Granite Real Estate Investment Trust (GRP.U) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the MI Developments first-quarter 2007 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 questions. (OPERATOR INSTRUCTIONS). I would like to remind everyone that this conference is being recorded today, Friday, May 11, 2007 at 1 PM Eastern time.

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

Thank you and good afternoon, everyone. Welcome to our conference call.

With me today are members of our senior management team, including Rob Kunihiro, our Chief Financial Officer. We have got Richard Crofts here, our General counsel, and Don Cameron, our Chief Operating Officer.

Before we start, I'm going to ask Richard to give you our standard comments on forward-looking statements and status of our ongoing litigation with Greenlight. So Richard?

Thanks, John. I wish to caution listeners that our comments on today's call are subject to and expressly qualified by the disclaimers that are set out in our press releases and Securities filings. A copy of the disclaimer is printed at the end of the text of the press release that we issued this morning announcing our 2007 first-quarter results.

In addition, as most of you know, in August 2005, Greenlight Capital filed an [oppression] application in the Ontario support Superior Court of justice against the Company and certain of its current and former directors and officers. A hearing of the application concluded in March 2006 and in October 2006, the Ontario Superior Court did dismiss the oppression application. Since that decision is now under appeal, it would be inappropriate for us to entertain questions requiring us to discuss the issues in the litigation. However, I do want to note that we continue to consider the oppression claim to be without merit and we will vigorously defend against the appeal. We anticipate filing our respondents factum at some point during the second corner with the hearing of the appeal to be scheduled within four to six months thereafter.

Now, I will turn the call back over to John.

Thanks, Richard. I don't have any prepared comments this afternoon, so I plan to be brief. We held our 2007 annual meeting this morning here in Toronto and I made a presentation in which I discussed the current state of our Magna business and specifically the lack of business recently and the reasons for that. I also gave more details about the real estate assets we recently purchased from MEC. Finally, I discussed the status of our MEC investment in general. I am not going to go into detail on these points but I do want to emphasize that we are open to exploring ways to arrive at a solution that will remove the uncertainty, as I call it, over the direction of our company and relationship with MEC.

With that said, I am going to hand things over to Rob to take you through the Q1 results and then we will just open the line for questions. Rob?

Thanks, John, and good afternoon. Before I begin, I'd like to remind you that my discussion this afternoon will focus on results of MID's real estate business only and that all amounts are in U.S. dollars. As in the first-quarter results -- as the first-quarter results were discussed in detail this morning at the annual meeting, I will be limiting my comments to certain highlighted areas.

Now, as we said this morning, the first quarter was relatively slow for our construction business as no new projects were brought onstream and our volume of active projects was lower than in the previous years.

Looking at our Funds From Operations, our 2007 first-quarter FFO was $34.2 million or $0.71 per share. This represents an increase of 3% over the first quarter of last year. On a sequential basis, FFO increased by $300,000 or 1% over the fourth quarter of 2006. FFO increased by $2.1 million due to the following items -- lower G&A expenses of $1.3 million; lower net interest expense of 500,000; and lower cash taxes of 300,000. These positive impacts to FFO were offset by a decline in revenues of $1.8 million. The decrease in revenues was entirely due to lower MEC interest and other income, which declined by $2.1 million compared to the fourth quarter, partially offset by an increase in rental revenues of 300,000. The decrease in MEC income relates primarily to the retainment of the bridge loan which took place in November of 2006.

The lower G&A expenses relate primarily to a reduction in SOX compliance costs combined with the fact that the fourth quarter of 2006 included higher salaries and benefits largely relating to stock option expenses for new options issued in the quarter.

Turning to other significant activities, during the quarter, we acquired MEC's interest and rights at three real estate development properties for approximately $55 million. These included a 34-acre parcel in Aurora, Ontario, a 64-acre parcel of excess land adjacent to MEC's racetrack at Laurel Park in Howard County, and a 157-acre parcel in Palm Beach County, Florida, adjacent to MEC's Palm Meadows Training Center. In addition, we advanced $10 million under the [MEC] project financing which stood at $196 million on March 31, 2007.

Finally, in terms of our Magna work, two expansion projects were started in the quarter, representing 62,000 square feet of leasable area with a budgeted cost of $9.5 million. In total, at the end of the 2007 first quarter, there are four Magna projects under development, three in Canada and one in the U.S., which will add 64,000 square feet of leasable square footage at a cost of approximately $17 million, of which $6 million has been spent by March 31.

That concludes my formal remarks. Operator, please open the line for questions.

(OPERATOR INSTRUCTIONS). Peter Sklar, BMO Capital Markets.

I'm just wondering how the interest income line from Magna Entertainment is going to trend. Are they going to be trying down additional amounts on their facility through the course of the year or is that they have drawn what they're going to draw?

