Q3 2022 Artis Real Estate Investment Trust Earnings Call
Good afternoon, ladies and gentlemen, my name is Michelle and I will be your conference operator today.
At this time I would like to welcome everyone to artists Reits third quarter 2022 results conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
If you would like to withdraw your question. Please press Star then the number two.
At this time I would like to turn the conference over to Heather Nicole. Please go ahead.
Thank you operator, good afternoon and welcome everyone. Thank you for joining us for artist Reits third quarter 2022 results conference call.
With me on today's call is artist as President and CEO , Samir Manji CFO , Jacqueline conic N C O L. Kim Reilly.
A replay of this call will be available until Friday November 11th and can be accessed by using the telephone numbers and pass code that were provided in yesterday's press release, a recording will also be made available on our website.
Okay.
I would also like to remind you that today's discussion may include forward looking statements that.
And involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied today.
We have identified such factors in our public filings with the securities regulators and suggest that you review those filings.
In addition, we may refer to non-GAAP in supplementary financial measures that are not defined under I FRS 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 and.
Lawrence with Ifr.
Lastly, as we discuss our performance. Please keep in mind that all figures are in Canadian dollars unless otherwise noted.
I will now turn the call over to Samir.
Yes.
Thank you Heather and good afternoon, everyone. Thank you for joining us for our Q3 results conference call.
As we've done in previous quarters I plan to keep my remarks high level and focused on the progress we've made towards the execution of our business transformation plan.
During the quarter and since the announcement in March 2021.
The three pillars of our strategy, our strengthening the balance sheet driving organic growth and focusing on value investing.
The first step in strengthening the balance sheet was to unlock value through the monetization of certain assets in the portfolio.
In total since the announcement of the reach new strategy in March of 2021.
We have sold 47 assets, including 31, industrial 10 office and six retail properties.
During the third quarter, we closed on the sale of one office property and made significant progress with other dispositions.
We anticipate a number of <unk> transactions will be completed during the fourth quarter, which will reduce leverage and enhance our overall liquidity.
The REIT is also working diligently on managing upcoming debt maturities over.
Over the next 12 months.
This is revolving and non revolving credit facilities will mature.
We are currently in the process of renewing the first $400 million tranche of the revolving facilities and intend to renew the additional 300 million maturing in Q2 2023.
In terms of non revolving credit facilities.
We expect to repay all non revolving credit facility with proceeds from new mortgage financings and invest in property dispositions.
Artist has approximately $550 million of mortgage debt maturing within the next 12 months.
We have repaid renewed or have extensions in place for 40% of these maturities.
26% of the debt is expected to be extinguished upon disposition of the property or maturity of the loan and the remaining 34% of the deck will be renewed.
Management is currently in discussions with various lenders with respect to the renewal or refinancing of the upcoming maturities and we look forward to providing progress updates in future quarters.
Yes.
At September .
30th.
NAV per unit was $19 26.
Compared to $19 37 reported at June 30th.
And an increase from $17 37 reported at December 31, 2021.
The increase from year end is primarily due to net operating income.
Come from equity accounted investments.
Impact of foreign exchange and the impact of units purchased under the normal course issuer bid.
Actually offset by distributions to unitholders, a fair value loss on financial instruments, and fair value loss on investment properties during the period.
Turning to the next pillar of the strategy, which is driving organic growth.
We're pleased to report that our third quarter operational results were positive, especially when considering the current macroeconomic factors that are impacting the broader market and specifically the real estate market.
The momentum that we had witnessed in Q2 in terms of activity at our properties with respect to both current tenants and perspective tenants continued into the third quarter.
Occupancy, including commitments at September 30 was 92%, which is consistent with June 30.
<unk> continues to be the highest level reported in well over a year.
During the third quarter, a notable one 5 million square feet of new leases and renewals were negotiated and signed which speaks to the increasing activity we are seeing across the portfolio.
After this new leases accounted for almost 1 million square feet, including new leases completed at properties under development and held in joint venture arrangements, which are not captured in our reported occupancy numbers and.
Renewals accounted for the remaining 500000 square feet.
