Granite Real Estate Investment Trust (GRP.U) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the MI Developments second-quarter results conference call. (Operator Instructions). As a reminder, today's teleconference is being recorded Friday, August 8, 2008.

I would now like to turn our presentation over to the Chief Executive Officer, John Simonetti. Please go ahead.

Good morning, everyone. Thank you for joining our conference call. With me today are Richard Crofts, our General Counsel, and Richard Smith, our CFO, who will take you through our second-quarter results later in the call, following which we will open the lines for questions.

Our Board of Directors met yesterday and approved our financial results for the second quarter and six months ended June 30, 2008. In addition, the Board declared a dividend of $0.15 per share for the second quarter, payable on or about September 15, 2008 to shareholders of record at the close of business on August 29, 2008.

This morning, we issued a press release with our second-quarter results. A copy of this press release is posted on our website at www.MIDevelopments.com.

I also 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 facts 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.

I plan to keep my comments brief this morning. And as noted in our press release, following a transition period, I will be stepping down as MID's CEO and a member of its Board of Directors. This decision wasn't easy for me. I have been with MID ever since it became a public company, and over that period of time, there have been many challenges, but also many rewarding experiences.

And in terms of those challenges, my main focus over the past three years was dealing with issues relating to how our Company is structured and operated, and dealing with our investment in MEC. In fact, I will say that my management team and I have spent an enormous amount of time and energy on these matters. And it's been very frustrating that despite these efforts we haven't been able to broker a compromise solution amongst our shareholders.

Now in respect of the reorganization proposal, which was put forward to MID in March by a number of our shareholders, I viewed that transaction as another opportunity for us to resolve the cloud of uncertainty that had surrounded our Company for a number of years. Shortly after the proposal was announced, we began to actively discuss possible amendments to it with certain shareholders, including shareholders that supported the original proposal.

I will not be discussing or answering any questions about these meetings because we agreed that they would be carried out on a confidential basis. But I will say that once again, it is unfortunate that to this point in time, we haven't been able to arrive at a consensus solution. I still believe that if all parties remain open-minded and flexible, and at the same time recognized MID's unique framework and operating structure, there is no reason why we can't reach a compromise that is acceptable and beneficial for all MID stakeholders.

Now before I hand things over to Richard Smith, I want to say from a personal standpoint that I have been truly fortunate to have worked with some outstanding people at MID.

In closing, I want to extend my best wishes to my Board colleagues, my management team, and all the MID employees. With that said, I'll now turn the conference call over to Richard Smith. Richard?

Good morning, everyone. Before I begin, I would like to remind listeners that my comments will focus only on results of MID's real estate business, and, unless otherwise noted, all amounts in today's presentation are expressed in US dollars.

Annualized lead payments, or ALP, increased by 5% or $8 million during the first six months of 2008 to $185.2 million. $6.4 million of this growth was driven by contractual rent increases, including $4.9 million from five-year cumulative CPI-based increases on property representing 7 million square feet of lease able area, and 1.5 million from an annual CPI-based increase on property representing 7.4 million square feet of leaseable area.

Positive contributions were also realized from foreign exchange rate fluctuations and completed projects coming on-stream of $3.3 million and $1.2 million, respectively. Partially offsetting these positive contributions are decreases in ALP from vacancies, renewals and releasing of income-producing properties totaling $2.7 million, and other adjustments, of $200,000.

On a sequential basis, ALP decreased by $800,000 from $186 million at the end of the first quarter. Vacancies at two properties representing 287,000 square feet of aggregate leaseable area reduced ALP by $700,000. The renewal of a lease for an office building in Michigan resulted in a $1 million decrease in ALP. The renewal rate for this property was based on fair market rent, which was negatively impacted by the deterioration in the real estate market in Michigan.

On the positive side, contractual rent increases completed projects brought on-stream and changes in foreign exchange increased ALPs by $1 million in aggregate.

Funds from operations, or FFO, for the second quarter was $39 million or $0.83 per share compared to $31.3 million or $0.64 per share in the prior year. Please note that general and administrative expenses for the second quarter of 2008 and the second quarter of 2007 include unusual items. G&A expenses for the second quarter of 2008 include $4.3 million of advisory and other costs incurred by the Company in connection with its evaluation of the reorganization proposal announced in late March.

For the second quarter of 2007, G&A expenses include $2.1 million of similar costs incurred in connection with the Company's continuing evaluation of its relationship with MEC that ultimately were not undertaken, and $2 million of costs associated with MID's contribution of land to a not-for-profit organization to assist Hurricane Katrina redevelopment efforts.

Excluding these items and the related tax effects, FFO for the second quarter of 2008 was $42.2 million or $0.90 per share compared to $34.6 million or $0.72 per share in the prior-year period.

