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Hello, everyone. I see it 12:00 p.m. Central Time. I think we'll go ahead and get started. Good morning, and good afternoon, everyone, depending on where you're joining us from. Welcome to Artis' 2021 First Quarter Results Webcast. My name is Heather Nikkel, I am Vice President of Investor Relations at Artis. With me today is Artis' CEO, Samir Manji; CFO, Jim Green; COO, Kim Riley; Executive Vice President, Frank Sherlock; Executive Vice President, U.S. region, Phil Martens; and Senior Vice President, Accounting, Jackie Koenig. Alyssa Barry, Head of Strategy, Operations and Communications, is also joining us, and will be moderating our Q&A session.Shortly, I'll be turning the floor over to Samir for opening remarks, following which there will be a question-and-answer session. [Operator Instructions]Our first quarter 2021 results were disseminated yesterday and are available on SEDAR and on Artis' website. Before we get started, please be reminded that today's discussion may include forward-looking statements. Such statements 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 securities regulators and suggest that you refer to those filings. As we discuss our performance, please keep in mind that all figures are in Canadian dollars unless otherwise noted. I would also like to note that today's webcast is being recorded, and a replay will be available on our website later this afternoon until Thursday, August 5, 2021.With that, I will turn the discussion over to Samir.
Thank you, Heather. Good morning to those in the West, and good afternoon to everyone in the East. On behalf of the Artis team, I want to welcome you all, and also thank you for joining us for our first quarter 2021 results webcast. This is our inaugural virtual quarterly results webcast. We're really excited to introduce this new format and hope that you all find it beneficial and more efficient, not to mention an interesting way to engage with and get to know members of our management team.With respect to the agenda for today's call and being mindful of your time, rather than providing a recap of the quarter and an overview of our quarterly results, I'll be keeping my comments relatively brief, and we'll then open up to Q&A. We recognize that most of you have already reviewed the results, so repeating them would not be the best use of your time.As we all know, it's been a full year now that the global community has been impacted by the pandemic, both in our personal and professional lives. We look forward to the continued rollout of the vaccines and are optimistic that brighter days are ahead. In the meantime, our business at Artis has continued to show resiliency.As detailed in our MD&A and financial statements, Artis is off to a great start in 2021. We reported FFO per unit of $0.35 and AFFO per unit of $0.25, both showing increases quarter-over-quarter. And we continue to maintain a conservative payout ratio with respect to our distribution. Further, our net asset value per unit, which is a key metric for the REIT, increased $0.31 to $15.34.Lastly, I'd like to highlight the sale of Tower Business Center, which occurred during the quarter. Artis' 80% interest in this property was sold for $53.2 million, representing approximately a 4% cap rate and a notable gain, both from an IFRS perspective, where the fair value was $47.8 million and even more impressively against our cost of $30.1 million.With respect to our business transformation plan, we continue to make progress in numerous areas and look forward to providing further updates in future quarters. The Board and I are pleased with what has been accomplished in a relatively short period of time so far. We're confident in the team that we have in place at Artis and have spent valuable time reviewing and realigning roles and responsibilities to support the new vision and to complement and build upon the skills of our talented workforce.As part of our commitment to making ESG a focal point and to establishing an ESG minded culture, we look forward to publishing our sustainability report in the coming weeks.Before I pass it over to Alyssa and open up for questions, I'd also like to take the opportunity to acknowledge Jim Green and Frank Sherlock for their many years of dedicated service to Artis. As many of you know, Jim will be retiring following the AGM later this month. And Frank will be retiring at the end of June. So this will be their last quarterly results conference call. They have both contributed significantly to Artis' growth and accomplishments. And on behalf of the Board and the team at Artis, I would like to thank Jim and Frank and wish them both a very happy retirement.That concludes my formal remarks. And with that, I will turn it over to Alyssa to moderate our Q&A session.
[Operator Instructions] The first question is from Jonathan Kelcher at TD Securities.
First question, just -- you've been there a few months now. Do you know -- what do you expect in terms of asset sales over the course of this year?
