Granite Real Estate Investment Trust (GRP.U) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the MI Development's third quarter 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 for questions. (OPERATOR INSTRUCTIONS) I would like to remind everyone that this conference is being recorded today, Friday, November 7, 2008 at 10:30 a.m. eastern time.

I would now like to turn the conference over to Mr. Dennis Mills, Vice Chairman and Chief Executive Officer. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thank you for joining our conference call. Our board of directors met yesterday and approved our financial results for the third quarter and nine months ended September 30, 2008. In addition, the board declared a dividend of $0.15 per share for the third quarter payable on or about December 15, 2008 to shareholders of record at the close of business on November 28, 2008. This morning, we issued a press release with M.I.D.'s financial results for the third quarter. The press release is posted on our website at www.midevelopments.com. With me today is Richard Smith, our Executive Vice President and Chief Financial Officer. Richard will take you through our financial results later in the call. After that we will open the lines for questions. I also want to 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. In August, the board asked me to become M.I.D.'s Chief Executive Officer. I have been a director of M.I.D. since August 2004 and so I am quite familiar with the Company and with the challenges that it has faced since it was spun off from Magna International. Those challenges have only intensified in recent months and shareholders of M.I.D. have certainly not been hesitant to make their views known, whether privately to me or publicly through filings with the S.E.C. However, as those of you who know me will attest, I am by nature a very positive person, someone who deals in hope and if people wish to criticize me for that, then so be it.

Since the time of M.I.D.'s inception as a public Company, we have had a controlling equity interest in Magna Entertainment. In recent years, Magna Entertainment has experienced significant operating and financial challenges and our relationship with M.E.C. has been the subject of particular focus in our interactions with shareholders. Although some people may disagree, I still believe that there is an opportunity to turn things around at M.E.C. I still believe that M.E.C. has tremendous assets and potential upside. I'm sure that many people will be quick to point out that M.E.C. has failed in its prior turnaround efforts. Nevertheless, I think M.E.C.'s announcement earlier this week that it has retained an experienced US advisor to assist it in developing restructuring alternatives and that it is exploring the possibility of selling or entering into joint ventures on core, core assets is a big step forward.

I am also very encouraged by the positive results of the Maryland slots referendum vote earlier this week. Accordingly, I still believe that it is the right thing to do to have M.I.D. continue to support M.E.C. through this journey provided, of course, that we can continue to be sure that M.I.D.'s interests are properly protected. And so under the terms of the existing consulting agreement between us and Magna Entertainment, we will continue to provide assistance to M.E.C. in exploring asset sales, joint venture opportunities, partnering arrangements and other potential strategic transactions. At the same time, Magna Entertainment must significantly improve its operating results. And we will also intend to provide assistance to M.E.C. in developing ways to stop the negative cash flow and help turn around their operations.

As noted in this morning's press release, discussions with M.I.D. shareholders on the reorganization proposal that was announced in late March of this year have effectively terminated. However, I remain optimistic that our shareholders will continue to engage in a dialogue with the Company's financial advisor, G.M.P. Securities, with the goal of developing a transaction that could attract the necessary shareholder support to proceed. This is a priority for us. At the same time, M.I.D. will continue to explore strategic transactions and alternatives available in respect of its investment in M.E.C., including a recapitalization, restructuring or sales of some or all of M.E.C. assets, and evaluating whether or to what extent we might participate in any such transactions or alternatives.

At this point, I want to take a few moments to discuss the current challenges facing our real estate business, given the negative economic developments the global financial crisis, in particular, depressions in the global automotive industry. Magna disclosed earlier this week that it expects to close additional facilities in North America and western Europe in 2008 and beyond, while growing its presence in new markets, including Asia and eastern Europe where to date M.I.D. has not had a significant presence. Although so far, Magna's plant rationalization strategy has not had a material impact on our portfolio, we have to anticipate the possibility that their strategy may broaden to include additional M.I.D. facilities. That being the case, I have asked Don Cameron, our Chief Operating Officer, to step-up his efforts to source third party tenants for certain of our properties.

Don has already had some success over the past few months adding strong, high quality companies, such as Cardinal Health and Trench Canada, a subsidiary of Siemens, to our tenant roster and we will continue to expand our efforts to diversify in this area. In addition, we are fortunate that over time the industrial nature of some of our more mature locations has changed and there are opportunities to rezone certain of our existing properties to a better and higher use. At the same time, given that none of us has any real idea of how long this downturn in the real estate and automotive industries will last, I believe that it is only prudent for us to also at least consider diversifying into other lines of business outside of our existing investments in real estate and M.E.C. I am hopeful that the board and management can also identify other opportunities to deploy our capital in a prudent manner that is in the best interest of the Company.

