AGM 2020

Sep 24, 2020

Slides

Morning, ladies and gentlemen, and welcome to the Artis Real Estate Investment Trust Annual General Meeting. All lines are in a listen only mode. This call is being recorded on Thursday, September 24, 2020. I would now like to turn the conference over to Ed Workington. Please go ahead. Good morning, everyone. This is the annual and special meeting of the unitholders of Artis REIT. My name is Ed Warkentin and I am the Board Chair. Due to ongoing concerns related to the spread of COVID-nineteen and the corresponding indoor gathering size restrictions, we encouraged unitholders to vote in advance of the meeting rather than appearing in person. This year's meeting is being broadcast via live conference call and is also available via webcast. So welcome to those listening and those who are present here in person and thank you all for joining us. Today's meeting as per usual will consist of 2 parts. The first part will be the formal business part and we'll deal with the matters set out in the agenda in the management information circular. In the second part, Armen Martens, the REIT's CEO will address the meeting and respond to questions submitted by unitholders via e mail as provided for in the notice of meeting. For precautionary reasons, we have limited senior management in attendance today. Only our President and CEO, Armin Martens and our CFO, Jim Green, are present. This meeting of the unitholders of Artis REIT is hereby called to order. As Chair of the REIT, I will act as Chair and Secretary of the meeting. Cara Watson will act as Recording Secretary of the meeting. Jennifer Villarreal of AST Trust Company is appointed to act as scrutineer. All unitholders of record who are present should now be registered with the scrutineer and all proxies should have now been deposited. If you have not done so, please do so now. The notice calling this meeting of unitholders was sent to all of the unitholders of record as required 30 days prior to the date of this meeting. An affidavit of mailing indicating a mailing date of August 25, 2020 has been submitted to the chair and will be attached to the minutes of this meeting. The scrutineer has submitted its report on attendance. You take I'll take a minute now and retrieve that report. The preliminary report on attendance states as follows. We are pleased to report that there are 67 unitholders holding 76,000,000,001 100 and 63,591 units represented in person or by proxy at this meeting. This represents 56.13 percent of the 135,000,000 701,321 issued and outstanding units. I declare the scrutineers preliminary report adopted. Notice of this meeting having been given as required and a quorum of the units being represented in person or by proxy, I declare that this meeting is duly constituted for the transaction of business. The first item of business is to receive the annual consolidated financial statements of the REIT for the year ended December 31, 2019. The 2019 annual financial statements, together with management's discussion and analysis, were sent to all Artis unitholders that requested them. Deloitte LLP, the auditors of the REIT, have certified that in their opinion, the consolidated financial statements present fairly in all material respects the financial position of Artis Real Estate Investment Trust as at December 31, 2019 December 31, 2018 and its financial performance and its cash flows for the years ended December 31, 2019 December 31, 2018. We will take the financial statements and the auditors' report they're on as received and considered. Also, copies of all 2020 statements of the REIT released to date are publicly available on SEDAR and on the REIT's website. The next item of business is to fix the number of trustees of the REIT and to elect the persons who will hold office from the close of this meeting and the next annual meeting of unitholders. I have requested that Bruce Jack move and Wayne Townsend second the following motion, Be it resolved that the number of trustees be fixed at 7. Bruce? Bruce has moved. Wayne? Wayne has seconded. Are there any questions on that? There are no questions. All those in favor, please so indicate. Any opposed, indicate. I declare that motion carried. Artis' declaration of trust allows for the appointment of additional trustees. The Board intends to do so as soon as practicable in the months ahead to achieve or exceed compliance with our Board diversity and renewal policies. The next item of business is to elect the persons who will hold office as trustees from the close of this meeting until the next annual meeting of unitholders. Before doing so, I would like to introduce those current trustees of Artis who are personally in attendance today. They are Bruce Jack, Armen Martens, Victor Thielman, Wayne Townsend and myself, Edward Workington. Unfortunately, due to COVID-nineteen related travel restrictions, 2 of our trustees are unable to attend the meeting in person and are therefore participating