Artis Real Est In Tr (ARESF) Q3 2022 Earnings Conference Call November 4, 2022 1:00 PM ET
Company Participants
Heather Nikkel – Vice President-Investor Relations and Sustainability
Samir Manji – President and Chief Executive Officer
Jaclyn Koenig – Chief Financial Officer
Kim Riley – Chief Operating Officer
Conference Call Participants
Jonathan Kelcher – TD Securities
Matt Kornack – National Bank Financial
Jimmy Shan – RBC Capital Markets
Steven Sandler – Private Investor
Mario Saric – Scotiabank
Operator
Good afternoon, ladies and gentlemen. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to Artis REIT’s Third Quarter 2022 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] At this time, I would like to turn the conference over to Heather Nikkel. Please go ahead.
Heather Nikkel
Thank you, operator. Good afternoon, and welcome, everyone. Thank you for joining us for Artis REIT’s third quarter 2022 results conference call. With me on today’s call is Artis’ President and CEO, Samir Manji; CFO, Jaclyn Koenig; and COO, Kim Riley. A replay of this call will be available until Friday, November 11, and can be accessed by using the telephone numbers and passcodes that were provided in yesterday’s press release. A recording will also be made available on our website.
I would also like to remind you that today’s discussion may include forward-looking statements that involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied today. We have identified such factors in our public filings with the securities regulators and suggest that you review those filings.
In addition, we may refer to non-GAAP and supplementary financial measures that are not defined under IFRS and are not intended to represent financial performance, financial position or cash flows for the period, nor should these measures be viewed as an alternative to net income, cash flow from operations or other measures of financial performance calculated in accordance with IFRS.
Lastly, as we discuss our performance, please keep in mind that all figures are in Canadian dollars unless otherwise noted.
I will now turn the call over to Samir.
Samir Manji
Thank you, Heather, and good afternoon, everyone. Thank you for joining us for our Q3 results conference call. As we’ve done in previous quarters, I plan to keep my remarks high level and focused on the progress we’ve made towards the execution of our business transformation plan, both during the quarter and since the announcement in March 2021. The three pillars of our strategy are strengthening the balance sheet, driving organic growth and focusing on value investing. The first step in strengthening the balance sheet was to unlock value through the monetization of certain assets in the portfolio.
In total, since the announcement of the REIT’s new strategy in March of 2021, we have sold 47 assets, including 31 industrial, 10 office and six retail properties. During the third quarter, we closed on the sale of one office property and made significant progress with other dispositions. We anticipate a number of sale transactions will be completed during the fourth quarter, which will reduce leverage and enhance Artis’ overall liquidity.
The REIT is also working diligently on managing upcoming debt maturities. Over the next 12 months, Artis’ revolving and non-revolving credit facilities will mature. We are currently in the process of renewing the first $400 million tranche of the revolving facilities and intend to renew the additional $300 million maturing in Q2 2023. In terms of non-revolving credit facilities, we expect to repay all non-revolving credit facilities with proceeds from new mortgage financings and investment property dispositions.
Artis has approximately $550 million of mortgage debt maturing within the next 12 months. We have repaid, renewed or have extensions in place for 40% of these maturities. 26% of the debt is expected to be extinguished upon disposition of the property or maturity of the loan and the remaining 34% of the debt will be renewed. Management is currently in discussions with various lenders with respect to the renewal or refinancing of the upcoming maturities, and we look forward to providing progress updates in future quarters.
At September 30, NAV per unit was $19.26 compared to $19.37 reported at June 30, and an increase from $17.37 reported at December 31, 2021. The increase from year-end is primarily due to net operating income, income from equity accounted investments, the impact of foreign exchange and the impact of units purchased under the normal course issuer bid, partially offset by distributions to unitholders, the fair value loss on financial instruments and the fair value loss on investment properties during the period.
Turning to the next pillar of the strategy, which is driving organic growth. We’re pleased to report that our third quarter operational results were positive, especially when considering the current macroeconomic factors that are impacting the broader market and specifically, the real estate market. The momentum that we had witnessed in Q2 in terms of activity at our properties with respect to both current tenants and prospective tenants continued into the third quarter. Occupancy, including commitments at September 30 was 92%, which is consistent with June 30 and continues to be the highest level reported in well over a year.
