Granite Real Estate Investment Trust (GRP.U) 2015 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the conference call for Granite REIT. Speaking to you on the call this morning is Mike Forsayeth, Chief Financial Officer.

Before we begin today's call, I would like to remind you that the statements and information made in today's discussion may constitute forward-looking statements and forward-looking information and that actual results could differ materially from any conclusion, forecast, or projection. These statements and information 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 Granite'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 Annual Information Form for 2014 filed on March 4, 2015. Readers are cautioned not to place undue reliance on any of these forward-looking statements and forward-looking information. Granite undertakes no intention or obligation to update or revise any of these forward-looking statements or forward-looking information, 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 Q2 2015 condensed combined financial results for Granite Real Estate Investment Trust and Granite REIT Incorporated, and other materials filed with the Canadian Securities Administrators and US Securities and Exchange Commission from time to time for additional relevant information.

I would now turn the call to Mike Forsayeth. Please go ahead.

Thank you, Chris. Before I get into my remarks on the results for the quarter, I'll just cover a couple things. First Tom is not joining us today. He's off dealing with some personal matters. And I can assure you it's not a CN situation, which was tragic news I just heard this morning for that individual.

Secondly, our strategic review of alternatives is continuing, and consistent with our statements and our press releases, we'll not be discussing any developments as the Board has yet to approve specific action and hasn't concluded their review. Consequently, following my remarks, we'll only be taking questions if there are any that specifically relate to the quarter. Appreciate you understanding. It's really appreciated.

Now onto business. Joining me here today are Jen Tindale, our EVP and General Counsel; John De Aragon, our EVP of Real Estate Investment; Lorne Kumer, our EVP of Real Estate Portfolio and Assets; and Stefan Wierzbinski, our EVP of Real Estate Europe. Before I get into the details of the financial results, let me give you some color on the state of our business and our operations, both in North America and in Europe.

Across the board, our underlying business fundamentals remain solid. And here's a few examples. Excluding CAD36 million of favorable currency gains, we reported CAD47 million of net fair value gains year to date. And this was clear evidence of how our value-based approach to Real Estate investment is favorably impacting our NAV. During the quarter, we renewed, extended or re-leased six properties, representing approximately 1.3 million square feet. Our Magna tenant properties are very busy and request for expansions are on the rise. We sold another small, non-core asset that closed in July in Germany and other sales on both sides of the ocean are progressing well but nothing definitive as of yet.

Our FFO for the quarter attributed to -- all attributed to continuing operations is up 8.6% and our payout ratio, a conservative 67%. Our views on the acquisition environment have not changed. The market's still quiet. There's not much good stuff out there. What is out there is very pricey, and we remain concerned about the potential for long-term accretion to our NAV.

That said, we will continue to be patient, opportunistic and pick our spots, which we believe, to date, has proven to be a successful strategy as evidenced by our appreciation in our NAV that I just mentioned. The leasing activity in our two spec developments in the US has been intensifying. The construction of the Berks property in Pennsylvania was completed this quarter and is ready for occupancy. This, together with the Louisville property, have approximately 6 million of rental income potential for us and it's just a matter of time before it finds our way into the income statement.

In addition, this past quarter, we acquired 28 acres of land in -- I'm going to botch this -- Warsaw, Poland that will take up to 6,000 square feet of logistics space. During the balance of the year, we'll look to prepare this site to be building ready. Granite has a lot of positives going for it right now, not the least of which is currency, and with our stable cash flow, a strong underlevered balance sheet, and an excellent liquidity, Granite has a lot of options available to it and has staying power to see them through.

I'll now turn to the details of the financial results for the quarter. As I mentioned, funds from operation attributed to continuing operations are up 8.6% compared to last year's Q2. And for the -- are slightly better than our first quarter, after you take into account the net effect of a few items. These items include, you'll note on the positive side, this quarter we enjoyed approximately CAD900,000 of lease termination revenue, and a net CAD1.6 million current income tax recovery resulting from the settlement of a recent income tax audit.

Mitigating those somewhat were lower average exchange rates in the quarter; CAD500,000 in higher compensation costs, largely attributed to the increase in the valuation of units outstanding under our unit-based compensation plans; and incrementally, CAD300,000 pertaining to costs associated with the strategic review. Cutting through all that, that's worth about CAD0.03 and we're likely a little more than CAD0.01 better than the unit FFO in Q1.