Thanks, Jonathan. Let me begin by sharing that following the March 10 announcement of the results of the 100 day review, and importantly, the go-forward vision and strategy for the company in which we made very clear that one of our objectives will be early on to fortify our balance sheet, and that would be achieved through the sales of assets with a focus initially on our industrial assets. We've been, frankly, overwhelmed with the number of unsolicited inbound calls, expressions of interest, even unsolicited LOIs, and offers that have come in on specific assets, groups of assets. And what this has certainly validated, Jonathan, is that there is a tremendous amount of liquidity in the market for hard assets. And I would say this across all 3 of our asset classes. To get to your question, we've made very clear what the next 2 or 3 years will look like. And at this point, it's difficult to pinpoint a specific financial target insofar as what the level of asset sales would look like. But again, if you simply look at the announcement on March 10, one can reconcile through that, that we're not talking about tens of millions of dollars. In order for us to truly, in a substantive way, fortify our balance sheet, it will require hundreds of millions of dollars of transactions on the asset sales side so as to ultimately achieve that near-term objective that we have published and communicated to the market.
But if you guys are seeing like the ton of demand that's obviously out there, would it not be more so in your control, like do you want to sell $500 million of assets this year? Do you want to sell $1 billion of assets this year? It sounds like with that kind of demand, it's really up to you guys as much as anything.
Yes. It's a good point, Jonathan. I would say that in typical Jonathan Kelcher fashion, we've established some nice goalposts that I think sound reasonable to me.
Okay. And then if we take that a step further and go 2 to 3 years out, what is your -- what do you think your -- so you're through what you want to sell? What does your balance sheet look like or your asset base, I guess, look like in terms of hard assets held versus securities? Is it a 50-50 or is it 60-40? Like how does that look?
I don't think that we can comment at this stage on what the picture is going to look like 2 to 3 years from now, Jonathan. I think that as we've made very clear, our primary objective and frankly, motivation is to grow and strengthen net asset value per unit for our owners, number one. Number two, in doing so, again, one of the near-term objectives we communicated on March 10 was we want to address this perennial issue that Artis has faced, where our unit price trades at a material discount to the underlying net asset value per unit. And so we're going to take the steps necessary to achieve that insofar as capital allocation decisions that management and the Board will explore and consider moving forward. And I think that one thing I can confirm is we can be confident that even 2 or 3 years from now hard assets will form a meaningful and significant proportion of our balance sheet, our asset base. And so will it be 50-50? I don't think so. I think our real estate ownership of direct assets will continue to represent the majority of our asset base. And really beyond that, going 2 to 3 years from now the rest is really going to be a product of a number of factors that we may not necessarily be in direct control of including the broader market environment. And also going back to our unit price performance and how that fares relative to the underlying value of the units themselves.
And then just lastly, on your, I guess, on the fundamentals, what -- the slow start for same-property NOI. What do you expect for the balance of the year?
Sure. I'll pass it over to Kim and to Jim to address that.
Sure. I can address it to start. I think for same-property NOI for this quarter, it's really the same items that we discussed last quarter. So parking in Winnipeg and some vacancies, I think there's one vacancy in Fort McMurray that came up, but we've backfilled all of that space. So going forward, I think as we move through the pandemic and we see the vaccines roll out and people get back to work and back to the office, we're seeing activity pick up. So that parking income will pick back up and the leasing activity remains strong. So I think through the balance of this year, we'll see improvements overall.
So positive in the quarters going forward, especially, I guess, in Q2, you start to lap the lack of parking income, right?
Correct.
The next question comes from Matt Logan at RBC Capital Markets.
You've done a good job of articulating your medium-term vision for the REIT and the wide range of potential outcomes that the strategy could take. Is there a point where you plan to provide more specifics on the cadence of asset sales, potential tax friction? And what the relationship with Sandpiper will look like going forward?
