Earnings Call: Q3 2018

Nov 2, 2018

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 3rd Quarter 2018 Conference Call. All lines have been placed on mute to prevent any background noise. After the Thank you. Today's discussion may include forward looking statements, which include statements that are not statements of historical facts 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 discussions 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. Martin, please go ahead. Thank you, moderator, and good day, everyone, and welcome to our Q3 2018 conference call. So again, my name is Armin Martins, the CEO of Artis REIT. With me on this call is Jim Green, our CFO as well as Kim Reilly, our SVP of Investments Phil Martens, EVP of U. S. Operations and Heather Nicholl, our VP of Investor Relations. So thanks again for joining us. I'll be starting as usual by asking Jim to review our Q3 financial highlights, but this time more briefly, if you will. Then I will continue with the review of our Q3 2018 investor presentation that's been somewhat customized to the press release that we've issued. And then we'll open the lines for questions. Just as a further note, this call, we do have the option of extending this call if necessary if we get to more questions. And then we'll talk more about what happens after that. In any event, I'll turn the floor over to Jim now and then I'll proceed after that. Thanks, Armin. Good afternoon, everyone. And I would echo Armin's comment. Welcome to our Q3 conference call for 2018. So as Armin mentioned, and I'm sure a majority of the people on the call are aware, 3rd quarter earnings press release also announced a series of new initiatives announced by the REIT and the outcome is a fairly significant shift for the REIT. And as I expect most callers will probably prefer to spend time on the review of those announcements And given the fact that the results from operations this quarter really contain no unusual items or surprises, I'll keep my comments on the financial reports fairly short. I am happy to answer any financial related questions later if needed. As we've said before, Artis is a diversified commercial REIT. We have assets in 5 Canadian provinces and 6 U. S. States. Based on our Q3 NOI that weighting is still roughly 44.1% in Western Canada. We're 11.1% weighted in Ontario and 44.8% weighted in the United States. On an asset class basis, Artis is 52.6 percent weighted to office, 20.4% in retail and 27% in industrial. We do have a presence, continuing presence in the Calgary office market, which as everyone knows has been very soft for the last 5 years or so. This quarter that contributed 7 point 7% of our NOI this quarter. We do have fairly manageable exposure to the Calgary office market leasing in the near future with just over 83,000 feet left to renew in 2018, only 141,000 feet in all of 2019 and only 47,000 feet in 2020. Calgary office actually contributed positive same property growth this quarter. Really pleasant to see in a market like that. However, we do still see headwinds in Calgary and it is very slow to improve. As we mentioned before, our acquisition and disposition activities are mainly focused on capital recycling to further diversify and improve our portfolio. In this quarter, we completed the acquisition of an office property in Phoenix. We had no dispositions closed in the quarter, although there was one subsequent to the quarter that did close. Artis continues to be active in both new developments and redevelopment of our existing properties and currently has approximately $105,000,000 invested in projects currently under development. During the quarter, the increase in properties under development was roughly $16,000,000 As detailed in our MD and A, we have several new development projects that are just getting started, including a new residential tower at 300 Main Street in Winnipeg, new industrial space in Houston, Phoenix and Denver. As detailed in the MD and A, we have several development projects in the planning stages where construction has not actively started and they continue to progress well through the development stages. We've been able to maintain our balance sheet with debt to GBV currently at 48.6%, down slightly from 49.3% at December 31 last year. Our interest coverage ratios and EBITDA interest coverage ratios remain healthy at 3x roughly. Sales program we implemented in 2016 2017 to sell assets and reduce debt has had a dilutive effect on FFO, however, funds from operations with FFO coming in this quarter at $0.33 versus $0.36 in the comparative quarter last year. On a quarter over quarter basis, FFO is up slightly this quarter, roughly a penny. It was $0.32 in Q2 and that's largely due to growth in same property income as well as the new property we acquired in Phoenix. AFFO for the quarter was $0.24 which does result in our AFFO payout ratio being above 100% is 112.5%, if you want to be exact. And this payout ratio was certainly not the only factor, but it was one of the drivers that led the REIT to consider implementing some new initiatives, which we'll be discussing shortly. Overall, we were generally pleased with results from this quarter, the positive same property growth, even as I mentioned, positive same property growth from the Calgary office market, very healthy weighted average growth in rents renewed during the quarter and the balance sheet metrics all staying fairly consistent to prior quarters. So I think I'm going to leave it there for now to allow more times for questions on the call. And I'll turn it back to Armen for more discussion. Okay. Thanks, Jim. So investors can anybody on the call can turn with me then to our Q3 '18 investor presentation. I'm going to jump right into Page 3. There's a graph there, a history of Odyssey unitholder returns. Like to draw everybody's attention to the year 2,008 and 2009, the last large recession, you will notice how we dropped and you remember that our yield went up. But at that time, our payout ratio went from the 80% range, went up to 120% range in 2,008 and 2009. Subsequent to that, we were able to raise a lot of equity. We're able to more than double our market cap and grow back to a payout ratio of well below 100%. But you fast forward to today, it's a different situation. We're a much larger REIT today. We are basically unable to raise new equity and double our market cap and grow back a payout ratio that's respectably below 100%. We're not in