Granite Real Estate Investment Trust (GRP.U) 2017 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 are Mike Forsayeth, the 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 material 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 Q2 2017 condensed combined financial results and management discussion and analysis of Granite Real Estate Investment Trust and Granite REIT Inc., and other materials filed with the Canadian Securities Administrator and U.S. Securities and Exchange Commission for additional relevant information. As a reminder, today's conference is being recorded Thursday, August 3, 2017. I would now like to turn the conference over to Mike Forsayeth.

Thanks, Jennifer. Good morning everyone. Joining me here today is John De Aragon, our Chief Operating Officer; Lorne Kumer, our EVP and Co-Head of Global Real Estate; and Ilias Konstantopoulos, our CFO who will take you -- be taking you through some of the details for our financial results in a couple of moments. Though a little noisy from an operating perspective, our results for the quarter were certainly in-line with our expectations. But there are 2 significant non-operating items impacting this quarter's results. First, the cost related to the proxy contest and second a higher unit base compensation expense resulting from the fair value increase due to the over 12% rise in our unit price in the quarter, as well as increased amortization due to the higher awards relative to a year ago. Together, these items adversely impacted our FFO and AFFO by approximately $0.15. Ilias will provide you with additional details on the financial results of the quarter shortly. My comments will be brief as it relates to what's been going on this past quarter. As it's no secret, we were pretty consumed with the events leading up to the AGM. It was a costly exercise, a huge distraction and certainly, Granite lost the momentum, but that's behind us now and both management and the new board are getting back to business working collaboratively to grow, diversify and move Granite forward in the best interests of all of its unit holders. The board and management are strategically aligned on what type and quality of product we'd like to buy, the investment returns and to ensure we buy the right stuff. Yes, the board has expressed their desire for an accelerated pace of growth. Remember, for the most part of Granite has 6 new board members out of 8, and since the AGM, there has been a fair bit of board orientation time spent, we've a little more work to be done, but these guys are all pretty quick studies. You'll also notice that the board has taken additional steps to further reduce their fees by approximately 20%.Despite the distractions, Granite has been very active in its pursuit of acquisitions in its core markets in North America and in Western Europe, and although we have nothing to report just yet, we have a few irons in the fire and as hinted at earlier, management has not lost sight of its commitment to deploy the balance sheet and achieve our growth and diversification objectives. With respect to the 2017 key priorities relating to our existing portfolio, I have some positive developments to report. We're still in negotiations for a long-term lease for 70% of our Novi and Michigan property, which Magna vacated at the end of the first quarter. This is a complex property and while we remain hopeful, nothing is signed just yet. We executed 2 leases and imminently expect to have a third lease signed for the remaining vacant 165,000 square feet of our development property in Poland. This will bring our development yield approaching 9% for this project. In connection with our Altbach property in Germany, the tenant vacated the premise at the end of July and we're continuing to work with the municipality to get the appropriate zoning for the redevelopment of this site. All of the leases that has expiries in 2017 are now resolved and we are starting to work on the 2018 expiries, recognizing that the majority do not have to give us notice until later this year. As a side note, some of you may have read The Globe this past week and as Siemens is looking to close its wind turbine related operations in Tillsonburg, Ontario. That plant they leased from Granite. By no means is this a significant property, but it's topical, so I thought I'd give a little color on the impact to Granite. The building is approximately 250,000 square feet, the annual rent a little over $600,000 and we are in very preliminary discussions with the tenant and to-date have to -- not received any formal notification that they're actually exiting. But with the 12-month notice period and early termination penalties, I can assure you Granite is well protected. As I said at the outset, my comments will be brief. Operationally, it was a steady quarter with some progress made, dealing with what little vacancy we have and deploying the balance sheet for growth remains management's key priority and we're focused on it. With that, I'll turn it over to Ilias, to go over the financial highlights for the quarter.