Thanks for the question, Matt. And the simple answer is yes. We look forward on all counts in terms of the items you've raised to provide more details, visibility, and clarification on the various items. And I will -- because I know it's on people's minds, I will go directly to your question regarding the Artis Sandpiper relationship where the Board has been focused, amongst other areas, also in trying to get that finalized so as to then be able to communicate that to unitholders and to the market more broadly.
Is there a time line for the specifics? I mean, should we expect this in Q3 concurrent with the AGM? Or just some high-level thoughts there?
Yes. Again, as it relates to the Artis Sandpiper relationship, I would say that the objective that the Board is working towards is to try and finalize those details and to communicate them in relatively short order, if possible, ahead of the May 21 meeting. And then beyond that, in the other areas that you've communicated or questioned, that will be really a product of transactional activity. And as we move forward and if we do see transactions of any significant size or scope materialize, then with that we'd be able to also communicate areas such as tax implications, et cetera.
And so maybe with regards to taxes, if we're thinking about $500 million to $1 billion worth of asset sales in 2021, how should we think about potential tax leakage?
Again, at this point, I think it's premature. I will say that as it relates to any transactions of a significant magnitude, we would undertake an exercise with the management team to ensure that, along with advisers, to ensure that any tax consequences are being managed in a thoughtful and effective way on behalf of the owners of the REIT.
And in terms of the medium-term objectives for asset sales, you've got about $4.5 billion worth of income-producing property today. How much of that portfolio is retained at the end of the 2 to 3-year plan?
So again, as I conveyed to Jonathan a few minutes ago, a lot of that remains to be seen. I don't anticipate that we're going to see $3 billion of assets sold in 2 to 3 years. But could it be in the $1 billion to $1.5 billion mark or range? Certainly, that's within the range of probabilities.
And with respect to the units still trading at a fairly wide discount to NAV, the REIT's been active on its NCIB. Is there a point where a potential substantial issuer bid starts to come into the picture?
That's a great question, Matt. And I would simply say nothing is off the table. We will assess with the Board and make recommendations to the Board for their consideration on capital allocation decisions based on how the other factors we've already referenced unfold in the months ahead.
The next question is from Jenny Ma at BMO Capital Markets.
So Samir, I'm just wondering with regards to the industrial portfolio, it sounds like it's getting some pretty good interest. Can you talk about whether or not that interest is broad-based? Or is it a -- are you getting a disproportionate amount of bids coming in for certain types of industrial or certain geography through industrial properties?
Thanks, Jenny. The industrial space, as we all know, and we certainly are hearing about and reading about in media, social media, et cetera, almost on a daily basis, is an asset class that is seeing unprecedented demand, growth drivers, cap rate compression, et cetera. And that has certainly translated into what our experience has been with respect to, as I touched on earlier, the substantial inbound interest that we've received with respect to our industrial on both sides of the border, the Canadian side and the U.S. side. I would say, however, that within that sort of broader mix, where there has certainly been even more elevated interest and expressions of interest with respect to potential transactional activity has been with respect to our GTA industrial. Everyone knows that Toronto and Vancouver are today seeing the lowest level of vacancy. In North America, when it comes to industrial real estate, and that has certainly found its way into the buyer side of the equation where, again, there has been a substantial amount of inbound interest, specifically related to our GTA industrial.
I guess, this is somewhat related to the disposition. But given that there's such strong interest and you've got a $2 billion portfolio, I don't presume that gets transacted all over the short-term. But when you're looking at the offers that you're getting, how do you -- and given the momentum in industrial pricing, how do you decide what to put in the keep versus sell today pile on the industrial? Like what's that parameter that you need to see before you agree to sell something versus keeping it for a little bit longer?