During the third quarter, a notable 1.5 million square feet of new leases and renewals were negotiated and signed, which speaks to the increase in activity we are seeing across the portfolio. Of this, new leases accounted for almost 1 million square feet, including new leases completed at properties under development and held in joint venture arrangements, which are not captured in our reported occupancy numbers, and renewals accounted for the remaining 500,000 square feet.
With respect to lease deals that commenced during the quarter, there were 262,000 square feet of new leases and 487,000 square feet of renewals that began in Q3. The renewals were negotiated at a weighted average rent decrease of 3%, marking the seventh consecutive quarter of positive growth in weighted-average renewal rates.
On a year-to-date basis, we have renewed over 1.1 million square feet at a weighted average increase of 4.3%.
The development projects that we currently have underway are 300 Main Phase II at Blaine 35, and Park Lucero East, which we have a 10% ownership in and a development management contract in place. Park Lucero East and Blaine 35, two industrial projects in the greater Phoenix Area and the Twin Cities Area, respectively, have generated strong leasing interest to date. We’re pleased to announce that Park Lucero East is now fully leased, and Blaine 35 Phase II is 50% pre-leased, with strong interest from prospective tenants in the remaining space. We anticipate Phase 2 at Blaine 35 will be fully leased upon completion in Q1 2023.
We continue to make excellent progress on all of these projects and look forward to having them fully leased in the very near term. Earlier this year, we completed construction of the fifth and final phase of Park 8Ninety, a best-in-class industrial development project, totaling 1.8 million square feet located in the Greater Houston Area, Texas.
During the third quarter, Artis acquired the remaining 5% interest in Park 8Ninety Phase II, which is fully leased and comprises 576,000 square feet. With this latest acquisition, Artis now owns 100% of the first four phases of the project and has a 95% ownership interest in Phase V, which represents the final 674,000 square feet of Park 8Ninety.
Finally, the third pillar of our strategy is focusing on value investing by allocating capital to investments that are undervalued with potential to produce above-average risk-adjusted returns over the medium to long term. The current market environment presents both challenges and opportunities for Artis. We continue to monitor interest rate trends and forecasts, and as mentioned earlier, are in active discussions with lenders, working diligently to manage our debt maturity schedule. Conversely, the impact that the rising interest rate environment has had on public markets has presented compelling opportunities that align with our value – that align with our strategy and that have the potential to generate meaningful NAV per unit growth for our owners.
We have strong conviction in our strategy, and we, alongside our Board of Trustees, continue to diligently consider all opportunities available to Artis on behalf of its unitholders.
With that, I’ll turn it back over to the operator to moderate the question-and-answer session.
Question-and-Answer Session
Operator
Thank you, sir. [Operator Instructions] Your first question will come from Jonathan Kelcher of TD Securities. Please go ahead.
Jonathan Kelcher
Hi. Good afternoon.
Samir Manji
Hi, Jonathan.
Jonathan Kelcher
First question, I guess, just on the balance sheet and the mortgages coming due over the next little bit. In your discussions with lenders, do you think – how do you think it will go on the renewals in terms of being able to maybe get more money? Or will you have to maybe pay down some of the principal? Just curious on that.
Samir Manji
I would say, overall, Jonathan, the discussions are very positive. We appreciate and continue to have the support of our various lenders across the debt spectrum, whether it’s credit facilities, whether it’s on the mortgage side. I think in terms of the question, it’s really going to be on a situation-by-situation basis. For the most part, we are seeing no issues with respect to renewals, in some instances, the opportunity to upward finance, and then in a couple of instances, and this would relate to specific office assets where there’s been perhaps short-term decline in occupancy, the need for a partial pay down. But overall, we would say that the indications are all positive.
Jonathan Kelcher
Okay. And then you’re currently a – if I calculated this correctly, you’re just over half your debt right now is variable rate. And I get that you’re paying down $400 million of it over the next few months, but could you – maybe from a longer-term perspective sort of let us know how you think about how much variable rate debt you should carry or will carry?
Samir Manji
Okay. Thanks, Jonathan. Again, the objective is to look at how we manage our debt structure in the context of our strategy. And as we’ve conveyed previously, because of what I will say or describe as the lumpy nature of some of the transactional work we have, whether it’s the value investing side, whether it’s the disposition front, we want to make sure we have flexibility built in. Having said that, we also want to ensure that we move in a direction where, particularly as it relates to what we would describe as core assets, that we intend to retain for the long term, we look at now an expanded debt ladder. And so where we are looking to – at the mortgage level or in other situations with respect to our bonds looking at potential opportunities for building in a more staggered ladder that’s something that we will aim to work towards.
