AGM 2019

Jun 13, 2019

Slides

Morning, everyone, and welcome here. Many of you have traveled quite a distance to be here today, and I thank you for joining us on this beautiful Manitoba morning. And we've got some beautiful exotic Manitoba flowers that you can enjoy. So thank you Darlene for that. This is the annual meeting of the unitholders of Artis REIT. My name is Ed Worthington and I am the Board Chair. Today's meeting 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, our CEO will address the meeting and respond to your questions. If required, meeting materials, which include the agenda, the infosurc and the annual report together with the 2018 consolidated financial statements can be found on the table near the entrance to the room. At the outset, I would like to introduce those of the senior management team who are in attendance today. And I would ask that you please identify yourself as I call your name. President and CEO, Armen Martens Chief Financial Officer, Jim Green Executive Vice President, Asset Management Central Region, Dave Johnson Executive Vice President, Investments and Development, Kim Reilly Executive Vice President, U. S. Region, Phil Martens Executive Vice President, Property Management, Frank Sherlock Senior Vice President, Leasing Central Region, Brad Goertzen and Senior Vice President, Accounting, Jacqueline Kuehnig and Senior Vice President, Asset Management, Western Region, Greg Moore and Senior Vice President, Asset Management in Wisconsin, Leon Wilcoast. Thank you very much. So 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. I'd ask Carol Watson to act as Recording Secretary of the meeting. And I appoint Kirsten Dillon of AST Trust Company 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 and if you've 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 May 14, 2019 has been submitted to the Chair and will be attached to the minutes of this meeting. The scrutineer has submitted its report on attendance and it reads as follows. We are pleased to report that there are 63 unitholders holding 77,000,000 558,351 units represented in person or by proxy of this meeting. This represents 54.26 percent of the 142,936,674 issued and outstanding units, a very good representation. I declare the scrutineers report adopted. Notice of this meeting having been given as required and a quorum of at least 5% of the units being represented in person or by proxy, I declare that the 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, 2018. The 2018 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, 2018 and December 31, 2017 and its financial performance and its cash flows for the years ended December 31, 2018 December 31, 2017. We will take the financial statements and the auditors report they're on as received and considered. In addition, we have copies of the financial statements of the REIT for the interim period ended March 31, 2019 and the related MD and A available on the table near the entrance to the room. These documents are also 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 for the ensuing year and to elect the person who will hold office from the close of this meeting until the next annual meeting of unitholders. And I have requested that Vic Tillman move and Lauren Zucker second the following motion. Be it resolved that the number of trustees be fixed at 8. Thank you. Any questions on that? All those in favor, please indicate by raising your hand. Thank you. Any opposed? None opposed, I declare that motion carried. The next item of business is to elect the persons who will hold office as introduce those current trustees of Artis who are in attendance and are being nominated today. And I'd ask you please to identify yourself as I call your name. Ida Elbow, Bruce Jack, Armin Martin, Dick Tillman, Wayne Townsend, Lauren Zucker and yours truly. The term of Board service for each of Cornelius Martin, Stephen Joyce and Ron Rimer will terminate today and they will not be standing for reelection. We are grateful for their commitment to Artis and for their time and valuable contributions to our Board and the REIT over the past years. Also being nominated to the Board today for the upcoming year is Ben Rodney. Ben, could you stand? There you are, back there. 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. First of all, for nominee Ida Elbow, I ask Bruce Jack to move and Wayne Townsend to second this motion. Bruce? Thank you, Wayne. Thank you. All in favor, so indicate. Any opposed? None opposed, thank you. That motion is carried. Secondly, for nominee Bruce Jack, I ask Vic Tillman to move and Ida Elbow to second this motion. Vic? Thank you, Ida. Thank you. All those in favor so indicate. Any opposed? None opposed. Thank you. I declare that one carried. For nominee, Armand Martins, I ask Bruce Jack to move and Wayne Townsend to second this motion. Thank you, Wayne. Thank you. All those in favor, so indicate. No opposed? None opposed? Thank you. I declare that. Motion carried. Number 4, for nominee Ben Rodney, I ask Lauren Zucker to move and Vic Tillman to second that motion. Thank you. All in favor so indicate? Thank you. Any opposed? None opposed. Thank you. That motion carries. Number 5, for nominee, Vic Tillman, I ask Ida Alba to move and Wayne Townsend to second this motion. Ida? Thank you. Any all in favor? Thank you. Any opposed? None opposed. Thank you. That motion carries. Number 6 for nominee Wayne Townsend, I ask Ida Elbow to move and Vikt Tillman to second this motion. Ida? Thank you. Thank you. All in favor? So indicate. Thank you. Any opposed? None opposed. That motion carries. For nominee Edward Workington, I ask Armin Martens to move and Wayne