we held our annual meeting here in Toronto, and management made presentations, including a financial presentation of the 2006 first-quarter results. I don't have any prepared remarks this afternoon. So we will proceed by having Doug summarize our Q1 numbers, and then we will open the lines for your questions.

Before we begin, however, I'm going to ask Richard to read our financial -- our forward-looking cautionary statement, and I will turn it over to Richard.

Thanks, John. Our Board of Directors met yesterday and approved our financial results for the first quarter ended March 31, 2006. In addition, the Board declared a dividend of $0.15 per share for the fourth quarter payable on or about June 15, 2006 to shareholders of record at the close of business on May 31, 2006.

This morning we issued a press release with our 2006 first-quarter results, and as John mentioned, we also reported on those results at our annual shareholders meeting. A copy of the press release is posted on our website at www.MIDevelopments.com, and the webcast of our annual shareholders meeting will also be posted on the website later this week.

At this time, we wish to caution listeners that this conference call may include forward-looking statements within the meaning of applicable securities legislation. For a description of the risks, uncertainties, material factors and assumptions associated with forward-looking statements, please refer to this morning's press release which includes a discussion of these matters 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.

As most of you know, in August 2005 Greenlight Capital Inc. brought an oppression application seeking extensive relief. The respondents to the application are MID, as well as certain of MID's current and former directors and officers. The application was heard in the Ontario Superior Court in late 2005 and early 2006 concluding on March 1, 2006. At the conclusion of the hearing as is typical, the judge reserved judgment. As we have stated previously, MID continues to believe that the Greenlight application is without merit, and we have vigorously defended against it. As the matter is still 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 conference call over to Doug Tatters. Doug?

Thanks, Richard, and good afternoon, everyone. Before I begin, I would like to remind you that my discussion will focus solely on MID's Real Estate Business as it did at the annual meeting this morning. I will provide only a few highlights of our financial results as they were discussed in detail at our annual meeting.

Looking at our funds from operations, our 2006 first-quarter FFO was $33.2 million or $0.69 per share on a fully diluted basis. This represents an increase of 25% or $0.14 per share over the first quarter of 2005. On a sequential basis, FFO increased $4.5 million or 16% over the fourth quarter of 2005. In the first quarter, FFO increased from the fourth quarter of 2005 due to higher reported revenues of $3.5 million, including 2.6 million related to interest and other income from MEC. Lower G&A expenses increased FFO by 2.5 million, higher net interest expense decreased FFO by 1 million, and higher cash taxes decreased FFO by 500,000.

The lower G&A expenses were primarily due to a net reduction of expenses related to the Greenlight litigation of 1.8 million combined with the fact that the fourth quarter of 2005 included an expense of 0.6 million related to assistance provided to the victims of Hurricane Katrina.

In addition, G&A expenses in the first quarter of 2006 included 0.5 million of cost associated with repairs and maintenance on an income-producing property. These costs related to a complete replacement of this facility, which under the terms of the lease require us to pay for the cost and then charge the tenant additional rent during the remaining term of the lease amortized over the expected useful life of the asset. Since there were just over seven years remaining in the lease and the life of the asset is longer, we have expensed the difference between the revenue we will receive and the replacement costs.

FFO decreased because of higher net interest expense of 1 million, resulting primarily from the change in average foreign exchange rates as the U.S. dollar weakened relative to the Canadian dollar as our debentures are denominated in Canadian dollars and a reduction in interest income due to lower cash balances.

During the first quarter of 2006, we received four new expansion projects for Magna totaling 101,000 square feet with budgeted costs of approximately $8.6 million. Including these new projects, at March 31, 2006, we had eight projects under development, four projects in Canada, two in Austria and one project in each of the U.S. and the Czech Republic. When completed, these projects will add 273,000 square feet to our income-producing portfolio. The total anticipated cost of these projects is 24.3 million, of which 11.9 million had been spent at the end of the first quarter.

In addition, subsequent to the quarter-end, we acquired a 344,000 square foot industrial facility in Saltillo, Mexico for 11.8 million. 202,000 square feet of this facility is currently under least to a Magna subsidiary for a term of approximately seven years, and the balance of this space has been leased back to the vendor for a term of 21 months. This property was purchased from a third-party, and the cap rate we earn on our investment is consistent with our other Mexican properties.

In terms of buying back our shares, during the first quarter of 2006, our insider trading and reporting policy prohibited MID from purchasing shares under our normal course issuer bid. 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 our desirable use of any available funds.

