Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Thomas Heslip - Chief Executive Officer

Michael Forsayeth - Chief Financial Officer

John De Aragon - Executive Vice President, Real Estate Investment

Stefan Wierzbinski - Executive Vice President, Europe

Lorne Kumer - Executive Vice President, Real Estate Portfolio and Asset Management

Analysts

Sam Damiani - TD Securities

Brad Sturges - CIBC

Mark Marquetis - Digal Bank Capital Markets

Frederic Blondeau - Dundee Capital Markets

Mark Rothschild - Canaccord

Neil Downey - RBC Capital Markets

Granite Real Estate, Inc. (GRP) Q4 2013 Earnings Conference Call March 6, 2014 8:30 AM ET

Operator

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

Before we begin today's call, I would like to remind you that statements made in today's discussion may constitute forward-looking statements and that actual results could differ materially from any conclusion, forecast or projection. These statements 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 the 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 2013 filed on March 5, 2014. Readers are cautioned not to place undue reliance on any of these forward-looking statements. Granite undertakes no intention or obligation to update or revise any of these forward-looking statements, 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 audited combined financial results for the year ended December 31, 2013, for Granite Real Estate Investment Trust and Granite REIT Incorporated and other materials filed with the Canadian Securities Administrators and U.S. Securities and Exchange Commission from time to time for additional relevant information.

And I would now like to turn the call over to Tom Heslip.

Thomas Heslip

Thank you, Jasmine, and good morning, everyone. Joining me on the call today are Mike Forsayeth, our CFO; John De Aragon, our Head of Investment; Stefan Wierzbinski, our EVP of Europe; and Lorne Kumer, our Head of Real Estate Portfolio and Asset Management.

Granite's 2013 fourth quarter, as was the case for 2013 overall, was a very active and strong period for us. Much was accomplished on multiple fronts. Our new property acquisitions in U.S. and Europe, sales of selected non-core properties, lease renewals and new leasing, new debenture financing and continued stabilization of revenues through long-term lease extensions, all combined to make 2013 a historically successful year for Granite. Let me recap the highlights from 2013, a very significant amount of which culminated in the fourth quarter of last year.

Our FFO on a year-over-year basis increased by 30%. In the fourth quarter, we completed the acquisition of eight state-of-the-art logistics distribution properties in Germany and the Netherlands, totaling 2.6 million square feet, at an aggregate purchase price of approximately $189 million. This brought the total of accretive acquisitions in 2013 to approximately $300 million comprised of 12 state-of-the-art logistics distribution income properties, totaling 4.2 million square feet and two development properties.

Through the aforementioned acquisitions, we have added incremental annual lease payments of over $23 million and 21 new tenants to our portfolio. Largely due to these acquisitions, we have achieved a reduction in Magna tenant concentration, as measured by annual lease payments from 97% at the beginning of 2013 down to 85% at the end of 2013.

We funded the acquisitions largely with debt to further optimize the balance sheet leverage with total debt as a percentage of the fair value of our real estate properties increasing from 14%, up to 24%, all part of our objective to reach an overall leverage level up between 40% and 50%. Last year the financing included $200 million, up 4.613%, Series 1 senior unsecured debentures issued in the fourth quarter with a five-year term and which we subsequently swapped out into €142 million denominated at 3.56%.

In 2013, we completed lease renewals, extensions and new leases for 21 properties, totaling 4.8 million square feet and brought the overall portfolio weighted average lease term or WALT to 4.8 years. In 2013, we also completed non-core property sales for gross proceeds of $28 million, the majority of which were completed in the fourth quarter of last year.

Let me touch upon a few of the areas that are generally of particular interest to callers. First, on the leasing front, the leasing momentum created in 2013, in particular in the fourth quarter of 2013, had carried over into the first two months of 2014. Since January 1, 2014, we have renewed or signed new leases for a total of 592,000 square feet in five properties, which had either 2013 lease expirings that carried over into 2014 or were in fact vacant at the beginning of the year.

More significantly, as was announced on January 30, 2014, we have extended the lease for our largest property, the 3.85 million square foot Thondorf property in Graz, Austria, through to January 31, 2024. As a result of the recent leasing activity and the Thondorf lease extension, we have further increased the overall portfolio weighted average lease term or WALT from 4.8 years at the end of 2013 to now 5.5 years.

On a further positive note, given the successful leasing activity in 2013 along with the early 2014 strong leasing activity, our overall vacancy rate is now or however our vacancy level is now approximately 600,000 square feet or 1.8% vacancy level. That's our lowest in several years.

Second, in regard to acquisitions, pipeline and markets, 2013 was a year in which the properties we acquired greatly enhanced the overall quality of our portfolio. We will continue to focus on modern, logistics distribution properties in strong logistics markets in the U.S. and in Europe. We feel this asset class is on the rise and offer strong long-term growth prospects.