Towne to second this motion. Armin? Thank you, Wayne. Thank you. All in favor? Thank you. Any opposed? None opposed. Thank you. That motion carries. Board nominee, Lauren Zucker, awful having a name surrounding this, isn't it Lauren? I ask Bruce to Jack to move and Ida Albo to second this motion. Thank you. All in favor? Thank you. Any opposed? None opposed. That motion carries. Thank you all very much for that puncture process. The next item of business is to consider a resolution reappointing the external auditors of the REIT for the ensuing year and to authorize the trustees to fix the remuneration of the auditors. And I requested that Bruce Jack move and Lauren Zucker 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 hereby authorized to fix the remuneration of the external auditor. Bruce? Thank you, Lauren. Thank you. Any questions on that motion? None. All those in favor then please indicate. Thank you. Any opposed? None opposed. Thank you. That motion carries. The next item of business is to conduct in an advisory non binding capacity, the approach to executive compensation described in the management information circular in Part 6, Executive Compensation Discussion and Analysis. And I requested that Bruce Jach move and Vic Tillman second the following motion. Be it resolved that on an advisory basis and not to diminish the role and responsibilities of the Board, unitholders accept the approach to executive compensation disclosed in the management information circular delivered in advance of the 2019 Annual Meeting of Unitholders. Bruce? Thank you. Vic? Thank you. Are there any questions on that motion? There being none, all those in favor so indicate? Opposed? Not opposed, thank you. I declare that motion carried. So this concludes the formal part of the meeting. And I now call on Armand Martens to present and to address any questions. Very good. Thank you, Mr. Chairman. Everybody can hear me okay? Just going to get the presentation put up here. On water, on PowerPoint. You can have yours back. So thanks again everyone for joining us. Let's talk a little bit about Artis REIT then. So as you may be aware that Artis is a diversified commercial REIT, diversified by asset class and by geography. So by asset class, it invests in office, retail and industrial properties by geography while we're in Canada and the United States. Our growth focus is all internal, right? There was a time when we'd be about half external, half internal, but we're not raising new equity buying buildings. We're not growing externally. It's all about internal growth now. So that means intelligent, accretive recycling of our capital. We're very good at that. We're buying back our units to support shareholder value, and we also have a development pipeline primarily industrial and we'll talk about that in a moment as well at positive spreads to market. So diversified by asset class by geography, focusing on internal growth. This map tells you what we own and where we own it, but in essence it also tells you our strategy. You can see by the color coding then the properties that we own and where we own them, the dark gray being office, red being industrial and the light gray being retail. So yes, we're in Canada, but we're west of Quebec and we're in primarily the major market by Canadian standards. So in Toronto, the GTAs and we're in Winnipeg, we're in Regina, San Catun, Calgary, Edmonton and Vancouver. And in the U. S, we're down the central corridor only. That was always by design in terms of our competitiveness and our advantage. But we're focusing on cities that are both capitals of states and university capital. These are drivers of real estate valuations being a state capital and a university capital. So we're in Madison, Wisconsin. We're in Minneapolis. We're in Denver. We're in Phoenix. Now also in Houston, that's an MSA of over 7,000,000 people arguably the second most important port in the United States, a great market to be in. And that in Houston we're involved in 2 very large and successful industrial developments. So these pie charts show you then how we make our money and where. On the left, you can see that 53% of our income is derived from office properties. 27% industrial, it's a good chunk and that's growing, 20% retail. On the right side, you see a busier pie chart showing which states and provinces we're on, again, by NOI weighting. We also still highlight Calgary office, where 6% of our weighting is Calgary office. It's been a drag on our income for several years now. But this is possibly this will be the last year we'll be highlighting that because we are shrinking our presence in the Calgary office market. This table describes our assets in a little greater detail and also gives you the sum of our parts, so to speak. The top line is a description of our office portfolio and we've got retail that in Delco. At the far right, you'll see the valuation. So we own about $3,000,000,000 of office properties, dollars 1,100,000,000 of retail and then $1,600,000,000 of industrial. It all adds up to book value of 5,700,000,000 dollars You do the math backwards and in the middle in that red box here, our NAV, our net asset value per unit adds up to $15.55 But that's the IFRS pretax NAV. We start as a benchmark think about analyst. The analyst community has our NAV at about $14 and currently ARTIS is trading under $12 So if nothing else, the message is loud and clear that we do represent a very good short and medium term value proposition for any investor. A note about our earnings last year was that we experienced a significant drop in our earnings quarter after quarter. The effect of the Calgary office market downturn did drag