Artis Real Estate Investment Trust

TSX:AX.UN

Earnings Call Transcript

[Operator]

Good afternoon, ladies and gentlemen. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to Artis REIT's First Quarter 2018 Conference Call. [Operator Instructions] I would now like to turn the meeting over to Mr. Armin Martens. Mr. Martens, please go ahead.

[Armin Martens, President, CEO & Trustee]

Thank you, Joanna, and good day, everyone. Welcome to our Q1 conference call. Again, my name is Armin Martens, the President and CEO of Artis REIT. With me on this call are Jim Green, our CFO; as well as Kim Riley, our Senior Vice President of Investments. So to begin with, I'd like to advise all listeners again that during this call we may, at times, be making forward-looking statements and we therefore seek safe harbor. So please refer to our website as well as SEDAR filings such as our financial statements, our MD&A and our annual information form for full disclaimers as well as information material risks pertaining to all of our disclosures. So again, thanks for joining us. I will now ask Jim Green to review our financial highlights and operational highlights, and then I'll wrap up with some market commentary. And we'll open the line for questions after that. So go ahead, please, Jim.

[James Green, Chief Financial Officer]

Thanks, Armin, and good afternoon, everyone. So this is a bit of an interesting quarter for Artis, a few unusual things happening. So I will try and highlight a few of those as I go through my review. As we've said before, everyone's probably aware, Artis is a diversified commercial REIT. We have assets in 5 Canadian provinces and 6 U.S. states. We've done some calculations in the MD&A disclosure to show the impact of an adjustment for a proportionate consolidation of our joint venture interests. And while it does turn those numbers into what are considered non-GAAP numbers, in many cases, we feel adjusted numbers are more relevant and where applicable, the resulting discussion is generally about the adjusted numbers for proportionate consolidation. Based on Q1 NOI, we had a 47% weighting in Western Canada; an 11.9% weighted in Ontario; and 41.1% in the United States. On an asset class basis, we're 53.4% weighted in office, 20.7% in retail and 25.9% in industrial. A specific focus for Artis, since the oil prices collapsed in late 2014, has been to reduce our exposure to the province of Alberta and specifically to the Calgary office market. Looking back 3.5 years ago to Q3 '14, before the crash in oil prices, our geographic asset mix resulted in 38.9% of our NOI coming from the province of Alberta and just over half of that or 19% -- 19.3% of the REIT's total NOI came from Calgary office properties. Based on Q1 2018, our total Alberta exposure is now down to 23% and Calgary office is only 9.7% even when including a substantial lease termination income received in the quarter. Calgary office would have been down to about 7.8% of total NOI if you exclude the lease termination. And just a bit more information on that termination was that it was a partial surrender from an ongoing tenant and we have a new tenant coming in to lease the majority of the space that's been surrendered. As we mentioned in our year-end call, we feel we fully executed on our commitment to diversify while continuing to sell at a good price in the current market. We have one further Calgary office building under an unconditional sales agreement, scheduled to close in June. We currently have relatively manageable exposure to the Calgary office market in the near future, with only 160,000 feet left to renew in 2018, only 147,000 feet in 2019 and only 47,000 feet in 2020. So as we've mentioned before, our acquisition and disposition activities have been increasing in recent years, focused primarily on capital recycling to further diversify and improve our portfolio. In this quarter, we completed the sale of 2 properties and acquired the remainder of an interest in 2 Denver office assets from one of our joint venture partners, such that we now own 100% of those 2 buildings. A bit of an interesting one, we were able to complete the acquisition at our Q4 IFRS valuation for the real estate and also issued equity also at our Q4 IFRS valuation of $14.85 per unit. So some interesting accounting falls under that combination, in that we booked a gain on both the acquisition and the equity. Artis continues to be active in new developments and redevelopment of our existing properties. We currently have around $70 million invested to date in projects currently under development. During the quarter, we invested roughly $19 million into the development projects and transferred $34 million of properties from underdevelopment to completed properties. As detailed in the MD&A, we have several new development