via conference call, namely Ben Rodney in Toronto and Lorne Zucker in New Haven, Connecticut. We will conduct individual voting for the trustees, but the following resolution will apply to each, namely be it resolved that the following nominee who is named in the information circular be elected as trustee for the ensuing year to hold office from the close of this meeting until the close of the next Annual Meeting of Unitholders. Number 1, for nominee Bruce Jack, I've asked Vic Tillman to move and Armin Martens to second this motion. Vic has moved and Armand second. Thank you. All in favor so indicate. Any opposed? None opposed. I declare that motion carried. Number 2 for nominee Armoured Martins, I ask Bruce Jack to move and Wayne Townsend to second this motion. Bruce? Thank you. And Wayne? Thank you. All those in favor, please indicate. Any opposed? None opposed? Thank you. I declare that motion carried. Number 3, for nominee Ben Rodney, I ask Armin Martens to move and Wayne Townsend to second this motion. Armin? Thank you. Wayne? Thank you. All those in favor, please indicate. Any opposed? None opposed, thank you. I declare that motion carried. Number 4 for nominee, Victor Thielman, I ask Bruce Jack to move and Wayne Townsend to second this motion. Bruce? Thank you, Wayne. Thank you. All those in favor, please indicate. Thank you. Any opposed? None opposed, I declare this motion carried. Number 5, for nominee Wayne Townsend, I ask Vic Tillman to move and Armand Martens to second this motion. Vic? Thank you. Armand? Thank you. All those in favor, please indicate. Thank you. Those opposed? None, thank you. I declare this motion carried. Number 6, I ask Armin Martins to move and Wayne Townsend to second the motion for Edward Workington. Armin? Thank you. Wayne, thank you. All those in favor, please indicate. Any opposed? None opposed, thank you. I declare that motion carried. For nominee, Lauren Zucker, I ask Bruce Jack to move and Armin Martins to second this motion. Bruce? Thank you. Armin? Thank you. Thank you. All those in favor? Thank you. Any opposed? None opposed, thank you. I declare this motion carried. The 4th item of business is to consider a resolution to reappointing the external auditors of the REIT for the ensuing year and to authorize the trustees to fix the remuneration of the auditors. I requested that Bruce Jack move and Vic Tillman second the following motion. Be it resolved that Deloitte LLP be and is hereby appointed the external auditor of Artis for the ensuing year and that the trustees be and are hereby authorized to fix the remuneration of the external auditor. Bruce? Thank you. Vic? Thank you. Any questions on that motion? There are no questions. All those in favor so indicate. Thank you. Any opposed? None. I declare that motion carried. The next item of business is to consider in an advisory non binding capacity, the approach to executive compensation referenced in the management information circular in Part 6, Executive Compensation Discussion and Analysis. I have requested that Brucejack move and Wayne Townsend second the following motion. Be it resolved that on an advisory basis and not to diminish the role and responsibilities of the Board, The unitholders accept the approach to executive compensation referred in the management information circular delivered in advance of the 2020 Annual Meeting of Unitholders. Bruce? Thank you. Wayne? Thank you. Any questions? No questions. All those in favor, please indicate. Any opposed? None opposed. Thank you. I declare that motion carried. The next item of business is to consider a resolution approving the adoption of a 4th amended and restated unitholder rights plan agreement as detailed in the management information circular. I have requested that Brucejack move and Armand Martin second the following motion, be it resolved that, A, the 4th amended and restated unitholders rights plan agreement to be dated on or about September 24, 2020, be and is hereby approved, which will renew the existing unitholder rights plan of Artis with such non material amendments as may be approved by the Chairman of Artis for a period commencing on the date of this meeting and ending on the date of Artis' annual meeting of unitholders to be held in 2023. And b, any one trustee or officer of Artis. Be and is hereby authorized and directed to execute and deliver on behalf of Artis all such agreements and documents and to do all such acts and things as in the opinion of such trustee or officer may be necessary or desirable to give effect to the foregoing. Bruce? Thank you, Armen. 