that situation anymore. Today as we speak, interest rates bond yields are on 8 year high. Honestly, trading at an 8 year low. And we still have about 10 years of supply of Calgary office profits in the Calgary office market. So the Board and management has come to the conclusion that the status quo was and is no longer an option and hence we've announced these new strategic initiatives. If you'll just turn with me skipping 4 in a way, I think I feel I've covered it Let's go to Page 5. Our key objectives of our strategic initiatives or the key elements of any good strategic plan are first to improve our payout ratio to improve the balance sheet and deliver growth, deliver AFFO per unit growth and deliver NAV per unit growth, all of which maximize unitholder value. And we feel these objectives are realistic and achievable with our initiatives. If you turn to Page 6, we give you more details on our initiatives of improving unitholder value. So firstly, as we've announced, we'll be reducing our distribution by 50 percent to $0.54 annualized and that will free up about 83,000,000 dollars in cash flow. From that perspective, we feel it makes Artis a more bulletproof REIT with a great payout ratio and good positive cash flow. Number 2, we will be repurchasing our units through our existing NCIB and in essence we'll be maxing out our NCIB by way of an automatic unit buyback as of Monday when our blackout is over. Number 3, over the next 2 to 3 years, we will sell between $800,000,000 $1,000,000,000 of non core assets at or above our IFRS value to fund our program. This is something we've done before and we're more than confident of our ability to execute on this again. And number 4, we'll be paying down debt and strengthening the balance sheet. This in turn should lead not just a better price, but better price multiple. And number 5, we'll continue to create value through our development pipeline and select acquisitions in Artisan's major target markets. And we'll focus on industrial developments, our existing land and on major markets that we're in. Again, we feel these new initiatives are both realistic and effective with minimal execution risk. Turn to Page 7 then. It refers to our improved operating and financial metrics that we're striving to achieve. So as our payout ratio will be in the 50% range, we will be freeing up, as I said, dollars 83,000,000 of cash flow. We'll be able to generate about $600,000,000 in net proceeds from our asset sales. Our model does show us delivering 4% annualized AFFO per unit growth and 4.5% annualized NAV growth. So there won't be a straight line, but for example, in year 3, we expect our AFFO to be $1.12 plus and we expect our NAV in year 3 to be $17.50 plus. And of course, we'll have a better balance sheet and we continue to be committed to our investment grade rating. So a better payout ratio, better balance sheet, better AFFO per unit and better NAV per unit. All of this should lead not just to better price, but I think a better price multiple as we move forward. And that does actually bring me to the part 8, the classification of assets. I'm going to ask Tim Riley to take over and then I'll wrap it up and then we'll move on to questions. Sure. Thank you, Armin, and good afternoon, everyone. Looking at Page 8, in order to assist us in optimizing the portfolio, we have re categorized our assets into 3 types. So they are core artist assets, development assets and non core artist assets. The core artist assets make up just over $4,000,000,000 of our portfolio. They are invaluable assets located in target markets where we anticipate maintaining a long term presence. These markets have historically produced healthy occupancy and same property NOI growth. These properties are also leased to quality tenants, including retail properties with strong weighting towards necessity and service based tenants. Development assets account for around $200,000,000 of portfolio. They include land upon which a development project is either underway or has the potential for future development. Development assets also include select assets that have growth potential through redevelopment and repositioning, all of which enable artists to achieve yields that are 150 basis points to 200 basis points higher than acquisition cap rates. Development properties will also be primarily new generation industrial. Non core artist assets, which account for $800,000,000,000 to $1,000,000,000 of our portfolio are good quality assets, but are which artist considers to be outliers in terms of type and location, and particularly assets or asset classes where we do not anticipate maintaining a long term presence. We'll go into more detail on non core assets in a few slides. If you turn now to Page 9, you can see several pictures of assets that we consider to be core within our portfolio. An example of an office building would be Max at Kierland in Phoenix. On the right hand side top corner, you can see Crowfoot Corner in Calgary, which is one of our best performing retail assets. And then 175 West Creek is a newly constructed industrial property in the GTA. We see these types of assets forming the foundation of our portfolio and they will continue to be prudently managed to realize maximum growth. Turning to the following page, you can see examples of developments that are currently underway, which are predominantly new generation industrial. These include multiple phases of Park Lucero, an industrial park that we own in Phoenix Cedar Port, which is a fully pre leased industrial property in Houston and Tower Business Center is a new industrial development that's just getting underway in Denver. Turning to Page 11, you'll see that over the last decade, Artis has established a solid track record of greenfield developments in both Canada and the U. S. Examples of these developments include Lindenridge Shopping Center in Winnipeg, which is a retail site that was acquired with excess land. We pre leased this development to several national tenants on long term leases and developed the site over multiple phases. That property is currently 100 percent occupied. Another example is Midtown Business Center in Minneapolis. This was an industrial land site that was acquired by Artis. During construction, it was fully pre leased to a strong medical use tenant on a long term lease. This property is currently 100% occupied. It is a new generation industrial park in a well amenitized location. It was developed over 