Granite Real Estate Investment Trust (GRP.U) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the conference call of MI Developments Inc. Speaking to you on the call this morning are Tom Heslip, Chief Executive Officer, and Michael 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 factors or assumptions, 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 in the US Securities and Exchange Commission from time to time, including the risk factors section of its management's discussion and analysis for fiscal 2011, filed on March 9, 2012.

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, the remarks this morning may contain non-GAAP initial measures. Please refer to our Q1 2012 financial results and other materials filed with the Canadian Securities Administrators and US Securities and Exchange Commission from time to time, for additional relevant information.

I will now turn the call over to Tom Heslip. Please go ahead.

Thank you, thank you and good morning, everyone.

As mentioned, joining me on the well is Mark Forsayeth, our CFO, along with Jen Tindale, our EVP and General Counsel, Lorne Kumer is here, he's our EVP - Real Estate Portfolio and Asset Management; and John De Aragon, as well, EVP Real Estate Investment. As the Company's most recent earnings call was just eight weeks ago on March 9, and since our upcoming AGM on June 13 is only four weeks away, I will keep my prepared remarks this morning brief. Let Mike take you through the details of our Q1 results and allow ample time for any questions you may have.

In a nutshell, our first-quarter results were strong, and they were in line with our expectations. Through this quarter, we continued to make progress on a number of fronts, and we continue to see evidence of strength and stability in our rental revenue profile, and in our overall earnings. As a Company, we continue to be focused on two central objectives. The first is the stability of our existing revenues, and the second, the growth of new and more diverse -- diversified rental revenue.

With this in mind, our first and most important objective is the successful resolution of the leases expiring in 2012 and in 2013. In total, there are 40 leases expiring this year and next, including 36 leases with Magna and its related subsidiaries and four leases with non-Magna tenants. These leases represent approximately 16% of the Company's total annual rental income, but nearly 40% of our total leases and properties by number. We are very encouraged with the discussions and activities happening with regard to these leases, and these properties.

For 2012, there are eight leases expiring, totaling 819,000 square feet, of which seven of these leases are with Magna Groups, totaling approximately 730,000 square feet, or about 90% of the space expiring. Of these seven leases, one extension for 115,000 square feet at Langsouth Drive in Concord, Ontario is now signed. Based on current discussions, there is a very positive outlook for renewal of the remaining six leases.

There are 32 leases in 2013 expiring, of which 29 are with Magna Groups and three leases with non-Magna-related tenants. Discussions are now under way on the majority of these leases, and overall, we're moving forward favorably.

Given that the process for resolving multiple lease negotiation discussions is relatively new, it's a new dynamic for MID and the Magna Groups, this being our first wave of multiple lease expiries between the parties. The fact that these discussions and reviews are underway nearly 14 to 18 months in advance of lease expiration dates, and with the early but positive feedback on the majority of these leases, we feel we are on track. In addition, the timing of these discussions and the focus being provided by the parties, Magna and its subsidiaries and MID, allowing us to proactively address a small number of potential future vacancies, in advance of expirations and prior to incurring carrying costs on this potential vacant space, allowing us to commence release, sale or lease activities now in advance, is a great step forward. Overall, across the entire portfolio, we continue to see a stable outlook, along with a degree of organic growth built into the existing leases and properties.

In a prior call, I made reference to a significant expansion project in Clinton, Tennessee. The terms for this expansion of 190,000 square feet onto the existing 326,000 square feet, the new lease, and the extension on the existing lease are now fully executed. The result is an extension of the existing lease for 10 years through to 2027, which is combined coterminously with a 15-year lease for the new expansion, resulting in a single, overall lease for 516,000 square feet through to 2027, and an increase in annual rental income from the current approximately CAD1.5 million per annum to CAD3 million per annum.

This rent increased is expected to commence on or about December 1 of this year. This type of transaction results in enhanced income, significant lease term extension, and further stabilized the Company's overall rental income profile, and it is something we will continue to explore with our tenants in other locations.

