Q3 2023 Artis Real Estate Investment Trust Earnings Call
Good afternoon, ladies and gentlemen.
Kim.
Real estate investment Trust third quarter 2023 results conference call at this time.
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All of the presentation, we will conduct a question and answer session.
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This call is being recorded on Friday November 3rd 2023.
I would now like to turn the conference call over to Heather Nicole. Please go ahead.
Thank you operator, Hello, and welcome everyone. Thank you for joining us for artist REIT third 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, Samir Manji CFO Jackman Coleg C O O Kim Reilly and executive Vice President U S region infill markets.
As we discussed our performance today, we want to acknowledge that the discussion may include forward looking statements that involve known and unknown risks and uncertainties. These risks and.
Uncertainties may cause actual results to differ materially from those expressed or implied today.
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 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 <unk>.
Again, we refer you to our public filings for additional detail on these metrics.
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 November Tech you can access it by using the telephone number 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 Sameer to discuss artist as third quarter results.
Thank you Heather Hello, everyone and thank you for joining <unk> third quarter earnings call.
We are pleased to report our Q3 2023 results and provide an update on our progress during the current fiscal year.
During the third quarter macroeconomic factors continued to create headwinds for the real estate sector.
In the face of these broader market challenges, we remain focused on what we can control as we navigate the current environment.
Our primary near term objectives are clear.
This leverage and enhance liquidity the strengthening of our balance sheet, while concurrently focusing on bridging the value gap between our intrinsic value and the current trading price of our units.
There are a number of levers available to us to strengthen our balance sheet and enhance liquidity.
Including selling assets refinancing mortgages, obtaining new mortgage financing and monetizing public securities.
Since last quarter, we have progressed with our disposition strategy and we continue to see the quality of our real estate reflected in the interest and traction we have achieved on dispositions.
Yeah.
During Q3, we generated liquidity through the sale of one of our few remaining western Canadian office properties.
Subsequent to the end of the quarter, we negotiated unconditional sale agreements for six assets for an aggregate sale price of $193 million, including four office properties totaling 465300 square feet.
Proceeds from these transactions along with additional dispositions underway are expected to enable us to continue reducing our overall debt and improving financial flexibility.
As disclosed last quarter in June of this year, we monetized a portion of our equity securities and most notably participated in Dream office reached substantial issuer bid.
Pursuant to which we sold approximately $2 2 million units for aggregate sale proceeds of nearly $34 million.
This was a capital allocation decision.
Ported our liquidity objectives.
Building on this during the third quarter, we monetized additional equity securities and we will continue to evaluate our public securities from a capital allocation standpoint.
We have been working closely with our lenders to manage our upcoming debt maturities.
At September 30, we had $143 million of mortgage debt maturing during the remainder of 2023.
We have extension options in place for 54% of the 2023 maturities.
And we are in discussion with lenders and have received renewal terms for the remaining 46% of these maturities.
Going forward, new mortgage financing and refinancing will continue to be an important tool available to us, especially given the large number of unencumbered assets in our portfolio.
Lastly, with respect to our overall debt obligations.
Feasible component of our 2023 debt maturities.
$250 million debentures that matured at the end of Q3.
In the same month, our series E preferred units were scheduled to either be redeemed or reset.
Upon careful consideration of a number of factors, including the options available to us our liquidity goals and prevailing interest rates.
We elected to repay the debenture and reset the rate on the series E preferred units.
As a result of these and other capital allocation initiatives undertaken this year.
Current liabilities on our balance sheet decreased by 885 billion from December 31 to September 30th.
This number is trending in the right direction and we are committed to ensuring this continues over the next several quarters.
During the remainder of the year, we will remain focused on the secured debt portion of our capital structure with the option of leveraging our large pool of unencumbered assets as a tool to provide us with additional flexibility.
Yes.
Increasing liquidity through asset sales has also allowed us to enhance unitholder value through the strategic reallocation of capital to unit buybacks.
This represents a low risk investment that reward unitholders with enhanced value.
In Q3, we continued utilizing our normal course issuer bid and when combined with units acquired in the first and second quarters. We have purchased the maximum number of units permitted under the current and CIB, which expires on December 18th 2023.
Going forward, we continue to view the N CIB as a compelling tool to enhance unit holder value and when permitted expect to continue to buyback units using the NCI be so long as artist suite units trade at a material discount to its net asset value per unit.
With our N CIB now fully utilized for 2023.
Board May consider additional mechanisms that are available to the REIT for returning capital to unitholders, including subject to market and other conditions other unit repurchases.
With respect to our operations leasing activity in the REIT portfolio has been strong throughout 2023 in Q3 was no exception.
Occupancy, including commitments remained stable at about 91%.
Additionally, lease renewals that commenced during the quarter were negotiated at a weighted average increase of three 5% over expiring rates.
This marks the 11th consecutive quarter of growth in weighted average rental rates on renewals.
