Artis Real Estate Investment Trust

TSX:AX.UN

Q1-2025 Earnings Call

[Operator]

Good afternoon. My name is Andrew, and I will be your conference operator today. At this time, I would like to welcome everyone to the Artis Real Estate Investment Trust's First Quarter 2025 Results Conference Call.

[Operator Instructions] Heather Nikkel, you may begin your conference.

[Heather Nikkel, executive]

Thank you, operator. Good afternoon, everyone. Welcome, and thank you for joining us for Artis REIT's First Quarter 2025 Results Conference Call. Artis' results were disseminated yesterday and are available on SEDAR and on our website.

With me on the call today is Artis' President and CEO, Samir Manji; CFO, Jaclyn Koenig; and COO, Kim Riley. As we discuss our first quarter performance, please note 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 June 9. You can access it by using the telephone numbers and passcode 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. Good afternoon, everyone, and thank you for taking the time to join us for Artis' first quarter results conference call. During the first 3 months of 2025, we continue to focus on reducing overall leverage and strengthening the balance sheet.

Objectives that are critical to managing our risk profile while creating a positive long-term trajectory for Artis' owners. As we've conveyed in the past, our strategy by design will produce lumpy income and we believe this strategy with successful execution is aligned with our ultimate goal of increasing net asset value for our unitholders over the long term.

During the first quarter, we sold 2 industrial and 2 retail properties located in Canada for an aggregate sale price of $70.5 million. At March 31, we had one retail property located in Canada under an unconditional sale agreement for a sale price of $4.8 million. This sale closed in April. Execution of our disposition strategy has been a critical component of our overall debt reduction goal.

Our active disposition exercise has enabled us to materially reduce leverage and derisk Artis' balance sheet over the last several quarters. At March 31, we maintained a conservative debt to gross book value of 39.2% compared to 40.2% at December 31. Net asset value per unit was $13.76 at March 31 compared to $13.75 at December 31. During the quarter, occupancy, including commitments, was 89.1%, down slightly from 89.2% at December 31.

Significant leasing completed includes a new 80,000 square foot lease at one of our Minnesota industrial properties that will commence in Q2. We also signed a 99,000 square-foot 7-year renewal with an industrial tenant in Arizona. For the 3 months ended March 31, the weighted average increase we achieved on the 123,000 square feet of renewals that commenced during the quarter was 4%, and we reported an increase in same-property NOI of 4.5% in mixed dollars.

As part of our efforts to improve Artis' risk profile and manage upcoming debt obligations at the end of 2024 we finalized terms on new 3-year senior secured credit facilities in an aggregate amount of $520 million. This includes a $350 million revolving credit facility and a $170 million nonrevolving credit facility.

At March 31, there were $39 million drawn on the revolving credit facility and $170 million drawn on the nonrevolving credit facility. Subsequent to the end of the quarter, we drew a net balance on the revolving credit facility of $213.6 million the majority of which was used to fund the Series E senior unsecured debenture repayment for a face value of $200 million upon maturity at the end of April.

We continue to work diligently and closely with our lenders on our upcoming mortgage maturities. At March 31, we had $275 million of mortgage debt maturing during the remainder of 2025. Of this amount, we have extension options in place for 17% and plan to repay 25% upon maturity or disposition of the property. We plan to renew the remaining 58% in due course.

On December 19, 2024, we renewed our NCIB pursuant to which we may repurchase -- sorry, we may purchase a maximum of [ 4,935,917 ] units, 291,560 Series E preferred units and 421,775 Series I preferred units. During the first quarter, we purchased 1,825,666 common units at a weighted average price of $7.58 per unit, a significant discount to NAV per unit of $13.76 at March 31. We also purchased 31000 Series E and 14,400 Series I preferred units at a weighted average price of $20.75 per unit.

We view our NCIB as a compelling tool to enhance unitholder value, and we'll continue to allocate capital to buying back units using the NCIB so long as Artis' units trade at a material discount to its NAV per unit.

Turning to an update on our Cominar investment. Alongside our consortium partners, we continue to work with parties that are interested in acquiring either a portion or the entire portfolio of investment properties Cominar homes with the ultimate goal of setting -- sorry, with the ultimate goal of settling the outstanding senior and junior preferred units. These discussions are ongoing, and we anticipate that an agreement for a transaction may be reached in the coming months. We look forward to providing updates on our progress in the near term.

