Artis Real Estate Investment Trust Q1 2023 Earnings Call
Good afternoon, ladies and gentlemen, my name is joelle and I will be your conference operator today at this time I would like to welcome everyone at the artist Street first quarter 2023 results conference call at this time I would like to turn the conference over to Heather Nicole. Please go ahead.
Thank you operator, good afternoon and welcome everybody. Thank you for joining us for artist Reits first quarter 2023 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 and your man T. C. F O Jacqueline conic C O L. Tim Reilly and executive Vice President U S regions L. Martin.
A replay of this conference call will be available until Friday may 19, 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.
I'd like to remind you that today's discussion may include forward looking statements that 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 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 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 Ias alright.
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 Scott.
Thank you Heather good morning, everyone welcome to artists as first quarter earnings call on behalf of the team I would like to thank you all for joining us today.
On today's call I will provide an update on our performance during the first quarter and will provide some additional commentary on our progress to date in 2023.
And the path forward for artists.
In doing so and as I've done in previous quarters I will keep my remarks brief so as to allow ample time for the question and answer session at the end.
On our last earnings call in March.
College that 2022 had presented both opportunities and challenges for artist due to macro economic factors that had a significant impact on the real estate sector.
These external factors continue to create uncertainty and volatility in the markets, which we do not anticipate will end anytime soon.
Having said that we will stay focused on addressing near term priorities. While also capitalizing on opportunities available to us from a capital allocation standpoint, with an eye on continuing to drive net asset value per unit for our owners.
Today, our top priority is strengthening the balance sheet and more specifically, reducing leverage and increasing liquidity.
Fortunately, we have a number of levers available to us to achieve this including selling assets refinancing mortgages, establishing new mortgage financing and monetizing public securities.
During the first quarter, we sold an office property located in Saskatchewan.
In addition, subsequent to the end of the quarter, we sold the retail property located in Alberta and have four assets under unconditional sale agreements expected to close in the second quarter at prices that are in line with our ISR <unk> values.
These four dispositions totaled $110 million.
We have a number of additional dispositions that are at various stages and look forward to providing updates on these transactions in the months ahead.
The disposition activity, we're seeing including unsolicited inbounds from buyers seeking to acquire specific assets of ours demonstrates demand in the market for quality real estate, while also reflecting the quality of real estate that artist owns.
Our disposition plan is on track and we are confident that we can execute our target of at least $400 million of dispositions in the year, which will contribute to reducing overall leverage enhancing our liquidity and will put us in a good position to satisfy our upcoming debt obligations.
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While our debt to gross book value increased slightly during the quarter, we are committed to reducing leverage in the second quarter and we will continue to focus on reducing leverage throughout 2023.
Proceeds from dispositions have also been instrumental in providing us the flexibility to utilize our normal course issuer bid.
Under our current and CIB, we acquired one 7 million units at a weighted average price of $8 40 per unit, a significant discount to our ifr S NAV per unit of $17.09.
Subsequent to the quarter, we acquired nearly $1 9 million additional units at a weighted average price of $7 17 per unit.
We intend to continue utilizing our N CIB I said represents the best investments, we can make today and it's highly accretive to our net asset value per unit.
Turning to our debt maturities, we began 2023 with a fair amount of debt maturing in the year we.
We have been working diligently to manage these maturities.
During the first quarter, we renewed the second tranche of the revolving facilities in the amount of $280 million.
In terms of the non revolving credit facilities, we extended both the $100 million and $150 million non revolving credit facilities each for a one year term.
Subsequent to the end of the quarter, we repaid the $50 million non revolving facility that matured in April 2023.
In terms of mortgages at March 31, 2023 mortgage maturities for the remainder of 2023 total $433 $5 million.
Subsequent to March 31, 2023, we repaid one maturing mortgage and the amount of $16 6 million.
We also refinanced two mortgages with accumulative principal balance at maturity of $24 million and received a cumulative uplift of $10 million on these two loans.
Of the remaining 2023 mortgage maturities, we have plans underway to renew refinance or repay each of these mortgages.
As a result of the progress we've made during the first quarter with our near term debt maturities current liabilities on our balance sheet decreased by $349 million from December 31.
The March 31.
This is heading in the right direction and we expect that this trend will continue over the next few quarters.
We recognize that a key component of our 2023 debt maturities is the $250 million debenture that is maturing at the end of Q3.
We are on track to have the flexibility to simply repay this full amount if the prevailing terms for issuing a new debenture by that time or not in the best interests of our unitholders.
I do want to acknowledge and recognize our lenders.
And thank them for their continued commitment to artists.
