Granite Real Estate Investment Trust (GRP.U) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the MI Developments Q4 and fiscal year-end December 31, 2006 conference call. (OPERATOR INSTRUCTIONS). I would like to remind everyone that this conference call is being recorded on Wednesday, March 7, 2007 at 10:30 AM Eastern Time.

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

Good morning, everyone. Welcome to our conference call. With me today are Robert Kunihiro, our Chief Financial Officer, and Richard Crofts, our General Counsel. Rob will be reviewing our financial results later on in the call.

Our Board of Directors met yesterday and improved our financial results for the fourth quarter and fiscal year ended December 31, 2006. In addition, the Board declared a dividend of $0.15 per share for the fourth quarter, payable on or about April 15, 2007 to shareholders of record at the close of business on March 30, 2007.

This morning, we issued a press release with our 2006 fourth-quarter and fiscal year results. A copy of the press release is posted on our website at www.MIDevelopments.com.

Before I get into my formal comments, let me remind our participants 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.

Now 2006 was another successful year for our Real Estate Business. Despite the auto industry challenges faced by our main tenant, Magna International, revenues from our core industrial rental portfolio increased 8% from the prior year to $155 million. Total revenues including $29 million of interest and other income from our financings with the Magna Entertainment Group were up 22%. Funds from operations increased 22% to $138 million at $2.86 per share.

And finally, net income including gains from real estate sales increased 29%. When gains from the sale of real estate are excluded from both 2006 and the prior year, net income increased 41%. These are outstanding results and clearly would not have been achieved if we did not have the opportunity to finance various development projects at MEC.

We are an entrepreneurial company, and the strategy of our Real Estate Business has always included leveraging the strong and steady cash flows from our core industrial portfolio in order to grow our asset base and to diversify our real estate holdings. Subsequent to the year-end, we have continued to pursue this strategy by purchasing all of MEC's interests and rights in two of its non-core real estate properties including a 34-acre parcel of land in Aurora, Ontario for C$12 million and a 64-acre parcel of excess land adjacent to MEC's racetrack at Laurel Park for C$20 million.

Now I want to point out that the acquisition of the Aurora lands was strategic for us as it completed the assembly of a 145-acre contiguous parcel of land we currently own surrounding Magna International's head office. Approximately 16 of the 34 acres of land we purchased compromise of 10 fully-serviced residential lots. Our intention is to either sell the lots on a retail basis to homeowners to build their own homes or joint venture with the builder to develop product. The remaining 18 acres will take longer to develop and likely will be used for medium-to-high residential purposes such as low-rise condominiums.

In respect of the Laurel property, it is strategically located midway between Baltimore and Washington on a commuter rail line with a train station located on the south edge of the property. The property has a very flexible zoning and densities with permitted uses including residential, retail, restaurants, cinemas and hotels. And it is our intention to partner with a local developer on this project.

Don Cameron, our Chief Operating Officer, has many years of experience with these types of projects. And both Don and I look forward to providing you with additional details in the future as we proceed with these developments.

The purchase of these lands represents an initial example of the excellent development potential afforded to us because of our MEC investment. I use the words "initial example" because MEC has made it clear that it intends to continue to sell non-core assets as part of the true capitalization plan efforts. And to the extent these non-core assets include real estate, we continue to evaluate these opportunities of our Real Estate Business.

Now at this point, I would like to say a few words in respect of MEC's recapitalization plan efforts. During the fourth quarter, MEC completed the sale of the Meadows racetrack and received cash proceeds of $175 million. All of the proceeds were used to pay down debt.

Significantly however, the debt repaid included the entire balance of the bridge loan with MID. I wanted to emphasize this point because we do understand that intercompany dealings between us and MEC are a sensitive issue for some of our stakeholders.

Ultimately however, we do have a business to run and a very material investment in MEC to manage. And under the circumstances, it has been a challenge for us to monitor MEC as it continues to deal with its financial issues. Nevertheless, we and MEC continue to evaluate alternatives to resolving the issues. And more importantly, we continue to determine to what extent MID will be involved in implementing a solution that is acceptable to all our stakeholders.

