Granite Real Estate Investment Trust (GRP.U) 2016 Q1 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 Executive 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 materials filed in 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 2015 filed on March 2, 2016. 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 first quarter 2016 condensed combined financial results for Granite Real Estate Investment Trust and Granite REIT and other materials filed with the Canadian Securities Administrators and US Securities and Exchange Commission from time-to-time for additional relevant information. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded Thursday, May 5, 2016. I would now like to turn the conference over to Mr. Mike Forsayeth. Please go ahead, sir.

Thank you, Savannah. I know that's quite a mouthful. Thank you. Joining me here today are John De Aragon, our Chief Operating Officer together with Lorne Kumer, who co-heads our global real estate with John; Jen Tindale, our EVP and General Counsel, and Stefan Wierzbinski, who's our EVP of Europe. We had a strong first quarter with a little assistance from some very favorable currency tailwinds, but before I get into some detailed comments on our financial performance, I'll give a brief summary of the operating highlights in the quarter and some recent developments all in the context of Granite's strategy going forward.

Simply put, Granite's strategy is to build a high-quality, diversified industrial real estate business by growing and diversifying our asset base through acquisitions, developments, and dispositions and by optimizing our relationship with Magna as well as our balance sheet leverage.

So with that as some background, here are the highlights. We recently announced executing leases with each of GameStop and Samsung for 1.1 million square feet or 82% of the leasable area of our two completed development properties in the US and we are hopeful that the remaining 250,000 square feet will be leased up very shortly.

Also, the first of three buildings of our development land in Poland is complete and tenants are beginning to take possession, all of which shows a meaningful progress towards our growth and diversification objectives. If all goes according to plan, we'll have only two small vacancies to get us to 100% occupancy, one in Canada for 91,000 square feet and the other being the remaining 172,000 square feet pertaining to our new facility in Poland, but for the moment, we sit at 98.9% occupied.

We sold two non-core properties in the quarter for gross proceeds of approximately CAD9 million and we have three more under contract, which we currently expect should bring in over CAD20 million in the second quarter. What's also important to note here is that as we sell these non-core assets, we'll lose some ongoing cash flow until those net proceeds can be redeployed. In terms of these five properties, that total [lost] annual revenue will be just over CAD3 million.

Our revenue and FFO were at 6.3% and 6.6% respectively largely driven by currency and as previously announced, we also increased our monthly distribution by 5.7%. As it relates to our relationship with Magna, some very preliminary discussions have taken place regarding five special purpose assets with leases expiring within the next two years. In total, these represent approximately CAD35 million in revenue.

With respect to the rest of our portfolio, should the three assets under contract I just mentioned take place, we'll have no other leases expiring in 2016. As we look to optimize Granite's balance sheet leverage, we took the step of implementing a normal course issuer bid. With the cash generated through operations and dispositions and given the scarcity of near-term attractive acquisitions, we believe that buying back our units through an NCIB at appropriate prices is a prudent use of capital. We believe we have ample liquidity and that this initiative will not impact the objectives underlying our long-term strategy. Our intention is to buy through an automatic purchase arrangement to enable buying during any blackout periods. We also added Brydon Cruise to our Board, a seasoned, highly respected veteran in the global real estate industry.

Turning to the financial performance of the first quarter. It was a strong one and relatively straightforward with no surprises. As just mentioned, our revenue and FFO were up 6.3% and 6.6% respectively largely driven by the very weak Canadian dollar relative to both the euro and the US dollar during the first three months of the year. Both our property operating cost and G&A were in line with last year after excluding CAD400,000 of strategic review cost and the adverse impact of the weak Canadian dollar on our US dollar and euro denominated expenses.

The net interest expense for the quarter was CAD5.1 million, up CAD600,000 from last year, again due to the weak Canadian dollar given all of our debt is denominated in foreign currencies and also due to increased borrowings related to construction draws for our US development properties. Relative to Q1 2015, we had favorable year-over-year swing of almost CAD500,000 pertaining to foreign exchange gains that impacted the FFO calculation. Also note that there's over CAD900,000 of embedded unrealized foreign exchange gains as a result of euro related forward contracts we put in place. These FX gains will help mitigate the impact of the recent strengthening of the Canadian dollar on our FFO results going forward.

