Q4 2022 Artis Real Estate Investment Trust Earnings Call
Good day my name is Michelle.
Conference operator today.
At this time I would like to welcome everyone to the artist.
2022.
Conference call.
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Thank you operator, good afternoon and welcome everybody. Thank you for joining us for artist rates fourth quarter and year end 2022 results conference call. Our results were disseminated yesterday and are available on SEDAR and on our website.
With me on today's call is artist as President and CEO Comanche CFO , Jacqueline conic C O L. Kim Reilly and executive Vice President U S region stomach.
A replay of this call will be available until Friday March 31, and can be accessed by using the telephone numbers and pass code that were provided in yesterday's press release and recording will also be made available on our website.
I'd like to remind you that today's discussion may include forward looking statements.
That involves 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 your view.
In addition, we may refer to non-GAAP and supplementary financial measures that are not defined under ifr S 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 ISR.
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 you Sir.
Thank you Heather good morning dose in the west and good afternoon to those in the east.
Thank you for joining us for our fourth quarter and year end results conference call.
In keeping with what we have done in previous quarters I plan to keep my remarks brief and we'll focus on the progress we've made in the execution of our business transformation plan, both during the year and since the announcement of a new strategy in March 2021.
2022 presented both opportunities and challenges for artists.
Macroeconomic factors had a significant impact on the broader real estate sector.
These external factors have influenced our business decisions over the past year.
And have been considered in our planning for 2023, as we focus on managing key areas of our business.
<unk> credit and borrowing costs.
We will continue to concentrate on things that are within our control, including executing our business transformation plan, which will ultimately generate long term value for our owners.
We have categorized our business transformation plan into three pillars.
The first pillar of the strategy is strengthening the balance sheet to accretive property transactions unit purchases and debt reduction.
Since the announcement of the business transformation plan, we have been unlocking value through the monetization of certain assets within the portfolio, which to date has included the sale of most of our industrial assets in the greater Toronto area and the twin cities area and all of our remaining office properties in <unk>.
Calgary, Alberta.
Since March 2021, we have sold 65 asset assets of which 45 are Canadian assets sold for $953 million and 20 were U S assets sold for 311 million U S dollars.
We made good progress with our disposition plan during the first half of 2022.
But the second half of the year witness significant change in the transaction landscape due primarily to the higher interest rate environment.
This caused a delay in completing some dispositions in 2022, while which sorry, which contributed to ending the year with overall leverage of 48, 5% versus our desired maximum target of 45%.
We remain committed to reducing leverage in 2023 and are confident we will achieve this.
This in turn will also improve overall liquidity.
Which will provide us with greater financial flexibility going forward.
Yes.
As of today, we have a portfolio of six industrial properties located in the twin cities area.
And one office property in Saskatoon under unconditional sale agreements.
We have also been working diligently on managing our various debt maturities during.
During the fourth quarter, we renewed the first tranche of the revolving facilities in the amount of $400 million.
And subsequent to end of year, we renewed the second tranche of the revolving facilities in the amount of $280 million.
In terms of the non revolving credit facilities, we will repay the $50 million facility maturing in April 2023.
Subsequent to the end of the year, we extended both the $100 million and $150 million non revolving credit facilities each for a one year term.
So in aggregate over the past three months, we have addressed almost $1 billion of near term debt maturities. We appreciate the strong relationships, we have with our various lenders and are grateful for their continued commitment to artists.
In terms of mortgages, we have approximately $540 million of mortgage debt maturing within the next 12 months.
We have extensions in place for 28% of these maturities.
2% of the debt is expected to be paid down upon disposition of the property or maturity of the loan.
And we anticipate no difficulty in managing the remaining 50% of maturities in normal course.
We will continue to manage our various debt maturities and look forward to providing further updates on our corp on a quarterly basis.
Given the disconnect between our trading price and our net asset value.
We view, our normal course issuer bid as an effective tool to enhance unit holder value.
During the term of the normal course issuer bids that expired at the end of 2021 and 2022, we purchased the maximum number of trust units permitted at average weighted at weighted average prices that were significantly below our internal net asset value.
The next pillar of our strategy is driving organic growth by identifying operational efficiencies, increasing occupancy and in place rents and the completion of new developments.
We are pleased to report that leasing activity remained strong throughout 2022.
There continues to be heightened activity in terms of foot traffic across our portfolio as well as strong leasing interest, especially at our new industrial development projects.
