Granite Real Estate Investment Trust (GRP.U) 2015 Q3 法說會逐字稿

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

Before we begin today's call, I would like to remind you that 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 materials filed with the Canadian Securities Administrators and US Securities and Exchange Commission from time to time, including 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 standardized meaning under International Financial Reporting Standards. Please refer to the Q3 2015 condensed combined financial results for Granite Real Estate Investment Trust and Granite REIT Inc, 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, sir.

Great. Thank you, Chris. Before I get into my detailed remarks on the results for the quarter, let me first speak to the status of our strategic review process.

Much as I would like to say it's concluded, it is not. Both Board and Management recognize the process has been a little protracted, but generally speaking, that's not all that unusual for companies in such circumstances. So we are working to bring it to its rightful conclusion as responsibly and as expeditiously as possible, and to do what's in the best interest of Granite's stakeholders.

So consistent with our past public statements, I will not be discussing any of the developments as the Board has yet to complete its review. And consequently, like last quarter, following my remarks, we will only be taking questions that specifically relate to the quarter. Your patience and understanding is greatly appreciated. Now on to the business.

Joining me here today are John De Aragon and Lorne Kumer, who have recently been appointed Co-Heads of Global Real Estate for Granite. John's title is Chief Operating Officer, Co-Head of Global Real Estate. And Lorne is Executive Vice President and Co-Head of Global Real Estate. Together they will be responsible for all aspects of Granite's Global Real Estate portfolio. And also as usual, Jen Tindale, our EVP and General Counsel is here with me, as is Stefan Wierzbinski, our EVP Real Estate Europe.

From an operation standpoint, it was another strong quarter and we continue to maintain focus on our day-to-day business. Across all metrics, our business and operations, both in North America and Europe remain stable and solid. Here are a few examples.

We've completed the renewal or extension of all but one of the remaining seven leases expiring in 2015. We have also reviewed or extended four of the nine leases expiring in 2016, bringing the total number of leases renewed, extended or released this year to 10. That represents approximately 1.5 million square feet and CAD10.1 million of annual lease payments, or as we refer to it, ALP.

Excluding our two development properties, we have only two vacant buildings currently and they total less than 200,000 square feet.

As tended in my last call we sold four small non-core properties in the quarter, representing approximately 300,000 square feet and ALP of CAD1.1 million, with gross proceeds of CAD11.5 million. Our comparable FFO for the quarter is up 2.7% and despite the few negative items, which I'll get to in a minute.

Our Magna concentration is down slightly to 81%. And as mentioned last quarter, we're seeing increased leasing activity on our two spec developments in the US. In particular at our Louisville facility, where we are in active negotiations with a quality perspective tenant, but until everyone signs on the dotted line, can't make any promises just yet.

In addition, on our 28-acre of land in Wroclaw, Poland, and I pronounce that wrong every time, that we bought last quarter, we've seen some strong interest from potential tenants and we've received some pre-lease commitments. As a result, we're looking to beginning construction on phase 1 of this 3-phase project in Q4.

On the acquisition front, we continue to generally be unimpressed with the product available and the relative pricing. At this time in the market cycle, we are more focused on the development opportunities and we're just seeing the more attractive opportunities in Europe. And remember, we have a great debt profile that positions us well to be nimble and act quickly when the situation presents itself.

And lastly, with John and Lorne's appointments, we have realigned some of the management roles and responsiblities to streamline our process and further enhance our focus on the day-to-day business.

I'll now turn to the details of the financial results for the quarter. As just mentioned, our comparable funds from operations was up 2.7% to CAD0.84 per unit fully diluted and included several unusual items that overall had a negative impact of close to a couple of cents. So on a normalized basis, our quarter was better than each of the first and second quarters of this year.

The unusual items included a net CAD1.8 million severance expense associated with Tom Heslip's departure. This net number reflects the surrender of those units outstanding under Granite's equity based compensation plan, which at the time had a value of CAD1.7 million.

