Earnings Transcript for ARESF - Q4 Fiscal Year 2022

Operator: Good day. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Artis Real Estate Investment Trust 2022 Annual 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] Thank you. Heather Nikkel, you may begin your conference.

Heather Nikkel: Thank you, operator. Good afternoon and welcome, everyone. Thank you for joining us for Artis REIT's 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 Artis' President and CEO; Samir Manji; CFO, Jaclyn Koenig; COO, Kim Riley; and Executive Vice President US Region, Phil Martens. A replay of this call will be available until Friday, March, 31st and can be accessed by using the telephone number 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 the securities regulators and 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. 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 Samir.

Samir Manji: Thank you Heather. Good morning those in the West and good afternoon to those in the East. Thanks 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 the new strategy in March 2021. 2022 presented both opportunities and challenges for Artis. 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 including 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 through 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 Calgary Alberta. Since March 2021, we have sold 65 assets, of which 45 were Canadian assets sold for $953 million and 20 were US assets sold for US$311 million. We made good progress with our disposition plan during the first half of 2022 but the second half of the year witnessed significant change in the transaction landscape due primarily to the higher interest rate environment. This caused the delay in completing some dispositions in 2022, 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. 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 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 Artis. 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. 22% 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 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 unitholder value. During the term of the normal course issuer bid that expired at the end of 2021 and 2022, we purchased the maximum number of trust units permitted 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 remains 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, 3,690,415 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 under development and properties that were subsequently sold as part of our disposition plan. So not 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 982,778 square feet of new leases and 1,456,537 square feet of renewals started in 2022. These renewals were negotiated at a weighted average increase of 4.9% over expiring rates. In Q4, the weighted average increase in renewal rents was 6.9%. 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 of 1.8%. 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 they cost us to build. Going into 2022, we had four development projects underway Park 8Ninety V, Blaine 35 I, Park Lucero East and 300 Main. Park 8Ninety V is the fifth and final phase of an industrial development project located in the Houston Area in Texas. Construction of Phase V, in which we have a 95% ownership interest, was completed in 2022. The entire project totals approximately 1.8 million square feet of best-in-class, well-located industrial real estate. Also in 2022, we completed the first phase of Blaine 35, a 2-phase industrial project located in the Minneapolis area in Minnesota. Blaine 35 will total approximately 317,000 square feet, and the second phase is expected to be completed in 2023. Park Lucero East is an industrial development project located in the Phoenix Area in Arizona, in which we have a 10% ownership interest and a development management contract in place. This project, which is nearing completion, will comprise approximately 561,000 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 Main, a 40-story residential and commercial project in Winnipeg, Manitoba. In 2022, Earls restaurant opened on the main floor of 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, Artis participated in an investor group to privatize come in our REIT. In 2022, we also announced that Artis, together with this joint actor has acquired a 14% ownership interest in Dream Office REIT and a 9% ownership interest in First Capital REIT. We are confident that each of these investments will deliver strong returns to Artis unitholders 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 expect the economic headwinds we faced in 2022 to carry into 2023, and while we will continue to monitor interest rate trends and forecast and work 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 has been almost two years since we announced our new vision and strategy for Artis. 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.

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jonathan Kelcher of TD Securities. Please go ahead.

Jonathan Kelcher: Thanks. Good afternoon. First, just on the -- I guess, on the business transformation plan, you guys are, as you said, two years into it, I looked 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 getting stage there. How do you guys -- how are you doing versus your expectations of a couple of years ago? And how does the Board measure that?

Samir Manji: Thanks, Jonathan. I think the point around the time line with respect to what we announced in March 2021 is 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 unitholders. But what I'll say here Jonathan is, there remains a commitment on the part of the Board and the senior management to ensure that ultimately we fulfill the commitment that we made to unitholders. And so far how it's going so far certainly to call this beta spade if you look at the trading price of our units, it's obviously a cause for concern. But on the other hand if you look at net asset value per unit where we were when we began and I'll use December 31, 2020 as a reference point. Our net asset value per unit on an IFRS basis since that time has grown 15%. And I think that would put us 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, as we are into the latter part of that two to three-year time line be evaluating and exploring what other options are available to us and look forward to speaking further to that in time.

Jonathan Kelcher : Okay. That's helpful. And then if I look at your -- and it happened in Q3 and Q4, you did sell some equity securities. How should we think about that? Like I was under -- like I would have thought or under the impression that you guys were investing in stocks that you thought over time you could sort of help drive value in and there sort of be a one-off liquidity event. Is that -- did I have that wrong, or is there more of a trading component to what you guys are doing?

Samir Manji : 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 investment 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 that asset value per unit to managing our leverage and our leverage ratios to other opportunities available to us from a capital allocation standpoint, including on the development side. These are all going to be taken into consideration. And if that results from time-to-time in the decision to either exit an investment that we have in light of what the Board and management view as better opportunities to allocate capital on behalf of unitholders then that's something that will always remain available to the Board and management to be able to exercise.

Jonathan Kelcher : Okay. And last one for me is how many equities -- how many different equities did you own on December 31? Was it just the Dream and First Capital, or is there more?