This is reflected in our occupancy including commitments, which increased to 92, 3% at December 31, 2022, compared to 91, 5% at December 31 2021.
In 2022 three.
$3 million 690415 square feet of new leases and renewals were negotiated and signed.
Some of these lease deals were at properties that are held in joint venture arrangements properties that are currently underdevelopment and properties that were subsequently sold as part of our disposition plan.
All of this will translate to our portfolio occupancy metrics, but speaks to how busy our leasing teams have been and the volume of activity we have been experiencing.
With respect to deals that commenced during the year 982778 square feet of new leases and 1 million 456537 square feet of renewals started in 2022.
These renewals were negotiated at a weighted average increase of four 9% over expiring rates.
In Q4, the weighted average increasing renewal rents was six 9%.
This marks the eighth consecutive quarter of growth in weighted average rental rates on renewals.
We also reported positive same property NOI growth over year over year in Canadian dollars or one 8%.
In addition to driving growth in our existing portfolio, we have a pipeline of industrial developments underway that we expect will be worth much more upon completion than what it cost us to build.
Going into 2022, we had four development projects underway Park 895.
Blaine 35, one popular several east and 300 <unk>.
Park aid 95 is the fifth and final phase of an industrial development project located in the Houston area and Texas construction.
Construction of phase five in which we have a 95% ownership interest was completed in 2022.
The entire project totals approximately one 8 million square feet of best in class well located industrial real estate.
Also in 2022, we completed the first phase of <unk> 35, a two phased industrial project located in the Minneapolis area and Minnesota.
Blaine 35 will total approximately 317000 square feet in the second phase is expected to be completed in 2023.
Partly several east is in industrial development project located in the Phoenix area in Arizona in which we have a 10% ownership interest and the development management contract in place.
This project, which is nearing completion will comprise approximately 561000 square feet and is 100% pre leased.
We anticipate exiting this investment in 2023 and plan to monetize both our equity and carried interest in the project.
Lastly, we continue to make progress on the development of 300 remained a 40 story residential and commercial project in Winnipeg, Manitoba and.
In 2022 boroughs restaurant opened on the main floor at the building.
Pre leasing interest in the apartment suites continues to be strong and we look forward to welcoming our first residential tenants to the property this year.
Lastly, 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.
During the year artist participated in an Investor group to privatize coming on a REIT.
In 2022, we also announced that artist together with its joined Doctor has acquired a 14% ownership interest in Dream office, REIT and a 9% ownership interest in first capital right.
We are confident that each of these investments will deliver strong returns to artists as unit holders based on the intrinsic value of each being materially higher than the cost of our investment.
External factors have made the past year difficult, but we continue to focus on the big picture and our fundamental goal of maximizing value for our unitholders we.
We expect the economic headwinds we faced in 2022 to carry into 2023 and Y will while we will continue to monitor interest rate trends and forecasts and worked to manage our risk exposure the impact that rising interest rates has had on public markets has also presented compelling opportunities that align with our strategy.
And that have the potential to generate meaningful net asset value per unit growth for our owners.
It's been almost two years since we announced our new vision and strategy for artists. We remain confident that as we continue to execute our plan, we will be able to increase net asset value per unit.
But we will also do everything we can to narrow the gap between NAV per unit and the trading price of our units so that ultimately our owners will be rewarded.
With that I'll turn it back over to the operator to moderate the question and answer session.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star.
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One moment. Please for your first question.
The first question comes from Jonathan Culture of TD Securities. Please go ahead.
Good afternoon.
First just on the.
I guess on the business transformation plan you guys are as you said two years into it I'd look back. This morning, when you put out the press release. It said it would take two to three years to implement so we're sort of at the.
At the beginning stage there.
Do you guys. How are you doing versus your expectations of a couple of years ago and how does the board.
Sure that.
Okay.
Jonathan I think.
The the point around the timeline with respect to what we announced in March 2021.
It's something that we are very mindful of both the board and the management team.
We will be speaking to that in our annual letter that we will be issuing in the coming weeks to our unit holders.
But what I will say here Jonathan is.
There.
Remains a.
<unk> commitment.
On.
The part of the board.
And the senior management to ensure that ultimately we.
We fulfill.
The commitment that we made to unit holders.
And in so far as how it's going so far.