Year over year same property NOI growth for the three months ended September 32023 was strong at 6.0%.
The increase in weighted average renewal rents and same property NOI growth are important indicators of the stability of the REIT portfolio.
And are a result of the leasing momentum that has been building over the last several quarters.
These fundamentals are key to the strength of any real estate business.
And reflect the quality of artist as real estate.
The third quarter was also notable for 300 main or 40 storey residential development in Winnipeg as we welcomed the first tenants into the building on July one.
As tenants continue to move in and the NOI from the property increases we anticipate that our surrounding office buildings tenants and park age will benefit from the live play and work downtown lifestyle that just doesn't offers to the Winnipeg market.
We expect to begin leaching the top 20 floors in early 2024.
Regarding our investment in common are we completed several dispositions year to date with additional dispositions in the pipeline.
We are working on various avenues available to reduce our cost of capital and common are while simultaneously pursuing dispositions and exploring opportunities to substantially enhance the density at a number of our core retail sites in greater Montreal.
Overall, we are pleased with our progress in the third quarter.
Our disposition plan is on course, and we are confident that with successful execution of our liquidity our liquidity strategy, we are well equipped to meet our forthcoming debt obligations.
We believe our ongoing initiatives, including the asset sales capital reallocation and liquidity enhancement will enable artists to navigate the current environment.
Lastly, as mentioned during last quarter's conference call on August 2nd 2023 artists as Board established a special committee to initiate a strategic review process to consider and evaluate strategic alternatives that may be available to the REIT to unlock and maximize value for unit holders.
This quarter, we announced that the special Committee retained BMO capital markets to provide financial advisory services to the REIT and special Committee in connection with the strategic review process.
Further updates on this will be provided in due course, but suffice it to say that we are evaluating all options with a singular goal of closing the substantial value gap between our current trading price and the intrinsic value of artist as units for our owners I will now turn it back to the operator commodity right the question and answer.
The recession.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone you will.
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Once again that is star one should you wish to ask a question.
Your first question is from HUD wandering from Laurentian Bank. Please ask your question.
Thank you and good morning in Vancouver are there was good afternoon, two quick questions for me first.
The payout ratio remains elevated and I was wondering how we should view the situation and.
Whether you had a specific payout target for 2024.
Okay.
As we communicated in our press release.
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The board has maintained the current distribution.
We with the respective dispositions underway and in light of the strategic review underway. The reality is there may be some bumpy ness in the next little while with respect to <unk>.
Our <unk>.
Metrics and are.
Where that leads to a payout ratio, but for the time being the distribution is intact and we're going to let the strategic review that's underway sort of be the primary focus and.
Hopefully maintain the distribution we have.
Okay. That's clear thank you and then.
Secondly.
In regards to your remaining assets held for sale I was wondering if you could give us a bit more color on the nature of the assets.
What should we be expecting for 2024 in terms of dispositions.
I'll, let Jackie look out to the first part of the question, but just let me deal with the second part we have not finalized our 2024 plans at this point again, a lot of that will be influenced by the strategic review that's underway and when we're in a position to provide more details regarding 2024.
So Jackie I'll leave it to you to the catch the first part of the question.
Yeah.
Sure. This is actually Tim I can take that question. So the remainder of the properties held for sale. So a few of them were announced at <unk>.
Subsequent events and then the remainder is kind of a mix of office, mostly office I would say in a couple of tiny little industrial property. So I would say, mostly office kind of across the portfolio not really focused in one general area.
Okay, but can you tell us if it's more in the U S versus Canada or.
We'd rather not too.
I would say it is more in Canada, but there was definitely some U S assets in Arizona.
Office U S Office office.
U S office correct Okay.
Okay. Thank you that's it for me thank you.
Yes.
Thank you. Your next question is from Jonathan culture from Gd Cowen. Please ask your question.
Thanks.
Good afternoon.
Just sticking with Fred's line of questioning on the dispositions there.
Yes.
Well I guess first on the $109 million or so that you have.
Your firm on but haven't closed what sort of cap rate, a weighted average cap rate or how much NOI.
Quarterly or annually.
He was involved with those assets.
I'll, let Jack you got to that.
Yeah.
Alright, yes, I can take that one as well this is Kent.
I would say so a few of the assets that we have sold them don't have a lot of it comes with some of the cap rates don't apply them, but for the other assets, it's really a mix.
Definitely on the lower end I would say somewhere between a six.
Most are in the low sixes in the summer and into the Sevens.
Hopefully that helps to clarify.
Okay, so sort of six to $6 million to $7 million annualized NOI coming coming off the books when when these calls so that's fair.
That seems reasonable we can put together a summary after the call just to confirm.
Okay.
And secondly, so.
Saverio said, you Havent finalized plans.
With regards to 2020 for dispositions and I guess waiting for the committee kind of make sense, but there is there will be a $160 million.
