Granite Real Estate Investment Trust (GRP.U) 2011 Q2 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the conference call of MI Developments Inc. Joining you this morning are Bill Lenehan, Chief Executive Officer, and Mike Forsayeth, Chief Financial Officer.

Before we begin today's call, I would like to remind you that statements made in today's discussion may constitute forward-looking statements and that actual results could differ materially from any conclusion, forecast or projection. These statements are based on certain material facts or assumptions that reflect management's current expectations and are subject to known and unknown risks and uncertainties. These risks and uncertainties are discussed in the Company's material filed with the Canadian securities regulators from time to time, including the Risk Factors section of its annual information form for 2010. Readers are cautioned not to place undue reliance on any of these forward-looking statements. The Company undertakes no intervention or obligation to update or revise any of these forward-looking statements whether as a result of new information, future events or otherwise.

In addition, this presentation contains non-GAAP financial measures. Please refer to our second-quarter report and other materials filed with the Canadian securities regulators from time to time for non-GAAP reconciliation.

I will now turn the call over to Bill Lenehan.

Thank you Benjamin. Good morning. Hello. I am Bill Lenehan. I'm the CEO of MI Developments. I joined the Company at the end of June. Prior to joining the Company, I spent 10 years investing in real estate at a private investment firm.

With me on today's call are Mike Forsayeth, our CFO, and Jen Tindale, our General Counsel. Both Mike and Jen joined in the last few weeks. We look forward to updating you on our business.

We recently posted on our website additional statistics on our real estate assets that had not been previously made available. I would like to briefly summarize this disclosure but would recommend you view it in detail.

Our portfolio is highly occupied and 95% of our properties are well utilized. 80% of our rents expire in 2016 or beyond. 8% of our rents are from R&D facilities and office buildings, 25% are from light industrial properties, and 66% are from manufacturing facilities. While virtually all of our industrial and manufacturing assets include office and other higher use space, we categorize our rents by the asset's primary use.

You will note that we have one less building as of June 30 as we sold 455 Magna Drive, our corporate headquarters located on Magna's campus as part of the plan of arrangement. We intend to move our corporate office by the end of the year.

I would like to provide a brief update on our business after which Mike will review the quarterly results with an emphasis on our ongoing Real Estate Business. After that, we will take some questions.

Mike, Jen and Jeff Barrett, our new VP of Capital Markets and Strategic Initiatives, have all recently started. I'm extremely pleased that they've joined and their dedicated to the business is already evident. They each have impressive credentials in their respective areas of expertise.

In addition to the prior management team's departure, which was previously announced, seven additional staff members have left the Company. Annual compensation for the prior management team and these employees is approximately $4 million.

In addition to the salary reductions, we have identified significant additional potential spending cuts in areas such as travel, insurance, and corporate sponsorship to further reduce the Company's G&A run rate. Our historical corporate overhead is not representative of a normalized run rate. As a management team, we are in early stages of establishing and building our relationship with Magna, discussing lease extensions, property expansions and on a limited basis new construction and property acquisitions.

We've also put in place new corporate governance practices with updated board charters and policies that are posted on our webpage. I would specifically recommend you view the charter of the strategic review committee. Our strategic review committee process is underway and we expect to conduct the strategic planning process concluding this fall. To date, we have interviewed and selected financial advisors and they have commenced their work. We've begun a comprehensive review of our business, including tax, dividend, capital structure, etc. I would also like to point out that I have visited already a number of the plants, including most of the larger plants in the United States, Canada, Austria and Germany.

We believe an important part of the strategic review process will be enhanced disclosure and improved shareholder communication. As previously discussed, we've posted additional real estate progress statistics on our website. We intend to spend more time and be more proactive with shareholders and other stakeholders in discussing our business. We intend to conduct investor property tours of our facilities in Europe and North America this fall.

Now over to Mike to discuss the financial results.