our earnings down. We do feel we've bottomed out. We feel that the worst is behind us. Things are getting better for us 1 quarter at a time. And this year, we fully expect to have a better year. More importantly, we're accelerating the improvements, if you will, we're accelerating the turnaround with some strategic initiatives that we announced at the end of November. And starts with a reset of the distribution. It's not always easy to appreciate, but the distribution is now very conservative and stable and reliable 55%. And we're selling real estate about $800,000,000 of real estate to fund a unit buyback and to pay down debt. And we're way ahead of plan of buying back our units and well below our NAV, it's very accretive. The thing is that all of us would appreciate is that whatever the amount of that distribution cut is, if it's $0.54 in the same one year, we're buying back $1.50 worth of units. So any patient investor that did not sell is benefiting by a factor of 3x by hanging in there and being patient while we turn things around with our unit buyback, with our disposition and improving our balance sheet. And as we do that, we, of course, have more capital available for our development pipeline to grow our revenue stream. So this 5 point plan, it's a 3 year plan. We are more than confident we'll be through it in half the time in about a year and a half. It's realistic, it's executable and it's going to be successful. A note about our assets, how we classify them on the far left. We feel we have well over $4,000,000,000 of prime assets that are invaluable to us for the long term. And we have a development pipeline of about $200,000,000 and then we've got some non craft of about $800,000,000 that we're selling. What we're selling is primarily office and retail and primarily in Canada. We're keeping all of our industrial. Never thought I'd see the day when I'd be seeing that industrial become the most desired asset class in the commercial real estate sector, but it really has. In our case, our industrial focus on both sides of the border were at 98% occupied, same property NOI growth is over 5%, performing very well. And you'll see us in the year and years ahead increasing our industrial weighting. Snapshot of some of our core assets. We really do own a lot of great real estate folks. Upper left might be our favorite building. Our U. S. Head office in Scottsdale, Arizona. 2nd on the left is our Winnipeg head office for Canada. An industrial building in Toronto and retail in Calgary going down to the right industrial in Minneapolis, office Minneapolis, office in Denver and far left is industrial game in Toronto. Great real estate in our core portfolio. Our development pipeline is primarily industrial and it's always been successful for us. The newer generation industrial, some of it's in Minneapolis, but a lot of it's now in Denver, Phoenix and in Houston, all performing very well. So back to the pie chart. The left pie chart I already showed you, but to the right you'll see where we're heading with our strategic initiatives and the repositioning of our portfolio. So office will shrink from 53% to 45%, Our retailers will shrink from 20% to 50%. Industrial will increase from 27% to 40%. And that's again a very good thing. Of all of the diversified REITs, we definitely own more industrial than any of the others and again performing very well, adding value for our unitholders. And on the right, you'll see because we're primarily selling in Canada and we're developing in the United States, you'll see the scale shift if you will. We'll shrink in Canada from 55% to 45% and in the U. S. We'll grow from 45% to 55%. This will lead to improved financial metrics. I already mentioned our payout ratio is a conservative stable 55% and again it's the lowest in the commercial REIT sector in Canada. With the distribution reset, we have over $80,000,000 of incremental cash flow to work with. With the disposition program, we will have $600,000,000 of capital to use to buy back our units and to pay down debt. That in turn improves our balance sheet. It's not just about the payout ratio, but an improved balance sheet that in turn will no doubt would be rewarded in the capital market. Our AFFO and FFO per unit will be growing. Our NAV will be growing. All of this we'll be doing keeping in mind and maintaining our investment grade credit rating. It's very important to us and to the Board to continue to have investment grade credit rating. I think it's an important skill of approval, not just for investors, but for our creditors. It really does give us an extra source of capital to work with. I'm near the end. I hope I haven't gone too fast for anybody. Looking ahead, it's like to the last year we talked about the Calgary office market, but I mentioned it again because it did put a drag on our earnings last year. But this is the year that the market stabilized in Calgary with about a 25% vacancy rate. Things will bottom out. What Alberta needs, what Calgary needs is more pipelines. The Enbridge Line 3 has to get completed. That mountain pipeline has to get completed. Canada East pipeline would be a wonderful thing so that Ontario and Quebec would buy their oil from Alberta instead of from Saudi Arabia. All Canadian Canada solution wouldn't hurt. But this is what Alberta needs in order to sell incremental crude, incremental GDP, incremental job creation, incremental demand for office space. We're not there yet, but that's what we need. In our case, in any event, we'll be signing down our Calgary office position this year and it will not be as relevant. The New REIT paradigm, what a difference 90 days makes. It wasn't that long ago