Although we will continue to consider deploying our capital to buyback our shares under the right circumstances, I want to note that in my view, it has always been quite clear that M.I.D. would favor long-term strategies intended to grow and expand the business over short-term strategies. We have all seen what has happened recently to companies that focus too much on short-term strategies. Although the recent significant downward movement in our stock price is not something that we are pleased about, we are not the only real estate Company that is experiencing this pressure. And we will not let short-term thinking sidetrack us from our longer term goals. M.I.D.'s focus will remain on developing and growing our business to maximize the return on shareholders equity over the long-term. In difficult times, it is always important to have colleagues who can help share the load.

On that note, I want to welcome the newest additions to the M.I.D. board of directors, Franz Deutsch and Ben Hutzel. Both these gentlemen are very accomplished and experienced individuals and I look forward to their assistance as we navigate through these challenging waters. I also want to recognize Senator Rod Zimmer, who was appointed to the lead director role by M.I.D.'s independent directors and who I am confident will also provide help in steering the ship. I will now turn the conference call over to Richard Smith, so that he can take you through the financial results for the quarter. Richard?

Thanks, Dennis, and good morning, everyone. Before I begin, I would like to remind listeners that my comments will focus only on the results of M.I.D.'s real estate business and, unless otherwise noted, all amounts in today's presentation are expressed in US dollars. Annualized lease payments, or A. L. P., increased by 2% or $2.7 million during the first nine months of 2008 to $179.9 million. This growth was driven by $8.1 million of contractual rent adjustments including -- $5.5 million from cumulative C.P.I. based increases on properties representing 8.2 million square feet of leasable area; $1.5 million from annual C.P.I. based increases on properties representing 7.4 million square feet of leasable area; and $1.1 million from fixed contractual adjustments on properties representing 3.2 million square feet of leasable area.

The completion of six Magna related expansion projects in the first nine months of 2008 added an aggregate of 144,000 square feet of leasable area and further increased annualized lease payments by $1.8 million. Partially offsetting these positive contributions were -- decreases in A.L.P. of $2.7 million from vacancies, renewals and re-leasing of income producing properties; $4.2 million from foreign exchange rate fluctuations; and $300,000 of other adjustments. On a sequential basis, A.L.P. decreased by $5.3 million from $185.2 million at the end of the second quarter. A.L.P. was negatively impacted by $7.5 million due to the strengthening of the US dollar against all foreign currencies in which the real estate business operates and $100,000 of other adjustments. On the positive side, contractual rent adjustments and completed projects brought on stream increased A.L.P. by $1.7 million and $600,000 respectively.

Funds from operations, or F.F.O., for the third quarter was $52.9 million or $1.13 per share compared to $37.3 million or $0.77 per share in the prior year period. Please note that the F.F.O. for the third quarters of 2008 and 2007 were affected by a number of unusual items. General and administrative costs during the third quarter of 2008 include $1.2 million of advisory and other costs incurred in connection with the reorganization proposal announced in late March and the exploration of alternatives in respect to M.I.D.'s investment in M.E.C. In addition, G&A costs include a $1 million bonus payment to M.I.D.'s former CEO concurrent with his departure in August 2008. F.F.O. for the third quarter of 2008 was also impacted by an $8.7 million current tax recovery from revisions to estimates of certain tax exposures and the ability to benefit from certain income tax loss carry forwards previously not recognized, both driven by the results of tax audits in certain tax jurisdictions.

And an $800,000 current tax recovery offset by an equal future tax expense resulting from the internal restructuring of one of the real estate business US operating entities. For the third quarter of 2007, F.F.O. includes a net $1.1 million current tax recovery primarily due to a favorable tax reassessment in relation to land sold in a prior year. Excluding these items and their related tax effects, as applicable, F.F.O. for the third quarter of 2008 was $45 million or $0.96 per share compared to $36.2 million or $0.75 per share in the prior year period. Higher revenues, lower G&A costs and lower cash taxes increased adjusted F.F.O. over the prior year period by $8 million, $300,000, and $1.1 million respectively. These positive contributions were partially offset by a $600,000 increase in net interest expense. In terms of the $8 million increase in revenues, rental revenues contributed $3.2 million of the increase, driven primarily by contractual rent adjustments and foreign exchange.