4 phases, the first three of which are now complete and the last is just dropping out construction. This project is also 100% committed. It's these types of developments that provide the REIT with new generation real estate at higher yields than acquisitions. Over the next 3 years, we plan to focus on developing more new generation industrial assets in major markets. These developments offer yields of 150 basis points to 200 basis points higher than acquisition cap rates and generate significant value for the REIT. Turning to our non core assets on Page 12. Over the next 3 years, you'll see that we're planning on selling between $800,000,000 $1,000,000,000 of non core properties. Non core assets were identified following examples. Underperforming Calgary office properties to bring our Calgary office weighting down to a target of 5% of the portfolio, assets and asset classes in markets where we only own a few properties and do not intend to grow further, such as Ottawa, Nanaimo, Hartford and U. S. Retail. They also include specific property types where only a few are held. An example would be enclosed retail. And finally, select multifamily densification opportunities, which upon receiving rezoning approval will be sold to capitalize on the strong demand for residential development as well as unlock incremental value for unitholders. In summary, on the following slide, over the next 3 years, we're looking to sell $800,000,000 to $1,000,000,000 of assets, which represents approximately 17% of the current portfolio. They are non core assets in non strategic markets or asset classes or markets where we lack scale. They also include multifamily densification projects once rezoned. These dispositions will align with our goal of owning a more focused and optimized portfolio. I'll now turn it back to Armin to wrap up. Yes. And let's just move on to Page 14, which is our last slide. We show your current asset class breakdown by NOI and then by geography and where we expect to be headed within the next 2 to 3 years. So you'll see from left to right in our current office portfolio is 45%, Calgary office 8%. So 53% total office will shrink that in total by over by about 8%. So Calgary office will come down to 4% or 5%, The rest of the office will be 40%. Retail will shrink to 15%. Industrial will grow to 40%. That's we see that happening quite realistically. And of course, the net result will be that we will increase our weighting in the U. S. And be decreasing our weighting in Canada. In terms of the disposition program that Kim mentioned, you can ask us questions about that. But the low hanging fruit is our some of our Canadian real estate, the densification opportunities, that's where the cap rates are the lowest and the higher achievable yields for new generation industrial real estate we all in the U. S. So, ours will continue to be a diversified REIT, commercial REIT, will be in 2 countries, 3 asset classes, but we'll be shrinking in secondary markets, we'll be shrinking in Calgary office and office in general, be growing in industrial and we'll be growing in major markets. So that brings us to the end of this presentation folks. I'll now ask the moderator to open the lines for questions. Thank you. Your first question is from Mike Markidis from Desjardins. Mike, please go ahead. Hi, thank you. I was hoping you guys could just walk us a little bit more in detail on the pro form a metrics in the deck. And I guess some specific to you, you gave a 3 year AFFO figure. Obviously, the asset sales are there, but maybe just in terms of how much of the sale proceeds are from non income producing today in terms of value extracted from your densification on the multifamily side? And what's that's the first question. And the second part to that would be what NOI growth from the remaining stabilized assets you're expecting over that 3 year period? And Kim is just opening up the model there. I believe your assumption was Kim was flat on NOI growth? Flat on NOI growth. In terms of value incremental development value, we have about $150,000,000 so that would be unlocked value for the multifamily rezoning developments. And would that 150 have zero carrying value in your books today largely or? That's correct, Mike. Yes, we have no value until we get those densities approved. Okay. And how much of that would be the project, which I think is under construction now at on Main Street in Winnipeg, roughly? $15,000,000 right now. Smaller piece of it, but expect it to be a $15,000,000 to $20,000,000 profit on that development. Okay. So just to make sure I heard you correctly flat on the same property growth over the 3 year period? Yes. We just went very conservative in there and didn't estimate anything that we didn't have already locked up sort of so. Yes. No, that's fair. Okay. And just that $112,000,000 on AFFO, Kim, what's the FFO number? We have to No, you're the second person that asked that. We just focus on AFFO, but We can easily calculate that and get back to that. Yes, you can follow-up offline. That's fine. Okay. Now on the CapEx, if we look at your stuff, if we exclude what you classify as new development and redevelopment in your disclosure, so just TIs and leasing costs outside of those, I guess, greenfield and repositioning projects. You've been running at about $100,000,000 annually for the last 3 years. With the initiatives you've announced now, how do you see that unfolding over the next couple of years? Sorry, Mike. So you're saying what will we be spending on new developments over the next? No, no. I was actually so if we look at your cap intensity or your cap spend, including TIs and leasing costs, excluding any new development and redevelopment, the way you disclosed in your MD and A. Annualized, you guys are running anywhere from, I would call it $100,000,000 annually over the last 3 years, 2016, 2017 and year to date. How do you expect that to trend? Do you think that's a good run rate going forward or do you think that's going to increase or moderate? I would say expecting that to moderate a little bit based on some of the assets we're planning on selling. Okay. Presumably a good chunk of that capital has been going to Calgary office over the last couple of years. Would that be fair? Yes, that'd be fair. Okay. Last question for me before I turn it back. Notice the initiative to focus on industrial. I think that was something that you talked about over the last several calls. But one of the