One of the things that we're in the fortuitous position to be able to evaluate and look at from an optionality standpoint is, as I mentioned earlier, that we've had substantial inbound interest across multiple geographies, across multiple asset classes. And what that's translated into beyond what I conveyed earlier, that there is liquidity, there is a bid for many, if not most, of our assets that we have within our $4.5 million or $4.8 billion asset base is that we can actually evaluate these different opportunities from a growth perspective, from a capital allocation perspective, from a perspective of how do we optimize what we, in the near term, look at potentially transacting. And again, quite frankly, we feel that we are very much in the driver seat and that based on the optionality we have, we can pick and choose. We can pick and choose geographies. We can pick and choose asset classes. And it's not a decision process that, to your point, Jenny, has the right answer and a wrong answer. The reality is we're going to try and establish a decision with our Board that represents what we believe is the best answer for unitholders so as to ultimately go back to our strategy and some of the key objectives that we've laid out that we are now focusing on executing on.
Speaking of capital allocation, just wondering what your thoughts were on the preferred piece of the capital stack. I know you've been sort of buying back a little bit at a time. Are there any limitations with regards to what you do with that piece? And how do you think about it over the longer term?
Jenny, the 3 classes of prefs that we have, as you know, have varying maturity dates going into 2022 and 2023, insofar as a reset dates that provide Artis on those reset dates with the option if we so choose to redeem and extinguish the respective class of prefs. And so at this point, we have been active, as you've noted, in a modest -- in a very modest way with respect to the prefs. And with respect to any longer-term decisions or medium-term decisions for 2022 and 2023, we have not made any final determinations, but we will explore and evaluate that as we keep going. I would also say in the spirit of transparency that those that understand some of the technical details with respect to one of the areas we have raised and have sought unitholder approval for at the upcoming annual general and special meeting on May '21, is to provide the Board with the flexibility as time passes to move from a closed-end structure to an open-ended structure. And that exercise, if it was something that unitholders approve and the Board then has that flexibility around if the Board was to exercise that conversion, likely with it would come the redemption certainly of some of the -- 2, if not all 3, of the classes of press that we have outstanding at those reset dates in 2022 and 2023.
And then one thing that Artis has retained for a long time is a large proportion of the floating rate debt and a comparatively short-term on the mortgages as well. So with the new Board and new management team in place, are you guys thinking differently, especially when you consider we're pretty much -- we think we're at rock bottom rates, and they've started to move up in the last while. Going forward, how do you think about extending out the debt term and as well as potentially reducing the amount of floating rate debt, given that was sort of more of a legacy strategy on debt management?
Jenny, thanks for that. I would say here with respect to our debt or financing strategy, moving forward, we are evaluating as existing asset level mortgages mature. We're evaluating 1 of 2 scenarios, either upward financing and capitalizing on, as you've noted, historical ultra-low interest rates available, even if one is to lock out -- lock in for 3 to 5 years or beyond. Alternately, depending on the asset or group of assets that have maturing debt to actually extinguish that debt and move it into the pool of unencumbered assets. And so again, what we're doing is trying to optimize the 2 because in doing so it actually benefits us insofar as our overall liquidity and capital position so as to, again, provide maximum flexibility. And then the third piece to that is by having, again, that flexibility, assets that we anticipate are going to be part of our core asset base for the longer term. It obviously makes sense to put asset level financing on those properties, whereas assets that might be potentially available for sale today, we benefit from situations where those assets are in our unencumbered pool because it provides buyers with the ability to establish whatever financing levels and structures are best suited for them. And by giving buyers that flexibility, it allows us to maximize value and price on any potential dispositions.
So I recognize that there are a lot of moving parts with what you're doing. But I guess, maybe another way to sort of get at what I'm trying to get at is, philosophically, does the current management team see the debt stack and the term as being ideal.
Philosophically, I would say that where the opportunity exists to put project level or asset level financing in place and to be able to capitalize on the current interest rate environment, which we anticipate will be here for a while still. Maybe we know not forever, but certainly for the next several quarters, we will evaluate over that period of time. And as we get more comfortable around what it is that we want to focus on insofar as retaining specific assets in specific geographies for the longer term. It would make natural sense to and be prudent to establish asset level financing on those properties, and that may see us turn the dial up a little bit on mortgages versus unencumbered assets contributing to the revolvers that we have in place.
Bringing in Dean Wilkinson from CIBC.
