Q1 2021 Artis Real Estate Investment Trust Earnings Call
And there are many years of dedicated service to artists 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 are both contributed significantly to artist is 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 elissa to moderate our Q&A session.
And from there just as a reminder, if you'd like to ask a question and click on the right hand button on the bottom of your screen and then you will be placed in the queue and Ivo and accordingly.
Our first question is from Jonathan Health threat TD Securities free.
And Jonathan.
Hey, Jonathan.
Hi, there can you hear me we can yes.
Okay for first question.
And just you've been there and there are a few months now that 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 10th announcement of the results of the 100 day review.
Importantly, the go forward vision and strategy for the company.
And in which we made very clear that one of our objectives would 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 LOI.
And offers that have come in on specific assets groups of assets.
And what this says.
And certainly validated Jonathan is that there is a tremendous amount of liquidity.
In the market.
For our assets and I would say this across all three of our asset classes.
And to get to your question.
We've made very clear what the next two or three years will look like and.
And at this point, it's difficult to pinpoint a specific financial target and so far as what the level of asset sales would look like but again, if you simply look at the announcement on March 10th 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.
On transactions.
On the asset sales side, so as to ultimately achieve that near term objective that we have published and communicated to the market.
Okay.
Okay, but if you guys are seeing the ton.
Ton of demand.
And that's obviously out there.
Would it not be more so and your control like do you want to sell $500 million of assets. This year do ourselves $1 billion of assets. This year, it sounds like with that credit demand.
Really up to you guys as much as any day.
And it's a good point Jonathan.
I would say that.
And typical Jonathan culture fashion, we've established some nice goalposts debt I think sound.
Sounds reasonable to me.
Okay and then.
If we if we take that a step further and go two to three years out.
What is your what do you think you're so you're through what you want to sell what is your balance sheet look like.
Or your asset base, I guess look like in terms of.
Hard assets held versus securities.
50, 50 or is it 60 for like how does that look.
And I don't think that we can comment at this stage on what.
And the pictures on it looks like two to three 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 10th.
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 debt, even two or three years from now hard assets will form a meaningful and significant a proportion of our balance sheet, our asset base and so.
And 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 to two to three years from now.
The rest is really going to be a product of a number of factors that we may not necessarily be indirect control of including the broader market environment and also going back to our unit price performance and.
And how that fares relative to the underlying value of the units themselves.
Yes.
Okay, and then just lastly on your <unk>.
<unk>.
And I guess on the on the fundamentals.
On the slow start for same property NOI.
What do you expect for the balance of the year.
Sure.
Has it over to Kim and to Jim to address that.
Sure I can adjusted to start.
For same property NOI for this quarter, it's really the same.
Items that we discussed last quarter, so parking and Winnipeg and then some.
And some vacancies I think theres, one vacancy and Fort Mcmurray and that came out and believe these backfill, though that sales are going forward I think as we move through the pandemic and we see the vaccines are all out and people get back to work and back to the office, we're seeing activity pick up so net parking income will pick back up and and the leasing activity remained strong so I think through the balance of.
This year, we'll see the improvements overall.
Okay. So so positive and the quarters going forward, especially I guess and.
And Q2, you start to lap the lack of parking income right.
Correct.
Okay. Thanks, I'll turn it back.
Thanks, Jonathan.
For the next question comes from Matt Mcconnell RBC capital markets.
Hi, Matt.
Yeah.
Okay.
Now Youre just on mute.
Hey, guys can you hear me now yes.
Excellent.
On a good job of articulating your medium term vision for the REIT and the wide range of potential outcomes that.
The 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's 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 and in terms of the items you raised.
To provide more details visibility and.
For clarification on the various items and I will because I know what's on People's minds I will go directly to your question regarding the artist 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.
Communicate that to unit holders and to the market more broadly.
Is there a time timeline for the specifics I mean should we expect this in Q3 concurrent with the AGM or just some high level thoughts there.
Yeah again as it relates to the artist and Sandpiper relationship I would say that the objective.
And at the board is working towards is to try and finalize.
And those details and to communicate them in relatively short order if possible ahead of the may 21st meeting.
And then beyond that and the other areas that you've communicated or.
Questioned that'll 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 a half a billion dollars to $1 billion worth thats for sales in 2021.