Looking at some of the details, quarter-over-quarter numbers, revenue for Q2 2015 was up CAD1.3 million compared to last year's Q2 and was largely due to the incremental revenue of approximately CAD1.3 million related to the acquisition of the Ingram Micro properties at the end of 2014. Other positive factors, such as contractual rent adjustments, completed projects and lease termination fees, were offset by the unfavorable impacts of FX movements, vacancies and disposals and certain releasing activities.

Property and operating costs were CAD500,000 lower as a result of reduced property taxes for vacant properties and reduced advisory costs on property administration matters. Our G&A for the quarter was CAD7.2 million, CAD800,000 higher than last year, largely due to the higher unit-based comp plan and the strategic review costs I previously mentioned. Year to date, we spent about CAD700,000 related to that initiative.

As in Q1, net interest expense for the quarter relative to last year was CAD2.4 million lower. This was driven by the replacement of the higher cost 6.05% Canadian dollar denominated debentures that expired -- that were expiring 2016 and we replaced those with effectively 2.68% Euro-denominated debt maturing in 2021. Our current tax provision for the quarter was a recovery of CAD300,000 and includes a net CAD1.6 million recovery from primarily, as I mentioned, related to the favorable settlement of an income tax audit. Excluding net-net recoveries, the remaining CAD1.3 million current tax expense is within our expected run rate range.

Also, I know I mentioned last quarter that we were expecting to repatriate some funds from Europe in Q2 via dividends which would result in withholding taxes that would increase our current taxes payable by a few hundred thousand dollars. This didn't happen but it could happen in the second half of the year. All of these factors contributed to Granite's Q2 2015 FFO of CAD40.3 million, or CAD0.86 per unit, all of it from continuing operations. This compares to an FFO for Q2 of 2014 of just under CAD40 million, or CAD0.85 per unit, which included CAD2.8 million of FFO from the discontinued Mexican operations that were sold back to Magna at the end of June last year.

On an IFRS reported basis, our net income was CAD48.2 million versus CAD26.4 million for the second quarter 2014. The major reasons for this, for the almost CAD22 million improvement quarter over quarter, was the CAD27.1 million increase in the net fair value gains or our investment properties, we had lower interest expense, and mitigating that was an increase in deferred taxes of approximately CAD7.2 million, largely attributable to the fair value gains on those investment properties.

As mentioned, you'll note in the quarter that we reported CAD21.5 million fair value gains in our investment properties. This is largely attributed to two factors. The general compression of that discount in terminal cap rates across Granite's portfolio and in particular, related to our two recently completed development properties in the US. This was partially offset by certain leases in Canada and in the US that are close to expiry and the re-leasing assumptions there are expected to be on less favorable terms than the current leases in place.

Some additional financial metrics and matters we'd like to highlight include that our annual lease payments at the end of the second quarter increased to CAD215.3 million, up from CAD212.5 million from the beginning of the year. This was driven largely by an 8% appreciation in the US dollar relative to the Canadian dollar whereas the euro has actually depreciated 1% although that's not the case as we sit here today.

The value of our investment portfolio has increased from CAD2.36 billion at the beginning of the quarter to just over CAD2.4 billion at the end of the second quarter 2015. The major components of the CAD46 million increase were the net fair value gains of CAD21.5 million, the net increase in foreign currency translation of CAD12.3 million, as a result of the Euro appreciating since the beginning of the quarter of 2%. The acquisition of the developmental land in Poland and CapEx associated with the completion of the Berks property, also were a factor in the increased value of our investment property portfolio.

Our total debt at the end of the quarter was approximately CAD58 -- CAD569 million which includes the favorable impact of an CAD11 million gain across -- on our cross-currency Euro swaps. With our investment properties having a fair value of CAD2.4 billion, that brings our leverage to approximately 24%. If you net out our cash on hand of over CAD113 million, our leverage would just be under 19%. We've invested CAD6 million in CapEx and just over half of that went to completing the capital -- the development property in Pennsylvania with the rest spread over several other small projects. Lastly, we declared CAD27 million of distributions to unitholders in the quarter and reflecting, as I mentioned, the payout ratio of 67% of the quarter's FFO. Overall, it was another solid quarter.