Thank you, Mike, and good morning. Generally, results for the quarter and for the 6 months year-to-date came in as expected when adjusted for the items Mike referenced namely the proxy contest expenses incurred in connection with the AGM and the fair value remeasurements on unit-based compensation included in our G&A. Revenue for the second quarter was $55 million compared to $56.4 million in the prior period. Revenue for the 6 months year-to-date was $110.1 million compared to $112.8 million in the prior period. The main contributing factors to the net decrease in revenue for the quarter and for the 6 months year-to-date were, one, a reduction in rents for certain properties in Canada and the U.S. that were previously renewed or extended; two, the vacancy at our Novi, Michigan property on March 31st and the disposal of income producing properties in the U.S. and Germany that occurred in the prior-year period and three, contractuals offset by contractual rent increases from our base portfolio and expansion rent from a recently acquired building expansions in Bowling Green, Kentucky and Piedmont, South Carolina. FX had a favorable impact during the second quarter as a result of the weaker Canadian dollar relative to both the euro and the U.S. dollar, whereas it had an unfavorable impact for the 6 months year-to-date as a result of the stronger Canadian dollar, related to the euro primarily. For the second quarter, our reported FFO was $31.6 million or $0.67 per unit versus $39.9 million or $0.85 per unit in the prior-year period. Adjusting for the $5.9 million in proxy contest expenses and $1 million for the fair value remeasurement for unit-based compensation expense during the quarter, our FFO would have been approximately $0.15 per unit higher or $0.82 per unit. For the 6 months year-to-date our reported FFO was $71.2 million or $1.51 per unit, compared to $81.3 million or $1.73 per unit in the prior-year period. Once again adjusting for the proxy contest expenses and $1.2 million for the fair value remeasurement for unit-based comp for the 6 months year-to-date our FFO would have been approximately $0.15 per unit higher or $1.66 per unit. 2 additional items that had an adverse impact on FFO operationally include higher property operating expenses associated with the vacancy at our property at Novi, Michigan and higher income taxes in our foreign operations, which together contributed to the slight decline in FFO for both the second quarter and 6 month year-to-date period. Turning to the balance sheet. As of June 30, 2017, the IFRS value of our investment property portfolio was $2.76 billion implying an overall cap rate of 8% with such cap rate remaining unchanged from the prior quarter. Our income-producing portfolio of 92 properties comprised approximately 30.2 million square feet, had an occupancy of 98.1% by GLA, had a weighted average lease term of 6.7 years by square footage and was 76% Magna tenanted if measured by revenue, or 70% if measured by GLA. The approximately $105 million net increase in fair value of our properties since the beginning of the year was primarily due to a $70 million of building expansions we acquired for Magna and approximately $25 million in net foreign exchange gains, of which $52 million stem from FX gains from our European assets offset by $27 million of that ex-losses from our U.S. assets. As at the second quarter end, i.e. June 30, 2017, our total debt was $683 million and was comprised only of unsecured debt, had a weighted average term to maturity of 5.5 years, had a weighted average interest cost of 2.53% and had a corresponding total leverage ratio of 25%. And when you net out our $197 million of cash and cash equivalents, our net leverage stood at 18%. Our $250 million credit facility was un-drawn and our investment portfolio remains entirely unencumbered. Annualized distributions for 2017 are expected to be $2.60 per unit, based on our current monthly distribution amount of $0.217 per unit. For the quarter, FFO and AFFO payout ratios adjusting for the proxy contest expenses were 82% and 80% versus 72% and 75% respectively for the prior-year period. For the 6 months year-to-date period, FFO and AFFO payout ratios, once again adjusting for the proxy contest expenses, were 80% and 78% relative to 69% and 71% respectively for the prior-year period. With that, I'll turn the call back to Mike.

Thank you, Ilias. Jennifer, and by all means, let's turn it back to you and see if anybody has any questions.

(Operator Instructions) And our first question comes from the line of Neil Downey with RBC Capital Markets.

Just a couple of quick ones. You did mention higher cash taxes, I believe in your European operations and on a 6-month basis cash taxes are at $4.5 million, I believe. Should we think about that as a good annualized run rate; i.e., $9 million for the year?