Jonathan Kelcher
And as part of that, what’s your target on variable versus fixed?
Samir Manji
I don’t think we can provide a specific number, but rest assured, I think the direction is to move towards a lower ratio of variable as it relates to our overall debt structure.
Jonathan Kelcher
Okay. Thanks. I will turn it back.
Operator
Your next question comes from Matt Kornack of National Bank Financial. Please go ahead.
Matt Kornack
Hi, guys. With regards to the assets held for sale, I saw that you did dispose of some Minneapolis industrial assets subsequent to quarter end. But can you give us a sense as to – it sounds like you’re fairly confident that you can still transact, just on the ability and the timing to transact on the remaining $500 million or so, I think it is?
Samir Manji
Thanks, Matt. Again, as we’ve conveyed in our announcement, we anticipate Q4 is going to be busy. We’re seeing a number of dispositions get to the finish line. And that confidence level is something I’d just reiterate on the call here. And so we look forward to reporting further on those disposition transactions as they become firm and/or across the finish line.
Matt Kornack
Okay. And with regards to pricing, obviously, bond yields have moved. There wasn’t much move in IFRS fair value. So presumably, the dispositions that you’re currently entertaining are kind of in line with book value. Is that a fair assumption?
Samir Manji
Yes, it is.
Matt Kornack
And then maybe I guess it’s a little bit tangential, but with regards to Cominar and what’s going on there on the disposition front, that’s not in the held for sale, but can you give us a bit of a sense as to how that process is going in terms of realizing the value on that portfolio?
Samir Manji
Thanks for that question. I would say the headline answer is, things continue to progress really well. As most people know, with real estate, you make money when you buy. And there, we have, I would say, bought very well on behalf of our unitholders and in collaboration with our consortium partners. We have a number of dispositions underway, some of which are firm, others are under contract and some are in the process of being negotiated. And across the board, I can say that we continue to see strong interest from buyers in the market. I think as we’re hearing from others who have already reported and have had their calls with the market, with the analysts, and I will echo what others have conveyed. We are no doubt seeing the volume of buyers coming down.
But having said that, the buyers that are continuing to have active engagement, many of them are strategic buyers, many of them are private buyers who are not necessarily impacted by the short-term market environment – or short-term fluctuations based on the market environment. So we’re seeing a healthy active pipeline of activity on the Cominar front, and I think the one caveat within that portfolio, there are two larger assets, Gare Centrale and Place Alexis-Nihon. I don’t think those will transact in the near term because of the nature of the buyers that we believe we would be looking at. If we were to transact ever on those assets would be more of an institutional nature. And so those would likely be pushed out again if we were to transact on either of those two assets. Everything else in terms of the 81 of the 83 assets that we retained on the completion of that privatization. I would, with confidence, say fits squarely in what I’ve described.
Matt Kornack
No, that makes sense. With regards to maybe the destination for some of this capital that you’ll be freeing up, it sounds like some will go to debt repayment. But how do you think of – at this point, clearly, the equity markets have been an ugly place for REITs recently. But how do you think of maybe public market opportunities versus are they starting to be, maybe in the U.S. or in certain select areas of Canada, I’m not sure if there’s much, but distress where you could possibly take advantage of that on buying fixed assets? Or is it purely going to be deleveraging and equity at this point?
Samir Manji
Again, for us, the idea is to have maximum flexibility so that we, in collaboration with our Board’s Investment Committee and our Board of Trustees, are able to ultimately make what we believe are the best capital allocation decisions possible on behalf of our owners. And you’ve covered nicely some of the opportunities and areas that we will consider. We will also look forward to renewing our normal course issuer bid in December.
Again, when we, alongside many peers, are seeing our unit price trading at the level of discount reflected in the market. We continue to have long-term confidence in our NAV. We have long-term confidence in the portfolio of assets that we own and manage, and we have confidence in our long-term strategy. And based on all of those, we should be able to continue with that flexibility to make sound, prudent decisions with respect to capital allocation.
Matt Kornack
Fair enough. And then the last one on the operations side. I know last quarter, you had indicated that AT&T would not be renewing, but you also mentioned that you’ve done a fair bit of leasing. Has any of that space been addressed at this point in terms of the leasing that you’ve done?