Our current tax provision for the quarter for FFO purposes was just under CAD1 million and excluding the benefit of almost CAD400,000 of favorable true-ups related to certain taxable Canadian entities was in line with our expected run rate. Also, as in prior years, over the course of the next couple of quarters, we're expecting to repatriate some funds from Europe via dividends. These amounts are a little larger than in the past and we're estimating the total withholding taxes to be in the range of CAD600,000 to CAD800,000. So as a result, our FFO for the quarter was CAD0.88 per unit and that compares with CAD0.82 a year ago.

On an IFRS reported basis, our quarterly net income was CAD43.4 million versus CAD54.8 million for the first quarter of 2015. Net income was less primarily due to the after-tax impact of lower fair value gains on investments partially offset by the increase in rental revenue. The net after-tax fair value gain in our investment properties of approximately CAD6.1 million is largely attributable to the impact of leasing up our development property in Pennsylvania.

Some additional financial metrics and matters I'd like highlight include, our annual lease payments at the end of the first quarter were CAD226.1 million, marginally lower than the CAD228.6 million at the beginning of the year. The positive impact of contractual rent adjustments together with new leases for the development properties were more than offset by the relative appreciation of the Canadian dollar compared to both the US dollar and the euro. The value of our investment property portfolio has decreased almost CAD58 million from CAD2.59 billion at the beginning of the year to just over CAD2.53 billion at the end of the quarter virtually all due to foreign currency changes that were mitigated a little bit by fair value gains as funds invested in capital expenditures were almost totally offset by dispositions.

The total debt including our swaps at the end of the quarter was CAD582 million. That brings our leverage to 23% or 17.3% on a net debt basis. This combined with our cash and available credit line gives us a strong liquidity position totaling approximately CAD375 million. We invested CAD9.5 million in capital expenditures with half of that going to our development in Poland and the balance to our two development properties in the US.

Lastly, we paid CAD27 million of distributions to our unit holders in the quarter and as mentioned, announced a 5.7% increase in the monthly distribution.

Looking forward, our priorities remain clear and unchanged. Solidify our cash flows with respect to the upcoming lease expiries for the special purpose properties and complete FFO and NAV accretive acquisitions and developments. In closing, we're very pleased with the results of our first quarter's performance and I'd like to thank our staff and management team for their support and commitment to Granite. And with that, I'll turn it back to the operator for questions. Operator?

Thank you. (Operator Instructions) Sam Damiani, TD Securities.

Mike, just to clarify, the five properties that you've got with leases coming up in the next two years, does that include the Aurora head office?

No.

And I guess the two Milton properties and two St. Thomas properties, I just want to (multiple speakers).

Got it. Just to clarify that Sam, it excludes the head office. Its properties in Milton, St. Thomas, and one in Austria, Albersdorf.

Oh okay and the CAD35 million of ALP on those properties, is that using the FX rate for Albersdorf at the end of the quarter?

Pretty much, yes.

Okay. And what would be the fair value of those five properties?

We don't get into the specifics of the fair value on those properties, but there's five of them. It's less than a third. Give or take CAD400 million.

Right, okay, that makes sense. And you said in your comments and also in the release that some discussions have taken place with Magna are very preliminary regarding renewal on these five assets. I'm just wondering those discussions, would they potentially have included also the possibility of Magna purchasing one or more of them? Is that part of the discussion?

It could, nothing concrete at this point. It's very preliminary and as we indicated, Magna has shown an interest, but don't want to comment any at this time in terms of where that may or may not go.

Okay. I'll just shift over to the dispositions you were mentioning, just want to be clear, just over CAD3 million of ALP that was on the assets that are being sold for CAD20 million, is that right?

No that includes all five of them, Sam. So, for the first bit -- CAD3 million is for the five assets.

Okay and what's the total fair value of those five properties?

Well, the total fair value would be the CAD20 million plus the [CAD9 million].