With respect to lease deals that commenced during the quarter. There were 262000 square feet of new leases and 477 487000 square feet of renewals that began in Q3.
The renewals were negotiated at a weighted average rent increase of 3%, marking the seventh consecutive quarter of positive growth in weighted average renewal rates.
On a year to date basis, we have renewed over $1 1 million square feet at a weighted average increase of four 3%.
The development projects that we currently have underway are 300 main page.
Phase two at <unk> 35, and park lose several east, which we have a 10% ownership in and development management contract in place.
<unk> Cerro Eastern Blaine 35, two industrial projects in the greater Phoenix area and the twin cities area, respectively have generated strong leasing interest to date.
We're pleased to announce that parks with Cerro East is now fully leased.
And Blaine 35 phase II is 50% pre leased with strong interest from prospective tenants in the remaining space.
We anticipate phase Iia Blaine 35 will be fully leased upon completion in Q1 2023 with.
We continue to make excellent progress on all of these projects and look forward to having them fully leased in the very near term.
Yeah.
Earlier this year, we completed construction of the fifth and final phase of.
Park $8 90, a best in class Industrial development project totaling one 8 million square feet located in the greater Houston area, Texas.
During the during the third quarter artist acquired the remaining 5% interest in parking 90 phase II, which is fully leased and comprises 576000 square feet.
With this latest acquisition artist now owns 100% of the first four phases of the project and has a 95% ownership interest in phase five which represents the final 674000 square feet of Park 890.
Finally, the third pillar of our strategy is focusing on value investing by allocating capital to investments that are undervalued with potential to produce above average risk adjusted returns over the medium to long term.
The current market environment presents both challenges and opportunities for artists will continue to monitor interest rate trends and forecasts and as mentioned earlier are in active discussions with lenders working diligently to manage our debt maturity schedule.
Conversely, the impact that the rising interest rate environment has had on public markets has presented compelling opportunities that align with our value.
In line with our strategy and that have the potential to generate meaningful NAV per unit growth for our owners.
We have strong conviction in our strategy and we alongside our board of Trustees continue to diligently consider all opportunities available to artists on behalf of its unit holders.
With that I'll turn it back over to the operator to moderate the question and answer session.
Thank you Sir.
Ladies and gentlemen, we will now begin the question and answer session.
If you would like to ask a question. Please press star followed by the number one on your telephone keypad.
If your question has been answered and you would like to withdraw. Please press star followed by the number two and if you are using a speaker phone. Please lift the handset before pressing any keys.
Your first question will come from Jonathan Culture of TD Securities. Please go ahead.
Hi, good afternoon.
Hi, Jonathan.
First.
First question I guess, just on the on the balance sheet and the mortgages coming coming due over the next little bit.
In your discussions with lenders.
<unk>.
Do you think how do you think it will go on the renewals in terms of being able to maybe get more body or maybe pay down some of the some of the principal.
Just curious on that.
I would say overall, Jonathan the discussions are very positive.
We appreciate and continue to have the support of our various lenders across the.
That spectrum, whether it's credit facilities, whether it's on the mortgage side.
I think in terms of the the question, it's really going to be on a situation by situation basis for the most part we are seeing.
No issues.
With respect to renewals in some instances.
The opportunity to upward finance and then.
A couple of instances and this would relate to specific office assets.
There has been perhaps short term decline in occupancy the need for a partial paydown, but overall, we would we would say that the.
<unk> are all positive.
Okay.
And then you're currently.
If I calculated this correctly youre just just over half your debt right now is variable rate.
And I get that you are paying down $400 million of it over the next few months, but could you maybe from a longer term perspective.
Sort of let US know how you think about how much variable rate debt you you should.
Kerry.
Or will carry yet.
Okay. Thanks, Johnson again.
The objective is to look at how we manage our debt structure in the context of our strategy and as we've conveyed previously because of.
What I will say or describe as the lumpy nature of some of the transactional work, we have whether it's the value investing side, whether it's the disposition front.
We want to make sure we have flexibility built in having said that.
These level or in other situations with respect to our bonds looking at potential.
Opportunities for.
Building in a more staggered ladder, that's something that we will.