Thanks Bill. Before I go through the financial results for second quarter and year-to-date, let me just give our audience a short bio of my own background. Without dating myself too much, I have over 30 years experience in the financial arena. Prior to joining MI Developments, I've been the Chief Financial Officer and held shift senior executive financial and operating positions in several iconic public and private companies. These companies include most recently Chief Financial Officer of Itrawest, a complex Canadian-based ski and real estate company; Chief Financial Officer of Cara Operations Ltd. Cara was the largest full-service restaurant operator in Canada, and a leader in airline catering and food service. In the late '90s, I was at Laidlaw Inc. where I held several senior management positions, including President of their Transit and Tour Operations, President of Greyhound Canada and Chief Financial Officer of Laidlaw's Passenger Services Group, which comprised of Laidlaw's 40,000 schoolbus operation. Earlier on, I was Bank of Montreal's first senior manager of Investor Relations. I'm a chartered accountant, spent nine years with Coopers & Lybrand, now Price Waterhouse Coopers, in various areas including their audit practice, their insolvency group and even a couple of years in London, England.

With that, I'll turn it over to the results themselves.

As of July 1, 2011, MID is a Canadian-based pure real estate company. MID has a new independent Board of Directors, and as Bill mentioned, a new senior executive management team.

Going forward, MID is a company engaged in the acquisition, development, construction, leasing, management and ownership of a predominately industrial rental portfolio of properties in North America and Europe. Those properties are leased primarily to Magna and its subsidiary, [Automotive] Operating Units. The results of these business activities are reported in our financial statements as the continuing operations of the Company.

Prior to July 1, 2011, MID, as everyone knows, also had a Racing & Gaming Business, which included the operation of thoroughbred race tracks located in the US and a casino. Following the close of business on June 30, 2011, the Racing & Gaming Business and substantially all of MID's land held for development were transferred to entities owned by Frank Stronach and his family. This was in consideration for the elimination of MID's dual-class capital structure through which Mr. Stronach and his family controlled MID. As previously reported, this transaction was completed through a court approved plan of arrangement. The operating results of the assets and business transferred pursuant to that plan of arrangement are reported in our financials as discontinued operations.

Today, the focus of my comments will be directed at the continuing operations of MID, mainly the results of operations associated with our remaining real estate portfolio. As it relates to the results from discontinued -- from the discontinued Racing & Gaming Business, I have only two comments to make. The results for both the three months and the six months include a net after-tax gain of $89.5 million that is directly attributable to the transfer of assets and business to Frank Stronach and his family. Because the distribution of the assets and liabilities under the arrangement is considered a non-pro rata distribution, the transfer has been recorded at fair value. As a result, there is a gain on the P&L that I just referred to, and the distribution of the assets and business at fair value was recorded in the equity section of the balance sheet, more akin to like a dividend treatment. The results from operations of the discontinued business are not comparable to the prior quarter, mainly because of the timing of when the MEC business was actually acquired by MID in the second quarter of 2010.

Turning to the results of our business, namely our continuing real estate operation, the financial highlights for the second quarter are as follows. Excluding the interest income earned from MEC of $1 million in the prior period, rental revenues increased $4.1 million to $46.4 million, or 9.7% over the same period last year. Approximately 76% of the increase is attributable to FX and the strengthening of our source currencies relative to the US dollar. The remainder relates to contractual rent increases and incremental rent from completed building improvement projects and facility expansions.

G&A expenses for the quarter were $12.8 million, or $2.1 million higher than a year ago and as Bill intimated, I would argue are not comparable to the prior year, nor are they indicative of the future run rate of the business going forward.

The two main components of the increase were increased compensation expense of $1.8 million due to payments to former executives and the non-employee director share-based compensation plan and higher D&O insurance costs of $800,000. Both periods had significant advisory fees and costs which are largely nonrecurring and not representative of the future run rate.

Now, I know your next question is going to be what's our view of the future run rate of the business going forward? To which our answer at this time is substantially lower. This can easily be inferred by the reduction in advisory fees, the ongoing annualized salary reduction of $4 million as a result of the elimination of the positions Bill mentioned, and as disclosed in our subsequent event note in the financials, though in upcoming quarters you'll still see severance expense to come in future quarters. That's just over $5 million.