Thus far in early 2014, we have tracked not an insignificant amount of product in the market, but for the most part it appears in early 2014 that owners or vendors are culling their portfolios of lower-quality older properties. Generally, we have not liked the quality of assets being offered on the market to date in 2014 in some of the key European and U.S. markets that we target.

That being said, on a more positive note, there are signs that better quality product and increased volume of product is being positioned to come to the market in both the U.S. and in Europe in early spring, and we've just started to see signs of much more attractive property that we want to go after.

So we do remain plus with cash and a strong balance sheet, which creates great [ph] bull riding power. And while we are focused on trying to effectively deploy capital, we believe that maintaining a discipline to acquire state-of-the-art logistics distribution properties will ultimately reap true unitholder value and benefits. We will continue to be vigilant in tracking and sourcing both marketed and off-marketed transactions, while being patient as we deem necessary.

And third, in regard to new development and development of new property, although it represents a much smaller allocation of our capital for new investment, new development of logistics distribution properties continues to be very attractive in terms of potential returns and potential opportunities. Our 625,000 square foot building under development in Louisville, Kentucky, is proceeding on time and slightly under budget. Building completion is scheduled for May of this year with active discussions on the leasing of the property well underway.

Our development site in Berks, Pennsylvania, part of the Central Valley, a key market in the Northeast, which is approved for 750,000 square foot logistics distribution building, is in a market that has seen significant leasing activity and demand in the past few months and we are exploring the potential to commence development on this building perhaps as early as this spring.

To wrap up, in terms of the key components of our strategic plans set out in October 2011 and its overall progress, the fourth quarter of 2013 and the year overall was certainly our most significant, yet. As I had mentioned frequently over the past two years, Granite believes that a strong real estate company, whether structured as a REIT, a corp, private or public, creates value through a thoughtful balance of asset acquisitions and dispositions, while continually emphasizing importance of lease renewals, extensions and value-creating asset management initiatives.

The milestones achieved in the execution of Granite's strategic plan during 2013 have set the benchmark for the advancement of Granite's strategic plan for 2014 and the years ahead. As Granite moves forward this year and focuses on its core strategic objective, the themes will continue to be property diversification, enhance asset quality, lease extensions and balance sheet optimization, while maintaining discipline in a highly competitive international investment market scenario.

We are confident that our strategic plan is on track and with continued diligence we expect to make progress on all fronts. In closing, I'd like to thank all of the Granite employees in North American and in Europe for their tremendous efforts and contribution towards making 2013 such a successful year for Granite and for our unitholders.

And with that, I will now turn it over to Mike Forsayeth, our CFO.

Michael Forsayeth

Thanks, Tom. As outlined by Tom and summarized in the highlight section of our press release, Q4 closed 2013 on several high notes, all of which resulted in a very successful financial performance and are achieving significant progress on the key deliverables encompassed within our strategic plan. Over the next several minutes, I'll try to give you some additional color and insight into the numbers, and why we see Granite poised and ready to take on additional profitable growth.

Turning to the results for the fourth quarter. With higher revenue driven by the acquisition of 12 accretive income producing properties in the year and favorable exchange rates, combined with the tax savings from the REIT conversion, Granite's funds from operations or FFO for the quarter was $0.78 per unit. In comparison to Q4 of 2012 and impairment, excluding the significant REIT and reorganization cost incurred in that quarter, this represents an improvement of approximately 30% over last year. Here are some significant items of note.

Our topline was up $9.4 million to $54.7 million over Q4 of 2012. Despite a $1.1 million revenue reduction caused by vacancies and lower renewal rates, over half of that increase of $9.4 million or $5.1 million was attributable to our acquisition growth; $2.6 million pertaining to contractual rent increases and revenue from completed projects, largely in Europe; and favorable foreign exchange rates added $2.7 million, as the Canadian dollar depreciated 11% against the euro and 6% against the U.S. dollar.

Excluding the large transfer taxes of about $1.2 million, primarily attributed to Germany last year, as part of our REIT reorganization steps and the new category that we've had now of the cost recoverable from tenants. Our property and operating cost for the fourth quarter of 2013 were up slightly larger, largely as a result of the increased leasing activity and a couple of vacancies compared to the year ago.

Our G&A in Q4 of last year, as I mentioned, included $4 million of REIT and reorganization cost, without that our Q4 2013 G&A was higher than a year ago and is due mainly to higher compensation expense, associated with some additional staff related to our growth.

We know that G&A is a focus point, but I can tell you that we spend it responsibly and to address the needs and requirements of operating a real estate business in 10 different countries. As the quarterly G&A expense of $8 million is not indicative of our run rate, and our probably closer to 6 to 6.25 on a quarterly basis.

I'll also add certainly the regulatory compliance, and particularly tax and audit, is placing increased demands and rigor on all of our jurisdictions and frankly has a price tag attached to it. I will say also, as with all that said, the tax savings that we're delivering with respect from the REIT convergence that is more than delivery, based on what we promised.