In summary, Q1 was another busy quarter. We made progress towards our goal of reducing overall leverage and strengthening the balance sheet. Our payout ratios were higher than we would have liked. But given the nature of our strategy, we expect our income and as a result, our FFO and AFFO metrics to continue to be lumpy from 1 quarter to next. We continue to believe that the successful execution of our strategy will provide for the long-term sustainability of our current distribution. And we look forward to providing further updates as we pursue opportunities aligned with our long-term objectives of growing net asset value per unit and maximizing value for our unitholders.

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

[Operator]

[Operator Instructions] Your first question is from Jonathan Kelcher from TD Cowen.

[Jonathan Kelcher, analyst]

First question, I guess, just on -- and I think you touched on it a little bit at the end there, Samir. On the lumpy income strategy, payout ratios were a little high this quarter. Is your -- under this strategy, are you comfortable that you guys can cover the dividend with full year AFFO if maybe not this year, but going forward?

[Samir Manji, executive]

Thanks, Jonathan. By the way, I'm not sure why the operator mentioned that you're limited to one question. You can ask as many questions as you want, and that's the case for all those who are in queue for questions or with questions.

So Jonathan, I think that as we've conveyed in the past, and we certainly demonstrated last year, but we do believe that over the medium to longer term the successful execution of our strategy will result in generating sufficient AFFO to cover the full year distribution that, again, will be met from time to time as we saw in Q1 with instances where we have a payout ratio above 100%. But again, we remain confident that executing on this strategy will enable us to fully cover the distribution in the long term.

[Jonathan Kelcher, analyst]

Okay. And then switching gears to dispositions did slow a lot in -- well, I guess, Q2, only $5 million so far. But -- is your balance sheet like sub 40% leverage, are you kind of comfortable where you're at and we could expect a disposition program to slow down?

[Samir Manji, executive]

You can see from our balance sheet and the level of properties held for sale that we have on the balance sheet that we do have the intention of continuing to monetize assets in a strategic manner where we believe these assets have near-term liquidity. But at the same time, as is the case from time to time to also opportunistically monetize assets if we have inbound unsolicited offers from buyers, be they strategic in nature or otherwise. And so from our vantage point, we've worked very hard, as you know, to get to this level of overall leverage.

The picture was not as optimistic a few quarters ago, and we feel good about where we are today. We also feel comfortable seeing that 40% ratio dropped further to 35%. And we say that because we believe, over time, as we work through a few near-term priorities that having that level of dry powder will put us in a position ultimately to start allocating that capital opportunistically in situations or with respect to opportunities that we believe can generate above-average risk adjustment returns in deploying that -- some of that dry powder. And that's why we're not shy to see further dispositions continue even though we know results had lost NOI. At the same time, it reduces leverage and just gives us that much more dry powder on our balance sheet.

[Jonathan Kelcher, analyst]

Okay. Sorry, I misspoke. I meant net dispositions -- so I guess the second part of that is, when might we see you start to do some acquisitions? Or do you want to get the leverage down to mid-30s first?

[Samir Manji, executive]

I anticipate that based on what we expect to see happen in the first half of this year, that we will begin to allocate some of that dry powder or put it to work in the second half of 2025.

[Jonathan Kelcher, analyst]

Okay. And would you be looking more Canada or the U.S.

[Samir Manji, executive]

Again, as you know, we have cross-border operations. We have the capacity from an asset management perspective to look at either side I don't think that we're going to actively explore new U.S. markets, but certainly, Canada for sure and possibly U.S. markets where we already have market presence.

[Jonathan Kelcher, analyst]

Okay. And would you look at any of the Cominar assets?

[Samir Manji, executive]

We have, as we mentioned in our remarks, active discussions going on with potential parties and depending on how those discussions evolve and unfold, certainly, one option for us would be to look at ourselves one or more of the Cominar assets.

[Operator]

Your next question is from Mario Saric from Scotiabank.

[Mario Saric, analyst]

If in an ideal scenario, how much additional assets do you think you can sell in the next 12 months or would be interested in selling in the next 12 months?

[Samir Manji, executive]

I think that you preface it with the word ideal. I think from our vantage point, our goal would be to see another $300 million to $400 million of assets monetized over the course of 2025. And again, we'll see how things evolve and unfold. But we've always maintained that Artis has good real estate. We know there are market factors that have impacted the broader, the weak universe across many asset classes.

I think seniors housing is the one asset class that has seen a nice reversal of their fortunes and how the market has evolved there and unfolded. But really most other asset classes have seen a lot of volatility and challenges in recent times, and sector as a whole continues to have headwinds that we think will settle down over time, and that will also translate into activity in the transactional front that we hope we, alongside others will benefit from.