things that stands out is that you've actually been invested quite a bit in U. S. Office over the last year and a half or 2. And just noticed that if I look at your pro form a metrics, it would appear that that's going to stop. So just curious if you could give us a moment to talk about what's changed perhaps on the office side in the U. S. And why you don't want to put any more capital into that asset class? Well, you're referring to acquisitions then, right, Mike? Yes, I guess, I mean, is it all development that's going forward, I guess, is that the plan? Yes. All development, select acquisition will always look at for industrial, but it's really all developments or development pipelines are pretty solid for industrial. We don't see ourselves we just did by the state we said, we're really happy with that asset. It's already gone from 94% to 98% occupied. We're doing really well with that. But we don't see ourselves increasing our weighting in office. We're not just an office REIT, we're diversified REIT and it's no secret that industrial asset class, it's not just an asset class that investors like, but it's performing very well for us on both sides of the board. We want to grow in that sector. We'll focus on industrial industrial for all of our growth. Just to give us more balance in our portfolio, we always wanted more industrial and a little less office. Your next question is from Jonathan Kelcher from TD. Jonathan, please go ahead. Thanks. Good afternoon. First on the size of the distribution cut, how did you guys come around to the 50% number? Yes, Tucker, it didn't happen in one day. There are 2 perspectives. One is do we right size the distribution and carry on or do we do we elect for a more significant cut? Do we decide on a more significant cut that will give us some good positive cash flow that we can use to grow? And in terms of growing, it's not just about funding our development pipeline, but it's about buying back our units and paying down debt. So we landed on a bigger cut instead of just rightsizing. Rightsizing might have been anywhere from 20% to 30% cut. 50% is a large cut, but it sends a good message we feel to investors that our payout ratio is always safe. We've always got positive cash flow. We've got flexibility now for unit buyback, flexibility for debt pay down. We've got a lot of options on the table now to create NAV growth. So that's and then we did some modeling. We modeled 44% cut, fifty percent, 56% cut. Obviously, the higher the cut, the more you can do with the money, more accretion you can generate. But we landed on the 50% cut in that way. Okay. Fair enough. On the assets that you've identified for sale, I guess, some are in Mike's question, not income producing. What if you take the overall sort of 800 to a $1,000,000,000 what would be a cap rate or like say the IFRS cap rate on those? The IRS, Catherine, go ahead. Yes, it would be so 6.25 is where we're modeling. Okay. Yes. And we really think we'll beat that because there's embedded value there that we haven't yet triggered by exiting that. I mean, the 3 quarter of that of those assets that we expect to dispose of, whether it's Poco Place or 415 Young or Concord after we get the density or a 50% non managing interest in Winnipeg Square here. All of those cap rates will be close in, will be sub-five even. But we feel very confident of our ability to be able to hit the 6.25% cap rate and do better than that, better than IFRS valuation, which again will support our model very well. Okay. And then just lastly, the 45% longer term target for leverage. Does that include like how do you treat your prefs in that? Does that exclude them or include them? Yes. We're still at the banks. We treat our prefs as equity. But no yes, so we don't include our prefs in that. Looking ahead, the prefs don't come up for I guess a couple of years, right? There is one series next year. We'll see how that goes, whether we redeem that at maturity or not. We'll give serious consideration to eliminating our prefs in the years ahead and cleaning up our balance sheet. As you know, we don't have any converts anymore in our balance sheet. And now that we're in this situation, we'll give serious consideration to eliminating the prefs as well and cleaning up the balance sheet some more. Okay. Thanks. I'll turn it back. Thank you. Your next question is from Dean Wilkinson from CIBC. Dean, please go ahead. Thanks. Hey, everyone. Hi, Justin. Armin, if I could just follow along the lines of John's question there. Looking at the distribution and obviously things have changed, but from last quarter you kind of did make the comment that in 14 years we've never contemplated a cut, we've increased it twice. Have things materially changed that much since August to now and you're seeing a larger deterioration? Or was help us sort of get from point A to point B there? Yes. I mean, the last 90 days, I guess it started in July already, but we saw our units trade down a lot aggressively. And all of a sudden, we find ourselves in October trading at an 8 year low. And we noticed and of course, the central bankers have come out and with hawkish narrative and bond yields are trading at an 8 year high. That happened very quickly. In addition to that, Dean, we got a lot of inbound calls from combination of investors and analysts suggesting that they wanted more clarity from Artis on its strategic direction and how we were going to grow back or get back into a payout ratio that was under 100%. And we couldn't answer those questions well during the last quarter. We brought this to the Board's attention, I guess, twice in the last 2 weeks. And then the Board landed on this decision in terms of new strategic initiatives. That makes sense. It would be tough decision, but probably the right one to make, right? So in light of that and then looking at sort of this, let's call it $1,000,000,000 of secondary market asset sales, which there are a few others that are out sort of doing a similar kind of thing and rightsizing the portfolio and focusing on their core markets. Are you confident over the next 3 years, particularly in light of possibly rising interest rates and the impact that may follow on cap rates that you're going to hit that those IFRS values? Or how confident maybe the next year, but you go sort of beyond that and there's a little more question as to what those ultimate values could be? Right now, we're very confident and we're basing this on the