Aimed to work towards.
Yes.
As part of that.
What's your target on variable versus fixed.
I don't think we can provide a specific number but rest assured I think the direction is to move towards.
A lower ratio of variable.
As it relates to our overall debt structure.
Okay. Thanks, I'll turn it back.
Your next question comes from Matt Cormack of National Bank Financial. Please go ahead.
Hey, guys.
With regards to the assets held for sale I saw that you did dispose of some.
Minneapolis industrial assets subsequent to quarter end.
But can you give us a sense as to it sounds like you're fairly confident that you can still transact.
Just on the ability and the timing to transact on the remaining.
The 500 million or so I think it is.
Thanks, Matt.
As we've conveyed in our announcement.
We anticipate Q4 is going to be busy.
We're seeing a number of.
Dispositions get to the finish line.
And that debt.
Confidence level is.
It is something I would just reiterate on the call here and so we look forward to reporting.
Further on those disposition transactions as they.
Become firm and Gore cross the finish line.
Okay, and with regards to pricing, obviously bond yields have moved.
There wasn't much move in <unk> fair value so presumably.
The dispositions that you are currently entertaining or kind of in line with book value is that a fair assumption.
Yes. It is.
Okay.
And then maybe.
I guess, it's a little bit tangential, but with regards to.
Commodore in what's going on there on the disposition front.
That's not in the held for sale, but can you give us a bit of a sense as to how that process is going in terms of.
Realizing the value on that portfolio.
Thanks for that question I would say the the headline answer is.
Things continue to progress really well as most people know.
With real estate, you make money when you buy and there we have I would say bought very well on behalf of our unit holders and.
In collaboration with our consortium partners.
We have a number of dispositions underway some of which are firm others are under contract and some are in the process of being <unk>.
Negotiate it.
And across the across the board.
I can say that we continue to see.
The strong interest from buyers in the market.
I think as we're hearing.
From others, who have already reported and have had their calls with the market with the analysts.
And I will echo what others have conveyed.
We are no doubt seeing the volume of buyers.
Coming down.
But.
Having said that.
The buyers that are continuing to.
Have active engagement many of them are strategic buyers many of them are private buyers.
Who.
Or not necessarily impacted by the short term market environment short term short term fluctuations based on the market environment. So we're seeing we're seeing.
A healthy active pipeline of activity on the pulmonary front and.
It seem to one caveat.
Within that portfolio there are two larger assets.
Garth Central and Plas Alexis Neon.
I don't think those will transact in.
The near term because of the nature of the buyers that we believe we would be looking at if we weren't to transact ever on those assets would.
It would be more of an institutional nature and.
And so those those would likely be pushed out again, if we were to transact on either of those two assets everything else in terms of the 81 of the 83 assets that we retained on the completion of that privatization I would with confidence say fits squarely in what I've described okay.
That makes sense.
With regards to maybe the destination for some of this capital that youll be freeing up.
It sounds like some will go to debt repayment.
How do you think of at this point.
Clearly the equity markets have been an ugly place for Reits recently, but how do you think of maybe public market opportunities versus are there starting to be maybe in the U S or in certain select areas of Canada, I don't I'm not sure if theres much but distress.
Where you could possibly take advantage of that on buying fixed assets or is it purely going to be deleveraging and equity at this point.
Again for us.
The idea is to.
Have maximum flexibility so that we.
Are we in.
Collaboration with our.
Ports investment Committee and our board of Trustees are able to ultimately make what we believe are the best capital allocation decisions possible on behalf of our owners.
And you've covered nicely the some of the opportunities in areas that we will consider we will also look forward to.
Trading at the level of discount reflected in the market.
We continue to have long term confidence in our NAV, we have long term confidence in the portfolio of assets that we own and manage and we have confidence in our long term strategy and based on all of those.
We.
You should be able to continue with that flexibility to make sound prudent decisions with respect to capital allocation.
Yes fair enough and then a last one on the operations side I know last quarter you had.
<unk> indicated that AT&T would not be renewing but you also mentioned that you've done a fair bit of leasing has any of that space has been addressed at this point in terms of the leasing that you've done.
