Good 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. We've got some beautiful, exotic Manitoba flowers that you can enjoy. Thank you, Darlene, for that. This is the annual meeting of the unitholders of Artis REIT. My name is Ed Warkentin, and I am the Board Chair. Today's meeting will consist of two parts. The first part will be the formal business part and will deal with the matters set out in the agenda and the management information circular. In the second part, Armin Martens, our CEO, will address the meeting and respond to your questions.
If required, meeting materials, which include the agenda, the info circ, 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, Armin Martens. Chief Financial Officer, Jim Green. Executive Vice President, Asset Management, Central Region, Dave Johnson. Executive Vice President, Investments and Developments, Kim Riley. Executive Vice President, U.S. Region, Philip Martens. Executive Vice President, Property Management, Frank Sherlock. Senior Vice President, Leasing, Central Region, Brad Gerdsen. Senior Vice President, Accounting, Jacqueline Kuernick. Senior Vice President, Asset Management, Western Region, Greg Moore. Senior Vice President, Asset Management in Wisconsin, is Leon Wilkos. Thank you very much.
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. 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. 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 77,558,351 units represented in person or by proxy at this meeting. This represents 54.26% of the 142 million, 936 thousand, 674 issued and outstanding units. A very good representation. I declare the scrutineer's 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, and December 31, 2017. We will take the financial statements and the auditors report thereon 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&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 persons who will hold office from the close of this meeting until the next annual meeting of unitholders. I have requested that Vic Fedeli move and Lauren Zucker second the following motion. Be it resolved that the number of trustees be fixed at eight. Vic?
Move.
Thank you. Lauren? 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 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 in attendance and are being nominated today. I'd ask you please to identify yourself as I call your name. Ida Albo? Bruce Jack. Armin Martens. Vic Fedeli. Wayne Townsend. Lauren Zucker, and yours truly. The term of board service for each of Cornelius Martens, Steven Joyce, and Ronald Rimer will terminate today, and they will not be standing for re-election.
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, can 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 Albo, 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 Fedeli to move and Ida Albo 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 Armin Martens, I ask Bruce Jack to move and Wayne Townsend to second this motion. Thank you. Wayne? Thank you. All those in favor so indicate. Any opposed? None opposed. Thank you. I declare that motion carried. Number four, for nominee Ben Rodney, I ask Lauren Zucker to move and Vic Fedeli to second that motion. Thank you. Vic? Thank you. All in favor so indicate. Thank you. Any opposed? None opposed. Thank you. That motion carries. Number five, for nominee Vic Fedeli, I ask Ida Albo to move and Wayne Townsend to second this motion. Ida? Thank you. Thank you. All in favor? Thank you.
Any opposed? None opposed. Thank you. That motion carries. Number six, for nominee Wayne Townsend, I ask Ida Albo to move and Vic Fedeli 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 Warkentin, I ask Armin Martens to move and Wayne Townsend to second this motion. Armin? Thank you. Wayne? Thank you. All in favor? Thank you. Any opposed? None opposed. Thank you. That motion carries. For nominee Lauren Zucker, awful having a name starting with Z, isn't it, Lauren? I ask Bruce Jack to move and Ida Albo to second this motion. Thank you. Ida? Thank you. All in favor? Thank you. Any opposed? None opposed. That motion carries. Thank you all very much for that 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. I've 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 are 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 six, executive compensation discussion and analysis.
I've requested that Bruce Jack move and Vic Fedeli 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. Any opposed? None opposed. Thank you. I declare that motion carries. This concludes the formal part of the meeting, and I now call on Armin 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. Just on water, on PowerPoint. There, you can have yours back. Thanks again, everyone, for joining us. Let's talk a little bit about Artis REIT. As you may be aware, again, Artis is a diversified commercial REIT, diversified by asset class and by geography. By asset class, it invests in office, retail, and industrial properties. By geography, well, 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 going external. It's all about internal growth now. That means intelligent and creative 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. 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. Yeah, we're in Canada, but we're west of Quebec, and we're in primarily the major markets by Canadian standards. We're in Toronto, the GTA, then we're in Winnipeg. We're in Regina, Saskatoon, Calgary, Edmonton, and Vancouver. In the U.S., we're down the central corridor only.
That was always by design in terms of our competitiveness and our advantage. We're focusing on cities that are both capitals of states and university capitals. These are drivers of real estate valuations, being a state capital and a university capital. We're in Madison, Wisconsin, we're in Minneapolis, we're in Denver, we're in Phoenix. We're also in Houston. That's an MSA of over 7 million people, arguably the second most important port in the United States, a great market to be in. In Houston, we're involved in two very large and successful industrial developments. Excuse me. 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, that's a good chunk, and that's growing. 20% retail.
On the right side, you see a busier pie chart showing you 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. Possibly this will be the last year we'll be highlighting that because we're 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, then we've got retail, then industrial. At the far right, you'll see the valuations. We own about CAD 3 billion of office properties, CAD 1.1 billion of retail, and then CAD 1.6 billion of industrial. It all adds up to a book value of CAD 5.7 billion.