As we work through the remainder of 2023 debt maturities, we will continue to be diligent and thoughtful in the process and we'll ensure that each decision regardless of its magnitude is made with an owner's mentality.
We look forward to providing additional updates as we make further progress in this important area of our overall business.
On the operational front, we are very pleased with the amount of leasing activity, we're experiencing across our portfolio.
Same property NOI was the highest it has been in several quarters, reaching eight 4% in Canadian dollars and four 3% in functional currency.
The weighted average increase achieved on renewal rents that commenced in the quarter was four 8%.
Occupancy remained above 90% and positive leasing momentum continued throughout the quarter with 409983 square feet of new leases and 315574 square feet of renewals commencing in the quarter.
During the first quarter, we completed two development projects Blaine 35 phase two and park Lou Cerro East both of which are 100% leased.
Subsequent to the end of the quarter. We also signed a new 440000 square foot lease at Park 890 phase five.
The last phase of our industrial development project in Houston.
Phase five park 890 is now 100% leased.
We've also made significant progress on 300 main or 40 storey residential development in Winnipeg.
The move in date for our first phase of suites has been set for early July an exciting milestone and we recently opened a series of display suite inviting the public into the tower for the first time.
The response has been overwhelmingly positive.
We're looking forward to not only the income stream that will be coming online as tenants move into this property, but also the impact that having people living at Portage in Maine will have on Winnipeg downtown businesses, including our own commercial tenants and our park AIDS situated within walking distance of our.
New residential tower.
Lastly, I'd like to touch on our public securities investments.
As I mentioned earlier, our near term focus is on improving our balance sheet and more specifically, reducing debt and increasing our liquidity position.
During the quarter, we sold $39 $2 million of equity securities as we saw a better capital allocation opportunity to buy back our own units using our N CIB, while also adding to our liquidity position.
Because of the significant discount to NAV that our units are trading at we view buying back our units as the best investment we can make today something we will continue to do as noted earlier given the significant accretive impact. This will have on net asset value per unit <unk> unit and <unk> per unit.
We are in no rush to monetize public securities going forward, but we'll consider doing so on an opportunistic basis and if it is an artist is interest from a capital allocation standpoint.
With respect to our investment in Pulmonology, we continue to work collaboratively Kurt we continue to work collaboratively with our partners and have completed several dispositions this year with additional dispositions in the pipeline once again, demonstrating the demand we continue to see in the private transaction market environment.
Overall external factors have certainly changed the overall landscape for real estate.
While current interest rates persistent inflation and fears of recession continue to impact the public markets. We remain encouraged by the operating fundamentals of our portfolio and the markets. We operate in and will continue to focus on the big picture and our fundamental goal of maximizing value for our unit holders.
We remain committed to increasing net asset value per unit, while also doing everything we can to narrow the gap between NAV per unit and the trading price of our units.
With that I'll turn it back over to the operator to moderate the question and answer session.
Okay.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on your Touchtone phone, you'll hear three Tom prompt acknowledging your request and your questions will be pulled in the order. They are received should you wish to the time from the polling process. Please press star followed by the two if you are using a speaker phone. Please lift the handset before pressing.
Any keys one moment. Please for your first question.
Your first question comes from.
Fred <unk> with Laurentian Bank. Please go ahead.
Thank you and good afternoon.
I was wondering sameer or Jackie.
When considering post Q1 refinancings.
Expected dispositions.
Where does that leave us on the remaining 434 million of our mortgage maturities this year.
Like can you give us a bit of guidance on what.
What percentage of this amount that you plan to actually refinance.
I can take that one.
And now that we plan on looking to refinance at somewhere around 28% of the maturing balance.
Some of the fourth quarter.
Okay, No that's great.
And maybe one last for me for Samir.
A little bit surprised that you guys are still active on yen CIB given the situation on the.
With the balance sheet.
I'm wondering is this because you're are you getting more comfortable with SaaS and this was like dispositions or.
Or are you just wanting to show some activity because you just feel like the.
The unit prices so depressed.
Yeah.
It's.
Both both of the factors you've noted Fred if we if.
If we were concerned about that.
Go forward liquidity and the balance sheet.
We would not be active with our in CIB and we're very comfortable with where we are today and Directionally, where we're heading and then based on that.
Have that.
And that comfort in seeing our NCI be continued to be active.
Perfect. Thank you for this.
Your next question comes from Matt Cormack with National Financial. Please go ahead.
Hi, guys.
Can you just walk us through the NOI contribution from I think it's 360 million.
Arms of how those units will come online and how we should expect kind of NOI to trend I understand apartments that can be negative in the beginning as you are in lease up but eventually obviously that turns to the positive.