Thanks for the question. So we are actively working on it we have engaged a broker and are putting together plans for the building.
The tenant is still in place so we won't be able to really tour that space until they vacate at which is at the end of February 2023 that actively underway no deals eminent but we are positive and optimistic that we'll be able to fill that space. Once we get an opportunity to lap to access it.
And would you say for that type of property.
There's probably going to be a fixed during periods. So if it goes if they depart in February .
Would the expectation be.
I guess I'll leave it to you what would be the downtime in terms of.
If you signed the tenant now or at the departure, how long would it take to get them in and paying cash rent.
Yes, it's difficult to determine right now, but I think it is fair to say that there would be a period of downtime and realistically probably closer to the end of 'twenty three.
<unk> be looking to have at least a new lease commence.
Okay perfect. That's helpful. Thank you.
Ladies and gentlemen, once again, if you would like to ask a question. Please press star one at this time.
Your next question will come from Jimmy <unk> of RBC capital markets. Please go ahead.
Thanks, Hey, guys. So on the December credit facilities.
Turing.
Is your expectation that you will renew the $400 million under the same terms.
I guess, what we wanted them to and then if I understand correctly there is another $150 million.
The revolving facility and that you expect to pay down fully.
Alright.
Hi, Jamie Yes, that's correct. We are looking to renew that 400 million in the first tranche at the same terms and we have plants.
Pay that $150 million on revolver with some mortgage proceeds and proceeds from disposition properties.
Okay.
And then on the.
Assets held for sale again to be clear your expectation is that the remaining 500 and some odd will get done by the end of the year and then I was just curious if.
You're having to can see it all in on any terms.
Are you having to provide.
TB to get the deal done maybe just some color around kind of how the negotiation is progressing.
I think Jimmy we responded to this earlier, but we will reiterate that we are confident that we will see.
A significant amount of disposition activity in Q4.
Including transaction that will get over the finish line.
Okay.
Maybe just obviously then on just on the equities. Obviously you guys continue to be pretty active can you just talk generally about that.
The key criteria that you're using to allocate capital that bucket just given that I think we're in an environment, where there seems to be a lot to choose from from a value perspective, I'm just trying to get a better understanding on how you decide which.
Which end is asking which talk you're buying but just kind of how you're thinking through that.
That environment.
There are a number of factors that.
Are taken into consideration.
Bye.
The <unk>.
Investment Committee and the board.
In.
Collaboration with the.
<unk>.
Investment team had sandpiper, but I can tell you that in so far as artists is investment Committee and board.
First and foremost obviously the actual value.
Analysis and assessment is important number two.
The levers available to potentially see those value gaps addressed in a reasonable timeframe and.
It would be taken into consideration.
And then number three the underlying nature of the asset classes within those entities that are being considered.
That we would lineup next to what our existing portfolio at artist looks like.
These are some of the factors that are taken into consideration.
Okay. No. That's helpful. And then just on that last third point than that.
As an example <unk>.
<unk> residential will not be one that you'd consider just because it's not.
And ask that you already got.
Is that fair.
Certainly at this point in time, that's not on our radar.
But again with the agnostic view when it comes to finding the best opportunities for our unit holders.
To allocate capital to I wouldn't say, there's any asset class that's off the table longer term, but that's not something that is in.
In consideration currently.
Okay.
Okay. Thank you.
Thanks, Jamie.
Your next question comes from Steven Sandler a private Investor. Please go ahead.
Alright.
Artist has been one of the more active companies repurchasing their securities.
Any thoughts on the federal governments.
2% excellent stock buybacks or is there any but where you can stop that because I think it's more or less in the idiotic idea.
Stephen Thank you very much for.
Raising that in for the question.
I think that.
As much as we like to believe there are areas, where we can influence.
Things on our end when it comes to the federal government's tax policies I think.
We would we.
We would be in a similar boat to most Canadians where we're at at the Mercy of those that we elect and.
Then rely on too to look after.
That side of.
The work that the government does on behalf of <unk>.
Canadians and so we won't we won't delve further into any sort of political discussions here, but in so far as the actual proposed measure.
Measures that were presented yesterday.