Throughout Q1, and concluding over the next few weeks, we will have completed what we feel are the main staffing changes and reorganization required to go forward on all fronts of the strategic plan. Our people at all levels in all of the countries we operate are extremely committed to both the work needed to be done on our existing leases and properties, as well as our goals for growth and diversification. In terms of the Company's G&A, though the Company is still completing its transition activities, which have nonrecurring G&A implications, we know that ongoing run rate G&A control and reduction is very important.

We continue to make progress towards G&A savings through organization and structural changes and other cost-saving measures. And on a recurring run rate basis, we're moving in the right direction towards the target of 8% to 10% of NOI. That being said, we will always balance this objective with ensuring the resources, the people and infrastructure are in place to ensure rental income stability and overall rental income and value growth.

As to growth and diversification, new acquisitions, we have begun to more actively explore and review various opportunities in the United States and Canadian markets, as well of parts of Western Europe. In recent weeks, significant time and review has been devoted to new acquisition opportunities and ideas, perspective product sources, intermediary meetings, and potential, strategic property partners.

I will wrap up my comments by noting three important upcoming or continuing Company matters. The REIT conversion steps are progressing. It is a time-consuming and expensive undertaking, and will require all of this year to be fully complete. Mike will update you further on this in his remarks.

I can tell you we're now able to confirm that the Company will relocate and open its new head office at 77 King Street West, Toronto. We have a scheduled move-in date of may 28. The Company's new name is expected to be official June 13, subject to shareholder approval, and is outlined in the management circular and proxy statement being mailed to shareholders in approximately a week. A new location, a new name, every step big or small is one further step forward for the Company. In summary, Q1 was a good quarter, and in many respects, 2012 is underway at or better than planned.

With that, I will now turn it over to Mike.

Great. Thanks, Tom.

The first quarter of 2012 was a solid quarter, and as Tom said, it was on plan and in line with our expectations. As you look at our results for the rest of the year, you will continue to see a reference to discontinued operations in the comparative numbers within our financial statements. Those operating results relate to the land held for development in the Racing and Gaming business, that was transferred out on June 30, pursuant to a Court approved plan of arrangement. That is all in the past, and accordingly, I am not going to make any comments on the discontinued operations.

The key message we want to leave you with is that Q1 operating results were on track. As mentioned in my comments in March, we did incur some nonrecurring expenses in the first quarter pertaining to the REIT conversion and undertaking detailed property reviews and assessments, including appraisals on all of our 105 properties, but again, no surprises.

Before I get into the details of the quarter's results, I'll give a brief update on matters we have discussed on prior calls and I know are of interest to many of our shareholders. Firstly, we are continuing to work with our advisors on the REIT conversion. The initial focus has been on non-Canadian jurisdictions, and I can report that good progress has been made on those fronts, and we see no change to our projected timeline of January 1, 2013. As mentioned on the last call, the REIT conversion process will require a Court approved plan of arrangement, and certain consents, including obtaining shareholder approval at a special meeting of shareholders we expect to hold this fall, will be part of the timeline. To date we've not encountered any significant bottlenecks, and we will continue to report and update you on cost and our progress over the course of the year.

Secondly, you'll note that, as previously communicated to our shareholders, we changed our reporting currency to Canadian dollars, but continue to report under US GAAP. With the Canadian dollar so close to par in recent quarters, the only significant change on the face of the statements is really in the equity section on the balance sheet. There, as described in the table and note one in our financial statements, you'll see an increase in the stated value of common shares of close to CAD600 million, with almost an corresponding offset in accumulated other comprehensive loss.

This is because, according to GAAP, the equity balances get translated at a historical rate, at the time the initial IPO of MID was just under CAD1.40, and, of course, the Canadian Dollar has fixed significantly appreciated since that time. Thirdly, we are continuing to consider converting our financial reporting to IFRS, and we are proactively working on the steps that will implement that.