Should we think about potential tax leakage.
And again at this point I think its premature I will say that as it relates to any transactions of significant magnitude we would on their take on exercise with the management team.
To ensure that.
Along with advisors and to ensure that any tax consequences are being managed in a thoughtful and effective way on behalf of the owners of the rig.
And then in terms of the medium term objectives for asset sales, you've got about four and $5 billion worth of income producing property today and how much of that portfolio is retained at the end of day two to three 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 two to three years, but could it be in the $1 2 billion and a half mark or range certainly that's within the range of probabilities.
And with respect to their units still trading at a fairly wide discount to NAV.
The rights and active on its on CIB is there a point, where a potential substantial issuer bid starts to come into the picture.
That's great question, Matt and I would simply say nothing's 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.
Well I appreciate the commentary I'll turn the call back. Thank you very much thanks, Matt.
Yeah.
Yeah.
Next question and Samsung <unk> BMO capital markets.
Hi, Tony interest free.
True.
Hi, everybody.
Jenny.
So Samir I'm, just wondering with regard for the industrial portfolio. It sounds like you're getting some pretty good interest can you talk about whether.
And whether or not that interest is broad based or is it are you getting a disproportionate amount of debt coming in for certain types of industrial or certain geography industrial properties.
Thanks Kenny.
The industrial zone.
Space.
We all know and we certainly are hearing about and reading about in media social media et cetera, almost on a daily basis is on asset class that is.
Seeing unprecedented demand growth drivers cap rate compression etcetera, 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 and with respect to our <unk>.
Real 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 on.
Today, seeing the lowest level of vacancy.
In North America, and 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 and.
Amount of inbound interest.
Specifically related to our GTA industrial.
Okay.
Okay.
Great I guess, this and somewhat related to the disposition, but given that there's such strong interest and you've got a $2 billion portfolio.
I don't think that gets transacted all over the short term, but when you're looking at the offers that you're getting how do you and and given the momentum and industrial pricing. How do you decide what to put in D and the keep versus sales per day pile on the industrial and like what's that parameter that debt.
And to see them for you agreed to sell something versus keeping it for a little bit longer.
One other things that were in a fortuitous position net too.
To.
And be able to evaluate and.
Look at from and 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 had conveyed earlier that there is liquidity there is a bid for <unk>.
And many if not most of our assets that we have within our 4.5 or $4 8 billion dollar 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 and.
And look at potentially transacting at.
And again quite frankly, we feel that we are very much in the driver's seat and debt based on the Optionality. We have we can pick and choose we can pick and choose geographies and can pick and choose asset classes.
And it's not a.
A decision process.
Processed that and to your point journey.
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 unit holders. So as to ultimately go back to our strategy and some other key objectives that we've laid.
[noise] out and we are now focusing on executing on it.
Yeah.
Thank you for that and speaking of capital allocation just wondering what your thoughts were on the preferred piece of debt capital stack I know you've been sort of you're buying back a little bit at a time are there any limitation with regards to what you do with that piece and and how do you think about it over the longer term.
Jenny and the three classes of Prefs that we have as you know have varying maturity dates going into 2022 and 2023 and.
And so far as a reset dates that provide artist 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 have noted.
And a modest and 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've 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.
And those that understand some of the technical details.
With respect to one of the areas we have.
Raised and have sought.
Unit holder approval for at the upcoming annual General and special meeting on May 21st is to provide the board with the flexibility.
As time passes to move from a closed and structure to an open and structure.
And that exercise if it was something that unitholders approved and the board then has debt flexibility around if the board wants to exercise that conversion.
Likely with it.
And would come the.
Redemption.
Certainly on some of the two if not all three of the classes of perhaps debt we have outstanding at those reset dates in 2022 and 2023.
Thank you and then one thing that artist net retained for a long time is a large portion of our floating rate debt and a comparatively short term on the mortgages as well. So you know with the new newbie.
Bard and new management team in place are you guys thinking differently.
And when you consider where pretty much what we think were at rock bottom rates and they've started to move up and 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 with sort of my remarks on our legacy strategy on debt management.
And.
And thanks, Jack Jenny Thanks for that I would say here with respect to our debt or our financing strategy moving forward.