Turning to net interest expense for the quarter of $6.7 million, relative to a year ago it was $2.6 million higher and is directly attributable to the added interest and financing cost associated with the borrowing, in particular the new debenture for the new properties acquired in Europe in the fourth quarter. Also despite a much higher income level, earnings and taxes were significantly lower than last year, a direct result of becoming a REIT.

Now, under IFRS, on a GAAP reported basis, we had a quarterly net loss of $2.4 million of $0.06 per unit. While in 2012, we had net income of $14.5 million of $0.31 per share. The volatility in certain line items under IFRS make historical comparisons difficult and complex.

Similar to Q3 there are three items that impact the fourth quarter of our GAAP reported earnings both for 2013 and 2012, but are neutralized for FFO. They are fair value changes, deferred taxes and acquisition cost. As it relates to fair value changes, in Q4 2013 there were fair value losses of $29.8 million on our investment properties, largely attributable to our changes in our Canadian and Austrian portfolios.

Q4 2012 also saw fair value losses of $41.6 million, largely driven by increases in the discount in terminal rates in Austria and Germany as well as certain changes in the leasing assumptions. As you've noticed over the year, the fair value changes quarter-to-quarter can be volatile, given circumstances in the market.

Also turning to deferred taxes, the amounts reported in each of the periods are not comparable, while both periods have a component that reflect net changes in the fair values of the investment properties, the jurisdictional mix of those fair value changes has a significant impact on whether deferred taxes apply and to what extent.

In Q4 2013, for example, our half of fair value loss relates to the Canadian portfolio, which attracts no tax. While Q4 2012 reflects the deferred tax recovery pertaining to the Canadian portfolio that was associated with one of our REIT reorganization steps, whilst Granite's Canadian entities were still taxable corporations. To say the least, it's complex when you get into the world of tax.

Also in the quarter we had approximately $7.7 million in acquisition transaction cost that were expensed. Of that majority, $6.7 million pertain to land transfer taxes related to the acquisition of the European portfolio.

Turning to the year as a whole, our comparable FFO for 2013, which excludes the $4.2 million of withholding tax payment we made in Q2 related to the REIT conversion, was $142.5 million or $3.04 per unit. This is up $32.6 million or $0.70 per unit from the $109 million or $2.34 per share reported last year.

However, as I mentioned in relation to the Q4 results, 2012 did incur significant cost associated with the REIT conversion and expenses associated with obtaining appraisals and environmental reviews. The adverse impact of these costs in the 2012 FFO result is in the 2010 range. Overall, the underlying themes and explanations for the year-over-year 30% improvement in our FFO are consistent with the analysis I just outlined for our Q4 performance and discussed in prior quarters.

We enjoyed higher revenue due to the 12 completed acquisitions, we enjoyed favorable exchange rates, we had lower G&A as a result of the lower REITs and reorganization cost, we had increased interest expense associated with funding of that acquisitions and we have lower current income taxes as a result of the RIET conversion.

Some additional financial metrics and matters that I'd like to highlight include our annual lease payments at the end of the fourth quarter are up $22 million from the end of Q3, driven by the eight European acquisitions made in the quarter and the appreciation of the euro and the U.S. dollar relative to the Canadian dollar.

As of the end of 2013 and relative to the end of 2012, our ALP has increased almost 20% or $36.7 million. And although, our lease payments were adversely affected by lease renewals at lower rental rates and vacancies and the disposal of the time referred to, totaling a net of almost $12 million, there were almost $50 million of positive factors that increased our annualized lease payments at the end of the year.

The major components consist of, $23.4 million in acquisitions; favorable foreign exchange of $12.8 million, as the euro and U.S. dollar appreciated 12% and 7% respectively; contractual rent adjustments of $7.2 million; and completed projects and releasing of previously vacant properties contributed $5.2 million.

The value of our investment portfolio has increased from $1.94 billion at the beginning of the year to just over $2.35 billion at the end of 2013, including major components of the $408 million increase, with the acquisitions of $286 million; foreign currency translation of just over $136 million, as a result of the euro and U.S. dollar appreciating; capital expenditures of $28 million; the net fair value losses for the year of approximately $25 million and of course the disposals that we had for about $17 million.

Our total debt at the end of the quarter was approximately $568 million, of which approximately 37% have bee swapped in the euros and almost 17% is U.S. dollar denominated. With cash on hand of over $95 million that brings our net debt to $473 million, giving us a net asset value of about $1.9 billion or about $40 per unit. Our balance sheet remains under-levered at 24% and is poised for the acquisition growth.

During December, we announced an increase of over 4.5% in the level of monthly distribution and we declared $25 million of distributions to unitholders in the fourth quarter and $98.9 million for the year. In terms of payout ratio on a year-to-date basis, we declared distributions representing about 68% of our comparable FFO.