We incurred advisory costs of approximately CAD500,000 that were part of our strategic review process and we had a withholding tax of CAD300,000 associated with the liquidation of our Mexican operations.

These additional unusual expenses were largely mitigated by CAD1.8 million of lower compensation costs associated with Granite's equity based compensation plans and the lower quarter-end market values of our stapled units.

Looking at some of the detailed quarter-over-quarter numbers. Revenue for Q3 2015 was up CAD3.6 million compared to last year's Q3. The increase was largely due to the incremental revenue related to the acquisition of the Ingram Micro properties at the end of 2014 and favorable US exchange rates, as the US dollar appreciated approximately 20% quarter-over-quarter.

Our property and operating costs were CAD500,000 higher for the quarter and except for CAD100,000 of advisory costs related to the strategic review process, the increase was largely due to the timing of certain repairs and maintenance costs and higher property taxes for vacant properties with Berks coming on stream.

Our G&A for the quarter was CAD7.1 million, CAD1.1 million higher than last year. Excluding the severance and the reduced unit based compensation costs, the increase was largely due to costs associated with the strategic review process, higher professional fees for certain internal corporate reorganization costs and to a lesser extent some foreign exchange.

As noted in prior quarters, the quarterly run rate for our net interest expense has been in the CAD4.9 million range, significantly lower than last year. This reduction has been driven by the replacement of the higher cost 2016 Canadian dollar denominated debentures with much lower cost euro-denominated debt maturing in 2021.

Also there has been some additional interest expense associated with the construction of our development property in Berks, Pennsylvania, and of course the acquisition of the Ingram Micro properties in December 2014.

Also last year, we had significant realized foreign exchange gains, CAD1.9 million, which were mainly attributed to the appreciation of the US dollar proceeds relative to the Canadian dollar that were received for the sale of our Mexican portfolio, that of course were not repeated to the same extent this year.

Our current tax provision for the quarter was CAD2.1 million and included CAD400,000 of taxes related to the sale of a US property and the CAD300,000 withholding taxes associated with the liquidation of our Mexican operation, which I just mentioned. Excluding those two items would put the remaining CAD1.4 million of current tax expense within our current run rate range.

All of these factors contributed to Granite's Q3 2015 comparable FFO of CAD39.8 million or CAD0.84 per unit fully diluted. This compares with the comparable FFO for Q3 of 2014 of CAD38.7 million or CAD0.82 per unit fully diluted.

On an IFRS reported basis, our quarterly net income was CAD47.1 million versus CAD3.7 million for the third quarter of 2014. The three major reasons for this over CAD43 million improvement was first, a CAD20 million quarter-over-quarter increase in the net fair value gains of our investment properties. Two, in 2014 there was CAD28.6 million of debenture redemption costs incurred. And three, we had CAD5.1 million of higher income taxes, mainly deferred in nature for 2015.

The CAD15.3 million reported fair value gains in the quarter in our investment properties is attributable to several factors. The largest component is the general compression discount in terminal cap rates in the United States, in particular as it related to the properties acquired since the beginning of 2013. There were also positive changes in the leasing assumptions for certain Canadian properties where we are seeing rent increases in certain markets.

These two positive factors were partially offset by fair value reductions due to certain leases in Camden in the United States that are closer to expiry and the re-leasing assumptions are expected to be on less favorable terms than the current leases in place.

As on past calls, there's a couple of additional financial metrics and matters I'd like to bring to your attention. Firstly, our annualized lease payments at the end of the third quarter increased to CAD226.1 million from CAD212.5 million at the beginning of the year. The increase is almost entirely driven by foreign exchange as the US dollar depreciated 15% and the euro is up 6% since the beginning of the year.

Two, with no acquisitions, the value of our investment property portfolio had increased over CAD200 million from CAD2.3 billion at the beginning of the year to CAD2.54 billion at the end of Q3 2015. The major components of the increase were a net increase to the net foreign currency translation gains of CAD165 million, CAD92.5 million which is attributed to the 15% appreciation in the US dollar and CAD71.6 million was attributed to the 6% strengthening of the euro. Currency can work for us and against us. Currently they're working for us.

