Granite Real Estate Investment Trust (GRP.U) 2011 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the conference call of MI Developments Incorporated. Joining you this afternoon are Bill Lenehan, Interim 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, forecasts or projections.

These statements are based on certain material facts or assumptions and 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 Administrators from time to time, including the risk factors section of its annual information form for 2010 and its quarterly report filed this morning.

Readers are cautioned not to place undue reliance on any of these forward-looking statements. The Company undertakes no intention or obligation to update or revise any of these forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. In addition, this presentation contains non-GAAP financial measures. Please refer to our third quarter report and other materials filed with the Canadian Securities Administrator from time to time. I will now turn the call over to Bill Lenehan.

Thank you, Benjamin. Hello, I am Bill Lenehan, the interim CEO of MI Developments. With me today on today's call are Mike Forsayeth, our CFO; and Jen Tindale, our General Counsel. The third quarter was the first full quarter of results under our Management; and we look forward to updating you on our business. We are hosting this call from Vienna, Austria, where we have been doing tours of our assets with the rest of Management and the Board of Directors.

As it is late here, I intend to make some summary comments. Mike will review in detail our quarterly financial results, and we will then open it up to a brief Q&A. Note that a couple weeks ago, we announced The Company's strategic plan which included hosting a conference call to review the plan with investors. Given how recent that announcement was, I think it's clear that there are no significant updates to the progress we've made on several of the initiatives outlined in the plan. We will, however, be clearly communicating progress towards executing on this plan in future calls.

In general, this was an uneventful quarter for the operations of MID. All of the key metrics that I discussed during our Q2 conference call remain largely in place, as to be expected given our long-term lease structure and high credit tenancy. You will note that the primary driver of changes quarter over quarter is currency fluctuations. Detail of our portfolio metrics can be found in an updated portfolio statistics sheet on the front page of our website.

We delivered on-line some construction projects this quarter; and generally speaking, we are encouraged by the pipeline of opportunities we see with Magna. As Magna has made clear in their recent announcement of quarterly results, they are experiencing strong growth in revenue and volumes. This is especially true in complete vehicle assembly, which occurs at our largest facility in Graz, Austria, a facility we toured this morning, where vehicle assembly volumes were up 55% in the quarter on a year-over-year basis.

With regards to corporate expense reduction, I believe it will be clear from our announcement and Mike's comments that significant progress has been made even though this was only our first quarter under new Management. We believe that corporate overhead goals outlined in the strategic plan are reasonable and we are well on our way to achieving them.

Please note that we have provided more clarity on our expenses in our financial statements and that the operating expenses, which we now specify separately on our income statement, are primarily related to upkeep, carrying costs and property taxes for our view vacant assets. Lastly in addition to the results announced today, the Board has unanimously authorized the normal course issuer bid. For obvious reasons, we will not be providing significant guidance on this call as to when we intend to use this NCIB. This concludes my brief comments. Mike, over to you.

Thanks, Bill. My comments for the most part will focus on the third quarter, which, as Bill mentioned, is also the first quarter that MID has operated under the direction of its new independent Board of Directors and under the leadership of its new Senior Executive team. As I stated on the August conference call, as of July 1, 2011, MID became a Canadian-based, pure real estate company that is engaged in the acquisition, development, leasing, management, and ownership of a predominantly industrial rental portfolio of properties in North America and Europe.

These properties are leased primarily to the automotive operating subsidiaries of Magna International; and 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 also had land for development in a racing and gaming business. Through a court-approved plan of arrangement, these businesses and assets were transferred to entities owned by Frank Stronach and his family in consideration for the elimination of MID's dual class, capital structure through which Mr. Stronach and his family controlled MID. The operating results of these assets and business, transferred pursuant to that plan of arrangement, are reported in our financial statements as discontinued operations.

Given MID's exit of the racing and gaming business and the disposal of substantially all of our land held for development by the end of the second quarter and that there were no subsequent adjustments to those results, I won't be making any comments with respect to the results from discontinued operations. Accordingly as stated at the onset, my comments will be directed at the continuing operations of MID, namely the results of operations associated with our real estate portfolio and in particular the third quarter.

Just before I turn to the results of our business, I wanted to bring to your attention that we have reformatted our financial statements to look more like a real estate company or REIT. We believe the changes improve our disclosure, make our financial statements more user-friendly, and are in a format that this audience is more used to seeing when analyzing companies in our industry.

The major changes are as follows. We've re-classified the ordering of items on our balance sheet. We still have items classified between current and non-current, but as is the industry norm, our balance sheet now starts with non-current assets, namely our real estate properties. With respect to the face of our income statement, we've made two significant changes.