As Tom outlined in his comments, this was a remarkable year for us and accomplishments for Granite. And as Tom indicated, our staff in North America and Europe delivered. This is all we asked for them and more and we thank them for their outstanding efforts and dedication.

And with that, I'll turn it back to Tom.

Thomas Heslip

Well, thanks, Mike. I think with that, Jasmine, we'll turn it over to you and try to deal with questions.

Question-and-Answer Session

Operator

(Operator Instructions) And the first question comes from the line of Sam Damiani from TD Securities.

Sam Damiani - TD Securities

Just getting into the leasing, it was a good finish to the year. Nice to see the vacancy drop at yearend and according to the comments even decline further this year. There were some leases still being negotiated at yearend, based on your comments, it sounds like all those leases have been basically finalized?

Thomas Heslip

Yes. We had three in particular that carried over, and they got signed in recent days. So those were renewals with the Magna Group for about 250,000 square feet. And then we had one vacant and one Magna did not save. We were able to release those. So two that absorbed 300,000 square feet and three that were renewed. So overall we brought the vacancy amount down from about 900,000 square feet at the end of 2013 to 600,000 square feet today.

Sam Damiani - TD Securities

And I guess, given the lease expiring profile, there really shouldn't be any material change in your vacancy rate for the foreseeable future?

Thomas Heslip

Not really. Most of the focus right now is actually dealing with some 2014 and 2015, so a positive momentum there. We have a couple of tenants that are on month-to-month we're dealing with, good space if they don't stay. So we have a little bit of exposure in 2014, but generally where we've landed now looks pretty stable.

Sam Damiani - TD Securities

And the expiring schedule you're showing today includes all the renewals, well, as you say specifically the renewals in Austria and Germany that were completed subsequent to yearend?

Michael Forsayeth

In the MD&A that scheduled the expirees, it does not include, it's only as at December 31, 2013. It will be updated at the end of Q1. For example, Thondorf and the additional one that Tom has mentioned.

Sam Damiani - TD Securities

In the MD&A you did disclose the ALP for the AEW acquisition was $16.6 million. Does that essentially NOI on those properties?

Michael Forsayeth

Overall, the ALP for the acquisitions, yes, that is an NOI number pretty much. Yes.

Sam Damiani - TD Securities

And that included the extra sort of eighth property acquired in Europe in addition to the AEW portfolio, is that correct?

Thomas Heslip

Yes. That smaller Empfingen property. And to accept the benefit of the exchange rate post-acquisitions, so we've got a bit of lift from that, ALP-wise for that.

Sam Damiani - TD Securities

And just finally on the Mexico sales, it sounds like thing are proceeding nicely here you've got I guess a binding agreement with Magna in subject to some regular conditions, including I guess approvals in Mexico. What's the timing on that and I guess the sort of risk of that not closing at this stage? And what would be the plan to use proceeds, when it does close?

Michael Forsayeth

I'd say, certainly, the timing of the closing is -- I'll summarize in one word and it's just I'll just say with all due respect to Mexico, Mexico things just take longer there. And so we're a bit at the mercy of, in certain instances, the Mexican regulatory authorities and different jurisdictions, so difficult to predict them on that front. As it relates to the use of the proceeds, initially right on our balance sheet, we've got about US$50 million on our credit line. We'll immediately acquire the proceeds to that. And then ultimately the objective will be to redeploy that cash into acquisitions.

Thomas Heslip

I think, Sam, generally just a bit of insights, because I know that investors wonder, how things are structured. As Mike said, we're looking to put a closing date on it, though we're certainly aiming for summer, for closing. None of the condition that our vendor or purchaser arbitrary pullouts, there are more regulatory requirements, municipal approvals, and as such is a bit the timing of Mexican authorities.

From a point of view of business matters, arbitrary conditions, those have all been renewed, and that's why the announcement of signing of agreement takes on a much stronger tone. Nothing is a 100%, but it now appears to be a very solid deal of subject to the Mexican authorities.

I should highlight that we won't continue to subject to a closing in the next several months. There is a cut off of rent, relatively speaking. So if you're trying to project the continuation of rent, if it closes in the summer, we would cut off rents at the end of February, which picks up a little bit more than we anticipated. But projecting through continued rent from Mexico, there would be some adjustment on closing for few months post-February, just in case that you're projecting.

I think, important to note is redeployment of capital is obviously our focus, as is investing smart, utilizing our borrowing power, we're going to end up with proceeds from Mexico that pay down in line, but also increase cash on hand. We would continue to focus on trying to buy smart.

I think the biggest challenge we face is to some extent marketplace that puts a reward to REITs that accumulate assets without regard to how wise they've acquired on a mid and long-term basis. Few are measured by how those assets ultimately will perform in long-term, they seem to be short-term oriented. We need to buy and acquire smart. We're looking forward to more products that can become available later in this year, but we'll continue to try to be a REIT that distinguishes itself by acquiring with more and more investments at.