On a sequential basis, and continuing to exclude the previously mentioned unusual items and the related tax effects, FFO for the second quarter decreased by $1.7 million from FFO of $43.9 million, or $0.94 per share realized in the first quarter of 2008. FFO for the first quarter includes a $3.9 million lease termination fee for Magna. Excluding the after-tax impact of this item, FFO for the second quarter increased 2% from $41.3 million or $0.88 per share realized during the first quarter.

Higher revenues increased FFO on a year-over-year basis by $9.2 million. The positive contribution was partially offset by increases of $500,000 in G&A costs after adjusting for the previously mentioned unusual items; $700,000 in net interest expense; and $400,000 in cash taxes. This reduction in cash taxes excludes the tax effects of the unusual items and taxes on the gain on sale realized in the second quarter of 2007.

In terms of the $9.2 million increase in revenues, rental revenues contributed $5.7 million of the increase, driven primarily by foreign exchange and contractual rent increases. The increase in interest and other income from MEC added $3.5 million, primarily due to interest and fees earned under the bridge loan made available to MEC in September 2007.

The cash tax rate for the second quarter of 2008 was approximately 12.7% compared to 15.9% in the second quarter of 2007. The decrease in cash tax rate was primarily due to reductions in the statutory tax rate in Canada and Germany, and changes in the overall mix of taxable earnings in the various countries in which the Company operates, including the tax effect from the unusual items noted earlier.

In terms of the overall tax provision, income tax expense for the second quarter of 2008 was $4.7 million, representing an effective tax rate of 15.3% compared to an effective tax rate of 18.2% in the second quarter of 2007. Excluding $400,000 of taxes related to a $1.4 million gain on disposal of real estate realized in the second quarter of 2007, the effective tax rate for the second quarter of 2007 was 17.7%. The decrease in the adjusted overall effective tax rate is attributable to the same factors affecting the cash tax rate mentioned previously.

Turning now to the cash flows, the Company's cash balance at the end of June was $147.2 million, representing an increase of $7.3 million from the prior quarter. Sources of cash during the second quarter amounted to $53.1 million, including $41.3 million from operations and $21.8 million of loan repayments from MEC.

Cash used during the second quarter amounted to $55.8 million, including $8.5 million of capital expenditures, $32 million of net advances under the loan facilities to MEC, and $14 million of dividend payments.

With respect to the MEC bridge loan, a further $32.8 million was advanced and $19.8 million was repaid during the second quarter, bringing the total balance outstanding to $69.4 million at June 30th.

Subsequent to quarter end, an additional $8.5 million was advanced and $4.5 million was repaid under the MEC bridge loan. Combined with our project financing facilities, the total principal amount outstanding from MEC now stands at approximately $269.4 million. At the end of the quarter, the Company had four minor projects under development from Magna, including two in Canada and one in each of Mexico and Germany, representing an aggregate of 67,000 square feet of leaseable area with the budgeted cost of $12.4 million, of which $6.2 million had been occurred at June 30th.

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

(Operator Instructions). Sam Damiani, TD Newcrest.

Good morning, John, sorry to see you go.

Thanks, Sam. You've been a big supporter for that this Company so thanks for that comment.

Just curious on your timing, it seems like you're closer than ever to getting this reorg across the finish line. So just wondering why you would choose this particular point in time to move on?

All I can say is, look, I've been here for five years now, four as a CEO. When I came over to MID, it clearly was a great opportunity for me, but I've always expected to go back to the automotive side at some point. And having said that, it really is in terms of timing an opportunity came up over the Magna side. I've been thinking really hard about whether I should pursue it.

Clearly here at MID we've been through a lot of challenges, as you know. And for a number of years it has been frustrating since we haven't really received any significant new business from Magna for a few years now. And moreover, we've been trying very hard to re-establish that relationship, in order to reopen the pipeline. We've been working real hard as you know in trying to come up with a solution, a compromise solution that makes everyone happy. And I do believe that there is something out there that we will be able to achieve a consensus.

And look, I've tried for the last three years, and maybe what we need to do is take a step back and maybe a new face has to go and talk to the shareholders to try to get something done. It just seems like the right opportunity right now, right time. Having said that, there is a transition period so I will not be leaving right away. I will be staying here for a smooth transition, and I obviously will help in any way I can. And that may include continuing to talk about the reorg proposal.

Thank you for that. How long do you expect the transitionary period to last?

I can't answer that. It's open right now. I really don't have a specific timeframe for you.

And so in terms of the new CEO, I guess the search has just recently begun. What profile would the Company be looking for?

I'm not going to answer that one either. We have a compensation committee that will be reviewing candidates. And, obviously, they will take their choices to the Board and the Board can decide who the right candidate for this role will be going forward.

