Granite Real Estate Investment Trust (GRP.U) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the conference call of Granite REIT. Speaking to you on this 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 statements made in today's discussion may constitute forward-looking statements and that accurate results could differ from any conclusion, forecast, or projections. 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 Granite 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 annual information form for 2013 filed on March 5, 2014. Readers are cautioned not to place undue reliance on any of these forward-looking statements. Granite 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 include financial terms and measures that do not have a standardized meaning under international financial reporting standards. Please refer to the audited combined financial results for the year ended December 31, 2013, for Granite Real Estate Investment trust and Granite REIT Incorporated and other materials with the Canadian Securities Administrators and US Securities and Exchange Commission for additional relevant information.

I would like now like to turn the call over to Tom Heslip.

Thank you Jasmine, and good morning everyone. Joining me on the call today are Mike Forsayeth, our CFO; John De Aragon, our Head of Investment; Stefan Wierzbinski, our EVP of Europe; and Lorne Kumer, our Head of Real Estate Portfolio and Asset Management.

Granite's 2013 fourth quarter, as was the case for 2013 overall, was a very active and strong period for us. Much was accomplished on multiple fronts. Our new property acquisitions in the US and Europe, sales of selected non-core properties, lease renewals, and new leasing, new debenture financing, and continued stabilization of revenues through long-term lease extensions all combined to make 2013 a historically successful year for Granite.

Let me recap the highlights from 2013, a very significant amount of which culminated in the fourth quarter of last year. Our FFO on a year over year basis increased by 30%.

In the fourth quarter, we completed the acquisition of eight state-of-the-art logistics distributions properties in Germany and the netherlands totaling 2.6 million square feet at an aggregate purchase price of approximately CAD189 million. This brought the total of accretive acquisitions in 2013 to approximately CAD300 million comprised of 12 state-of-the-art logistics distribution income properties totaling 4.2 million square feet and 2 development properties.

Through the aforementioned acquisitions we have added incremental annual lease payments of over CAD23 million and 21 new tenants to our portfolio. Largely due to these acquisitions, we have achieved a reduction in Magna tenant concentration as measured by annual lease payments from 97% at the beginning of 2013 down to 85% at the end of 2013.

We funded the acquisitions largely with debt to further optimize the balance sheet leverage with total debt as a percentage of the fair value of our real estate properties increasing from 14% up to 24%, all part of our objective to reach an overall leverage level of between 40% and 50%. Last year, the financing included CAD200 million of 4.613%, Series 1, senior unsecured debentures, issued in the fourth quarter with a 5 year term in which we subsequently swapped out into EUR142 million denominated debt at 3.56%.

In 2013 we completed lease renewals, extensions and new leases for 21 properties, totalling 4.8 million square feet and brought the overall portfolio weighted average lease term, or WALT, to 4.8 years. In 2013, we also completed non-core property sales for gross proceeds of CAD28 million, the majority of which were completed in the fourth quarter of last year.

Let me touch upon a few of the areas that are generally of particular interest to callers. First, on the leasing front, the leasing momentum created in 2013, in particular in the fourth quarter of 2013, has carried over into the first two months of 2014. Since January 1 of this year, we have renewed or signed new leases for a total of 592,000 square feet and five properties, which had either 2013 lease expirees that carried over into 2014 or were in fact vacant at the beginning of the year.

More significantly, as was announced on January 30th of this year, we have extended the lease for our largest property, the 3.85 million square foot Thondorf property in Graz, Austria, through to January 31, 2024. As a result of the recent leasing activity and the Thondorf lease extension, we have further increased the overall portfolio weighted average lease term, or WALT, from 4.8 years at the end of 2013 to now 5.5 years.

On a further positive note, given the successful leasing activity in 2013, along with the early 2014 strong leasing activity, our overall vacancy rate now is -- or our overall vacancy level is now approximately 600,000 square feet or 1.8% vacancy level. That's our lowest in several years.

Second, in regards to acquisitions, pipeline, and markets, 2013 was a year in which the properties we acquired greatly enhanced the overall quality of our portfolio. We will continue to focus on modern logistics, distribution properties, in strong logistics markets in the US and in Europe. We feel this asset class is on the rise, and offers strong long-term growth prospects.

Thus far in early 2014 we have tracked not an insignificant amount of product on the market, but for the most part, it appears in early 2014 that owners or venders are culling their portfolios of lower quality older properties. Generally we have not liked the quality of assets being offered on the market to date in 2014, in some of the key European and US markets that we target.

That being said, on a more positive note, there are signs that better quality product and increased volume of product is being positioned to come to the market in both the US and in Europe in early spring. And we're just starting to see signs of much more attractive property that we want to go after.

