Granite Real Estate Investment Trust (GRP.U) 2012 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Conference Call of Granite Real Estate Inc. Speaking to you on the call this morning are Tom Heslip, Chief Executive Officer, and Mike Forsayeth, Chief Financial Officer.

Before we begin today's call, I would like to remind you that the statements made in the day'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, 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 and the US Securities and Exchange Commission from time to time, including the Risk Factors section of its Management Discussion and Analysis for the 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 financial measures. Please refer to our Q3 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.

During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. (Operator Instructions) As a reminder, this conference is being recorded Thursday November 8, 2012.

I would now like to turn the call over to Mr. Tom Heslip. Please, go ahead, sir.

Thank you. Good morning, everybody. Joining me on the call today are Mike Forsayeth, our CFO as mentioned, Jen Tindale, our EVP and General Counsel, and Lorne Kumer is with us today, our EVP, real estate portfolio and asset management. I have only a few brief comments and then I'm going to hand it over to Mike to walk you through the results. Mike and I are on the road today so we'll do our best to answer questions afterwards but there may be some that will follow-up with you later in the week or early next week as we are traveling.

A few comments. Consistent with the last prior two quarters, our third quarter results were on budget and in line with our expectations. Through this period we continue to make progress on a number of fronts and we continue to see evidence of strength and stability in our rental revenue profile and overall earnings. During this quarter we completed some important activities and we continue to go forward on the right track we believe.

Regarding our lease activities, as I've said in the past, Granite cannot comment on the specifics of lease renewals or negotiations until they are fully completed and signed. But that being said, we can say that this year has been positive in terms of signing multiple leases in a year where we had only seven Magna group leases expiring.

Also, there continues to be ongoing constructive discussion with regard to the 2013 lease expirees as well as several other properties with longer dated lease expirations. To this point in 2012, we've now concluded lease renewals, expansions, and extensions on 13 properties, totaling approximately 2.4 million square feet. In combination with all other leases, our overall annual lease payments are holding steady and even slight increases with any rental renewal declines being offset by rental increases on multiple other longer-term leases.

Subsequent to September 30, quarter end, we renewed two additional 2012 expirees, totaling about 275,000 square feet, bringing the 2012 renewals now signed to 661,000 square feet out of a total of 734,000 square feet up for renewal this year. This translates into 90% of the 2012 expiring square footage has now been renewed and this is before noting one final 2012 lease expiree for 73,000 square feet which we are in positive discussions for reaching final resolution. If successfully completed this will conclude with a 100% renewal outcome on the 2012 Magna group lease expirees and rents on those leases declining by about 14% but generally overall rents holding steady and growing.

As to new business, we have been very active and continue to be so. Diversification, growth, and new acquisitions we are actively in Canada and Europe but in particular our focus of late has been in the US markets. Overall we like the balance of quality, product, volume, yield, and potential strategic alliances that we're working on in the US. It's a fairly wide range of product but with a focus on more traditional industrial and primary and secondary markets. We are currently pursuing specific deal opportunities directly in the US and we'll continue to work towards new investment and acquisitions. I can't comment on any transactions until they are fully documented but I can say we are very active.

As for the REIT update, Mike will more comments on it in his dialogue and as you are aware, next Thursday, November 15 is the shareholder meeting to approve the REIT conversion. This has been a process going back over a year now and has been an extensive one. It should prove to bring considerable value and after-tax revenues to Granite, all of which has been well and publically documented and circulated to all shareholders. I am personally very grateful to our Board for their support throughout this process and to the entire team that has worked so tirelessly to bring it this far.

In summary, Q3 was a good quarter. There's much still to be done. And as stated in recent meetings and presentations, our focus is on achieving results that demonstrate progress on all fronts. We believe that we are well underway and very much on track.

With that, I'm going to turn it over to Mike to walk you through the details.

Thanks, Tom. As Tom said, the results of our third quarter continue to demonstrate the consistency and stability of our revenues and cash flow. The quarter was on plan, in line with our expectations, and not surprisingly very similar to Q1 and Q2. As in prior calls, I will not make any comments with respect to results from discontinued operations which are only there on a year to date basis. That being said, until we really complete fiscal 2012, there are still many elements and costs related to that transaction that make certain year over year comparisons not relevant.

Just before I get into the details of the quarter results, let me give you a brief update on the REIT conversion and other reporting initiatives discussed in prior quarters. As it pertains to the REIT, as previously announced on October 17, the shareholder vote to consider approval of the REIT conversion is set for a week today, November 15. Shareholder feedback to date has been positive and we attribute this largely to the REIT conversion being consistent with our stated strategic plan announced over a year ago and the improved tax related savings which are now estimated to be CAD11 million, about CAD3 million better than previously thought.

Also for tax planning reasons, we've moved the actual conversion date to occur at the end of December 2012 instead of early January. To say the least there's a lot of paperwork to complete between now and then and that's assuming it's approved, of course. Secondly, we officially announced our intention to convert our financial reporting to IFRS from US GAAP beginning in Q1 2013. We are working our way through the required adjustments and intend not only to follow but to take advantage of the policies and learnings of what most Canadian REITs have already adopted.