There'll also be reduced travel costs. As part of our business model review, we are [sized] in the appropriate overhead structure for the business going forward.

As it relates to interest expense, depreciation, and ethics gains and losses, there's nothing really of any significance to mention on those particular line items.

In the 2011 quarter, there was an impairment charge of $2.8 million taken on a commercial office building in Michigan, while the 2010 second quarter saw the benefit of an impairment recovery on the MEC loans of $10 million and a favorable purchase price adjustment of $20.3 million relating to the acquisition of the MEC transferred assets.

Lastly, there was a $23.3 million favorable swing in income taxes quarter-over-quarter. This is due to Q2 2011 reporting in total net recovery of $11.2 million, and this includes a $13.3 million recovery from a tax liability that was reversed and related to 2010 internal amalgamation that was set aside and canceled by the Ontario Supreme Court Justice. Excluding that reversal, the Q2 2011 effective tax rate was 12.8%. This is significantly lower than the 2010 effective rate, which reflected the tax impact on the revaluation of our future assets in relation to the loan recoveries on MEC. When you factor all of these items into a comparable analysis of the quarter-over-quarter results, we believe you'll come to the conclusion that, from a pure operating perspective, our overall results will show favorable improvement.

Turning to the six-month year-to-date numbers, excluding the interest income earned from MEC of $1.8 million in the prior period, rental revenues increased by $5.3 million or to $91.2 million, or 6.2% over the same period last year. As with the quarter on its own, approximately 68% of that increase is attributable to foreign exchange. The remainder relates to contractual rent changes and incremental rent earned from various projects and facility expansions.

G&A expenses for the six months were $26.9 million or $4.4 million higher than a year ago and, again, not indicative of the future or comparable to the prior period. The two main components of the increase were also attributable to increased compensation expense of $2.2 million due to payments to former executives and a non-employee director share based comp plan and higher D&O insurance costs of $1.9 million.

As with the quarter, both periods -- the first half periods had significant advisory fees and costs, which are largely nonrecurring and not representative of the future run rate -- $8.3 million in 2011 and $7.9 million in 2010. Again, nothing of significance to mention in the interest expense depreciation or FX gains and loss line items. The six months of course include and reflect the impairment charge I previously mentioned, as well as the impairment recovery related to the MEC loans and purchase price adjustment.

Lastly, there was also a $24 million positive swing in income taxes when comparing the first half of 2011 to the first half of 2010 and the swing is due to the reasons I previously mentioned. Again, as with the three-month numbers, when you factor all these items together, the comparable analysis I think will again yield a favorable conclusion as it relates to our results year-over-year.

Looking to the balance sheet, I just want to make five points. We have cash on our balance sheets of $90.7 million. Our debt is just under $300 million and we are well (technical difficulty) all of our bank covenants. The debt increase that you see in the equity section is due to the distribution of the transferred assets and business to Mr. Stronach and his family. Also in the equity section you'll see other comprehensive income, and that relates solely to the favorable currency translation impact of our assets and liabilities on our balance sheet.

Also for the six months, we've invested $27.6 million in capital expenditures to enhance our future revenue stream. The major investments were as follows -- $12 million in Austria, and that is all Magna related; $9.3 million in Germany, again Magna related; $7.4 million in Canada, and that is not Magna related but to a new customer in a facility, namely Siemens.

The last thing I want to do is I want to thank the financial team at MID as this was a very complex quarter from a financial reporting perspective. They did a great job under a tight time line and constraints and had to cope with a new board and a new management team.

Also on a personal note, I want to thank John Simonetti for his leadership of the financial team turning the course of this interim period.

With that, I'll turn it back to Bill.

Thanks Mike. We look forward to your questions. Operator?

(Operator Instructions). Sam Damiani. TD Securities.

Good morning. It's certainly not the easiest name to pronounce. Just on the datasheet that you provided, which was great, thank you very much for that, the utilization -- could you be a little bit more specific as to when you say utilized and low utilization, what percentage utilization generally should we assume would be sort of average for those two categories?

