Granite Real Estate Investment Trust (GRP.U) 2017 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 are Mike Forsayeth, Chief Executive Officer; and Ilias Konstantopoulos, Chief Financial 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 the U.S. Securities and Exchange Commission from time to time, including the Risk Factors section of its Annual Information Form for 2016 dated March 1, 2017.

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 Q1 2017 condensed combined financial results and management's discussion and analysis of Granite Real Estate Investment Trust and Granite REIT Inc. and other materials filed with the Canadian Securities Administrators and U.S. Securities and Exchange Commission for additional relevant information.

As a reminder, this conference call is being recorded today, Wednesday, May 10, 2017.

I will now turn the call over to Mr. Mike Forsayeth. Please go ahead, sir.

Thank you, Lila. Joining me here today is -- welcome, everyone. Joining me here today is John De Aragon, our Chief Operating Officer; Lorne Kumer, our EVP and Co-Head of Global Real Estate; our EVP, Real Estate Europe, Stefan Wierzbinski; and of course, Ilias Konstantopoulos, our CFO, will be taking you through some of the details of our financial results in a couple of moments, referencing our snappy, new, revamped MD&A, which I think he and our financial reporting team have done a great job on.

Operationally, with FFO of $0.84 per unit, our first quarter results came in a little better than expected. The strong Canadian dollar with some withholding taxes incurred as part of repatriating funds from Europe to facilitate distributions to our unitholders adversely impacted our FFO and AFFO by over $0.04 per unit compared to last year.

In addition, significant progress has been made on the G&A front in adapting our business model. Before the impact of increases in our unit price and our stock-based compensation expense in the quarter, our G&A was approximately $1.1 million lower than last year. This is due in part to reduced salaries and benefit costs of $400,000, resulting primarily from headcount reductions. The rest of the savings were in professional fees and other admin costs that included over $300,000 of expenses last year related to the strategic review process.

Our headcount today stands at approximately 15% lower than the run rate prior to going into the strategic review in 2015. And we will continue to evaluate our G&A as our business model evolves to ensure a cost-effective structure in delivering value to our unitholders.

Ilias will provide you some additional details on the quarter shortly, but before I get into that, I'd like to spend a moment on our growth initiatives. We typically do not comment on the detail of our investment pipeline, but I can say we continue to target our core markets in North America and Western Europe.

It's not lost on us that the core market -- that the core product in these markets continues to be highly sought after and in limited supply. Having said that, given our global approach, management remains committed to deploying the balance sheet to achieve our growth and diversification objectives.

With respect to the 2017 key priorities relating to our existing portfolio, I have a few updates. We are in advanced negotiations to lease approximately 2/3 of our Novi, Michigan, property which was vacated at the end of the quarter. We are in discussions with Magna for a short-term extension at our Altbach property in Germany. And only 1 of the 16 leases that have expiries in 2017 remain unresolved, and it's under discussion.

At this point, I'd like to acknowledge the filings made by FrontFour and Sandpiper and provide some facts regarding Granite. As we stated in the Q1 press release, Granite's track record and prospects are a matter of public record. So let's take a little trip down memory lane and recall how Granite has been built into what it is today.

When the board and management took on what was then MI Developments in the summer of 2011, Granite had total real estate assets of approximately $1.9 billion, net leverage of 14%. Magna represented 98% of revenues. The FFO for that year was $2.14. The annual dividend was USD 0.40. And the stock price was trading in the $28 to $29 range.

It was effectively a captive real estate division of Magna located on Magna's campus. Its legal structure and cash flow management practices were tax inefficient. It reported in U.S. dollars, and the balance sheet was completely mismatched from a currency perspective. It required a board and management team that could affect the significant restructuring.

As a result of management successfully executing on the strategic plan announced in October 2011, by the end of the first quarter of 2017 Granite had converted into a tax-efficient REIT structure, had total real estate assets of $2.7 billion, net leverage of 17%. Magna represented 76% of our revenues, and the 12-month trailing comparable FFO was $3.40, up over 60% since 2011. Distributions had been increased from USD 0.40 annually, 5 consecutive years, to $2.60 per unit. And currently, the unit price is trading in the $50-plus range.