All right. Just on the G&A, $4.3 million written off in the quarter, all of that representing costs related to the proposed reorg. I don't recall any cost being written off in the first quarter. Is that correct?

That's right. Remember, we just received that proposal, I think it was March 31st. So there wasn't really a lot of cost. It was right at the end of the quarter when the first reorg proposal was announced.

Just like last year, you typically write off the cost when there's sort of no deemed value. And that would happen because maybe the reorg just isn't going to happen. Is that the message we should take? Is there something that triggered the write off now as opposed to just keeping it on the balance sheet in hopes of maybe it being saved for a future event?

I think we've had in two other or three other occasions where we've written off costs. I don't mean to be funny about it, but it sounds like that's what we do for business around here is trying to get a reorg done. Maybe they are more akin to running costs than they are something we should defer and hopefully get a deal done. I think it really came to the side of being conservative, and just -- there's no harm in expensing them as we incur them as we go along.

But that hasn't been the practice in the past, I don't believe. I think the expenses have -- the costs have been expensed kind of when the finality is achieved.

You're right, it's a change of how we account for them. But again I think it just -- better to err on the side of conservatism.

So it's not because there's some -- I guess uncertainty beyond a threshold that is forcing you to do this thing?

We've been at the altar twice on this one. We're going back a third time. And I guess, again, just to be conservative, there's no harm in just expensing them as we incur.

That would be the plan in Q3 going forward?

Absolutely.

Just finally, you mentioned a couple or one or two vacancies in the quarter. Those were new lead -- new vacancies that weren't expected? Is that right?

The vacancies in the quarter relate to -- there is one facility here in the GTA, the lease came up and was not renewed. One is a facility out in Michigan. That facility, we don't expect to -- what we're going to do is we put it -- we transferred that property from income-producing to held for sale. The vacancy rates are really high over in Michigan. It's going to be hard to re-lease, so what we're going to try and do is just sell that one.

It was 287,000 square feet, as I recall.

That's right.

Is it just the two properties then, the GTA and the Michigan?

That's it.

That's aggregate 287,000.

Right. Sorry, the size of the two, can you just --?

It was an aggregate 287,000.

The one in GTA is about 90,000 square feet, and the one in Michigan, about 200,000.

Right. And what's the plan for the GTA one?

We're going to try to release that one. It might take some time, but we're out there trying to find tenants.

Magna just reported their results a couple days ago; is there any change in their plant rationalization plan that you can talk about?

Nothing I can talk about. I mean clearly it's a difficult environment for them. They obviously need to rationalize and really think hard about their manufacturing footprint; things are extremely difficult in North America. We see that even on our end, because particularly in the Michigan area, vacancy rates are 15%, 20%. So they're moving up. But we continue to have discussions with them to figure out where they need to go in terms of our portfolio. But really nothing new, definitively has come down the pipe on that front.

All right, thank you.

(Operator Instructions). Sam Damiani.

This year I think was a little more lease roll than prior years. I think that's right, is that right?

Yes, there was, particularly in the first quarter. We had about 6.2 million square feet of property that kind of had a five-year cumulative bump. And again in the second quarter, about 800,000 square feet of what you call five-year cumulative bumps. So you're right, this year has been a good year for bumps for us.

Typically those are bumps during the term of the lease as opposed to lease expiration; that is what I'm referring to. This is an elevated year of lease expirations, as I recall?

Yes, it is, but those leases -- the new rent on those leases haven't really kicked in yet. Most of them expire in the latter half of the year.

I guess what I am most concerned about is the potential for those not to be renewed. Can you speak to your outlook on that in terms of what percentage of those expirees you hope or expect are going to be renewed?

It's tough to say now. We've got -- in total I think there is about 1.6 million square feet coming up for renewal. Magna has done a very good job of not having too much overcapacity, so we hope we're sitting pretty good. But clearly, there is going to be some in that bunch that will likely not be renewed. It's kind of hard right now to guess. We are in discussions with Magna. I'd like to say it's more than 50-50. It probably will be, but there certainly will be a chunk in there that we'll have to find some more tenants on.

And the 1.6 million, is that just in the last two quarters of the year?

Most of them, yes.

Have many rolled earlier this year, like in terms of expirees?

No, not really. It's funny how that works, but most of these expirees are going to happen in the second half of the year.

Thank you.

(Operator Instructions). At this time we have no additional questions in the queue. I'll turn the conference back to you at this time for any closing remarks.

I just want to thank everybody for participating on this conference call. Again, it's been rewarding yet challenging here at MID. And we hope to bring you some further developments shortly, but if not, thanks again. And bye for now.

Thank you, management. Ladies and gentlemen, at this time, we will concludes today's teleconference presentation. We thank you for your participation on the conference call. You may now disconnect, and please have a pleasant afternoon.