Granite Real Estate Investment Trust (GRP.U) 2012 Q4 法說會逐字稿

Good morning, everybody. Joining me on the call today, we are in Vienna, Austria, are Mike Forsyth, our CFO; Jen Tindale our EVP and General Counsel; and Lorne Kumer, our EVP, Real Estate and Portfolio and Asset Management. I have a few comments I want to go through that recap 2012 and where we are right now in early 2013. Mike will take you through our financials in detail and then we'll have some time for questions and hopefully answers for you.

2012 was a year in which Company started out as MI Developments and we've now enter 2013 as Granite REIT. It was a year of transformation and laying the foundation for the future, a year of executing on positive change in value creation. With our name change, new office locations, investment in new people and the completion of converting into a real estate investment trust structure, we are now poised for growth and diversification. All of these changes were designed as part of a new foundation for growing unit holder value.

In October 2011 we announced a new strategic plan that formed a platform and directives upon which we went forward in 2012. Our results last year show that we completed several key steps and are executing on our strategic initiatives. Most importantly, we have taken the necessary actions to both stabilize as well as grow Granite. Throughout 2013, Granite's REIT's focus will be on ensuring that we execute on the plans to maximize opportunities to grow and diversify our asset base, rental revenues, and net cash flow. As we have stated in that the past, and we'll mention again, the components outlined in our strategic plan are interdependent.

However, it is crucial to note that the success with our existing portfolio of assets and the continuing fortification of our relationship with our key tenant, Magna International Inc and its subsidiaries, will be a key factor in strengthening the foundation as well as the flexibility for the future diversification and enhancement of our asset and tenant base and for the overall success of Granite REIT. I'm grateful for the work completed by so many people throughout this past year. They worked tirelessly to complete the necessary steps which have position Granite to go forward this year. The actions by these people, their continuing commitment and the success of 2012 will allow Granite REIT to grow and diversify.

Our 2011 strategic plan laid out the road map to go forward and continues to guide us as we move through 2012 and now into 2013. We completed our first significant acquisition in February of this year, just a few weeks ago, over 713,000 square feet in two properties located in New Jersey and in Georgia in conjunction with Dermody Properties all part of important steps towards value-creating growth, new tenant and new property diversification. Each of these things we've touched upon will be the major struts as the year unfolds while we concentrate on investment in our key markets, which will be Canada, the United States and selected parts of Europe.

The repositioning of Granite REIT for the future was a major accomplishment of 2012 and has allowed us now to fully focus our resources and act as a true value oriented, real estate investment trust. As Mike will take you through in detail, on a recurring basis, our 2012 fourth quarter results were on budget and in line with our expectations. Through this period we continue to see evidence of strength and stability in our rental revenue and overall earnings.

For Granite, the finalizing of the REIT conversion steps, which led to the conversion being completed on January 3 of this year, was definitely the major accomplishment of Q4. While there were not insignificant one-time expenses related to the conversion, the results and benefits going forward are very positive and significant. Regarding our leasing activities, as I've said in the past and will note again, Granite cannot comment on the specifics of lease renewals in negotiations until they are fully completed and signed by all parties. That being said, we can say that the 2012 was positive in terms of signing multiple leases.

For the 2012 fiscal year, there were seven leases expiring and represent 0.7 million square feet and annual lease payments of CAD3.5 million or just 1.9% of Granite's annualized lease payments as of December 31, 2011. The 2012 lease expirees were all renewed with a weighted average lease term of 4.3 years representing 0.7 million square feet and annual lease payments of CAD3 million at December 31, 2012.

Five leases relating to 2013 expirees were also renewed during this past year, representing about 800,000 square feet and annual lease payments of CAD2.8 million. In addition, during the fiscal 2012 year the lease expirees on three properties occupied by Magna were extended in conjunction with expansion projects undertaken on these specific properties. The weighted average lease term on these lease extensions is 7.4 years, again as of December 31, 2012.

For 2013, there are 26 remaining leases expiring. This represents about 5 million square feet and annualized lease payments of approximately CAD25 million or 13.5% of Granite's ALP as of December 31, 2012. Most of these leases expire towards the end of 2013 and discussions are underway on the vast majority. We are making progress but it is a process that will take a better part of this year with many situations with Magna being at successful conclusion tends to be very close to the final expiration date. Thus, I don't have any near-term conclusions on these expiring leases.