[Mario Saric, analyst]

And then you have the benefit of being active in both Canada and in the U.S. There's been a lot of discussion broadly speaking, in the commercial real estate markets about the bid-ask spread maybe widening or the volatility associated with the Liberation Day announcement and potential tariffs in terms of transaction volumes perhaps slowing relative to previous expectations. Can you maybe talk about how much of an impact you're hearing the tariff uncertainty is having on transaction discussions and whether it's differentiated between Canadian product and U.S. product.

[Samir Manji, executive]

Yes, we've -- we've certainly been hearing what you've summarized just now. But I can tell you that as it relates to our transactional activity, if there has been impact, it has not been significant, i.e., we continue to see on the disposition front activity, progress in the various initiatives we have underway that we are in discussions on with potential buyers. And so I think as we've seen post liberation Day, things also settle down the announcement this week that the U.S. and the U.K. have come to an agreement in principle or certainly appear to be on the path to having an agreement in place and the corresponding impact announcements like those are having in the overall sort of macro market environment.

I think those are positive signs, and hopefully, they'll continue as we keep going.

[Mario Saric, analyst]

Okay. And then just maybe coming back to the payout ratio and the recycling of capital. Is there -- like is there a target a full yield differential on the stuff that you're selling versus the stuff that you may ultimately end up buying that you're targeting? Is that how we should think about the recycling of capital is it does have in mind kind of the pull that you're loosing on dispositions relative to the AFFO that you're ultimately meaning on acquisitions? And how do you think about that?

[Samir Manji, executive]

Yes, we're -- that's a really good question. I would say that as we -- on the back half of this year, begin to allocate capital to what I would describe as growth-oriented opportunities I think we're going to benefit from having a more entrepreneurial mindset where -- it's not so much just AFFO we're going to focus on. I think fundamentally, as we've conveyed in the past, our primary long-term focus is growing NAV per unit.

And so yes, one can achieve that by enhancing cash flow, FFO, AFFO and looking at that, are those important metrics in any type of acquisition or investment opportunity. But I think more fundamentally for us, in addition to those, what we are really going to prioritize is value. And whether it's acquiring assets or making investments in assets that we believe we're acquiring below fair market value or in other instances, value-add opportunities.

That's where we're going to likely put greater emphasis. And as we begin to embark on what we believe is going to be an exciting sort of reversal of having consolidated a fair bit over the last couple of years to now looking at growing again. We will do our best to ensure that as those investments are made, that we are highlighting and communicating to our unitholders to the broader market the specific nature of whatever those new investments are [indiscernible]

[Mario Saric, analyst]

Okay. My last question is just a broader question. You've been selling assets, paying down debt, buying back a lot of units over the past couple of years. We've gone into a strategic review, you've exited the strategic review, the stock still notwithstanding all of that trades at a very significant discount to your IFRS fair value. So when you look out ahead, what are some factors? Do you think about that may suggest maybe it's time to pivot to something different, like how much patience, I guess, does the organization have to continue on doing what it's been doing and the public markets haven't necessarily recognized it yet.

[Samir Manji, executive]

Well, I think the reality is we're in an environment today where the dynamics of the macro environment are impacting most REITs. It's not just the diversifies anymore. It's not just in diversified an office REITs. Most suites are seeing a very challenging macro environment and a public market environment. And -- so I don't think that question around patients is unique to artists or to a smaller subset, it would have been perhaps a few years ago. I don't think that's the case today. And so as far as we are concerned, we're going to do -- we're going to continue to stay focused on controlling what we can control, making decisions that we believe will produced the best outcome possible for our unitholders.

And as things continue to evolve in the broader macro environment, I, for one, have been a believer, certainly in recent times that with interest rates on the decline and with a stabilizing of a lower interest rate environment it's only a matter of time before we either see a healthy level of correction in the public markets or we're going to start to see M&A activity. And we've made it abundantly clear from the get-go that our #1 priority is maximizing value for our unitholders.

We've attempted to pursue different initiatives, as you've noted, in that regard. And with that objective, we can, again, only control what we can control. We cannot control macro factors. We cannot control other extraneous issues and events that impact us and others. And so it's really not so much about patients as much as it is about the broader environment and uncontrollable factors evolving to a point where things become conducive for us to be able to achieve that ultimate goal and outcome of maximizing value.

However, that may be achieved. So I wish I could tell you more. I wish I had a lens on how the world is going to unfold. I don't. I don't think anybody does particularly these days where we have certain geopolitical realities that we're all sort of witnessing and living through amongst other factors that hopefully, again, settle down and just create a healthier overall environment for us to be able to work within.

[Operator]

[Operator Instructions] There are 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.