Now turning back to our Real Estate Business. During 2006, we bought 750,000 square feet of Magna-related business on stream with total expenditures of $44 million. This is down significantly from 2005 when we spent $71 million on our Magna work.

Magna released its 2006 fourth-quarter results last week and posted a 66% decline in operating income and cut its dividend in half. Clearly, the difficult automotive environment took its toll on Magna's financial results. And more significantly for MID, the difficult automotive environment has also reduced Magna's needs for new facilities.

As I wind down my formal comments, I do want to point out that despite these challenges, Magna has been able to maintain a very strong financial position. And we expect that it will continue to invest capital for future growth. The auto industry has it peaks and valleys, and we believe that Magna is well positioned to achieve greater success once the North American automotive environment improves, which is why we continue to seek ways to improve our relationship with Magna despite the ongoing distraction and uncertainties created by the ongoing litigation with Greenlight Capital.

And on this note, I'm going to ask Richard Crofts to give you an update of recent events with respect to the ongoing litigation. Richard will then turn the conference call over to Robert to discuss our financial results. Richard?

As most of you know, on August 2, 2005, Greenlight Capital, Inc. and certain of its affiliates filed an oppression application in the Ontario Superior Court of Justice against the Company and certain of its current and former directors and officers. The hearing of the application concluded on March 1, 2006. And on October 30, 2006, the Ontario Superior Court of Justice dismissed the oppression application.

However, on November 29, 2006, Greenlight filed a notice of appeal with the Ontario Divisional Court. On January 30, 2007, Greenlight filed an appellant's factum. The Company continues to consider Greenlight's oppression claim to be without merit and together with the other respondents will file a responding factum to vigorously defend against the appeal. We anticipate filing our factum during the second quarter of 2007 and that the appeal hearing will take place approximately three to six months after the date of such filing.

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 Rob Kunihiro, MID's Chief Financial Officer. Rob?

Good morning, everyone. This is my first year as CFO for MID, and I'm very pleased to be able to report on what was a great year for our Real Estate Business.

Before I begin, I would like to remind you that my discussion this morning will focus only on the results of MID's Real Estate Business. Also, all amounts in today's presentation are in U.S. dollars unless otherwise noted. Annualized lease payments at the end of 2006 were $159.2 million or $13.6 million higher than the prior year, representing an increase of 9%. [Probiacs] coming on stream and contractual rent bumps increased annual rents by $4.5 million and $2.4 million respectively.

The U.S. dollar's depreciation against the euro resulted in a $6.9 million increase in annual rent. On a sequential basis, annualized lease payments increased marginally from $158.2 million of the end of the third quarter. Completed projects on-stream added $600,000, while the U.S. dollar's depreciation against the euro, partially offset by the U.S. dollar's strengthening against the Canadian dollar, resulted in a net increase of $400,000.

Now, looking at our funds from operations. Fourth-quarter FFO was $33.9 million, representing an increase of $5.2 million or 18% over the fourth quarter of 2005. FFO per share was $0.70 on a fully diluted basis, representing an increase of 17% or $0.10 per share over the prior year. On a sequential basis, FFO decreased by $1 million or 3%. Lower general and admin expenses and net interest expense increased FFO by $1 million and $800,000 respectively.

However, these increases were more than offset by lower revenues and higher cash taxes of $1.3 million and $1.5 million respectively. The decrease in revenues of $1.3 million was entirely attributable to lower interest and other income for Magna Entertainment as a result of the bridge loan repayment in November 2006. Rental revenues were unchanged from the third quarter.

The sequential decrease in G&A expense of $1 million is primarily due to a $2.4 million expense in the third quarter for advisory and other costs incurred in connection with the Company's evaluation of certain transactions that ultimately were not undertaken. Excluding these costs, G&A expense increased by $1.4 million, primarily due to higher professional fees related to the Company's first year of Sarbanes-Oxley compliance and increased salaries and benefits including increased stock option compensation expense.

