Granite Real Estate Investment Trust (GRP.U) 2016 Q2 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 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 factor section of its annual information form for 2015 filed on March 2nd, 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 a Q2 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.

As a reminder, this conference is being recorded Thursday, August 4th, 2016. I will now turn the call over to Mike Forsayeth.

Thank you, Beatrice. Joining me here today is John De Aragon, our Chief Operating Officer, Lorne Kumer, our EVP and Co-Head of Global Real Estate, Jen Tindale, our EVP and General Counsel, and our EVP Real Estate Europe, Stefan Wierzbinski.

On our next call in November, I look forward to introducing Granite's new CFO, Ilias Konstantopoulos. As I stated in the announcement last week, we are thrilled about having someone of Ilias's caliber join Granite, and I know he'll be a tremendous addition to the executive team.

Today my comments will be relatively brief as Q2 was another steady, no surprises quarter. That said, the quarter did have a couple of important operational highlights that demonstrates the measurable progress towards achieving our goals for 2016, and our longer term strategic objectives.

Firstly, Magna exercised its contractual lease renewal options for two special purpose properties in Canada, on in Milton, CarMax, the other in St. Thomas, Formet. Together these properties have an aggregate square footage of 2.1 million, and annualized lease payments of CAD16.4 million. The renewal options are for 12 years thereby extending the lease terms to December 31, 2029. The original lease expiries were December 31, 2017.

As it relates to the status of our lease expiries for 2016, with the completion of recent disposals, 2016 is done, though we do have a couple of month-to-month leases remaining. With respect to the 2017s, including CarMax and Formet, 4 of the 16 have been renewed. I can also tell you that, as expected, Magna did not exercise their renewal options on the Aurora corporate head office or 2550 Steeles, but despite that we are in discussions with Magna to continue their occupancy in both properties beyond the existing lease term of December 31, 2017.

Also as expected, Magna did not exercise their renewal option on the Novi, Michigan property, and we are actively looking at our options there. And with respect to Modatek, the other special purpose property in Milton next to CarMax, it remains out of contract but continues to be the focus within some broader discussions with Magna. Together, these four properties total roughly CAD25 million of the CAD31.5 million in ALP pertaining to 2017 referenced in our MD&A.

We leased the remaining 250,000 square feet of the recently completed development property in Pennsylvania to the existing tenant, Samsung, who occupies the other 500,000 square feet of the property. This property is now fully leased and has total annual revenue of approximately CAD4 million.

We sold three non-core properties in the United States and Germany, representing approximately 800,000 square feet and CAD2.9 million in annual revenue for gross proceeds of CAD23 million. And we have another two properties under contract that are undergoing due diligence.

As a result of the two 12-year special purpose property renewals, our weighted average lease term increased to 5.4 years from 4.7 at the end of Q1, and our occupancy stands at 99.1%.

I'll now turn to the details of the financial results for the quarter. FFO for the quarter was CAD39.9 million, or CAD0.85 per stapled unit, and is very consistent in absolute terms in comparison with the CAD40.3 million, CAD0.86 per stapled unit in the second quarter of 2015. But as you may remember, Q2 2015 results included the favorable impact of a significant income tax recovery, and some incremental close out revenue which boosted its earnings and masked the year-over-year improvement in Q2 2016. This improvement was driven largely by the higher revenue from the favorable exchange rates, and the lease up of the two development properties in the United States.

Looking at some of the detailed quarter-over-quarter numbers. Revenue for Q2 2016 was up CAD2.9 million compared to last year's Q2. The increase was largely due to favorable exchange rates and the incremental revenue from leasing up the development properties. But of note, the Q2 exchange rates were on average over 4% lower than our first quarter of this year. The other revenue increases from contractual rent adjustments and completed projects were offset by the impact of losing the rental income from non-core properties that had been sold.

Property and operating costs were virtually unchanged from a year ago as incremental costs associated with the develop properties almost offset the property related advisory costs associated with last year's strategic review process.

Our G&A for the quarter was CAD7 million, CAD200,000 lower than last year. And on balance, Q2 2016 had lower compensation costs relative to a year ago as higher professional fees associated with certain internal reorganizations and administration matters largely offset the cost incurred for last year's strategic review.

The net interest expense for the quarter was CAD4.9 million, and was up CAD400,000 from last year, largely due to the weaker Canadian dollar given that all of our debt is denominated in foreign currencies, but it was also due to the increased borrowings associated with the construction draws for our US development properties.

Our current tax provision for the quarter for FFO purposes was CAD1.9 million, and includes CAD300,000 for withholding taxes for an internal dividend received from our Austrian operations. This compares with a recovery of CAD300,000 in Q2 of 2015 that included a net CAD1.4 million recovery primarily related to the favorable settlement of an income tax audit. All of these factors contributed to Granite's Q2 2016 FFO of CAD39.9 million or CAD0.85 per unit.