This concludes our formal remarks. Operator, we will now open the lines for questions.

(OPERATOR INSTRUCTIONS). Himalaya Jain, Scotia Capital.

Can you give us a status of properties that are subject to the potential Magna rationalization that was discussed on the last call?

Sure. There were five properties I believe or six properties, five actually. I'm not going to give you a status on each particular one. I think as we continue to deal with them, we will tell you what has happened once we concluded on each individual property. But we're working, like I said in our prior conference call, we're working to either sell facilities if we can and make sure that there is -- we don't come in at the short end of the stick because we have to sell it at a certain price. If Magna has to top it up, then they will have to top of proceeds. We will try to release some facilities if we can, and we're working on that. And in one particular instance, one of the locations is far better suited for residential. We're working on the moment just trying to get the proper entitlements. If they come through and depending on the value of that property, then we will have to deal with the remaining lease term accordingly. But there is a number of ways we're trying to deal with them, but we have not really concluded on any of them right now.

Okay. Then in the first quarter, the FFO that you reported includes revenue from these group of five properties?

(multiple speakers). Yes, they do, Himalaya. In all circumstances, like I said before, Magna is still obligated to pay rent under these leases, and we're collecting the rent right now.

Peter Sklar, BMO Nesbitt Burns.

John, I just wanted to ask you about the liquidity situation at Magna entertainment. As you know, the metals divestiture is likely to close this fall before your bridge loan matures and before there is a secured credit maturing prior to that timeframe as well. So I'm just wondering what your plans are for the investment should they get into a liquidity issue?

I mean one alternative is they could raise equity capital. I don't know if they are going to be able to do that. So I'm just wondering what your plans are to secure this investment of yours?

Well, that is a good question, Peter, and it is something we discussed with our Board yesterday, but we're going to have to reconstitute our special committee and look at all of our alternatives. Certainly if the metals does not close prior to the time that the bridge loan comes due, they are going to have a liquidity crunch. I think everybody knows that. MEC is contemplating raising some (technical difficulty)-- sorry, MEC is contemplating raising some equity. There could be also other alternatives available, but we're really not in a position to discuss that right now. All I can say is that is something that we will reconstitute the special committee to look at very shortly.

I mean just from my perspective it looks like one way or another you're going to have to provide further equity or bridge financing for them. So how does that work structurally? Does that go to the special committee?

If it is a transaction between MID and MEC and to the extent that we are involved, then yes. It has to go to the special committee. They will have to look at it and see if it is the right thing for MID to do and make the recommendation to the rest of the Board.

And do we know yet who the members of that committee would be?

Right now we had a Board meeting yesterday, and I'm just looking at Richard here. The special committee I think we're going to have to reconstitute it. Doug Young who was the chair of the special committee is no longer with us, so we're going to have to decide who will -- the composition of that committee very shortly. So it is not done yet.

Sam Damiani, TD Newcrest.

Just on the same topic there, what is MID's view on contributing more equity into MEC?

Well, like I just said to Peter on the previous question, that is something that the special committee and Board are going to have to evaluate. But look at MEC, we own 63 million shares. It is worth $400 million at today's market price. I mean clearly like I said in this morning's presentation at the AGM, we do have a vested interest to make sure that they can see themselves through this.

I mean they are on the right path. They started to sell some assets as you know including the metals. The metals unfortunately, the granting of the license has taken longer than we all like. But that is something we're going to have to deal with. I think they are on track with their recap plan, and like I said, we will have to evaluate how to deal with this liquidity crunch that is coming up, but MEC is also looking at their own alternatives.

So if they come to market with an equity issue and they have no problem filling it with the public, would MID still want to invest to retain their economic stake in the Company, or are you happy given that you control the votes and you already own a substantial portion of the Company? Like I'm wondering how you think about it.

Well, I'm not going to tell you how I think about it because I think that is really a decision that has to come from the special committee and the rest of the Board collectively. I will weigh in at that point, but I'm not going to -- I don't think it's appropriate for me to give you my personal views on that.

Okay. How about the bridge loan maturity? What do you expect to happen on August?

Well, it is the same thing. I will go back and reiterate what I said. These shares are worth 400 million, and when the bridge loan is supposed to come due, we will have to again reevaluate if we are going to call on it. Or is it in the best interests of MID to perhaps extend it? But there are alternatives, and like I continued to say, it is something that the special committee and the Board will have to evaluate.

So you're not having any discussions right now about extending that maturity?

No, we're not.