we're talking about interest rates rising and a recession. All of a sudden, that things have settled down and the Goldilocks economy is back, not too hot, not too cold. And the U. S. Maybe a little more hot than cold, In Canada, maybe a little more cold than hot. But it's a great environment for real estate. So interest rates aren't rising anymore. Interest rates are now either level or falling, which means cap rates for real estate are at the level or falling, which means real estate valuations at the level are rising. And that in turn means that's a great time to be in the real estate business and it's a wise time to hold on to your hard assets, hold on to your hard assets including your REIT securities. That does bring me to the end. So why invest in ARTIS? Why do we like ARTIS? Again, we have a very strong sustainable distribution yield folks. It's the best in the sector right now, really. It's a conservative low payout ratio. Our earnings profile is positive and improving. Our balance sheet is improving. All that adds up to Artis being a very good value proposition, not just for the long term investor, but for the short and mid term investor as well. And that does bring me to the end of my presentation, Mr. Chairman. I'll turn the floor over to you or to anybody to host some questions. But I do want to take the time to thank all of our stakeholders. We have so many stakeholders starting with our unitholders, our investors for their support and their patience for our Board of Trustees that are elected by our stakeholders, our unitholders to govern us and guide us. Last year was a year of heavy lifting for the Board of Trustees and this year will probably be another year of heavy lifting. We appreciate them a lot. Our tenants, our tenants represent the top line of our income. They're the most important to us. We want to be every tenant's favorite landlord. We appreciate them all as key stakeholders. Our financial institutions, this is the only time of the year when I say anything nice about them. But we do it as a capital intensive industry and we need everyone's help in that sense of which we appreciate our lenders, our financial institutions that help us on the debt side, the equity side and on the deal making side. And of course, last but not least, our wonderful employees. Have a team of 2 20 people in our management platform, if you will, in 2 countries, 6 offices and we do it all. We do on asset management, property management, leasing, in blue shirt and building maintenance. We do it all. I do want to thank each and every one of them for their contribution to Artis' success as well. So that takes care of me for now. I'll turn the floor over for questions. Will there be any questions? I'll just have you, sir. So there might be 2 questions. First, our view that the U. S. Economy will outperform the Canadian economy for some time. None of us in this room are currency experts, but it's also my personal view that either the U. S. Dollar has more tailwind than the Canadian dollar. I really think the U. S. Dollar is going up versus the Canadian dollar in the years ahead. But from Kelly's thinking, the economy is stronger there. For the first time in possibly America's history, they are not energy self sufficient. Just imagine if Germany or Japan were energy self sufficient, we'd see what's going on. But in America, the largest economy in the world is not energy self sufficient. This is a game changer for manufacturing, for job creation, it's a game changer for the industrial sector. So we're really bullish about what we're doing there. But again to your point, we're not we have money to work with it. 45 percent of our assets are there. We're able to recycle existing money there as well. So we feel good about that program. 3 it Good questions. I'm sure I'll forget half of them. We missed the days over $20 at $18 just briefly just before the last recession. I remember that quite fondly as well. TD Waterhouse, I believe they would have reported NAV in the I mean, the research analyst at Toronto Dominion Bank has, I think, at $14.75 for NAV. The analyst consensus NAV for auditors is $14 even on the average. Our IFRS NAV, auditors are in the room too, is $15.55 How do we get there? It's difficult for diversified REIT because diversified the investors don't always get diversified. We are viewed as being a complicated REIT. We have 3 asset classes, But we should be trading at least where analyst NAV is of the $14 range. The market right now is just like that. The pure play REITs are trading at better multiples than diversified. We can't unscramble our own omelette. We've got invested great credit rating. We've got our critical math, and we're doing very well. Buying back our units, yes, we've been buying back pretty aggressively, including reporting inside and board members and management since last November when we did announce our distribution cut. Where do we go from here? As our earnings have improved and we've said this before, as we get more as our balance sheet improves and our earnings improve, as we get more visibility on the success of our strategic initiatives, we do see ourselves being able to raise our distributions as well and going back north in all respects. Does that help you a little bit? Always we're in good company with about 5 or 6 other REITs that are trading at a discount and now diversified REITs and that we're always out there explaining that. And that's why you would have noticed in the sum of our parts at one table, we break out the value of each of our asset classes and how it adds up to $15.55 We point out that if industrial is the desired asset class, well, Artis has more industrial than