Though we do remain flush with cash, and a strong balance sheet, due to our outlook, which creates great borrowing power, and while we are focused on trying to effectively deploy capital, we believe that maintaining a discipline to acquire state-of-the-art logistics distribution properties will ultimately reap true unit holder value and benefits. We will continue to be vigilant in tracking and sourcing both marketed and off-marketed transactions while being patient as we deem necessary.

And third, in regard to new development, and development of new property, although it represents a much smaller allocation of our capital for new investments, new development of logistics distribution properties continues to be very attractive in terms of potential returns and potential opportunities. Our 625,000 square foot building under development in Louisville, Kentucky proceeding on time and slightly under budget, building completion is scheduled for May of this year with active discussions on the leasing of the property well underway.

Our development site in Brooks, Pennsylvania, part of the Central Valley key market in the northeast, which is approved for a 750,000 square foot logistics distribution building is in a market that has been or has seen significant leasing activity and demand in the past few months. We are exploring the potential to commence development of this building perhaps as early as this spring.

To wrap up, in terms of the key components of our strategic plan set out in October 2011, and it's overall progress, the fourth quarter of 2013 and the year overall was certainly our most significant yet. As I have mentioned frequently over the past two years, Granite believes that a strong real estate company, whether structured as a REIT, a Corp., private, or public, creates value through a thoughtful balance of asset acquisitions and dispositions while continually emphasizing the importance of lease renewals, extensions and value creating asset management initiatives.

The milestones achieved in the execution of Granite's strategic plan during 2013 have set the benchmark for the advancement of Granite's strategic plan for 2014 and the years ahead. As Granite moves forward this year, and focuses on its core strategic objectives, the themes will continue to be property diversification, enhanced asset quality, lease extensions and balance sheet optimization while maintaining discipline in a highly competitive international investment market scenario. We are confident that our strategic plan is on track and with continued diligence we expect to make progress on all fronts.

In closing, I'd like to thank all of the Granite employees in North America and in Europe for their tremendous efforts and contribution towards making 2013 such a successful year for Granite and for our unit holders. And with that, I will now turn it over to Mike Forsayeth, our CFO.

Thanks Tom. As outlined by Tom and summarized in the highlight section of our press release Q4 closed out 2013 on several high notes, all of which resulted in a very successful financial performance, and are achieving significant progress on the key deliverables encompassed within our strategic plan. Over the next several minutes I'll try to give you some additional color and insight into the numbers and why we see Granite poised and ready to take on additional profitable growth.

Turning to the results for the fourth quarter. With higher revenue driven by the acquisition of 12 accretive income producing properties in the year, and favorable exchange rates, combined with tax savings from the REIT conversion Granite's funds from operation or FFO for the quarter, were CAD0.78 per unit. In comparison to the Q4 of 2012, and in fairness, excluding the significant REIT and reorganization costs incurred in that quarter, this represents an improvement of approximately 30% over last year.

Here's some significant items of note. Our top line was up CAD9.4 million to CAD54.7 million over Q4 of 2012.

Despite a CAD1.1 million revenue reduction caused by vacancies and lower renewal rates, over half that increase of CAD9.4 million or CAD5.1 million was attributable to our acquisition growth. CAD2.6 million pertained to contractual rent increases and revenue from completed projects, largely in Europe, and favorable foreign exchange rates added CAD2.7 million as the Canadian dollar depreciated 11% against the Euro and 6% against the US dollar.

Excluding the large transfer taxes of about CAD1.6 million primarily attributed to Germany last year as part of the REIT reorganization steps, and that new category that we have now of the costs recoverable from tenants, our property and operating costs for the fourth quarter of 2013 were up slightly. Largely as a result of the increased leasing activity and a couple of vacancies compared to a year ago.

Our G&A in Q4 of last year, as I mentioned included CAD4 million of REIT and reorganization costs. Without that, our Q4 2013 G&A was higher than a year ago and is due mainly to higher compensation expense associated with some additional staff related to our growth.

We know that G&A is a focus point, but I can tell you that we spend it responsibly and to address the needs and requirements of operating a real estate business in 10 different countries. The quarterly G&A expense of CAD8 million is not indicative of our run rate. And our run rate's probably closer to CAD6 million to CAD6.25 million on a quarterly basis.

I'll also add that certainly the regulatory compliance, and particularly tax and audit, is placing increased demands and rigor on all of our jurisdictions, and frankly has a price tag attached to it. I will also add with all that said, the tax savings that we're delivering with respect from the REIT reconversion are going to be more than delivered base on what we promised.

