ARESF - Artis Real Est In Tr (ARESF) Q3 2023 Earnings Call Transcript
2023-11-03 16:48:09 ET
Artis Real Est In Tr (ARESF)
Q3 2023 Earnings Conference Call
November 03, 2023, 01:00 PM ET
Company Participants
Heather Nikkel - IR
Samir Manji - President and CEO
Jaclyn Koenig - CFO
Kim Riley - COO
Conference Call Participants
Fred Blondeau - Laurentian Bank
Jonathan Kelcher - TD Cowen
Jimmy Shan - RBC
Mario Saric - Scotiabank
Presentation
Operator
Good afternoon, ladies and gentlemen, and welcome to Artis Real Estate Investment Trust Third Quarter 2023 Results Conference Call. At this time, all lines are in a listen-only mode. Following a presentation we will conduct a question and answer session. [Operator Instructions] This call is being recorded on Friday, November 3, 2023
I would like to turn the conference over to Heather Nikkel. Please go ahead.
Heather Nikkel
Thank you, operator. Hello and welcome everyone. Thank you for joining us for Artis REIT’s 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 Artis’ President and CEO, Samir Manji, CFO, Jaclyn Koenig, COO, Kim Riley; and Executive Vice President, U.S. Region, Phil Martens.
As we discuss 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. 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. Again, we refer you our public filings for additional detail on these measures.
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 10. You can access it by using the telephone number and passcode 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. Hello, everyone and thank you for joining Artis' 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, macro-economic 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, reduce leverage and enhance liquidity to strengthen 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.
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 $109.3 million, including four Office properties totaling 465,300 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 REIT's 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 that supported our liquidity objectives.
Building on this during the third quarter, we monetize 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 30th, 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, a sizable component of our 2023 debt maturities was a $250 million debenture had 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 million from December 31st 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.
Increasing liquidity through asset sales has also allowed us to enhance unit order value through the strategic reallocation of capital to unit buyback. This represents a low risk investment that rewards 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 NCIB which expires on December 18, 2023.
Going forward, we continue to view the NCIB as a compelling tool to enhance unitholder value, and when permitted, expect to continue to buy back units using the NCIB so long as Artis' units trade at a material discount to its net asset value per unit.
With our NCIB now fully utilized for 2023, the 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's portfolio has been strong throughout 2023 and Q3 was no exception. Occupancy, including commitments remained stable at above 91%.
Additionally, lease renewals that commenced during the quarter were negotiated at a weighted average increase of 3.5% 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 30, 2023, were 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's 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 Artis' real estate. The third quarter was also notable for 300 Main, our 40 storey residential development in Winnipeg, as we welcome the first tenants into the building on July 1.
As tenants continue to move in and the NOI from the property increases, we anticipate that our surrounding office buildings, tenants and parkades will benefit from the live, play and work downtown lifestyle that this building offers to the Winnipeg market. We expect to begin leasing the top 20 floors in early 2024.
Regarding our investment in Cominar, we've 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 in Cominar, while simultaneously pursuing dispositions and exploring opportunities to substantially enhance the density at a number of our core retail site 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 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 Artis to navigate the current environment.
Lastly, as mentioned during last quarter's conference call on August 2, 2023, Artis 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 unitholders.
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 Artis' units for our owners.
I will now turn it back to the operator to moderate the question and answer session.
Question-and-Answer Session
Operator
Thank you, ladies and gentlemen, we will now begin the question and answer session. [Operator Instructions] Your first question is from Fred Blondeau from Laurentian Bank. Please ask your question.
Fred Blondeau
Thank you. And yes, good morning in Vancouver or otherwise good afternoon. Two quick questions for me first. The payout ratio remains elevated, I was wondering how we should view that this situation? And whether you had a specific payout target for 2024?
Samir Manji
As we communicated in our press release, the board has maintained the current distribution. With the respective dispositions underway and in light of the strategic review underway, the reality is there may be some bumpiness in the next little while with respect to our FFO metrics and where that leads the 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.
Fred Blondeau
Okay, that's fair. Thank you. And then second, 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. And what should we be expecting for 2024 in terms of dispositions?
Samir Manji
I'll let Jackie look at 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, we will do so. But Jackie, I'll leave it to you to look at the first part of the question.
Kim Riley
This is actually Kim. I can take that question. So the remainder of the properties held for sale, so a few of them were announced as in subsequent events. And then the remainder is kind of a mix of office. Mostly office I would say and 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.
Fred Blondeau
Okay. But can you tell us if it's more in the U.S. versus Canada or you'd rather not to?
Kim Riley
I would say it is more in Canada, but there's definitely some U.S. assets in there as well.
Fred Blondeau
Office, U.S. office?
Kim Riley
Office, U.S. office, Correct.
Fred Blondeau
Okay. Thank you. That's it for me. Thank you.
Operator
Thank you. Your next question is from Jonathan Kelcher from TD Cowen. Please ask your question.
