Q2 2023 Artis Real Estate Investment Trust Earnings Call
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Good afternoon, ladies and gentlemen, my name is JP and I will be your conference operator today.
This time I would like to welcome everyone to <unk> second quarter 2033 results conference call. At this time I would like to turn the conference over to Heather Nicole. Please go ahead.
Thank you operator, Hello, and welcome everybody. Thank you for joining us for artist Reits second 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 artists as president and CEO , Samir Manji CFO Jacqueline Ko leg.
Riley and executive Vice President U S region film market.
I will discuss our performance today, we wanted with knowledge that the discussion may include forward looking statements that involve known and unknown risks and uncertainties.
And uncertainties may cause actual results to differ materially from those expressed or implied today. We have identified these factors in our public filings with the securities regulators and we suggest that you review those filings.
In addition, we may refer to non-GAAP in supplementary financial measures that are not defined under ifr us 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 <unk>.
Throughout this discussion. Please note that all figures will be presented in Canadian dollars unless otherwise specified.
Before we proceed I would like to note that a replay of this conference call will be available until Thursday August 10, you can access it by using the telephone numbers and pass code that were provided in yesterday's press release. Additionally, a recording will be made available on our website I will now turn the call over to <unk> to discuss <unk> second quarter results.
Thank you Heather.
Hello, everyone and thank you for joining artist as second quarter earnings call.
We are pleased to report our Q2 2023 results and provide an update on our progress during the current fiscal year and will also briefly comment on yesterday's announcement that the board of artist has established a special committee to initiate a strategic review.
As we navigate the current environment and macroeconomic challenges that all Reits are facing liquidity and flexibility are key.
On our last conference call, we made it clear that our top priority is strengthening the balance sheet and more specifically reducing.
Reducing leverage and increasing liquidity using the various levers available to us, including selling assets refinancing mortgages, obtaining new mortgage financing and monetizing public securities.
We will now add to this list of priorities pursuing all options available to unlock and maximize value for our unit holders.
Yeah.
During the second quarter, we made significant progress on our disposition strategy.
During Q2, we sold 13 properties and one parcel of land.
These dispositions comprised five Canadian retail properties sold for $121 7 million and.
In <unk> U S industrial properties and a parcel of land.
And a parcel of land sold for $117 6 million.
These sales unlocked nearly $200 million of liquidity and put us well on track to meet our target of $400 million of dispositions this year.
These asset sales have increased our overall financial flexibility and also allowed us to enhance unitholder value by reallocating capital to our normal course issuer bid.
Under our current and CIB, which began in December 2022, we have bought back over 6 million common units at a weighted average price of $7 47 per unit, a significant discount to our $16 and 28.
<unk> net asset value per unit.
As long as the disconnect between our trading price and NAV per unit persists repurchasing units continues to be one of the best low risk investments that artist can make and also reward unit holders with enhanced value.
During the quarter, we monetized a portion of our equity securities and most notably participated in Dream office reached substantial issuer bid.
Soon to which we sold approximately $2 2 million units for aggregate sale proceeds of nearly $34 million.
The decision to participate in the <unk> side was quite simply a capital allocation decision that supports our liquidity objectives as.
As we have conveyed throughout the implementation of our strategy, we expect our income and correspondingly our <unk> metrics to be lumpy from one quarter to next and we anticipate that this will continue to be the case going forward.
For clarity we have included metrics in our MD&A, showing <unk> calculations, both including and excluding the impact of the realized loss on the sale of equity securities.
We will continue to evaluate our public securities options from a capital allocation standpoint, as we navigate the current environment, while remaining focused on our goals of reducing leverage enhancing liquidity and pursuing capital allocation opportunities that will maximize net asset value per unit for our owners.
Our metrics have also been impacted by rising interest rates and we anticipate visits will continue to be the case in the near term as rates are expected to remain higher for longer.
As we've conveyed on previous earnings calls mortgages have been a significant focus for us over the past several quarters.
New mortgage financing is one of the levers available to us to provide liquidity, especially given our large pool of unencumbered assets.
During the quarter, we obtain new mortgage financing in the amount of $186 7 million.
A substantial contribution to our liquidity position our.
A significant portion of this $171 9 million.
Rates to a new mortgage at $303 30 main and the Winnipeg Square Parkade.
This is a three year mortgage with interest only payments for the duration of the term.
These levers property dispositions equity securities and mortgage financing are an integral part of our capital allocation strategy and our commitment to reduce leverage and improve our balance sheet.