Turning to net interest expense for the quarter of CAD6.7 million relative to a year ago it was CAD2.6 million higher and it is directly attributable to the added interest and financing costs associated with the borrowings, in particular, the new debenture for the new properties acquired in Europe in the fourth quarter. Also, despite a much higher income level, current income taxes were significantly lower than last year, a direct result of becoming a REIT.

Now under IFRS, on a GAAP reported basis, we have a quarterly net loss of CAD2.4 million or CAD0.06 per unit, while in 2012 we had net income of CAD14.5 million or CAD0.31 per share. The volatility of certain line items under IFRS make historical comparisons difficult and complex.

Similar to Q3, there are three items that impact the fourth quarter of our GAAP reported earnings both for 2013 and 2012, but are neutralized for FFO purposes. They are fair value changes, deferred taxes, and acquisition costs.

As it relates to fair value changes, in Q4 2013, there were fair value losses of CAD29.8 million on our investment properties, largely attributable to changes in our Canadian and Austrian portfolios. Q4 of 2012 also saw fair value losses of CAD41.6 million, largely driven by increases in the discount and terminal rates in Austria and Germany, as well as certain changes in the leasing assumptions. As you have noticed over the year, the fair value changes quarter to quarter can be volatile given circumstances in the market.

Also turning to deferred taxes, the amounts reported in each of the periods are not comparable. While both periods have a component that reflect net changes in the fair values of the investment properties, the jurisdictional mix of those fair value changes has a significant impact on whether deferred taxes apply and to what extent.

In Q4 of 2013, for example, over half the fair value loss relates to the Canadian portfolio which attracts no tax, while Q4 2012, reflects a deferred tax recovery pertaining to the Canadian portfolio that was associated with one of our REIT reorganization steps while Granite's Canadian entities were still taxable corporations. To say the least, it's complex when you get into the world of tax.

Also on the quarter we had approximately CAD7.7 million in acquisition transaction costs that were expensed. The vast majority, CAD6.7 million, pertained to land transfer taxes related to the acquisition of the European portfolio.

Turning to the year as a whole, our comparable FFO for 2013, which excludes the CAD4.2 million of withholding tax payment we made in Q2 related to the REIT conversion was CAD142.5 million, or CAD3.04 per unit. This was up CAD32.6 million or CAD0.70 per unit from the CAD109 million or CAD2.34 per share reported last year.

However, as I mentioned in relation to the Q4 results, 2012 did incur significant costs associated with the REIT conversion and expenses associated with obtaining appraisals and environmental reviews. The adverse impact of these costs on the 2012 FFO results is in the CAD0.20 range. Over all, the underlying themes and explains for the year over year 30% improvement in our FFO are consistent with the analysis I just outlined for our Q4 performance and discussed in prior quarters.

We enjoyed higher revenue due to the 12 accretive acquisitions. We enjoyed favorable exchange rates. We have lower G&A as a result of the lower REIT and reorganization costs. We had increased interest expense associated with funding of that acquisitions, and we had lower current income taxes as a result of the REIT conversion.

Some additional financial metrics and matters that I'd like to highlight include our annual lease payments at the end of the fourth quarter are up CAD22 million from the end of Q3, driven by the eight European acquisitions made in the quarter and the appreciation of the Euro and the US dollar relative to the Canadian dollar. As of the end of 2013 and relative to the end of 2012 our ALP has increased almost 20% CAD36.7 million.

And although our lease payments were adversely affected by lease renewals at lower rental rates and vacancies and the disposals that Tom referred to, totaling a net almost CAD12 million, there were almost CAD50 million of positive factors that increased our analyzed lease payments at the end of the year. The major components consist of CAD23.4 million in acquisitions.

Favorable foreign exchange of CAD12.8 million as the US dollar appreciated, the Euro and US dollar appreciated 12% and 7% respectively. Contractual rent adjustments of CAD7.2 million, and completed projects and releasing of previously vacant properties contributed CAD5.2 million.

The value of our investment portfolio has increased from CAD1.94 billion at the beginning of the year to just over CAD2.35 billion at the end of 2013. The three major components of the CAD408 million increase were the acquisitions of CAD286 million, foreign currency translation of just over CAD136 million as a result of the Euro and US dollar appreciating. Capital expenditures of CAD28 million, the net fair value losses for the year of approximately CAD25 million, and of course the disposals that we had for about CAD17 million.

Our total debt at the end of the quarter was approximately CAD568 million, of which approximately 37% has been swapped into Euros and almost 17% is US dollar denominated. With cash on hand of over CAD95 million, that brings our net debt to CAD473 million, giving us a net asset value of about CAD1.9 billion or about CAD40 per unit. Our balance sheet remains under levered at 24% and is poised for the acquisition growth.