Certainly to call a spade a spade if you look at the trading price of our units.
It's obviously a cause for concern.
But on the other hand if.
If you look at net asset value per unit.
Where we were when we began.
I'll use December 31, 2020, as a reference point.
Our net asset value per unit.
On an <unk> basis since that time has grown 15% and I think that would put us in.
Amongst the.
Top performers in the broader REIT landscape. Unfortunately, our unit price doesn't reflect that.
And we will over the course of the coming months and quarters as we as you mentioned.
We are into the latter part of that two to three year timeline.
<unk> evaluating and exploring what other options are available to us and look forward to speaking further to that.
Right.
Okay.
Okay.
That's helpful and then if I if I look at your.
It happened in Q3 Q4, you did sell some some equity securities how should we think about that like I was under.
I would have thought are under the impression that you guys for.
Investing.
In.
Stocks that you thought over time, you could sort of help drive value in and sort of.
One off liquidity event.
So does that does that.
Did I have that wrong or is there more of a trading component to what you guys are doing.
What I would.
What I would say Jonathan is as it relates to decisions that the board and the investment committee of the board make.
Related to managing our investments in equity securities.
This will always form part of the broader capital allocation decision making process.
And a lot changed in 2022.
And so for us in looking at a range of factors that can contribute to everything from driving net asset value per unit to managing our leverage and our leverage ratios to other opportunities available to.
From a capital allocation standpoint.
On the development side.
These are these are all going to be taken into consideration and if that results from time to time in the decision to either exit on investment that we have.
In light of what the board and management view as better opportunities to allocate capital on behalf of unit holders and that's something that we'll always remain available.
Available to the board and management to be able to exercise.
Okay.
Last last one for me is how many.
Equities, how many different.
Equities did you own.
December 31 was it.
Just just a dream and first capital are there is there is there more.
On December 31, we would have owned three different names.
Okay. Thanks, a lot I'll turn it back.
Okay. Thank you.
Thank you. The next question comes from Jim.
<unk> <unk> of RBC capital markets. Please go ahead.
Thanks, So maybe if I could ask jon's question bit of a different way on the on the transformation plan.
Like when you put together the plan a couple of years ago.
Circumstances were a lot different.
Today as you pointed out rates are a lot higher a lot more volatile.
And when I think about the strategy of trying to our public and private market. That's resulted in a very high variable debt exposure.
So.
And then we're in a market where private market values are very unclear and youre, having to look into selling into that market.
With your balance sheet. So I guess my question is really given the changing circumstances why when the board and that should be rethinking the plan.
And if you are kind of how you're thinking about that.
I think Jimmy I've already addressed the question so.
Hope that between that response, and what we will publish in our year end letter to unit holders that that will give the owners of the REIT the visibility that that they would want to have.
Okay.
And then maybe my second question would be on the comment on our portfolio.
Zinc I think this quarter you've marked it at a.
$146 million, which is still above your cost basis, but its certainly have come down quite a bit from from early 'twenty. Two so I wondered if you could provide us an update on what's going on there in terms of asset sale or or the strategy there to realize on that value.
The <unk>.
The strategy on commoner has not changed.
The.
Pipeline of dispositions that we have previously spoken to continues to be.
In the process of being executed upon.
We have as is the case I think across the entire real estate spectrum.
We've seen the impact of the <unk>.
Current interest rate environment.
And they're the two the two main.
Comments I would offer number one that as many know institutional investors.
Currently largely pens down.
And that is anticipated to remain the case over the near term and that will impact the timing of.
Any sales of larger assets and I would say in particular assets like our central and Plas Alexis Neon.
The flip side of that and where we continue to see.
Very.
Healthy progress is.
The.
In the universe of private buyers.
They continue to be active whether they're strategic buyers whether they are.
Private firms that kind of look at syndicating real estate et cetera.
And so.
There there continues to be activity, albeit transactions are taking longer to get to the finish line again in light of the current environment.
But I think I think that's.
What will likely be the picture for 2023.
And on the pulmonary front there will continue to be a lot of activity with some of the smaller and medium size asset stack are part of our disposition plan.
Okay. Thank you.
Thank you. The next question comes from Matt <unk> of National Bank Financial. Please go ahead.
Hey, guys.
Just just quickly on the on the lending front.
You have a fair bit of U S office assets.
