Good afternoon, ladies and gentlemen. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to Artis REIT's first quarter 2018 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star then the number two. Thank you. I would now like to turn the meeting over to Mr. Armin Martens. Mr. Martens, please go ahead.
Thank you, Joanna. Good day everyone. Welcome to our Q1 conference call. Again, my name is Armin Martens, the President and Chief Executive Officer of Artis REIT. With me on this call is Jim Green, our Chief Financial Officer, as well as Kim Riley, our Senior Vice President of Investments. To begin with, I'd like to advise all listeners again that during this call we may at times be making forward-looking statements, and we therefore seek safe harbor. Please refer to our website as well as see our filings such as our financial statements, our MD&A, and our annual information form for full disclaimers as well as information on material risks pertaining to all of our disclosures. Again, thanks for joining us.
I'll now ask Jim Green to review our financial highlights and operational highlights, and then I'll wrap up with some market commentary, and we'll open the lines for questions after that. Go ahead please, Jim.
Thanks, Armin. Good afternoon, everyone. This was a bit of an interesting quarter for Artis. A few unusual things happening. I will try and highlight a few of those as I go through my review. As we've said before, everyone's probably aware Artis is a diversified commercial REIT. We have assets in five Canadian provinces and six U.S. states. We've done some calculations in the MD&A disclosure to show the impact of an adjustment for proportionate consolidation of our joint venture interests. While it does turn those numbers into what are considered non-GAAP numbers, in many cases, we feel the adjusted numbers are more relevant, and where applicable, the resulting discussion is generally about the adjusted numbers for proportionate consolidation.
Based on Q1 NOI, we had a 47% weighting in Western Canada, an 11.9% weighted in Ontario, and 41.1% in the U.S. On an asset class basis, we're 53.4% weighted in office, 20.7% in retail, and 25.9% in industrial. Specific focus for Artis since the oil prices collapsed in late 2014 has been to reduce our exposure to the province of Alberta and specifically to the Calgary office market. Looking back three and a half years ago to Q3 2014 before the crash in oil prices, our geographic asset mix resulted in 38.9% of our NOI coming from the province of Alberta, and just over half of that, or 19.3% of the REIT's total NOI, came from Calgary office properties.
Based on Q1 2018, our total Alberta exposure is now down to 23%, and Calgary office is only 9.7%, even when including a substantial lease termination income received in the quarter. Calgary office would have been down to about 7.8% of total NOI if you exclude the lease termination. Just a bit more information on that termination was that it was a partial surrender from an ongoing tenant, and we have a new tenant coming in to lease the majority of the space that's been surrendered. As we mentioned in our year-end call, we feel we've fully executed on our commitment to diversify while continuing to sell at a good price in the current market. We have one further Calgary office building under an unconditional sales agreement scheduled to close in June.
We currently have relatively manageable exposure to the Calgary office market in the near future, with only 160,000 sq ft left to renew in 2018, only 147,000 sq ft in 2019, and only 47,000 sq ft in 2020. As we've mentioned before, our acquisition and disposition activities have been increasing in recent years, focused primarily on capital recycling to further diversify and improve our portfolio. In this quarter, we completed the sale of two properties and acquired the remainder of an interest in two Denver office assets from one of our joint venture partners, such that we now own 100% of those two buildings. A bit of an interesting one, we were able to complete the acquisition at our Q4 IFRS valuation for the real estate, and also issued equity also at our Q4 IFRS valuation of CAD 14.85 per unit.
Some interesting accounting falls out of that combination in that we booked a gain on both the acquisition and the equity. Artis continues to be active in new developments and redevelopment of our existing properties. We currently have around CAD 70 million invested to date in projects currently under development. During the quarter, we invested roughly CAD 19 million into the development projects and transferred CAD 34 million of properties from under development to completed properties. As detailed in the MD&A, we have several new development projects that are just getting started now, including a new apartment tower at 300 Main Street in Winnipeg, a new industrial space in Houston and Phoenix. As we detailed in the MD&A, we also have several development projects in the planning stages where construction has not yet actively started. And these projects are all progressing well through the development stages.
We did have a couple of non-recurring items this quarter, including booking an adjustment to our pension liabilities of roughly CAD 3.4 million and a cost incurred to internalize several of our third-party property management contracts of CAD 5 million. The pension adjustment relates to a future compensation payable at the end of some employment agreements and will be a one-time amount. We were pleased with the internalization of the management agreements. The impact will definitely be accretive to our cash flow and income. Just for a little more color, we anticipated roughly a 10% return on a cash flow basis from that investment. However, not all of it hits our income statement because you're not allowed to pay yourself money and treat it as income. On a cash flow basis, it will be a good savings trust.
