Earnings Call: Q4 2018

Mar 1, 2019

Good afternoon, ladies and gentlemen. My name is Leone, 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 speakers' remarks, there will be a question and answer session. Session. 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's 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 Martin. Mr. Martins, please go ahead. Thank you, Leonie and moderator. Good day, everyone, and 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 Reilly, our Senior Vice President of Investments and Phil Martins, our EVP of U. S. Operations and Jackie Koenig, our SVP of Accounting is with us as well. So 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, then I'll wrap up with some commentary, 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 Q3 earnings press release released November 1, 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 5 Canadian provinces and 6 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 United States. 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 growing in 2019 and only 48,000 feet in 2020. So fortunately, Calgary 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. And this is obviously 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 our 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 continues to be active in new developments and redevelopment of our existing properties. We have roughly $160,000,000 invested to date in projects considered under development. And during this quarter alone, this investment in development properties was almost $50,000,000 As detailed in our MD and A, we have several development projects also underway, including a new residential tower at 300 Main, a new industrial space in Houston, Phoenix and Denver. As detailed also in the MD and A, we have several development projects in the planning stages where construction has not actively started, 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 31 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 3 times and the sales program we implemented through 2016 2017 to sell assets and reduce debt has had a dilutive effect on the FFO with our FFO coming in at $0.33 this quarter. That's unchanged from last quarter, but it is down from $0.35 in the comparative quarter of last year. And AFFO for this quarter was $0.24 also unchanged from last quarter. So as I mentioned, relatively quiet quarter. A brief update on the initiatives. On November 1, 'eighteen, 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 on quality of the portfolio. The distribution was reset to $0.54 annually, resulting in a much more conservative payout ratio and freeing up cash flow to fund the development pipeline. Plan also included non core asset sales of between $800,000,000 to 1,000,000,000 dollars and this process is well underway. You'll note that at December 31, we had already moved $320,000,000 of properties into what's considered for accounting purposes held for sale, and we anticipate most of these will sell in the first half of twenty nineteen 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, and we started this immediately after the announcement last November. To December 31, we had purchased roughly 3,500,000 units at a cost of just under $35,000,000 We 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 February using the maximum available under the NCIB, and it's a very similar number to roughly another 3,500,000 units at a cost of just over $35,000,000 In our opinion, the plan and the initiatives are on track and ahead of schedule. And I'm sure you'll get more color from the other speakers on the call after I finish the financial highlights. So I'll just touch on a couple of more items and 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 in this quarter, it was a decrease in value, giving us a decline for the year of $35,600,000 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, but we remain very comfortable with the ratio. It is up very slightly, but 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. And at December 31, our unencumbered property portfolio was up to $1,850,000,000 We did increase our unsecured line of credit to $700,000,000 and we have 2 non revolving unsecured credit facilities in the further amount of $300,000,000 Both non revolving facilities have been drawn in 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 We also present a stabilized same property calculation, which eliminates properties planned for disposition or repurposing, as well as the Calgary office sector. And 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 repurchasing activities at a couple of buildings. Calgary office sector, interestingly enough, actually had positive same property growth for the Q3 in a row, up 1.1% this quarter. We do, however, still continue to treat that as a non stabilized segment. So that's 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 United States. 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, 'seventeen and the early part of 'eighteen with the proceeds being used for debt reduction. FFO on a quarter diluted basis was $0.33 unchanged from last quarter, down $0.02 from the same quarter last year. FFO payout ratio was 54.5 percent and would be even lower pro form a by roughly the same items sitting at $0.24 unchanged from last quarter, but down $0.01 from the same quarter last year. Payout ratio was 75% this quarter and pro form a the new distribution would have been 56%. Artis reports our net 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 plus the equity held by preferred unitholders and divided by the number of common units outstanding for the quarter. And our math comes out to a value of $15.55 per unit, up from 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. But 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. So we