On an IFRS reported basis, our quarterly net income was CAD57.5 million versus CAD48.2 million for the second quarter of 2015. The major reasons for the CAD9.3 million improvement were an increase in the net fair value gains of our investment properties, higher revenue, and a lower deferred tax expense.

The net CAD26 million fair value gain reported in the quarter in our investment properties is largely attributable to three factors, the positive impacts of the renewal of the two special purpose properties, and the lease up of the remaining portion of the development property in Pennsylvania that were partially offset by certain leases in Canada and the United States that are close to expiry and where the lease releasing assumptions are expected to be on less favorable terms than the current leases in place.

I'll now turn to some additional financial metrics that we often like to highlight on these calls. Our annualized lease payments at the end of the second quarter were CAD222.8 million compared with CAD228 million at the beginning of the year. The difference is largely driven by lower exchange rates due to the over 5% appreciation of the Canadian dollar relative to the euro, and the US dollar since the beginning of the year as ALP increases from new leases and contractual rent adjustments more than offset the lost ALP from the disposal of non-core properties.

The value of our investment property portfolio was CAD2.51 billion compared to CAD2.53 billion at the beginning of the quarter. The reduction is mainly due to the sale of non-core properties in the quarter as the fair value gains virtually offset the negative impact of lower exchange rates.

We've made no purchases under our NCIB in the quarter. Our total debt at the end of the quarter was approximately CAD562 million and our leverage stands at 22%. If you net out our cash on hand of almost CAD160 million our leverage would be approximately 16%. We invested CAD8.7 million in CapEx spread across the development properties in the US and Poland. And lastly, we declared CAD28.7 million of distributions to unit holders in the quarter, reflecting a payout ratio of 72% of the quarter's FFO.

Overall, as I mentioned at the outset, it was another solid, steady quarter. And in closing, I'd like to thank all of our staff in both North America and Europe for their continued dedication and support.

With that, I'll turn it back to the operator to see if anyone has any questions on the quarter. Thank you.

Thank you. (Operator instructions) Our first question comes from the line of Sam Damiani with TD Securities. Please proceed.

Thank you, and good morning.

Good morning, Sam.

First off on the two renewals, congratulations there. That's great to see. I'm just curious the circumstances around that, those were renewal options exercised by Magna. Was that just a contractual exercising of those options or was there any negotiation around that? And I'm wondering if there was any inducement paid to Magna for those two renewals.

No inducement paid. Contractual rent renewal.

Okay. And the rent is sort of increasing per the lease agreement then?

Correct.

Okay. The status of the other three sort of renewals that you've been I guess looking at, there's one in Milton there, Modatek you've mentioned, also St. Thomas and Cosma in Austria. Those are coming up in the next 18 months or so. What's the status of those? I wonder if you could talk about that. I know you mentioned Modatek is subject to more broader discussions and I'm curious what you meant by that.

Actually just that. Modatek is the subject of some broader discussions. And the other two, their renewal notices aren't due yet, but discussions are ongoing.

Do you expect anything different on those other two than other --

Can't say.

Can't say. Okay.

No.

Okay. And just looking at the revenue and streamline rent in Q2, how do you expect that to be impacted in Q3 because of the lease renewals that you experienced and I guess the lease up in the US and Poland that impacted those items in Q2?

The straight line rent, it will come down a little bit because there was I'll say free rent in the current quarter. But it will come down a little bit but not significant.

So you don't see it reverting back to the previous run rate of around CAD1.5 million a quarter?

No.

Okay. And just lastly on the topic of acquisitions, anything in the hopper right now in terms of discussions?

We continue to look in our non-core markets, but nothing has really sort of rise to the top. We continue to look but there's nothing in the hopper and we're not in discussions with anybody at the current time.

And overall, how would you describe the environment for acquisitions in your target markets?

Expensive.

All around? I mean there was some opportunity --

Expensive all around. And we've been looking and been exploring, but currently some of the focus has been on the Magna leases. But that said, we continue to look and see what's available. But on the face of it, what we've seen is still expensive.

Okay. Good, I'll turn it back. Thank you.

Our next question comes from the line of Pammi Bir with Scotia Capital. Please proceed.

Thanks, good morning. Just going back to the commentary around I guess discussions or alternative maybe discussions around Modatek, would the other two properties possibly form, you know possibly part of a sale back to Magna on those at all? Or any thoughts you could provide there would be helpful.

Pammi, just in terms of where we're at, I'd really like to leave at the point that says Modatek is part of some broader discussions. And certainly, you know Presstran and Albersdorf, their renewal options aren't due yet, but we are in active discussions.

Do you think we may actually hear anything on Modatek or the other two? Is there a chance that we could hear something before yearend?

I would like to think certainly Modatek before yearend given that the lease expires in January of 2017.