We have presented some of our non-GAAP metrics, including interest coverage ratios, FFO and AFFO, on the basis of excluding these two items. Couple of other highlights from the quarter included the issuance of a new series of preferred units and the issuance of a new unsecured debentures. Use of proceeds for the preferred was to redeem another series that was due for rate reset, and we achieved a better rate on the new series than we would have had if we had let the previous series reset its interest rate. The use of the debenture was just to pay off other indebtedness. We have been able to continue to strengthen our balance sheet and improve our debt metrics.
A slight improvement again this quarter, with debt to GBV falling to 48.9% from 49.3% at the last year-end, and our interest coverage ratio is remaining over three times. The sales program we implemented through 2016 and 2017 to sell assets and use a portion of those proceeds to reduce debt, has had a dilutive effect on our FFO. FFO came in at CAD 0.33 this quarter after adjusting for those non-recurring items that I just mentioned, versus CAD 0.36 in the comparative quarter. There are some specific items impacting that drop, and I'll discuss in a little more detail the FFO in a minute. AFFO remained flat from Q4 at CAD 0.25. However, this does result in our AFFO payout ratio being above 100%. AFFO was also impacted by some of the same items as FFO that I'll be discussing.
As we said at year-end, our mission is to go back into that distribution and get our payout ratio down. We plan to work hard to achieve that. On a couple of specific operating results. On the fair values of our investment properties that are on our balance sheet at fair value. This quarter, we recorded a relatively small decrease of about CAD 4.4 million. We did provide for some further declines in the Calgary valuations, probably more to be conservative than based on actual transaction history, but it just seemed appropriate to do that. We took a little write-down in Calgary. It was largely offset by increases in value in the Toronto area, which continued to increase. At the present time, we're not really anticipating major changes for the rest of the year.
However, we do expect we'll likely see further increases in our industrial valuations as recent market transactions have been at pretty low cap rates in the industrial space. We remain very comfortable with our debt to GBV ratio. As I mentioned, it was slightly down this quarter at 48.9% versus 49.3% at year-end. Secured debt to GBV is also declining as we're increasing our unsecured debt and correspondingly increasing our unencumbered asset pool. Unencumbered assets are slightly up this quarter at CAD 1.69 billion, up from CAD 1.68 billion at Q4. On the credit side, Artis has a CAD 500 million unsecured revolving line of credit with a syndicate of lenders, we also have two non-revolving unsecured credit facilities in the aggregate amount of CAD 300 million.
Both of the non-revolving facilities have been drawn in full, we placed interest rate swaps to fix the rates, as we expect they'll be outstanding for their full 5-year term. Looking at a couple of highlights from the results of operations. On the same property basis, results were fairly flat this quarter in functional currency, but showed a decline of 1.6% in Canadian dollars once foreign exchange was factored in. We also presented this stabilized same-property calculation, which eliminates our properties planned for disposition or repurposing and also eliminates the entire Calgary office sector, as it's hard to argue that's a stable sector. On this basis, we had growth of 3.1% in functional currency, but down to 1% once foreign exchange was factored in.
By asset class, the office segment in Canada was the weakest, led by a negative 9.4% in the Calgary office sector. Interestingly, retail in both Canada and the U.S. was fairly strong, we also had good results from the U.S. industrial portfolio. By geography, the strongest performer once again was our portfolio in Wisconsin. We get to some of the fun stuff on the FFO and payout ratios. As I mentioned in my opening results, FFO year-over-year has declined, with the largest driver being the dilutive effect of asset sales, with the proceeds being used for debt reduction. Our FFO for the quarter on a diluted basis was CAD 0.33, down CAD 0.02 from last quarter and down CAD 0.03 from the same quarter last year.
The biggest decline year-over-year, of course, is the assets we have sold, there were several items impacted FFO, resulting in the CAD 0.02 decline this quarter. The biggest one was the issuance of the Series I preferred units on January 31st, with the Series C not being redeemed until March 31st. We had a 2-month period with 2 series outstanding. In absolute dollars, FFO for the quarter after adjusting those 2 non-recurring items, was down roughly CAD 1.6 million, and CAD 1.3 million of that related to the additional distributions on the preferred units. As we won't have both series next quarter, there will be an improvement in FFO just from lower preferred distributions. If I compare quarter-over-quarter results instead of year-over-year, same-property quarter-over-quarter in functional currency increased roughly CAD 338,000.