We are evaluating as existing asset level mortgages mature, we're evaluating one of two scenarios either upward financing and capitalizing on as you've noted a historical ultra low interest rates available.
And <unk>.
Even if one is to lock out a lock in for three to five years or beyond.
Alternately depending on the asset or group of assets.
Debt 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 tube because in doing so it actually benefits us in.
And so far as our overall liquidity and capital position so as to again provide a maximum flexibility and and the third piece.
And two 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.
Day, 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.
Great. Thank you. So I recognize that there are a lot of moving parts, but what youre doing but.
But I guess, maybe another way to sort of get on what I, what I'm trying to get on it.
Philosophically.
And does the current management team.
On the the debt stack and the term as being ideal.
Philosophically.
I would say that where.
Where the opportunity exists to put.
Our 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 and so far as retaining specific assets in specific geographies for the longer term it would make natural sense too and.
And and prudent and be prudent to establish asset level financing on those properties and that may see us.
And I turn the dial up a little bit on mortgage.
And mortgages versus unencumbered.
Assets contributing to the revolvers that we have in place.
Great. Thank you that's all for me and just wishing Jim and Frank the bad debt and the next day.
Thanks Sheila.
Yeah.
Yeah.
Okay.
On this are you on mute sorry.
Sorry, bringing and Dean welcome and from CIBC Dania you're on.
And I'm on I'm lives can you hear me.
We can thank you Deane.
And that's a first for me with the technology.
And I liked the format, but I was hoping we'd see the video because I missed Mr Kelter space.
And.
Sameer.
When we're looking at the potential investment and public Securities and we had a big run and in capital markets.
Is there a specific market or identified asset type and you think you could be looking at or is it is this too early and are you limiting the view choose for PSX listed or are you looking to go down into the U S or other markets.
For those opportunities.
Thanks for the question Deane and I'm sure I don't want to speak on behalf of Jonathan but I'm sure he'd love to see you turn your camera on also and see you but.
Going to your question at this point, it's too early to tell where.
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 a more conservative levels.
And we and then begin.
In a.
More active manner as a management team and with the board exploring.
On growth opportunities, whether it's investing and developments investing and other a value add.
Assets or other securities as you pointed out.
We're going to try and provide ourselves with as much.
And flexibility as possible so that really the priority becomes a.
Focusing on what are the best opportunities.
And where are the best places from and 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 on the REIT and I know that sounds very cliche Dean.
I can say that it's something that our board of trustees.
Are very committed to.
That decision, we made debt net asset value per unit.
Is going to be our primary and most important metrics and we're going to focus on so as to build grow and strengthen the value for the owners of the REIT is something that we are all committed to and are going to have.
Focus a lot of our time and energies towards as we move forward.
Okay great.
And that's all I had I'll hand, it back thanks, Mark Thanks, Dave.
Okay. Next question is from Irina Parker P on that customer.
Every night just price.
For the room.
Yes, Hello, and thank him me, yes, we can nice to hear you Irina thanks for joining us.
Wow.
And I wanted to call up on much more concern for you.
And everything goes according to your plan and what kind of.
Okay and innovation.
Even though looking for by anthem for small.
And maybe one of them.
On target long term goals for me in terms of average.
Yeah. Thanks Irina.
I would say that first of all we were very pleased.
And 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 a 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 Forty's and ultimately our goal is to see it brought two levels be below that.
And 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.
And execute on and deliver to the owners of the REIT.
Hum.
Hum.
And I apologize.
My next question with already and trust.
But overall.
How many people from from China.
Okay.
How many equine and tubing.
It's not something we've.
Actually spoken about historically.
But I'm happy to again and the spirit of transparency I am happy to share that.
Being based in Vancouver, and in order to insure with my colleagues not just in Winnipeg, but across North America.
That I and 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 Elisa who.
And many of you know already.
Into artists on for <unk>.
On basis, and she's based here in Vancouver, Our alongside me and we've also brought and Cory Colleville.
From who was formerly with sandpiper and now into artists and.
And he is also based share.
And in Vancouver, and then finally on my executive assistant.
And is now also on working with me inside artist. So that's.
And the response to your question again, and full transparency and again all under the.
Per view oversight and approval of the GNC on the board.
And so you don't book.
And we cannot comment too much.
Uh huh.