The increase in interest and other income from M.E.C. added $4.8 million, primarily due to interests and fees earned under the bridge loan first made available to M.E.C. in September 2007. Adjusting for nonrecurring tax recoveries and the tax effects of unusual G&A costs, the cash tax rate for the third quarter of 2008 was 10.2% compared to 16% in the third quarter of 2007. In terms of the overall tax provision, there was an income tax recovery for the third quarter of 2008 of $7.2 million, representing an effective tax rate of negative 20.2% compared to an effective tax rate of 10.9% in the third quarter of 2007. Adjusting for the unusual items discussed previously, the overall tax provision was 15.6% in the third quarter of 2008 compared to 19.5% in the prior year period.

The reductions -- the reduction in the adjusted cash tax and effective tax rates are primarily due to reductions in the statutory tax rates from 2007 to 2008 in Canada and Germany, and changes in the proportion of income earned in the various tax jurisdictions in which the real estate business operates. On a sequential basis, and continuing to exclude the after-tax effects of the previously mentioned unusual items, the after-tax effect of the $4.3 million of advisory and other costs incurred by the Company in the second quarter of 2008 in connection with its evaluation of the reorganization proposal and $1.4 million of current tax expense from the second quarter that was reversed as part of the unusual current tax recovery in the third quarter. F.F.O. for the third quarter increased by $1.4 million, from F.F.O. of $43.6 million or $0.93 per share realized in the second quarter 2008.

This sequential increase in F.F.O. was primarily due to the impact of foreign exchange rate fluctuations and the timing of costs associated with our annual meeting and related filings. Turning now to the cash flows. The Company's cash and cash equivalence balance at the end of September was $156.3 million, representing an increase of $9.1 million from the prior quarter. Sources of cash during the third quarter amounted to $48.5 million, including $43.5 million from operations and $5 million of loan repayments from M.E.C. Cash used during the third quarter amounted to $39.4 million, including $2.9 million of capital expenditures, $21.9 million of net advances under the loan facilities to M.E.C., $7 million of dividend payments and a $7.4 million reduction in cash from the effect of changes in foreign exchange rates and other items.

With respect to the M.E.C. bridge loan, a further $24 million was advanced and $4.5 million was repaid during the third quarter bringing the total balance outstanding to $89.2 million at September 30. Subsequent to quarter end, an additional $18.3 million was advanced under the M.E.C. bridge loan. Combined with our project financing facilities, the total principal amount outstanding from M.E.C. now stands at approximately $303 million. At the end of the quarter, the Company had four minor projects under development, including three in Canada and one in Austria, representing an aggregate of 20,000 square feet of leasable area with a budgeted cost of $7.3 million, of which $500,000 had been incurred at September 30th. This concludes my formal remarks, operator, we will now open the lines for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from Andrew McKendry of B.M.O. Capital Markets. Please go ahead, sir.

Hi, thanks. Just a couple questions. You mentioned in your opening remarks, Dennis, that your intentions to diversify into other lines of business outside of M.E.C. and real estate. Wonder if you could just elaborate on that.

Well, Andrew, we're all aware of the challenge that the real estate sector's going to be going through over the next few years and so management has taken a position that alongside looking for real opportunities in the real estate business, we should not be closed minded about looking at some other business opportunity that could help us grow the business and weather through that storm. But I don't -- at this time, we have no specifics.

Okay. Just in terms of -- you mentioned stepping up efforts to source third party tenants and a couple of names there. Are you seeing kind of a lot of -- ?

Opportunity?

Yes, opportunity, I guess and what's -- if you can just talk a little bit more about that.

We're really blessed here at M.I.D. to have one of the most experienced real estate operators in the nation, Don Cameron. His reputation is widely known and combined with Magna's M.I.D.'s goodwill and reputation, we're finding that, that when we knock on doors people will listen and we're actually, if I could put it in a street word, we're hustling to try and find third party tenants and we're doing that very aggressively. One of the things that -- I've been on the job for approximately 60 working days and one of the things that -- one decision that we took here was that it's a little different from my predecessor. We've got a great management team here and we're trying to manage and operate the business, and what we've done is let G.M.P. interact to try and develop a solution, a transaction for shareholder support. This has allowed Don Cameron and others on his team to go out there and really try and make sure our facilities are completely leased.