No. Neil, the one refinement I would make in that run rate attempt is if you look at the withholding taxes in our MD&A, you'll note that those numbers, historically, we incur withholding taxes in Austria and Germany. We historically declare dividends -- inter-company dividends, early part in the year. We don't expect at this point to incur any more withholding tax as we sit today and therefore with that caveat I would say your $4.5 million that you referenced, if you were to assume no withholding tax in the second half of the year, you'd probably end up a little bit closer to the, again a ballpark, $8-ish million for the year and that would be a reasonable expectation as we see the world today.

And the second follow-up question. Mike, you mentioned the Siemens lease in Tillsonburg. One thing I don't believe I heard was the contractual maturity date on that lease, or I guess conversely the number of years remaining on the lease?

Yes. The contractual term on that, I believe, is 2021, but they do have an option to early terminate, which is why my reference was -- and they have they have to give us 12 months notice and there is an early termination penalty associated with that on top of the notice.

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

Mike, can you remind us -- what the -- you talked about rezoning at Altbach? What the plans are for that site?

The plans ultimately are to demolish the building and redevelop into a logistics warehouse facility. It's a great piece of property. How many acres, Lorne, is that? How many acres has that got on it? Yes, it's a good-sized property and we're in the process of, say, just getting it re-zoned for redevelopment.

And is there excess land there? Would you be able to bump up the GLA?

It's 15 acres right now and it certainly has almost 300,000 square feet.

Currently.

Currently. And the new one will be closer to 2 1/4.

As Mike said in the Stuttgart region and it's -- you can't get land there, it's a tough learning process, for sure, to get logistics in that region, high-demand, but really good site for (inaudible).

And then last question from me. Just, Mike, you mentioned the positive -- I mean, truly there is a positive move with respect to the reconstitution of the board and their indication, a bit like a faster-pace of growth. But just curious with your move to reduce the board fees by 20% -- another 20%. Has there been any preliminary discussions on what can be done on the G&A side, perhaps in terms of a structural review, anything like that?

We'd certainly talked about the -- it's part of the board and management. As I indicated, even earlier on in our first quarter call, a number of initiatives on the G&A front have been taken and are continuing, but nothing at this stage, it's early days, no structural thing from the board. It's an education process for them as well, but nothing to report on that, Mike.

And just maybe then a housekeeping question. If we strip out all the special items, sort of the noise, would the remaining G&A that you incurred in 1H '17 be a good run rate going forward then?

If you strip it out, I think you're probably looking at a run rate -- I'm going to call it $24 million or so in that range, plus or minus.

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

Just looking to your 2018 lease expiries, I believe there's a high concentration in the GTA and as well perhaps some leases in the AEW portfolio acquired back in 2013, expiring in Germany and The Netherlands. I wonder if you can give some color on expected retention and lease preference if you might see an extra?

I think and Lorne can jump in. I think what we are going to do -- our expectation here it is a high level of retention. There's a couple that we know -- a couple of small ones that we know that we've got indications that they're going to be vacated but they're one in the GTA and -- but we're confident that will -- it can be released easily, but we got a high confidence level that the '18s will be renewed. But also, as I mentioned earlier in the call, they don't -- none of them have to actually give us notice until the back half of this year and also in the fourth quarter. So that said, we still expect a very high retention rate.

And what about rents? The GTA market has certainly tightened since 2013. And I recall the rents were reduced 10% or 15% or so on the renewal back in 2013 in most cases. So what's your expectation on rents on the renewals next year?

It's going to be negotiated. We're not looking to see them necessarily decrease, certainly at this juncture. As you pointed out, we did see some drop to fair market rent back there in 2013 and there may be opportunities on the upside.

Our next question comes from the line of Troy Maclean with BMO Capital Markets.

Just curious on the -- you have a 16-acre land parcel in Poland. That could be developed and you had some success in the quarter leasing up some of the previous projects. Just curious if you'd expect to begin construction of that project, of a new Poland project in 2017 or early 2018?

We're looking at it, Troy, absolutely. But the key thing for us first, this was -- when we first bought this property, it was, "Let's dip our toe in the water in Poland and see what we can learn there." It was initially probably a little slower lease up than we had expected. That said, we did well on the cost and we've got -- and we're very happy with the development yield, we achieved on that, but it is absolutely something we're looking at. Now that we've got that leased up, is -- the possibility of looking at the other 2 building sites.