projects that are just getting started, now including a new office, a new apartment tower at 300 Main Street in Winnipeg and new industrial space in Houston and Phoenix. As we have in the MD&A, we also have several development projects in the planning stages where construction has not yet actively started. And these projects are all progressing well through the development stages. We did have a couple of nonrecurring items this quarter, including booking an adjustment to our pension liabilities of roughly $3.4 million and a cost incurred to internalize several of our third-party property management contracts of $5 million. Pension adjustment relates to a future compensation payable at the end of some employment agreements and will be a onetime amount. And we were pleased with the internalization of the management agreements and the impact will definitely be accretive to our cash flow and income, and just for a little more color, we anticipated roughly a 10% return on a cash flow basis from that investment. However, not all of it hits our income statement because you're not allowed to pay yourself money and treat it as income, but on a cash flow basis, it will be a good savings for us. So we have presented some of our non-GAAP metrics, including interest coverage ratios, FFO and AFFO on the basis of excluding these 2 items. A couple of other highlights from the quarter included the issuance of a new series of preferred units and the issuance of new unsecured debentures. Use of proceeds for the preferred was to redeem another series that was due for a rate reset, and we achieved a better rate on the new series than we would have had if we ended up letting the previous series reset its interest rate. The use of the debenture was just to pay off other indebtedness. So we have been able to continue to strengthen our balance sheet and improve our debt metrics, a slight improvement again this quarter with debt-to-GBV falling to 48.9% from 49.3% at the last year-end, and our interest coverage ratio is remaining over 3x. The sales program we implemented through 2016 and 2017 to sell assets and use a portion of those proceeds to reduce debt has had a dilutive effect on our FFO. FFO came in at $0.33 this quarter after adjusting for a couple of those nonrecurring items that I just mentioned versus $0.36 in the comparative quarter. There are some specific items impacting that drop and I'll discuss in a little more detail the FFO in a minute. AFFO remained flat from Q4 at $0.25. However, this does result in our AFFO payout ratio being above 100%. AFFO is also impacted by some of the same items as FFO that I'll be discussing. So as we sit at year-end, our mission is to go back into that distribution and get our payout ratio down. And we plan to work hard to achieve that. So on a couple of specific operating results. On the fair values of our investment properties, they're on our balance sheet at fair value. In this quarter, we recorded a relatively small decrease of about $4.4 million. We did provide for some further declines in the Calgary valuations, probably more to be conservative than based on actual transaction history. But it just seemed appropriate to do that, so we took a little write-down in Calgary. It was largely offset by increases in value in the Toronto area, which continued to increase. At present time, we're not really anticipating major changes for the rest of the year. However, we do expect we're likely to see further increases in our industrial valuations as recent market transactions have been at pretty low cap rates in the industrial space. We remain very comfortable with our debt-to-GBV ratio. As I mentioned, it was slightly down this quarter at 48.9% versus 49.3% at year-end, and secured debt-to-GBV is also declining as we're increasing our unsecured debt and correspondingly increasing our unencumbered asset pool. Unencumbered assets are slightly up this quarter at $1.69 billion, up from $1.68 billion at Q4. On the credit side, Artis has a $500 million unsecured revolving line of credit with a syndicate of lenders and we also have 2 nonrevolving unsecured credit facilities in the aggregate amount of $300 million. And both of the nonrevolving facilities have been drawn in full, and we placed interest rate swaps to fix the rates as we expect they will be outstanding for their full 5-year term. Looking at a couple of highlights from the results of operations. On a same-property basis, results were fairly flat this quarter in functional currency, but showed a decline of 1.6% in Canadian dollars once foreign exchange was factored in. We also presented the stabilized same-property calculation, which eliminates our properties planned for disposition or repurposing and also eliminates the entire Calgary office sector as it's hard to argue that's a stable sector. So