Assets on the balance sheet as held for sale like can we assume that those are going to go and then you are looking beyond that or.
You might have no no further dispositions in 2024.
No I would I would agree with the way you positioned it there will be additional dispositions.
Going into 2024.
Are not in a position to comment on.
What's the nature of that nor the magnitude of that looks like but suffice it to say as we conveyed in our remarks, there is a very clear focus.
On monetizing assets.
To pay down debt and reduce our overall leverage and thereby giving us greater financial flexibility as a key near term priority.
Okay, and then I guess, just sticking with that do you have.
Leverage targets, either debt to EBITDA or debt to gross book value targets that you could share.
Uh huh.
Jackie I don't know if that's something we can comment on but I'll pass it to you.
Yeah, we're committed to reducing our current debt and using proceeds from dispositions to repay debt.
In terms of actual ratio that we put out I don't think we're quite there yet.
Kind of see what evolves with the special Committee.
Yes.
Okay. So would it be fair to say the majority of proceeds from any dispositions will be targeted towards debt repayment.
And I'm thinking.
Versus the CIB really.
Well the <unk> has been fully utilized for the year, we have the opportunity to renew the N CIB in December but we have other mechanisms available for buybacks, but as we've already conveyed now twice I'll pay for the third time.
The near term priority is debt reduction and enhancing liquidity.
Okay.
And then just on operations.
And maybe this goes into the assets.
Solid Winnipeg.
The vacancy in the little Peg office seems a little elevated grandparent Grand Prairie retail can maybe comment on those.
Yes, sure I can take that one so and Winnipeg offers it's funny. It was actually just won one space.
So we're working on re leasing that space nothing that is concerning and then greenbrier to retail same situation. One tenant has vacated and we're actually working on several leases for that building to hopefully increase occupancy overall, so I'm really just timing issues in the occupancy and nothing that we have.
It's concerning.
Okay. Thanks, I'll turn it back.
Thank you. Your next question is from Jimmy Sean from RBC. Please ask your question.
Thank you.
Wanted to a clarification on your distribution comment.
I guess should we assume that the distribution is expected to stay the same until.
We know what the outcome of the strict strategic review is or how you're thinking about that.
The board evaluates the distribution on a quarterly basis, Jimmy and.
We've again tried to.
Provide clarity that for the time being the distribution is intact and is being maintained.
And as I said earlier, the hope is that we're going to be able to sustain and maintain that but the focus on the strategic review and bridging the value gap is priority. One is so far as the sort of macro.
Yeah.
Focus that the board has right now.
And operationally, we're we're confident that.
With the occupancy levels leasing momentum there.
Debt.
The results we're generating.
Allow for us to maintain.
The distribution at this time.
Okay.
And then just a question on leasing costs I didnt notice leasing costs.
Moved up let's say versus.
Versus a year ago.
Can you give us sort of a general sense of what the.
And leasing cost per foot is to lease office across your various markets.
Sort of how it's been trending the last.
A few quarters.
I can take that question.
Really varies by market.
Some markets we see it.
In the low 20 days and then other markets you see it up into the $70 a square foot range.
But it really varies by market I would say as with everything costs have been increasing so we're definitely seeing cost increase but we're also seeing Brian kind of increase to offset those costs. So.
But yes that would be hard to generalize with our portfolio, but that's fine.
Right.
Okay. So maybe just to use those bookends twenty's and set many of those.
The average is somewhere in between but.
Like what 70 is would be in which market.
I would say the seven years are going to be in Winnipeg.
Minneapolis Phoenix, the lower the lower cost would be really Wisconsin.
Okay.
Okay. So maybe like in Winnipeg, and like what would be the what is the net net EUR any of ours look like today, maybe versus a year ago, because it's sort of hard to look at it just the face rent.
Yeah and <unk>.
In terms of year over year, I don't think were seeing significant decreases.
Definitely again it depends on the space.
It depends on you know with a number for what the improvements are living in now, but I would say low single digit any ours to mid teen <unk>, our comment, but it really depends on the deal.
Okay, great. Thanks for that.
Thank you. Your next question is from Mario <unk> from Scotia Bank. Please ask your question.
Alright, thank you.
Just one quick one for me on the strategic review is it fair.
To say that the expectation would be that some sort of resolution would surface by the end of the year from a timing perspective.
I don't think we can comment on the timing of the strategic review.
As we've conveyed the work is underway.
Financial adviser on board and.
That will just have to take its normal course, and when when the timing is right, we'll be able to communicate more attuned to the market.
Okay, great. Thank you.
Okay.
Yeah.
Thank you once again should you have any question. Please press star one.
There are no further questions at this time.
I'll now hand, the call back to Heather Nicole for the closing remarks.
Thank you operator, and thank you all for joining us that concludes our call for today have a great rest of your day and a great weekend.
Thank you ladies and gentlemen, the conference has now ended thank you all for joining you may all disconnect.
Yeah.