By allocating a significant portion of the proceeds generated from the liquidity initiatives to reducing debt our debt to gross book value decreased to 47, 2% at June 30 from 49, 1% at March 31.
At the same time current liabilities on our balance sheet decreased by $540 million from December 31, two.
At June 30th.
These numbers are moving in the right direction and we are committed to ensuring that this trend continues over the next several quarters.
Turning to our debt maturities, we began 2023 with a fair amount of maturing in the year. We continue working diligently to manage these maturities.
In terms of credit facilities in Q1, we renewed the second tranche of the revolving facilities in the amount of $280 million.
And extended to $100 billion and $150 million non revolving credit facilities each for one year term.
Going into Q2, we had only one credit facility left to be addressed in 2023, a $50 million non revolving facility that was repaid upon maturity in April .
At June 30th we had $332 $5 million of mortgage debt maturing during the remainder of 2023.
We have received term sheets for new or renewed loans for 40% of these maturities have extension options in place for 23%.
17% of the debt is expected to be paid down upon maturity of the loan or disposition of the property and we anticipate no difficulty in managing the remaining 20% of maturities in the normal course.
With respect to our overall debt obligations, we recognize that a key component of our 2023 debt maturities is the $250 million debenture that is maturing at the end of Q3 in.
In the same month, our series E preferred units will either be reset or redeemed.
Based on prevailing interest rates, we anticipate repaying the debenture.
And resetting the rate on the series E preferred units.
Again with the overall objective of allocating capital such that we maximize liquidity and flexibility.
I would now like to turn to our operational performance. Despite the current economic environment, our real estate portfolio continued to show strength and stability during the quarter.
Of course in the real estate business leasing activity and tenant relations are fundamental to our portfolio of success and overall business in.
In Q2 hardest negotiated and signed over 1 million square feet of new leases and lease renewals.
This leasing momentum reflects the strength of our properties.
Owning units of artist REIT means having an ownership stake in a desirable active portfolio of high quality real estate.
I would like to acknowledge and thank our team for their hard work that contributed to achieving the releasing results we witnessed in Q2.
On top of signing over 1 million square feet of leases renewals that commenced in the quarter were at a weighted average increase in rental rates of four 6%.
In addition to our leasing accomplishments in the second quarter, our same property NOI increased by six 9% and seven 7% year over year for the three and six months ended June 30th respectively, and overall occupancy across the portfolio remained over 90%.
These results reflect artist as robust operational strength, which is critical to our resilience.
The second quarter was also notable for our 300 main.
Our 300 main development, our 40 storey residential development in Winnipeg, as we prepare to welcome tenants into the building on July one.
The response from the local community has been very positive we are thrilled to contribute in a significant way to the fabric of Winnipeg downtown and to the city's ongoing urban renewal efforts. We are looking forward to the income stream that will continue to grow as more tenants move in but we're equally enthusiastic about the impact that people.
Living in the heart of the city will have on when it takes downtown businesses, including our own commercial tenants and park gates situated within walking distance of the tower.
With respect to our investment in <unk> will continue to work with our partners in executing our plan and completed several additional dispositions year to date with additional dispositions in the pipeline once again, demonstrating the demand that we continue to see in the private transaction environment.
Overall, we are pleased with the progress we made during the second quarter in a short amount of time, we have made improvements to our balance sheet and are in a better position in terms of liquidity than we were even just a few months ago. Our disposition plan is on track and we are confident that between this and the other levers that are available to us we are well positioned to satisfy.
Our upcoming debt obligations.
With asset sales and other liquidity enhancing initiatives along with the strong real estate fundamentals and performance of our portfolio. It is our view that despite broader market uncertainties presenting challenges to all Reits, we are executing on a sound strategy that will ultimately deliver unit holder value.
This last point around strategy to drive unit holder value is a good segue into yesterday's announcement that the artist Board has formed a special committee to initiate a strategic review to our strategic review process to consider and evaluate strategic alternatives that may be available to the REIT to unlock and maximize value.
<unk> for our unit holders.
The board is very clear and its commitment to address the significant discount to intrinsic value that our unit price trades at.
We know that there continues to be strong demand for quality real estate in the private transaction market and this has certainly been demonstrated in our disposition activity. We commented on earlier.
We also know that we have very good real estate as reflected in our leasing results and property level of financial performance.
And we have a very strong management team and platform.
The Board and special Committee are going to look at all avenues available to harness these strong fundamentals to deliver on our commitment to maximize value for our unit holders.
Since yesterday's announcement, we've heard from a number of unit holders who are thank the board for moving in this direction.