Okay. Just a couple of questions on the -- maybe you just talk on the financials. First of all, the cash tax rate of 10% seems a bit low. Is that something you'd expect to continue?

Andrew, we expect to be somewhere between 10% and 15% going forward. You have to remember that mix does have a significant impact on our tax rate. The interest and fees earned on the M.E.C. loans is earned at a very low rate of tax. As that increases in proportion to other income, the tax rate will -- decreases.

Okay. Thanks. I understand that. Just one other item, just on the G&A expense, can you -- I think you mentioned -- well it was about $4 million I think excluding the unusuals of that. A good amount we could expect to continue going forward?

Somewhere between $4 million and $4.5 million is reasonable. I think the -- we have a bit of a seasonal effect in the second quarter, as we have additional filing costs as well as annual general meeting costs that incurred during that period. But somewhere in the order of $4 million to $4.5 million is reasonable.

Okay, thanks.

(OPERATOR INSTRUCTIONS) Your next question comes from [Bill Bane] of Crystal City Sports Pub. Please go ahead.

Dennis.

Hi, Bill.

Hi, how are you.

Never better. Nice hearing from you.

Good talking to you, sir. I'm calling about our investment in M.E.C. As you are well aware of, Maryland just passed slot machines, but in order for us to get that and ensure we get it, we have to clean up our balance sheet of M.E.C., which is going to pose a big problem because everybody's going to come firing at us saying we're not going to be able to deliver because we're broke. So with M.I.M. owning 50% of M.E.C., it's in their best interest to clear up this balance sheet because it's going to be worth hundreds and hundreds of millions of dollars to this Company in the long term and it is going to be impossible to do without cleaning up this balance sheet.

And what, what I feel like should be done is, especially with M.I.M. owning a 50% interest in it you've got to take these loans and get them down to not usury rates, we got to get them down -- make a convertible preferred at 6% and then try to sell off San Anita to raise some cash and pay down a big portion of our debt there. You could have a home run with M.E.C. coming with Maryland in slots and coming back to Lone Star with Texas and slots and trying to get them at Thistle again. All these states need money. They're all broke like all of us. With that in mind, they're going to go to alternative areas to get money that aren't invasive to their taxpayers, especially when it's done on other borders. We've got a good chance to get all this in the next few years if we do it right. But we've got to clean up our balance sheet on M.E.C.

Well, Bill, I'm going to say two things. First of all, you're absolutely correct. We do have almost a 60% equity interest in M.E.C. As I said in my opening remarks, we still have a view that M.E.C. has assets that are worth significantly more than the amount of its secured debt, including the debt owed to M.I.D. We have engaged G.M.P. Securities to work with our shareholders who are presenting constructive ideas, and I'm going to appeal -- we're well aware of the opportunity in Maryland and I am going to appeal. I take your thoughts in a constructive way and I'm going to appeal to you, as I said, I've been on the job for 60 days. We want to get through this and just give us a little bit more patience. Thank you.

Thank you, Dennis.

Your next question is a follow-up from Andrew McKendry of B.M.O. Capital Markets. Please go ahead.

Thanks. Just wondering if could talk about where you're at in terms of Magna's plant rationalization, what is the number of facilities and kind of activities you're working on for those facilities?

Sure, Andrew. In our total portfolio, what has been -- Magna has announced and I'll note that there was one initial announcement on Tuesday. They announced on Tuesday that they were intended to close the facility in St. Louis, Missouri, a seating facility. We do own that facility and that facility still has five years left on the lease. Magna continues to honor its obligations in relation to that lease. Of the total facilities that have been announced to date, there are 15 facilities. Let me run through the list so that you have a complete understanding. Of the 15, four of those facilities have been sold. Three of the facilities have been re-leased.

One of the facilities in the U.K. has been designated for redevelopment, a very attractive redevelopment opportunity there to residential. One of the facilities, which the lease has expired, is intended to be closed. It has been closed and we will -- in fact, be sold by M.I.D. So the total we've dealt with at this stage are nine. There are six remaining. And of the six that remain, the shortest lease term remaining on one of the six or on all of the six is 4.8 years. Some of the leases on these facilities still have ten years left on their term. So the full details will be included in our M.D.&A, which will be filed later today. But that kind of gives you the rundown of what we have dealt -- how we have dealt with those facilities.

Great, that's helpful, thanks.

If there are no further questions, operator, then we would thank everyone who tuned into the call and we will continue to be focused to try and get things accomplished. Thank you very much.

Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation. You may now disconnect your lines.