Firstly, we separately disclosed our property operating costs, which were previously lumped in with our general and administration expenses. Included in these costs are property taxes, utilities, insurance and maintenance expenses related to our vacant properties and also some legal, consulting and structural repair-type costs relating to the asset management activities of the rest of our income-producing portfolio. The second, less significant change is the reclassification of our credit facility standby fees and other financing costs out of general administration expenses and into interest expense where they belong.

With that as background, I'll now turn to the third quarter operating results. As reported, on an as-reported basis, our quarterly net income was $15.5 million, and our funds from operations, or [FFFO], was $26.4 million. That's $0.33 per share, and $0.56 per share respectively. Using Q3 exchange rate, annualized, this translates into net income of $62 million and an FFO number of $105.6 million.

That said however, as set out in our MD&A, our third quarter G&A includes approximately $7.8 million of G&A expenses that we would characterize as not being representative of our run rate. These include $5.8 million of severance and salaries expense related to former officers, directors, and employees who are no longer with the Company and will not be replaced. It includes $1.2 million of costs associated with the strategic plan process, and approximately $800,000 of cost for matters related to the transaction and plan of arrangement.

Without those costs, our G&A run rate for the quarter would be $4.8 million, or $19.2 million annualized. At this expense level, our G&A expenses represent approximately 10.3% of our lease revenues, and that's very close to the higher end of our targeted range outlined in our strategic plan of between 8% and 10%. In addition in the quarter we had a small $88,000 gain on the disposal of a small property in the quarter. Adjusting our income taxes for the impact of the G&A, the $7.8 million, and the gain on disposal of that property, our taxes for the quarter would have been just over $5 million, for an effective tax rate of 19.5%.

If you were to adjust our Q3 results for the G&A, the gain of the disposal and the related tax impacts, our net income would be $21 million, almost $0.45 per share. And our FFFO would be $32 million or approximately $0.68 per share, respectively. In using Q3 FX rates annualized, these amounts translate into $84 million for net income and $128 million for funds from operations.

Further, at the current level of revenues, and staying status quo, we believe there are further savings to be had in our G&A, and that our tax rate can be substantially reduced upon the successful conversion to a Canadian REIT. However please recognize, to implement our strategic plan and to convert to a REIT, there will be costs incurred, but you can be assured that we'll track those very closely.

To address some of the other components in our income statement, I'd like to first speak to revenue. Revenue for the quarter increased by $3.8 million or 9% over the same period a year ago. 2/3 of that increase is attributable to foreign exchange and the strengthening of currencies relative to the US dollar. The remainder of the increase relates to contractual rent increases and incremental rent from completed building improvements and facility expansions.

G&A expenses I already talked about. And there's actually nothing of significance to mention in relation to our property operating costs, interest expense, depreciation, or FX gains or losses in the quarter. Overall, we're pleased with the quarter's results, the improvements made, and frankly the stability of our revenue streams.

Turning to the nine-month numbers. Excluding interest income earned from MEC of $1.8 million in the prior period, rental revenues increased by $9.1 million to $137.6 million or 7.1% over the same period last year. Approximately 68% of that increase is attributable to FX. The remainder relates, as in the quarter, to contractual rent increases and incremental rent from completing building improvement projects, and facility expansions.

G&A expenses for the nine months were $37.7 million or $8.5 million higher than a year ago, and again as previously stated, these are not comparable to the prior year or indicative of the future run rate of the business going forward. Both the current and the historical numbers contain a lot of noise, and our focus is frankly on the run rate which I spoke to earlier. Although property operating expenses increased by $600,000 on a year-to-date basis, there's nothing unusual in those numbers; and it's really driven by the level of activity.

As with the quarter, there's nothing of significance in the interest expense, depreciation, or FX gains or losses to report. In addition, the nine months results reflect in Q2 an impairment charge of $2.8 million taken on a commercial office building, while the 2010 period saw benefits of an impairment recovery on MEC loans of $10 million and a favorable purchase price adjustment of over $20 million related to the acquisition of the MEC transferred assets.

Also reflected in the year-to-date numbers is a $25 million positive swing in income taxes; and these are all in comparison to the first 9 months of a year ago. All of these item were previously discussed in our last report and are more detailed in our MD&A. There's some other financial metrics and matters that I would also like to share and highlight. Our annualized lease payments at the end of the third quarter have declined by $9.4 million at the end of Q2, driven totally by the change in exchange rates.