Samir Manji : On December 31, we would have owned three different names.

Jonathan Kelcher : Okay. Thanks. I’ll turn it back.

Samir Manji : Okay. Thank you.

Operator: Thank you. The next question comes from Jimmy Shan of RBC Capital Markets. Please go ahead.

Jimmy Shan: Thanks. So maybe if I could ask John's question of a different way on the transformation plan. Like when you put together the plan a couple of years ago, obviously, 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 kind of 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 you're having to look into selling into that market balance sheet. So I guess my question is really given the change in circumstances why wouldn't the Board and management be rethinking the plan and you are kind of -- how are you thinking about that?

Samir Manji : I think Jimmy, I've already addressed the question. So I hope that between that response and what we will publish in our year end letter to unitholders that will give the owners of the REIT, the visibility that they would want to have.

Jimmy Shan: And then maybe my second question would be on the Cominar portfolio. I think in this quarter you've marked it at $146 million, which is still above your cost basis, but it certainly have come down quite a bit from early 2022. So I wondered if you could provide us an update on what's going on there in terms of asset sale or the strategy there to realize on that value?

Samir Manji: The strategy on Cominar 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 current interest rate environment. And there the two main comments I would offer number one that as many know institutional investors are 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 Car Central and class Selexis Neon. The flip side of that and where we continue to see a very healthy progress is in the universe of private buyers. They continue to be active whether they're strategic buyers, whether they are private firms that look at syndicating real estate et cetera. And so 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 that's what will likely be the picture for 2023. And on the Cominar front there will continue to be a lot of activity with some of the smaller and medium-sized assets that are part of our disposition plan.

Jimmy Shan: Okay. Thank you.

Operator: Thank you. The next question comes from Matt Kornack of National Bank Financial. Please go ahead.

Matt Kornack: Hi, guys. Just quickly on the lending front. You have a fair bit of US office assets the market for lending on a secured basis I think is a bit challenging in that segment. But can you give us a sense a, 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 on debt financing on both a secured and unsecured basis?

Samir Manji: Thanks Matt. I'll start off and then I'll pass it over to Jackie. In terms of some of the exact ratios you're 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. If there are instances where we want to -- because of the cost of financing or other factors we want to look at not putting secured debt on a maturity of 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. Jackie anything you want to add?

Jaclyn Koenig: 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 can circle back to the fact that the U.S. secured debt percentages you're looking for.

Matt Kornack: Okay. Fair enough. I appreciate that. And then on the amend and extend which I think are positive. Was there any cost associated with that outside of maybe just the interest? I don't think the spread's changed that materially.

Jaclyn Koenig: Well, spreads are at the plus 1.7% now. I'm certain of them were 1.6% last year.

Matt Kornack: Okay. And then when you look at your equity positions and kind of the liquidity of those positions, do you have a sense as to how long you think it would be to trade out of them if you needed to get 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?

Samir Manji: So I'll answer the second part of the question first. These are unencumbered. They are free and clear on our balance sheet. And on the first part of your question, generally speaking, I'll speak to the two names that are publicly disclosed on First Capital. It's a very liquid name. There's 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 day's large numbers or certainly volumes of block trades. But on a retail trading basis it would be less liquid than First Capital.

Matt Kornack: Okay. Appreciate that. Thanks.

Samir Manji: Thanks, Matt.

Operator: Thank you. [Operator Instructions] There are no further questions at this time. I will turn the call over to Heather Nikkel for closing remarks.

Heather Nikkel: Thank you, operator.

Operator: Sorry. The question just came up, if you want to take it.

Heather Nikkel: Yeah.

Operator: The next question comes from David Dewier [ph] of Kirk Enterprises. Please go ahead.

Unidentified Analyst: Yes. Thanks for taking this call. I've been an investor from day one. And my concern is on a positive basis, I think you've generalized what are you going to be doing in 2023 regarding a few issues like the one-year value is down about a-third? Today's value is down about 4%. I check the TSX with a huge volume. The Dream REIT – the Dream units that you got during the year is down about 30%. 50% value the TSX to your net asset value and that's concerning me as an investor I'm going nowhere fast. And then the other question I have this is the final one part of this or comment is regarding a negativism that's out there regarding Sandpiper and looking at what I saw yesterday regarding Business Wire, it's indicated that Sandpiper has a history of value destruction. So I see nothing positive about here so I hope you can address all these issues.

Samir Manji: Thank you very much David. We – we will not comment on Sandpiper here. This call is really geared towards Artis, but I appreciate your point and happy to have a discussion with you off-line anytime on that point. I think on the first three points David that, you've raised, we have 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 unitholders because they see that every day and it represents to value that they can either buy units at or sell units at on a day-to-day basis. But 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 line for us, and we look forward to providing further updates on as we keep going into 2023.

Unidentified Analyst: Okay. Thank you. And look forward to the upside. Thank you.

Samir Manji: Thank you very much, David.

Operator: Thank you, Ms. Nikkel, please continue with closing remarks.

Heather Nikkel: 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.

Operator: 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.