I would say that we went property by property and made an assessment of what's going on in each asset, the contracts that Magna has, how many shifts they're running etc. We wanted to differentiate the low utilization line item such that our owners could have a sense of which assets are not being fully productively employed by Magna. We think it's a small number, and we wanted to differentiate that so our investors could understand what level of operations are taking place in the plants.

It's a property by property, asset by asset analysis. As you infer from your question, there is somewhat of a qualitative component of the analysis.

Should we think of low utilization somewhere between kind of 10% and 50%, and then the utilized would be somewhere between on average maybe 80% to 100% utilized? Is that a reasonable way to think about it?

Yes, it's a continuum. I don't think -- I think low utilization plans you kind of know it when you see it. These are assets that they're not running equipment on their full floor. They're not running multiple shifts a day, etc. Then the full utilize plants again are very well utilized. They're producing parts at a full run rate.

And just on the annualized lease payments, do you have a sense, having perhaps gone through the leases, do you have a sense as to the schedule of upcoming contractual rent increases over the next 12 to 24 months? Is there anything sort of unusually large materializing over the next short-term?

I don't think there's anything unusual. (multiple speakers) portfolio has, as you infer from your question, has contractual rent increases, and we expect those to continue.

Just on the lease roll in obviously '13 and '17, is there anything you can say at this point in terms of progress of talks with Magna as far as extending those terms?

Not specifically, but I would say that, this fall, we intend and have already scheduled meetings with Magna to go through a run roll.

Great, thank you very much.

Steve Velgot, Susquehanna Group.

Hi Bill. Listen. I just had a question, given I know you're going through strategic alternatives, but could you say whether there is anything that's preventing management or the Board from looking at something like a normal course issuer bid or a share repurchase program, given kind of the sell-off we've had in the market of late, or is that something that is better to wait for this strategic review to go through?

Yes, I think you nailed it. We're considering a number of different factors, and we are working very hard to get that process concluded in a short time period. At the conclusion of that process, will address issues like NCIB, dividend, capital structure, etc.

Okay. You mentioned you expect to get through that sometime this fall, correct?

Correct. Work is already underway.

Great, thanks very much.

(Operator Instructions). Sam Damiani, TD Securities.

I just wanted to ask about the Magna International results (inaudible) a week or so ago, if you had a comment on how those impacted I guess your view of the business, particularly in Europe.

Sure. I'm going to answer the question from the perspective of a landlord, not necessarily from the perspective of an auto research analyst. Magna continues to be a very strong credit, a terrific counterparty. They are actively turning around Europe. I have confidence they'll be successful in that endeavor.

North America remains very strong. They have low leverage, and I think what's clear from their results is they're growing aggressively, and they remain a very good tenant.

Great. Just switching over to sort of the lighter utilized plant facilities and those that are vacant, I know it's a very small portion of the portfolio, but having I'm assuming seen many of those properties, could you give us some characterization as to what they're like, what locations they're in and what sort of I guess opportunities there are either to re-lease them or to redevelop them?

I would say that they tend to be on the more generic industrial side. Thus it's more likely that we will have an ability to re-tenant them. But I think that, as you mentioned, in general they're a very small portion of our portfolio. We intend to be active, realizing value from those assets. Some of them, as you can read through our portfolio overview, are under lease by Magna and we continue to collect rent from Magna. A small portion of them are vacant and not under lease. Obviously, our intention is to either sell or re-lease those properties. There's nothing about those properties that would prevent us from doing that over a normal time period.

They're generally spread throughout geographically, or are they (multiple speakers)?

Yes, there's really no thematic -- there's nothing thematic about them. They're representative of a normal industrial portfolio.

I know you don't have a lot of lease roll in the next year and a half, but any commentary as to how we should think about renewal discussions, and conclusions to take place on that sort of roughly 3% of your space?

I don't think there's anything notable about the leases that we have coming up in the next couple of years.

So you expect them to be renewed in the normal course?

Yes, I would say so.

Thank you.

We have no further questions at this time. I'll now turn the call back over to you.

Thank you. I appreciate everyone joining the call today. Thank you. Have a great weekend.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.