Artis Real Estate Investment Trust

TSX:AX.UN

Earnings Call Transcript

[Operator]

Good afternoon, ladies and gentlemen. My name is Lara, and I will be your conference operator today. I would like to welcome everyone to Artis Real Estate Investment Trust's First Quarter 2024 Results Conference Call.

At this time, I would like to turn the conference over to Heather Nikkel. Please go ahead.

[Heather Nikkel, executive]

Thank you, operator. Good afternoon, everyone. Welcome, and thank you for joining us for Artis REIT's First Quarter 2024 Results Conference Call. Our results were disseminated yesterday and are available on SEDAR+ and on our website. With me on today's call is Artis' President and CEO, Samir Manji; CFO, Jaclyn Koenig; COO; Kim Riley; and Executive Vice President, U.S. Region, Phil Martens.

As we discuss our performance today, we want to acknowledge that the discussion may include forward-looking statements that involve known and unknown risks and uncertainties. These risks and uncertainties may cause actual results to differ materially from those expressed or implied today. We have identified these factors in our public filings with the securities regulators, and we 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. Throughout this discussion, all figures will be presented in Canadian dollars, unless otherwise specified.

Before we proceed, I'd like to note that a replay of this conference call will be available until Friday, May 31. You can access it by using the telephone number and pass code that were provided in yesterday's press release. Additionally, a recording will be made available on our website.

I will now turn the call over to Samir to discuss Artis' first quarter results.

[Samir Manji, executive]

Thank you, Heather. Hello, everyone, and thank you for joining Artis' first quarter earnings call. We are pleased to report our Q1 2024 results and provide an update on our progress thus far in 2024.

While the real estate sector continues to face pressure related to the current interest rate environment, our Board and management team remain squarely focused on levers within our control to achieve our goal of maximizing value for unit owners. With that in mind, we continue to pursue our primary near-term objective, reducing leverage and increasing liquidity to strengthen our balance sheet.

This objective is key to ensuring Artis is positioned to withstand less favorable market conditions that may continue to impact the real estate sector, including the potential higher for longer interest rate environment. We are executing on strategies designed to achieve our internal targets related to liquidity enhancement, including asset dispositions, refinancing existing mortgages and securing new mortgage financing.

So far this year, Artis has unlocked $174.3 million through key asset dispositions, demonstrating the healthy demand for quality real estate despite the challenging interest rate environment. In addition, we have $184.4 million of unconditional Canadian asset sales and USD 272.9 million of unconditional U.S. asset sales scheduled to close in the coming months. This includes the sale of Park 8Ninety, a significant milestone and addition to our list of unconditional asset sales expected to close in the near term.

Collectively, we anticipate that these dispositions will reduce our overall leverage below 45% and will lower our overall borrowing costs moving forward. At the same time, the fact that we are achieving sales prices in line with IFRS, provides compelling validation of our $14.06 net asset value per unit.

We view in the successful progress of our disposition plan, a positive reflection of the quality of our real estate, and anticipates that the traction we've been able to achieve with our dispositions will continue through the remainder of 2024. We have ongoing discussions with potential buyers for additional asset sales, the proceeds from which will enable us to continue reducing our overall debt and improving financial flexibility, important steps in navigating the current environment marked by higher interest rates, inflation and market volatility.

And during the first quarter, we announced that Artis, together with our joint actors, had increased our ownership position in Dream Office to 16.76% and subsequent to the end of the quarter, had further increased our ownership position to 18.77%.

Our investment in Dream Office represents a capital allocation decision that followed the monetization of real estate assets at fair market value. We then allocated a portion of the sale proceeds to a company that we believe is materially undervalued. We see value in Dream Office's portfolio and more specifically, in the downtown Toronto office market, where Dream Office has a high concentration of well-located assets.

Going forward, we will continue to evaluate our public securities from a capital allocation standpoint as we navigate the current environment and prioritize capital allocation opportunities that will maximize net asset value per unit for our owners.

With higher interest rates and other macroeconomic factors impacting the real estate sector, we have been working closely with our lenders to manage our upcoming debt maturities. We have $211.9 million of mortgage debt maturing in the remainder of 2024. We have renewed 14% of these maturities, have extension options in place for 50% of these maturities, and anticipate no difficulty in managing the remaining 36% of the maturities in the normal course.

With a substantial pool of unencumbered assets in our portfolio, looking ahead, securing new mortgage financing and refinancing existing mortgages will remain an important tool available to us.

Turning now to our credit facilities. In Q1 2024, we renewed our $100 million nonrevolving credit facility for a 2-year term, and we are in active discussions with respect to the renewal of our $150 million nonrevolving credit facility that expires in July. Also in 2024, the first tranche of the revolving credit facility matures, and we are in active discussions regarding this maturity.

