Earnings Transcript for ARESF - Q3 Fiscal Year 2024

Operator: Good afternoon. My name is, Constantine, and I will be your conference operator today. At this time, I would like to welcome everyone to the Artis Real Estate Investment Trust's Third Quarter 2024 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. [Operator Instructions] Heather Nikkel, you may now begin your conference.

Heather Nikkel: Thank you, operator. Good afternoon, everyone. Welcome, and thank you for joining us for Artis REIT's third quarter 2024 results conference call. Our results were disseminated yesterday and are available on SEDAR and on our website. With me on today's call is Artis' President and CEO, Samir Manji; CFO, Jaclyn Koenig; and COO, Kim Riley. As we discuss our performance today, please note 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. 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 and supplementary financial measures that are not defined under IFRS 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 IFRS. Throughout this discussion, all figures will be presented in Canadian dollars, unless otherwise specified. Before we proceed, I'd like to note that a replay of this conference call will be available until December 8th. You can access it by using the telephone numbers and passcodes 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 Samir to discuss Artis' third quarter results.

Samir Manji: Thank you, Heather. Good afternoon, everyone, and thank you for joining us for Artis REIT's third quarter earnings call. Let me start right off the top by saying that Artis' third quarter was a defining quarter for our unitholders with our overall leverage reduced to 39.8%, and our AFFO payout ratio improved to 71%. These two points alone magnify the impact of the work that's been underway for the past several quarters, during which time we focused on our key objectives of strengthening our balance sheet and enhancing liquidity, while at the same time continuing to work at executing our value investing strategy. This strategy by design will produce lumpy income that we believe will ultimately allow us to maintain our distribution while aiming to grow our net asset value in the long-term. These objectives are critical to managing our risk profile while producing a positive long-term trajectory for Artis' owners. We are seeing positive signs in the overall real estate sector with the Bank of Canada's recent policy rate cuts and the anticipation that further rate cuts could be coming in the months ahead. In order to achieve our internal leverage and liquidity targets, we continue to use the tools available to us, including asset sales, refinancing existing mortgages, and obtaining new mortgage financing. In the third quarter of 2024, we sold two office properties and a parking lot located in Canada, and 14 industrial properties, and one office property located in the United States for an aggregate sale price of $616 million. This includes two significant portfolio sales, Park 8Ninety, a portfolio of industrial properties in the Greater Houston area that closed in July, and the Arizona and Minnesota industrial portfolio comprising nine properties that closed in August. The proceeds from these sales were used to reduce debt primarily. At September 30, 2024, the REIT had one industrial property and two retail properties located in Canada, and one industrial property located in the US under unconditional sale agreements for an aggregate sale price of approximately $113 million. As part of our commitment to improving our balance sheet and reducing debt, our mortgage maturities continue to be a key area of focus for us. We've been working diligently and closely with our lenders on this important area of our business. At September 30, we had $74.7 million of mortgage debt maturing during the remainder of 2024, and we have extension options in place for the entire balance. Subsequent to the end of the quarter, we extended the $150 million non-revolving credit facility to November 2024, and are in active discussions with lenders with respect to both this maturity and the maturity of the first tranche of our revolving credit facilities. We have a substantial pool of unencumbered assets in our portfolio and believe we can secure a new financing structure that is better aligned to Artis' strategy and long-term goals. During the third quarter, our units, despite appreciating 25%, continue to trade at a material discount to our net asset value. From July 1st to September 30th, we used our normal course issuer bid to purchase 1,630,500 common units at a weighted average price of $7.30, and 149,868 preferred units at a weighted average price of $19.81. Under the current NCIB terms, we have purchased 4,975,324 common units, representing over 70% of the maximum number of unit buybacks permitted under the term. The weighted average price for these units was $6.64 per unit, representing a discount of over 50% compared to our net asset value of $13.77 per unit at September 30th. Through our efforts over the last several quarters, including asset sales and other capital management strategies, we are pleased to report that our debt to gross book value decreased to 39.8% at September 30th, 2024, compared to 49.8% at June 30, 2024, and 50.9% at December 31st, 2023. At September 30th, 2024, Artis had investments in equity securities of $100.2 million compared to $152 million at December 31st, 2023. This includes equity securities of Dream Office REIT and First Capital REIT. Including the impact of realized gains and losses on equity securities, FFO and AFFO per unit increased to $0.31 and $0.21, respectively for the third quarter of 2024, compared to $0.25 and $0.13, respectively, for the third quarter of 2023. And we are very pleased to see our payout ratio drop to 71.4% of AFFO this quarter. As we have conveyed since establishing Artis's new strategy in 2021, we expect our income and correspondingly our FFO and AFFO metrics to be lumpy from one quarter to the next, and we anticipate that this will continue to be the case going forward. On August 2nd, 2023, Artis' Board established a special committee to oversee a strategic review process to consider and evaluate alternatives available to the REIT to unlock and maximize value for unitholders. The work undertaken over the past 15 months has enabled us to properly assess the current environment, and the Board remains committed to evaluating and pursuing strategic alternatives that may be available to the REIT. Looking ahead, with improved leverage, our near term debt maturities dealt with and the benefit of lower interest rates, we are well positioned to explore growth opportunities that we believe will increase our net asset value per unit and narrow the gap between intrinsic value and the market price of our units. We look forward to providing further updates on some of the key initiatives we've highlighted in due course. I will now turn it back over to the operator to moderate the question-and-answer session.