On the new business and on the pipeline, diversification, growth and new acquisitions, we are actively reviewing opportunities in various markets as I have said, Canada, in North America, US, Europe, in particular the US's and Germany are markets we are focusing on. Overall we like the balance of quality product volume, yield and strategic alliances that we're seeing in US as well as in Germany, as evidence by the Dermody transaction. It's a fairly wide range of products, but with a focus on newer age warehouse distribution, logistics, light industrial, primarily, and in primary markets and in secondary markets.

In summary, we believe that 2012 was a good year, but there is much to be done. As stated in recent meetings and presentations, our focus is on achieving results that demonstrate progress on all fronts. We believe that we are very much on track. With that and those prepared comments, I'd like to turn it over to Mike to go through the details of our financials for fiscal 2012.

Thanks, Tom. We're pleased, as Tom said, with our financial performance for the quarter and for the year as a whole. After excluding those costs associated with the REIT conversion and related corporate reorganizations, the fourth quarter was in line with our expectations and consistent with the operating performance of the previous three quarters. I'll not be making any comments with respect to the results from discontinued operations and thankfully this will be the last quarter I'll have to say that. Still, as a result of the June 30, 2011 plan of arrangement transaction, certain year-over-year comparisons are difficult to make and not relevant.

Before I get into the details of the quarter's results, let me give you a brief update on the REIT conversion and other reporting initiatives discussed on prior calls. As it pertains to the REIT, it's done. We completed it on January 3, and we began making monthly distributions, with the first one being paid on February 15. As you can see from the income statement the conversion wasn't an inexpensive undertaking with a lot of the executional effort and dollars being spent in the fourth quarter. Frankly, they're a little higher than expected due to some tax law changes in a couple of countries along the way, particularly in the fourth quarter.

The complexity of having entities in 13 countries, and that's including our financing subsidiaries, had a price, but I can assure you the end result has been worth it. All in, the total for the year including legal and tax advice, land transfer taxes, appraisals was pre-tax CAD10.9 million for the year as a whole. As previously reported, we're going to convert our financial reporting to IFRS from US GAAP beginning in Q1 2013. In our MD&A we've discussed and outlined our position on the major adjustments and how that will really impact our financial reporting going forward.

Turning to the quarter and excluding the nonrecurring items, our revenue was CAD45.3 million. Our net income was a little under CAD20 million. Our FFO was about CAD30 million. All consistent with the financial performance of recent prior quarters. As I just mentioned, we incurred significant costs associated with the REIT conversion in the quarter, a total of CAD5.7 million. Of that amount, CAD3.8 million related to REIT advisory fees and is included in our G&A and CAD1.9 million is included in property costs largely related to transfer -- land transfer taxes being paid relating to the reorganization of our Austrian corporate structure. We still had some post closing REIT costs to come, and you see a little bit of that coming in Q1, but not nearly to the extent you've seen them in the past year.

With that as background, here's some of the highlights of the fourth quarter. First of all, currencies continue to play a role in our reported results. Relative to the third quarter, the average foreigner exchange rate for the US dollar was pretty much flat and the euro appreciated 3%. As compared to the same quarter a year ago, the US dollar depreciated 3% against the Canadian dollar and the euro depreciated 7% relative to the Canadian dollar.

On an as-reported basis, our quarterly net income was CAD15.1 million and funds from operation was CAD25.9 million, that's CAD0.32 and CAD0.55 per share respectively and lower than the previous quarters due to the higher REIT related conversion costs. Revenue for the quarter was approximately 2% lower, largely due to the impact of foreign exchange and 1% higher than the third quarter of 2012 due to the cumulative impact of several small factors.

With respect to G&A, our REIT conversion -- excluding our REIT conversion advisory costs, G&A for the quarter would have been approximately CAD6.4 million, which was higher than recent quarters. The reason for that was really related to increases in expenses associated with additional staff, stock-based compensation and the annual incentive plan. There's some timing aspects related to that. You'll note that we had over 600,000 foreign-exchange losses in the quarter, these are largely unrealized losses and relate to the steps we've taken to forward-buy the Canadian dollar to hedge our expected cash flows. Details of our foreign exchange contracts are set out in note 18 in our annual financial statements.