assumption that interest rates, when they rise, they'll rise one step at a time and that the Fed and the Bank of Canada are not going to cause a recession. So, but right now, we're very confident and we're not anticipating interest rates to rise too much too soon. And as they do, we're cautiously optimistic with modules moving up that at least we can that spreads will come down a bit. But if they cause another financial crisis like they did in 2,008, 2009, well then things will change. Our plan would be to move very quickly on the asset sales today with the exception of the multifamily sites that still need the zoning to come through before we can really sell them at the maximum value. Yes. We really think we can do the bulk of this in less than 2 years. The bulk in less than 2 years. Okay. That makes total sense. And then the last question for me is, did you anticipate in your model that entire $600,000,000 of net proceeds going towards the share buyback? Or how much have you penciled in there? Not all of it. We've got $270,000,000 roughly in the model budgeted for unit buyback and then the rest for our developments. About $100,000,000 for debt paid out. Okay. To GBV down a little lower as well. So some of it going to debt repayment. Okay. So $370,000,000 in the capital stack and then the rest of it is going to be work in progress and stuff like that. Correct. Perfect. I will hand it back. Thanks everyone. Thank you. Your next question is from Walter from Roman Management Inc. Walter, please go ahead. Thank you, operator. I heard a great deal about how you derive the 50%. Going forward, do we expect to stay at the 50% payout ratio or not payout ratio, but the 50% cut for the full 3 years? Or is there a prospect that you might be increasing it again? And what criteria would you be using for an early increase earlier than the 3 year program you've laid out? So it'll be locked down for 2 years for sure, Walter. In year 3, as we can demonstrate more traction and success in our plan, and this is I don't mind sharing with you with everybody on the call, we did discuss it at the board level. At year 3, we can then review the distribution and start moving it up. In the long run, our payout ratio between 60% 70% is very good. It doesn't have to be in the 50% range nor necessarily should it be. But we will have the opportunity to move the distribution up and that is in the long run what every board wants to do. They want to be in a situation where they can increase distributions in a predictable manner, not just keep them fixed. Right. I understand now. Hypothetical, what if it went into the 40s as your payout ratio high 30s? Yes, that would beg for an increase then. But not until the 3rd year at the earliest? We're pretty much committed to 2 years working through this. If it drops to 30% in year 2, I mean, if we take things 1 quarter at a time, you'd have to stand in line behind several board members that would want to increase at that point as well, right? But it's hypothetical, it's hard to predict. But for sure, the lower the payout ratio is, the better the possibility is and the chance that we'll be raising. Thank you very much. Thank you. Your next question is from Howard Leung from Veritas Investment Research. Howard, please go ahead. Thank you. Just want to ask about a follow-up on that net $600,000,000 that you would use to spend from your disposition. $230,000,000 I guess the numbers are $100,000,000 would go down to paying extra debt, dollars 270,000,000 would go down to the buybacks and $230,000,000 would go down to development. Is that the right split? Yes. That sounds correct. Yes. And I guess the NCIB right now, you're allowed to kind of buy back $130,000,000 in total for the year. So is it the $270,000,000 will be split between 2 years? Yes, not quite because the NCIB also allows there's 1 block trade a week Okay. So it'll be a little faster than the 130? I hope so, yes. Okay. Okay. So it'd be a little faster than the 130? I hope so, yes. So then I guess the when you talked about AFFO per unit growth at 4 and NAV per unit at 4.5, is the majority of that going to be because of the buybacks? They'll reduce the unit count? Buybacks will contribute for sure. And that's the lowest hanging fruit and easiest in terms of execution. But part of it is also our new developments, right, Kim? Correct. Yes. And the debt paid out. And the debt paid out, of course, right. The debt paid out. Yes. And I want to touch on that as well. Looking at the debt and when you're deciding where to pay down the debt, is that more are you going to be prioritizing more towards the debt that's higher rates, but more towards the debt that's higher rates but fixed or the debt that's variable? Probably just go with it as it matures, so that we're not incurring penalties to pay off. At the moment, we're not planning on paying off any debt that's not maturing. Okay. Yes, that makes sense. And then the $900,000 the $900,000 rough split of asset sales, can you kind of give a rough split between the various sectors and geographies? Just trying to see how much of that is actually going to go down to, for example, office, office retail and you're probably not selling industrial, but want to see the split between those 2? Correct. So to give you a breakdown, approximately 2.25 $1,000,000 would be retail, dollars 125,000,000 would be Calgary office and then the balance would be various office properties in a few different markets. Okay. Got it. So I guess I'm trying to kind of get to that 6.25% cap rate that you're targeting to sell at. So the retail and the Calgary office, those would likely be higher than the 6.25. So it's really the other stuff that will be that will lower your weighted cap rate of sales. Is that the right way to think about it? Yes. And it's hard to classify it correctly. But for example, a 50% non managing interest in Winnipeg Square, that's in the $225,000,000 range. It will be a sub 6% cap no matter what. It will be in the low 5% s we believe. We did just finish closing CenterPoint Winnipeg at a 5.9% cap rate as an example. Then we've got Popo Place retailoffice. We're applying for density there. That cap rate is a 4% all day long. We've got 415 Young that cap rate sub-five percent. Concord that cap rate is sub-six percent. The bulk of this stuff is it will be easy to achieve a sub-six percent cap rate on the bulk of this stuff. And then as you said, there's the odd thing that where the cap rate will be