on this basis, we have growth of 3.1% in functional currency, but down to 1% once foreign exchange was factored in. By asset class, the office segment in Canada was the weakest, led by a negative 9.4% in the Calgary office sector. And interestingly, retail in both Canada and the U.S. was fairly strong, and we also had good results from the U.S. industrial portfolio. By geography, the strongest performer once again was our portfolio in Wisconsin. Now we get to some of the fun stuff, on the FFO and payout ratios. So as I mentioned in my opening results, FFO year-over-year has declined, with the largest driver being the dilutive effect of asset sales, with the proceeds being used for debt reduction. Our FFO for the quarter on a diluted basis was $0.33, down $0.02 from last quarter and down $0.03 from the same quarter last year. So the biggest decline year-over-year, of course, is the assets we have sold, but there were some -- several items impacted FFO, resulting in the $0.02 decline this quarter. The biggest one was the issuance of the Series I preferred units in January 31, with the Series C not being redeemed until March 31. So we had a 2-month period with 2 series outstanding. So in absolute dollars, FFO for the quarter, after adjusting those 2 nonrecurring items, was down roughly $1.6 million, and $1.3 million of that related to the additional distributions on deferred units. As we won't have both series next quarter, there will be an improvement in FFO just from lower preferred distributions. And if I compare quarter-over-quarter results instead of year-over-year, same-property quarter-over-quarter in functional currency increased roughly $338,000. However, the impact of dispositions compared to acquisitions, again in functional currency, reduced NOI by roughly $718,000, with a contribution from new and development properties -- newly developed properties that are not part of the same property income group for a little over $20,000. And the average exchange rate was relatively flat quarter-over-quarter, however, there was still a slight positive in translating back to Canadian dollars this quarter. So the net impact of all those changes is that property NOI declined around $400,000. And if you add that to the $1.3 million from the preferred units, you would explain the majority of the variance in FFO. There's a couple of other differences that go both directions, but those 2 are the main ones. So despite the drop in FFO, we remain convinced that our strategy has been correct to improve our balance sheet in the current operating environments, at the same time, as we diversify our way from Alberta. On those -- with those adjustments in, it gives us an FFO payout ratio of 81.8% for the quarter. On an AFFO basis, the AFFO is not quite impacted to the same degree. Normalized AFFO came in at $0.25, unchanged from last quarter, although it is down $0.02 from the same quarter last year, mainly due to dispositions. And as I mentioned in the discussion on FFO, the same items actually impact AFFO, so we would have reported an increase in AFFO exclusive of those items. Our FFO payout ratio this quarter was 108%, the same as Q4 '17. And as I mentioned, our mission is to go back into that distribution, and we anticipate the changes we're making in our portfolio and our development activity will, over time, bring this ratio back under 100%. We continue to evaluate all strategic initiatives that could help us in that mission. A couple of others, just quickly. We disclosed our EBITDA calculations in the MD&A. Main ratios. We track our EBITDA interest coverage, currently at 3.31x, a slight improvement from Q4 '17, and debt-to-EBITDA currently at 8.5x. One of the positives this quarter in reporting our investment properties at fair market value under IFRS, we can calculate our net asset value per trust unit, just simply taking our equity on the balance sheet plus the equity held by the preferred unitholders and dividing it by the number of common units outstanding. Net asset value was $15.03 per unit, up from $14.86 last quarter. Finishing the quarter, we ended up with $41 million of cash on hand and $245 million undrawn on our line of credit. There are several events detailed in the subsequent events note, which we continue to believe reflect our strategy of intelligent recycling of capital. And we plan to continue our focus on improving the balance sheet and the overall portfolio -- quality of the portfolio. So that completes the financial review. We feel it's a fairly solid quarter given the operating conditions in one of our major markets. We're pleased with the NAV growth, and we're obviously not so happy with the FFO decline, which I hope I explained. We look forward to demonstrating our results in future quarters, and I'll pass it back to Armin for a bit more discussion.