There were also net fair value gains of approximately CAD62 million, largely attributable to the acquisitions and development initiatives that we've undertaken in the last two years.

The third component is just the acquisition of the development land in Poland and CapEx associated with the completion of the Berks property.

Our total debt, including currency slots at the end of the quarter was approximately CAD606 million, bringing our leverage to 24%. On a net debt basis, our leverage is just over 18.3%.

And lastly, we declared CAD27 million to distributions to our unit holders in the quarter, reflecting a payout ratio of 68% of the quarter's FFO.

So overall, as I said at the beginning, it was another solid quarter for Granite.

And in closing, I want to thank all of our staff for their continued patience and dedication in these complicated times. And with that, I'll turn it back to the operator to see if anyone has any questions on the quarter.

(Operator Instructions) Mike Markidis, Desjardins Capital Markets.

Mike, would you be able to comment on whether or not a search process has been initiated with respect to this vacant -- well, I guess not vacant, but with respect to the CEO position?

I'd like to think I'm not vacant. But --

Yes, pardon my misquote on that.

Not to worry, Mike. The only thing I can comment is that's a Board matter, Mike. That's in the hands of the Board, so I haven't got any comment I can make on that. I would expect as a result of that following the conclusion of any process, that would -- they'd act on that at that time.

Then just sort of keeping on with the upper level management, congratulations to John and Lorne for their appointments. Maybe perhaps you could give us a sense as to why the change in the title was necessary and how that relates to each individual's role.

The change was to really leverage John and Lorne's expertise across the entire portfolio and to bring an increased, I'll say consistency and focus across all of our portfolio, with respect to process, decision making and how we handle each real estate situation. And it's to bring a little more clarity internally to just how we manage and how we deal with things at the real estate level.

And then just maybe with respect to the change in promotion, something we would have to wait to you until your next AIF I guess. But would you be able to confirm whether or not the change of control provisions in any of those management agreements have been changed?

Nothing's been changed at this time.

Just with respect to your credit rating, which you have a very strong credit rating relative to most REITs. Do you have a sense from past discussions with Moody's as to what parameters would need to necessarily be maintained in order to maintain that credit rating? And I guess what I'm specifically getting on, is there a specific size where if you fell below that from an EBITDA perspective, or even a national level perspective, might trigger a review of the existing rating?

Haven't had those specific discussions, Mike, in that context in terms of with respect to size. I will say that in terms of the assumptions relating to our credit ratings it's based on they fully expect our leverage ratio to go up and that's all baked into their assumptions. But there's been no discussions as it relates to our size or probably from that perspective at all. I don't anticipate any.

And then I guess just finally before I -- actually two things before I turn it back. Number one, just with respect to your 2017 maturities and specifically the special purpose side, I think the past couple of conference calls the level of confidence certainly hasn't waned. In fact, if anything I would say that it's increased on your confidence in terms of getting extensions. So maybe you can just comment on how that's progressing and if your confidence has waned at all or if it continues to get stronger (inaudible).

I'd say our confidence hasn't waned. We haven't had any current discussions right now. There's still lots of time, but bottom line our confidence hasn't changed with respect to expectations.

And last question here, just with respect the distribution. And obviously the last three years you've passed through an annual increase. I guess obviously that's a Board level decision, but I'd ask the question, Mike, now in your capacity as a CFO and interim CEO, given where the business is heading today, and assuming no change to the operations, would you be supportive of another increase in December? Or would you think the existing distribution would be more prudent?

I think the -- you nailed it in the first point. It's absolutely a Board decision. We have a track record of increasing the distribution in each of the -- well, in the last three years. And in a perfect world, we'd like to see that continue.

(Operator Instructions)

Sounds like that's -- that might be it. I think there's a few competing calls at this time. And Operator, Chris, if you don't any further questions.

We have no further questions at this time, sir.

Then we'll call that a wrap and thanks very much, 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.