If we look at the assets we acquired last year, they are all up substantially in value, post our closing from Westchester, Ohio, that's up probably in a range of 15% to the AEW portfolio that is up enormously. We know we can't continue that trend, but we do want to send a message to investors that we don't just accumulate, we try to acquire with some edge to it and will continue to do that.

And the reason for elongated answer is we're a company, a REIT, that's going to go through a process of selling some major assets that don't really meet our criteria in the long-term, like Mexico. And we're going to end up with cash, and you're going to have a slip backwards in FFO and redeployment smart. And gradually moving both directions, ultimately one direction forward, we end up with a company that has a better balance between Magna and other tenants and much higher quality. And hopefully one that has a logistics distribution portfolio, that's amongst the best in the world.

And so Mexico is a watershed moment whereby significant amount of cash comes in, revenues fall that are not great long-term necessarily, and we have to redeploy cautiously. And I explain it this way because I think it is a characteristic of our company that's a little different than others where we will sell in large chunks at times and be thoughtful in redeployment at other times.

Sam Damiani - TD Securities

Just a couple more, I don't mean to have the buck here. What were the rationale for the rent cut-off at the end of February?

Thomas Heslip

Business negotiation, there were lots of gives and takes, holding our price up at the US$105 million, picking up more than we thought, giving some other cut-off points we renegotiated. So all-in-all, we feel pretty good about coming out ahead. That's part of doing the business.

Sam Damiani - TD Securities

And just to be clear, I mean the rent not paid from March till closing will be an adjustment on closing, is that right?

Thomas Heslip

No. It will be paid, and then adjusted on those.

Michael Forsayeth

Rents will be continued to be collected.

Operator

And the next question comes from the line of Brad Sturges with CIBC.

Brad Sturges - CIBC

Just a follow-up on your commentary there on dispositions. It looks like you still have some other assets, some vacant assets and maybe couple of other income producing assets. Are you able to score sort of the average cap rate on sale for anything income producing?

Thomas Heslip

Well, a little hard to say on cap because we sold to a user in one case, so it would be certainly a sub 8.5 cap income on a price per pound, well above appraisal. These were sales in the 10 million to 15 million range. So we really didn't sell any, what you would call income producing properties, whereby there was a tenant in place sold to a third-party investor, our sales were baked into a user or negotiated the user to come into the building and then gave them the right to buy, so it's a little hard to put a cap rate on it.

Brad Sturges - CIBC

And looking out further, if you're looking at other opportunities, would it be similar in nature, looking at some of your few remaining vacant assets or are you looking at tackling a little bit more larger assets?

Thomas Heslip

Well, we're looking at tackling a little bit more in volume, not necessarily larger properties singularly. What we're doing this year is looking at some of the mid-to-smaller sized properties that in fact we could call together in a portfolio and sell in this case to potential investors.

So for the first time, we are actually going to package portfolios of two to five properties that collectively might appeal to the more local investors, not necessarily the users as the buyer, and that would be the case where we could give you a better sense of cap rate on that kind of product. It's going to be a little bit more aged product that we think are better in local hands. And that's something we're really focused on right now on the asset management side, our disposition to some of the smaller ones, some in U.S. and a few in Germany.

Brad Sturges - CIBC

And in terms of acquisitions, you gave us pretty good commentary earlier. Just in terms of opportunities now, it sounds like maybe at the moment you're not seeing maybe the type of quality or the volume that you would like to be seeing that would get you to pull the trigger. Just give us general thoughts on what you're seeing in the market today?

Thomas Heslip

Well, as I mentioned, what we're seeing is a little bit of killing of portfolios by vendors that are typically older properties and not in a good quality we would like to see. There's been a lot of nuances in the market in the first two months, really two months into 2014. That have caused some portfolios to be pulled back. We've looked at some things seriously where we just felt that over the market rents resulted in over price per pound, so just a little bit of nuance.

But generally, not as much as volume in the first two months as we saw in the last eight months of last year. To put it in context, by end of February of last year, we had essentially acquired really one or two properties in New Jersey and in Savannah, Georgia. In fact, by the end of the year we had acquired 300 million, and what we saw happened and unfold later in the spring and summer and fall, don't really change the acquisition dynamic last year.

So bottomline is the beginning of this year, doesn't look a lot different than the beginning of last year. And we haven't seen the turn we like so far, but all we really focus on is making sure we are not missing opportunities out there, both in Europe and in selective parts of the U.S. and we'll continue to do so.

And where we can pull the trigger, we will. So I would tell you that we put no cap on how much we'll buy this year. We want to buy a lot and we'll continue with the cash and foreign part to do so. But we've got to see things unfold with better quality, good locations and we will act.

Brad Sturges - CIBC

In terms of opportunity, would you be considering looking to acquire potentially development land for future development if the opportunity arose?