During December we announced an increase of over 4.5% in the level of monthly distributions, we have declared CAD25 million of distributions to unit holders in the fourth quarter and CAD98.9 million for the year. In terms of payout ratio on a year to year basis, we declared distributions representing about 68% of our comparable FFO.

As Tom outlined in his comments, this was a remarkable year of firsts and accomplishments for Granite, and as Tom indicated our staff in North America and Europe delivered. They did all we asked of them and more and we thank them for their outstanding efforts and dedication, and with that I'll turn it back to Tom.

Thanks Mike. I think with that, Jasmine we'll turn it over to you. And try to deal with questions.

(Operator Instructions)

Sam Damiani from TD Securities,.

Just getting into the leasing. It was a good finish to the year. Nice to see the vacancy drop by year end, and according to your comments, even decline further this year. There were some leases still being negotiated at year end. Based on your comments, it sounds like all of those leases have been basically finalized?

Yes, we had three in particular that carried over, and they got signed in recent days. So those were renewals with Magna Group for about 250,000. And then we had one vacant and one Magna did not stay. We were able to release those.

So two that absorbed 300,000 square feet and 3 that were renewed. So overall we brought the vacancy amount down from 900,000 at the end of 2013 to 600,000 square feet today.

And I guess given the lease expiry profile, there really shouldn't be material change in your vacancy rate for the foreseeable future.

Not really. Most of the focus right now is actually dealing with some 2014 and 2015s so positive momentum there. We have a couple of tenants that are on month-to-month that we're dealing with. Good space if they don't stay. So we have a little bit of exposure in 2014, but generally where we've landed now looks pretty stable.

Okay. And the expiry schedule you're showing today includes all the renewals, I should say specifically the renewals in Austria and Germany that were completed subsequent to year end, is that correct?

This is Mike, not in the, in the MD&A that schedule of the expiries does not include, it's only as at December 31, 2013. It will be updated at the end of Q1 for, for example, Thondorf, and the additional ones that Tom has mentioned.

Okay. All right. In the MD&A, you did disclose the ALP for the AEW acquisition of CAD16.6 million, is that essentially NOI on those properties?

The overall, the ALP for the acquisitions is about, yes, that is an NOI number pretty much, yes.

Okay. And that included the extra of sort of eighth property acquired in Europe in addition to the AEW portfolio; is that correct?

Yes, that's the smaller [Austrian] property, and it picks up the benefit of the exchange rate post acquisition, so we have got a bit of lift from that, ALP wise.

Okay. And just finally on the Mexico sale, it sounds like things have proceeded nicely here. You've got a binding agreement with Magna, subject to some regular conditions, including, I guess, some approvals in Mexico. What's the timing on that and the sort of risk of that not closing at this stage. And what would be the planned use of proceeds when it does close?

I'd say certainly the timing of the closing is, I'll summarize it in one word, and I'll just say all due respect to Mexico, things just take longer there. And so we're a bit at the mercy of, and in certain instances, the Mexican regulatory authorities in different jurisdictions. So difficult to predict, Sam, on that front.

As it relates to the use of the proceeds, initially as a wind on our balance sheet. We've got about $50 million on our credit line. We'll immediately apply the proceeds to that, and then ultimately, the objective will be to redeploy that cash into acquisitions.

I think, Sam, to generally just a bit of insight, because I know that investors will wonder how things are structured, as Mike said, he's reluctant to put a closing date on it, though we're certainly aiming for summer for closing.

None of the conditions are conditions that are vendor or purchaser arbitrary pull outs. They're more regulatory requirements, municipal approvals and as such, it's the timing of the Mexican authorities. From a point of view of business matters, arbitrary conditions, those have all been renewed and that's why the announcement of the signing of the agreement takes on a much stronger tone. Nothing's 100%, but it now appears to be a very solid deal, subject to the Mexican authorities.

I should highlight that we won't continue to, subject to a closing in the next several months, there is a cut off of rent relatively speaking, so if you're trying to project a continuation of rent, if it closes in the summer, we would cut off rent at the end of February, which picks up a little bit more than we had anticipated. But projecting through continued rent from Mexico, there would be some adjustment on closing for a few months post-February, just in case you're projecting.

I think important to note is redeployment of capital is obviously our focus period, is investing smart, utilizing our borrowing power, we going to end up with proceeds from Mexico that pay down the line but also increase cash on hand. We continue to focus on trying to buy smart.

I think the biggest challenge we face is to some extent, a marketplace that puts a reward to REITS that accumulate assets without regard to how wise they've acquired on a mid and long-term basis. Few are measured by how those assets ultimately will perform in the long-term. They seem to be short-term oriented.