However, the impact of dispositions compared to acquisitions, again, in functional currency, reduced NOI by roughly CAD 718,000, with a contribution from newly developed properties that are not part of the same property income group for a little over CAD 20,000. The average exchange rate was relatively flat quarter-over-quarter. However, there was still a slight positive in translating back to Canadian dollars this quarter. The net impact of all those changes is that property NOI declined around CAD 400,000. If you add that to the CAD 1.3 million from the preferred units, you've explained the majority of the variance in FFO. There's a couple of other differences that go both directions, but those two are the main ones.
Despite the drop in FFO, we remain convinced that our strategy's been correct to improve our balance sheet in the current operating environments, at the same time as we diversify away from Alberta. With those adjustments in, it gives us an FFO payout ratio of 81.8% for the quarter. On an AFFO basis, the AFFO is not quite impacted to the same degree. Normalized AFFO came in at CAD 0.25, unchanged from last quarter, although it is down CAD 0.02 from the same quarter last year, mainly due to dispositions. As I mentioned in the discussion on FFO, the same items actually impact AFFO, so we would have reported an increase in AFFO exclusive of those items. Our FFO payout ratio this quarter was 108%, the same as Q4 2017.
As I mentioned, our mission is to go back into that distribution, and we anticipate the changes we're making in our portfolio and our development activity will, over time, bring this ratio back under 100%. We continue to evaluate all strategic initiatives we feel could help us in that mission. Couple others, just quickly, we disclose our EBITDA calculations in the MD&A. Main ratios we track are EBITDA interest coverage, currently at 3.31 times, a slight improvement from Q4 2017. Debt-to-EBITDA currently at 8.5 times. One of the positives this quarter, in reporting our investment properties at fair market value under IFRS, we can calculate our net asset value per trust unit. Just simply taking our equity on the balance sheet, plus the equity held by the preferred unit holders and dividing it by the number of common units outstanding.
Net asset value was CAD 15.03 per unit, up from CAD 14.86 last quarter. Finishing the quarter, we ended up with CAD 41 million of cash on hand and CAD 245 million undrawn on our line of credit. There are several events detailed in the subsequent events note, which we continue to believe reflect our strategy of intelligent recycling of capital. We plan to continue our focus on improving the balance sheet and the overall quality of the portfolio. That completes the financial review. We feel it's a fairly solid quarter given the operating conditions in one of our major markets. We're pleased with the NAV growth, although obviously not so happy with the FFO decline, which I hope I explained. We look forward to demonstrating our results in future quarters, and I'll pass it back to Armin for a bit more discussion.
Okay, thanks, Jim. Folks, on balance, we feel that Artis is progressing well this year. Our earnings, our balance sheet, and our liquidity are in good shape, and we feel that our diversification and outlook is slowly but surely improving. Looking ahead, it continues to be our view that both the U.S. and Canadian economies will perform fair to good this year and next, with the advantage going to the U.S. economy. Last year, our capital recycling program concluded with about CAD 500 million of deals done. For this year, in 2018, the best guidance we can give is that we'll recycle between CAD 200 million to CAD 300 million of property, so a little less. As we accretively recycle our capital, you will, of course, notice that our Alberta footprint will continue to shrink in relation to our total NOI, and that the diversity of our NOI will improve.
In terms of the Calgary office market, as you can see by our same property there, we're not out of the woods yet, but our visibility continues to improve, including sublease space vacancy rates are about 27% now. May climb a little higher before stabilizing, but this is the year that we hit stabilization. Oil and gas prices have stabilized. Keystone XL and Trans Mountain, we trust will eventually get done. The OPEC deal continues to have good traction. We feel we're bouncing along the bottom with respect to office leasing rates. The absorption, you will have noticed there was slightly positive absorption in Q1 this year, more in the suburbs, and I think the downtown was just a little negative. We feel we're bouncing along the bottom there, and that's actually a good thing.
Capital spending and job creation is slowly but surely increasing in Alberta, and we are seeing green shoots of economic and tenant activity. It may be slow and protracted, but it is our view that the economic recovery is well underway in Alberta and will be sustained for many years thereafter. Looking ahead, we'll continue to work hard to keep our buildings full whilst bringing the rents up to market and consistently improving our real estate portfolio. Because at the end of the day, the caliber of our real estate is the foundation of our REIT. For this year, we view our drivers of growth to be, firstly, more accretive recycling of capital and repositioning of our portfolio. Working hard to increase our same-property NOI in at least the majority of our markets.