Okay. So, about a 10 cap, a little over 10 cap. Can you describe these properties just generally? I mean, what do they look like? Why is it a 10 cap and I guess not a seven cap or a 12 cap?

They are tertiary markets overall and while they had a 10 cap, again it's probably speaks to the assets themselves, the original leases that were put in place and they --

Leases coming up any time soon or is it term --

There is term with some of them, absolutely. Ober-Waltersdorf, which was the head office of Magna Europe, that was vacant.

Pammi Bir, Scotia Capital.

Just going back to the comments on the -- I guess, preliminary discussions on the renewals for those five special purpose assets. Are there specific ones that are more in focus at this point that are actually in discussion or is that just a comment generally on all five?

No, the focus right now is on the Canadian ones.

Okay and then based on what you're seeing, do you think it's possible that you'd be able to stagger those maturities better going forward or is there something that would perhaps prevent that from happening whether it's maybe tied to their OEM contracts or something of that nature?

We've got a wide ranging discussion going on with Magna. Our objective would be to try and stagger them, but very difficult to say at this time.

Okay. Just again going back to the commentary in the MD&A and I guess your remarks about possible sales to them. Is your sense that they may have interest in all them? I suspect some of this might have been part of this strategic review, but I'm curious as to whether that's an option or is it really just select assets?

Pammi, it's difficult. As you know, we're recently has -- they've made a number of their own strategic acquisitions as it relates to capital to speculate on their -- what they might want to buy and what they will buy at any point in time is difficult. We do believe they're all certainly mission critical, but in order to determine if there is any specific ones they want, they're probably as you know, one, they might be more interested and maybe grasp for example because they've got a recent acquisition related to that, but nothing specific at this time.

Okay and then just maybe thinking along those lines, if you were to actually to sell I'd say a couple of these and thinking about the redeployment of those proceeds, what are your thoughts there at this stage? I mean clearly it's been difficult to find places to park or put capital to work, developments have been in focus, but I'm curious as to your thoughts on what options you would consider?

The options we'd consider would be certainly a first priority and first purpose would be to redeployment into assets like the ones we've acquired in The Netherlands and the development of things we bought and built in the US. Other options we consider would be potentially a share buyback, potentially a special dividend. Those would be the opportunities.

Okay and then just lastly and maybe its preliminary, but your thoughts on any possible TI payments required on these five renewals that are coming up? Do you have a sense of what you might be looking at in terms of a spend?

Don't really want to comment on that aspect of it. We're not looking that way, but no comment at this time.

David Crystal, Desjardins Capital Markets.

So I just want to touch again on the upcoming five maturities in the special purpose properties. Can you remind me of the renewal notice requirements on these leases?

It's generally 18 months. The main ones are June 30 of this year and those relate to three of them.

Okay and which three, because I believe another two are towards the end of 2017, correct in terms of the actual lease expiries?

Yes, CarMax, Format and well, Mototech is currently [weren't] out of the contracts.

Okay. And so, I mean to that point, is there any repercussion on this period expiring or when do you actually expect clarity on these leases?

Yes, it is really difficult to say. The fact that they should give us notice, we would like to think that they would give us notice, but the example for Mototech, for example, they let that expire and, but we know, we think it's an important asset to them. So I wouldn't read anything into the fact whether or not they give us notice by the end of June or not.

Okay. So, I mean despite the fact that there should be an 18-month notice period, it's possible we don't get clarity beyond mid-year?

Possible.

Okay. And then so, specifically I know the head office offset is not included in these five, but have you got a timeline for Magna's move out and is there any opportunity for a short-term holdover lease?

Yes, I think there is the opportunity for a short-term holdover.

Okay. Any idea on what kind of time frame?

No, I don't. It's best to ask them that question.

Yes, okay fair enough.

But based on what we hear, we think there could be a short-term holdover.

Okay and then with respect to re-leasing or re-purposing that property, have you made any progress with respect to determine an alternative use for it?

We've had some discussions, but until we finalize sort of where Magna is going with it, it's difficult to contemplate. That said, we have looked at various options with respect to the property.