2nd. Thank you. Any questions on that? No questions. All those in favor, please indicate. Any opposed? None opposed. Thank you. I declare that motion carried. Now this concludes the formal business part of the meeting. I'd now call on Armand Martens to present and address questions. There have been no questions submitted in advance. However, questions from the floor may still be asked. Armin? Got that. Okay. Very good. Thank you very much, Ed. And thank you again, everyone, for joining us today at our 2019 AGM. We're already in the second half of twenty twenty and might have forgotten, but last year was a good year. We'll talk about it a little bit and maybe more primarily, and then we'll talk about the present and what we're thinking about for next year as well. So first, as always, we'll talk a little bit about Artis REIT, what we are as an investment vehicle, the year behind us and the year win and the year ahead. So again, folks, when you're investing in Artis REIT, you are investing in a diversified commercial REIT. We find ourselves saying we're not your typical diversified REIT anymore, we're not your grandmother's diversified REIT anymore. We're primarily industrial and office and only 17% retail. Retail is primarily needs based retail, very good retail performing well in our office, primarily suburban office, which also performing well, particularly in this paradigm shift we're experiencing now. Industrial always performed well, continues to do well. We invest in capital cities. By that, we mean provincial capital, estate capital and also where universities are based. These are significant drivers of real estate valuations. We have, of course, a very robust yield, reliable yield, what we call bulletproof payout ratio of 52%. That's one of the lowest of the commercial REITs. Cash yield is over 6%. Our AFFO yield is double digits. Very good situation. We continue to have our maintain our investment grade credit rating, which we feel is a seal of approval for the REIT. And we are creating value through development. I'll talk about that more a little bit later, but we have an excellent track record of creating value through our industrial development pipeline that significantly can be at relatively high unlevered yields and very high IRR. So this map shows you what we own and where we own it. Our retail properties are in just in Western Canada, which is a good focus for us. Our office and industrial are in Toronto, Winnipeg, Regina, South Kathoun, Calgary, Edmonton and Vancouver. And in the United States, we're down the central corridor, if you will, within Madison, we're in Minneapolis, we're in Denver, we're in Phoenix and we're in Houston. So about 2 16 properties, about 24,000,000 square feet, $5,400,000,000 of book value and of course, the fully internalized management platform. This pie chart shows you where we were at the end of last year twenty nineteen, how we've moved forward for the first half of this year. On the left, you can see we're at 18% retail and today we're at 17%, office was 49%, we brought it down to 48%, and we moved industrial up from 33% to 35%. All steps in the right direction in terms of improving our portfolio and our growth profile. This table here shows you the sum of our parts, the office valuation, the retail valuation and industrial valuation and how it corresponds to our book value and our net asset value, our NAV per unit. So on the left column, you see office is 48% of our NOI. On the far right, you see it's $2,600,000,000 in value. Retail, 17% of our NOI. On the far right, you see it's $800,000,000 of our value. In Telstra, 35% of our NOI, and on the far right, almost $2,000,000,000 of our value. Adding up to $5,400,000,000 in book value, which translates, if you look in the center of that table at the bottom center, that translates to a net asset value of $15.40 per unit. This is important. It's quite higher than what we're trading at and higher than analyst NAV for us, but this is a NAV that we continue to deliver on. We've sold over $1,000,000,000 in properties in the last 3 years and continue to sell at a price that correspond to our NAV of $15.40 Not the pretax NAV, but we're hitting that number day in and day out. And right now as we speak, we have properties under contract at that same price per unit. This bar graph will show you then the year behind. As you can see, 2018 2019 being compared there, 2019 was a good year for sure. We increased our FFO and our FFO premiums by about 8%. On the far right, you can see what the analysts are projecting for this year. Now we're already we printed 2 quarters already, folks. We're into our 3rd quarter now. We feel comfortable with being able to achieve ANALYST NAV. It's a little bit lower than what we achieved last year. But given that this is a once in a 100 year pandemic we're experiencing, these will be very good results for us. And if we hit these numbers, I think we can congratulate ourselves and the market should be very pleased with both kind of results in this kind of economic environment. In this bar graph, again, this was a good year 2019. The red line shows you how artists performed last year in total unitholder returns. We did deliver 35% total return to our investors last year and we beat all of our peers. Our peers are the other diversified REITs, other diversified, it's Cominar, it's H and R and it's more Guard. We