There is still a little bit more, about 20 million that they need to draw down in terms of the second slots facility that they just put together, Peter. Other than that, that's it.

Okay. On another matter, at the annual meeting this morning, John, Frank kind of made that off-the-cuff remark about maybe MI Developments could require the remaining Magna real estate that it doesn't already own and lease back to Magna. I couldn't tell if he was joking around or if there some underlying substance that. Is that a possibility or are there some impediments to that?

Well, I think, Peter, that question, to answer that question, we really need to look at our Magna relationship overall in general. Let's be honest here. The first quarter was really slow. The pipeline is not light; nothing came onstream. There are assets that Magna has that could come over on a onetime sale leaseback basis. Magna is growing, so as I said in my comments this morning, just because we have no business doesn't mean Magna is not putting together any Greenfield projects, because they are.

The reality is there is an uncertainty around our company, a lot of that uncertainty in terms of our strategic direction and relationship and business with Magna. A lot of that is driven by the ongoing litigation. So I think, first and foremost, that is something that we need to deal with. Once we deal with that and assuming we can then focus on just running our business, I do not see why -- Frank is not just making those comments just to make comments. I think he has always said Magna makes more money in their core business and that is where they should be investing their CapEx and not into bricks and mortar. So I think what we need to the first is resolve this ongoing litigation with Greenlight.

Okay. Can you take me back? What was the rationale for the properties that were included and the properties that were excluded at the time of the spinoff? Are there some structural issues related to these properties that remain within Magna?

At the time there was, Peter, because most of the properties that Magna had that did not come over to MID back in 2003 rested in our Spinco groups. When we were doing this transaction, it was -- we wanted to keep it quiet so we did not go down to the Spinco groups and structure those assets to move over to MID. We said there is always a possibility to do that later; let's get the deal done and just get the assets that are wholly-owned by Magna. That is why we did not take those assets with us at that time.

Just on the last area, with this new strategic investment that Magna may get approved and they may go forward with, it appears that Magna is just on the cusp of making some pretty significant investments in Russia that would include both acquisition of facilities and Greenfield. Is that the kind of business that would appeal to -- that you would be interested in?

Peter, that is absolutely the type of business we would love to do. Clearly, the growth on the Magna side, what we are seeing in terms of where new plants are going, are more so in Eastern Europe. Russia is going -- it looks like Russia is going to be part of that going forward. Certainly, we have some experience there already. We do have a vast portfolio in Austria; we have a facility in Poland; we have facilities in Slovakia. So Russia, I think is just, if we can get in there and grow with Magna, we would certainly love to do that business.

All right. That is all have. Thank you.

(OPERATOR INSTRUCTIONS). Sam Damiani, TD Newcrest.

Thanks. Just following on there, this Chrysler deal that Magna appears to be involved in, is there any possibility of MID participating in that transaction in any way, shape or form?

First, the deal has to get done and we're not close to that at all. Assuming that deal does get done and if Magna or Magna/Chrysler, whatever you want to call that entity, ever came to us to do a sale leaseback of some assets, sure we would love to do that transaction. Again, I would suspect that we will have other issues we'd have to explore there in terms of what is the covenant going to be like it? Is it a Magna covenant or a Chrysler covenant or what is the locations of these plants? Surely, these assembly plants are a lot larger than we are accustomed to. Clearly, you have got to look at the residual risk and what could possibly be the alternative use if, for some reason down the road, those plants are no longer pumping out cars. So again, it is wait-and-see but we don't know where Magna sits on that transaction but if they ever came to us, sure we'd look at it.

So you haven't been sort of asked to potentially consider something if indeed Magna does proceed here?

Sam, we're not involved in that transaction at all. I mean, that is strictly a Magna transaction and we haven't heard anything.

Okay. There is a lot of cash on your balance sheet. What are you doing with that sort of excess cash at the moment? Is it sitting in the bank or are you trying to invest in and earn a bit of a yield on it?

Right now, it is earning a little bit of a yield on it right now. It is sitting in the bank and will have to say see what we are going to use that for going forward.

There is no plan to put it in something a little higher yielding on a short-term basis?

I think, Sam, again, I'm go to go back to this uncertainty because if the cloud moves away, I think there's going to be many opportunities to deploy that cash with Magna and if not with Magna, you know, certainly we bought some assets from MEC. We are exploring to buy other assets. We do believe they are sitting on some great pieces of real estate that could be accretive to our numbers. So I think, in short-term, I think you're going to see us deploying that cash in one way, shape or form.

What about the Village at Gulfstream, what possible involvement do you see them might be having in there and then how much capital could that use?

Well, again, that is not -- I'm not make any bones about it but that is one of the assets we are looking at. MEC has a good joint venture going there with Forest City. We think it is a great development. We will have to see. Maybe we will step into MEC's shoes. Again, that is one of a number of properties they have that we are currently looking at.