Okay. And just with these two extensions, or renewals, sorry, you gave us some color on your thoughts around acquisitions. But once you lock down let's say Modatek, will it change your view at all with respect to maybe how actively you might be willing to put capital to work? Or is it fair to say that acquisitions has sort of been sidelined as you've been working on these special purpose assets?

I would say to some extent. I wouldn't say our acquisitions have been sidelined, but in terms of how we've been looking at it has been perhaps less aggressive. If and when we lock down Modatek and some of the others, it opens a wide earth of opportunities for us.

Okay. And just going back to the rent on the renewal. You mentioned it was along the contractual terms. Can you remind us what sort of CPI related [rent] bump was seen in that renewal?

Yes, it's the lesser of 10% in a five-year look back on CPI.

And that will take us back (multiple speakers).

That would take place January 1, 2018.

Right. Okay. And then just on the other extensions that you talked about at the Aurora head office and 2550 Steeles, can you give us a sense of the duration of those extensions?

No, I can't. Sorry. No, right now we need more direction literally from Magna on that front. So it's difficult to say.

Okay. And any thoughts on the releasing of Novi? I think it's an office property, correct, the Novi, Michigan asset?

It's a combination of office, R&D and some manufacturing. And we've known this has been coming and we've been looking at a number of alternatives as it relates to repurposing it. We've had some interest in terms of from parties to lease portions of it. So we've got some time on that, but we've already started the process in terms of determining what are our options available.

Okay. Thanks very much.

Great. Thanks, Pammi.

(Operator instructions) Our next question comes from the line of Mike Markidis with Desjardins. Please proceed.

Thanks, and good morning. Mike, not to beat a dead horse, but just going back, I think you said four of the 2016s, 2017s have been renewed during the two new renewals that you announced. And then you had mentioned Aurora, 2550 Steeles, Novi, Michigan and Modatek, and I think you said that was CAD25 million of the CAD31 million of ALP. Is that correct?

Correct. Yes.

Okay. So what would Presstran, because Presstran is a 2017 as well, is it not?

Presstran is 2018 actually.

Presstran is 2018, okay.

Yes.

Okay. So when you look into the 2018 maturities, still a fairly significant amount of ALP there. I know it's a greater number of properties. So is it just Albersdorf and Presstran that are the two special purpose that fall in there, or is there any other special purpose?

Those are the only two.

Okay. Now, just going on in some of the commentary here, and you said you've sort of been less aggressive on the acquisitions as you're working with Magna on these renewals, but you also mentioned that everything you've seen is very expensive. So if pricing parameters don't change, and you do get through -- or when you eventually get through this period of locking down the large special purpose in 2017 and maybe 2018, all else equal, do you think you'd become more aggressive? I'm just trying to reconcile your thought, comments with respect to --

[My comment.] We've been less aggressive to some extent on the acquisition front. On the development side, we've actually been a little more call it aggressive, and we're looking at some opportunities there, particularly internally with some of our existing properties, one in Indianapolis, one in Altbach in Germany. So that's where some of our focus has been from a growth perspective. And we'll just play it a little more cautiously at this point on the pure acquisition front and see where it takes us from there.

Okay. So if pricing parameters don't change, once you're feeling better about getting through the leases, then it looks like you'll have more emphasis on development opportunities than acquisitions?

We're looking into development right now regardless of sort of the leasing of Modatek or the others.

Okay.

We're active on that.

Got you. Okay. And then just circling back. So Aurora, we know that eventually they'll be leaving, but it sounds like you'll get a hold over lease on that. And 2550 Steeles, just to make sure that you said you are in renewal discussions there, they just don't want to exercise for 12 years. Is that the case?

It's similar to the Aurora head office. Magna has been looking to consolidate their corporate office with some of the regional head offices, which includes 2550 Steeles.

Okay.

So those two are related.

Okay. And last question for me. Going through old disclosures, so it may not still be the case. But I thought Piedmont in South Carolina was also a 2017 maturity. I think that's the drive automotive plant.

It's 2019.

It is 2019. Okay.

Correct.

Okay, great. That's it for me. Thank you very much.

Great. Thanks, Mike.

Our next question comes from the line of Morton Spector with RBC Dominion Securities. Please proceed.

Good morning. With your strong liquidity position, I'm surprised that you're not being a little more aggressive on your buyback program. Could you comment on that?

No, the only comment I have on that is that at current prices, it's frankly just less interesting. When we initiated it back in April we were in a blackout. The stock was in the CAD36, CAD37 range and much more attractive.

Okay.

And since that time we've seen some appreciation since then.

So at this price level, you're not buying?

Yes, that would be a fair statement given we haven't bought any in the quarter. Yes.

Okay. Thank you.

(Operator instructions) Mr. Forsayeth, there are no further questions at this time. I will turn the call back to you.

Thanks very much, Beatrice. Thanks everyone for your attention this morning. With that, we'll sign off here. We'll talk to you in November. 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.