I don't think anyone likes to see new taxes.
Proposed particularly when it comes to areas such as buyback.
Buybacks.
And from our vantage point, we will obviously have to look at what the impact of the implication of that additional cost is in assessing.
Backs as one form of capital allocation decision, making with our board moving forward.
Think the proposed measure doesn't take effect till 2024, but nevertheless, it's something that we of course have to be mindful of as we navigate forward.
Was there any suggestion as to whether its proud to only common shares.
Or does it include preferreds or does anybody know yet.
I'm not familiar with at this point with any of the details and specifics around the proposed.
Measures, but.
I'm sure there may be others that are aware and we will rely on and engage with to understand better and <unk>, we will get more clarity as time passes.
Alright, thank you.
Thank you very much.
Your next question comes from Mario <unk> of Scotiabank. Please go ahead.
Hi, good afternoon.
Andrea.
The investment properties held for sale, the consolidated numbers $260 million.
Just that.
But have you disclosed.
What the associated liabilities.
Or.
We don't have any included in our current disclosure I can total that up to you and sending across Maria.
Okay.
That'd be helpful. And then I guess, there's an associated question.
I think Sameer you mentioned the $550 million.
Debt maturity.
12 months, 20% of it will be sold at $150 million.
Is that like would that be a fair way to think about the amount of debt that's on that or.
Or is that too simplistic.
No that doesn't include the amount is that included in the 650.
Okay and then in your negotiations today.
How important is in place.
On the buildings that your trends so.
We have not seen this.
As an issue whether it's an unencumbered asset.
Or whether it's an asset that has.
Debt attached to it most of the dispositions that have mortgage debt, we can unwind and in fact.
If it's swapped we actually get paid for that of course, selling the asset unencumbered.
Okay, and then just maybe.
I don't know if you can answer this question or not but just like broadly speaking that theres been so much volatility in the markets.
Where do you see kind of the best.
Asset class or by geography, whether it's public or private.
I would it's a really good question I would say that.
I know, it's going to sound cliche, but when you're in an environment like we are in today, where the proverbial baby is being thrown out with the bathwater.
I have to believe that there is generally going to be a gravitation to quality, where if you can buy quality.
Relative to lower quality.
Assets or portfolios in the public markets and the private markets, where the Delta that one is looking at is at potentially potentially at historical lows I E for a smaller premium than one would historically have paid you can upgrade the quality of what you are buying.
Materially.
Again.
Irrespective of asset class I think that's where people are going to find.
Compelling opportunities and certainly where we would be channeling.
Our attention and focus with our <unk>.
Trustees as we're evaluating as I mentioned earlier capital allocation opportunities available to artists on behalf of our owners.
Got it and how would you how would you characterize that spread between let's say quality.
And something else.
Just tighter.
Paraphrase, what you're saying is tighter than historical average.
How would you characterize that spread.
Today in Canada versus the U S.
I don't I don't know if I can answer that question from a geographic perspective in terms of what youre, describing a lot of the.
Our public Securities investment work, we do focuses on Canadian listed names.
We don't.
I don't personally have.
As detailed in understanding more granular understanding of all of the U S names across the various real estate asset classes I know some of them I don't think what we're describing generally is different I think that that scenario I've tried to describe exists on both sides.
But I can't quantify what the Canada versus U S Delta is.
The Genesis of the question I'm, just trying to understand.
Picked up on something where with devaluation and users so.
So much more discounted than in Canada.
Now it makes sense to maybe do a bit more work on the U S Securities just on Canada.
And it's a good question. Thanks for clarifying that I don't think we're there yet.
Got it.
Okay. That's it for me thanks, everyone.
And Mario extent to your question on the mortgages and held for sale of approximately $196 million.
The group has a.
Okay.
Perfect. Thank you.
Thank you Mary.
There are no further questions from the phone line. So I will turn the conference back to Heather Nicole. Please go ahead.
Thank you operator.
Wraps up our call for today. Thank you all for joining us and have a great weekend.
Ladies and gentlemen, this does conclude your conference call for this afternoon, we would like to thank everybody for their participation and you may now disconnect your lines.
Sure.
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