Our operational fundamentals, key to the resilience of any real estate portfolio, continues to demonstrate stability quarter-over-quarter. Occupancy rates, including commitments, remain near 91% this quarter. Additionally, lease renewals that commenced in Q1 were negotiated at a weighted average rate increase of 2.2% over expiring rates, continuing a 13-quarter streak of growth in weighted average rental rates secured upon renewal.

Year-over-year, same-property NOI growth for the 3 months ended March 31 was strong at 4%. These fundamentals are critical measures of our portfolio's performance, and are reflective of the leasing momentum that has been growing over recent quarters, underscoring the foundational strength and potential growth profile of our real estate operations.

With respect to our Cominar investment, we continue, alongside our partners, to collaborate and make progress towards our objectives. To date, we have finalized several additional asset sales with additional transactions in the pipeline.

In summary, during the first quarter of 2024, Artis achieved several important internal objectives and generated positive momentum to build on throughout the remainder of the year.

Going forward, we will continue with our efforts to strengthen the balance sheet and enhance liquidity. And as our balance sheet and liquidity continue to improve, we will look at capital allocation opportunities that we believe will ultimately grow NAV per unit, objectives that we have been focused on since 2021.

We are optimistic about the remainder of 2024 and confident that with the continued execution of our plan, we will be able to narrow the gap between the intrinsic value and market price of our units.

I will now turn it back over to the operator to moderate the question-and-answer session.

[Operator]

[Operator Instructions] Our first question comes from the line of Jonathan Kelcher from TD Cowen.

[Jonathan Kelcher, analyst]

First question. First, congrats on getting Park 8Ninety sold. Would you be able to give us a cap rate on that asset?

[Kim Riley, executive]

Jonathan, we can't actually disclose the cap rate on that asset, but we would direct you back to the MD&A. So for U.S. industrial cap rates, they're around 6%, and what we can say is that we did slightly better than that.

[Jonathan Kelcher, analyst]

Okay. Fair enough. And I guess just looking at your asset sales, you've got another -- you've got $550 million unconditional now and it looks like another $300 million in the held for sale. And that gets you, I guess, below 45%. What's -- like how much is too much? How much -- like how small will you take this -- your investment portfolio?

[Samir Manji, executive]

Thanks for the question. Just to be clear, it's not the asset for -- assets held for sale that will take us sub-45%. It's just the CAD 550 million approximately equivalent figure that you referenced, Jonathan, that will take us sub-45%, and anything above and beyond that will only further improve that objective of ours of lowering our debt to total asset ratio.

I think the question related to sort of how low can we go or are we prepared to go. At this point, we're not setting a target. I would suggest that subject to the ability to achieve IFRS values on assets that have been earmarked for disposition or that as is the case from time to time, we get unsolicited offers on, we're prepared to, as a Board and management team, to push the envelope as much as we can to bring that ratio as low as possible.

And as I conveyed in my remarks, in doing so, to really put Artis in a position of financial flexibility so that we can then be more opportunistic in the current environment from a capital allocation standpoint.

[Jonathan Kelcher, analyst]

Okay. So does that -- can I take that to mean that you might be -- like you are buying Dream Office units? I guess two things on that. One is, is it fair to say that the -- basically all of the equity dispositions that you did in Q1 would be First Capital and then the acquisitions, all Dream Office?

[Samir Manji, executive]

That's a fair assumption.

[Jonathan Kelcher, analyst]

Okay. And would you -- if you keep selling here and improve your liquidity position, would you be looking to ramp up your equity securities program? Or how do you think about capital allocation going forward?

[Samir Manji, executive]

From a near-term perspective, Jonathan, I don't anticipate -- we don't anticipate that we're going to be ramping up the public securities investments as opposed to, again, from a near-term perspective, looking at continuing to monetize assets, continue to delever. If we can take 45% to below 40%, then even better.

Again, the whole -- the uncertainty that we continue to experience from a macro perspective with respect to interest rates and this higher for longer scenario, we're -- as a Board and management team, we're heavily focused on risk mitigation, on -- and we believe just delevering is in and of itself going to enable us to materially reduce Artis' risk.

And then again, we can be opportunistic, whether it's 2, 3, 4 quarters from now and whether that's opportunistic or those opportunities are through direct acquisitions, whether it's public securities, whatever they are, different buckets of opportunities that are out there, we're going to be in a good position to explore any and all possibilities.

[Jonathan Kelcher, analyst]

Okay. Fair enough. And then just one last one for me. Just in the cash flow statement. I noticed some $50 million addition to joint ventures. Can you give us some color on what that relates to?

[Jaclyn Koenig, executive]

I can take that one, Jonathan. That was our -- one of our Park 8Ninety properties at a mortgage within the joint venture, and it was a contribution to pay out that mortgage prior to acquiring the remaining 100%. So those on Park 8Ninety V. So it wasn't for CapEx, it was just for the mortgage repayment.