higher than 6.25%. Right, right. That makes sense. So yes, because I see that you have 4, I guess, 1 active residential and 3 future residential developments listed. So all 4 of those are kind of on the they'll be sold, right? That's the plan. Right. Okay. That's helpful. And then I think is a question about the maintenance CapEx and leasing. Just following up on that, do you expect that to go back down to let's say 2012, 2013 levels before Calgary office was a big drain, I guess on a per square foot basis or? I'm sort of going to say probably not quite that low. As we reduce our waiting in office, you should see that costs start to come down. But tenants these days seem to still be expecting more tenant improvements than we used to have to pay in the strong days in Calgary for sure. That makes sense. And is that driven mainly still by Calgary properties? Are you seeing that across the board? No, that's kind of driven across all geographies. Calgary used to probably be the anomaly that it was very low in prior to 2014. Today, Calgary, of course, is high, but so are the other markets seem to be gradually creeping up. Okay, great. Thanks for this. I'll turn it back. Thank you. Your next question is from Matt Kormak from National Bank Financial. Matt, please go ahead. Hi, guys. With regards to timing on the asset sales, just wondering from a tax standpoint, are you going to time it such that you don't have to pay any special distributions I assume? That's the plan, Matt. Yes, we think we've got the tax structuring worked out that. Yes. Okay. So because some of those assets that you mentioned that are lower cap rates, I would assume have pretty low cost base as well for what you bought them for? Correct. But on the flip side of that, unfortunately, some of the Calgary offices are much higher cost base. So there should be some losses to offset. Gives and takes. Yes. Okay. No, that makes sense. And then just from an operation standpoint, your lease renewal spreads have been pretty good of late, not entirely jiving with your view on market versus maturing leases, at least in the table that shows sort of negative lease renewal spreads. Wondering if you're just outperforming expectation or if it's the specific leases that have come up that have generated positive returns and if we should expect sort of outperformance going forward if those are very conservative numbers in the lease maturity profile you've put forward? We try to keep those on a pretty conservative basis. So we hope we can deliver better results than those. But I those are kind of our estimate of where it could be. Yes, we're doing pretty good on that front for sure all year long. But without a doubt, every time we renew an office decent Calgary, we get beat up bad and that's the one place where we're not able to outperform. And with current occupancy where it is, I mean, obviously, you've got higher committed occupancy than in place. But is the expectation to stay in the low 90% range for a while now or would you expect some occupancy improvement over the next couple of years as well? So it's going to be lumpy. We've got some good news in coming some markets, but we think our Calgary office vacancy will increase. Calgary office NOI will decrease before next year before things get better for us there. Right. And presumably We'll be north of 90% collectively. We Yes. And as we've moved more into the U. S, the stabilized vacancies in the U. S. Are a little bit higher than they traditionally are in Canada. So not unusual to be 8% to 10% vacant in the U. S. Market, whereas in Canada that would be less than that. Okay, great. Thanks, guys. Thank you. Your next question is from Tony Troiano from Tofino Capital. Tony, please go ahead. How are you, Armin? Very good, Tony. Armin, after you being so adamant that you weren't going to cut the distribution and then cutting it by 50% and disclosing it on Page 4 of your press release was like a kick in the teeth. Now out of the $83,000,000 that you're going to be saving from the distribution, can you please confirm how much is going to be going back to buying back units? Our plan as we've said and I'll repeat it now is about $270,000,000 of our total capital will be going to buy back units. We expect to average about $130,000,000 a year in that range. But as Jim mentioned, there may be times because of block trades when we buy back more. So we're still blacked out. As of Monday, we'll be back in and we'll be maxing out our NCIB and buying back units. Thank you. Thank you. We have a follow-up question from Mike Markidis from Desjardins. Mike, please go ahead. Hi. Sorry, just a couple of clarifications. On the $800,000,000 to $1,000,000,000 $150,000,000 if I had that correctly was the no income producing. And then the $6,250,000,000 is that on the remainder I. E. The $650,000,000 or whatever that number would be if you subtract it from the total bucket or is it on the entire envelope? It's on the entire envelope. So it's a weighted average on the whole portfolio, including the value from the non performing or non income contributing assets right now. Okay. So now I see why you think 6.25% is a pretty low benchmark to hit. Okay, that's fair. And then just thinking about your segments going forward and looking at sort of the occupancy performance of individual segments. If I just focus on sort of the big ones, Canadian office is obviously one for you guys at 20% of NOI, Calgary office is a drag there. It does seem that your in placing your gap between your in place and committed has been growing as well. Is that something over the next several years that you think will continue to persist? Or do you think that we move forward here, in place will start trending higher and the gap between in place and committed will start to narrow? You may want to grab that call. So specifically, Mike, I mean in Calgary, that gap won't improve for a while, right? In the markets, that's not going to improve for a while. And we still haven't recycled all of our leases from market the in place, it's down to market yet. So we've got at least another year or 2 to go before we've stabilized in Calgary. And then hopefully, by then, 1 or 2 pipeline shows up as well. I mean, the office market in Canada is stable or good. Everywhere except Calgary is bad, of course. And Winnipeg becoming a bit of a battle zone. It doesn't take much to overbuild in Winnipeg. We feel comfortable with our situation here. You go down to the States, some