All right. Just to wrap up, John, I think your comment at the meeting this morning was you have got to rethink the structure of the MEC investment. What exactly did you me by that? I wonder if you could flush that out a bit more as to what that could mean or what it could not mean?

Well when I'm trying to say, Sam, is, right now, if you look at where we are in trying to run our business, there's a lot of uncertainty. There's a lot of uncertainty with respect our relationship with both Magna and Magna Entertainment. I believe we had a clear game plan when were spun off and that is now being challenged and continues to be challenged. From our point of view, in terms of running a business, it has been difficult to pursue the strategy we had when we were spun off. I guess what we're seeing is we know where the extensive points are, specifically with our relationship with MEC. Again, it is an investment we need to manage. We do believe, we really do believe that we can come up with some constructive solutions that perhaps could remove this uncertainty. When I say come up with constructive solutions, that may meant hat we need to re-explore what our relationship specifically will be with Magna Entertainment going forward. I am not going to give you alternatives but certainly that is something that is high on our priority list.

Okay, well, the one alternative that was attempted three years ago of course was a takeover of MEC by MID. Would you roll that out or would that be possibly like a top consideration, top three -- one of the top three or four considerations in your mind right now?

You know, Sam, at today's annual meeting -- and I've said it before I think even in the press releases. When we look at our MEC investment, given where I think we need to go with it, you cannot rule anything out. Anything means if you want to include perhaps revisiting privatizing MEC, well, that may be on the list, but clearly, it has got to be something that makes business sense. Once again, that, combined with other alternatives, are things we are exploring.

Why is the situation with MEC so critical as you say the situation is with your strategy or with the Greenlight lawsuit and what not? Like, things seem to be working out just fine. You've got some loan arrangements MEC. You are buying the (inaudible) asset that makes sense now and then from, MEC, isn't that kind of working out just fine? Why is that such a concern right now?

If it's working out just fine, Sam, then I don't think I'd be under this cloud of litigation right now.

What I mean is you're dealing with it in a productive way, like you are satisfying the needs that are there, so it's working. I am just curious why you characterize it as so urgent.

Well, Sam, if it is working out in a productive way -- and I agree with you -- then why am I spending a lot of time on litigation and appeals and not worrying about running my business and making money?

No, I understand that, but I mean, it seems like there's two separate issues here. The one -- how you can deal with MEC, and the other one is how you pursue your real estate strategy. In some ways, I hear you, they are a little connected, but on the other hand, it seems that you're dealing with the MEC relationship in a productive (inaudible) you're doing a workaround fashion here. You've got (inaudible) loans and some asset transfers happening now and again. That seems to be working out just fine. You continue to do that. So why is it so urgent that you sort of -- your words were rethink the structure of your MEC investment. It's just not clear to me why that particularly is of heightened importance right now.

Try it this way -- I mean, let's assume that is all working like you're saying and it's productive, well one thing that is not working is my Magna business.

How does rethinking your structure of your own investment in MEC impact that?

Well, Sam, to me, it all goes back to this cloud we have over our head and this litigation. One of the remedies being sought there is for Frank to lose control of MID. I just don't see how that makes any sense for Magna wanting to give me more business if they now have an entity which has all of their key facilities, or a majority of them, not under common control. To me, that is a simple concept. So I want to get that business back. One way to get that business back may be that we need to rethink the structure and relationship with MEC because the litigation in -- one of the reasons or maybe the majority reason why it came on was because of our relationship with MEC and what people want or do not want us to do with it. I'm not trying to be evasive. I really believe it is something we need to explore to simply remove the uncertainty and this litigation cloud over our head.

I just don't see I guess the connection as being as tight as you seem to be suggesting.

Okay, well, I take your point but we see it another way.

Ha, thank you.

Bruno Yang, Citadel.

Hi, guys. There's been a lot of discussion regarding Magna International, the potential deals with Chrysler. Would you, as MI Developments, view that as positive or negative?

For the business?

If it is a transaction, if that transaction ever got completed, then it means there's opportunities for us to deal with assets that Chrysler may have or maybe it means that Magna wants to free-up more of its cash flow to pursue core business rather than real estate for themselves. So I would be that transaction -- if it ever gets culminated -- as being positive for our company.

Okay, thanks.

Thank you.

(OPERATOR INSTRUCTIONS). Gentlemen, there are no further questions at this time. Please continue.

Okay, I just want to thank everyone for participating on this conference call. We hope you had a chance to listen to our presentations we did this morning at the annual meeting. If you have not, I know they will be posted on our Web site if not this afternoon, I'm sure by Monday they will be on there.

I would just leave you with this thought. We are constantly searching for ways to allow us to better run our company and allow us better to obtain some good business for Magna, which I know is important for all of you guys.

Having said that, thanks again and until next time, we're signing off. Thanks.

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