And in closing, I'd like to thank all of our staff. They've had a lot on their plate lately and as usual, they stepped up their game to meet the challenge. They're truly a terrific group of people to work with.

And with that, I'll turn it back to the operator to see if there are any questions.

Thank you

(Operator Instructions)

Mike Markidis, Desjardins Capital Markets.

Thank you for taking my questions. Mike, I think in the beginning of your comments, you noted that, or somewhere in your comments, you noted that activity at the Magna properties is very busy and negotiations are on the rise. I just wondered if you could give us a few data points maybe or give us a sense of whether you expect the amount of lease expenses with Magna to increase in the relatively short term?

Mike, the comment was about expansions related to at Magna that in many of our certain special-purpose properties, we've seen a lot of expansion requests there. Magna is investing significant capital in many of those. And that's the -- that's what's on the rise. It's not related to necessarily any particular negotiations or extensions, but we're just seeing a lot of activity in those properties which we'd love to see Magna invest -- continue to invest in those.

Okay. And then just on the two properties that you've got under loan, I guess, the one in Pennsylvania is now completed. The one in Louisville, you guys have done, I think for about a year. I know you thought it could take maybe up to two years in your underwriting but maybe you could give us a sense of your tour activity there and when you're expecting to get that secured?

Sure. We've been very particular about the tenant there and who's going to -- we're going to let occupy that. It's a terrific property. It's great real estate and it's a great market. We've had lots of opportunities to lease it, but we've had issues, I'll say, with the tenant, the covenant, and duration. And we're just going to continue to be patient. As you mentioned, we've got two years to lease this and we'll still have a terrific development return, probably in the 8% range, if it takes -- that even if it takes that long. So tour activity is continuing. We've got a couple of ones that we're working hard on right now. But we're going to be patient. We're closer than we have been but the activity has increased.

Okay and last one for me, you also reiterated your view on the marketplace with respect to acquisitions and all that stuff just due to pricing. With the Warsaw, I probably screwed that one up, too, so the Warsaw investment was underway prior to the announcement of the review process. Are you able to shed any light on your ability to, I guess, execute on an acquisition just in light of the strategic review process that's underway if you do, in fact, find something that's attractive?

If we find something attractive, we'll look at it; we'll take it seriously. It's business as usual. And yes, we've got the process ongoing, but it is business as usual. We executed on the development property in Poland, and we'll undertake, should that circumstances allow us to invest and build on that, but in short, we're not being held up.

Okay. That's it for me. Thank you.

(Operator Instructions)

Pammi Bir, Scotia Capital.

Thanks, good morning. Mike, can you -- do you have any sense of perhaps any color on when Tom may return or how long this -- if he could be away?

No. Not going to make any comments on that, Pammi. As I said, he's off dealing with some personal matters, so no comment on.

Okay. And then just looking at where the unit price is and when you compare that to some of your development opportunities or even on the acquisition side, which seems, again, still relatively quiet, I'm just wondering whether you given any thought to buy back some stock or at this stage?

That's the strategic review, Pammi. A lot of alternatives are being reviewed. A lot of options, but not really addressing any of that. But as mentioned before, everything's on the table.

Okay. And then maybe just turning to the Poland development, can you remind us of the potential cost there? And remind me again, is your partner Panattoni?

Yes. That partner is Panattoni. The total investment that we're looking to put in there is --

About EUR25 million.

EUR25 million. So we're -- as I said, we're looking to get it building ready during the second half. And with the, if we see some pre-lease up, we may begin to -- with that at certain thresholds, we may begin to start building.

So the EUR25 million is at 100% share, or your 50% or --

We are 100% on this. Panattoni is our (multiple speakers) the development manager.

And then just maybe turning to the Magna head office in Aurora, any update there on the prospects for that in terms of a sale or any progress?

No. Nothing as yet. We've still got time on that. We've got till the end of the 2017 to be there. And they might need to be there a little longer beyond that depending on the -- depending on how their new site gets developed.

Okay. Thanks.

(Operator Instructions)

Sounds like there --

It --

Go ahead --

Sorry. It appears to be no questions on the phone lines at this time.

Terrific. Thanks, everyone. Bye for now.

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.