Okay. This is Kevin I can take that question so.
So we are opening our first phase of suites July 1st and we've already made significant progress on the lease up so we expect them to have probably 30 or 40 people moving in July one and then kind of ramping up from there 200 suites are coming online in the first phase and then the balance later in the year. So I expect.
Significant leasing through the last two quarters of 2023, and then continuing into 2024 and being stabilized occupancy by the end of 2024.
And can you provide what kind of your your.
Pro forma stabilized NOI would be from from that building.
I don't have that on hand, but we can definitely calculate that and circle back.
Thanks.
Sameer I'm not I'm not sure if I'm going to get any answer on this but I'll try.
One of your equity Securities is in the process of doing it S. I b.
Would that qualify as an opportunistic point to get some liquidity out of your equity securities.
Yes. The simple answer is yes, it will provide that sort of opportunistic scenario, we're going to obviously evaluate between now and the tender deadline date.
How things progress on other fronts, we want to spend some more time understanding.
<unk> information circular and then with our board will make a decision accordingly, when we get closer to the deadline date.
Alright fair enough.
And with regards to our 161 Inverness.
Can you give us a sense of.
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How do you think that property will be repositioned and the leasing prospects for I guess smaller spaces as opposed to trying to go after a single tenant for all of it.
I can answer that if you like severe.
Is it still a barnes.
Right now we are.
We are working through.
Through.
Renovating the building.
Upgrade a lot of our a lot of our equipment and we're also a white box in the fist first floors.
To begin this process of multi Kang.
The building for the first time ever.
We have had some tours already there are looks at this building its unique its got great frontage.
On the Interstate as well as having access to light rail.
We remain hopeful that we are introducing so to speak a new building to the market that has great visibility.
And ballpark, how much would be the investments to get it to that positioning.
Right now we are budgeting for the next couple of years around $4 million.
This year, we will be spending approximately $1 seven okay.
Okay.
And then the last one for me just with regards.
I think I may have asked last call, but I'm not sure if.
There was if I ultimately got the answer but.
With regards to the way the U S office portfolio is.
Funded or or lending there, but can you give me a sense as to what the secured financing looks like on that portfolio and are there any assets, where it would be accretive to the REIT.
To give it back to the lenders are not something that youre considering at all.
I'll I'll address the second part and then pass over to Jacky for the first part.
And you may have to come back to you Matt in terms of not have necessarily all the detail you're looking for but on the second part there is no intention at this point.
Two keys back to any of our lenders.
For any of our U S assets.
Okay. Thanks.
Your next question comes from Allison <unk>.
Yeah Kumar with RBC capital markets. Please go ahead.
Hi, good afternoon guys.
Just had a couple of quick questions.
So outside the $110 million of asset sales closing in May can you speak to sort of the timing and the investor interests for the rest $2 $50 million to $260 million of actually helps you out.
Yeah.
Sure.
As we said in our press release and we have a.
With a healthy pipeline of additional dispositions.
And we anticipate that.
The the majority of that is not going to be back ended that it's real time. The good news is we have multiple irons in the fire and often in many of these instances again, given the quality of the real estate.
It's not a one horse race, we have multiple buyers for certain assets that are currently in that disposition pipeline. So we expect it'll be.
Closer to near term versus back ended and really that translates into Q2 and into Q3.
Yeah.
Perfect. Thank you just two more quick ones here.
With the upcoming debenture what rates are you potentially seeing if you were to issue anyway.
The indication today in the market is that.
We would be.
Somewhere in the range of eight give or take and hence the comment in our narrative a few minutes ago that.
Those levels.
We anticipate that.
Would be in the interest of artist owners to simply extinguished the $250 million.
If we believe that we can source capital.
Elsewhere at a lower rate.
Perfect. Thank you.
That's all for me.
Okay. Thank you.
Your next question comes from Mario <unk> with Investor. Please go ahead.
Hi, good afternoon.
Maryann here.
On the on it seems like the.
Sentiment on dispositions, the better marketing last quarter, but it seems like a little bit better.
Quarter, the market seems to be opening up a little bit and talk about some unsolicited offers.
You give us a sense of what the magnitude.
The unsolicited offers.
And whether there is any.
Our relationship on the assets, but the offers are coming in on like if there's any kind of common characteristics.
That's your funding.
Yes, Thanks Mario.
The magnitude.
Is.
Certainly.
Okay.
The significant and I say that in the context of where these are unsolicited they would not be within the universe of planned dispositions.
So to give you a more sort of specific indication.
We're probably talking anywhere from $75 million to $100 million in magnitude and what is interesting is.
It also spans across multiple asset classes. So.