We need to buy and acquire smart. We're looking forward to more product that can come available later in this year. But we'll continue to try to be a REIT that distinguishes itself by acquiring with a little more investment savvy.

If we look at the assets we acquired last year, they are all up substantially in value post our closing from West Chester, Ohio, that's up probably in the range of 15% to the AEW portfolio. That is up enormously.

We know we can't continue that trend, but we do want to send a message to investors that we don't just accumulate, we try to acquire with some edge to it, and we'll continue to do that. And the reason for the long winded answer is we're a company, a REIT that's going to go through a process of selling some major assets that don't really meet our criteria in the long-term, like Mexico. And we're going to end up with cash.

You're going to have a slip backwards in FFO, and in a redeployment smart. And gradually in moving both directions, ultimately one direction forward, we end up with a company that has a better balance between Magna and other tenants, and much higher quality, and hopefully one that has a logistics distribution portfolio that's amongst the best in the world. And so Mexico is a watershed moment whereby a significant amount of cash comes in.

Revenues fall that are not great long-term necessarily, and we have to redeploy cautiously. And I explain it this way because I think it's, it is a characteristic of our company that's a little different than others, where we will sell in large chunks at times and be thoughtful in redeployment at other times.

Okay. Just a couple more. I don't mean to hog the puck here. What was the rationale for the rent cut off at the end of February?

Business negotiation. There were lots of gives and takes, holding our price up at the $105 million, picking up more than we thought given some other cutoff points we negotiated, so all in all, we feel pretty good about coming out ahead. That's part of doing the business.

Just to be clear, the rent not paid from March until closing will be an adjustment on closing, is that right or?

No, it will be paid and then adjusted on closing.

Rent will be continued to be collected.

Okay. All right. I'll hand it back, thank you.

Brad Sturges with CIBC.

Just to follow up on your commentary there on dispositions. It looked like you sold some other assets, some vacant assets and maybe a couple other income producing assets. Are you able to disclose the average cap rate on sale for anything income producing?

Well, a little hard to say on cap because we sold to a user in one case. So it would be certainly a sub 8.5 cap on our price per pound, well above appraisal. These were sales in the CAD10 million to CAD15 million range.

So we really didn't sell any what you would call income producing companies, whereby there was a tenant in place, sold to a third party investor. Our sales were either vacant to a user or negotiated the user to come into the building and then gave them the right to buy. It's a little hard to put a cap rate on it.

And looking out further, if you're looking at other opportunities, would it be similar in nature looking at some of your few remaining vacant assets, or are you looking at tackling a little bit more larger assets?

Well, we're looking at tackling a little bit more in volume. Not necessarily larger properties singularly.

What we're doing this year is looking at some of the mid to smaller sized properties that in fact we could cull together in a portfolio and sell, in this case, to potential investors. So for the first time, we're actually going to package portfolios of two to five properties that collectively may appeal to more local investors, not necessarily the users as the buyer, and that would be a case where we could give you a better sense of cap rate on that kind of product.

It's going to be a little bit more aged product that we think is better in local hands. And that's something we're really focused on now on the asset management size are dispositions of some of the smaller ones, some in the US and a few in Germany.

Okay. And in terms of acquisitions, you gave some pretty good commentary earlier. Just in terms of opportunities now, it sounds like maybe at the moment you're not seeing maybe the type of quality or the volume that you would like to be seeing that would get you to pull the trigger. Just give a general thoughts on what you're seeing in the market today.

Well, as I mentioned, what we're seeing is a little bit of culling of portfolios by vendors that are typically older properties and not of the quality we would like to see. There's been a lot of nuances in the market in the first two months, we're really two months into 2014, that have caused some portfolios to be pulled back. We have looked at some things seriously where we just felt over market rents resulted in an over priced per pound, so just a little bit of nuance, but generally, not as much volume in the first two months as we saw in the last 8 months of last year.

To put it in context, by the end of February of last year, we had essentially acquired really one or two properties in New Jersey and in Savannah, Georgia. In fact, by the end of the year, we had acquired 300 million, and what we saw happen and unfold later in the spring and summer, and fall, really changed the acquisition dynamic last year.

So bottom line is the beginning of this year doesn't look a lot different than the beginning of last year. And we haven't seen a ton we like so far, but all we really focus on is making sure we're not missing opportunities out there both, in Europe and in select parts of the US and we'll continue to do so. And where we can pull the trigger, we will.

So I would tell you that we've put no cap on how much we'll buy this year. We want to buy a lot. And we'll continue with the cash and borrowing power to do so, but we've got to see things unfold with better quality, good locations, and we will act.