As noted in our MD&A, our development pipeline is growing and slowly but surely on track to deliver us great results in this year and in the years ahead. That's our report and commentary for this quarter, folks. I'll now turn the mic over to the moderator, to Joanna, and open the floor, the mic up for questions. Joanna, please.
Thank you. Ladies and gentlemen, as a reminder, should you have any questions, please press star one. Your first question is from Jonathan Kelcher from TD Securities. Jonathan, please go ahead.
Thanks. Good afternoon. First question, just on the lease termination, can you maybe give a little bit more color on that? How'd the new rent compare to the old? How much did you have to spend in the way of TIs to get that done?
The lease termination fee kind of covers the difference in both the rent and the tenant improvement numbers. The new rent is at a lower rate than the expiring one.
This was Heritage Square, right?
Correct.
Yeah. On this one, Heritage Square, where we have Amec Engineering, and we were able to get a provincial government tenant to take some of their space. They're subleasing at a longer term. We think we definitely did the right thing for that building. We took a lease termination fee. We negotiated one with Amec Engineering and still in discussions with them about an early blend and extend on their lease as well. Needless to say, today's rents are lower than previous rents, but I don't have that rent offhand. It's still, we think, a fairly good rental rate we got.
Yeah.
The suburban office markets at East South and the (Inaudible) we're experiencing right now are slightly stronger than Downtown.
Okay. Well, just sticking with Calgary, I guess. You took a small write-down there, but you did sell an asset. You said you sold that asset at IFRS value. Was there a write-down before that, or was that sort of the Q4 IFRS value you sold at?
That was Q4. Right, Jim?
Yeah.
Yeah, it's Q4.
Okay. Then lastly, just on the termination of the management contract, you said that you expect about a 10% return on that, Jim?
About 10% on a cash flow savings basis versus what we would've had to pay the third-party manager. Of course, if it's things like lease commissions and supervision fees on capital projects in the building.
That's our savings.
Unfortunately, it's a cash flow savings for us, we can't pay ourselves that money and call it income.
Right. We won't really see it flow through the NOI or anything.
You'll see some flow through the NOI because, for example, on property management fees, while the property management fee eliminates.
The recovery from the tenants, which goes straight into income.
Yeah.
Okay. Thanks. I'll turn it back.
Thank you. Your next question is from Howard Leung from Veritas. Howard, please go ahead.
Good afternoon. I just wanted to also follow up on the internalization. You mentioned there'd be about, I guess, CAD 500,000 of cash flow savings. How does that flow through to FFO and AFFO? Will it just go straight to AFFO?
The portion that comes from property management fee recovery from the tenants will go straight to AFFO. The portion that's a cash flow savings on supervision fees and leasing commissions, it will just result in less expenses being capitalized.
Correct. Because, I guess, in AFFO, you're using amortization of leasing costs to account for the reserve, I guess it will still show up there, or will there be savings? Trying to understand how that works out.
There'll be savings there because you eliminate that portion. In essence, you don't charge yourself a leasing commission.
Right. Okay. No, that makes sense. Then just wanted to touch on some of the occupancies. It seems like, retail and office, same property occupancies are a little weaker compared to last year, industrial is up. Just wanted to get some of your thoughts on those segments.
Yeah. In Canada, we lost a Sears. We had one Sears in total. We lost in Grande Prairie, that brought that occupancy. Our same property NOI is still positive both in Canada and the U.S. for retail and industrial. The good news with that one Sears is, we don't want to jinx ourselves, we are in serious discussions and trading paper with a national tenant to take all that Sears space off our hands. We're hoping we can announce good news by the time we report again in August with our Q2 results. That was the main driver in terms of occupancy levels for retail. Industrial is performing well. There's little tweaks here and there, we're almost 99% occupied in the GTA with our industrial. We're about 97% in Winnipeg.
I think we're in the 95%-96% range for what we have left in Alberta. The one industrial building in Vancouver is, of course, 100% leased. Down in the U.S., we're about 96% on average. We're seeing very good traction on all fronts. Not to get ahead of myself, but all of our greenfield developments looking ahead are now basically new generation industrial in the U.S. You'll see our Park Lucero, the last phase that we're just under construction with in Phoenix, will be fully leased in no time based on the tenant action that we're getting and the paper that we're trading. Houston will be starting phase 2 there very soon, and we're getting a lot of interest. We're seeing a good momentum on both sides of the border, and that we feel has legs for industrial absorption and increasing industrial rents.