You do the math backwards. In the middle, in that red box there, our NAV, our net asset value per unit, adds up to CAD 15.55. That's the IFRS pre-tax NAV. We thought as a benchmark, think about analysts. The analyst community has our NAV at about CAD 14, and currently, Artis's trading under CAD 12. 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, the 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 one 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. It starts with a reset of the distribution. It's not always easy to appreciate, but the distribution is now a very conservative and stable and reliable 55%, and we're selling real estate, about CAD 800 million of real estate to fund a unit buyback and to pay down debt. We're way ahead of plan in buying back our units at well below our NAV. It's very accretive. The thing that not all of us would appreciate is that whatever the amount of that distribution cut is, if it's CAD 0.54, in the same one year, we're buying back CAD 1.50 worth of units.
Any patient investor that did not sell is benefiting by a factor of three times by hanging in there and being patient while we turn things around with our unit buyback, with our disposition, and improving our balance sheet. As we do that, we of course have more capital available for our development pipeline to grow our revenue stream. This five-point plan, it's a three-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 CAD 4 billion of prime assets that are invaluable to us for the long term. We have a development pipeline of about CAD 200 million.
We've got some non-core assets of about CAD 800 million 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 saying that industrial's become the most desired asset class in the commercial real estate sector, but it really has. In our case, our industrial folks on both sides of the border were at 98% occupied. Same property NOI growth is over 5%, performing very well. You will see us in the year and years ahead increasing our industrial weighting. A 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. It's our U.S. head office in Scottsdale, Arizona. Second from the left is our Winnipeg head office for Canada.
An industrial building in Toronto, a retail in Calgary, going down to the right, industrial in Minneapolis, office Minneapolis, office in Denver, and far left is industrial again in Toronto. Great real estate in our core portfolio. Our development pipeline is primarily industrial, and it's always been successful for us. A 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. Back to the pie chart. The left pie chart I already showed you. To the right, you'll see where we're heading with our strategic initiatives and the repositioning of our portfolio. Office will shrink from 53% to 45%. Our retail will shrink from 20% to 15%. Industrial will increase from 27% to 40%. That's, again, a very good thing.
Of all of the diversified REITs, we definitely own more industrial than any of the others. Again, performing very well, adding value for our unitholders. On the right, you'll see, because we're primarily selling in Canada and then we're developing in the U.S., you'll see the scale shift, if you will shrink in Canada from 55% to 45%, and in the U.S. will grow from 45% to 55%. This will improve financial metrics. I already mentioned our payout ratio is a conservative, stable 55%. Again, it's the lowest in the commercial REIT sector in Canada. With the distribution reset, we have over CAD 80 million of incremental cash flow to work with. With the disposition program, we will have CAD 600 million 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. An improved balance sheet that, in turn, with no doubt, would be rewarded in the capital market. Our AFFO and FFO per unit will be growing. Our NAV will be growing. All this we'll be doing, keeping in mind, maintaining our investment-grade credit rating. That's very important to us and to the board to continue to have our investment-grade credit rating. We think it's an important seal 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 the last year we talked about the Calgary office market. I mention it again because it did put a drag on our earnings last year.
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. Excuse me. Trans Mountain pipeline has to get completed. A Energy East pipeline would be a wonderful thing so that Ontario and Quebec would buy their oil from Alberta instead of from Saudi Arabia. Although, being Canada, a solution wouldn't hurt. 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. That's what they need. In our case, in any event, we'll be signing down our Calgary office position this year. It will not be as relevant. The new REIT paradigm. What a difference 90 days makes.
It wasn't that long ago we were talking about interest rates rising and a recession. Things have settled down and the Goldilocks economy is back. Not too hot, not too cold. In the U.S., maybe a little more hot than cold. In Canada, maybe a little more cold than hot. It's a great environment for real estate. Interest rates aren't rising anymore. Interest rates are now either level or falling, which means cap rates for real estate are either level or falling, which means real estate valuations are either level or rising. That, in turn, means that it's a great time to be in the real estate business, and it's a wise time to hold onto your hard assets, including your REIT securities. That does bring me to the end. Why invest in Artis? Why do we like Artis?
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. That does bring me to the end of my presentation, Mr. Chairman. I'll turn the floor over to you or to anybody to pose some questions. 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. We're considered as a capital-intensive industry, and we need everyone's help, and that's the sense that which we appreciate. Our lenders, our financial institutions that help us on the debt side, the equity side, and on the deal-making side. Of course, last but not least, our wonderful employees.
We have a team of 220 people on our management platform, if you will, in two countries, six offices, and we do it all. We do asset management, property management, leasing, even 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. That takes care of me for now. I will turn the floor over for questions. Would there be any questions at all? Yes. Yes, you, sir. It might be two questions. First, it is 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 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. Generally speaking, the economy is just stronger there. For the first time in possibly America's history, they are now energy self-sufficient. Just imagine if Germany or Japan were energy self-sufficient. We'd see, "Oh, what's going on?" America, the largest economy in the world, is now energy self-sufficient. This is a game-changer for manufacturing, for job creation. It's a game-changer for the industrial sector. We're really bullish about what we're doing there. Again, to your point, we have money to work with there. 45% of our assets are there, and we're able to recycle existing money there as well. We feel good about that program. Yes, sir. Lot of good questions. I'm sure I'll forget half of them.
We missed the days when we were trading at CAD 18 just briefly just before the last recession. I remember that quite fondly as well. TD Waterhouse, I believe they would've reported NAV in the TD, the research analyst at Toronto-Dominion Bank, has us, I think, at CAD 14.75 for a NAV. The analyst consensus NAV for Artis is CAD 14 even on the average. Our IFRS NAV, and our auditors are in the room, too, is CAD 15.55. How do we get there? It's difficult for a diversified REIT because the investors don't always get diversified. We are viewed as being a complicated REIT. We have three asset classes. We should be trading at least where analyst NAV is, of the CAD 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 omelet.
We've got our investment-grade credit rating. We've got our critical mass, and we're doing very well. Buying back our units, yes, we've been buying back pretty aggressively, including reporting inside with board members and management since last November when we did announce our distribution cut. Where do we go from here? As our earnings improve, and we've said this before, 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 on all respects. Does that help you a little bit? What did I leave out?
There wasn't much
Always. We're in good company with about five or six other REITs that are trading at a discount to NAV, diversified REITs, and we're always out there explaining that. That's why you would've 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 CAD 15.55. We point out that if industrial is the desired asset class, well, Artis has more industrial than other diversified REITs. 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 issued a press release 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.
The board's also undertaking a full-on strategic review just to address that, for example. Is there something we're missing to enhance and to extract, to mine shareholder value? We should at least be trading at the analyst NAV, which is CAD 14. That's really the minimum goal. To get to IFRS NAV, not all REITs, very few REITs 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 a full-on strategic review to see how we can get there as well. Yeah, 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 pay down 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 as per plan, the market probably will start anticipating a distribution hike, and that will push up our units as well. The back in the red shirt. You. Sir.
There actually aren't many events coming, none to speak of. There are always overtures being made, but as regards to the work of the independents or in this case, the special committee, it's just been struck and we are in the early stages of investment banks and so on. That's well underway and we'll be getting on to the full review of examining all strategic alternatives. It's definitely going along. For sure, that's always one of the considerations.
It's BBB-. We're here in Canada with Heather Nikkel. Is it on our slide? Is it Bell? I think it's Bell MTS here in Canada, and in the U.S., who is it? Another telecommunications company in the U.S. Bell MTS, we all recognize.
Speaking across the door.
Yeah. Yeah.
All right. One more.
One more. Office, yeah.
Basically, the ability to change government is very slow. We are not done. I know. Operating.
That is always a concern. I am sure when we sell our last office building there, the market will return. We are not going to sell out completely. We will keep some of a position there. We are concerned that we are bouncing along the bottom, but it will be a long bottom. It will be many years before things get better there. The Enbridge Line 3 now, which was supposed to have been completed this summer, and then next summer, now it will be 2021. We do not know about the Trans Mountain pipeline and things like that. We think it behooves us to minimize our position a little bit more there, not to go to zero, but to go to 3% and then redeploy that capital elsewhere, even buying back our shares. We have already experienced significant write-downs on our books in terms of the value of our Calgary office building.
From that sense, from a financial perspective, a reporting perspective, the pain has already been experienced.
Where's your book value tonight selling out?
Right now, we think we won't take a hit. 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 not taking.
Oh, we're definitely taking a hit. If you follow our, we've taken write-downs in the range of CAD 600 million over the past four years in the Calgary office market. That's a lot of money. There's a hit. That hit we've taken on our books already, and that hit is reflected in our unit price. Now, when we sell, what we're selling at is at our book value. That's after a post write-down.
Writing it down.
Yeah. For sure, we're taking a hit. The only advantage is as we sell this CAD 800 million that we've signed, it's a method to the madness. 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 Calgary that we're selling at a loss. You'll only crystallize the loss once you sell, right? So we'll crystallize the loss, and we'll use that loss to offset the gain when we sell something in Toronto. So we'll get good balance there. Yes, sir. Hope I didn't say seven and a half. We'll all be dead by then. Yeah, no, I meant three-year plan that we'll finish in one and a half. One and a half years. Yeah. Again, selling about CAD 800 million of our properties, primarily office and retail, and primarily in Canada.
The net proceeds after debt will be CAD 600 million, and we'll use about half that to buy back our units, our shares, because they're below NAV, and another half to pay down debt and improve our balance sheet. Ready for more coffee?
Thanks, Armin.
Okay.
Thank you for the question. 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. Finally, and most importantly, I acknowledge the Artis 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. This concludes our meeting, and I would ask that Wayne Townsend move and Lauren Zucker second the motion to terminate the meeting. Thank you. Lauren, thank you. We won't vote on that, and I'll declare the meeting terminated.
Once again, thank you, everyone, for coming, and I wish you all a safe and wonderful summer.