Net interest expense as compared to the previous quarter decreased by $800,000 due to the Company's earning more interest income as a result of having higher cash on-hand after the repayment of the MEC bridge loan. And finally, cash taxes are higher due to the incremental taxable earnings of the Company and as a result of the Company incurring $800,000 of withholding tax, arising from intercompany dividends paid from our foreign subsidiaries in the fourth quarter.

In terms of our tax provision, for the fourth quarter of 2006, we reported a total tax provision of $5.1 million for an effective tax rate of 17.8%, which decreased marginally compared to our effective tax rate for the fourth quarter of 2005 of 18.1%. The decrease in our effective tax rate is due to the mix of the Company's taxable earnings in the different countries in which we operate.

Turning to the full year, FFO was $24.6 million higher than the prior year at $138.2 million or $2.86 per share on a fully diluted basis compared to $113.6 million or $2.35 per share on a fully diluted basis. This represents an increase of 22%.

The increase in year-to-date FFO was primarily due to higher revenues and lower G&A expenses, which increased FFO by $33.6 million and $1.3 million respectively. These increases were partially offset by $3.9 million of increased net interest expense and $6.4 million more of cash taxes. The increase in revenues is primarily due to $11.4 million from rental revenues and $22.2 million from MEC interest and fees.

With respect to G&A expenses included in both the 2006 and 2005 amounts are costs with respect to the Greenlight litigation and related matters. In addition, G&A expenses for 2006 include $2.5 million for advisory and other costs incurred in connection with the Company's evaluation of certain transactions as discussed previously. Excluding these items, G&A expense was $19 million or $2.1 million higher than the 2005 amount of $16.9 million. The increase is primarily due to costs associated with Sarbanes-Oxley, increased salary to benefits including increased stock option compensation expense and increased repairs and maintenance expenditures.

Net interest expense was $6.4 million higher in 2005 primarily for three reasons. First, the stronger Canadian dollar against the U.S. dollar increased the reported interest expense on our Canadian dollar-denominated debentures. Second, there was less capitalized interest in 2006 compared to 2005. And third, we had reduced interest income as our average cash balance available for short-term investment was lower throughout most of 2006.

Excluding the tax on gains from the sale of real estate, cash taxes increased $6.4 million from $8.8 million in 2005 to $15.2 million in 2006. The 2005 cash tax expense was net of a $3.1 million benefit due to accelerated depreciation in claims for prior years. Also, in 2006, we had an $800,000 withholding tax payment on intercompany dividends relating to our foreign subsidiaries, again, as discussed previously. Excluding these items, cash taxes increased by $2.5 million primarily due to the increase in the Company's taxable earnings.

Turning to our balance sheet, our loans receivable from MEC at December 31, 2006 amounted to $186 million, all of which relates to the project financings given that the bridge loan was fully repaid. A main contributor to the decrease was the debt reduction of $100.4 million under the bridge loan which was repaid in full during the quarter.

During the quarter, we also advanced $12.2 million and capitalized $4.6 million of interest under the project financing facilities. In addition, $1.6 million of capitalized interest was repaid under the cash suite provisions of the Remington Park project finance.

Looking at our cash flows, our cash balance increased by $107.9 million September 30, 2006 to $191.9 million at the end of the fourth quarter. [Norses] of cash during the fourth quarter amounted to $142.7 million, including $28.4 million of cash from operations, a $1.6 million cash suite payment, a $111.8 million principal repayment of the bridge loan and $900,000 of other items. Cash used during the fourth quarter amounted to $34.8 million, including $24 million of advances under the loan facilities to MEC, $3 million of capital expenditures, $7.2 million of dividend payments and $600,000 of other items.

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

(OPERATOR INSTRUCTIONS). Sam Damiani, TD Newcrest.

The financial cash balance there, obviously, you've spent a little bit on some land in the first quarter so far. But what are the near-term plans for that cash?

Good question, Sam. As I said during the conference call, we are a company that I believe has a fair bit of entrepreneurial flair. That entrepreneurial flair has been the cornerstone for Magna success and clearly our success.

So how we said that I think first and foremost, we're going to look to deploy that cash in our core business. Now that may include continued growth with Magna. We can also continue to diversify. Historically, we have made some investments with MEC and purchased some land from them. We could do more land or purchase more land from MEC or still continue to pursue other opportunities.