ended the quarter with $66,000,000 on hand and $225,000,000 undrawn on our line of credit. And we've 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. I understand our same property income growth and new development activities. And we continue to feel the initiatives we announced last November will make Ardas a better and stronger REIT. And we look forward to demonstrating those results in future quarters. I'll pass it back to Armin for a bit more discussion. Thanks, Jim. From all folks, on balance, we're glad that 2018 is behind us. It was a challenging year in which we made some very difficult but important decisions, which in turn, however, we feel has already set the stage for us to become a much better REIT. Again, we'll recall some key strategic initiatives that we announced in Q3 last year, as we discussed and described in our MD and A. But 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 is in good shape. Our unit buyback program, we're already 30% there actually. Our plan was to buy back 23,500,000 units, an average fleet average price of $11.50 We're way ahead of that in terms of a better unit price, so to speak. But we already bought back about 7,000,000 units to date, which is about 30%. So well ahead of plan. We really hope 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 you as much color as you want there. We're getting very good momentum. Our target is to sell $890,000,000 to 1,000,000,000 dollars of non core properties over the next 2 years to streamline our portfolio. And of course, we deploy those proceeds into debt repayment and unit buyback. So a lot of wood to chop here, but we've done it before. And thus far, we think we're getting very good momentum. About 20 listing agreements have been signed, 1 property sold, 5 more are already under contract, so about another $100,000,000 of property is under contract and active negotiations taking place with several more. Needless to say, we're confident and we're striving to get this physician plan done in 2 years or less, not 3 years. And this year, for example, we're confident that we'll be able to sell over $400,000,000 of properties alone and be ahead of plan. So meanwhile, our portfolio is performing well. The office market, as we can see, is somewhat inconsistent depending on which market or submarket our properties are in, but 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 rental increase and earnings are, we feel, are sound. And our development pipeline is on track to deliver good results as well. So again, we'd like to look at our MD and A and investor presentations for more detail here. So 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, and we feel we're in good shape on all fronts. So again, that's our report for this quarter year end. Folks, notwithstanding our past challenges, we're very pleased with the results that are most confident in our outlook where we are today and looking forward. So I'll now ask the moderator and Leonie to take over and field your questions. Thank you. Your first question is from Jonathan Kelcher from TD Securities. Jonathan, please go ahead. Thanks. Good afternoon. Hi, Jonathan. First question, just on the assets held for sale. Just to clarify, you said it there at the end, Norman. So that's $100,000,000 under contract, 5 properties of the 320,000,000 dollars Yes. What did you is any of the write down you guys took in Q4 related to the 320,000,000 dollars that are held for sale? Yes, I think, Jim, a small portion of it would relate to the Calgary office buildings, but it was only a couple of $1,000,000 The bigger pieces is more the U. S. Office assets that are not currently considered held for sale. Okay. And what cap rate are you carrying on the $320,000,000 for IFRS? I'll have to get back to you offline on that one. I don't know that answer off the top of my head. Okay. And then would your plan be to sell this $320,000,000 and then roll out a portfolio similar size in the back half of this year? Yes. We've got and we've made and sprinkle in some extra properties that aren't part of the portfolio that we've listed so far. But yes, there's sort of nothing stopping us we think except our own type of exchange 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. So yes, we and you'll see us going flat all year long. Yes, there's been already a few after the year end. So you'll see that number up at Q1, they held for sale, because I'm not anticipating that any of the ones that are under contract close before March 31. But we have listed more properties, so the held percent will be higher next quarter. Okay. Roughly how much higher? I think around $100,000,000 higher. Okay. And then 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, do you have 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 up every day and every week. It's the right thing to do. I mean, 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. And then those assets are mostly unencumbered or all unencumbered? Some are, and some aren't, and it's always a little trickier when there's some mortgage debt on it's a combination. The Calgary office, for example, multiple are clear title. That makes them easier to sell. Your next question is from Mike McCarthy from Desjardins. Mike, please go ahead. Hi, thanks, Hartmut and Jim. I guess kind of another way to ask Jonathan's question on the IFRS cap rate of the $320,000,000 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? Yes, we can do that. We'll certainly that to the analyst group. Okay, perfect. Just looking into your capital plans for this year, including sort of inducements in 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? So ignore for a minute the developments and redevelopments because that's a bigger spend, but the sort of ongoing capital expenditures be probably comparable to