That said, it's virtually unchanged from this time last year as contractual rent adjustments and rent on projects that have come on-stream have almost offset the foreign exchange impact. It's important to note that this calculation is a point in time. Namely September 30, when at that time the Euro was $1.345 to the US dollar; and the Canadian dollar was $0.936, both reflecting a 7% decline from June 30.

Year to date, we've invested $39.5 million in CapEx to enhance our future revenue stream. This is up from $7.1 million a year ago, and the vast majority of the amount relates to Magna. We've paid off our Canadian dollar-denominated credit facility that was outstanding at the end of Q2. We are comfortably on side on all of our debenture and debt covenants. DBRS has confirmed our BBB investment grade status; and at the end of Q3, we had $6.3 million of cash in the bank.

As Bill mentioned, we announced a normal course issuer bid. And lastly, and I'm sure of interest to many on this call, we increased our quarterly dividend from $0.10 to $0.50 per share. In closing, as Bill said in our press release today, we're pleased with our progress to date. A new strategic plan has been announced which includes converting this Company into a Canadian REIT. As just mentioned, the dividends has been substantially increased; and our third quarter results reflect a solid improvement in the operating performance and the go-forward business model of MID.

And one last thing, I'd like to thank our people for their contribution and efforts that helped make this a successful quarter. With that, I'll turn it back to Bill.

Excellent. Thank you, Michael. Benjamin, may we have our first question?

Thank you. (Operator Instructions) One moment please for our first question. Steve Velgot with Susquehanna.

Okay. Thanks. Couple questions. Bill, could you describe in any way some of the pipeline that you referenced with Magna, just in terms of either significance of potential developments. I know you're getting down to the end of the expansion capital in the facilities that are currently being expanded. I was wondering if you could do that.

The second question was, really, if you could give us a better idea of your priorities over the next six months or so, in addition to doing things that you need to do for the REIT conversion? I'm wondering if deals will generally be left to your successor or will you have a hand in some deals? That's it, thanks.

Thanks for the questions, Steve. So, as far as the new pipeline with Magna, I would generically say that it's representative of their portfolio of buildings as a whole, i.e., we have opportunities in Europe and North America. There has been an interest from Magna that we consider new locations, new geographies for MID, including Brazil, China and India. We are doing due diligence on how that would fit into our tax structure.

As far as priorities, you can anticipate for us to continue to focus on corporate overhead reduction, intense focus on the process of converting our Company to a REIT, which we have a high degree of confidence will be concluded within 12 months, if not quite a bit sooner than that, but it is a complicated process. We also, will be keenly trying to improve our relationship with Magna, whether that's through expansions or lease extensions.

As far as new deals, I think we're going to be consistent with our last comments, that this will be an opportunistic process. So, I'm not going to give guidance today on timing of acquisitions. Historically, that guidance has been, frankly, less helpful than you might imagine for other real estate companies.

Okay. Thank you.

Thanks. Next question?

Sam Damiani with TD Securities.

Hi, Sam.

Hi there. Good evening. Just on the projects that are underway, the $31.5 million, are those projects complete now? Or is there more to spend? I'm just trying to get at what the yield is on average for those projects.

They're largely complete, but frankly, there's a number of other projects that we're looking at for expansions of our existing portfolio both in Europe and North America, as I mentioned. Generically, the returns to those projects have roughly been around 9%.

Sam, just to clarify Bill's comments. When it moves into the capital expenditures and you see it in that line, that means that, that specific item is now revenue generating and is on-stream. Other CapEx that does get incurred and you see in property under development, that is not on-stream.

Right. Of course, okay. So, the $3.1 million of ALP here, we're meant to think of that as a 9% yield on the total cost?

That's roughly correct.

Okay. Are all of those projects increasing square footage or I'm just trying to get a sense as to what different types of projects there are. (multiple speakers)

They're primarily expansions to existing facilities where we own the land and Magna has won new business and needs to expand the facility, in order to meet that new business that's been won. Typically, in addition to economic return on capital deployed, we receive an extension on the underlying lease of the existing facility as well.

Okay. That's great. So, what would be the total leasable area represented by this $3.1 million of ALP?

Sam, we don't have at our figure tips. I can get back to you on that.

Okay. All right. Maybe just over to the plant rationalization. I noticed a couple of properties were added to the category this quarter. Any color you can provide there? It looks like there are couple larger assets as well.

Sure. There were two facilities added both from the low utilization bucket from prior quarter. They're both current, currently paying their rent. It's really one large facility in Germany. It's a facility that's been highlighted numerous times in Magna's recent financial statements, but they're currently paying. We had a representative there earlier this week. The facility is being used, but we felt it was prudent to highlight the change in ownership of that facility to a third-party tenant, even though Magna remains on the lease.