They have expressed their frustration with the unit price performance and I can tell you that management and the board share in this frustration.
The Board and Special Committee look forward to providing updates in due course.
I will now turn it back over to the operator to moderate the Q&A session.
Thank you, ladies and gentlemen, we will now conduct the question and answer session. If you have a question. Please press star followed by the number of water under Touchtone phone.
You will hear at the REIT on prompt acknowledging your request if you will.
I would like to cancel your request please press star two.
Please enter your lift the handset if you're using a speaker phone before pressing any keys.
Your first question comes from the line of Jonathan <unk> from <unk>. Your line is now open.
Thanks, Good afternoon.
I guess the first question will just be about the strategic review and some hopefully is one that you can answer but.
In setting up.
The committee is.
The border the committee looking at hiring external advisers to help with the strategic review.
Yes.
Okay.
Okay, Okay short and sweet.
And then as this as this goes on.
Any changes or slowdown so I think you kind of addressed this in your opening remarks here, but any changes to what you guys are currently doing with the business transformation plan.
Or is it sort of continue as is.
I think in so far as the areas that I've highlighted in our remarks today that will continue to be our focus.
In so far as allocating capital to any new investments or acquisitions.
I think that one can read between the lines that that would be done.
In a very tempered way if at all moving forward until we work through the <unk>.
Initiatives that the special committee has been established to undertake.
Okay.
That's helpful.
And then just on the comment or.
Just on the comp call. It our platform you talked about dispositions how would the pricing compare.
To what you guys Mark those assets when you first put them on your books.
Okay.
<unk> com and our results had been reflected in our consolidated results and so.
To date I can say that the dispositions that have been.
Completed.
Have been have achieved values in line with what we had underwritten.
In so far as most of those dispositions certainly a more recent dispositions we've seen some erosion in value but.
The positive if I had to describe it this way is.
We continue to retain the higher quality assets that we inherited in that acquisition and so those assets. We believe will continue to have.
Good value and liquidity as we move forward.
Okay.
Thanks.
I'll turn it back.
Your next question comes from the line of Matt <unk> from National Bank Financial Your line is now open.
Yes.
Just with regards to the dispositions that you.
Completed in Q2 can you give us a sense as to where they would've been sold relative to either for us and I think they were retail and industrial assets. So.
Just a sense on maybe pricing in those two segments in investor demand.
I'll, let Kim and Jackie address to address that question.
Sure. This is cam I can take it first so the assets were sold in line with ISR S values.
And we're seeing a lot of demand actually for the industrial and the retail.
We've done very well with those dispositions.
Overall cap rate for all dispositions is actually in the mid fives, so really strong demand.
Pleased with where the dispositions took place.
Okay.
And then I guess with regards to your commentary around the.
Our capital allocation.
Location side on the repayment of your unsecured debenture, but keeping the prefs outstanding and can you give a sense as to what the prestwood reset to pricing wise at this point.
But Jack you address that.
Matt Let me run that out and then I can circulate.
We'd love today, if we were to reset.
Okay. Thanks, guys.
Your next question comes from the line of Jamie Shen from RBC capital markets. Your line is now open.
Thanks, just for.
For modeling purposes, so that $280 million of asset sale, you said it was around a mid five and.
It's probably in your MD&A some of it will be the timing of that of those sales kind of throughout the quarter and also the timing of the pay down of the credit facility during the quarter.
Yeah.
I would say government took place mid quarter and then quite a few took place at the end of the quarter. So ended the quarter is probably a reasonable average.
Okay and the mid five was in reference to the $280 million right.
Yes, okay.
Also on the mortgage maturities and familiar way through it.
Quite catch it all but $333 million coming due.
40%, you've got term sheets and sort of like what rate are you are you seeing.
And then.
I think it's something like 17% paid out and I couldn't get what would the remainder.
Okay, I can take that one tumor.
Yeah.
Yes, the 40% of the planned renewal, where we have term sheets and had it depends on the asset.
We're looking at a few in office and retail along with I believe one industrial so they're somewhere around.
Six 5% to 7%.
On our variable and fixed.
Great.
We have about 20%, which are maturing at the end of the year. What you are looking at getting term sheets, we have 70% that we're planning on repaying just dependent on that mortgage any asset that we have at hand, and then we have about a 23% that we're able to exercise extension options that are currently built into those.
Current agreements and the options are between 12 and tight.
Okay and the rate on the extension would be at that six 5% to 7% rate as well.
Yes, yes, okay.
Okay, and then just lastly on the liquidity side.
I think as you do have some unencumbered assets $1 7 billion.