With respect to our effective tax rate in the quarter it was 11.7% and is lower than our expected run rate. This quarter's tax rate was favorably influenced by the net impact of the amounts that we provided for in our income statement with respect to -- versus what we actually file in our tax returns together with recognizing some previously unrecorded tax benefits. Excluding those, our effective tax rate would have been closer to 19%. If you were to adjust our Q4 results for the after-tax impact of the REIT related costs and the favorable Q4 tax rate, our net income and FFO would increase approximately CAD0.09 per share.

Turning to the results for the year, on an as-reported basis our net income was CAD71.3 million and funds from operation was CAD114.1 million. That's CAD1.52 per share and CAD2.43 per share, respectively. Revenue for the full year of 2012 was virtually flat when compared to 2011. Contractual rent adjustments, revenue from completed projects and from renewals and re-leasing added CAD6 million to the revenue line. However, these increases were largely offset by the CAD4.6 million impact of the depreciated euro and to a lesser extent the non-cash related straight line rent adjustment.

Our G&A for the year includes approximately CAD7.9 million of REIT conversion advisory costs and CAD300,000 of employee termination costs. Without those costs, our G&A would have been about CAD22.7 million for the year. Included in our property and operating costs for the year is approximately CAD3 million of costs that comprise of land transfer taxes, appraisal and property related assessment that are due primarily to the REIT conversion and to a lesser extent to prepare for IFRS.

Our effective tax rate for fiscal 2012 was 16.8% and is lower than the expected range due to the favorable impact of Q4's tax rate. If you were to adjust our year-to-date results for the after-tax impact of the additional G&A property and operating costs and a more normalized tax rate, our net income and FFO would be about CAD0.16 or CAD0.17 higher than as reported. In addition, there is some additional financial metrics and subsequent event matters I'd like to highlight.

In the quarter we invested CAD7.6 million in capital expenditures over seven projects, six of those in North America and one in Europe. The largest being the expansion at the Eagle Bend facility in Tennessee. For the full year, we invested CAD33.6 million across 15 of our properties, with close to over 50% going to the Eagle Bend project. We entered 2013 with just over CAD51 million of cash in the bank, and subsequent to the year end and effective February 1, we completed a significantly enhanced unsecured credit facility. As a result we now have CAD175 million multi currency facility, Canadian, US dollars and euros, which with lender approval can actually be an increase to CAD250 million. This will help fuel our acquisition growth.

In addition, as Tom mentioned, subsequent to the year end, we completed our first acquisition in the US. This was financed with US denominated debt comprising of a property specific non recourse variable interest rate mortgage for approximately 60% of the value and the balance being funded from our multi currency credit facility and cash on hand. We also purchased an interest rate cap related to the mortgage loan to help hedge our interest rate exposure.

Finally, last week we settled what we refer to as the Meadows Note. Details of this note are more fully described in Note 22E of our financial statements. In short, Granite's share of this settlement will result in us receiving $5 million over the next seven months and of that amount we'll receive $1.5 million of it on March 4. Given the uncertainty of that particular situation, we had nothing on the books, so this will have a favorable impact on our Q1 results. As said at the outset, we're pleased with the quarter's results and the year as a whole. From the recent positive events subsequent to the year end, I'd say we're off to a pretty good start for 2013.

In closing, I'd like to echo Tom's appreciation of our people. It's been an intense and very rewarding year and we couldn't have done it without their tireless commitment. With that, I'll turn it back to Tom.

Thanks, Mike. Operator, we're going to go to questions now.

(Operator Instructions)

Sam Damiani, TD Securities.

Just wanted to touch on the acquisition pipeline. Wonder if you could provide a little more color on the pipeline that you've got both with Dermody, perhaps, and with other third parties both in the US and in Germany?

Sam, the pipeline is unlike last year, which was quite often conceptual. Our pipeline right now is very real, the most significant of things that we're in dialogue on. Of course on any investment, things can change along the way, but they are US-focused in terms of the key pipeline. I would tell you in total it's nearly CAD400 million. One can't say which of those could ultimately lead to closing, but they're active dialogue going on. Of that, I'm going to say approximately CAD75 million is involving Dermody, a partner we hope to do many things with in the future.