Turning to the quarter, as I mentioned, Q3 like Q2 and Q1 was on track and produced very similar results. In fact, if you look at each of the last six quarters and exclude the non-recurring expenses, our revenues approximate CAD45 million on a quarterly basis, our net income remains around CAD20 million, and our FFO is generally CAD30 million plus. All pretty consistent.

In Q3 we ramped up our efforts to complete the circular and other materials and the steps required in advance of the upcoming shareholder meeting. As a result, we incurred higher REIT advisory costs than in prior quarters. In total, CAD2.6 million for the quarter. In addition there was an incremental CAD300,000 included in our property costs related to our undertaking and property appraisals and reviews. The total of those two, CAD2.9 million, are not really representative of our quarterly run rate.

With that as background, here are some highlights of the third quarter of our business. First of all, currencies played a role in our reported results relative to the second quarter, the average foreign exchange rate for the US dollar depreciated 2% and the Euro depreciated 4% as compared to a year ago, the same quarter, the US dollar has appreciated 2% against the Canadian dollar and the Euro has depreciated 10% relative to the Canadian dollar.

On an as-reported basis, our quarterly net income was CAD18.9 million and funds from operations was CAD29.4 million. That's CAD0.40 per share and CAD0.63 per share respectively. Very consistent with Q2 and Q1's performance. Looking at some of the other highlights in the income statement, revenue for the quarter was about 2% lower than the prior year and Q2 largely due to foreign exchange. With respect to G&A, as I mentioned, our third quarter G&A includes approximately CAD2.6 million of REIT conversion advisory costs and without those costs our G&A for the quarter would be approximately CAD5.2 million, slightly lower than Q1 and Q2. And we continue to target an annualized G&A run rate in that CAD21 million range.

As I mentioned, we had -- pardon me -- you'll note we also had over CAD300,000 of foreign exchange gains in the quarter. These are largely realized gains in the quarter and are as a result of some proactive steps taken through forward buy the Canadian dollar to hedge our expected cash flows. These gains go towards mitigating the adverse impact of the recently depreciated Euro and details of our foreign exchange contracts are set out in note 15 to the Q3 financial statement. Our effective tax rate in the quarter was 13.9%, lower than our expected run rate.

This quarter's tax rate was favorably impacted by three factors -- the favorable tax treatment of the US disposal of a property in the US, the recognition of some previously unrecorded tax benefits, and we had a reduced amount of non-deductible expenses in the quarter. Excluding these items, our effective tax rate would've been over 18%. If we were to adjust our Q3 results for the after-tax impact of the additional G&A, property and operating costs, and the favorable Q3 tax rate, our net income and FFO would've increased by about CAD0.03.

Turning to the results for the nine months, it really is as simple as sort of Q3 times three. I'll keep my comments brief. On an as-reported basis, our net income was CAD56.2 million and funds from operation were CAD88.2 million. That's CAD1.20 per share and CAD1.88 per share respectively. Revenue for the nine months ended September 30, 2012 increased by CAD1.2 million or 1% from the prior year. Contractual rent adjustments, revenue completed from completed projects, and from renewals and releasing added CAD5.1 million. These increases were largely offset by CAD3.9 million associated with the impact of the depreciated Euro and to a lessor extent the non-cash related straight-line rent adjustments.

Our G&A for the nine months includes approximately CAD4.1 million of REIT conversion advisory costs and CAD300,000 of employee termination costs that are not representative of our ongoing run rate. Without those costs, our G&A for the year to date would be approximately CAD16.2 million. As mentioned also in the quarter we incurred approximately CAD1.4 million in appraisal and property related assessment costs that are also not entirely reflective of our ongoing property costs and are partly due to the REIT conversion and to prepare for IFRS.

Our effective tax rate for the nine months ended September 30 was 18.2% and although there were some plusses and minuses in certain specific quarters the year to date effective run rate of our taxes is within our expected range. If you were to adjust our year to date results for the after-tax impact of the G&A and property and operating costs, our net income and FFO would increase approximately CAD0.09 per share.

Some additional financial metrics and other matters that I want to bring to your attention are in the quarter. We invested CAD10 million in CapEx over eight projects -- five in North America and three in Europe, the largest being the expansion at the Eagleville facility in Tennessee. For the year to date, we've invested over CAD26 million across 12 properties and just over half of that CAD26 million going to the Eagleville project. At the end of the quarter we had just under CAD54 million in cash -- not a bad spot to be.

Overall, we're pleased with the quarter's results, the continued stability of the financial performance it demonstrates, and the progress made on our lease renewals and extensions. And lastly, and in closing, as Tom said, I'd like to thank our people. It's been another intense quarter for everyone, both in Europe and in Canada as we explored growth opportunities, worked towards completing the REIT, and prepare for IFRS.

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

Thanks, Mike. Let's open it up to questions if there are any.

(Operator Instructions) There appear to be no questions at this time.

Okay. I appreciate it. I think we'll wrap it up then.

We'll wrap it up. Thanks, everyone.

Thank you.

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.