[Armin Martens, President, CEO & Trustee]

Okay. Thanks, Jim. So folks, on balance, we feel that Artis is progressing well this year. Our earnings, our balance sheet and our liquidity are in good shape, and we feel that our diversification and outlook is slowly but surely improving. Looking ahead, it continues to be our view that both the U.S. and Canadian economies will perform fair to good this year and next, with the advantage going to the U.S. economy. So last year, our capital recycling program concluded with about $500 million of deals done. And for this year, in 2018, the best guidance we can give is that it will recycle between $200 million to $300 million of properties, so a little less. But as we accretively recycle our capital, you will, of course, notice that our Alberta footprint will continue to shrink in relation to our total NOI and that the diversity of our NOI will improve. In terms of the Calgary office market, as you can see by our same-property there, it's not -- we're not out of the woods yet. But our visibility continues to improve, including subleased space making its way to about 27% now. It may climb a little higher before stabilizing, but this is the year that we've hit stabilization. Oil and gas prices have stabilized. The Keystone XL, Trans Mountain, we think -- we trust will eventually get done. And the OPEC deal continues to have good traction. So we feel we're bouncing along the bottom with respect to office leasing rates. And the absorption, you will have noticed, there was slightly positive absorption in Q1 this year, more in the suburbs, and I think the Downtown was just a little negative. But we feel we're bouncing on the bottom there. And that's actually a good thing. Capital spending and job creation is slowly but surely increasing in Alberta, and we are seeing green shoots of economic and tenant activity. So it may be slow and protracted, but it is our view that the economic recovery is well underway in Alberta and will be sustained for many years thereafter. So looking ahead, we'll continue to work hard to keep our buildings full whilst bringing the rents up to market and consistently improving our real estate portfolio because at the end of the day, the count of our real estate is the foundation of our REIT. For this year, we view our drivers of growth to be, first, the more accretive recycling of capital and repositioning of our portfolio; working hard to increase our same-property NOI in at least the majority of our markets; and as noted in our MD&A, our development pipeline is going in slowly but surely on track to deliver us great results in this year and in the years ahead. So that's our report and commentary for this quarter, folks. I'll now turn the mic over to the moderator, to Joanna, and open the floor to -- out for questions. Joanna, please?

[Operator]

[Operator Instructions] And your first question is from Jonathan Kelcher from TD Securities.

[Jonathan Kelcher, Analyst]

First question, just on the lease termination. Can you maybe give a little bit more color on that? How -- like how the new rent compare to the old, how much did you have to spend in the way of TIs to get that done?

[James Green, Chief Financial Officer]

So the lease termination fee kind of covers the difference in both the rent and the tenant improvement numbers. But the new rent is at a lower rate than the expiring one.

[Armin Martens, President, CEO & Trustee]

That's compared to Square, right?

[James Green, Chief Financial Officer]

Correct.

[Armin Martens, President, CEO & Trustee]

Yes, just with Heritage Square, where we have AMEC engineering, and we were able to get a provincial government tenant to take some of their space, their subleasing, at a longer term, so we think we definitely did the right thing for that building. And we just -- and so we took a lease termination fee. We negotiated one with AMEC engineering and still in discussions with them, but an early plan to extend on their lease as well. Needless to say, today's rents are lower than previous rents. But I don't have that rent offhand. It was still, we think, a fairly good rental rate we got. And the suburban office markets, at least South and the Beltline we're experiencing right now, are slightly stronger than Downtown.

[Jonathan Kelcher, Analyst]

Okay. On the -- well, just sticking with Calgary, I guess. The -- you took a small write-down there, but you did sell an asset. Did you write -- like you said, you sold that asset at IFRS value. Was there a write-down before that, or was that sort of the Q4 IFRS value you sold at?

[Armin Martens, President, CEO & Trustee]

That was Q4, right, Kim?

[Kim Riley]

Yes.

[Armin Martens, President, CEO & Trustee]

Yes, Q4.

[Jonathan Kelcher, Analyst]

Okay. And then lastly, just on the termination of the management contract. You said you expect about a 10% return on that, Jim?