In terms of opportunity, would you be considering looking at acquiring potentially development land for future development if the opportunity arose?

Yes, we will. Selectively, like we acquired last year with Berks and Louisville, and likely to have one completed in spring, and one underway. We would like to repeat that ongoing.

The value creation, even with very conservative lease up assumptions and carry even post completion, they still produce much more attractive yields than anything we see in the market. And of course, upon completion and lease up, we have a brand new building in a good location.

So we will continue to look for good development sites. I would say that that focus will be US oriented and a little bit in parts of Germany as well.

Okay. Great. Thank you.

Mike Markidis from Desjardins Capital Markets.

Just quickly just to make sure I heard it right, so just on the Mexican portfolio sale, rent cutoff, end of February, and the purchase price or sale price, I should say remains at $105 million when it gets done.

Correct.

Okay. And then, Mike, what would be the, in terms of the after tax proceeds you're able to pull out, would it be close to the $105 million or what should we be thinking about there?

I think it would be over all, you know, a little north of $90 million.

Okay.

US.

Yes, of course. So just moving over to Tom, your comments with respect to dispositions, could you give us a sense of, you gave some good color with respect to packaging small portfolios and from the sounds of your comments, it looks like you're focusing on doing it in the US and Germany. If you had to ballpark a number of potential sale volume for 2014, where do you think that might come out?

Well, barring any dialogue with Magna on any of the large ones, which we really aren't having, so putting that aside, and let me just clarify that, we're always open to talking with Magna about certain large assets and that may continue post-Mexico. But putting that aside, we're going to target in the 50 million or more this year. Again, that's packaging. I think in terms of product we'll see how the market reacts.

I can't promise we'll get the feed back, I think probably in the 50 million range or more would be packaged this year. That could take, when I say smaller properties, 50 million or more could be upwards of 15 to even 20 properties. But we are talking about some of the smaller, not what we like in terms of longer term assets.

Okay. And just switching over to the leasing activity, you guys have done a great job with securing some of the, obviously with getting through the 2013 bulge, and recently securing some of your big 2017 roles and extending them, particularly with Graz. For 2014, based on your dialogue today, should we expect to see more progress on that front this year with respect to other large properties or do you think it will be, that will be it for a while, and the focus will be more on the acquisition side?

I think it's fair for our investors to expect us to put a lot of attention to the big ones. Of course there's two sides to it. There's us who want to do it. There's Magna who we have to be sure want to do it with us, but there's nothing wrong with having expectations of us to do more large asset extensions.

We're focused on it. We're focused on it in Austria, and in Ontario, in fact. So can't guarantee anything. Can tell you we're having dialogue on some of the big ones, and certainly both sides are trying to come to some kind of an arrangement for extension.

We always like when Magna wants to discuss extension on some of the larger ones, because it's a sign that the business is flowing in a way that they're contemplating an extension, convincing them to do it early is something we have to be mindful of. But so far, after Lannach and we got that pushed out in Austria, and then we got the Thondorf pushed out, we're going to keep trying on particularly a couple of big Austria ones and some of the big Ontario ones.

Okay. Well, that's great. Congrats on wrapping up a solid 2013 and thank you for your time.

Frederic Blondeau from Dundee Capital Markets.

Just getting back to the new lease in Graz, I was just wondering, the tenant allowance of EUR25 million was relatively large. Was that in line with your expectations and what do you expect in this regard going forward?

I think that's a relatively easy question to answer. I think the Thondorf stands out apart from anything else we have in our portfolio. Lannach and Eurostar are big assets. We didn't pay much of a big allowance on Lannach to extend that out, and some upgrades there.

Bottom line, the Thondorf allowance is in fact, as you know, significant, but not proportionate to what we would anticipate doing anywhere else, and we really said to Magna, there's a number of ways to look at allowances and could allocate a large amount to one large asset, could spread it out, in this case, the Thondorf was one they took a very large allowance. It's my view that that's not a pattern we'll repeat.

We will incentivize them. We will provide allowances. We will do upgrades to properties and we will certainly do all the things that we're required to do under lease terms. But when you look at EUR25 million relative to the annual rent, it is not the norm and is a little larger than we would anticipate doing in the future.

Okay. Thank you. And then maybe a more high level question, we know that Magna is looking to expand more in China and India, generally speaking, so how would you qualify today their incentive to maintain sizable operations in Europe?

Well, again, as much as we deal with Magna every day on our properties and leases, we're not experts on their business. But their business is truly global. And more so than just about any company I can think of.