Samir, when we're looking at the potential investment in public securities, and we've had a big run in capital markets, is there a specific market or identified asset type that you think you could be looking at? Or is this too early? And are you limiting the view to sort of TSX listed? Or are you looking to go, say, down into the U.S. or other markets for those opportunities?
Thanks for the question, Dean. But going to your question, at this point, it's too early to tell. We're really focused on some of the near-term objectives that I've already touched on, so I won't repeat. But once we find ourselves in that position where at a balance sheet level, we have strengthened our liquidity further, we've reduced our leverage to more conservative levels. And we can then begin in a more active manner as a management team and with the Board, exploring growth opportunities, whether it's investing in developments, investing in other value-add assets, or public securities, as you've pointed out. We're going to try and provide ourselves with as much flexibility as possible so that really the priority becomes focusing on what are the best opportunities and where are the best places from a capital allocation standpoint to direct some of this liquidity that we believe can produce and generate above-average risk-adjusted returns for the owners of the REIT. And I know that sounds very cliche, Dean. But I can say that it's something that our Board of Trustees are very committed to. That decision we made, that net asset value per unit is going to be our primary and most important metric that we're going to focus on so as to build, grow, and strengthen value for the owners of the REIT is something that we are all committed to and are going to focus a lot of our time and energies towards as we move forward.
The next question is from [ Irina ] [indiscernible].
I wanted to follow-up on the previous question. So assuming everything goes according to your plan, what kind of LTV ratio you would be looking for by the end of this year? Or maybe there's a target long-term goal for you in terms of leverage?
Yes. Thanks, [ Irina ]. I would say that, first of all, we were very pleased with our Q1 results, including the slight downtick we saw in our overall leverage ratios. And that's something that we remain committed to seeing reduced to more conservative levels. And so if I think about 2021 calendar year, we are confident that we should be able to see that 49% to 50% ratio that we have today reduced to somewhere in the mid-40s. And ultimately, our goal is to see it brought to levels below that. It's obviously going to take time and a lot of effort, but it's something we're committed to and look forward to being able to execute on and deliver to the owners of the REIT.
I apologize if my next question was already addressed. But overall, how many people from Sandpiper have joined Artis so far? And how many are you planning to bring?
It's not something we've actually spoken about historically. But I'm happy to, again, in the spirit of transparency, I'm happy to share that being based in Vancouver and in order to ensure with my colleagues, not just in Winnipeg, but across North America that I am positioned to be able to fulfill my duties, responsibilities, and to support and work alongside my colleagues, again, in all of the key markets where we have offices and teams established. We have, with the approval of the governance nominating and compensation committee, we have hired Alyssa, who many of you know already, into Artis on a full-time basis. She's based here in Vancouver alongside me. And we've also brought in Corey Colville from -- who was formerly with Sandpiper now into Artis, and he's also based here in Vancouver. And then finally, my executive assistant is now also working with me inside Artis. So that's the response to your question, again, in full transparency, and again, all under the purview oversight and approval of the GNC on the Board.
So you don't -- you're not planning to bring more people?
No. That is not our intention. We've got a very comprehensive team of over 200 incredible, hard-working individuals at Artis. And so we think that we've got all the right people in the right places, so as to be able to now move forward and execute on our strategy.
And my final question would be about conversion to open-ended trust. Can you maybe explain the rationale behind it and what it can bring to REIT and shareholders?