I would also mention, Sam, that we have a couple of properties that we continue to list into the Magna plant rationalization bucket, but may in time actually be brought back on-line, Where Magna has come in and released or we are in discussions to release existing, currently categorized as, rationalized facilities.

Okay. Would you expect -- (multiple speakers)

Would make up frankly, a significant portion of the offset of the German property.

Okay. So, I'm just trying to understand the German property. It went to a third-party? I didn't quite get what you said there.

Yes, there's a description in Magna's press release and financial statements that discuss it, but Magna remains on the lease through 2013.

Okay. I'll look for that. Okay. Just, there was a reference to a small roll-down from lease renewals. Can you maybe put some numbers around that, in terms of what the new rent was versus the old rent?

Yes, Sam, it's such a small, sample set that we're not going to reconcile that on this call. But it's not representative of the portfolio as a whole.

Okay. I understand. Thank you.

Okay. Thanks, Sam. Benjamin, next question.

Lee Matheson with Broadview Capital Management.

Hi, Lee.

Good evening, guys. Just a quick question. Kind of topical with you doing this call from Vienna. Just given the bond yields going everywhere in Europe, I'm curious on whether you guys have seen a material change in what you would assume are the implied cap rates are on the Magna properties that you own in Germany and Austria? Can you compare where absolute cap rates are in those markets versus where they are in North America?

Great question, Lee. We had some experts present to us today, on exactly that subject. I would make a couple of comments. One, the macro economic environment in Germany and Austria is quite a bit stronger than the rest of Europe. I think that's first and foremost. Secondly, it's very difficult to draw comparisons of cap rates as these assets haven't traded in the public market, frankly, ever. But cap rates remain low for high credit tenants.

I would point out however, that the velocity of transactions is clearly off significantly from the peak.

Okay. Do any of the large publicly-traded German REITS have exposure to industrial properties that we can kind of get a sense from a cap rate valuation standpoint?

I think it's very difficult in North America or Europe to look through public REIT comparables to get a sense on a moment-by-moment basis on what our assets would trade at.

Okay. Just on a relative North America versus Germany and Austria, would you say Germany and Austria are a couple hundred basis points inside from a cap rate standpoint versus North America?

I think it depends on the property type. In industrial, there hasn't been, to my knowledge, as robust of a market of industrial assets trading on an asset basis as in North America. Certainly, for other property types, such as apartments, the market in Austria and Germany is quite strong.

Yes. Okay. And would you guys -- (multiple speakers)

And to your point, Lee, relatively quite a bit stronger than in the United States or Canada, where it's also relative to historic pricing, quite strong.

Just under IFRS, are you going to be reporting a weighted cap rate for your property in that market?

We don't report currently under IFRS, Lee.

Okay.

Although, that's something that's certainly under consideration over the long-term at the Company.

Okay. Great. I appreciate it. Thanks, Bill. Well done.

Thanks.

Mike [Markidis] with RBC Capital Markets.

Thank you, and good evening. Guys, just on the assets in the Rationalization Pool, maybe you could give us a little bit of color on what types of assets are in there. I know you alluded to the one that included that Magna [Scotner] statements. Just overall, what are your thoughts on those assets and the prospects for eventually finding replacement tenants there?

Well, a couple comment, Mike. Firstly, it's interesting that a couple of those properties have historically, and we expect, or we think it's possible that a couple additional properties may, go from the rationalized bucket and back into income producing.

Sure.

Some of these assets, especially those in Ontario, I think fit that category. We have a couple of small assets. Generally, other than the one property in Germany, they're all very small. We have a couple small assets in the Midwest that aren't frankly, significant contributors to our rental stream. Other than that, there are assets in the different groups of Magna. So, it would be hard to make a particular read-through to the performance of individual divisions within Magna to these plants, but I guess I would say, they're just generally smaller, less relevant plants.

Okay. Would they be highly specific in use -- or if Magna decides they don't want them, how easy would it be or what would the prospects be for finding somebody else?

That's a great question. They're generally less specific. Clearly, they're smaller and their plants, I think you can generally say, had far less capital investment in the properties than, for example, our top 25 plants, which represent over 70% of our NOI. These are small -- which would be characterized as large with high degree of Magna capital investment.

Okay. I know the focus has been in approaching Magna, working on the extension --

Mike, can I make one clarifying comment to what I just said?

Sure.

I would also, point out that a number of these properties are leased for many years. Some are leased to 2017. Some are leased to 2019, et cetera. So, some of these assets, while not currently productive, we have a long, predictable stream of contractual cash flows related to those assets.