last year or likely even a bit down for the current year. The development spends will continue to we're still finishing the construction on 300 Main, we'll be carrying on all year long, that will be a fairly big number. And the industrial projects we have underway in the U. S. Will probably generally wrap up about by the end of the first half, we'll be pretty much done then. So expect the development spends to be higher in the first half than the second half. Okay. So you don't have any other projects that you might start in the second half then? Okay. Are we still live? All right. I didn't hear an answer there, but I guess the answer was Sorry, nothing planned to start and that is not underway yet. Okay. And then just a last question I have here is just on the you guys have a couple of properties, Dunwin and Sierra, the Calgary Apis property that are classified as redevelopment. And then 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 what you intend to sale over time. But then 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 Center in Grand Prairie, which is currently vacant. We're working with a tenant to take it, but it's not unconditional yet. Okay. And I guess last question for me, I promise this time. Occupancy gains going forward, I mean, 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. We can get that Sears box done in Grand Prairie, for example, we're optimistic and that's a good chunk of vacancy to absorb. We've got 601 in Carlson in Minneapolis and we're getting good momentum. We're down in the low 80s. We're on the high 80s now for occupancy. We want to get to the mid-90s. We've got 2 market points up to almost 100%. Here, the MAX in Phoenix, we lost a big tent that downsized, but we're slowly but surely back very nicely. We see occupancy gains. We do see occupancy gains. Mike, I don't know if we've ever modeled in what percent. Is there any comments, Kent? No. Overall, I mean, I think there was another issue on Madison where there was a vacancy, and we've backfilled that with 45,000 square foot tenant at 8,401 Greenway. So we're in regards to MAX specifically, we're trading paper on entire floor. So we're seeing some good occupancy opportunities. And then back into market points, we have expansions and we have new leases that will get us 100%. So we're wrapping up negotiations there. So the office has actually performed fairly well in the last two quarters. Yes. I mean, little things, 415 Young, we're almost 100% leased there too and the rents keep going up. Concord is progressing very well, good momentum. But like Ted, couldn't give you a number on what the occupancy level will be. We feel that the trend is our trend right now. We're there? 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. So just speaking of 415 Yonge Street and your Gateway property, are you any I know you still have some a lot of rezoning still to do. You're well You spent a lot of time doing it or in the process and there's still more time to go and more work to do. But 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. Yes. There's demand, I think, and we're really contemplating that. We think by the second half of this year, we'll launch the sale of that property. We're getting we've been at this for 2 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. And because of that, and again, you can't quote me on this, but we just feel good about the momentum we're getting the progress, and that is a bit of a game changer in terms of getting the actual entitlements after that. So we're plugging away. And the more visibility we can get on the rezoning, I think the higher the more value we get when we sell. So that's the balancing act right now for 415 Young. But meanwhile, it's a great asset. If we don't rezone that site, Mike, 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. And so the same applies to Concord. Concord would be well received. By the end of this year, we're off to the concert. We'll have full entitlements and we'll look to launch Concord in the second half of this year as well. And any chance you'll sell some Calgary office this year? For sure. Well, I mean, 2 of those 4 that we mentioned are under contract, the numbers get smaller as we write those assets down. We only own $330,000,000 roughly of office properties in Calgary, but it's still we want to get off more of them. I mean, Stampede Station has been listed. Center 70 has been listed. The 805 has been listed. Britannia and Sierra are both under contract to just 2 different qualified buyers. And we'll be looking at TransAlta next, and we'll see what happens after that. But we expect that will all be dealt with this year. And the properties that are under contract, I guess, including Sierra and Britannia, but all the other ones as well, are they under conditional But they But they're both qualified buyers that really have a good use for the property. And we feel good about that. Okay. And so you're so if I heard correctly, I think you said earlier that probably about $400,000,000 will be done this year. You're pretty confident about that? For sure. Okay. And I know you're busy selling, you got a lot of selling your assets, buying back your stock, funding your development. But just on the acquisition front, can we safely assume that there'll be no acquisitions or if there is, there'll be part of previously sort of contracted acquisitions or? Yes, there's 1 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 paying rent. And that I anticipate will happen in Yes. And that's it. And that's the truth here of this year, right? But that's it. Other than that, we're not buying we're selling assets and buying macro 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. Hi, 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, we prepared 