Thomas Heslip

Yes, we will. Selectively, like we acquired last year with Berks and Louisville and I could have one completed in spring and one underway, we would like to repeat that on going. The value creation even with very conservative lease-up assumptions and carry even post-completion, they still produce a much, much more attractive yields than anything we see in the market. And of course, upon completion at least we have a brand new building in good location. So we will continue to look for good development site. I would say that that focus will be U.S. oriented and a little bit in parts of Germany as well.

Operator

And the next question comes from the line of Mark Marquetis from Digal Bank Capital Markets.

Mark Marquetis - Digal Bank Capital Markets

Just quickly, just to make sure I heard it right. So just on the Mexican portfolio sales, rent cut-off end of February and that the purchase price or sale price, they remains at US$105 million when it gets done?

Michael Forsayeth

Correct.

Mark Marquetis - Digal Bank Capital Markets

And then, Mike, what would be, in terms of the after-tax proceeds you're able to pull-out, would it be close to the US$105 million or what should we be thinking about that?

Michael Forsayeth

Mike, overall, a little north of US$90 million.

Mark Marquetis - Digal Bank Capital Markets

So just moving over then to, Tom, your comments with respect to dispositions. Could you give us a sense of, you gave some good color with respect to packaging small portfolios, and from the sounds of your comments, it looks like you're focusing on doing it in the U.S. and Germany. If you had to sort of ballpark a number of potential sale volume for 2014, where do you think that might come out?

Thomas Heslip

Well, borrowing any dialogue with Magna on any of the large ones, which we really aren't having, so putting that on a side, let me just clarify that. We're always open to talking with Magna about certain large assets and that may continue post Mexico. But putting that aside, we're going to target in the 50 million or more this year.

Again, that's packaging, I think in terms of product, we'll see how the markets reacts. Can promise will get the feedback, but I think probably in the 50 million range or more would be packaged this year. That could take, when I say smaller properties, 50 million or more could be upwards of 15 to even 20 properties. So we are talking about some of the smaller, not what we like in terms of longer term assets.

Mark Marquetis - Digal Bank Capital Markets

And just switching over to the leasing activity. I know you guys have done a great job with securing some, obviously, with getting through the 2013 bulge and recently securing some of your big 2017 roles and extending them, particularly with Graz. For 2014, based on your dialogue today, should we expect to see more progress on that front this year with respect to other large properties or do you think that well be for a while and the focus will be more on the acquisition side?

Thomas Heslip

I think it's fair for our investors to expect us to put a lot of attention to the big ones. Of course, there is two sides to it. There's us who want to do it. There is Magna who we have to make sure, they want to do it with us. But there is nothing wrong with having expectations of us to do more, large asset extensions. We are focused on it. We're focused in Austria and in Ontario, in fact. So can't guarantee anything, can't tell you we're having dialogue on some of the big ones. And certainly both sides are trying to come to some kind of arrangement for extension.

We always like when Magna wants to discuss extension on some of the larger ones, because it's a sign that the business is flowing in a way that they are contemplating in extension. Convincing them to do it early is something we have to be mindful of, but so far, after Lannach and we got that pushed it out in Austria and then we then we got the Thondorf pushed out. We're going to keep trying to get a couple of big Austria ones and some of the big here at Ontario ones.

Operator

And the following question comes from the line of Frederic Blondeau from Dundee Capital Markets.

Frederic Blondeau - Dundee Capital Markets

Just getting back to the new lease in Graz. I was just wondering the tenant in the low rents of 25 million was relatively large. Was that in line with your expectations? And what do you expect in this regard going forward?

Thomas Heslip

I think that's relatively easy question to answer. I think the Thondorf stands out apart from anything else we have in our portfolio. Lannach and Eurostar are big assets. We're getting pretty much of a big allowance on Lannach to extend that out and some upgrades there. Bottomline, the Thondorf allowance is in fact, as you know is significant, but not proportionate to what we would anticipate doing anywhere else.

And we really said to Magna, there is a number of ways to look at allowances and allocate a large amount to one large asset, could spread it out, in this case, the Thondorf was when they took a very large allowance. It's my view that that's not a pattern we'll repeat. We will incentivize them. We will provide allowances. We will do upgrades to properties and we will certainly do all the things that we're required to do under lease terms, but when you look at €25 million relative to the annual rent, it is not the norm, and it is little larger than we would anticipate, going in the future.

Frederic Blondeau - Dundee Capital Markets

And maybe more higher level question. We know that Magna is looking to expand more in China and India, generally speaking, so how would you qualify today their incentive to maintain sizeable operations in Europe?

Thomas Heslip

Well, again, as much as we deal with Magna everyday on our properties and leases, we're not experts on their business. But their business is truly global. And more so than just for any company I could think of, their expansions in China and India are best for them to comment on. It has a number of nuances and reasons, but it doesn't seem to be as a detriment investment they're making in the Southern United States now and in growth in Michigan, in Ontario, and of course in Europe.