Kim Riley
Thanks for the question. So we are actively working on it. We have engaged a broker and are putting together plans for the building. The tenant is still in place. So we won’t be able to really tour the space until they vacate, which is at the end of February 2023, but actively underway, no deal is imminent. But we are positive and optimistic that we’ll be able to fill that space once we get an opportunity to access it.
Matt Kornack
And would you say for that type of property that there’s probably going to be a fixturing period. So if it goes – if they depart in February, would the expectation be – I guess I’ll leave it to you. What would be the downtime in terms of if you signed a tenant now or at the departure, how long would it take to get them in paying cash rent?
Kim Riley
Yes. It’s difficult to determine right now, but I think it is fair to say that there would be a period of downtime realistically probably closer to the end of 2023 would we be looking to lease – a new lease commence.
Matt Kornack
Okay. Perfect. That’s helpful. Thank you.
Operator
[Operator Instructions] Your next question will come from Jimmy Shan of RBC Capital Markets. Please go ahead.
Jimmy Shan
Thanks. Hey guys. So on the December credit facilities maturing, is your expectation that you’ll renew the $400 million under the same terms? I guess we want to – and then if I understand correctly, there’s another $150 million non-revolving facility, and that you expect to pay down fully. Is that right?
Jaclyn Koenig
Hi, Jimmy. Yes, that’s correct. We’re looking to renew the $400 million in the first tranche at the same term, and we have plans to repay the $150 million non-revolver with some mortgage proceeds and the proceeds from disposition properties.
Jimmy Shan
Okay. And then on the assets held for sale, again, to be clear, your expectation is that the remaining $500 million some odd will get done by the end of the year? And then I was just curious if you’re having to consider at all on any terms. And like are you having to provide VTB to get the deal done? Maybe just some color around kind of how the negotiation is progressing?
Samir Manji
I think, Jimmy, we responded to this earlier, but we will reiterate that we are confident that we will see a significant amount of disposition activity in Q4, including transactions that we’ll get over the finish line.
Jimmy Shan
Maybe just lastly then on – just on the equities. Obviously, you guys continue to be pretty active. Can you just talk generally about the key criteria that you’re using to allocate capital to the bucket, just given that I think we’re in an environment where there seems to be a lot to choose from a value perspective. So I’m just trying to get a better understanding on how you decide which – I’m not asking which stock you buying, but just kind of how you’re thinking through that environment?
Samir Manji
There are a number of factors that are taken into consideration by the investment committee and the Board in collaboration with the investment team at Sandpiper. But I can tell you that insofar as Artis’ Investment Committee and Board, first and foremost, obviously, the actual value analysis and assessment is important. Number two, the levers available to potentially see those value gaps addressed in a reasonable time frame would be taken into consideration. And then, number three, the underlying nature of the asset classes within those entities that are being considered that we would line up next to what our existing portfolio at Artis looks like. These are some of the factors that are taken into consideration.
Jimmy Shan
Yes, that’s helpful. And then just on that last third point, then, as an example, multi-residential will not be one that you’d consider just because it’s not an asset that you already have. Is that fair?
Samir Manji
Certainly, at this point in time, that’s not on our radar. But again, with an agnostic view when it comes to finding the best opportunities for our unitholders to allocate capital to. I wouldn’t say there’s any asset class that’s off the table longer term, but that’s not something that is in our consideration currently.
Jimmy Shan
Okay. Thank you.
Samir Manji
Thanks, Jimmy.
Operator
Your next question comes from Steven Sandler, a private investor. Please go ahead.
Steven Sandler
Hi. Artis has been one of the most active companies repurchasing their securities. Do you have any thoughts on the federal government’s 2% tax on stock buybacks? Or is there any way you can stop that because I think it’s more or less an idiotic idea?
Samir Manji
Steven, thank you very much for raising that and for the question. I think that as much as we like to believe there are areas where we can influence things on our end when it comes to the federal government’s tax policies. I think we would be in a similar boat to most Canadians where we’re at the mercy of those that we elect and then rely on to look after that side of the work that the government does on behalf of Canadians.
And so we won’t delve further into any sort of political discussions here, but insofar as the actual proposed measures that were presented yesterday, I don’t think anyone likes to see new taxes proposed, particularly when it comes to areas such as buybacks. And from our vantage point, we’ll obviously have to look at what the impact or implication of that additional cost is in assessing buybacks as one form of capital allocation decision-making with our Board moving forward. I think the proposed measure doesn’t take effect till 2024, but nevertheless, it’s something that we, of course, have to be mindful of as we navigate forward.