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. And pension funds, I think the club of operators, but there's always some opportunity to fund out there. And then as 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, but they're using local and North American operators. It's a sub U. S. Operators that show up, and I'm not always sure where their money is coming from. Okay. Switching to the write downs of the U. S. Office portfolio, Jim, I think you mentioned that of the And 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 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? And is it on a few properties? Or is it a little bit across more properties? It's on a few and it's based on some lease terminations that we know are coming up. And 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, but that's just the way ARGUS runs valuation software. So what is the threshold that would trip that? Like if something goes vacant, is it because you don't see any prospect of leasing it for the two quarters or the next year? Like at what point do you take the write down 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 and the assumption in Argus is generally going to be at least a 6 month lag time on a turnover. So that's where the hit comes to the valuation. So it's from the lag, so you basically build something in after making you make an assumption? Right. So that value can come back up again as you release the space, but you do take the hit when you know you have a vacancy coming up. Okay. And then 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 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 3 to 5 years as a result of the strategic initiatives? I'm looking at some of the pie charts here and 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 0? When we look at 3 to 5 years after all the efforts that you put in over the next 12 to 24 months will be done, how do you want ARTIS to look? Well, take a look at our investor presentation. I guess, it will be uploaded by the end of the day today or first thing next week or Q4. But 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 will shrink to 45% and possibly lower. Industrial will increase up to 40% and retail will shrink down to 15%. And to the geography, we see ourselves flipping. We're going to now 55% Canada, 45 percent 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. And then looking further ahead, as things stabilize and our unit price moves up and things other things justify the fact. We want to ramp up our industrial development pipeline. Acquisitions can be expensive, but we do want to ramp up our industrial development pipeline when the time is right. The industrial pipeline in the U. S? Yes, that's where we're achieving unlevered yields north of 7% and getting good results one project at a time. So we are prepared to increase our weighting there as well, but not this year. This year we've got other things to do. And then what about on the leverage side? So, look, I think our model shows us bringing our total debt down to about 45% by year 3 and that's still the objective. 50 is we don't want 50 is works obviously, but it's not good enough. We want to get down to 45. 45, so by say 2022 or so. Yes. And 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. 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? Yes. I mean, the Calgary office buildings have high vacancy rate across the board, most of them. So I think that our NOI contribution is not that high from the properties we're selling. Okay. So you'll actually you'll get a net benefit of higher occupancy and less fixed costs across your portfolio, I guess. And then this is nitpicky, but your top tenants, TDS Telecommunications, I don't know if it's a typo, but it went from 6.3 years remaining to 1 year remaining in this MD and A just quarter over quarter. Are they leaving or That's a typo. You want to comment on your No, it's coming. That's a typo. That's a Yes, that lease was actually extended and for whatever reason, it didn't pick up in our system. And just so that is There's 5 years 9 months left on that. They did have an option and our software was tracking the option and not the full term lease. So it's just the Yardi issue. Fair enough. That's an easy answer then. And then Whiting, any update there with regards to negotiations or renewal? Well, that's one of the write downs Jim was talking about. So widening is at least expired at the end of this year and they will be leaving. That's 10 floors in that building. Their average rent is $25 gross. We feel we've already got 4 of those 10 floors spoken for at higher rents. The market rents is about 35 gross there. So we're working hard to get that space back, but right now, that's it. And 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. So it will 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. And then any view with regards to financing to 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. But 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 of mortgages versus fixed floating and unsecured? Mortgages have fallen for us down to around the 30% mark. We 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. And I mean, 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? I mean 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? Yes. That is definitely a goal for us is to move up to the next step in the credit rating, move it from BBB low to BBB mid would be great. We've had those discussions with PBRS, but 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. And 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. But so far, our discussions have been that I think the rating will stick as we go through it and hopefully come up the other end with an improvement in rating. 