also benchmark ourselves against the TSX REIT index, which is there in green. But that was a very good year for us, but it's behind us now. And this year to date, it's much more sobering year for us. On the next slide, you'll see that we're still beating our peers by a lot, but we're just very even with the REIT index so far. We're optimistic that as we continue to deliver good results 1 quarter at a time, that this thing will improve for us. But it is a different year this year. I think we all know that. I want to take the test to connect a couple of slides here to remind ourselves of the great quality of properties that we own. We own very good institutional caliber real estate and we've classified them into 3 different categories, about $4,000,000,000 in core assets that we want to own, manage and grow long term, about $200,000,000 in development assets. Again, we have a very good track record of creating value by the Greenfield development, primarily industrial. Then we have non core assets of about $1,000,000,000 These are assets that we have been selling about 3 quarters way through this selling to buy back our units and pay down our debt and streamline the REIT and improve our growth profile. This slide shows an example of some of the core assets we are holding of 8 different pictures there. Upper left is our head office for the U. S. It's located in Scottsdale, Arizona, the LEED Platinum building. The next building is a LEED Gold building in Winnipeg, the TD Bank building. We all know that one. And we have a LEED silver building, the Carrefour Building in Toronto. And on the far right, you see a retail property in Calgary that's performing very well. Bottom right and left, you see 2 industrial buildings that we developed ourselves, 1 in Minneapolis and 1 in Toronto. And bottom middle is an office building in Denver and another suburban office building in Minneapolis, all great real estate. This slide gives you an example of some of the completed industrial developments of our that are in our portfolio. These are Class AA institutional caliber industrial developments. We've developed them from scratch. We achieved an unlevered yield of about 7% IRR over 30%. Moving forward, you'll see us developing more profits and we'll be partnering with some institutional investors. These are our global players, by the way, also men want to invest with us because they have confidence and they see what we've done. They know what our track record is. They have confidence in our platform, our ability to create value in the industrial development sector. So stay tuned on that front. Excuse me. Now we move to 2020 and talk a bit about that. We've heard the expression what a difference a year mix, and we can also say what a difference a 100 year pandemic makes. And there has been a paradigm shift that's affected all kinds of real estate ranging from hotels to personal care homes. And then of course, to the real estate we own. We own office, retail and industrial and there's been a paradigm shift. If you look to the right, a couple of blocks on the right of this slide, we make the point and we stressed this at our Q2 conference call already. We have turned the pandemic quarter. It really isn't our pandemic. That applies to a lot of REITs. It's not our pandemic. We returned the quarter. Leasing has improved and is stabilizing. Rent collections are back up to 97%. Income is trending up. Our retail rent collections are 95%, for goodness sakes. That's very good. Our office at 97%, our industrial at 98%. Things are going very well for us, and we're optimistic that our NOI will be increasing and trending up. Our portfolio is the right portfolio. It's a great industrial, of course, performing well on both sides of the border. Our retail needs based retail that's performing well. And our office is primarily suburban, which used to be a bit of a negative, now it's a big positive because there is a paradigm shift in favor of suburban office performing well. We virtually don't have, we do not have any tenants subleasing their space in any of our office buildings because of the COVID-nineteen. So back to the paradigm shift, so I'll talk a bit about office first. There is There will be more WFH, which is not a swear acronym, it means work from home. So there will be more work from home, but not so much because creativity matters, productivity matters, teamwork matters, mentorship matters, so many things matter and quality of life matters, not everybody wants to work from home is overrated. We'll see more and more work at the office happen, but we should expect that the office tenants settle down and stabilize that say 1 to 2 days of working from home per week. We should also expect in terms of our paradigm shift, office tenants to need more space per employee, and this is what the science tells us. So we'll remind the tenants of that as they renew their leases. We should also expect, therefore, demand for suburban office space to increase. This