Operator: [Operator Instructions] Your first question comes from the line of Jonathan Kelcher from TD Cowen. Please go ahead.

Jonathan Kelcher: Thanks. Good afternoon.

Samir Manji: Hey, Jon.

Jonathan Kelcher: First question, Samir, just and I guess this goes to the lumpy income, but you guys had $4.7 million of additional interest income that as the MD&A says, may or may not be recurring. What does that refer to and how can we think about it, whether -- like whether it will be recurring or not? Or when does it come in.

Samir Manji: Yeah. No. Thank you. I'll let Jaclyn respond to it.

Jaclyn Koenig: Hi, Jonathan. We've spoke about this one in the past as we've seen it previously in our quarters. Going forward, we aren't certain that it will recur, but this is additional interest accrued related to our IRS investment.

Jonathan Kelcher: And what causes it to come in?

Jaclyn Koenig: This would just be certain metrics surrounding the agreements related to that investment.

Jonathan Kelcher: Okay. So I guess on that investment, it looks like you guys can put the prep back to the JV early next year. Is that something you're considering?

Samir Manji: Yeah, I think that the plans related to Cominar are fluid. And we're starting to see, as I mentioned in my comments, some positive momentum in the broader real estate market. And we think with rates continuing to decline, the overall picture for Canadian real estate generally and we would say even specific to the core assets that we continue to own within the Cominar consortium, that outlook looks reasonably positive. And so we're working through the 2025 plans with the Board -- of the consortium’s Board. And at this point, it's premature to comment on what our intentions are related to our prep. I think it's going to be contingent on a few different factors, including the other pieces of the capital stack.

Jonathan Kelcher: Okay. Switching gears and congrats on getting your leverage down.

Samir Manji: Thank you.

Jonathan Kelcher: Actually past, I think past the target you were aiming for, so that's good. But how does -- how are you looking at dispositions going forward? Do you have a target size for your asset base? And I know at the end of your comments, you talked about growth opportunities. Maybe give us some color on what type of growth opportunities you guys might look at?

Samir Manji: Yeah. Thanks. I don't think we have a definitive target number for our income producing properties. I think your question related to disposition activity, now that we have our balance sheet where we would like to see it in terms of both leverage, but also liquidity, there are a number of opportunities of different forms that are in front of us that we are exploring. And as it's consistent with our strategy, we have a lot of flexibility, whether we want to acquire directly a property or group of properties, whether we want to acquire an interest in a property or group of properties in the form of a joint venture that Artis would then be the managing partner in. Those are a couple of options as it relates to hard assets. We continue to look at the broader public securities environment. And again from a value perspective, identifying opportunities that we think could provide on a risk adjusted basis, a better returns on our capital for our unitholders. And then we continue to have existing investments that we're continuing to manage and assess as we keep going. And the outlook -- again, there is a lot of optionality whether there could also be M&A in the future could be an interesting area as Artis' unit price continues to strengthen and looking at sort of the universe of other players in the market that may not have that same benefit, and to see if there are scenarios out there where one plus one equals three and that again on a risk adjusted basis, we'll be comfortable with. I think it's a full gamut, Jonathan, in terms of the spectrum of opportunities and areas where we're going to consider growth and we're going to do it in a very thoughtful, strategic, and diligent manner.

Jonathan Kelcher: Okay. That's helpful. And then last one for me, just on the 300 Main. Where do you sit in terms of occupancy on that? How is the lease up going?

Samir Manji: I'll let Kim address that, but things are going very well at 300 Main. Kim?

Kim Riley: Thanks, Samir. Hi, Jonathan. So yes, agree with Samir, things are going very well. We have released Phase 1 as we've talked about previously. We are over 90% occupied for that phase. So we're very happy with that outcome. And the second phase of the tower got released to the market a few months ago. So we continue to lease up there. We're seeing great progress, lots of tours weekly and things continue to progress really well.

Jonathan Kelcher: Perfect. That's great. I'll turn it back. Thanks.

Operator: [Operator Instructions] There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.