office markets are pretty good, But even in Minneapolis, there's been some overbuilding. We've got to watch it. We're holding on very well Minneapolis, but we've got to watch it there. Once in a while, you get a tenant leaving in markets like Phoenix or Denver, and we've got to work through that. But at least they're good markets to be in. But on balance, if you just it's all about the Calgary is what skews the number. But on balance, I like to think that the metrics are improving. The U. S. Real estate fundamentals are good, not just industrial, but office. But I think the trend is our friend, providing that interest rates don't ruin the party. Okay. And then just thinking about the Canadian industrial, I would imagine your GTA portfolio is doing tremendous right now from a lead occupancy and re leasing perspective. How are the assets in Alberta holding up? Also very good. I mean our industrial vacancy in Toronto is basically the GTA is 1%. And yes, we are very strong, same property NOI. Winnipeg is 2%. And Alberta is about 3%, but improving. So it's holding up very well. The Alberta industrial and retail sector is performing very well. I think multifamily has turned around. It's not our category, but we feel we know it's turning around. Office is once a week. It's just been too much overbuilding. The pipelines are maxed out. They need more pipelines so they can produce more, sell more, make more money. And that's where the bottleneck is right now. And of course, in BC, there's everything airtight there. We only have 1 industrial or 2 industrial buildings in BC that are both fully East. Are rents rolling down in the industrial segment in Calgary? I mean, the occupancy is obviously holding up very well, but are rents rolling down or are they kind of stable? No, they're stabilized for sure. And if anything, they'd be moving up now, but at least what we're seeing, the stabilized for sure and the trending north. Okay. The cap rate on Shapely looked really attractive at 8 percent. Is that an anomaly? I'm just wondering how we should think about that in terms of the quality of that building and how we should think about that relative to the other office assets you own in Phoenix? I'd call that a historical anomaly, but this year, what we have seen, you can check with brokers on there, is a bigger split, if you will, bigger dichotomy between suburban office cap rates and downtown urban office cap rates. And suburban office cap rates have moved up at a higher rate than urban, which maybe haven't moved at all. So we found that to be a good opportunity. It's a heck of a good suburban office location at Stapley Center. Our property manager and our leasing manager inside our Phoenix office used to both lease and manage that building. So they recommend they knew the building well, they recommended it to us. And so we bought it and it's since we barely owned it. It's already outperforming. So we'll see how long that lasts, but there's a big dichotomy right now in many U. S. Markets between suburban office valuations and downtown office valuations. And how would that building compared to Max at Kieran? Because I think Max at Kieran is your trophy, right, in Phoenix? Yes, Max is called Class AA. This one is A minus. Phil is right here. You want to comment on that, Phil? Yes. The stapley building is also older in a much more mature location that's proven itself. Over all that stately building has never been below 90% in its entire history. It was built in the late 1990s and MAX was built in 2,008. And yes, it is a Class AA, but both are in highly monetized locations. Okay. Last question for me. Sorry for the long laundry list here. But Millwright and the new Denver office property that you built on land adjacent to your existing asset there. While Denver is an easy question, is Millwright contributing anything from an NOI perspective right now? Or was it in Q3? Jim, was it? Well, we're committed at 62 thirds committed now at Millwright in terms of One of those tenants is in occupancy and one not yet. Correct. The latest tenant is still undergoing TIs as United Healthcare, that's a Fortune 5 company. And so we're excited about Millwright, which is in Minneapolis that is helping the Millwright building and we continue to get quite a bit of interest from co working as well for that Millwright building. Yes. In Denver, it's not we don't have anything signed yet. We are trading paper with 2 different tenants to take a floor each. And if we can conclude those deals, that would be 50 percent leased with that smaller building at 169 Inverness. So we feel we're getting traction on a lot of good fronts. Okay. And those properties are not in your PUD anymore, right? Those are in IPP? Correct. Correct. I was hesitating on the Denver asset, but I believe that I believe you're correct, yes. Okay. Well, if in addition to the year 3 FFO number, if you could confirm the carrying value of those assets and the NOI contribution in aggregate in Q3, that would be fantastic. Okay. Thank you. Thank you. Your next question is from Michael Smith from RBC. Michael, please go ahead. Thank you and good afternoon. I guess over the last couple of years you've sold $1,500,000,000 of assets, a lot of which are a lot of Calgary office, which you've taken a loss. You've got a bunch of buildings for sale now, including Calgary office for a loss. So I guess my question is, is it fair to assume that you don't really have any cash considerations? So in other words, if you sold the full 800,000,000 dollars next year, for example, like there's nothing really preventing you from doing that from a tax point of view, maybe from a strategic timing point of view or getting the you may want to stretch it out, but is it correct to assume that there's really nothing from a tax perspective stopping you from doing that? I would say that's generally correct. If you could sell the yes, there's no tax reason that we would hesitate on selling those assets. Okay. Thank you. And so you've given yourself 3 years, but I think Armin, you said you think the bulk of it will be done in 2 years. And I'm just wondering if there's any motivation to do in a quicker? And the second part of that, it sounds like you've ruled out a substantial issuer bid. I wonder if you could just give us your thoughts on those things. So yes, if we can hit plan, our pro form a and our model and achieve these dispositions and these results a year sooner, we will. We'll do it all as fast