Okay. No, thanks. You had a deal where I think you acquired the remaining 50% in partial exchange for units issued at, evaluated at NAV. Is that particular to this only because you were buying out the other partner, or is it something that you see doing for other deals as well?
It's particular to this partnership. It was a fund with a lot of, you might say, retail investors in the fund that were happy to make the trade. We said, "Look, if you want us to pay you NAV, you've got to take our units at our NAV." They eventually agreed to do that. We're always open to doing that with, they call it an UPREIT transaction in the U.S. Here, we might just call it an exchange. We're open to doing more of that. We've pursued it at times, but we haven't been successful, but we'll see. We can't promise we'll be doing more of them.
Right. When you think about just, in general, issuing equity, what are your thoughts on that right now, given where it's trading?
Well, at the other, don't ask. At CAD 14.85, it was our last NAV. Now we're over CAD 15. We haven't raised new equity for about 2 years now. We're just getting close to 2 years. We shut down our DRIP about a year and a half ago. We're watching that very carefully. We don't want to dilute our common equity without a good reason. We're doing just fine on the liquidity front and cash flow front with our development pipeline. We can always sell. We still have some more non-core assets on our radar screen to sell, if we want to just make a profit, we can also sell and start recycling our new generation industrial as we develop it. We have a very good development pipeline that's growing. We can always take some money off the table there.
We can't be raising equity at the If it starts at a CAD 13.
Okay, sounds good. Thanks. I'll turn it back.
Thank you. Your next question is from Matt Kornack from National Bank Financial. Matt, please go ahead.
Hi, guys. Just a quick question on top tenants. I think Whiting Petroleum moved up a bit, and that's as a function of your purchase in Denver. A bit of a shorter lease term there. Do you have some visibility as to whether they would renew at the end of that term in that building?
Yeah, we're busy hugging each other, so to speak. We've been all over that tenant last fall already. We're in close contact with them, having dinners with the new president, things like that. They have a history of being sticky. They've been in this building for about, I think, 15 years now. When they first started as a junior oil company with about 5,000 sq ft. We fully expect them to renew. We have a head start on them in the sense that if they were to go somewhere else, they'd be paying at least CAD 10 a sq ft more rent. They're not the type of a tenant that wants to do that. They're not a wealth management tenant. They just don't have that in their DNA to be spending that kind of money. We think we've got a leg up. They like our building.
They like our location. We've got a ton of parking available for them. The amenities have only improved. The building's only improved. It's not papered yet, but we're in discussion with them to renew. We'll let you know as soon as it's done.
I guess it sounds like if that's the case, you may even get a rent uptick.
We're cautiously optimistic. That's the plan, of course, to get at least some uptick.
Right. Okay. With regards to TD Canada Trust, is that multiple different locations, or is it an office tenancy somewhere in Canada?
Well, it's a move and an expansion here in Winnipeg across the street into our building.
That's not in yet.
Oh, okay.
This is just in multiple different locations.
Oh, they're that big, huh?
Yeah.
Okay. They're going to get bigger.
They are a new tenant coming into our Winnipeg office building as well.
They'll move up on the list.
Yeah.
That's fair. There have been a few I've been watching UrbanToronto, seen a few development proposals for two properties here, both residential. Is your goal to own those assets at the end of the day, or has that developed at all? I mean, which of the two, or do you think both would go together or, sorry, go forward at the same time?
That doesn't need to be seen because it takes so long to get the entitlements of formal approval, right? We have two applications in that are in for formally submitted, completely submitted. One is at Concord on the Don Valley Parkway there for about 500 suites, almost 500,000 sq ft of density. We're optimistic because the Eglinton line is coming soon. Within two more years, I think we'll have it there. It'll be just 100 steps away from the LRT station, just 100 steps away. We're seeing positive traction, leasing momentum for the office buildings, and we think it'll be good for any multi-family development there. Optimistic about attaining that density and also at 450 Yonge, our application is in. That's going to take a little longer. There, it's for about 62 stories. It's about 350,000 sq ft of density and about 300 suites.