is happening real time as tenants need more space, a lot cheaper to rent for building space. The parking is cheaper if it's not free and it's all closer to home. And so being closer to home is not such a bad thing in this environment. In that sense, it's been a peri arm shift for office. For retail, we've had all the effect of shock effect. You can make the case that peak online shopping has transpired because the economy shut down, we're all shuttered down, and maximum online shopping took place. And now we're going the other direction as the economy opens up and people are shopping more in person, we also like doing that. So I think we're close to equilibrium, see the equilibrium in terms of online shopping and in person shopping, which would be good for the retail sector, retail landlords to get there instead of taking a long way there. We need to remember that not all retail is bad retail. Needs based retail will always be in demand because the shopping has to be done in person, and it really is akin to showcase industrial, which is a good asset class. In terms of industrial real estate, well, we could talk a long time about it, but basically industrial is the tide is lifting as industrial ship, all asset class of industrial all forms of industrial realtor are performing well. Release rates and pricing are right back to pre COVID times and improvements. And industrials benefited from this paradigm shift as a result of the COVID-nineteen experience So looking ahead, I do want to make mention that 2 weeks ago, we announced a strategic initiative, a very major one. I just want to spin off its retail portfolio into a pure play retail elite. If you look at the right side of this slide that bar graphs indicate an example of our rationale that supports our rationale. The red bar graph is ARTIS, you can see us trading at a discount to NAV of about 27%. The diversified the blue is diversified, they trade at about 37% average. So we're doing better than the diversified, but it's not better enough. The retail you can see are trading at 19% discount, Office 15, industrial trading at a premium, very good. So, Office and other diversified, we are not trading at one of the discounts of this free asset class that we own. In a minute, I'll show you the price multiple compared to. And it's really what it is. It means diversified offer a very good value proposition. And institutional investors, wealth managers and retail investors all over, Toronto, Montreal, Vancouver, New York, London, Singapore, Hong Kong. We've talked to them all, we've met them and they've made the case that they do not invest in diversified REITs anymore. So at the time when they did, but they don't want to do that anymore, they will pay more, yes, they'll pay higher price multiple except the lower discount for pure play REITs. They do not want diversified REITs to diversify for them. They will do it themselves. So there's no saying the customer is always right. If that's what the customer wants, that's what investors want, then we have to move in that direction. It's not easy to unscramble an omelet and do this, but this is something we can do now and we're doing. We can effectively spin off our retail to pure play retail REIT. And then a year later, we will take the next step if it's the right thing to do. Our retail REIT will be a very good REIT. It will have to be about $800,000,000 in assets. It will have a conservative balance sheet. It will have a conservative payout ratio and a positive cash flow and own very good needs based retail. They're very good investment products and yield products. We need not be afraid of this product. It will be an excellent idea and it's something we can do now as I said and we are moving forward on that. This slide shows you the price multiples of industrial retail and office. And really the bottom of the pack, not all of them, we're taking the average of the bottom. This is another example that supports our This is basically empirical data. When you look at what the bottom of 2 trading these are all good REITs by the way, except that they're trading at low multiples at the lowest in their sector. You look at industrial REIT, average is the bottom 2, which have an average multiple of 1485, average of the bottom 2 retail REITs, average multiple of 6.85, average at the bottom of 3 office REITs, average multiple of 10. If you take those multiples, correspondingly multiply them against Artis' industrial office and retail FFO and you get a price today of over $15 and that's just that is in these COVID times. When I take the worst case scenario, I take the lowest trading REIT, industrial lowest trading retail REIT, lowest trading office REIT and the growth multiples, you would get a price today of $12 per artist compared to the $8 that we're trading at. So quite compelling data. And again, empirical, it changes every day a little bit, but in principle, this is where it is. And in terms of our balance sheet and our payout ratio, we