Yes. We've tried to summarize this in the materials that have been disseminated to unitholders. And as we conveyed on March 10, and we certainly will look forward to speaking to in more detail at the annual general and special meeting on May 21. A big part of this recommendation to the owners of the REIT for their consideration and support is to, again, provide the board with the flexibility we believe is required so as to enable us to execute on the vision and strategy that has been presented to the owners of the REIT. We are confident that with this new vision and strategy, we will be able to, first and foremost, execute on this strategy so as to address what again has been a perennial issue for the owners of Artis, where our unit price in the market trades at a material discount to the underlying value of the units. And secondly, to be able to move forward in a manner that as it relates to capital allocation and providing, again, the Board and management with flexibility to look at different ways in which we can look to deploy or redeploy capital that we believe can produce above-average risk-adjusted returns that ultimately will contribute to growing net asset value per unit in the long-term that moving to an open-ended structure would provide that flexibility. There are certain restrictions that come with being a close-ended structure that, including, as an example, in the U.S., where every time in one of our U.S. entities, our assets as a percentage of our overall assets is bumping up against the 10% threshold. We've got to then create one more U.S. vehicle. And I'm digressing to some degree here. This is not the primary reason, but it's also something that is a factor that has been taken into consideration. By moving to an open-ended structure, we no longer have that 10% limit or threshold on how much we can own in one entity or company, whether it's an existing internal subsidiary structure of Artis or whether it's Artis investing in a third party company. And so this all ties together insofar as why we are recommending and why we believe with very high conviction that moving to -- down a path that allows the Board the flexibility when the time is right to exercise this ability to convert from a close-ended structure to an open-ended structure is in the best interest of the owners of the REIT. As it relates to REIT status, again, the expectation is that we will continue to maintain REIT status for the foreseeable future. And that even as we move forward in executing on the vision and strategy, in the medium-term event, it may simply result in a proportion of our income continuing to receive the tax benefit that we currently receive as a REIT. And then perhaps a portion of our income, depending on source of income being treated differently. Again, that's not for today or tomorrow or even this calendar year. We anticipate it will be something that we will talk more about and we will provide more color and detail around as time passes in the quarters and frankly, the years ahead of us.
The next question is from Michael Markidis at Desjardins.
Just 2 quick ones for me. Number one, Samir, you talked a lot about just the demand you're seeing for the industrial assets in particular. I think if I remember correctly, one of your strategies for tax mitigation was to potentially take back stock unit transaction. I was just wondering if that's been brought up with any of those potential buyers and how are those discussions, if so are progressing.
Thanks, Mike. I would say that, again, it's early days. One of the things that has certainly been interesting for us in these last few weeks, again, as we've seen what I would simply describe again as unprecedented inbound interest and demand is the number of players in the market looking to acquire industrial, retail, or office. But going back to your point around industrial, who, from a cost of capital standpoint, are demonstrating that they can pay very aggressive cap rates. And that, of course, has an inverse relationship. In other words, they can pay a much higher price than other players in the market. And at the end of the day, the conventional parties who would be in the position to provide consideration in the form that you've noted. At some point, Artis is also a public entity. At some point, our cost of capital is going to reach a level where it's hard to justify, competing or paying prices that perhaps others with a lower cost of capital would be in a position to pay. And I'll simply say that these last few weeks have reconfirmed and validated that there is significant liquidity in the market and substantial investor demand for all asset classes, but particularly industrial real estate.
And then just last one here for me. Tower Business Center, we were well aware of the success on that transaction. I guess you've got some asset sales or dispositions first quarter. I may have missed it, but did you guys happen to comment on cap rates for that or where that's compared to versus your IFRS securing value?
Sure. I'll pass it over to Jim. It would be a shame for us to have a call -- our last call with Jim and not have the audience have the opportunity to hear from him.
Thanks, Samir. And hello Mike. So they were of course sold, I'm going to say, virtually at IFRS value, but that's partly because the quarter end rolled through. So everything gets adjusted based on its fair value. So the transactions that occurred would be virtually identical to the Q1 IFRS value for those assets. As far as your question on cap rate goes, I guess, there was the only enclosed mall that Artis owns was one of those sales wouldn't be our favorite cap rate, but I think it was, by far, the right choice to get ourselves out of the enclosed mall asset class. There was another retail asset in a tertiary market that maybe the cap rate is a little high. But again, I believe that was the right call. And the other asset was, I think, a very attractive cap rate on a retail asset. So pretty happy with those transactions.
It looks like there are no further questions. So with that, thank you, everyone, for joining our webcast. And if there are any further questions, please feel free to reach out to Samir or Heather. Have a great weekend, everyone.