No. Absolutely. Totally recognized. Just on looking at the potential extension of leases. I know it's been an initiative on your part. Is there any new incremental progress to report there? Or is it still just an objective and continue to work on it?

I would say it's a work in progress, and will continually be a work in progress for the life of the portfolio.

Okay. Just looking at your -- and I know it's tough, because a lot of these things are, or many of them are, CPI based. But based on the existing lease structures, is there any way to think about how the rent steps might look over the next couple of years? I mean, if we just assume 1% to 2% inflation, and how the timing -- is there any lumpy steps or years where it would be lumpy that would be coming on-line?

Yes, I think what you referenced of 1% or 2%-ish growth rate from contractual ramp up is probably a good starting point. With some of our larger assets having rents bumps every 5 years, or 10 years in different cases, you might have a little bit of lumpiness, but the range that you referenced I think is a good starting point.

Okay. You'd mentioned you were looking at some opportunities with Magna in some BRIC countries in particular. I was wondering if you could clarify, would that be more heavily weighted to acquisitions of assets that are already existing or would it be more on the development side?

Currently those discussions are related to acquisitions of existing assets. However, we have had discussions about developing assets for them on a global basis.

Okay. One final housekeeping question. Maybe for Mike, just on the adjusted tax figure, $5 million that you had cited earlier, what would the cash component of that number be?

If you look on our deferred taxes, there's not that much as it really relates to from an asset to book to tax. So, most of that you would probably characterize as cash taxes. The majority.

Yes. No, that's helpful. Thanks very much, guys.

Thanks, Mike. Benjamin?

Phillip Armstrong with Steinberg Wealth Management.

Just a couple.

Hi, Phil.

The revolver, is that completely gone away now? You no longer -- (multiple speakers)

Yes, the revolver's completely paid off. There's some small letters of credit outstanding

Okay.

It's totally paid off on a balance sheet basis.

But is it still available or is it just -- (multiple speakers)

It's still available until December 22nd.

Okay. And then, okay.

I would anticipate that we will be extending that in the normal course.

Okay. In terms of the stock buyback, how are you guys going to pay for that? I assume you'll do more debt?

We have significant cash on hand. We have availability under a revolver. There's numerous sources of cash, should we decide to purchase stock back under our NCIB.

Okay. Then finally, obviously you guys outlined pretty significant increase in debt going forward. Have you spoke to the rating agencies? Are they going to change your rating if you add more debt to the Company?

We've spoken to the rating agencies before, during, and after our strategic plan. We have been reaffirmed by DBRS, they're quite comfortable with our financial position currently and where we intend to take it. And Moody's is still contemplating their rating. So, we should hear from that, I would imagine, before the end of the year.

Okay. So, you basically outlined (technical difficulty)

Phillip, we're losing your connection. Could you repeat your question?

Sorry. You spoke to DBRS, they know about the 40% to 50% of total cap target, right? And they are -- (multiple speakers)

Correct.

Affirmed based on those numbers?

Yes, that's correct.

Okay. Thank you.

Benjamin?

Sam with TD Securities.

Thanks, just on your plans or consideration of expanding into Brazil, China, et cetera Bill, you'd mentioned that was more on acquisitions, at least initially. Would you be looking at acquiring assets from Magna or from third-parties?

I think what we're initially considering now is acquisitions from Magna. As I mentioned in my brief introduction, since we only announced our strategic plan two weeks ago, we don't have a formal acquisition pipeline. So, I can't make comments on what geographies those assets might be in.

Okay. Just on the operating costs, you said some of them are related to the vacant properties and some of it is related to the portfolio overall. But I guess, Magna pays most of the cost themselves under the lease. So, can we assume that the majority of this is related to the vacant properties?

I think that, that's absolutely the case, and it will fluctuate up and down as our occupancy fluctuates up and down.

Okay.

It is only the very odd exception where -- in our over 100 properties we pay operating expenses if the building is leased. They are triple net leases.

So, it looks like the adjusted number for the quarter was around $700,000?

I think that's a good rate. Right, so, if I just take that, annualize it over the vacant square footage, I think I just did it roughly a minute ago. It's $9 a foot. That seems a little high, though. I think you're including one -- you're annualizing one quarter that may have some small noise in it; and you're probably not reducing it somewhat for ongoing operating expenses. That is high, Sam.

Yes. Okay. Okay. So, that really will move with occupancy for sure, okay. Thanks very much.

Benjamin, how about 1 or 2 more questions?

We have no questions from the phone lines at this time.

Excellent, thank you very much, everyone. Very much appreciate your participation in the call.

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.