Okay, great. That's helpful. And then turning to the NCIB, at what levels do you expect to be active on that front?

I'm probably not going to give you a definitive answer on that pricing, but certainly, we're going to look at -- make our own independent judgments at points in time, but I'm not going to give any guidance on the pricing.

I guess put another way, at today's share price, would you be looking into it or is that more color than you are willing to give?

It's a little more color than I'm willing to give, sadly.

Okay, fair enough. Have you guys looked into a substantial issuer bid and I guess, what was the rational emerging from the strategic review on holding off on that front?

We did look at that and that was really driven by how we think of and look at our weighted average cost of capital and cost of equity and how we see ourselves growing and diversifying going forward.

Okay and then just finally in your strategic outlook section, you mentioned solidifying cash flow particularly with respect to the upcoming lease maturities as a key factor in determining your appropriate leverage going forward. Can you expand a little on this, specifically how high are you are willing to take leverage before securing some of these renewals and maybe thereafter, what your views on leverage are?

In the near-term, until we've got those locked down, as you can appreciate CAD35 million of cash flows going to influence how you think of your debt position. So we'd certainly be comfortable right now anywhere from CAD300 million or CAD400 million of incremental debt at this stage. Beyond that, assuming we lock those in and we lock that up, we'd probably take -- we'd be comfortable looking at our leverage in the 40% range.

Sorry, the 40% range?

Yes.

(Operator Instructions) Sam Damiani, TD Securities.

Thanks, just wanted to ask again about the Magna's interest in buying some special purpose properties. The discussions with Magna that took place early last year, were they partly or primarily in respect of some of the five properties that we're talking about today or was that a different set of properties they were looking at that, that time?

Sam, it was a range from virtually all to a subset and it moved over the course of the period. Again, I think a function of Magna's own capital allocation. That said, these assets are important to them and they continue to invest heavily in them as we've seen over the last 12 months and what more we hear in terms of their future plans.

Okay and just on Poland, there's little bit of lease up left to do on Phase 1. Maybe you could give us your thoughts on the timing and prospects there to sort of get that done and then, I think there's one or two more phases, just wondering if you think you'll start those this year as well?

On the one, we've got 60% yet to lease up in the first building and we're currently in some active negotiations on leases with a couple of tenants as it relates to that space. So, timing of that will again, hard to predict, but it is active. As it relates to the other two buildings, we're going to just wait and see in terms of how the leasing activity gets completed on building one and then we'll look to the next two phases.

Okay and actually, just wanted to go back to Albersdorf. I see that there's actually two adjacent properties there, one is about 800,000 square feet and the other one is about 100,000 square feet. Do you count those as one together or five properties under lease negotiations?

We count it as two, Sam. The 800,000 being the special purpose one.

Okay and so of the five properties you discussed in the results last night, is that including just the 800,000 square foot or its --

Yes. Just the 800,000 square feet.

Okay, and then there's two is St. Thomas and two in Milton?

Correct.

Mark Rothschild, Canaccord.

Maybe just following up on conclusion of the strategic update, has there been any change to the strategy as far as the global diversification as far as the focus and with the asset sales that you've done relate to that at all?

There's been no change in terms of our focus on growth. We've said primarily Europe and the US and we're sticking to that. Canada remains difficult given the pricing albeit we would love to do something in Canada given it's the most tax efficient jurisdiction that we have. So no change in strategy. And non-core is non-core and it can be -- it's in actually all jurisdictions.

Understood and then maybe just following up, I've realized there's only so much you're going to say about the unit buyback, but is this something that you expect to allocate significant capital to if the unit [prices, is that a price] that you find attractive?

As you know, if you do the math for the number of shares and it works out for you to do it all -- well north of a CAD100 million. So, we implemented the NCIB with the intention that we could buy up to that much. So, we would be happy to allocate again at appropriate prices, a significant amount of capital.

And Mr. Forsayeth, there are no further questions at this time. I'll turn the call back to you. Please continue with your closing remarks.

Okay, operator, if there are no further questions, I will close it off 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.