Of course, we're going to do a lot of things direct. Right now we're involved in a situation in the US that we're actively and very focused pursuing that is above CAD200 million is all I can say. We've never been more actively engaged and I think the pipeline, it's never been larger. That being said, we all know that there's competition in markets and things can happen, but that's where we stand today.

Sure, thank you. With the Dermody transaction, you didn't publicly disclose it until it was closed. In the future do you expect to continue that practice or would you commence announcing acquisitions at the time you've firmed it up and waived conditions?

We simply put -- want to be making any announcements when we know everything is done and put to bed. If we were involved in a transaction that had very finite time frames, conditional periods and conditional periods and waved, and we were firm, we would make some type of public announcement. Just a bit of color on Dermody, that was a very friendly process. It wasn't a bid process. It didn't involve other parties and we were working on a lot of things together.

What we were reluctant to do was issue anything formal when there was no certainty on the timing of the actual closing. That's more a function just of the dynamic of those two properties and us working with Dermody. In the future, when you have very precise bid situations or very finite time frames, once we're firm and we've got Board approval that we're proceeding, that's likely when we're going to put out an announcement.

Just on the financing of the next, call it CAD300 million of acquisitions, where will the debt component come from besides secured debt on the target properties? Will you be drawing on the lines that you've arranged?

A line works as a warehouse facility of blending it with first mortgage debt to take us, as Mike has noted, it's CAD175 million facility with an accordion feature subject to bank approval that can take it up to well in excess of CAD200 million. That is certainly the facility that, together with first mortgage debt. And then we'll look at, as that rises and we've drawn on that line, more taking out term financing, and likely in the form of the debentures.

One more question before I turn it back. Just on the dividend, I know this first acquisition wasn't a huge one, but in the future as the program does get larger and achieves some meaningful accretion, do you foresee increasing the dividend? Just wondering what your thoughts are at this point?

We see the Company growing and revenues growing and stable revenues growing while maintaining a cautious payout ratio that's pretty close to where we are today. We don't intend to make changes to our payout ratio, but if we're growing revenues through acquisitions and those are, say, solid revenues, I think it is certainly the Management and the Board's view to grow our dividend as possible.

Great, thank you.

Mark Rothschild, Canaccord.

You mentioned briefly how about just how leasing is going. If you can give a little more detail, in particular on the 2013 lease expirees? How are negotiations going? You have said in the past that you expect maybe a few properties to be vacated, has anything changed in that regard?

From our end there's been no significant changes. We have, as mentioned, about 26 properties to see through in 2013. I think we know for sure that two are going to be vacated, because they have already been vacated, and are currently paying rent and are marketed for re-lease or sale right now. I think there will be some additional properties vacated, more than one, less than five, we anticipate.

The remainder we have a variety of situations. We have discussions going. We have certain ones where they've provided notice of renewal, but we still have to work out final terms. We have others that they've indicated a desire to stay, and we're working through those terms. Each has a different profile to it.

I guess for lack of a better way of characterizing it, there is a bit of adjust-in-time approach that our main tenant takes to signing those leases. It does come down to the stretch. Since so many of those leases are in the fall this year, we don't want to start making comment that they'll be signed in advance of that. We're hopeful and some things are likely to happen a little before that, but altogether we're really looking at the fall of this year as being where things start to really crystallize and hopefully conclude.

Do you continue to believe that when you factor in rent escalations at other properties that net the same-store NOI should be relatively flat after all that?

Excluding new acquisitions, yes. We think overall, when you look at the total ALP or the total NOI excluding new deals, the upside through contractual rent increases, CPI adjustments that several of the leases have, are more than offsetting some of the slippage on renewals, and even offsetting some of the rental lost on vacancy before re-leasing. What we're not putting anything in there is those properties, such as the two I mentioned that they will be vacating, we're not factoring in that there is a re-lease ability to those assets. Their good properties, and if we sold them, there's the redeployment of that capital. A simple answer, yes, we -- our NOI is stable, blending the upside from some with the downside from others.