Another significant matter is that our dividend was declared, and will be paid, in Canadian dollars. Although we had indicated a quarterly dividend of $0.50 last fall, given the proximity of recent exchange rates to par, management and the Board determined that a CAD0.50 denominated dividend was appropriate. Each of the initiatives I have just mentioned have been communicated in advance to the market. They are in line with our home currency and our objective to convert to a Canadian REIT.

With that as a background, I will turn to the first-quarter operating results of our Business. First of all, currency, again, played a role in our reported results, but certainly much less so than prior reported results, given the Canadian dollar profile of our revenue and expenses, and that we are now reporting in Canadian dollars. That said, relative to the prior quarter, the average FX rate for the US Dollar and Euro depreciated 2% and 5% respectively, relative to the Canadian Dollar during the quarter. As compared to the same quarter a year ago, the US Dollar appreciated 2% against the Canadian dollar, and the Euro depreciated 3%. On an as-reported basis, our net quarterly income was CAD18.6 million, and funds from operations or FFO was CAD29.4 million. That's CAD0.40 per share and CAD0.63 per share respectively.

As set out in our MD&A, our first quarter G&A includes approximately CAD1.1 million of expenses that aren't representative of our run rate. These include CAD800,000 of REIT conversion advisory costs, and CAD300,000 of employment-related termination costs. Without those costs, our G&A for the quarter would have been approximately CAD5.4 million, which are in line with last quarter, and our expectations.

We still expect an annual G&A run rate in the CAD20 million to CAD21 million range, and as Tom indicated, the 8% to 10% of lease revenue remains the target. We also incurred approximately CAD250,000 in appraisal and property-related to assessment costs, that aren't representative of the property operating cost run rate, and are partly due to the REIT conversion costs. If you adjust the Q1 results for the after-tax impact of the additional G&A and property and operating costs, our net income and FFO would increase close to CAD0.02 per share. Really, not that significant.

Turning to the detailed income statement, revenue for the quarter increased CAD1.5 million, or just over 3% from the prior year. Contractual rent adjustments and revenues from completed projects, net of a small reduction from renewals and releasing added 1.8 million to the quarterly rent roll, with FX reducing that increase by CAD300,000. And, that was all Euro-driven.

With respect to property and operating costs, approximately 25% of the costs incurred in the quarter relate to vacant properties, and the majority of the balance relates to property assessment and appraisal costs I referred to earlier. G&A expenses, as I mentioned, were in line with expectations, and we expect that on a run rate basis, will continue to reduce over the balance of the year. Depreciation was up slightly, due to recently-completed expansions, and with no debt other than our Canadian Dollar-denominated debenture, our interest expense came in, as expected, at CAD4 million. Our effective tax rate was 19%, and that covers most of the line items on the income statement.

Some additional financial metrics and matters I would like to highlight here include, our annual lease payments at the end of the first quarter had increased CAD1.9 million from the end of 2011. FX had a negligible impact, and the increase is entirely due to contractual rent adjustments, and rent from projects that have come on stream. In the quarter, we invested CAD7.2 million in capital expenditures for six projects to enhance our future revenue stream with Magna, four of those were in Europe, and two in North America.

At the end of the quarter we had CAD88 million in cash in the bank, and to date we've not been active in our normal course issuer business. Over, we're pleased with this quarter's results, and the stability in the revenue. Lastly, and in closing, I would like to thank our people for the contribution and efforts that made this a very successful quarter, and with that, I will turn it back to Tom.

Well thanks, Mike.

As everyone can see, the quarter was on line. We're pleased with everything we are seeing on all fronts, and I think the best thing is to open it up to questions.

Operator?

(Operator Instructions). And our first question comes from the line of Sam Damiani with TD Securities. Please go ahead.

Just a question on the currency, you switched to Canadian dollar reporting and with two-thirds of the rents coming in from other currencies, what are your thoughts on implementing a hedging program?

Sam, it's Mike. We are looking at and actually have hedged, and you'll see in the financials, we've hedged about EUR10 million in the upcoming quarter, and we are going to be looking at hedging some of the balance of our net cash flow exposures over the balance of the year. As you know, those are really short-term fixes. Our really long-term strategy is how do we best match our asset and liabilities on a long-term basis, and that's really the program we're looking to get on.