other diversified REITs. But you will but last year, June, for example, we wouldn't have been talking about a distribution cut, of course. Today in June, you will have noticed, I guess, it was already the end of May, we should have press released about a strategic review. And that is still another step. We have these strategic initiatives that we're embarking on and we're implementing very well ahead of plan. But the Board is also undertaking a full on strategic review just to address that, for example, as there's something we're missing to enhance and to mine shareholder value? We are trading we should at least be trading at the analyst NAV, which is $14 That's really the minimum goal. To get to IFRS NAV, not all very few weeks get there, but we should at least be at analyst NAV. That's an objective the whole board has and the management team has and we're conducting just going through the full on strategic review to see how we can get there as well. Yes, for sure. I think right now the market is watching and patiently supporting us one step at a time as we implement our initiatives. They want to see us sell more real estate at the right price. They want to see us continue to buy back our units. They want to see us paid on debt. They want to see us make more progress on the plan. The market wouldn't be anticipating a distribution hike today. But by the end of this year, things go out for plan, the market probably will start anticipating distribution of distribution hikes and that will push up our units as well. The back in the red shirt. The on on on 3 on of that. I mean there are always overtures being made. But as regards to work with the independent or in the State Special Committee, it's just been struck and we are in the early stages of investment banks and so on. But that's well underway and we'll be getting on the full review of examining all strategic alternatives. So it's definitely Thorn's Law. For sure, that's one that's always one of the considerations. Here in Canada, we're Heather Nichols. Is it on our slide? Is it Bell I think Bell MTS here in Canada and in United States, where is it? It's another telecommunications company in the United States. But Bell MTS we all recognize. That's always a concern. I'm sure when we sell our last office building there, the market will return. But we're not going to sell it completely. We'll keep some of a position there. But we just we are concerned that we're bouncing along the bottom, but it will be a long bottom. It will be many years before things get better there. Enbridge line 3 now, which was supposed to been completed this summer and then next summer now will be 2021. We don't know about the Trans Mountain pipeline and things like that. So we think it behooves us to minimize our position a little bit more there, not go to 0, but to go to 3% and then and redeploy that capital elsewhere, even buying back our shares. We've already experienced significant write downs on our books in terms of the value of our Calgary office. Nelly, from that sense from a financial perspective, a reporting perspective, the pain has already been experienced. Right now, we think we won't take it yet. Some cases, we'll win a little bit. Some cases, we'll lose it. Because we've taken some write downs already. We've taken a lot of write downs. We don't think We're definitely taking hit. If you follow our we've taken write downs in the range of $600,000,000 over the past 4 years in the Calgary office market. That's a lot of money. And so the hit, but I think we've taken on our books already and that hit is reflected in our unit price. But now when we sell, what we're selling at is that our book value that's after a pause write down. But for sure we're taking a hit. The only advantage is as we sell this $800,000,000 that we signed as a method to the band is we're making a lot of money on some of this stuff, a ton of money. Now we have this tax shelter, if you will. We have buildings in Calvio, we're signing on a loss. You'll only crystallize the loss once you sell, right? So we'll crystallize the loss. We'll use that loss to offset the gain when we sell something in Toronto. So we'll get good down here. Hope I didn't say 7.5, we'll hope dead by then. Yes, I meant 3 year plan that will finish in 1.5 years. Again, selling about $800,000,000 of our properties, primarily office and retail and primarily in Canada. And the net proceeds after debt will be $600,000,000 and we'll use about half of that to buy back our units, our shares, as they're below NAV and another half to pay down debt and improve our balance sheet. Ready for more coffee? Thanks, Herman. All right. Thank you. Thank you for the question. So before we conclude So before we conclude, I would also like to express my appreciation to our trustees. They're very responsive and knowledgeable and good people. Very much appreciated. And thank you trustees for your contribution, for your trustworthiness. We are trustees after all. And finally and most importantly I acknowledge the artist management and the staff for their dedicated performance during the past year and we appreciate their commitment and focus during these interesting times and look forward to the opportunities that lie ahead and they are there. On behalf of the trustees and unitholders of the REIT and others represented here today, thank you, Artis team. So this concludes our meeting. And I would ask that Wayne Townsend move and Lauren Zucker second, motions to terminate the meeting. Thank you. And Lauren? Thank you. We won't vote on that and I'll declare the meeting terminated. And once again, thank you everyone for coming and I wish you all a safe and wonderful summer.