Their expansions in China and India are best for them to comment on. It has a number of nuances and reasons, but it doesn't seem to be at the detriment of the investment they're making in the southern United States, now in growth in Michigan, in Ontario, and of course in Europe.

They have said themselves that the heavy lifting in restructuring Europe is over. They're very happy with the increase in sales. Volume, for example, at Graz is up some 20% ultimately. Sales the same. So they see a rebound in Europe and are giving it great attention.

For them to extend Thondorf, 3.8 million square feet, which, by the way, they made a very significant investment in the premises as well as part of the overall extension. They have landed major business with BMW. Demands of some of the European auto manufacturers necessitates the quality, the workmanship, engineering that comes from plants like Graz, Lannach, and other parts of Europe. So we kind of commend Magna for how well their business is doing, which is extraordinary, but also that it seems to be mapping out across the world, parts where we're the landlord and the parts where we're not.

So overall, not to our detriment, but to the benefit of other countries. Mexico, they have a commitment too, and they want to acquire those assets. That works well for us because from an investor point of view, it's not ideal for us to be there.

So each country has had a different dynamic, but today, even compared to 18 months ago, the strength of Europe, their commitment to their best plants there, many of which we're the landlord, and of course, parts of the US that have rebounded so well, overall it's good. China, India is another matter that doesn't really, bottom line, affect us in our (technical difficulty)

Very helpful. Thank you very much.

(Operator Instructions)

Mark Rothschild from Canaccord.

Tom, does the lease that you signed in Graz have any impact on the remainder of the property that they're building there, and how confident do you feel about Magna staying there as that lease comes up in a couple of years?

Very fair and good question. For everybody to be reminded, Graz consists of 2 significant facilities on one large campus. They have previously worked independent of each other as the Eurostar facility was in fact bought by Magna when they acquired another manufacturer. But overall, then, the Graz facility consists of Thondorf, 3.8 million square feet which as noted has been extended to January, 2024, and produces about in the range of EUR15 million in rent.

The second facility, the Eurostar that Mark referenced is the more modern and smaller of the two but still not insignificant at close to 1 million square feet, and about two-thirds the annual revenue of the Thondorf facility. We have had very focused discussions with Magna on that facility, and what's happening is really in their hands to study some of the uses they're intending for it, both contracts they're looking at and maybe bidding that we don't know, and consolidation that they may consider of other facilities that are not into it.

So right now, we are very optimistic that the Eurostar facility will be one they want for the long-term but that has not been inked in terms of an extension now, and it will play out potentially this year, and it may take a few years, but certainly we feel optimistic about their desire to stay in it. We can't be 100% certain today. We'll keep you posted for sure.

One of the things that as I mentioned in Frederic's question about allowance, it's not one that we would be prepared to extend that sizable type of allowance. We want to keep them. The facility works a number of ways so we're going to leave it with them. With some ideas we have left with them to work with and see what happens in the coming months and/or couple of years.

Great. Then maybe this is one I should follow up offline with Mike, but just understanding the restatements from, it looks like you restated some numbers from 2012, can you explain that in a little more detail, and how we should look at the year-over-year comparison.

The restatement from 2012 was really just a conversion from US GAAP to IFRS, and overly simplistic, it's sort of debit investment properties, credit equity, and deferred taxes associated with the fair value increments. That's really the best way to look at it from the balance sheet perspective.

There are some differences under FFO as it relates to the calculations used by NAREIT versus REALpac. The major one is just the exclusion of deferred taxes.

Okay, I think I'm good with that. Thanks a lot.

Okay.

Sam Damiani from TD Securities.

Just wanted to talk about Canada in a couple ways. You continue to kind of shy away from Canada from an acquisition perspective. I was just wondering if that is purposefully still what you want to express today or is there any sort of increased interest in the Canadian marketplace for acquisitions and I have a follow up as well.

It's a good question, Sam, and I'll start out by saying that Canada in its own right would be our country of first choice to invest in all things being equal: proximity, tax efficiency, and so on. The first issue has been for some time, is the priciness of the market, probably the lowest cap rates we see anywhere in the world, and certainly right now, the lowest volume in particular in terms of quality of assets.

The second thing is we really believe, not only in, but certainly primarily in the logistics distribution type facilities and they have a certain market dynamic that is not surprisingly transportation based, and that transportation base, is it leads to proximity to population within what is defined as driving ships. Strong logistic distribution facilities typically are within 6 to 12 hours of up to 150 million people, and that creates the most dynamic logistics warehouse market releasability, attractiveness and appreciation dynamic to the asset.