So, on that front are you looking at raising debt denominated in some of the other currencies then?

Yes. Ultimately, as we look at acquisition and expansion opportunities, debt we'll raise will be in those other currencies.

Okay. The tax rate in the first quarter, I know it's kind of a short-term issue, but is that a good run rate for the balance of the year?

Yes, it's within a point or two, Sam. So, I would say anywhere in that sort of 19%, 20%, 21% is in there, so it's a good proxy.

Great. And with the CPI increase in the first quarter, can we assume that about half of that increase actually fell through into the results in the first quarter?

I'd have to think about that come out of the think about that a little harder.

In terms of the timing of the increase?

The timing of the increase? It really, the impact of the CPI is a result -- it really evens out over the course -- it doesn't happen on a real lumpy basis but --.

It seems like for this pool of leases, it's a Q1 event every year, is that right?

I would have to get back to you on that, Sam.

We can be more detailed for you Sam, off-line because, it isn't lumpy, given not all of them have CPI adjustments annually, some of them have them annually, some of them have it every five years. So we can break that down for you.

Sure. And just one last question, I know in the past few quarters, I think some of expenses on the vacant properties were included in, I believe, G&A. And I don't think that's the case anymore. Can you just tell us where that's showing up now and how much that was in the first quarter?

In the first quarter, that's all in property and operating costs and I think, as I just mentioned in my remarks, about 25% of those costs, in this particular quarter, relate to those vacant properties.

Great, thank you.

(Operator Instructions). And our next question comes from the line of Mike Markidis with RBC Capital Markets. Please go ahead.

Tom, you made some comments about work that's been underway looking at acquisitions. I was hoping maybe you could just expand a little bit on that, maybe with respect to the potential volume of deals that you've looked at? And after that, maybe you could just give us a little sense of where you are in terms of looking at potentially selling some of the assets, either wholly outright or maybe even having some of them taken back by Magna? Specific properties?

Well, generally in terms of pipeline, which I like to refer to as opportunities, we really look at, in the category of new product, diversified away Magna, but opportunities also are those things we can do with Magna, new investment opportunities with them. By far, and in terms of volume of things that we've seen in the market, on the new side, or the diversified side, there is a significant amount of real estate for sale in all of the locations we've seen, we're focused on the industrial, we're focused on the kind of product that could roll in to our portfolio, and we could execute on. We are seeing a lot of B, B-minus portfolios for sale. We have looked at a lot of things. We have looked it within the smaller components, and we've looked at it on a larger scale. And we will keep doing that as we kind of hone in that. I think the biggest thing this quarter is really the latter stage of the quarter, having the people and the ability to take the time and to organize and go about it methodically. Remember, our pipeline will also include prospective partners, establishing those relationships both on things we might do with our existing assets in terms of potential sale, and partnerships with local operators and expertise in markets that we could build into or buy into. And on that front. With respect to the latter part of your question, on this Magna --?

Yes. Specifically, I was just curious as if the discussions with Magna at any point undergone maybe them potentially taking back a partial interest in any of the assets owned?

Nothing specific of that nature. We have had great dialogue with Magna, both on the specific leases of 2012 and 2013 but just in the overall more comprehensive game plan with them. But, in terms of any asset sales or acquisitions from them, no, nothing specific on that front.

Okay. So, it was good to see the Clinton, Tennessee expansion, blended and extend done. You mentioned there, that you were seeing signs that there might be some opportunities for additional investments, where you could get that same sort of blend and extend on other properties. You sort of have a sense on what the magnitude of the opportunity is? Should we be thinking about maybe one or two properties in the next couple of years, or is it something where it's maybe even a bit more significant than that?

The answer to that is, we constantly talk to them and vice versa, in terms of things happening. Putting a number on it is like predicting each element of activity in the auto sector. We are all seeing and I am not an expert on, but you are seeing very positive signs throughout the industry. Announcements being made on new contracts, and on growth. So, all of that bodes well for opportunities for us, and obviously things Magna will do on their own account.