You have got some additional security I believe on one or more of your loans from MEC. Can you try and maybe quantify or more accurately describe what that additional security was?

You know, I'm going to have Richard answer that question for you. Go ahead.

That is the Palm Meadows residential property. The transaction when we entered into the amendments to the bridge loan facility, one of the conditions was that that transaction, the sale transaction that MEC had been working on needed to be closed by a specified date. When it was not closed by that date, MEC was required to register a mortgage on that property to secure the bridge loan. So that is what they did as is disclosed in our documents.

Were there some other assets also pledged, just reading the press release here today?

No, there were no other assets -- no new additional assets that were pledged beyond the security that was originally pledged for that loan when it was originated.

Okay. It seemed to talk -- it mentioned something about New York, Ohio and I believe one other stake.

All of those other assets were previously pledged back in July of 2005 when the bridge loan was first issued.

Understood. Okay. On the Mexican deal, just to switch gears here, what is the age of that particular facility?

I think that building is about 10-years-old.

10-years-old. And what is the plan for the space when the vendor tenant, their lease comes up in less than two years?

Well, we hope there will be more Magna business going in there, but we don't know that for certain right now. Otherwise, we're going to go out there and try to lease it to -- lease a space to a third party.

And when you say the yield is consistent with your other Mexican deals, like does that mean it is 9% or 11% or 13%? What does that mean?

It is actually about 12.5% going in yield right now, cap rate.

Why is that? Why did you get 12.5%?

It is Mexico. I mean those are kind of the ranges down there. I think one thing that I like about this transaction, this is a transaction where we bought the facility from a third party, and it was an existing lease in place for 60% of the facility. And the rent we are getting per square foot on the other 40%, because we entered into a lease agreement with the vendor, is basically the same amount per square foot.

But I think what this does is kind of validates the cap rates we are getting in our portfolio right now because all our other Mexican leases are somewhere between 11 and 12.5%. So I think this is a good indication -- I know there have been some questions in the past of whether the cap rates we received are market. I think this is a good test for that.

Okay. Thanks, guys.

I just want to correct one thing that I said. The additional properties that you listed went on as security for the bridge loan in February when the amendments were made, just so that we are clear on that. And then the Palm Meadows security went on as disclosed more recently when in April when MEC's sales transaction did not close.

Anymore questions, operator?

[Mark Clunkett], Atlas.

I was wondering with regards to future funding of MEC, have any discussions been held with Magna International? Is there potential for them to maybe get reinvolved in MECA?

You know, I certainly have not been having any discussions with Magna International in funding MECA, and I cannot answer that question for you.

I just did not know -- obviously you have an interest in MECA, and I would think you would be aware of the various paths they were considering, just like you said they were considering issuing equity.

Yes, but don't read into it that one of the paths they are considering is funding for Magna International because that is certainly not what I was alluding to.

Sam Damiani, TD Newcrest.

I just wanted to talk about these repair and maintenance costs. Have you embarked on those kind of costs before?

No, I mean ever since we were spun off we have never had maintenance CapEx costs like this. Now and again it is going to happen because we are -- sometimes we will have to fix the roof. And to the extent that the life of the roof extends beyond the term of the lease, then we cannot pick that up through additional rent. That is going to force us for accounting purposes to expense that. Or else typically what we would do is we would get additional rent on the maintenance CapEx that we do.

So when you compute the additional rent on the roof improvement, what yield are you're putting on that for the tenant?

Well, that -- it is negotiated and it will vary. But it is typically -- I don't want to be quick to say that it is the same as we would get under the base building because there's a number of factors that go into it given the current interest rate environment, but also how quick we want to get our costs back. But it is typically in the same range if not a tad lower.

And I guess you have expensed the net number. Can you tell us what the gross number was?

Doug?

The gross cost was 1.2 million. We expect 500,000.

How many square feet was this particular building?

I don't think I have the square footage off -- I don't have the square footage off the top of my head, but it was our facility out in Windsor, and that plant is probably in 100 to 150,000 square foot range. I mean I'm guessing here. It is not a monster plant. It is about 100 to 150.

What is the likelihood this is going to happen again and then over the next year or two or three?

That is a good question. I don't really have an answer for you there. We constantly do our spot checks on the roofs to make sure they are being maintained probably by the tenant. But like I said, I do have a good feel right now to be honest with you how often it may happen in the next two or three years ago. But based on history, I can't see happening -- it has not happened periodically on a yearly basis. So that is all I can tell you right now. I don't have a guess on the future.