as we can and move on from there. SIB, we don't see ourselves doing that. A couple of reasons, I guess, is the capital available, available capital. Also, we are watching our market cap. There's a limit to how many we want to buy back. The Board is still committed to maintaining its investment grade credit rating. And I guess in SIB suggests a lot of units at one time above market and we're just not in that position to do that right now. Okay. And just switching gears, can you just talk about your retail strategy? So we still like retail and we don't we won't own any retail in the U. S. And we've got 2 small enclosed malls left in our portfolio both in Saskatchewan will sell those. After that, we know that's all performing well. I mean, Grand Prairie is performing well. Fort Mac has stabilized moving north already the rents there. All the retail is performing well, giving us good same property NOI growth. So we don't mind owning it. We've got that retail in Port Coquitlam that has a densification opportunity. So we expect to be that's on our books to be sold now. But all of the retail we have on balance, most of the retail we have on balance is performing very well and we still like it. So we're not of the opinion that you just you get out of retail. We're not of that opinion, but we will get out of the little bit of retail we have left in the States. We'll get out of those 2 small malls we have in Saskatchewan and then we'll move on from there. Great. Thank you. That's it for me. Thank you. Your next question actually it's a follow-up from Walter from Ronan Management Inc. Walter, please go ahead. Thank you. Just to be a little bit controversial. As one of your alternate strategies, did you ever look at Artis REIT from the perspective of an investor and ask yourself what would be the investors' return if you were to sell everything and distribute to current unitholders? I would give that some consideration in terms of strategic review, if you will, and which wasn't formally undergone. There's 2 directions. 1 is you sell the REIT and to the best maximum price you can get and the other is implement a new strategic plan. And our largest shareholder that owns 11% of our units is on our Board. Our largest shareholder as well as other all of the Board members unanimously were of the opinion that now is not a good time to pursue selling the REIT or selling all of the real estate and shutting down. They think we've got a good plan here, good opportunity to increase value, increasing the older value, increase our NAV. The idea of selling the REIT or entertaining office for the REIT, it can always be revisited at another day. But so that's not the direction. The Board unanimously agreed that the best way to maximize unitholders value would be to implement these new strategic initiatives. Even with the difference between the NAV and what the REIT is trading for on the market now? Yes, there's a concern that in a rising interest rate environment, we might not get bids at our NAV of $15 The concern that the bids would come in lower, they'd be underwhelming and it wouldn't and then we'd be just wasting our time. Notwithstanding what I just said, the Board will entertain any reasonable offer that maximize unitholder value if it comes in. We've never, for example, had a friendly offer or any offer at all that we said no to that we've never engaged in. We've just never had any offers at all in the 1st place. Well, that's why I went to the selling of all of the assets and the distribution out to unitholders. And so that takes I guess that we would need my understanding is and Jim's right here, we would need unitholder approval to sell all the assets and to return the money to our investors. We'd have to call a special meeting on that or we'd have to deal with that as a special agenda item at our next AGM. But that's sometimes that's the best way to maximize value, just liquidate all the assets, right? Now it's a very disruptive thing to do. You've got G and A issues, management team issues. Before you know it, you're negotiating retention bonuses and change in control bonuses with a lot more employees. I understand all of that, yes. So it's very disruptive. But that scenario might be the best one that maximizes value today. But the Board is not doesn't want to pursue that right now. Well, when the Board reconsiders that, have them if If I got back my NAV, I would be able to go elsewhere and invest it so that I could rebuild, not as well as Artis, of course, but approaching what Artis accomplishes. Just a thought. Thank you. Thank you. We have a follow-up from Howard from Veritas Investment Research. Howard, please go ahead. Thank you. Just wanted to ask about the follow-up on the development properties. On your I guess in your MD and A, you have the value at like just over $100,000,000 and in the presentation you're listing $200,000,000 Is the difference because some of those future developments are that are not in PUD that they'll be that's part of the $200,000,000 That's correct. Okay. And then just in terms of timing, this is kind of a 3 year plan. Do you expect the $200,000,000 of development assets to all be complete and kind of fully functional income producing properties by the end of the 3 years or end of 2? In the 2 to 3 range, I would say, yes. Okay. And then I guess in terms of thinking about how much NOI those properties can bring, I've kind of factored in a 7.5 cap rate for development. Is that kind of where you're thinking to or too high, too low? That's exactly where we are. Okay, great. That's helpful. Thanks. I'll turn it back. Thank you. There are no further questions at this time. Please proceed. Well, thank you again moderator and thank you again everybody for joining us on this call. Just as a footnote sidebar, Jim and I will of course be in Toronto during the Toronto Real Estate Forum the last week in November. There's a debt conference that we'll be participating debt marketing conference. Then on Tuesday and Wednesday of that week, November 27 to 20, we will be making ourselves available for follow-up meetings with real estate bank analysts and with institutional investors. You can feel free to reach out to us if you want to book meetings with us on November 27 28 in Toronto. So thanks again everybody for joining us and have a good weekend. Ladies and gentlemen, this concludes your conference call today. We thank you for participating and ask that you please disconnect your lines.