So I am not going to put a number of what might be out there, but I am more than happy to say we love the opportunity to work with Magna, where we can do that type of expansion in conjunction with logical lease extensions and incorporating potentially other assets with all of that. So, it is a key part of the Company, but today, there are things we are very preliminarily exploring, and there may be more, there may be less in incoming quarters but we really like how Clinton got done, we are down there next week because watching and looking into how the extension is going, and we're going to explore some other things. So it's an opportunity for us, but no detail right now on further ones.

Okay. And just lastly, before I turn it back, on the REIT conversion. So it is great that you guys are still committed to maintaining the January 1, 2013 timeline. It sounds like things are progressing well. You have mentioned in today's comments and in the past that several approvals including shareholder approval would be acquired. The indenture that is outstanding with respect to the debentures that you have, is there anything in there that would suggest that you may need debenture holder approval as well?

It might. At this stage, it's too early to tell. We're still reviewing the structure with our advisors, and of course, the ideal situation we don't, but it is just too early to comment on that at this time.

Okay, great. Thanks.

(Operator Instructions). And we have a follow-up question from the line of Sam Damiani with TD Securities. Please go ahead.

I'm just wondering how far along you are on the appraisal process. And if you are able at this point to offer any indications in terms of range of discount rate or cap rate that these appraisals are coming in at?

Sam, it is a comprehensive process. We're actually glad we have it fully underway. We don't have any final ones. It's broken down into Canada, and people we're working with here, the United States group, and then a group covering Europe for us. It's just the whole coordination of the processes going better than we thought. Right now, we are working on drafts to come in, the interaction with the appraisers and making sure that all the logical data is in place. I think it's moving well, but in terms of directionally, cap rates and discount rates, no. I just reinforce what everyone is seeing, is great stability in the revenue stream, both now and on a go-forward basis and nothing beats that when you value real estate. So, overall, we like the outlook.

That's great. And at a high-level though, do you feel that the yields will come in lower in one jurisdiction over another, perhaps Europe? Where do you see Europe relative to Canada, US, et cetera? Any high-level commentary you could offer would be helpful.

I don't think the discount rates are country-driven, they are asset-driven, they are risk-driven. The longer the lease, the elements of the business within the building, and its probabilities for retention impacts discount rate, location attributes within the country. So the better-located assets, the more release-ability of these assets, the better the outcome. Remember, we have a number of assets that fall into a more traditional category in terms of the ability to assess market rents, release-ability, and they are valued accordingly. In the large ones really final into the term of the lease and probability of renewal. So, I don't think we're finding a distinct difference in how the appraisers are looking at it in the different countries. Obviously, in the marketplace we know that cap rates in Canada on quality stuff are lower than cap rates in parts of Europe. That factors into some assets.

Okay. And, maybe just switching over to the debt side. You mentioned the possibility or the desire to raise debt in some euros in US dollars. Is that something that you see happening this year? And, any commentary on the cost of debt in those two currencies would be helpful as well.

It would be opportunity-driven, and acquisition-driven so we find an opportunity from an expansion perspective of upsize, that would be the trigger factor. As it relates to the cost of the debt, we'll search the market and look for, it will be based on term and in those metrics. So, I don't think it's -- it will be with the market, it will be what the market is, if it's certainly Canadian, it's going to be 4% or 5%, hard to say.

Okay, thank you.

And we have another follow-up question on the line from the line of Mike Markidis with RBC Capital Markets. Please go ahead.

Thanks. Just one follow-up, Tom. You gave some detail again, with respect to the 2013 lease renewals that are coming due. And there was certainly nothing new in your commentary there. The one thing I just wanted to double check, is your confidence still, are you still fairly confident that any potential rundown you have on the lower rents and the few vacated properties that you are expecting will be offset by the rent steps in 2013 and 2014?

Yes, we are.

Okay, that's excellent. Thank you.

And we have no further questions on the telephone line.

Thanks, everybody. Keep it going.

That's great, thanks.

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.