Okay. Just following up on of Sam's question about acquisitions. You said you had about CAD400 million that you are looking at but they don't always work out. What do see as a goal suite for the REIT to acquire this year? What's a good number that you'd be happy with?

We'd like to buy as much good property as we can. And good property, newer age, multifunctional, cross stock, low on future CapEx exposure, good diversity in tenants. I certainly know we have the capacity to do, in terms of our manpower, our focus, our resources, we could do more than CAD300 million just by virtue of how we're set up and ready to go. Are the markets good to us and do those deals fall in place? Like you say, sometimes things work out, sometimes they don't. Optimistically, we're somewhere between CAD200 million and CAD300 million would be what we'd like to see happen in 2013. Truthfully, I hope even more.

(Operator Instructions)

Mark [Marquetis], [Digal] Bank Capital Markets.

Tom, just wanted to follow up on your last comment there on CAD200 million to CAD300 million being a number that you guys would be happy with in 2013. How should we be thinking of that and reconciling the initial strategic plan and the goal to get to 50% magna within three years? Would it be safe to say that that goal is now pushed further out?

I think we're still believe that we can get there. I think there is some possibility it could take longer, but we have a transaction we're involved with right now, significant size, that as a way of example again, cautioning that it's not by any means a done deal, what would move the needle quite substantially. If something like that happens, we'd be more optimistic than ever that meeting the 50/50 diversification within three years is more than achievable. Internally amongst ourselves, we still view it as achievable, but I'll say that was a bit of cautious optimism if I could.

Your opening comments, you noted that you're still look at Canada, US and Germany, but I guess your nearest-term focus is US primarily, and perhaps secondarily Germany. We've seen what you can do with respect to a cap rate basis on the Dermody transaction. How would the, say the CAD200 million that you're looking at currently today, how would that compared to the mid 7% going-in yield that you achieved there?

Generally speaking, Mark, I would say that the cap rate we've got on those Dermody properties was generous, in the sense that it was part of establishing a new relationship. I think Dermody worked with us to really pave the road to come into that. I think 7.4% cap rates anywhere in the world right now would probably reflect inferior quality. So, I'm not projecting 7.4% cap rates on some of the new stuff we would buy.

I do think, selectively, we will do build-to-suit and some other development, and we would certainly more than expect to exceed 7.4% on that product. The things we're seeing in the United States, the things we're most active now, are below that. But I will tell you they are above the kind of cap rates we're seeing in Canada and for definitely superior product.

What about with respect to what you're seeing in Germany? What would the cap rate differential be there for a similar quality product of what you acquired in the US recently?

Relative to the US, I would say that depending -- we're looking at a few things, pretty seriously here in Germany right now. We're in Europe this week. It's going to be sub 7.4%, but in all likelihood were looking in the 7% ish range.

Okay. Have you gotten as far as looking at what the availability for mortgage financing is like in Germany on those types of assets?

We've looked at it from the relationship point of views. In other words the stuff we've looked at, the first thing you have is to have established a relationship with the banks. I might also add that we're looking at things in Germany with some joint venture partners who have strong relations. Debt availability in Germany is not as readily accessible as it is in Canada and the United States, but it is still fairly flexible and wouldn't be the impediment to us acting in Germany, I think, in that regard.

We wouldn't say that in countries such as a Portugal, a Spain. The feedback we're getting is that would be very difficult. Those aren't places we're focused on right now. I would generally say, financing is available in Germany. We could access it. Is it as flexible and as readily available as United States? No.

Okay. Just moving on to the additional cash you put into a few properties. I think you had three projects in 2012 that worked as maybe continued to on go today. Looks like the bulk of that work is done, you might have some additional expenditures in that regard going forward in 2013. Do you expect any additional types of significant expansions and extensions of leases that could be achieved in 2013 or at least the deals that could be achieved?

Simple answer to that, there are -- at this exact moment there are no significant new expansion/major capital expenditures in the pipeline. If you were to compare that to a new project like Clinton, Tennessee, now we do have some still underway and still happening. We have one that is contingent on a couple of things in Germany, that we're awaiting feedback on that could happen. But, if you were to compare it to this time last year when we were looking very seriously at getting going with the Clinton, Tennessee and we went on with Muncie, Indiana and some others, it's not the same right now.