Secondly, if opportunities for CapEx are not there, I think we always have the flexibility to return some capital to shareholders. And that could include dividends and/or stock buybacks.

Is there any talk now of adjusting the dividend?

No, there is not.

MEC was to commence monthly payments on the project advancing starting January. Has that happened? Are they making cash payments to MID at this stage?

Yes, they are. They are on track.

And what is the monthly amount they're paying?

On a monthly basis, they're paying cash pay about $1 million - $1.5 million.

Maybe just a couple more questions here; they are quick. The Romulus lands, I noticed the option did expire. So I gather MEC has no interest in that land anymore and just wondering what MID's plans are for that land parcel.

Yes, you're right. MEC has not renewed its option to purchase the Romulus lands from us. At the end of the day, we have always -- it is a well-located site. It is next to the Detroit airport. We continue to review our options.

The property has flexible zoning. You can do commercial on there; you can do industrial. We will be looking to develop the lands at some point, but that's going to be down the road. Like I said, we continue to review our options.

Is there any chance Magna would put up something there?

There is always a possibility. They are close to the big three. The land is situated close to the big three. Certainly if Magna is looking for space, we certainly have it. But again, there's nothing concrete there.

Maybe just finally, the cash tax you noted an $800,000 withholding tax in the quarter. Why did that intercompany transfer happen? And what is the likelihood of further withholding taxes to occur in '07 and beyond as a result of a similar transaction in the future?

If you look at the way we are set up outside Canada, there isn't many expenses that we incur. We're just collecting a lot of rent. We're always building up cash outside of Canada.

Back home here, we have salaries to pay. We have the interest on our debentures. We have our dividends that we have to pay, so we are always deploying cash up here. And sometimes, we need to just repatriate some of those funds home to fund that cash need.

So I can't really tell you when we plan to bring more cash back, but it all depends on where the cash is needed throughout the group. If we're building things in Europe, the cash is going to stay in Europe. If we don't and we need the cash back home, we will bring it home. But right now, there is not any immediate plans to bring cash back. But that could change, but it depends on the facts.

Has the Company incurred a withholding tax like this since the spin-off aside from this one instance?

Not really. This is the first time we brought cash back. Specifically, this cash was brought back from our German sub, and there was a 5% withhold tax.

Now if we structure things right and bring cash back from other subs, sometimes, we can avoid the withhold tax altogether. But albeit even if we did pay the withhold tax at 5%, it's a pretty big rate.

(OPERATOR INSTRUCTIONS). Sam Damiani, TD Newcrest.

Crowded here today.

People are just loaded up with questions today.

Just a couple of quick ones here perhaps. The contractual step-ups were $2.4 million in '06 for the year in terms of the contribution. Where do you see that penciling out in '07 and '08 -- much different or is it going to increase or decrease?

I think on an annual basis, we've always -- rule of thumb, we said 2% is where we generally are at. I don't think we have any large unusual bumps coming up this year or the next year. So it's going to be standard fare. So if you work on 1.5 - 2%, I think you will be fine.

Then in terms of leases that did mature during the year, what was that total? And what happened with those leases? How many were renewed? By how much did the rent change?

Now, you're testing my memory. I think we only got two this year. Both of them were Tacoma facilities. And I can't remember what bumps we got on those. They were not material bumps. I think they were CPI bumps. But we did not have to adjust them up to market. So I think in the range those facilities were getting annual bumps. So the next year's rent, we've probably got 2 points off the previous years.

So both leases were renewed though?

Yes, they were.

You talked about a property, has been agreed -- you've agreed to sell a property. Is this the Michigan property you talked about last quarter?

The property we agreed to sell, that will be one of the facilities that Magna has included in the restructuring plan. You're right; that is a Michigan facility. It is a smaller facility. When I say small, I mean really small. It's about 25,000 square feet.

Right, that's the same one, okay.

Yes.

Is this one of the six properties or did this property -- this was in addition to the original six identified?