[James Green, Chief Financial Officer]

About 10% percent on a cash flow savings basis versus what we would have had to pay the third-party manager. But of course, if it's things like lease commissions and supervision fees on capital projects in the building, we -- unfortunately, it's a cash flow savings for us, but we can't pay ourselves that money and call it income.

[Jonathan Kelcher, Analyst]

Right. So you don't really see it flow through the NOI or anything?

[James Green, Chief Financial Officer]

You'll see some flow through the NOI because, for example, on property management fees, while our -- while the property management fee eliminates the recovery from the tenants, which will show as income...

[Jonathan Kelcher, Analyst]

That you get shrinked at...

[James Green, Chief Financial Officer]

Yes.

[Operator]

Your next question is from Howard Leung from Veritas.

[Howard Leung, Investment Analyst]

I just wanted to also follow up on the internalization. Is -- and you mentioned there will be about, I guess, $500,000 of cash flow savings. How does that flow through to FFO and AFFO? Will it just go straight to AFFO?

[James Green, Chief Financial Officer]

The portion that comes from property management fee recovery from the tenants will go straight to AFFO. The portion that's a cash flow savings on supervision fees and leasing commissions, it will just result in less expenses being capitalized.

[Howard Leung, Investment Analyst]

Correct. And because that gets an AFFO, you're using amortization of leasing costs to account for the reserve. I guess that will -- it will still show up there, or will it -- will there be savings? I'm trying to understand what would happen...

[James Green, Chief Financial Officer]

There will be savings there because you eliminate that portion. So in essence, you don't charge yourself a leasing commission.

[Howard Leung, Investment Analyst]

Right. Okay. And okay. No, that makes sense. And then I just wanted to touch on some of the occupancies. It seems like retail and office, same-property occupancies are a little weaker compared to last year. But industrial is up. So I just wanted to get some of your thoughts on those segments.

[Armin Martens, President, CEO & Trustee]

Yes, I mean, in Canada, we still did -- [ the offices ] shift, so we have a week. We lost a Sears. We had one Sears in total we lost in Grande Prairie, so that's brought down our occupancy. Now total -- same store annualized, it's still positive both in Canada and the U.S. for retail and industrial. I think the good news with that one Sears is, and we don't want to jinx ourselves, but we are in serious discussions and trading paper with the National, tends to take all that Sears space off our hands. So we're hoping we can announce good news by the end -- by the time we report again in August with our Q2 results. So that was the main driver in terms of occupancy levels for retail. Industrial is performing well, and there's little tweaks here and there, but we're almost 99% occupied in the GTA with our industrial. We're booked 97% in Winnipeg. I think we're in the 96% -- 95%, 96% range for what we have left in Alberta. And the one industrial building in Vancouver is, of course, 100% leased. And down in the U.S, we're about 96% on average. We have seen very good traction on all fronts, and not to get ahead of myself, but all of our greenfield developments, looking ahead, are now basically new generation industrial in the U.S. You'll see our partner's share with the last phase, they were just under construction within Phoenix, lease-up -- have been fully leased in no time based on the tenant action that we're getting and the paper that we're trading. And Houston will be starting Phase 2 there very soon. And we're getting a lot of interest. We're seeing a good momentum on both sides of the border that we feel has legs for industrial absorption and increasing industrial rents.

[Howard Leung, Investment Analyst]

Okay. No. And then you had a deal where I think you acquired the remaining 50% and in partial exchange for units issued at -- evaluated at NAV. Is that particular to the -- to this only because you were buying out the other partner? Or is it something that you see doing for other deals as well?

[Armin Martens, President, CEO & Trustee]

It's particular to this partnership. It was a fund with a lot of, you might say, retail investors in the fund that were happy to make the trade, and we said, "Look, if you want us to pay you NAV, you've got to take our units at our NAV." And they eventually agreed to do that. And so we're always open to doing that with -- they call it an UPREIT transaction in the U.S., and then, here, we might just call it an exchange. But we're open to doing more of that. We've pursued it at times, but we haven't been successful. We'll see. So we can't promise we'll be doing more of them.