Is this lease basically structured the same way every other lease is structured in that over time you're going to have to do this to every property?

All the leases are fairly much the same. But there is a give and take. There were seven years left in the term on this lease. We have to make a decision when Magna comes to us and say, do we repair the roof and how much cost we will put into it? With this one, the roof we put in will have probably a 15-year life, and there are seven years left. So it kind of made sense for us to spend the money. But if Magna came back to us with two years left in the lease and asked for a roof repair and legitimately they require one, then there's going to have to be some give and take. And maybe what we do at that point is extend the term or whatever the case may be before we sink any more money into a plant.

Peter Sklar, BMO Nesbitt Burns.

John, a couple of comments on the annual meeting. First, I thought when the Chairman made his presentation, I thought that there was a little bit of back-pedaling going on with respect to the Company's commitment to over time increase the dividend and also to bring the debt to capitalization ratio to 35% over a five-year period. He seemed to throw out some cautionary language that that is not necessarily in the works and that the Board has not made a decision on it. So I am just wondering, can you clarify, what exactly is the Company's position on this? I think you had provided some kind of soft commitment to do these things in the past.

I think what Frank was saying -- I think what he was trying to say is the Board constantly reevaluates the current business environment, including within the context of prior recommendations that they have made. For example, achieving the 35% debt to cap structure.

But I think what he meant to say was the additional recommendations of the Board have not changed. Really what he is saying before we go out and raise the debt and do something with the proceeds, obviously management is going to have to go back to the Board and explain to them. We are now ready to do something, so let's raise the debt, and we either use it to fund additional CapEx or some acquisitions or perhaps even return some capital to shareholders.

I think all he was saying is before we pull the trigger on anything, management is obligated to go back to the Board. I would not read into it that all of a sudden we have changed our position because that is not the case.

Okay. Another issue as well is, during your presentation you made the point that you had already acquired and leased up Magna's core properties. I believe the Chairman, and correct me if I'm wrong, I believe what he was saying that at the end of his remarks was that if we can reach a reconciliation with the Class A shareholders, there is another 500 million of real estate to come out of Magna. I mean is that what he said, and is it true? Is there still 500 million of real estate that would be suitably to be moved over into MI Developments?

Well, Peter, we have always said there are opportunities -- onetime significant opportunities with Magna. We knew that, and most of those facilities were down at the -- the (inaudible) recently were taken private last year. I don't know if the number is 500 million. We have not done any homework on it.

But the reality is the current environment we are in right now makes it difficult to focus on this, but we have not had any detailed discussions with Magna on it. But we have always said there are onetime opportunities there for us. We would like to explore those opportunities and perhaps move some properties over. But I think what Frank was saying was, given the current state, I think we need to sit and wait and see how things unfold.

But you're going to get out from under that situation one way or another very shortly I would imagine when the judge renders his decision?

You're absolutely right. And then maybe at that point, we're going to have to step up the pace from our side and maybe try to go to Magna and see if they are willing to put those properties over. But again, if that should happen, that is a decision that has to be made by both our special committee and Magna's special committee because it would be a related party transaction. So the decision is going to rest with the respective boards at that time.

Right. Okay. That is all I have. Thanks.

(OPERATOR INSTRUCTIONS). [Greg Keenan], The Globe and Mail.

In the MEC note 1 ongoing concern, it has a working capital deficiency of 112 million. In your notes today, you have a working capital deficiency at MEC of 163.8 million. I wonder if you can reconcile those two numbers for me and tell me why they are different?

Well, I'm going to ask Doug Tatters here to answer that question for you.

We at MID follow Canadian GAAP. MEC, because they are a U.S. registrant, follow U.S. GAAP. So when you're disclosing properties held for sale or assets sold like the Meadows situation, there is a different accounting under Canadian generally accepted accounting principles than U.S. Which the major difference there is the fact that one of their assets racing licenses, which under U.S. GAAP you are allowed to put all of your assets in as a current asset or under Canadian GAAP when you're disclosing these assets held for sale, you're not allowed to reflect it as a current asset. So that is really the primary difference between the two numbers.

Mr. Simonetti, there are no further questions at this time. Please continue.

Okay. Thank you. Once again, I am glad to see a number of shareholders who attended our annual meeting this morning. I hope you enjoyed the presentations, and I will thank everybody for participating in this afternoon's conference call. We look forward once again to talk to you guys at the end of the second quarter. And for that, I will say bye for now.

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