They have said themselves that the heavy-lifting and restructuring in Europe is over. They are very happy with the increase in sales, volume, for example, like Graz is at some 20%, ultimately, sale is the same. So they see rebound in Europe and are giving a great attention for them to extend Thondorf, 3.8 million square feet, which by the way, they made a very significant investment in the premises as well, as part of the overall extension.

They've landed major business with BMW. Demands of some of the European auto manufacturers has set the stage, the quality, the workmanship, engineering that comes from plants like Graz, Lannach and other parts of Europe.

So we've kind of commend Magna for how long their business is doing, which is extraordinary, but also that it seems to be mapping out across the world, the parts of the world where they're landlord and parts where not. So overall, not to our detriment, but to the benefit of other countries, Mexico, they have a commitment too, and they want to acquire those assets that works well for us, because from an investor point of view, it's not ideal for us to be there.

So each country has had a different dynamic. But today, even compared to 18 months ago, the strength of Europe, their commitment to their best plants there, many of which where the landlord, and of course parts of the U.S. that have rebounded so well. Overall, it's good. And China, India is another matter, that doesn't really bottomline affect us in our view.

Operator

And the next question comes from the line of Mark Rothschild from Canaccord.

Mark Rothschild - Canaccord

Tom, does the lease that you signed in Graz, have any impact on the remainder of the property, the building there? And how confident do you feel about the Magna's staying there as that lease comes up in a couple of years?

Thomas Heslip

Very fair and good question. For everybody to be reminded, Graz consists of two significant facilities on one large campus. They have previously worked independent of each other as the Eurostar facility was in fact bought by Magna when they acquired another manufacturer. But overall, the Graz facility consists of Thondorf, 3.8 million square feet, which as we noted had been extended to January, 2024 and produces about in the range of €50 million of rent. The second facility, the Eurostar that Mark referenced, is the more modern and smaller of the two, but still not at significant at close to 1 million square feet and about two-thirds of the annual revenue of the Thondorf facility.

We've had very, very focused discussions with Magna on that facility. And what's happening is really in their hands to study some of the uses they're intending for, both contracts they are looking at and maybe bidding that we don't know and consolidation that they may consider of other facilities that are not into it.

So right now we are very optimistic that the Eurostar facility will be one they want for the long-term. But that has not been in terms of an extension now and it will play out potentially this year and it may take a few years. But certainly we feel optimistic about their desire to stay in it, but we can't be a 100% certain today. We'll keep you posted on it, for sure.

But one of the things that as I mentioned in Frederick's question about allowance, it's not one that we would compare to a extend that that sizeable type of allowance. We want to keep them. The facility works in a number of ways. So we're going to leave it with them, with some ideas we've left with them to work with, and see what happens in the coming months and/or a couple of years.

Mark Rothschild - Canaccord

And maybe just this one as a follow-up on at Mike, but just understanding that the restatement from, it looks like you restated some numbers for 2012. Can you explain that in a little more detail on how we should look at the year-over-year comparison?

Michael Forsayeth

We say that 2012 was really just a conversion from U.S. GAAP to IFRS. And overly simplistic, it's sort of debit investment properties, credit equity and there is deferred taxes associated with the fair value increments. That's really the best way to look at it from the balance sheet perspective. There are some differences under FFO, as it relates to the calculations used by NAREIT versus REALPAC. The major one is just the exclusion of deferred taxes.

Operator

And the next question comes from as a follow-up from Sam Damiani from TD Securities.

Sam Damiani - TD Securities

Just wanted to talk about Canada in a couple of ways. You continue to kind of shy away from Canada from an acquisition perspective. I was just wondering if that is purposefully still what you want to express today or is there any sort of increased interest in the Canadian marketplace for acquisitions? And I have a follow-up as well.

Thomas Heslip

It's a good question, Sam, and I'll start up by saying that Canada in its own would be our country of first choice to invest in, all things being equal, proximity, tax efficiency and so on. The first issue has been, for some time, the priciness of the market. Probably the lowest cap rates, we see anywhere in the world. And certainly, right now, the lowest volume and particularly in terms of quality of assets.

The second thing is we really believe not only in, but certainly primarily in the logistics distribution type facilities. And they have a certain market dynamic that is not surprisingly transportation based, and that transportation base as it relates to proximity of the population within whether it's defined as driving shifts. Strong logistic distribution facilities, typically within six to 12 hours, about 250 million people, and that creates the most dynamic logistics warehouse market, really stability, attractiveness and appreciation dynamic through the asset.

So the New Jersey's and the Pennsylvania's, the parts of the southeast, where it would not be seen as AAA office, say for example, Louisville is AAA logistics, in their case because of the UPS Air Hub. Cincinnati would not be AAA office. Then for Westchester property within an eight-hour drive of a 150 million people.