[Howard Leung, Investment Analyst]

Right. Right. And when you think about, just in general, issuing equity, what are your thoughts on that right now given where it's trading?

[Armin Martens, President, CEO & Trustee]

Well, at $14.85, it was our last NAV. Now we're over $15. But we haven't raised new equity for over -- about 2 years now, and we're just getting close to 2 years. We shut down our DRIP about 1.5 years ago. So we're watching that very carefully. We don't want to dilute our common equity without a good reason. We're doing just fine on the liquidity front and then cash flow front with our development pipeline. We can always sell. We still have some more noncore assets on our radar screen to sell, but we could -- if we want to just make a profit, we can also sell and start recycling our new generation industrials as we develop it. We have a very good development pipeline that's growing. I know it takes some money off the table there. But we can't review raising equity unless it starts with a 13.

[Operator]

Your next question is from Matt Kornack from National Bank.

[Matt Kornack, Analyst]

Just a quick question on top tenants. I think Whiting Oil moved up a bit, and that's the function of your purchase in Denver. A bit of a shorter lease term there. Do you have some visibility as to whether they would renew at the end of that term in that building?

[Armin Martens, President, CEO & Trustee]

Yes, we're busy hugging each other, so to speak. And we've been all over that tenant for the last fall already, and we're close in contact with them, we're having dinner with the new president and things like that. They have a history of being sticky. They've been in this building for about, I think, 15 years now. When we first started, it's a junior, all comfy with about 5,000 square feet. We fully expect them to renew. We have a head start on them in the sense that if they were to go somewhere else, they would be paying at least $10 a square foot more rent. And they're not the type of a tenant that wants to do that. They're not a wealth kind of management tenant, and they're not -- they just don't have that in their DNA to be spending that kind of money. So we think we've got a leg up. They like our building, they like our location. We've got a ton of parking available for them. The amenities have only improved and the building's only improved. So it's not papered yet. But we're in discussion with them to renew, and we'll let you know as soon as they're done.

[Matt Kornack, Analyst]

And I guess it sounds like if that's the case, you may even get a rent uptick?

[Armin Martens, President, CEO & Trustee]

We're cautiously optimistic. That's the plan, of course, to get at least some uptick.

[Matt Kornack, Analyst]

Right. Okay. And then with regards to TD Canada Trust, is that multiple different locations? Or is it an office tenancy somewhere in Canada?

[Armin Martens, President, CEO & Trustee]

Well, one, it's a movement and expansion here in Winnipeg across the street into our building.

[James Green, Chief Financial Officer]

But that's not...

[Armin Martens, President, CEO & Trustee]

That's not in yet. Oh, okay.

[James Green, Chief Financial Officer]

This is just in multiple different locations. So...

[Armin Martens, President, CEO & Trustee]

Oh, it's that big. Okay. They're going to get -- then it's getting bigger.

[James Green, Chief Financial Officer]

They're our new tenant coming into the -- our Winnipeg office building on...

[Matt Kornack, Analyst]

Okay. So they will move up on the list.

[James Green, Chief Financial Officer]

Yes.

[Matt Kornack, Analyst]

Okay. That's fair. And then there have been a few -- I've been watching urban Toronto. I've seen a few development proposals for 2 properties here, both residential. Is your goal to own those assets at the end of the day? Or has that developed at all? And I mean, which of the 2, or do you think both would go together or so they can start to go forward at the same time?