So the New Jerseys and the Pennsylvanias, the parts of the southeast where what would not be seen as AAA office, say, for example, Louisville is AAA logistics, in their case because of the US, UPS air hub. Cincinnati would not be AAA office, yet for the West Chester property, within an 8 hour drive of 150 million people. In Germany, while Germany has a population of 80 million people, our logistics facilities there are within 3 to 4 hours of 7 countries. And as a result are within 4 to 8 hours of 150 million people, a metric we like to use.

And we believe in that market, whereby if you have a facility of that locational attribute, and it's not replaceable, you're going to be happy with the tenant you have and you're going to be able to find many new ones. The issue with Canada when we look at that type of product is that the Metro GTA may have some dynamic to that extent to serve the GTA, but generally Canada wouldn't be a true logistics distribution market the way we think of the US and the way we think of Germany and the Netherlands.

That being said, if quality industrial warehouse, single tenant, 2 to 4 tenants came on the market and there were no pension funds bidding it at 5.75, and there were no REITs able to get a spread of 2% financing and 5% cap rates, we would be the next in line to buy it. Nothing we'd rather own than a 250,000 square foot new warehouse facility in a good market in Canada at a cap rate of about 6.5 or above. And that does not appear to be a lot of it on the market. So we'd love to be here. But we're not having much luck finding it.

The volume of the US, the size of the US, the different niche markets and meaning that the central triangle of Indiana, Kentucky, Ohio, creates a great market. The northeast of Pennsylvania, New Jersey, has a great market. Certainly parts of the West, and even the Southwest.

So you just have multiple markets, better opportunity to find things even when there's market competition. So it's by the design that we focus on US and Germany, and yet, given our choice, we wish we could buy in Canada.

All right. That's very interesting. Thank you. And just on the fair market value change, CAD30 million in the quarter, Mike, you said about half was in respect to the Canadian properties.

Is there any color you can add to there in terms of what assumptions were changed or what drove that? Is there some negotiations underway that kind of drove that realization of a different market rent?

I think it's just looking at certain other properties and looking at sort of the lease term and then determining as we look at that, looking at the market rents and if they were to become vacant, the time to release it and that sort of thing was, you know, part of the [privacy] associated with that.

I don't want to get into too much detail here, but was there increased amount of down time put into the model to drive the lower value or?

Yes, there was in, there were one or two where there was increased down time, and that was about it.

Okay. Thank you.

(Operator Instructions)

We have, operator, one item just to reiterate, Mike and I together, there are sort of four or five critical points to building a good real estate company. Buying well, selling appropriately, leasing, asset management, and financial administration, and that brings in the G&A topic which has come up on occasion, something that I have been specific about.

We have set a target of 10% of net income as opposed to net income plus recoverables. And that target is one that we're not moving away from. And in fact, over time, we want it to be less than 10%.

Our dynamic is such that, for example, if we took Mexico in place, not sold, the acquisitions we have done, and our overall revenues, we'd be well into the revenues of CAD224 million, CAD225 million. And we have a run rate G&A of about CAD24 million, CAD25 million. We would have hit our 10% target.

We then sell Mexico, and for a short period of time, there's some FFO decrease. G&A looks higher as a percentage, and we really have to say, keep an eye on spending on the right things. Spending smart, being prudent, but allow the growth both from redeployment after sale, to borrowing and cash we have for new sales to eventually hit that target, being mindful that it matters. And we had some uptick higher in 2013, in part final REIT closure costs, some compensation, to restructure or to structure our staffing in Europe, and parts of Canada the way we want it.

I don't want any investors to believe that we take it lightly. That we don't try to manage it as efficiently as possible, and that we will get there. And not spend recklessly along the way. It will take some time. Over to you operator.

Neil Downey from RBC Capital Markets.

Tom, since you brought up the topic, I'll just ask one question in particular. When you make your references to G&A, is that on a basis that includes stock based compensation expense?

Yes. Towards this year.

A couple million bucks, I believe?

Yes, that one hit us for the first time.

That's right. Neil, the other part is people need to understand, that because under IFRS, that gets marked-to-market, so that goes up and down like a yo-yo and just literally from the end of Q3 to Q4, the uptick in the stock from September 30 to December 31, there was a little uptick in there that ran through.

Yes, and that's in part why I asked the question, and I believe some entities perhaps remove the mark-to-market component or disaggregate it in their disclosures. There's an amortized component and a mark-to-market component, is there not?

Yes, that's correct.

Okay. Thank you.

And there appears to be no further questions over the phone lines at this point. Mr. Heslip, Mr. Forsayeth, I'll turn the call back over to you for any closing remarks or to continue with your presentation.

No, only that the analysts' questions today were very fair and logical. Appreciate it. Allows us to get our message out, and appreciate everybody being on the call today. So thank you very much.

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