You're testing my memory here. I think additionally, we identified six facilities which went up to eight. This is one of the two that went up to eight.

So what's the status of the other seven I guess?

The other seven, there is one -- two we sold already. There's another one we're going to sell shortly, and that one is located in Belgium. So we're looking to sell that one, and we will just have a very small gain on that. There is I think one more in Poland that we are negotiating with a third party to perhaps take the lease off Magna's hands, which is good news for Magna.

There's the property in the UK, which we're proceeding with entitlements. It is very well-suited for residential. I actually went over there with Don Cameron to look at the facility. I think it is an outstanding facility. Land is scarce in that country.

So once we get the entitlements, then we will go back and talk to Magna and see what they want to do in order to help them get out of that lease. We would like to see them get out of that lease because we think there's some good upside in that property.

And then, we got one more here in Canada we're looking to release and another smaller -- well, it's a larger facility in the U.S., which we're looking to deal with as well, possibly sell that one.

In aggregate, are you looking at much of a loss on these investments?

You know what, so far, we haven't had a loss on these facilities. We tried to at least get booked, but [most cases were getting north of booked]. And what we will do is we will actually -- Magna might have to put in a kicker, maybe pick up some of our legal fees and what have you to help us get the property off our hands if they want to get off the lease as well. We're pretty lucky so far.

Great. Just finally on the G&A front, what was it the non-cash compensation expense was $600,000 in Q4. Is that an aberration or is that a run rate?

No, no. The stock option expense in Q4 is an aberration. We issued some options to -- Rob joined us as CFO and Don and that is really the reason why. There is a couple of directors who got some deferred units as well, and that's why we had that expense in Q4.

So where do you see your G&A running at in '07?

We are going to track higher. We've been running around 16 - 16.5. I think we are going to move that up closer to 19. SOX has really been an exercise that I'm glad it is over with in terms of the big exercise, but there's still continuing costs to comply with that. That's going to add easily 1 million - 1.5 million to our annual cost.

Don has joined us, so our salaries are going to go up a bit and just inflation in general. So that's why I think we need to up our G&A up to closer to 19. 19 is a good run rate right now.

How much of the 19 would be just public company/compliance costs?

You're asking me tough questions as I stare over to our Controller here, who's flipping through a bunch of pages. I think public company costs -- I'm going to take a stab here -- but I think the public company costs would be anywhere between $2 million and $4 million. $2 million and $4 million is probably good number.

Himalaya Jain.

Just going forward, can you talk about your cash tax rate and what should we expect considering there's been some volatility in recent quarters? What is a reasonable rate to use going forward?

That's a good question. There's been some volatility. The volatility arises from sometimes timing differences and on the withhold tax that we talked about today. But I think if you look at our normalized division and our normalized cash taxes, we are running somewhere -- I would use 12 to 13% of pre-tax as a good run rate for cash taxes.

12 to 13?

Yes. Use 13. 13 is probably better.

Then just as far as other potential investments, I know you have talked on previous conference calls about potentially pursuing third-party investments. I just wanted to get an update on your intention or desire to pursue third-party business.

I think our intention or desire to pursue third party is very strong. But we have our hands full right now, not only with our Magna work. Magna has not been busy, but we have been talking to them vis-a-vis the plant restructuring. They do have things on the go, just not as busy as they were in the past. So that keeps us busy. There's a lot of opportunities with MEC which we believe are great opportunities, and I think you are going to see more of that.

On the third-party front, Don has been very helpful to network with our colleagues out there. And that is all I can tell you. I don't want to give you a lot of guidance on what we're looking at. But we do look at all three opportunities, but we do have our handful right now with both Magna and MEC.

And then the nature of the MEC investments that you seem pretty excited about, can you describe the flavor of those? Are they continuing to be of the nature you have talked about?

Yes, I think they will be akin to what we have already announced. It will be a combination of residential, commercial mixed use. Those are the types of things we're looking at.

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

Thanks for participating on the conference call. A special thanks to Sam who came on twice to ask questions. But I guess we will see you -- the next up will be our annual meeting in May and hope to see many of you there. So that is it for now, and we're going to sign off. Thank you.

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