Yeah.
No that is not our and we've got a we've got a very comprehensive team of over 200 are incredible hardworking individuals that artists and so are we and we think that we've got a we've got all the right people and the right places so as to be able to now move forward and execute on our strategy.
Mhm.
And my final question would be about.
Conversion.
And.
Can you maybe explore more rationale behind that and what they are.
Hum to income.
Sure.
Yeah. We've we've tried to summarize this in the materials that have been disseminated to unit holders.
And as we conveyed on March 10th and we certainly will look forward to speaking to and more detail.
At the annual General and specialty meeting on May 21.
On a big part of this.
Our 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 the strategy so as to address what again has been a perennial issue.
For the owners of Artis, where our unit price and 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.
And net asset value per unit.
And the long term.
Debt moving to an open ended structure would provide that flexibility there are certain restrictions that come with being a closed 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 that 10% threshold.
Got it and then create one more U S vehicle and 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 thresholds.
And on how much we can own in one entity or company, whether it's on existing internal subsidiary structure of artists or whether it's artis investing in a third party company.
And so this all ties together and so far as why we are recommending and why we believe with very high conviction that moving to <unk>.
Down a path that allows the board the flexibility when the time is right to.
To exercise this ability to convert from a closed and its structure to an open end and structure is and the best interest of the owners of the REIT as it relates to REIT status.
And again the expectation is that we will continue to maintain REIT status.
For the foreseeable future.
And that even as we move forward and executing on the vision and strategy in.
And the medium term event and it may simply result in.
A proportion of our income continuing to receive the.
The tax benefit.
And 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 and we anticipate it'll be something that we will talk more about and we will provide.
<unk> more color and detail around as time passes in the quarters and frankly the years ahead of us.
Okay.
Okay.
Thanks Irina.
The next question.
From Mike Mark and things like that.
And I can just about you and thank.
Thank you. Thank you Melissa and good afternoon, everybody just two quick ones for me number one scenario talks a lot about.
Just the demand youre seeing for the industrial office, and particularly I think if I remember correctly, one of your strategies for tax mitigation with the potentially.
Take back stock and a transaction and I was just wondering if that's been brought up with any of those central buyers and how are those discussions if so are progressing.
Thanks, Mike I would say that again, it's early days.
One other things that has certainly been interesting for us in these last few weeks.
Again as we've seen.
What I would simply describe again.
Is 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 and who from a cost of capital standpoint.
Are demonstrating.
And that they can pay very aggressive.
Cap rates.
And that.
And that of course has an inverse relationship.
In other words, they can pay on.
And much higher price than other players and the market.
And at the end of the day.
And the conventional parties.
Who would be in a position to provide consideration and the form that you've noted.
And at some point artist 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 more paying prices that perhaps others with a lower cost of capital would be in a position to to pay.
And I'll simply say that the last few weeks.
Have reconfirmed.
Reconfirmed.
And validated that there is significant liquidity and the market and.
And substantial investor demand.
For all asset classes, but particularly.
Industrial real estate.
Okay. Thanks, and then just.
Last one here for me.
Power business, and our ROE or the the success on that transaction and I guess you've got some.
Asset sales and dispositions post quarter.
And I may have missed it but did you guys have and comment on.
Cap rates for that or where that compares to versus.
On a gross carrying value.
Sure I'll pass it over to Jim It would be ashamed for us to have a call our last call with Jim and not have the audience have the opportunity to hear from him.
Okay.
Thank you Samir and I are Mike.
And so they were of course Seoul.
I'm going to say virtually at different value, but that's partly because of the quarter and rolled through so everything gets adjusted based on its fair value. So the transactions that have occurred.
And would be virtually identical to the Q1, if first value for those assets.
As far as your question on cap rate goes I guess there was.
So 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 malls.
Our asset class.
There was a.
Another retail asset and a and it's tertiary market that maybe the cap rates a little high but again I believe that was the right call and.
The other asset growth was and I think a very attractive cap rate on our retail asset so pretty happy with those transactions.
Okay.
Great. Thanks very much.
And it's Mike.
Okay. It looks like there are no further questions.
And thank you everyone for joining our webcast and if there are any further questions. Please feel free to recap and year.
Yeah.
Have a crazy and everyone.
Yes.