[Armin Martens, President, CEO & Trustee]

Yes, so that does remain to be seen because it takes so long to get the entitlements, a form of approval, right? And we have 2 applications in -- that are -- in -- formally submitted and completely submitted. One is Concorde on the Don Valley Parkway there for about 500 suites, almost 500,000 square feet of density. We're optimistic because I think that line is coming soon. Within 2 more years, I think we'll have it there. It will be just 100 steps away from -- now with Artis is just 100 steps away. We're seeing positive traction, leasing momentum for the office buildings, and we think it will be good for any multifamily development there. So optimistic about attaining that density. And also the 415 Yonge application is in. That's going to take a little longer there. It's for about 62 stories. It's about 350,000 square feet of density and about 300 suites. So we're optimistic about both. But it can take 1 to 2 years to get the full approval at that time, and then we'll -- as we get closer to that D-Day, so to speak, then we'll decide whether or not we cash in and sell the asset with the density or if we go ahead and develop. And if we develop it, we develop it with a partner or with ourselves. So we've got time to think about that. But there's a lot of potential value that we can create just by getting the density. And that's our -- that's job 1. You'll see in Calgary, where -- at Stampede Station, the second phase there is approved for a 300,000 square-foot office building, and we're just getting it reapproved for 300 suites of multifamily. And then by the end of this year, we feel we'll be applying for about 600 suites of density up in the GVRD, in -- part of the Greater Vancouver Area on our Poco Place site, where we've got additional room there. A great opportunity there as well that we'll be pursuing too. We'll keep everybody posted in our MD&A on that stuff.

[James Green, Chief Financial Officer]

But I think you're right. Historically, people haven't usually blended residential into a commercial REIT, but we are starting to see most of the REITs entertaining residential development as the densification of their properties. So we'll see how that plays out over time, whether people continue to hold those in commercial REITs or whether they sell them out.

[Armin Martens, President, CEO & Trustee]

To that point, there comes a point where we might be too diversified into that fourth asset class. Once built, once completed and built, we may just sell at that low cap that the multifamily assets sell at and take the money and recycle into industrial or office, right? But that will be a nice problem to have. In the meantime, our densification opportunities, we want to maximize them. The hottest events use appears to be multifamily -- or it is multifamily right now, so we want to maximize that right now as best as we can to create the best value, most value, and then we'll decide if we keep them in our portfolio and enjoy the income or if we sell in cash and at a low cap rate.

[Matt Kornack, Analyst]

Okay. And the articles themselves, they referenced Marwest as being involved, but it's no longer a related party for Artis' standpoint. But is that a cost relationship? Is it essentially just cost recovery between Marwest and Artis?

[Armin Martens, President, CEO & Trustee]

Yes. It's just a small fee, monthly fee they get to do their work, plus the cost involved. And then it's just -- it's a Phase I, if you will, to get the entitlements. There's a whole team of consultants, a page long, that get -- that are part of this team. It's not just Marwest, that's for sure.

[Matt Kornack, Analyst]

Okay. And then Artis would be responsible for the actual construction process?

[Armin Martens, President, CEO & Trustee]

Now we're the owner/developer.

[Operator]

Your next question is from Michael Smith from RBC Capital Markets.

[Michael Smith, Analyst]

Just following up on Concorde and 415 Yonge. Are your applications in under the old regime or the new regime, the OMB or the new local planning authority?

[Armin Martens, President, CEO & Trustee]

So Concorde, for sure, under the new regime. The 415 is open for a debate. But at the end of the day, we're working -- and to the Concorde, for example, so far, the reception we're getting from that planning team is very positive. There -- and very supportive. With 415 Yonge, it's -- Yonge's just a little more controversial, and there's a lot more hype involved. So it will be a longer process, but we're working with the planning committee that's been assigned to us there to basically negotiate a positive -- report positive recommendation and all of that. Well, this will take time, but that's the process we're in. But as I've said, in both cases, applications are fully completed and in.

[Michael Smith, Analyst]

Okay. Just switching gears. So you -- in terms of your other noncore bucket, I know you have, I guess, $200 million to $300 million potentially for sale this year. What would be the rough value of, let's say, non -- other noncore assets beyond that which you could potentially sell should you have a good use of cash for the proceeds?