Steven Sandler
Was there any suggestion as to whether it pride to only common shares? Or does it include preferred? Or does anybody know yet?
Samir Manji
I’m not familiar at this point with any of the details and specifics around the proposed measures. But I’m sure there may be others that are aware and we will rely on and engage with to understand better and/or we will get more clarity as time passes.
Steven Sandler
Great. Thank you.
Samir Manji
Thank you very much.
Operator
Your next question comes from Mario Saric of Scotiabank. Please go ahead.
Mario Saric
Hi, good afternoon.
Samir Manji
Hi, Mario.
Mario Saric
The investment properties held for sale, the consolidated number is $660 [ph] million. I may have missed it, but have you disclosed what the associated liabilities would that $650 million are?
Jaclyn Koenig
We don’t have it included in our current disclosure. I can total that up to and send it across, Mario.
Mario Saric
Okay. That would be helpful. And then I guess as an associated question, I think, Samir, you mentioned the $550 million debt maturity over the next 12 months, 26% of it will be sold, that’s about $150 million. So is that like – would that be a fair way to think about the amount of debt that’s on that $650 million, or is that too simplistic?
Jaclyn Koenig
No, that doesn’t include the amount of debt included in the $650 million.
Mario Saric
Okay. And then in your negotiations today, how important is in place in debt on the buildings that you’re trying to sell?
Samir Manji
We have not seen this as an issue, whether it’s an unencumbered asset or whether it’s an asset that has debt attached to it. Most of the dispositions that have mortgage debt we can unwind. And in fact, if it’s swapped, we actually get paid for that if we’re selling the asset unencumbered.
Mario Saric
Good. Okay. And then just maybe I don’t know if you can answer this question or not, but just like broadly speaking, there’s been so much volatility in the markets. Where do you see kind of the best risk-adjusted returns today by asset class or by geography, whether it’s public or private?
Samir Manji
I would – it’s a really good question. I would say that the – I know it’s going to sound cliché, but when you’re in an environment like we are in today, where the proverbial baby is being thrown out with the bathwater, I have to believe that there’s generally going to be a gravitation to quality, where if you can buy quality relative to lower quality assets or portfolios in the public markets, in the private markets where the delta that one is looking at is at – potentially at historical lows i.e., for a smaller premium than one would historically have paid, you can upgrade the quality of what you’re buying materially.
Again, irrespective of asset class. I think that’s where people are going to find compelling opportunities and certainly where we would be channeling our attention and focus with our Board of Trustees as we’re evaluating, as I mentioned earlier, capital allocation opportunities available to Artis on behalf of our owners.
Mario Saric
Got it. And how would you characterize that spread between, let’s say, quality and something else, which is tighter – to paraphrase what you’re saying, it’s tighter than historical average. How would you characterize that spread today in Canada versus the U.S.?
Samir Manji
I don’t know if I can answer that question from a geographic perspective. In terms of what you’re describing, a lot of the public securities investment work we do focuses on Canadian listed names. We don’t – I don’t personally have as detailed and understanding or granular and understanding of all of the U.S. names across the various real estate asset classes. I know some of them. I don’t think what we’re describing generally is different. I think that scenario I’ve tried to describe exists on both sides, but I can’t quantify what the Canada versus U.S. delta is.
Mario Saric
Got it. The genesis of the question is just trying to us whether you picked up on something where the valuation in the U.S. or so much more discounted net in Canada that did now make sense to maybe do a bit more work on U.S. security opposed to just focusing on Canada?
Samir Manji
It’s a good question. Thanks for clarifying that. I don’t think we’re there yet.
Mario Saric
Okay, that’s it for me. Thanks, everyone.
Jaclyn Koenig
And Mario, just to answer your question on the mortgages and held for sale, it’s approximately $196 million, just so the group has the number out there.
Mario Saric
Perfect. Thank you.
Samir Manji
Thank you, Mario.
Operator
There are no further questions from the phone lines. So I will turn the conference back to Heather Nikkel. Please go ahead.
Heather Nikkel
Thank you, operator. That wraps up our call for today. Thank you all for joining us, and have a great weekend.
Operator
Ladies and gentlemen, this does conclude your conference call for this afternoon. We would like to thank everyone for their participation and you may now disconnect your lines.
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