Retail industrial and even office in some instances so.
It's hard to ascertain whether.
Any of these transactions will proceed but it's certainly encouraging the fact that as I said earlier the quality of our real estate the markets that we are situated in for the most part.
To attract interest again largely from the private buyer market.
Yeah.
No no concentration by asset class or by.
Geography, probably also.
Geographically dispersed.
No. There's a yes, there we've seen it both on the Canadian and U S site.
Got it.
Okay, and I don't know if you can provide this but can you give us a sense of what.
The cap rate range on the assets you are looking to sell that comprise the remainder of the fundamental reasons one screen.
It obviously will range.
Depending on the asset depending on the asset class and depending on the market. What I can say is when we look at cap rates generally that we're seeing number one they are in line with our with our Ifr S values and number two and equally important.
Is the fact that.
These cap rates are.
Well below our current cost of capital.
And so the opportunity today and this can change over time.
But the opportunity today to transact and in doing so to see a positive net effect on the overall financial Ah side of things looks looks.
Certainly appealing.
And just on that point.
The.
Private market appetite is opening up.
And units continue to trade, where they are are there any.
Pediments towards.
Substantially exceeding that $400 million goal.
To accelerate.
And CIB activity I'm talking about special distributions and taxable income or anything along those lines.
Yeah.
We don't see any impediments, but again, we'll see how things play out.
Okay. That's it for me thank you.
Thank you ma'am.
Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by the one.
Your next question comes from Jonathan <unk> with TD Cowen. Please go ahead.
Thanks, just following up on scenarios last questionnaire.
The assets that you have in the held for sale.
What would be average gross cap rate on those.
That's a great question, Jonathan we don't have the answer off the top of our heads here, but we can certainly get back to you on that.
Okay.
And then switching to operations.
Specifically the Madison.
Portfolio.
You guys are fair.
A fair amount of leasing to do in that portfolio. This year, you've done a good job you got 44%.
Already taken care of but is there any sense on the the other 50, 556% or so that you still have to.
Take care of.
Are there any in other words are there any known tenants that are are not according to renew.
Yeah.
I can take that question as well.
Right now we are.
We are we have a few exploration some we've already worked through.
For renewals the Madison office market is.
Is is wonderfully resilient and continues to surprise us and so we.
Outside of Tds is something they have some.
Retraction that they've been structured into their lease since we've acquired the asset way back in 2016.
There are no surprises here.
We continue to get big tenants. So we're surprised at the resiliency of this market.
And I'm pretty hopeful for the rest of the year.
Okay, and then how it like I think you guys are 18% vacant there, but theres no.
You didn't put a CBRE.
Number in there how would you guys compare to the overall market.
Yes CBRE.
Compared to the overall market of the U S or how are you guys. How are you guys in Madison versus the overall Madison market or do you outperform.
Hi.
We are we are outperforming right now.
It's quite the.
The region, where we invest we have one chief competitor.
And our occupancy is.
We're around 86% right now and there is a little bit lower we are more competitive than they are and I think that also has a lot to do with.
Quality bar of our management team there as well. So we are we do get out once in a while and we find ourselves as a as.
That's the recipients of new leases.
Okay, and then just lastly, Samir I'm not I'm not sure on the filing rules, but for your equity securities dispositions in Q1 and post Q1.
If any of that was SCR or dream office that you guys have to file.
FTR No Dream office, yes.
Okay.
Care to add any color to that.
No I think as I said in my commentary earlier.
And in addressing the question that was raised earlier about the current <unk>.
That's underway with Dream office.
We're going to evaluate each of these on an ongoing basis.
Opportunistically based on other moving parts with dispositions overall liquidity.
And ultimately land on decisions that we believe are in the best interests of artist says unitholders. We're under no pressure at this point given the outlook and given the trajectory.
To do.
Any further.
Public security monetization beyond what has already been completed both in Q1 and subsequent to the quarter as was disclosed in the release.
But again the <unk>.
Market is a fluid one and we're going to just try and be as diligent and prudent on behalf of artist as unit holders moving forward.
Okay Fair enough I think last quarter, you said that.
You guys had three securities one not named in that obviously, you have CR and dream.
Still the case or are you.
Just those two.
The third.
Will.
Confirm Jonathan that the third name that was part of the mix we have.
Completely exited so.
That leaves us with the two.
Okay. Thanks for the color I'll turn it back.
Thanks, Jonathan.
Okay.
There are no further questions at this time I will now turn the call over to Heather Nicole. Please go ahead.
Thank you operator that wraps up our Q1 results call. We appreciate your taking the time to join US today and have a nice weekend ahead.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
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The conference is no longer.