[Operator]

[Operator Instructions] We have our next question coming from the line of Jimmy Shan from RBC Capital Markets.

[Khing Shan, analyst]

Yes. It also looks that you've had some success on office, the 5 office assets that you sold post quarter. I was wondering if you could provide, similarly, like a rough cap rate on those assets?

[Kim Riley, executive]

Yes, I can take that one. I don't have a breakdown in terms of cap rate on asset class, but I can say overall on our disposition program, we're achieving a weighted average cap rate of around 6%. So some are a little bit higher, some are a little bit lower, but they're all kind of in and around that 6% mark.

[Khing Shan, analyst]

Okay. So to be clear, so that 6% is in reference to entire sales so far year-to-date?

[Kim Riley, executive]

Yes. Yes, that's correct.

[Khing Shan, analyst]

Okay. Okay, including Park 8Ninety?

[Kim Riley, executive]

Yes.

[Khing Shan, analyst]

Yes. Okay. Okay. And then I wondered, maybe, Samir, if you could comment more in general about the investment market today and whether you see if it's changed at all levels of interest? We've seen bond rates being a little bit more volatile, and so maybe anything you could share would be appreciated.

[Samir Manji, executive]

Sure. Thanks, Jimmy. I don't think I'm going to hear anything that's earth shattering here. We're seeing an interesting dynamic at play between Canada and the U.S., and having exposure in both markets, certainly, in some respects, is beneficial to us.

And to be more specific there, it's really interesting. With some of the recent office asset sales and then the upcoming firm retail asset sales on the Canadian side, these are largely all private buyers, family offices that are looking to allocate capital in an environment on the Canadian side where we're not seeing yet any significant institutional buying activity.

On the U.S. side, and Park 8Ninety will be the reference point here, it was quite -- it was interesting and quite beneficial to us in that exercise, where ultimately, through a multi-round process, we had a very strong universe of institutional buyers, including many all-cash buyers. And that allowed us to achieve an outcome that we feel very good about.

And while the price that we reported on that sale is in line with the -- with IFRS, that IFRS number for Q1 was marked up relative to the Q4 IFRS value for that asset. And again, I think it speaks to what we're seeing on the U.S. side, particularly with respect to industrial appetite, and a very, very healthy seller's market for good quality institutional-grade industrial assets. I hope that's helpful.

[Khing Shan, analyst]

Yes, that is. And then -- so just to follow up on the side of the border. You mentioned here, it sounds like it's mostly small private buyers. Are you having to provide vendor [ take-back ] financing on those sales because presumably, if you can sell them in that 6% range, there's not a lot of spread for the buyer in terms of not a lot of investing spread. What does that look like in terms of structuring the deal?

[Samir Manji, executive]

Yes. Generally speaking, when it comes to retail assets, these are all cash transactions. There's -- generally speaking, very little requirement or need to provide vendor financing.

And then as it relates to office assets that we've had some success with, it's been a mixed bag. We've done all cash transactions, i.e., [ no VTB ]. And then in a couple of instances, in order to achieve a higher price and better overall terms for Artis, we've agreed to carry some vendor financing.

But again, it really is case by case. Directionally, we have, obviously, a leaning towards cash transactions versus structured transactions that require vendor financing, but we're going to look at this on a case-by-case basis.

[Khing Shan, analyst]

Okay. And then just a couple of small ones. So on 300 Main, was there any NOI contribution in the quarter? And I'm assuming that $10 million that you referenced, $10 million of NOI that you talked about last quarter, that's still the case.

[Kim Riley, executive]

Yes, that's correct. So we've done a little bit of leasing over the last couple of months since we had our last call. We're ticking up occupancy. We're starting to work on Phase 2 leasing now. We've released -- in the middle of April, we released 50 suites to the market, and we're seeing good leasing momentum on those.

So all moving in the right direction, but still really -- the first phase of the building is really the part that's occupied. So we'll start to see more contributions to NOI as we get closer to full occupancy and start leasing up that top half of the building.

[Khing Shan, analyst]

Okay. And then the last one for me is the retail occupancy jumped more than 300 basis points from Q4 to Q1. Can you remind me what that related to?

[Kim Riley, executive]

Retail occupancy moved up?

[Khing Shan, analyst]

Yes, moved up.

[Kim Riley, executive]

Yes, I think it's actually related to the removal of Prairie Ridge, it's moved to under development. So right now, we're working on redeveloping of the former space that was occupied by [ Sears ]. We're splitting it into a multi-tenant space. So that was contributing to occupancy. And so that was really why it moved.

[Operator]

[Operator Instructions] There seems to be no further questions at this time. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.