Maybe can you remind me like.
Why you're not putting new mortgages on those.
To pay down the facilities is it you're not going to get much savings or those ear marked for sale, maybe some color around.
Why you are not tapping that those unencumbered assets.
So Jamie I'll start and I'll pass over to Jacky we have been.
Going down that path as.
<unk> demonstrated in the comments, we just offered a few minutes ago.
But at the same time as you.
Suggested.
Part of what we're trying to balance is assets that are.
Part of our disposition plan assets it may be brought into <unk>.
That disposition.
Exercise and then now with the announcement we've made we just want to make around the strategic review, we want to make sure that we.
We maintain the flexibility that unencumbered assets would have.
When it comes to potential buyers for those assets.
Okay, Jack sorry, Jack and team went out.
No nothing I would add to that I think you've covered it.
Okay. Thank you.
Okay.
A reminder, if you have a question. Please press star followed by the number one on your telephone keypad. Your next question comes from the line of Mario <unk> from Scotiabank. Your line is now open.
Hi, good afternoon.
Just a couple of questions on the dispositions during the quarter.
First one just a clarification in terms of selling it.
Alright.
Wanted to ensure that good guy for us.
Yes, that's correct, they're all all dispositions were in line with where our analysis.
Okay.
And then the dispatch.
So were completed where all of them and the planned dispositions in your original $400 million.
Yes, yeah, everything that was disposed of in the quarter was planned to be disposed of.
As part of the overall disposition plan.
Okay, and then Sameer I think last quarter you mentioned.
The acceleration in the pipeline.
7500, millions 100 million of Alpha.
Can you give us a sense of where that stands today and whether.
I'll, let <unk> address that.
Sorry, I could could you repeat the question.
But last quarter's Samir mentioned.
The bid pipeline of between $75 million to $100 million. So these would presumably be assets that werent original guidance in terms of.
Potential dispositions I, just wanted to get a better understanding of where the pipeline stands today and quantum edge and how things are progressing.
So right now we have around 100, and let's call it $40 million of assets in our held for sale pool them and as we discussed on the last.
Carl we do get inbound calls for.
Buyers looking to acquire assets, which will we will evaluate and respond to but for the most part where we're focused on the list of dispositions that we've identified and those are the ones that are on our priority for execution.
Okay.
My next question just with respect to the maturing mortgages this year.
Can you give us a sense of what the average <unk> for us the cap rate is on the asset.
Mortgages.
Yeah, that's a number I don't have on hand, I tend to look at something and circulate that as well.
Okay.
My last question just with respect to the strategic review.
I know you've highlighted the material discount to NAV.
But the stock is trading at.
How do you think about.
And the attribution of that discount to kind of the diversified nature of the portfolio today.
Internally.
Do you think that.
Part of the discount or not.
Additional theres no question that the discount that.
We witnessed for many years is attributed.
Uh huh.
Partially to that as opposed to.
One conventionally sees with pure play.
<unk> and <unk> in the market.
And so again I think therein lies part of the opportunity moving forward.
In the board and special committees.
Exercise that is being initiated.
Yes.
I don't know if you can answer this but is it your sense that.
Theres enough scale in each of the.
Asset classes.
Just on a standalone basis.
Sorry, you're breaking in and out I think can you repeat the question.
So my question was is it your sense that there is enough scale.
And each of the asset classes to operate as a stand alone.
Vehicles.
Uh huh.
Certainly certainly the size of harnesses.
Asset class specific portfolio.
Our portfolios.
The different asset classes.
Across some of the asset classes.
Would potentially.
Fit that bill, but again you know I think this is really about maximizing value and looking at all options available.
As the board and Special Committee move forward with this initiative.
Okay.
My last question and in the private market today, we've heard the.
Private capitals the predawn.
Buyer.
And the market.
Do you sense that.
Attempting to sell portfolios of assets or several losses that together do you sense, theres, a premium being attached to that or or others.
Or does it not matter.
Individualized versus groups of assets.
It's a fair question and one that I don't think it's a one size fits all I think that one has to evaluate different markets different asset classes and <unk>.
Certainly.
There there there could be there could be.
In some instances.
That scenario that you've described but.
I think it's premature to speculate on that or to comment further we will see.
How things unfold and we will be able to in due course, let the board and Special Committee report back.
Okay.
That's it for me thank you.
There are no further questions at this time I will now turn the call back to Heather. Please continue.
Thank you operator that wraps up our Q2 results call. We appreciate you taking the time to join US today and enjoy the rest of your day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.