have a better payout ratio than all of these REITs and our balance sheet is very comparable, if not better than most of these REITs as well. So there's nothing we're not playing with numbers here. There's a strong case to be made to spinning off into a pure play REIT and moving forward. So that brings me to the end of this part of the presentation. In terms of the retail spin off, there is an information that starts to come out in a couple of weeks We'll give everyone more fulsome information. We look forward to receiving obtaining investor support when we have the vote in the middle of November. So again, why invest in Artis? As I said, we have a very sustainable, robust yield. It's a bulletproof payout ratio, very conservative. We have a positive earnings profile that's improving. We have a great value proposition and we have a proactive Board and management team that's fully committed to advancing the REIT and unlocking value. So that brings me to the end of my presentation, Mr. Chairman. I'll turn the floor over to you and or to the moderator to host questions. Thanks, Armand. I'm not sure any questions are coming in online. That's not possible. Are there any questions? There's a question from the floor there, Amit. Yes. So that information will come out information in the InfoCERT. But if you want a unit of RSV today, then tomorrow you own 1 unit of the retail REIT, another unit of Artis REIT and the distribution in total will be the same. So all support retail in this context, 360, 330 and even 300, That from 360 and 330, that will stay with 360, maybe stay with the office and industrial REIT. The multifamily property is definitely will be sold and will be put up for sale next year. We do not want to own a 4th asset class. Preferred units will stay with Artis REIT. They're offered Industrial REIT, which will still have its investment grade credit rating. And there will be no changes there. If you stay tuned in the info search, you'll get more information of what the benefits of continuing to be a preferred unitholder. No, we've double checked all of that. And that's one of the reasons we're doing this sort of one step at a time. The retail rate is something a spin off we can achieve, but we will not be offside any of our covenants and we will continue to maintain our investment grade credit rating, even optimistic that our credit rating will improve. Thank you. Any other questions? And I do want to say thank everybody again. And I want to say thank you to all of our stakeholders, starting with our unitholders, our investors for their engagement and support, our Board of Trustees for the corporate governance they provide on behalf of the unitholders and their guidance. Our tenants are in the top line of our income. We appreciate our tenants. We consider them to be major stakeholders. We appreciate them all, our financial institutions and the relationships we have with them, Real Estate is a very capital intensive industry. We appreciate all those relationships in that sector. And our team of employees, we have about 20 employees collectively in Canada and the United States, a great team of employees, a good, great culture. We have a culture that embraces diversity and inclusion in terms of gender and in terms of demographics. Something that comes quite natural to us. We have a we all get along well and Teamwork is number 1 with us. And we do want to thank all of our employees, each and every one of them for their positive contributions to Artis' success. And that's all for me for now. Thank you very much. Thanks, Armin. And before we conclude, I'd like to continue on that vein and express my appreciation to our trustees. Their dedication and diligence and engagement were especially demonstrated this past year. As you know, we formed a special committee to review and evaluate strategic alternatives to maximize unitholder value. After a thorough and rigorous process, that undertaking was discontinued as a result of market conditions and uncertainty caused by the COVID-nineteen pandemic. However, the work and engagement of the Board continues as evidenced by our recent announcement and as Armin mentioned of the proposed spin off of our retail assets into a new REIT and all these efforts are being undertaken to unlock value for our unitholders. So thank you, trustees. Finally and most importantly, I acknowledge the artist management and staff for their dedicated performance during this past year. We acknowledge and appreciate their commitment and focus during these unprecedented times and look forward to the opportunities that lie ahead. And on behalf of the trustees and unitholders of the REIT and others represented here today, thank you to the Artis team. This then concludes our meeting. And I would ask that Wayne Townsend move and Bruce Jack second a motion to terminate this meeting. Wayne? Thank you, Bruce. Thank you. I declare the meeting terminated. Once again, thank you everyone for attending online and in person.