Jonathan Kelcher
Thanks. Good afternoon. Just sticking with Fred's line of questioning on the dispositions there. Well, I guess first on the $109 million or so that you've - you affirm on, but haven't closed, what sort of cap rate - weighted average cap rate or how much NOI quarterly or annually is involved with those assets?
Samir Manji
I'll let Jackie look after that.
Jaclyn Koenig
You have it. Go ahead.
Kim Riley
Yes, I can take that one as well. This is Kim. I would say - so a few of the assets that we have sold don't have a lot of income, so some of the cap rates don't apply. But for the other assets, it's really a mix. Definitely on the lower end, I would say somewhere between a $6 million - most are in the low 6s and some are into the 7s. Hopefully, that helps to clarify it.
Jonathan Kelcher
Okay. So sort of $6 million to $7 million of annualized NOI coming off the books when these close? Is that fair?
Kim Riley
That seems reasonable. We can put together a summary after the call just to confirm.
Jonathan Kelcher
Okay. And secondly, so Samir, you said that you haven't finalized plans with regards to 2024 dispositions. I think us waiting for the committee kind of makes sense. But there is - there will be $160 million of assets on the balance sheet as held for sale. Like can we assume that those are going to go and then you're looking beyond that? Or you might have no further dispositions in 2024?
Samir Manji
No, I would agree with the way you've positioned it. There will be additional dispositions going into 2024. We just are not in a position to comment on what 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.
Jonathan Kelcher
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?
Samir Manji
Jackie, I don't know if that's something we can comment on, but I'll pass it to you.
Jaclyn Koenig
Yes, we're committed to reducing our current debt and using proceeds from dispositions to repeat it. In terms of actual ratio that we put out, I don't think we're quite there yet and kind of see what evolves with the Special Committee.
Jonathan Kelcher
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 NCIB, really?
Samir Manji
Well, the NCIB has been fully utilized for the year. We have the opportunities to renew the NCIB in December. We have other mechanisms available for buybacks. But as we've already conveyed now twice, I'll say for the third time, the near-term priority is debt reduction and enhancing liquidity.
Jonathan Kelcher
Okay. And then just on operations, and maybe this goes into the assets that you've sold in Winnipeg, but the vacancy in the Winnipeg office seems a little elevated, same with Grand Prairie Retail. Can you maybe comment on those?
Kim Riley
Yes, sure. I can take that one. So in Winnipeg office, it's funny. It was actually just one space that went vacant. So we're working on re-leasing that space, nothing that is concerning. And in Grande Prairie Retail, same situation, one tenant has vacated, and we're actually working on several leases for that building to hopefully increase occupancy overall. So, really just timing issues in the occupancy and nothing that we feel is concerning.
Jonathan Kelcher
Okay. Thanks. I'll turn it back.
Operator
Thank you. Your next question is from Jimmy Shan from RBC. Please ask your question.
Jimmy Shan
Thank you. I just 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 strategic review is, or how are you thinking about that?
Samir Manji
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 and so far is the sort of macro focus that the Board has right now. And operationally, we're confident that with the occupancy levels, leasing momentum that the results we're generating allow for us to maintain the distribution at this time.
Jimmy Shan
Okay. And then, just a question on leasing costs. I did notice leasing costs have moved up a fair bit versus a year ago. Can you give us sort of a general sense of what TI and leasing cost per foot is to lease office across your various markets, and sort of how it's been trending in the last few quarters?
Kim Riley
I can take that question. It definitely varies by market. Some markets, we see it in the low 20s and in 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 rents kind of increase to offset those costs. So - but yes, that would be hard to generalize with our portfolio, but that's kind of a summary.
Jimmy Shan
Okay. So maybe just to use those bookends 20s and $70s is, I imagine the average is somewhere in between, but what would - like what 70s would be in which market?
Kim Riley
I would say the 70s are going to be in Winnipeg, Minneapolis, Phoenix. The lower cost would be really Wisconsin.
Jimmy Shan
Okay. So maybe like in Winnipeg, like what would be the - what is the NERs look like then today maybe versus a year ago? Because it's sort of hard to look at it just at face rent?
Kim Riley
Yes. And NERs in terms of year-over-year, I don't think we're seeing significant decreases, but they're definitely -- again, it depends on the space, it depends on who's in number four, what the improvements are, who is moving in now. But I would say, low single-digit NERs to mid-teen NERs are common, but it really depends on the deal.
Jimmy Shan
Okay. Great. Thanks for that.
Operator
Your next question is from Mario Saric from Scotiabank. Please ask your question.
Mario Saric
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?
Samir Manji
I don't think we can comment on the timing of the strategic review. As we've conveyed, the work is underway. We have a financial adviser on board, and that will just have to take its normal course. And when the timing is right, we'll be able to communicate more to the market.
Mario Saric
Okay. Great. Thank you.
Operator
Thank you. [Operator Instructions] There are no further questions at this time. I will now hand the call back to Heather Nikkel for the closing remarks.
Heather Nikkel
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 ahead.
Operator
Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.
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Artis Real Est In Tr (ARESF) Q3 2023 Earnings Call Transcript