Okay. Quickly on the 2013 expires, you noted that there was two properties, and I think they're in Maryland, that will be vacated that you know for sure. I think you mentioned in your commentary that there would be more than one, or maybe less than five. Would that be additional properties that you would expect to be vacated this year? Or is at including --?

Yes.

Okay, and is that sort of an increase in your expectations from, say, three or six months ago?

It is, I mean there's a couple that have moved into that category, and a couple that have moved out of that category. It's definitely a moving thing. But I think, in total, it's probably five, potentially six, and counting the two Maryland.

Very quickly, Mike, you noted that your G&A, obviously, had some significant one-time costs. If you strip out the re-org costs in Q4, you're at a run rate of CAD6 million, and I guess you had noted maybe CAD22.7 million, I think, for 2012 as a whole? Are you guys still targeting CAD21 million to CAD22 million for 2013?

I think it's closer to the higher end of that, Mike.

Okay, it's still in the CAD21 million to CAD22 million range. That is fine. Just finally also on the effective tax rate, you noted the 19% effective tax rate would be what you'd expect going forward. Could you help us out with the split between what would be cash taxes of what would be deferred?

I think going forward, Mike, we're a REIT now, so the 19% is not even relevant. You need to look at, to some extent, look at the results as a whole for 2012 stripping it all out, and then saying here is the current taxes. Then, as we've said, you're looking to probably save about CAD11 million. You have to do a little math there, but it's really hard to come out and say, okay, here we are 2012 it was 19% and now you're a REIT. What's your tax rate going to be?

Right, okay, that's fair enough. That's it for me, guys, thanks very much. Congratulations on a good year.

Just a comment, Mike, both for you and a number of people over the past year that have asked about our G&A, our goals, our targets, and I feel that in light of it being mentioned often and part of our strategic initiatives established in 2011, I'd like to be very clear where we stand today and be sure there's no wavering on this.

Based on where, as Mike has referenced the 2013 G&A and our current ALP before new acquisitions, we're slightly above 11%. We have a strong commitment, a very unwavering commitment to bring that to 10% G&A as a present of our ALP. We're going to do that through growth on the revenue side. We've looked at all of our expenses. We've tried to bring them in line as much as possible. We obviously have far less on the nonrecurring, so things are finally normalizing. I think on this call, I want to say that our objective of 10% is one we're committed to.

I would say the message would be that that number is certainly scalable as you grow. I would appreciate that. Thank you.

Neil Downey, RBC Capital Markets.

I have only one follow-up question with respect to the cash taxes. Mike, your answer was maybe just a tad cryptic. If we look at the existing business today with no acquisitions, what is your budget for cash taxes for 2013?

We haven't been in the habit, Neil, of giving a forecast or forward-looking data as it relates to 2013, but what I can tell you is, is that when you look at our revenues and you look at the split, Canada and the US, those jurisdictions attract virtually -- virtually attract no tax. Where the leakage is is in Mexico, Austria and Germany. If you look at our revenue stream, you can come to a number, and when you see our first quarter you'll get a better -- you'll certainly get a better sense of it.

Okay, thank you.

Sam Damiani, TD Securities.

The only question I have left is on the Clinton redevelopment project, there. Just at what point during last year did the rent commence at the higher rate on a full run rate basis?

Sam, I could get you that answer precisely when I'm back next week. It was late in the year. It was either November 1 or December 1.

Okay, that's great. Thank you.

I may have it here. Just one second. I do have something -- just hold on one second. I do have -- I'm sorry, rent commenced January 1 of this year.

Oh, okay, great. Just, actually, while I think of it. You'd mentioned Germany as one of the three areas where you are seeing a little more taxation. Is that going to be applicable on the properties that you acquire going forward as well?

Yes, there will be some tax leakage on the German side, but Germany from a tax rate perspective, their corporate tax rates are roughly 17%. We will also use, I'll call it internal leverage, to help drive that down.

I guess even with the tax burden, although it's modest, you're still seeing Germany as an attractive place relative to Canada. Thank you very much.

Absolutely.

There are presently no further questions at this time. Please, continue with your closing remarks.

That's it from us, Sylvia. I appreciate the questions from the various folks in Toronto, and I hope we've answered them properly. So thank you very much.

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.