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 and the top 20 tenants list, TransAlta, I know it expires in about 4.5 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 2? Yes. It turns out that property is becoming more and more of a redevelopment play. As you know, there'll be a the green line was the multibillion dollar project has been approved. And our block there, just between our site and the Oxford site, there's going to be a space to subway station there that will connect to both of our properties. So we'll have a full on POD, if you will, to as an oriented development there, and the city is encouraging a lot of density there. So we're right now into resorting plans and schemes to add a lot of density to that site, multifamily primarily. In parallel with that, Mario, we have reached out to TransAlta to make proposals. They are looking to downsize it to just the main building. And we're in discussions, but because it's 4 years away and they've got other things on their mind, there's nothing conclusive there. However, we view the greatest the value in this and any buyer interested in this site wanted for the redevelopment potential primarily and the office secondary. That's what's happened there. Got it. So 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 on office rents? Yes. Okay. And then just sticking to the initiatives, I mean, I think at the onset you mentioned on the NCIB when you initiated, there was a kind of a target $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 price doesn't go up there? Potentially, I mean, I think we'll be buying full of hard right to $12 threshold for sure, and then we'll see. Needless to say the higher our unit price goes, the more we'll consider pausing. We're just I mean, 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. So 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 debt levels and whatnot? Yes. And again, as I think I mentioned, it won't be a straight line, it will be a little lumpy. But 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. And we'll keep doing that. We're very confident that our disposition will get done. And by summertime, we'll have lots of money to pay down debt. Understood. Okay. And then just maybe an operational question. Obviously, the portfolio is really changing over the next couple of years. So the same property NOI metric may be a little bit less relevant than it has been in the past. But when you look at the same property NOI delivered in 2018, kind of flattish in Canada, 3% in the U. S, so 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 probably because that's where that's why I mean, we had a good quarter with the Calgary office last quarter, but that's where the where the decline always comes, right, from the Calgary office renewals. But I wouldn't predict I'd expect the U. S. To outperform Canada until we get through all of our Calgary office dispositions. Okay. But aside from Calgary office, on a steady state portfolio basis, so ignoring the assets that you may sell, just in the current core portfolio, what type of run rate do you think the core portfolio is capable of? Industrial, for example, very good numbers, right? And industrial can be between 4% to 6%. And the retail, we only have that one problem in Grand Prairie, which I think we're going to solve and get some good news. But our retail has always been given us good respect for growth as well. We feel very comfortable with our industrial and our retail right now. Okay. Presumably, the wildcard will be kind of the lease up in the U. S. On the office side? Pardon me, Pani? The near term wildcard 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, 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, I mean it looks like a fairly higher year in terms of expiries that shade over 14%. When you look at sort of the lift on renewals during Q4 of 2018 at 0, 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? So 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've got some big industrial renewals that didn't work as well as we thought that we feel we can do better and maybe we should have done a bit better. But I'm pretty off connection about positive NOI growth across the board. I don't and the economy is what it is. There's always a rumor about economic slowdown, so that can change the outlook and change the fact at real time. But right now, we're seeing good velocity across the board for even our retail, not just our industrial. In offices, it's a fragmented market. You get Winnipeg has gone soft. Certain submarkets of Minneapolis are soft. You've got Toronto is super strong. Anything we've got in Toronto is progressing very well. So the office market is fragmented and inconsistent, but the retail and industrial is doing well for us in all of our markets. And 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? Or are they do they look more like the Q3, Q2 or look more like the Q4? So I don't have my there are gains, but I don't have both recent reports with us, really. Fair enough. Maybe if If I'm not soon, Q1 is around the corner. Okay. That's all I had there. Thanks guys. Okay. Thanks, Dean. Thanks, Dean. Thank you. There are no further questions at this time. Please proceed. Well, thanks again everyone there for joining us and a special word of congratulations and best wishes to Michael Smith if he's still on the line. This was his last conference call with us. And we're wishing you Godspeed in all that you do and best of luck in all of your endeavors, Michael. So thanks again, everyone. Looking forward to catching up on our next call as well. Jim will get back to you with an e mail on that answer on the NOI. And feel free to reach out to us anytime offline as well. Thanks a lot. Bye bye. Ladies and gentlemen, this concludes your conference call today. We thank you for participating and ask that you please disconnect your lines.