[Armin Martens, President, CEO & Trustee]

So we're running out, and that will depend on which board member you talk to, I guess. But there's pretty much consensus on our board that we don't have much more. But by example, when we get this 40-story apartment underway here in Winnipeg, the 395 suites, in parallel with that, we expect to be able to lock in a very attractive CMHC financing. And then we'll have a very large and significant mixed-use asset here in Winnipeg, with a 30-story office building, a 40-story apartment, about a 1,000-stall underground parkade, along with 60,000 square feet of retail. So we will look at selling a 50% nonmanaging interest in that complex as we get closer to rounding out the -- to reidentifying it and then basically completing it. So that in that sense, it could be -- it's a core asset, but we'll sell that 50% nonmanaging interest. In that sense, it will be noncore. But we don't have a lot more in that, in terms of recycling after that.

[Michael Smith, Analyst]

Okay. And for same-property NOI for the balance of the year in functional currency, what are you thinking?

[Armin Martens, President, CEO & Trustee]

More of the same. I mean, in the U.S., we're up a little bit on the office, up a little bit on the retail, not bad at retail, but a smaller needle. Industrial is good. We're expecting positive, and I think we are 3% in functional currency in the U.S. And then -- but Canada is what it is. We've got little -- we've got less Calgary office renewals ahead of us, so that should help. Retail continues to perform well. Industrial should pick up. It's a little -- we've got some vacancies in Saskatchewan that we're filling up now and one in Winnipeg. So we're optimistic. It's positive. If you take Calgary office, it's always positive. And with Calgary office, maybe it's flat in Canada, but positive in the U.S. But it's a little bit hard to predict. But the good news is that, as I mentioned and as Jim mentioned, we don't have a lot of Calgary office renewals coming up anymore this year and next year, and so the negative impact should be smaller.

[Michael Smith, Analyst]

Okay. And just lastly, so there was a lot of moving parts in FFO this quarter. So I guess I'll normalize it around $0.33. I mean, is that more or less what you're expecting for Q2?

[James Green, Chief Financial Officer]

No, I would think it will be a lift in Q2, just from nothing else from the second Series of preferred units being taken out at the end of March.

[Operator]

Your next question is from Fred Blondeau from Echelon Wealth Partners.

[Frederic Blondeau, MD & Head of Real Estate Research]

I just had one high-level question. Armin, you just mentioned you still have this sizable development pipeline. How did your expected returns evolve over the last year or so? And I guess, in parallel, how did your appetite for development evolve as well? Should we expect -- or would you like the pipeline to go further from here or you could you become a bit more conservative?

[Armin Martens, President, CEO & Trustee]

I feel we've hit all of our targeted yields, for sure, in industrial. In some cases, we've invested a little bit more money. But the yield has always kept pace with the cost. And like all of our industrial, it's just been -- had been excellent for us. The office development has been a -- is still -- has a 7.5 cap rate, I think became a 7.25 cap rate. But north of 7, and it's all new generation real estate, so I'm really pleased with it. And as we move ahead, we're still only half. We have less than 2% of our GBV that's in our development pipeline. We think it can get closer to 4%. And as long as we continue to achieve success, Fred, we will -- it will be a wonderful thing. We're developing new generation real estate at higher deals than we could get by buying with the yields. I'll start with a 7. It's going to be accretive for us. But -- and more importantly, the exit cap rate is still at a 5, even in the U.S., and we can always take some money off the table and cash it on, say, one out of every 4 developments and just keep making a profit and keep recycling that money as well.

[Operator]

There are no further questions at this time. You may proceed.

[Armin Martens, President, CEO & Trustee]

Okay. Well, thank you again, everyone, for joining us. And happy Friday to us all. I'm sure everyone is cheering for the Winnipeg Jets, given that Winnipeg -- we do our best to keep playing hockey and representing Canada. I'm sure we're going to get a couple of upgrades for Artis as a trickledown effect, so I can hardly wait. Anyways, thanks again, everyone, and have a good weekend.

[Operator]

Ladies and gentlemen, this concludes today's conference call. We thank you for participating, and we ask that you please disconnect your lines.