And with the 9% yield that you mentioned, would that be kind of your typical development yield in Poland?

Plus or minus. Yes.

Our next question comes from the line of Howard Leung with Veritas Investment Research.

Mike, you touched briefly on the board's kind of desire for higher growth and mentioned that there were some irons in the fire. Has the new board personally started examining transactions or kind of left it to management?

No, we have an investment committee. This has been constituted as part of the board. So there's good interaction between management and the board on investment opportunities and acquisition opportunities.

With the expansion CapEx, there was about kind of $70 million spent so far in the year or just over that. Any kind of upcoming needs of more expansion CapEx, or is that basically it for the year?

It's possible, Howard, but nothing immediately on the horizon. And if you remember, that related -- that $70 million really related to the October deal we did with Magna.

And just on the topic of Magna. There's a couple of properties that they seem to be vacating. Is that kind of signal of any trend or can you kind of touch on the opportunities and challenges of kind of getting going outside the Magna tenant base?

No, I don't see any trend as it relates to the couple -- it's actually the one that we know of, that they're vacating, but there's no trend or anything else to -- underlying that.

And just I was thinking of last one. Here on ACFO for Ilias. Are there any plans for Granite to eventually adopt that, or is it sticking with the AFFO for now?

There are no plans at this current time. However, I think for the time being we'll stick with the AFFO.

(Operator Instructions) Our next question comes from the line of Pammi Bir with Scotia Capital.

Mike, just going back to Tillsonburg, can you maybe just comment on the releasing prospects at that property if it is terminated early?

The releasing prospects, it's a small property, a tertiary one. We actually might likely to resell that property. It's not core. It wouldn't be core to us at all. So that's the likely outcome for that.

And then just in terms of the 300,000 square foot in nonrenewals in The Netherlands, can you just maybe provide some context around the progress on talks for releasing that space and perhaps some expected downtime there?

That's a tenant who we've been actively negotiating with and they would just -- I'll just call it in their own world in a bit of a box, so they needed to give us that termination notice, but we'll continue to negotiate with them as we work forward here. It's good real estate. We're not concerned about the downtime or the re-leasing of that property at all.

So the expectation is perhaps more likely that they renew, but they just had to provide that notice in the interim?

That's right. Yes.

And just maybe going back to your comments on capital allocation. Where do you see a better likelihood of putting this balance sheet capacity to work? You've commented on (inaudible) assets, portfolios and corporate transactions in the past. Just curious if there's a better chance of any one of those moving head first?

Moving head first, I think we're -- if you look at it we'll be looking more at sort of the portfolio groups of assets that we'll be looking at, still on our key markets. Everything is on the table as we move forward here and, as I said, lost a little bit of momentum in the (inaudible) but we're back on track.

And so when you say back on track, what does that mean in terms of potential allocations or spending for the balance of this year?

It's going to be as it comes, Pammi. I don't want to comment on the value, but I can tell you that we've seen a lot more product in -- that fits our criteria in this past quarter than we've seen in more recent quarters which give us some optimism in terms of what we might be able to accomplish in the back half.

And are these mostly in Europe, or the U.S. or?

U.S.

In the U.S.? Sorry?

Yes.

And then just last one for me. Just on the savings on the board cost. Can you just quantify that for us on an annualized basis?

It's about $200,000.

Our next question comes from the line of Mark Rothschild with Canaccord Genuity.

Mike, can you maybe just give some explanation and understanding if there was some legal requirement or need for reimbursing out-of-pocket fees and expenses by Front Four and Sandpiper. I'm referring to the $2 million mentioned in the press release.

Yes. There's no legal requirement.

I'm just trying to understand what the rationale was for that.

The board as they looked at it, it took into account a number of factors, looked at precedents and all I can tell you is it looked at them all and thought in the end it was of value to the unit holders to do the reimbursement.

(Operator Instructions) And we're showing no further questions at this time.

Thank you, Operator. With that we'll close off the call and in closing, I would like to thank all of our employees and certainly the management team for their continued support and dedication through what was a challenging time. So thank you everyone and bye for now.

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