$100 invested in Granite at the beginning of 2012 was worth approximately $180 at the end of 2016, even more today. This represents a compounded annual growth rate of 12.5%. Granite has executing on its strategy, maintained strong corporate governance and generated a total cumulative return to unitholders of approximately 24.5% in 2016 compared to 17.4% for the S&P/TSX Capped REIT Total Return Index. Since converting to a REIT on January 3, 2013, Granite has generated a total cumulative return of 55.9% compared to the total cumulative return of 19.8% for the S&P/TSX Capped REIT Total Return Index over the same time period.

Coming out of the strategic review, which spanned virtually all of 2015, 2016 was a transformational year for Granite. On the back of the Magna lease deal announced in October of last year, we've established long-term stability and enhanced visibility of our future revenue streams, having locked in over $800 million of future cash flow from our A- credit-rated tenant Magna, a weighted average lease term of 7 years for the portfolio and 10.7 years for the special purpose properties.

We have a favorable debt maturity schedule with a weighted average interest rate of 2.53%, a balance sheet unencumbered by secured debt, a lower cost of capital and borrowing capacity in excess of $1 billion using our target leverage ratio in the 40% range.

My next comments are going to sound like a broken record compared to -- from previous calls, but it speaks to our resolve to stay the course, act with discipline and focus on what we believe is in the best interest of Granite unitholders.

It's no secret that our leading balance sheet is underlevered relative to others in the REIT space. Just as I mentioned, our net debt leverage stands today at 17% at the end of Q1, not far off from what it was in 2011. We've added $600 million worth of high quality, new industrial asset class; we've locked down the balance sheet with low cost, foreign-denominated unsecured debt; dramatically derisked the portfolio with the significant lease extensions announced in October 2016; and completed over $225 million of asset sales, including the sale of our entire Mexican portfolio. Each of these significant achievements was carried out in a sequenced but opportunistic manner and resulted in a lower cost of capital and preserved Granite's most significant untapped asset, its balance sheet.

That said, you can be assured that this management team is not going to recklessly abuse that asset by leveraging up the balance sheet to get a short-term earnings pop. And while Granite, of course, looked at many asset purchase opportunities in 2015 and '16, the lack of certainty of future cash flows from the Magna leases that were recently extended was concerning to us and was a deterrent. Clearly, with those lease extensions and early renewals behind us, we are in a far better position to execute on our growth strategy.

As I said before, in 2017 and beyond we will pursue property portfolio, company acquisitions and where we can capitalize on any regional disparities and market disruptions across our global footprint. We will pursue development opportunities from within Granite's existing portfolio and from acquired real estate assets. We'll pursue joint ventures and similar arrangements with our local operating partners. We'll continue to target the sale of certain noncore properties, primarily Magna tenanted; and we will look to make further investments with our tenants, including Magna, in support of their growth. Granite's business model and cost structure has changed since the summer of 2011, and it will continue to evolve to meet the demands of a high quality, diversified, industrial real estate company.

We are in incredibly well positioned, but this is only as a result of our sequentially putting the building blocks in place to build a stable foundation from which to grow our asset base and continue to drive down our cost of capital. I believe Granite's prospects for growth and value creation have never been stronger. No doubt, execution is the key to unlock our value but so is discipline.

That said, we are confident that the initiatives taken will result in capitalizing on investment opportunities that will achieve our goals and continue to create sustainable long-term income and value for our unitholders.

With that, I'll turn it over to Ilias to go over the financial highlights for the quarter.

Thank you, Mike, and good morning. Before I get into the highlights of Granite's Q1 results for 2017, let me begin by mentioning that we have made several changes to our MD&A, as Mike referred to. You'll note in our Q1 '17 MD&A that we've enhanced our disclosure by introducing certain non-IFRS measures, which we consider, and trust you will agree, to be helpful in assessing Granite's overall financial and operating performance in addition to hopefully increasing transparency, relevance and usefulness.

I will highlight some of these changes in my remarks. First off, revenue for the quarter was $55.2 million compared to $56.4 million in the prior period.

Net operating income measured on a cash basis is one of the measures we introduced in the quarter. NOI cash basis, as I'll refer to it, was $54.5 million compared to $55.9 million in the prior period. NOI cash basis excludes the impact of straight-line rent and tenant incentive amortization and reflects the cash generated by our income-producing properties. You will note that property operating costs are not a significant portion of our business currently given that most of our leases are net leases under which the lessee is responsible for the operating costs.

The 2.1% decline in revenue and the 2.5% decline in NOI cash basis was each attributable mainly to the unfavorable impact of FX rates and the impact from property disposals made in the prior period, which were partially offset by contractual rent increases and the recently acquired building expansions in Kentucky and South Carolina in January '17. Excluding the impact of foreign exchange, NOI cash basis would have increased by 1.6%.

FFO during the quarter, as Mike mentioned, was $39.6 million or $0.84 per unit versus $41.4 million or $0.88 per unit in the prior period. In addition to the $1.2 million revenue reduction, other items impacting FFO were a reduction to G&A of $700,000; a reduction to interest expense of $0.5 million, offset by higher current taxes of $1.2 million and various other individual items aggregating to $0.6 million, which collectively contributed to reduce our FFO by $1.8 million or $0.04 per unit.

So Mike spoke and gave a bit of context on G&A and the decrease in the period. I'd like to point out a couple of additional points with respect to our G&A.

None of our employee compensation expenses are included in property operating costs. That is to say that we do not allocate any of the real estate professionals' compensation expense. Of our $6.2 million in G&A for the quarter, approximately half of it or $3.1 million relates to salaries and benefits for our 48 employees, of which 1/3 are in real estate-related functions, 1/2 are in finance, accounting and treasury and tax-related functions and the remainder are in executive management, legal and other support functions.

Adjusted funds from operations or AFFO is another non-IFRS measure we introduced this quarter and define it in accordance with REALPAC's recent white paper issued in February 2017.

AFFO during the quarter was $40.3 million or $0.86 per unit. This was $41.7 million or $0.89 per unit in the prior year period. The bridge from FFO to AFFO during Q1 '17 includes actual maintenance CapEx of $600,000, leasing expenses paid of $200,000, net of straight-line rent and tenant incentive amortization of $1.5 million that are noncash.

The comparable numbers bridging FFO to AFFO for the prior period were actual maintenance CapEx of $0.5 million and lease expenses paid of $800,000, net of straight-line rent and tenant incentive amortization of $1.5 million.

Shifting to our balance sheet. The IFRS value of our investment property portfolio was $2.7 billion as at March 31, 2017, implying an overall capitalization rate of 8.1%. Our income-producing portfolio of 92 properties comprised approximately 30 million square feet, had an occupancy of 98.4%, a WALT or weighted average lease term of 6.9 years and of which Magna tenanted 76% as measured by revenue or 70% as measured by GLA. The change in the fair value of our properties was primarily due to the $71 million of building expansions we acquired from Magna, offset by $7 million in fair value losses.

We introduced net asset value or NAV this quarter, which is a non-IFRS metric. We calculate NAV as the fair value of our investment properties less the carrying value of our net debt and noncontrolling interests. On this basis and as at the quarter end, NAV per unit before and after deferred taxes was $47.88 and $42.93 per unit, respectively.

At the quarter end, our total debt stood at $651 million and comprised only of unsecured debt. It had a weighted average term to maturity of 5.7 years, a weighted average interest cost of 2.53% and a corresponding total leverage of 24%. Netting out our $190 million of cash and cash equivalents, our net leverage stood at 17% at quarter end.

Our $250 million credit facility was undrawn, and our investment portfolio was entirely unencumbered, giving us substantial liquidity and debt capacity that we can deploy, as Mike described.

Cash flow from operating activities for the quarter were $46.2 million compared to $48.9 million in the prior year. Incidentally, as it relates to our cash flow visibility that Mike referred to, we have contractual cash flow commitments due to us pursuant to our in-place leases that aggregate to $1.7 billion.

Distributions paid for the quarter were $0.65 -- $0.651 to be precise versus $0.576 per unit in the prior year period. The corresponding FFO and AFFO payout ratios for the quarter were 78% and 76%, respectively, and for the prior period, 67% and 66%, respectively. Annualized distributions for 2017 are expected to be 2 point -- or $2.60 a unit based on the current monthly distribution amount of $0.217 per unit.

At this point, I would love to turn the call back to Mike. Thank you.

Thank you, Ilias. In closing, I'd like to thank all of our employees for their continued support and dedication to Granite, as we always do. But before turning it over for questions, I want to let everyone know that as it relates to the dissidents' assertions and their intention to nominate individuals to stand for election to our board, board matters for our upcoming AGM, Granite will issue a press -- a proxy circular for that meeting in due course. That circular will contain important information regarding the AGM and address a number of inaccurate and misleading statements made by the dissidents. I don't have anything to add beyond that, beyond what we said in the quarterly press release and my comments just now. Accordingly, I will ask that any questions be kept only to those about Granite's financial results, operations and outlook.

With that, I'll turn it back to Lila to see if anyone has any questions.

(Operator Instructions) Our first question comes from the line of Howard Leung with Veritas Investment Research.

Just wanted to ask about the investments into Magna. Mike, you mentioned that there'll be some investments there. Will that include any special purpose properties or extensions?

When you say in terms of, that's where we would invest some of our funds going forward, Howard?

Yes, exactly. Just want to know if you foresee any more exposure to any special purpose properties.

Nothing's on the radar screen at this moment. But certainly, the $70 million that we spent in the first quarter related to the October deal that we signed in 2016. And that was for 2 special purpose properties. And those came with significant lease extensions to 2032.

Right. Do you guys view that special purpose properties are -- would you consider increasing your exposure to them? Or is it kind of like you want to have a limit of how much you want exposure to?

No, it's situational, Howard. It just depends.

Okay. Makes sense. Could you give a little color around the amortization of lease payments in the AFFO investments. Was that due to the Graz incentive payments, I think, in 2015?

Primarily, yes. I'll let Ilias respond.

Yes, Howard, that is correct. Of the $1.5 million that I referenced, the bulk of that, i.e., in excess of $1 million, $1.1 million relates to both the Graz, the 2 facilities in Graz, one of which you'll recall or may recall in the beginning of 2014 there was a EUR 25 million cash allowance incentive that was made. And that is being amortized. So collectively, those 2 assets comprised about $1.1 million of the $1.5 million.

Okay. That's helpful. For the -- I noticed that the annual lease payments or annualized lease payments that was -- you guys are no longer using that. Just kind of any reason around that.

Yes, it's a good observation. You'll note -- actually, we try to provide that reasoning in our MD&A. I'll highlight that we considered keeping ALP for a quarter or 2. The issue is that it would have been a lot of metrics around the same magnitude. The substitute and the proxy is the NOI cash basis, which would be pretty well -- very similar other than for some ForEx assumptions that we were using in ALP and how we calculated it. But we're hoping that the NOI on a cash basis will serve as a proxy and a better proxy of that going forward.

Okay. So basically the ALP and the revenues or NOI, they're pretty similar?

Correct.

Okay. Makes sense. And just one more. I think, Mike, you mentioned the real estate staff comprises about 1/3 of the total in G&A. Is that 1/3 of the dollar total of the G&A for staff? Or is it the 1/3 of the headcount?

Yes, Howard, I think in my remarks I mentioned 1/3 of the 48 FTEs, i.e., 16 are real estate-related functions, so professionals that are -- effectively devote substantially all of their time doing real estate activities.

Our next question comes from the line of Mike Markidis with Desjardins.

Not specifically to ask about the dissident event, Mike. But just for benefit, the AGM, do you anticipate that the date will change at this juncture or will go ahead as originally scheduled?

The current plan is to go ahead as originally scheduled.

Okay. Just noticed that your NCIB expired on -- at the end of April in '17. Have you guys put forth a filing to get that reenacted or what's the status of that right now?

Yes. Yes, we have.

Okay. And would you expect any difference in terms of your activity under the NCIB over the last year based on the fact that you now have the expiries? I mean, I guess the question going back to your balance sheet now is you have much more confidence with the extended leases, so would that change your view with respect to NCIB activity going forward versus the past?

No, I don't think it necessarily changed our view, Mike. We -- it's there, and we'd like to take advantage of it. But it's -- and we may nibble around the edges, as I refer to in some investor presentations. But it's available and depending we'll -- we have no issue using it.

Okay. Last one for me. Just wondering if you could provide an update, not sure if it's too early, on what the status of the 28 maturities are. I think the bulk of those are properties in the GTA that Magna renewed in '13. Do you have any additional color you can add to the status of that right now or what your expectations are from that pool?

Pardon me, say that again, Mike?

The 2018 maturities, my understanding is that a big group of that relates to properties in the GTA that are leased to Magna. Could you give us an update on what your, I guess, prospects for renewal would be there and what's the outlook for that?

Yes, I'll let Lorne provide a comment. But overall, for the most part, they were the 2013 leases that we -- that were rolled over for 5 years. In addition, there is a number of those that relate to the acquisition we did in the Netherlands and Germany, but I'll let Lorne give a couple of comments.

Mike, simply put, the majority of the notice periods for the '18s are late 2017 or into 2018. So it's still a little early for us to be able to comment on those. But as it stands right now, there's nothing that has risen that gives us any significant concerns.

The next question comes from the line of Pammi Bir with Scotia Capital.

Just, Mike, going back to your comment on the G&A side. What's your sense in terms of the potential savings that you could squeeze further out in the structure? Can you expand on that?

Pammi, it's not about squeezing the G&A. If one thing we need to do a better job on is explaining our G&A and explaining our cost that are in property and what's in G&A. As I said, we continue to evaluate the -- our business model. We've done that over the course of this year, and you've seen some results of that. But certainly, as we grow and we have become a much more diversified, I'll call it, real real estate company with properties like the $600 million that we've added to date that cost structure is going to change and evolve. So it's not about squeezing. It's about ensuring that we have a cost-effective structure that delivers the most money to the bottom line.

And Pammi, if I may just complement what Mike said. Our G&A at least at a point in time in the quarter is at a level that if you were to annualize the $6.15 million at Q1 you get a number that is approaching $25 million. You compare that to the $28 million previously. It's a continuous improvement project, if you will; our business is evolving. But the facts are that there is a -- on a run rate basis compared to last year $3 million of G&A less than last year, something under 12% reduction encompassing the initiatives that Mike spoke of.

Okay. So you're comfortable with this, with say, using Q1 as a near term sort of run rate?

Yes, at this time, yes. And it's all of our expenses, Pammi. You need to look at all of the cost in properties. As we mentioned, we've got -- we don't have any salaries and benefits in our property and operating costs. We have in-house legal, in-house leasing, in-house construction and development. All of those costs are expensed in the G&A. We don't amortize. We don't capitalize. It's all about allocations. And I stand behind how we've -- how we approach our G&A, our cost structure. And it's -- as I said, it's whoever delivers the most to the bottom line is winning the game.

Right. Can you just remind us when the last time the portfolio or portions of the portfolio were appraised. And just your thoughts on the -- what you're currently using for your IFRS assumptions with respect to the cap rates on the portfolio and some of the discount rates?

Go ahead, Ilias.

Sure. So we have a policy in place whereby we appraise our portfolio on a rotational basis such that we want to cover 90% of the portfolio, i.e., the nonspecial purpose portfolio. I'll come back to that in a second. So over a 3-year period, the intent is to cover 90% of the nonspecial purpose properties. The special purpose properties, as suggested by the name, don't have a ready and liquid market. And therefore, the exercise of appraising those is one that we have done ourselves. They were originally done, I believe, at inception, Mike, when the REIT was formed or when the company was spun out. This being said, we do look at those periodically. And to come back to your question on the cap rates, Pammi, let me just go to the specific references. So I mentioned the overall capitalization rate was 8.1%. We do disaggregate that in our MD&A on a -- both on an asset class basis. And I'm just looking through that page. So just bear with me. And then directionally, you'll see, for example, our special purpose properties for the quarter had a weighted overall cap rate of 8.04%; our multipurpose facilities, a little over 9.5%; and about 6.5-ish for our modern facilities, for an overall weighted of 8.1%. And so we've got that disaggregation in our -- Page 13 of our MD&A, which I will point you to. And as well, we do it geographically in our financial statements. You'll see that in the note disclosure under fair value of investment properties. So hopefully, that will provide additional clarity for you.

No, we saw all that detail. Just sort of curious as to whether you felt there was room for further compression based on your current assumptions?

No. I think at a point in time, let me say, this is our best judgment. I'll add further that as it relates to the nonspecial purpose, I mean, we do have these properties appraised on a rotational basis, number one. Number two, we do seek out from the brokerage community regularly, i.e., quarterly and more frequently information as it relates to market rents, as it relates to cap rates, discount rates, term of the lease, et cetera, all of which are baked into point-in-time assessment. What happens in the future, I won't comment in terms of potential cap rate compression. But at least at this particular point in time that, that is our best judgment. And I will say in addition to that, what we try to do is we recognize its objective what we try to do. And you'll note that on Page 13 of our MD&A we've given sensitivities around our judgments. So should one have a slightly different view, we want to at least equip you easily to make an assessment as to what value might be plus or minus 25 basis points, a few basis points.

Yes, the only other comment I'll make is that -- 2 things. As we do our appraisals and we compare that to ours, we come very close compared to the appraisals that have come in. There's -- it's pretty tight. The other thing that I'd like to point out is likely the appraisals out there are probably a little behind in their view of the market. They're always, I don't know, 6 to 12 months behind where the market is. So those are the only sort of 2 comments I'd leave you with, Pammi.

Okay. That's helpful. And maybe just -- maybe lastly here. Can you comment on what sort of transaction volume that you have under review at this stage? Anything further in terms of any LOIs out there, anything under contract? Just trying to get color of what you can put to work.

Yes, we haven't got anything under contract. We've had a couple of NDAs out there. And as I mentioned even on our last call, we've looked at over $2 billion of stuff. So there's nothing we're missing in the market we've -- from what we've seen in our network, investment bankers, brokers, but we're all over it.

Right. And still a preference at this stage for Europe versus North America?

No, U.S. and Europe, not Canada. No offense to you.

(Operator Instructions) Our next question comes from the line of Neil Downey with RBC Capital Markets.

Maybe there's a random list here. Of the vacant space in the portfolio, about 1.5%, I guess that's 0.5 million square feet or so. Is that just spread across a number of buildings? Or is it 1 or 2 properties that are entirely empty?

It's 1 or 2 properties. The biggest is Novi, and Altbach is the other one.

They were both vacant at March 31?

Oh, sorry, Altbach is -- they're still there, but it's -- there's one other small one, haven't got the name, but the vacant is Novi, and it's 300,000 square feet.

Right. Okay. Maybe to circle back on, I guess, the line of questioning that Pammi had. With respect to the special purpose properties and the discount rate of 7.83%, I believe it was, how do you think about that discount rate in the context of, say, Magna's credit profile, where Magna's bonds might trade, et cetera?

It's a great question, Pammi (sic) [Neil]. We look at the -- also the valuation, and we look at, for example, the -- on cap rate that we had on the recent expansions. And we look at the -- sort of the terminal value associated with those properties. And it's really driven by -- on the terminal value side. That's what's driving it. We look at the rates, the discounted rates over -- of the cash flows and then it's going to be sort of views on the terminal value that will impact it.

Okay. I believe the dissidents, as you refer to them, have appointed some advisers to help them with proxy solicitation, et cetera, has the Granite board appointed an adviser on its end?

The -- we'll get to that, Neil, in the coming days as we publish our circular.

Okay. And I guess lastly on that front, one of the things that you make very clear is that in the proxy circular you will, I guess, make some statements about some inaccurate and misleading comments made by the dissidents. Are you able to share or otherwise give a bit of a sneak peek of the major items that would fit that term inaccurate or misleading?

No.

The next question comes from the line of Sam Damiani with TD Securities.

And also just a bit of a random order here of questions. So first off, on the G&A, the -- just correct me if I'm wrong here, but the board level costs are not included in the sort of $3.1 million in the quarter, as you talked about, is that correct?

No.

No. All the board costs are included in G&A.

Sam, that's not correct. They are included.

In G&A, but you sort of segregated out $3.1 million, kind of like half the G&A was for the 48 staff, but that doesn't include the board?

The $3.1 million does not, but the G&A -- pardon me if I misunderstood your question, the G&A includes all the board expenses. The $3.1 million that I referred to are the salaries and benefits of the employees.

Of the 48 people, yes. Okay. And then your outlook for G&A, you kind of hinted at a $25 million number for 2017. Is that sort of your guidance at this point?

No, it's not guidance. All I said was the run rate would equate to -- the $6.15 million would equate to about $25 million. I'm not predicting what will happen in the future, to be clear. What I'm trying to give you is a sense for what is the current run rate. And so I'm not being evasive, but I'm trying to give you a sense for the difference in that run rate relative to what it was and then separately the point that Mike made, which there have been initiatives underway. There are always initiatives underway to look at G&A, both from a reduction perspective and then as we scale the business from a potentially addition perspective. So but -- the point being that we're conscious of G&A, always are and looking to rightsize that for our business, which is evolving.

Understood. And just on the NOI, you mentioned the NOI would have been up 1.6% excluding FX. Is that a same-property number or is that just a total portfolio? And I'm wondering if you've given any thought to disclosing a same-property NOI.

Right. So with the first question, the latter, i.e., it's not a same property. It's the total. Yes, we have given thought to same property. We've not done that to date. And so it is something that we will consider as we go forward. It's on the list.

On the list, okay. And just on those 2 acquisitions made, the expansions, 8 1/4% cap rates, correct me if I'm wrong here, but Granite didn't make any incentive to Magna to produce a negotiation that would result in a cap rate that high. Is that correct?

That's correct. Yes.

That's right.

And so -- and these are specialized -- special purpose properties. What was the square footage?

About 0.5 million square feet, 2 expansions relating to Bowling Green and Piedmont, South Carolina. These were additional base that Magna added to existing special purpose facilities. And you're absolutely right, the 8 1/4% cap is generating -- we expect to generate USD 4.4 million, roughly CAD 6 million without any other strings attached, i.e., incentives or otherwise.

And the lease structure here is similar to the other special purpose leases, i.e., net payments, Magna pays all the op cost, et cetera?

Exactly, coterminous with the other in-place leases as well, yes.

And growth in the rent over the term based on inflation? Yes. And just on acquisitions, I understand there was a fairly large portfolio in Western Europe that traded just recently, a bunch of Amazon centers actually. Did you look at that one? And if so, I don't know, do you have any thoughts on that? Looked like the cap rate might have been accretive.

It's John De Aragon. There was a couple of portfolios that traded or in the process of trading, like the. There was the [Andel] portfolio, which is primarily on (inaudible) capital. We took a look at that one. The one you're referring to is the Gramercy portfolio. It traded for about EUR 1 billion. We had discussions with our investment bankers on a subset of that portfolio, but they weren't willing to break it up. There's a couple of big portfolios in [Bourn]. We saw that one by [AW] and one by [Osniff]. We're looking at subsets of those portfolios as well, but nothing's come of it as of yet. The price is still moving around in a lot of that stuff.

And so on the Gramercy, was the portfolio just too large? Or are there just too much that you didn't want within the $1 billion package?

It was too large, but it had a mixed bag of stuff that we would have to sell off, car dealerships and some retail, specialty retail. It had a higher office component on a few things. But generally, it was too large.

The next question comes from the line of Dominique Barker with CIBC.

On the appraisals, I wanted to know if you've considered replacement cost. If so, if you have a sense of whether that would result in a higher or a lower valuation?

Would result probably in a higher valuation particularly on the special purpose.

Yes, I am focused on -- I'm thinking of the special purpose. And I guess I'm following up on Pammi's question just with respect to the cap rate. And just wondering if the cap rate approach is really the appropriate one for valuation. And then following up on Neil's question just with respect to the credit with Magna and if you are going to use the cap rate approach then thinking about it as a string of cash flows. And then the alternative would be just on the replacement cost. Do you have a sense of what the impact would be on the special purpose properties if you -- like how undervalued they are compared to replacement cost?

So Dominique, it's Ilias. Just to clarify on the first part of your question, we don't use the cap rate approach to derive value on the special purpose. That is the implied output, if you will. What we look at is the cash flows, contractual cash flows using market over a 10-year investment horizon. The driver that Mike referenced before is the renewal with respect to the special purpose properties by virtue of their nature. That is a factor that would impact value and drives value to where it is in our judgment. So that was the first part of your question. With respect to the second part, I apologize, I lost it in my train of thought here.

Would the impact -- would the -- what the delta would be on the difference between what you have implied in your IFRS value versus the replacement cost. Is it like 2x, 50% higher, 100% higher?

Yes, Dominique, it's John De Aragon. It varies between buildings. But what I can say is, and to Pammi's questions as well, the driver for valuations as it relates to the majority of the special purpose, Milton is an outlier, but really IRR-driven. They're internal rate of return driven. And so the discount rates back into through an internal rate of return metric. And as to, as Mike mentioned, the residual fluctuates on these assets. Milton extremely strong residual; on some of the others, not so strong. And so it's really return on capital, return of capital. And so that's the difference. The replacement cost and the relevance of the replacement cost is more geared to the negotiations, the lease negotiations, the renewal negotiations with Magna. It's also -- it goes further than that because Magna continues -- we bought 2 expansions, as Ilias talked about, Bowling Green and Piedmont. Magna continues to complete expansions with their own capital on our lands effectively. So it's -- I guess it's a metric. It's used more for lease negotiations than valuation. And it gets exaggerated a little bit further because Magna continues to invest significant capital in the properties and most specifically in Graz.

We have a follow-up question from the line of Sam Damiani with TD Securities.

Yes, just wanted to discuss Graz for a moment. On the special purpose, I think you mentioned that they were appraised back 6, 7 years ago, but since then there's been internal management adjustments since then. Have you given any thought to putting it out for a fresh appraisal?

Yes, we have. And let's be clear, we undertook a strategic review not that long ago, and we got a pretty good sense on value through that process.

So that -- you use that information, it's reflected in your current balance sheet today?

It's certainly reflected in our current thinking.

Is it much the number that you show on the balance sheet?

No, actually, it pretty much validated how we were looking at it and how we were thinking about it.

So Sam, as you know with these assets, there's not a lot of market metrics for these assets. And so that strategic review and testing the value of those assets with third-party market participants was pretty important to us.

So I understand that. And to sort of get back to my earlier question, how was the 8 1/4% cap rate arrived at? I guess just on negotiation based on, I don't know, whatever. But it certainly is...

The math, well, honestly, I mean, outside of a significant lease extension on in total 1.5 million square feet in total. So it's 400 -- it was effectively 450,000 square feet. The cap rate was negotiated up and down between us and Magna. The resulting IRR with a 0 residual after 15 years was about 3%. Any renewals on top of that or any probability of renewal on top of that will take your IRR further than that. So effectively, it was based on extension. It was an 8 1/4% cap. Assuming 0 residual, just cash flow, it was just over 3% IRR.

Right. Okay. And just switching over to the multipurpose facilities. The cap rate there is 9.6%. Just curious why that is so high?

You can see from recent examples of our sales on the disposals of some of those properties the income that was generated and the sales price. And you've heard the observation before different times is, gee, that's been a pretty high cap rate. And the answer to this is, yes. So...

So I guess the implication is that the bulk of your existing multipurpose properties are consistent with the ones that you've sold in and around that 10% cap?

Yes.

In terms of quantity, location, et cetera?

Yes.

Listen, I think it varies. I mean, it's a large portfolio. It's a lot of different jurisdictions. And so I'm not sure you can say that broadly speaking. The GTA is very strong for sure. Czech Republic is a lot different than what we would find here. Lease term in practice is different as well. And we have some tertiary properties, particularly Iowa, that we have renegotiated as part of the deal in October that affect the valuations of those. It's hard on those category 3 to kind of broadly speak about cap rates. It's very different jurisdiction by jurisdiction.

(Operator Instructions) Gentlemen, there seems to be no further questions on the phone lines, so I'll turn the call back to you.

Great. Thanks very much, Lila. And thanks, everyone, for your participation in today's call. Let me just make one last comment: That in closing I want to emphasize that we are committed to our strategy, and we will not alter it for short-term value gains. So with that, I'll shut it down and speak to you next time. Bye for now.

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