The market for lending on a secured basis I think is a bit challenging in that segment, but can you give a sense as to what you carry in terms of secured debt against maybe the office portfolio in the states and also kind of how negotiations are going and pricing.
Debt financing on both the secured and unsecured basis.
Thanks, Matt I'll start off and then I'll pass over to Jacky in terms of some of the exact ratios. You are looking for we may have to do a follow up on that but what I would say is that we have very good relationships on both sides of the border with our various lenders.
And we also have.
Fortunately, we have lots of optionality.
There are instances, where we wanted to because of the cost of financing or other factors, we want to look at not putting.
Secured debt on our maturity.
A certain asset whether it's in Canada or the U S.
Because we can get more attractive pricing by using other avenues of financing then we're going to capitalize on that flexibility again your point is well taken around the lending environment for office, but Fortunately for US we have lots of options available.
Okay checking anyone at.
And we've already started working on some of the 2023 maturities and we're in conversations with lenders regarding a few of the office properties as well, but I cant.
Circle back to the fact that U S secured debt percentage that youre looking for.
Fair enough I appreciate that and then on the amend and extend to which I think are positive.
Was there any costs associated with that outside of maybe just the interest I don't think the spreads changed materially.
Hello, all spreads or would that be a plus one seven now.
Certainly none of them were $1 six last year.
Okay.
And then.
When you look at your equity positions in kind of the liquidity of those positions.
Do you have a sense as to.
How long you would think it would be to trade out of them, if you needed to get at that liquidity.
Or if you view it in that way and are any of them at this point pledged against any of your facilities or are they kind of free and clear.
So I'll answer the second.
Part of the question first.
Our unencumbered they are free and clear on our balance sheet.
And on the first part of your question generally speaking.
Well I'll speak to the two names that are publicly.
Disclosed on first capital its a very liquid name.
There is there is.
Liquidity on both our ability to buy more units or sell units if that ever is something that we choose to do.
Dream office would be less liquid.
But.
It has demonstrated.
Historically.
On higher volume days large numbers.
Number so certainly volumes of block trades.
But on a retail trading basis, it would be less liquid than first capital.
Okay I appreciate that thanks.
Thanks, Matt.
Thank you once again, ladies and gentlemen, if you do have a question. Please press star one at this time.
There are no further questions at this time I will turn the call over to Heather nickel for closing remarks.
Oh I'm sorry, thank you operator.
Great.
A question just came up if you want to take it.
Sure.
The next question comes from David Davir Kirk Enterprises. Please go ahead.
Yes, thanks for taking this call ive been an investor from day one.
And.
My concern is on a positive basis other general wise, what are you going to be doing in 2023 regarding a few issues like the one youre value was down about a third.
Today's value is down about 4% I check PSX with a huge volume.
The dream right.
<unk> units that you got during the year is down about 30%.
Yes, 50% value the TSS to your net asset value and that is concerning me as an investor Im going nowhere fast and then the other question I have this is the final part of this or comment.
As regarding a negative.
That's out there regarding sandpiper and looking at what I saw yesterday regarding business wire its indicators of sandpiper has a history of value destruction. So.
I think nothing positive about here. So I hope you can address all these issues.
Thank you very much David.
We.
We will not comment on sandpiper here this call literally geared towards artists, but I appreciate your point and happy to have.
A discussion with you offline anytime.
On that point I think on the first three points David that you've raised.
<unk> ahead.
I've touched on this earlier and I will reiterate that across the board.
There is a commitment on behalf of the board and management to ensure that we're taking every step possible to maximize value.
There are a lot of metrics you can look at and yes, calling a spade a spade the trading price of our units.
Is one of those and it's the most important one when it comes to our unit holders because they see that every day and it represents the value that they can either buy units at or sell units at an AR.
Day to day basis.
Got you.
From a from a value creation standpoint, again as I touched on earlier, what we have been able to do with respect to growing net asset value per unit over the course of the last couple of years, we feel pretty good about.
We now have the task of reconciling that with the trading price and as I conveyed earlier, that's something that is very much top of mind for us and we look forward to providing further updates on as we keep going into 2023.
Okay. Thank you and I look forward to the upside.
Thank you very much David.
Thank you.
This is Nicole please continue with closing remarks.
Thank you operator.
That wraps up our 2022 results call. We appreciate you taking the time to join US today and enjoy the rest of your week.
Okay.
Ladies and gentlemen, this does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
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