In Germany, well Germany has a population of 80 million people. Our logistics facilities there are within three to four hours of seven countries, and as a result are within four to eight hours of a 150 million people, a metric we like to use. And we believe in that market, whereby if you have a facility of that locational attribute and it's not replaceable, you're going to be happy with the tenant you have you're going to be able to find many new ones.

And an issue with Canada, when we look at that type of product is that the metro GTA, and they have some dynamic to that extend to serve the GTA. But generally Canada wouldn't be a true logistics distribution market, the way we think of the U.S., and the way we think of Germany and the Netherlands.

That being said, if quality industrial warehouse, single tenant, two to four tenants, came on the market and there were no pension funds bidding it, at 5.75%, and there were no REITs able to get a spread of 2% financing and 5% cap rates, we would be the next in line to buy it. Nothing we'd rather own, a 250,000 square foot new warehouse facility in a good market in Canada at a cap rate of about 6.5% or above, and that does not appear to be a lot of it on the market. So we'd love to be here, but we're not having much luck finding it.

The volume of the U.S., the size of the U.S., the different niche markets and meaning, the central triangle of Indiana, Kentucky, Ohio, creates a great market. The northeast, the Pennsylvania, New Jersey has a great market, certain parts of the west and even the southwest. So you just have multiple markets, better opportunity to foreign things even where there is market competition. So it's by the design that we focus on U.S. and Germany and yet given our choice we wish we could buy in Canada.

Sam Damiani - TD Securities

And just on the fair market value change, $30 million in the quarter, Mike you said about half was in respect to the Canadian properties. Is there any color you can add to there in terms of what assumptions where changed or what drove that as their negotiations underway that kind of drove that sort of realization of the different market rents?

Michael Forsayeth

I think it's just looking at certain of the properties and then looking at the sort of the lease term, and then determining as we look at the market rents and they were to become vacancies and time to re-lease it, and that sort of thing was part of the drivers associated with that.

Sam Damiani - TD Securities

Was there increased amount of downtime put into the model to drive the lower value?

Michael Forsayeth

There were one or two where there was an increased downtime and that was probably it.

Operator

(Operator Instructions)

Thomas Heslip

We have, operator, one item to just reiterate, Mike and I together. There are sort of four or five critical points to building a good real estate company, buying wealth, selling appropriately, leasing asset management and financial administration, and that brings in the G&A topic, which has come up on occasions, something that I have been specific about. We have set a target of 10% of net income as opposed to net income plus recoverables, and that target is one that we're not moving away from. And in fact overtime we want it to be less than 10%.

Our dynamic is such that for example, if we took Mexico in place, not sold the acquisitions we've done and our overall revenues, we do well into the revenues of $224 million to $225 million and we have a run rate G&A of about $24 million to $25 million. So we would have hit our 10% target.

We then sell Mexico and for a short period of time some FFO decrease, G&A looks higher as a percentage. And we really have to say, keep an eye on spending on the right things, spending smart, begin prudent, but allow the growth, both from redeployment after sale to borrowing and cash we have for new sales to eventually hit that target, being mindful that it matters.

And we had some uptick higher in 2013 in part final reclosure cost, some compensation to restructure or to structure our staffing in Europe and parts of Canada the way we want it. I don't want any investors to believe that we take it lightly, that we don't try to manage it as efficiently as possible. And that we will get there and not spend a recklessly along the way, it will take some time.

Over to you, operator.

Operator

The next question comes from the line of Neil Downey from RBC Capital Markets.

Neil Downey - RBC Capital Markets

Tom, since you brought up the topic, I'll just ask one question in particular. When you make your references to G&A, is that on a basis that includes stock-based compensation expense?

Thomas Heslip

Yes, which this year --

Neil Downey - RBC Capital Markets

Was $2 million bucks I believe?

Thomas Heslip

Yes. That one hit us for the first time.

Michael Forsayeth

Yes. That's right, Neil. The other part is people need to understand, that because under IFRS, that gets mark-to-market. So that goes up and down like the yo-yo and just literally from the end of Q3 to Q4. The uptick in the stock from September 30 to December 31, there is a little uptick in there that ran through.

Neil Downey - RBC Capital Markets

And that's in part why I ask the question. And I believe some entities perhaps remove the mark-to-market component or disaggregate it in their disclosures, is it an amortized component or mark-to-market component, is there not?

Michael Forsayeth

Yes. That's correct.

Operator

And there appears to be no further questions over the phone lines at this time. Mr. Heslip, Mr. Forsayeth, I will turn the call back over to you for any closing remarks or to continue with your presentation.

Thomas Heslip

Only that the analysts questions today were very fair and logical. I appreciate it. It allows us to get our message out. And I appreciate everybody being on the call today. So thank you very much.

Operator

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.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Granite Real Estate's CEO Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts