Good afternoon, ladies and gentlemen. My name is Leonie, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Artis REIT's 2018 Annual Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star, then the number two. Thank you. Today's discussion may include forward-looking statements, which include statements that are not statements of historical fact and statements regarding Artis REIT's future financial performance and its execution of initiatives to deliver unitholder value. Such statements are based on management assumptions and beliefs.
These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. Please see Artis REIT's public filings for a discussion of these risk factors, which are included in their annual and quarterly filings, which can be found on Artis REIT's website and on SEDAR. Thank you. I would now like to turn the meeting over to Mr. Armin Martens. Mr. Martens, please go ahead.
Thank you, Leonie, and moderator. Good day, everyone. Welcome again to our Q4 2018 Conference Call. Again, my name is Armin Martens, the CEO of Artis REIT, and with me on this call is Jim Green, our CFO, as well as Kim Riley, our Senior Vice President of Investments, and Philip Martens, our EVP of U.S. Operations, and Jaclyn Koenig, our SVP of Accounting, is with us as well. We have a big crew here today. Again, thanks for joining us, and I will start as usual with Jim going over some financial and operational highlights. I'll wrap up with some commentary, and then we'll open the lines for questions. Go ahead, Jim.
Great. Thanks, Armin, and good afternoon, everyone. As I'm sure most people on the call are aware, our third quarter earnings press release released November 1st, 2018, announced a series of new initiatives for the REIT. This has been a relatively quiet quarter, and I expect most callers are probably more interested in a status update on those initiatives. I'll try and keep my comments on the financial results fairly short, but happy to answer any questions later if that comes up. Artis is a diversified commercial REIT. We have assets in five Canadian provinces and six U.S. states. Based on the Q4 NOI, that was a 43.4% weighting in Western Canada, 11.4% weighted in Ontario, and 45.2% weighted in the U.S..
On an asset class basis, we're approximately just over 53% weighted in office, 20% weighted in retail, and almost 27% weighted in industrial. We do continue to have a presence in the Calgary office market, which contributed approximately 7.7% of our NOI this quarter. Luckily, it's relatively manageable exposure to the Calgary office market in the near future with 197,000 feet rolling in 2019 and only 48,000 feet in 2020. Especially in Calgary, it does remain under pressure, but the lease rollovers, I think, are fairly manageable. As we've mentioned before, our acquisition and disposition activities have mainly been focused on capital recycling, this is obviously a 2018 comment, not so much on the initiatives going forward. We've been looking to further diversify and improve our portfolio.
In this quarter, we completed the acquisition of an office property in Minneapolis. That was actually the completion of a forward purchase that we entered into almost a year earlier, and a disposition of an office property in Winnipeg held in one of our joint ventures. Artis REIT continues to be active in new developments and redevelopment of our existing properties. We have roughly CAD 160 million invested to date in projects considered under development, and during this quarter alone, the investment in development properties was almost CAD 50 million. As detailed in our MD&A, we have several development projects also underway, including a new residential tower at 300 Main and new industrial space in Houston, Phoenix, and Denver.
As detailed also in the MD&A, we have several development projects in the planning stages where construction has not actively started, but we're progressing well through the development stages to get the entitlements needed to build future density. We've been able to maintain our balance sheet. Debt-to-GBV is up slightly this quarter compared to 50.6% compared to 49.3% at December 31st of last year. The main driver of the increase, which isn't that huge, but it was an increase in the Debt-to-GBV, has been the timing of our planned unit buybacks compared to the asset sales, which we anticipate will close in 2019.
Our EBITDA interest coverages remain healthy at over three times. The sales program we implemented through 2016 and 2017 to sell assets and reduce debt has had a dilutive effect on the FFO, with our FFO coming in at CAD 0.33 this quarter. That's unchanged from last quarter, but it is down from CAD 0.35 in the comparative quarter of last year. AFFO for this quarter was CAD 0.24, also unchanged from last quarter. As I mentioned, relatively quiet quarter. A brief update on the initiatives. On November 1st, 2018, we announced a series of new initiatives with the goal of increasing cash flow, increasing unit values by increasing our net asset value and improving our focus and quality of the portfolio. The distribution was reset to CAD 0.54 annually, resulting in a much more conservative payout ratio and freeing up cash flow to fund the development pipeline.
The plan also included non-core asset sales of between CAD 800 million- CAD 1 billion. This process is well underway. You'll note that at December 31, we had already moved CAD 320 million of properties into what's considered, for accounting purposes, held for sale. We anticipate most of these will sell in the first half of 2019 or early into the second half. The initiatives also included using a portion of the sales proceeds to buy back our units using our Normal Course Issuer Bid. We started this immediately after the announcement last November. To December 31, we had purchased roughly 3.5 million units at a cost of just under CAD 35 million. We've used our line of credit to fund these purchases and plan on repaying the line as the assets are sold.
The unit repurchases have continued through January and February using the maximum available under the NCIB. It's a very similar number, roughly another 3.5 million units at a cost of just over CAD 35 million. In our opinion, the plan and the initiatives are on track and ahead of schedule. I'm sure you'll get more color from the other speakers on the call after I've finished the financial highlights. I'll just touch on a couple more items. Then I'll pass it back to Armin. Fair values of the investment properties, I'll touch on that. They're valued at fair value. This quarter was a decrease in value, giving us a decline for the year of CAD 35.6 million.
Major changes this quarter, somewhat comparable to last quarter, were continued lower values in our Calgary office properties as leases roll down to new market rents, along with some lower values for a couple of U.S. office properties based on timing of tenant re-leasing. Debt to gross book value, I touched on that. We remain very comfortable with the ratio. It is up very slightly. We anticipate that coming back down again as we sell some assets. We've been gradually paying off mortgages with the goal of increasing the unencumbered asset pool. At December 31, our unencumbered property portfolio was up to CAD 1.85 billion. We did increase our unsecured line of credit to CAD 700 million. We have two non-revolving unsecured credit facilities in a further amount of CAD 300 million.
Both non-revolving facilities have been drawing full with interest rate swaps placed on them to effectively fix the interest rate. Touching on a couple of highlights from operations. Same property results were, in our opinion, fairly good this quarter. On a same-property basis, the results were up 0.9% this quarter in functional currency and translating into up 2.7% once foreign exchange was factored in. We also present a stabilized same property calculation, which eliminates properties planned for disposition or repurposing, as well as the Calgary office sector. On this basis, we had growth of 2.4% in functional currency and 4.4% once FX was factored in. By asset class, the office segment in Canada was weakest due to some repurposing activities at a couple of buildings. Calgary office sector, interestingly enough, actually had positive same property growth for the third quarter in a row, up 1.1% this quarter.
We do, however, still continue to treat that as a non-stabilized segment, so that is why we pull it out of stabilized same property results. Industrial segment continues to show the strongest performance with 2.4% growth in Canada and 9.9% growth in the U.S. Touching on a couple of the non-GAAP metrics. As I mentioned in the opening results, our FFO year-over-year has declined, with the largest driver being the dilutive effect of asset sales during 2016, 2017, and the early part of 2018, with the proceeds being used for debt reduction. FFO on a quarter dilutive basis was CAD 0.33, unchanged from last quarter, down CAD 0.02 from the same quarter last year. FFO payout ratio was 54.5% and would be even lower pro forma the new distribution.
Our AFFO was impacted by roughly the same items, sitting at CAD 0.24, unchanged from last quarter, but down CAD 0.01 from the same quarter last year. Payout ratio was 75% this quarter, and pro forma the new distribution would have been 56%. IFRS reports our investment properties at fair market value under IFRS, and accordingly, we can calculate our net asset value per trust unit just simply using the equity on our balance sheet, less the equity held by preferred unit holders and divided by the number of common units outstanding for the quarter. On NAV, come out to a value of CAD 15.55 per unit, up from CAD 20.11 last quarter.
The biggest driver of that, of course, is FX, but there was a decline from fair value adjustments, as I mentioned, during the quarter. The decline from fair values was almost exactly offset by the increase created by our using our NCIB at current prices to buy back our stock. We ended the quarter with CAD 66 million on hand and CAD 225 million undrawn on our line of credit. We have got several events detailed in the subsequent events note, which we believe continue to reflect our strategy of intelligent recycling of capital. We plan to continue our focus on a strong balance sheet and the overall quality of the portfolio. That completes my financial review. We are pleased with the NAV growth and our same property income growth and new development activities.
We continue to feel the initiatives we announced last November will make Artis REIT a better and stronger REIT, and we look forward to demonstrating those results in future quarters. I will pass it back to Armin for a bit more discussion.
Thanks, Jim. For most folks, on balance, we're glad that 2018 is behind us. It was a challenging year, during which we made some very difficult but important decisions. Which in turn, however, we feel have already set the stage for us to become a much better REIT. We'll recall some key strategic initiatives that we announced through last year, as already discussed and described in our MD&A. We're pleased to report that things are going well on all fronts. If you look at the distribution reset is, of course, done. That was the easy part, but we do feel we have a bulletproof payout ratio at this point in time. Our balance sheet's in good shape. Our unit buyback program, we're already 30% there, actually. Our plan was to buy back 23.5 million units, an average weighted average price of CAD 11.50.
We're way ahead of that in terms of a better unit price, so to speak. We already bought back about seven million units to date, which is about 30%. Well ahead of plan. We really hope we can keep continuing on that track. It's a great NAV booster, of course, and it's accretive to our earnings. Our property dispositions, and we'll give as much color as you want there. We're getting very good momentum. Our target is to sell CAD 800 million-CAD 1 billion of non-core properties over the next two years to streamline our portfolio. Of course, redeploy those proceeds into debt repayment and unit buyback. There's a lot of wood to chop here, we've done it before, and thus far, we think we're getting very good momentum. About 20 listing agreements have been signed, one property sold.
Five more are already under contract, so about another CAD 100 million of properties under contract, active negotiations taking place with several more. Needless to say, we're confident, we're striving to get this disposition plan done in two years or less, not three years. This year, for example, we're confident that we'll be able to sell over CAD 400 million of properties alone and be ahead of plan. In all, our portfolio is performing well. The office market, as we can see, is somewhat inconsistent, depending on which market or sub-market our properties are in. It's not performing bad either. Our retail and industrial properties are consistently delivering solid and consistent organic growth. Our same property NOI growth, our weighted average rent increases, and earnings, we feel, are sound. Our development pipeline is on track to deliver good results as well.
Again, we'd invite you to look at our MD&A and investor presentations for more detail here. Looking ahead, we'll continue to work hard to keep our buildings full whilst bringing the rents up to market and consistently improving and streamlining our portfolio. To be clear, again, the integrity of our balance sheet and our credit rating, as well as implementing our new strategic initiatives, are of utmost importance here, we feel we're in good shape on all fronts. Again, that's our report for this quarter and year-end, folks. Notwithstanding our past challenges, we're very pleased with the results and are most confident in our outlook where we are today and looking forward. I'll now ask the moderator and Leonie to take over and field your questions.
Thank you. Ladies and gentlemen, should you have a question, please press star followed by one on your touch-tone phone. If you're using a speakerphone, please lift your handset before pressing any keys. One moment, please, for your first question. Your first question is from Jonathan Kelcher from TD Securities. Jonathan, please go ahead.
Thanks. Good afternoon.
Hi.
First question, just on the assets held for sale, just to clarify, you said it there at the end, Armin. That's CAD 100 million under contract by properties of the CAD 320 million?
Yeah. Correct.
Okay.
Yeah.
Is any of the write-down you guys took in Q4 related to the CAD 320 million that are held for sale?
Good question. Jim?
A small portion of it would relate to the Calgary office buildings, but it was only a CAD couple million. The bigger piece is more the U.S. office assets that are not currently considered held for sale.
Okay. What cap rate are you carrying on the CAD 320 million for IFRS?
I'm going to have to get back to you offline on that one. I don't know that answer off the top of my head.
Okay. Would your plan be to sell this CAD 320 million and then roll out a portfolio similar size in the back half of this year?
Yes. We've made and sprinkled in some extra properties that aren't part of the portfolio that we've listed so far. Yeah, there's sort of nothing stopping us, we think, except our own timing constraints right now. The market is good. Interest rates have come down a little bit. We might have the Goldilocks economy might be back. There's still a lot of money chasing real estate. Yeah, you'll see us going flat out all year long.
Yeah. There's been already a few after the year-end. You'll see that number off at Q1, the held for sale, because I'm not anticipating that any of the ones that are under contract close before March 31st. We have listed more properties, so the held for sale will be higher next quarter.
Okay. Roughly how much higher?
I think around CAD 100 million higher.
Just my second question is just on the buyback. You guys have been very aggressive with it so far. I guess with the stock price beginning to move up, any thoughts of slowing the pace down a little bit, at least until you get some asset sales closed?
Not yet. We're still maxing it out every day and every week. I think it's the right thing to do. You can see the debt creeps up a little bit because of it. It's a lumpy thing, but we're very confident in the proceeds coming our way from the asset sales and being able to bring our debt down by Q2 at the latest.
Okay. Those assets, they're mostly unencumbered. They're all unencumbered?
Some are, and then some aren't, and it gets probably a little trickier when there's some mortgage debt on it. It's a combination. The Calgary office, for example, most of them are clear title. That makes them easier to sell.
Okay, thanks. I'll turn it back.
Thank you. Your next question is from Michael Markidis from Desjardins. Michael, please go ahead.
Hi. Thanks, Armin and Jim. I guess kind of another way to ask Jonathan's question on the IFRS cap rate of the three 20. Perhaps there's some vacancy in those assets. I was just wondering, Jim, if you could probably after the call, get everybody what the NOI contribution during Q4 was from that pool?
Yeah, we can do that.
Okay.
We'll circulate that to the analyst group as a whole.
Okay, perfect. Just looking into your capital plans for this year, including sort of inducements and leasing costs and building improvements, whether it's recoverable or non-recoverable, how much would you guys be looking to spend this year, roughly, and how does that break down between existing portfolio and the developments and redevelopments?
Ignore for a minute the developments and redevelopments because that's a bigger spend. The sort of ongoing capital expenditures would be probably comparable to last year, likely even a bit down for the current year. The development spends will continue to We're still finishing the construction on 300 Main will be carrying on all year long. That will be a fairly big number. The industrial projects we have underway in the U.S. will probably generally wrap up by the end of the first half. We'll be pretty much done then. expect the development spends to be higher in the first half than the second half.
Okay, you don't have any other projects that you might start in the second half then?
Nothing planned.
Okay. Are we still live? All right. I didn't hear an answer there, but I guess the answer would have been.
Sorry, nothing planned to start that is not underway yet.
Okay. Just a last question I have here is just on the You guys have a couple properties, Dunwin and Sierra, the Calgary office properties that are classified as redevelopment. Just in the way you guys are doing the excluding the properties held for sale or intended for sale, I guess it says, which, and I assume that that doesn't necessarily jive with what's held for sale, I guess it's what you intend to sell over time. But you also strip out sort of properties that are being repurposed. I'm just curious what the difference is between what you consider to be a redevelopment and what's a repurposing?
There's a couple that we're considering repurposing, specifically 360 Main in Winnipeg, which is undergoing a fairly extensive renovation for a new tenant that's going to be taking a substantial portion of the lower tower, and also the former Sears Centre in Grande Prairie, which is currently vacant. We're working with a tenant to take it, but it's not unconditional yet.
Okay. I guess the last question for me, I promise this time. Occupancy gains going forward, I guess it doesn't really look like you have much rent opportunities in terms of rent growth in your portfolio on an average basis. As you rework the portfolio, where do you think you can get the occupancy in this portfolio up to in the next couple of years?
Well, that's a tough question. If we can get that Sears box done in Grande Prairie, for example, we're optimistic, that's a good chunk of vacancy to absorb. Got 601 Tower at Carlson in Minneapolis. We're getting good momentum. We're down in the low 80%s. We're on the high 80%s now for occupancy. We want to get into the mid-90%s. We got Two MarketPointe up to almost 100%. Here at THE MAX in Phoenix, we lost a big tenant that downsized, but we're slowly but surely backfilling it very nicely. We see occupancy gains. Michael might tell that. I don't know if we've ever modeled in what percent. You got any comments on that, Kim?
No. Overall, I think there was another issue on Madison, WI where there was a vacancy, we've backfilled that with a 45,000 sq ft tenant at 8401 Greenway Boulevard. In regards to THE MAX specifically, we're trading paper on an entire floor. We're seeing some good occupancy opportunities. Back at Two MarketPointe, we have expansions, we have new leases that will get us there to 100%, we're wrapping up negotiations there. The office has actually performed fairly well in the last two quarters.
Yeah. I mean, there's little things, 415 Yonge, we're almost 100% leased there too, the rents keep going up. Concord is progressing very well, good momentum. I couldn't give you a number on what the occupancy level will be. We feel that the trend is our friend right now. You there? Did we lose the call?
Thank you. Your next question is from Michael Smith from RBC Capital Markets. Michael, please go ahead.
Thank you, and good afternoon. Just have a few questions. Just speaking of 415 Yonge Street and your Gateway property. I know you still have a lot of rezoning still to do. You spent a lot of time doing it or are in the process, and there's still more time to go and more work to do. Any interest in selling or any demand for selling it unzoned? There's some unzoned res sites in Toronto that are going for very high numbers.
There's demand, I think, and we're contemplating that. We think by the second half of this year, we'll launch the sale of that property. We've been at this for two years with the city planners, and we feel optimistic that we're going to be getting a positive report and support from the planners in the near future. Because of that, again, you can't quote me on this, we just feel good about the momentum where we're getting the progress, and that is a bit of a game changer in terms of getting the actual entitlements after that. We're plugging away, the more visibility we can get on the rezoning, I think the more value we get when we sell. That's the balancing act right now for 415 Yonge. Meanwhile, it's a great asset.
If we don't rezone that site, Michael, in the next 10 years, that NOI will double. That's just the way it is. It's just a great asset to hold right now. The same applies to Concord. Concord, we're being well received. By the end of this year, we're confident we'll have the full entitlements, and we look to launch Concord in the second half of this year as well.
Any chance you'll sell some Calgary office this year?
For sure. Well, I mean, two of those four that we mentioned are under contract. The numbers get smaller as we write those assets down. We only own CAD 330 million roughly of office properties in Calgary, but still we want to get off more of them. I mean, Stampede Station has been listed. Centre 70 has been listed. 805 Fifth has been listed. Britannia and Sierra are both under contract to two different qualified buyers. We'll be looking at TransAlta next, and then we'll see. We'll see what happens after that. We expect that will all be dealt with this year.
Mm-hmm. The properties that are under contract, I guess, including Sierra and Britannia, but all the other ones as well, are they under a conditional contract or have conditions been waived?
Yeah, still conditional. If they're unconditional, we'd be happy to report that. They're both qualified buyers that really have a good use for the property, and we feel good about that.
Okay. If I heard correctly, I think you said earlier that probably about CAD 400 million will be done this year. You're pretty confident about that?
For sure.
Okay. I know you're busy selling your assets, buying back your stock, funding your development. Just on the acquisition front, can we safely assume that there'll be no acquisitions, or if there is, they'll be part of previously sort of contracted acquisitions or?
Yeah, there's a second phase of that office project in Minneapolis that will close in probably the second half of this year. That's been under contract for a long time. It's 100% leased, and we don't take possession until the tenant is in and paying rent. That I anticipate will happen in. Yeah, that's it. That's the true three of this year, right? That's it. Other than that, we're not buying. We're selling assets and buying back our shares.
Okay, perfect. All right, thank you. That's it for me.
Thank you.
Thank you. Your next question is from Jenny Ma from BMO Capital Markets. Jenny, please go ahead.
Thanks. Good afternoon.
Hey, Jenny.
Just on the topic of the Calgary office assets, could you give us a little bit color on the buyer profiles or the type of buyers who are looking at Calgary office properties?
Private families, opportunity funds, hotel operators and apartment operators that want to reposition a property. User buyers as well, a buyer that will want to occupy half the building. That's the profile. REITs are not on the list. Pension funds, I think they club with operators, there's always some opportunity fund out there. I mean, we all know the Canadian market at least a little bit. If there are opportunities, it's really in the Calgary office market right now.
I'm curious to know if there's any global buyers who are kicking the tires, or are these mostly Canadian buyers and users?
It's a good question. It could be global money, they're using local and North American operators. There are some U.S. operators that show up, I'm not always sure where their money's coming from.
Okay. Switching to the writedowns of the U.S. office portfolio. Jim, I think you mentioned that of the amount, there was a very little bit related to Calgary office, the rest is U.S.. Then you mentioned it was due to some timing of vacancies, if I heard you correctly. I'm just trying to get some color on sort of what prompted that. Is it on the NOI side? Is it on the cap rate side? Is it on a few properties or is it a little bit across more properties?
It's on a few, it's based on some lease terminations that we know are coming up. When you factor that into ARGUS, the discounted cash flow drops the value because it factors in a vacancy factor. Whether that vacancy factor materializes or not is unknown at the present time because they are second half of this year, that's just the way ARGUS runs valuation software.
What is the threshold that would trip that? If something goes vacant, is it because you don't see any prospect of leasing it for the next two quarters or the next year? At what point do you take the writedown as opposed to waiting it out while you lease it up?
We value the majority of those properties more on a discounted cash flow basis, the assumption in ARGUS is generally going to be at least a six-month lag time on a turnover.
That's where the hit comes to the valuation.
It's from the lag, so you basically build something in after, you make an assumption.
Right. That value can come back up again as you re-lease the space.
You do take the hit when you know you have a vacancy coming up.
Okay. Just a question sort of on the higher level. You gave us a lot of good detail on the strategic initiatives. I'm just wondering what the discussion has been around the table about, I guess, what the ultimate, not the end game, but sort of where you want to be in three to five years as a result of these strategic initiatives. I'm looking at some of the pie charts here, you've got a sliver of retail in U.S.. Calgary office, you're down to 8% with a bunch listed for sale. Can that go to zero? When we look at three to five years after all the efforts that you put in over the next 12-24 months will be done, how do you want Artis REIT to look?
Well, take a look at our investor presentation. I guess it'll be uploaded by the end of the day today or first thing next week or Q4. At the end, we do show, for example, the pie charts, where we are today in terms of our NOI and geography breakdown by asset class and geography, and where we expect to be. I mean office will shrink. It's about 55% now. It'll shrink to 45% and possibly lower. Industrial will increase up to 40%, retail will shrink down to 15%. To the geography, we see ourselves flipping. We're now 55% Canada, 45% U.S. We see that flipping and going to 45% Canada and 55% U.S., primarily because most of what we're selling is in Canada.
Okay.
Looking further ahead, as things stabilize and our unit price moves up and other things justify the price, we want to ramp up our industrial development pipeline. Acquisitions can be expensive, we do want to ramp up our industrial development pipeline when the timing's right.
The industrial pipeline in the U.S.?
That's where we are achieving unlevered yields north of 7% and getting good results one project at a time. We are prepared to increase our weighting there as well, but not this year. This year, we have got other things to do.
What about on the leverage side?
Looking at, I think our model shows us bringing our total debt down to about 45% by year three, and that is still the objective. 50% works, obviously, but it is not good enough. We want to get down to 45%.
45%, by, say, 2022 or so.
Yeah.
That's just through the initiatives that you've currently announced.
Right.
Okay. That's helpful. I'll turn it back. Thank you.
Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star followed by one. Your next question is from Matt Kornack from National Bank. Matt, please go ahead.
Hi, guys. Along the lines of the questioning with regards to dispositions. Wondering if the portfolio that you're looking to sell, if the vacancy in place is sort of equivalent to what the portfolio is today, or if there's more vacancy there, or maybe there's higher occupancy, and how that would translate to your overall occupancy.
Yeah. I mean, Calgary office buildings have high vacancy, right?
Okay.
Across the board, most of them. I think that our NOI contribution is not that high from the properties we're selling.
Okay. You'll get a net benefit of higher occupancy and less fixed costs across your portfolio, I guess.
Yeah.
This is nitpicky, but I was interested. Your top tenants, TDS Telecommunications, I don't know if it's a typo, but it went from 6.3 years remaining to one year remaining in this MD&A, just quarter-over-quarter. Are they leaving?
Oh, that's a typo. It's a comment on your show.
Lot of comments.
Yeah, no, that's a typo.
Yeah, that lease was actually extended, and for whatever reason, it didn't pick up in our system then. That is an error.
There's five years and nine months left on that. They did have an option, and our software was tracking the option and not the full term of the lease. It's just a Yardi issue.
Fair enough. That's an easy answer then. Whiting, any update there with regards to negotiations or renewal?
Well, that's one of the write-downs Jim was talking about. Whiting, their lease expires at the end of this year, and they will be leaving. That's 10 floors in that building. Their average rent is CAD 25 gross. We feel we've already got four of those 10 floors spoken for at higher rents. The market rent is about CAD 35 gross there. We're working hard to get that space back, but right now, we're in a good place with that building. It's a hell of a good location in Uptown and downtown Denver in general, Uptown, Lower Downtown, there is a very strong market right now.
Okay, it'll just be a timing-related issue, if anything, in terms of space coming off and coming back on.
Right. All the leases we're dealing with are 10 years plus.
Okay, fair enough. Then any view with regards to financing on the floating versus fixed, I mean, the market's been very volatile of late with regards to interest rates, and they've pulled back a bit here. You did an unsecured deal, which I think was interesting to show that that market is still open to you. Yes, generally, how do you think of financing this business going forward? It seems like you're committed to keeping your credit rating, so what's your view, mortgages versus fixed, floating, and unsecured?
Well, mortgages have fallen for us down to around the 30%. Expect that that may even fall a little bit further. As we use more unsecured debt, we need to increase the unencumbered asset pool. The cheapest debt for us is the secured debt, so we'll bring it down a little bit, but to watch overall cost of capital, it may not look a whole lot different than where it sits today.
It may be a ways off, but if you're committed to the unsecured market, are you committed to trying to, in time, move your rating higher, and would you look to leverage levels that would make that possible? You mentioned 45, but I would assume because you've got a little bit higher yield on your assets, your debt-to-EBITDA number can get fairly attractive the lower you bring that down.
Yeah. That is definitely a goal for us, is to move up to the next step in the credit rating. Move it from BBB- to BBB mid would be great. We've had those discussions with DBRS, we have to get through this initiative process first before we'll be able to go back to them and say, "Now we think we qualify.
Okay. Size-wise, I know they have their thresholds, but even with selling your assets, are you still big enough that you make the EBITDA threshold to be BBB mid?
The EBITDA threshold gets a little bit tight, and so does the market cap. That's the risk that we have to monitor as we go through this initiative process. So far, our discussions have been that I think the rating will stick as we go through it and hopefully come out the other end with an improvement in rating.
Okay, great. Thanks. That's interesting.
Thank you. Your next question is from Mario Saric from Scotiabank. Mario, please go ahead.
Hi. Thank you, and good afternoon. Maybe just sticking to the asset dispositions in the top 20 tenants list. TransAlta, I know it expires in about four and a half years, so there's still some time. Have there been any discussions in terms of renewing the tenant prior to asset disposition, or how do you balance the two?
Yeah. TransAlta is probably becoming more and more of a redevelopment play. As you know, there'll be the Green Line, the multi-billion-dollar project has been approved, and our block there, just between our site and the Oxford site, there's going to be a spacious subway station there that'll connect to both of our properties. We'll have a full-on TOD, if you will, transit-oriented development there, and the city is encouraging a lot of density there. We're right now into resorting plans and schemes to add a lot of density to that site, multi-family primarily. In parallel with that, Mario, we have reached out to TransAlta and made proposals. They are looking to downsize into just the main building, and we're in discussions, but it's because it's four years away, and they've got other things on their mind. There's nothing conclusive there.
However, we view the greatest value in this, and any buyer interested in this site wants it for the redevelopment potential primarily and the office secondary. That's what's happened there.
Got it. I think the ultimate valuation will be more along the lines of a price per buildable square foot as opposed to some kind of cap rate.
Yeah.
On office rents. Okay.
Yeah.
Just sticking to the initiatives, or maybe I think at the onset, you mentioned on the NCIB, when you initiated, there was a kind of a target CAD 11.50 per unit kind of average purchase price or repurchase price. Is it fair for us to kind of think of that level as being the level where you potentially do slow down if the unit price does move up there?
Potentially. I think we'll be buying full out hard right to CAD 12 threshold for sure. We'll see. Needless to say, the higher our unit price goes, the more we'll consider pausing. We're very disappointed that our stock dropped as much as it did last fall and through December, but we're also grateful for being able to get through 30% of our program at such low prices ahead of plan.
Got it. Okay. The sensitivity to the unit price is there, but at the same time, you're also taking into consideration kind of the timing of the asset sales and the debt levels and whatnot.
Yeah. Again, as I think I mentioned, it won't be a straight line. It'll be a little lumpy. For now, we think it's a good use of capital, good use of our line, if necessary, to keep maxing out our NCIB. It's an automatic NCIB. We're maxing it out. Sometimes we're doing a block trade as well. We'll keep doing that. We're very confident that our dispositions will get done, and by summertime, we'll have lots of money to pay down debt.
Understood. Okay. Then just maybe an operational question. Obviously, the portfolio is really changing over the next couple of years that the same property NOI metric may be a little bit less relevant than it has been in the past. When you look at the same property NOI delivered in 2018, kind of flattish in Canada, 3% in the U.S., let's call it 1% on a local currency basis. How do you see that shaping up for 2019?
I think similar. A lot will depend on how fast we can sell this Calgary office property because that's where we had a good quarter with the Calgary office last quarter, but that's where the decline always comes, right? From the Calgary office renewals. I wouldn't project. I'd expect the U.S. to outperform Canada until we get through all of our Calgary office dispositions.
Okay. Aside from Calgary office, on a steady state portfolio basis, ignoring the assets that you may sell, just in the kind of core portfolio, what type of run rate do you think the core portfolio is capable of?
You know what? Industrial, for example, very good numbers, right? Industrial can be between 4%-6%. The retail, we only had that one problem in Grande Prairie, which I think we're going to solve and get some good news. Our retail has always been giving us good respectable growth as well. We feel very comfortable with our industrial and our retail right now.
Okay. Presumably, the wild card will be kind of the lease up in the U.S. on the office side.
Pardon me? I didn't catch that.
The near-term wild card will be kind of the pace of lease up in the U.S. office portfolio in terms of your aggregate.
Yes. Correct. Yes.
Okay. Thank you.
Okay. Thanks.
Thank you. Your next question is from Dean Wilkinson from CIBC. Dean, please go ahead.
Thanks. Afternoon, everyone. Armin, I'd just like to actually follow on Mario's questioning there, not on the assets that you're selling, but focusing on the stuff that you're keeping. Just looking at that 2019 renewal program, it looks like a fairly higher year in terms of expiries at a shade over 14%. When you look at sort of the lift on renewals during Q4 of 2018 at zero, is that something that we can expect looking at 2019, just given that it looks like your rents are at or maybe 1% above market across the board? I'm kind of getting to the point of, do you think that the same property NOI growth for 2019 is maybe a shade lower than 2018, FX aside?
Well, I hope not. I know in Q4, we had some big industrial renewals that didn't work as well as we thought that we feel we can do better, and maybe we never should have done a bit better. I'm pretty optimistic about positive NOI growth across the board. The economy is what it is. There's always a rumor about an economic slowdown, that can change the outlook and change the facts of what we know. Right now, we're seeing good velocity across the board for even our retail, not just our industrial, and offices. It's a fragmented market. Winnipeg has gone soft. Certain sub-markets of Minneapolis are soft. You got Toronto super strong. Anything we've got in Toronto is progressing very well. The office market is fragmented, inconsistent, but retail and industrial are doing well for us in all of our markets.
We still expect it to give us pretty good positive numbers.
Okay. On the 22% of the stuff that you've already signed, how have those penciled in? Have you seen the gains there? Do they look more like the Q3, Q2, or look more like the Q4?
There are gains, but I don't have those leasing reports with us.
Okay. Fair enough. Maybe if.
They find out soon. Q1 is around the corner.
True enough.
You'll be fairly low on it.
Okay. That's all I had there. Thanks, guys.
Okay. Thanks, Dean.
Thank you. There are no further questions at this time. Please proceed.
Well, thanks again, everyone, for joining us, and a special word of congratulations and best wishes to Michael Smith, if he's still on the line. This might be his last conference call with us, and we're wishing you Godspeed and all that you do, and best of luck in all of your endeavors, Michael. Thanks again, everyone. Looking forward to catching up at our next call as well. Jim, we'll get back to you with an email on that answer on the NOI, and feel free to reach out to us anytime offline as well. Thanks a lot. Bye-bye.
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