We're optimistic about both, but it can take one to two years to get the full approval, and at that time, as we get close to that D-Day, so to speak. We'll decide whether or not we cash in and sell the asset with the density, or if we go ahead and develop it. If we develop it, do we develop with a partner or with ourselves? We've got time to think about that, but there's a lot of potential value that we can create just by getting the density. That's job one. You'll see in Calgary, we're at Stampede Station now. The second phase there is approved for a 300,000 sq ft office building. We're just getting it reapproved for 300 suites of multifamily.
By the end of this year, we feel we'll be applying for about 600 suites of density up in the GVRD, in Port Coquitlam, Vancouver area on our Poco Place site where we've got additional room there. A great opportunity there as well that we'll be pursuing. We'll keep everybody posted in our MD&A on that stuff.
I think you're right. Historically, people haven't usually blended residential into a commercial REIT, but we are starting to see most of the REITs entertaining residential development as the densification of their properties. We'll see how that plays out over time, whether people continue to hold those in commercial REITs or whether they sell them out.
Yeah, I think.
Sorry, go ahead.
To that point, there comes a point where we might be too diversified into that fourth asset class. Once built, once completed and built, we may just sell at that low cap rate, the multifamily assets sell at, and take the money and recycle into industrial or office. That would be a nice problem to have. In the meantime, our densification opportunities, we want to maximize them. The highest and best use appears to be multifamily, or it is multifamily right now. We want to maximize that right now as best as we can to create the best value, most value. We'll decide if we keep them in our portfolio and enjoy the income or if we sell and cash in at a low cap rate.
Okay. The articles themselves, they referenced Marwest as being involved, but it's no longer a related party for Artis's standpoint. Is that a cost relationship? Is it essentially just cost recovery between Marwest and Artis?
Yeah. It's just a small fee, monthly fee. They get to do their work plus the cost involved, it's just the phase one work, if you will, to get the entitlements. There's a whole team of consultants a page long that are part of this team. It's not just Marwest, that's for sure.
Okay. Artis would be responsible for the actual construction process.
We're the owner/developer.
Okay. Thanks, guys.
Thank you. Your next question is from Michael Smith from RBC Capital Markets. Michael, please go ahead.
Thank you, and good afternoon. Just following up on Concord and 415 Yonge. Are your applications in under the old regime or the new regime, the OMB or the new local planning authority?
Concord, for sure under the new regime. The 415 is open for debate. At the end of the day, we're working. In terms of Concord, for example, so far, the reception we're getting from that planning team is very positive. They're very supportive. With 415 Yonge Street's a little more controversial, and it's a lot more height involved. It'll be a longer process, but we're working with the planning team that's been assigned to us there to basically negotiate a positive report, positive recommendation. This will take time, but that's the process we're in. As I said, in both cases, the applications are fully completed and in.
Okay. Just switching gears. In terms of your other non-core bucket, I know you have, I guess, CAD 200 million-CAD 300 million potentially for sale this year. What would be the rough value of, let's say, other non-core assets beyond that which you could potentially sell should you have a good use of cash for the proceeds?
We're running out, and that'll depend on which board member you talk to, I guess, but there's pretty much consensus on our board that we don't have much more. By example, when we get this full 40-story apartment underway here in Winnipeg, the 395 suites. In parallel with that, we expect to be able to lock in very attractive CMHC financing. We'll have a very large and significant mixed-use asset here in Winnipeg with a 30-story office building, a 40-story apartment, about 1,000 stall underground parkade, along with 60,000 square feet of retail. We will look at selling a 50% non-managing interest in that complex as we get closer to [reidentifying it and basically to completing it. In that sense, it's a core asset, but we sell at 50% non-managing interest, in that sense would be non-core.
We don't have a lot more in terms of recycling after that.
Okay. For same property NOI for the balance of the year in functional currency, what are you thinking?
More of the same. In the U.S., we're up a little bit on the office, up a little bit on the retail. We're up not bad in retail, but the smaller needle. Industrial is good. We're expecting positive. I think we had 3% in functional currency in the U.S. Canada is what is. We've got less Calgary office renewals ahead of us, so that should help. Retail continues to perform well. Industrial should pick up. We've got some vacancies in Saskatchewan that we're filling up now. On one Winnipeg. We're optimistic. It's positive. If you take Calgary office out, it's always positive. With Calgary office, maybe it's flat in Canada, but positive in the U.S. It's a little bit hard to predict.
The good news is that, as I mentioned, and as Jim mentioned, we don't have a lot of Calgary office renewals coming up anymore this year and next year. The negative impact should be smaller.
Okay. Just lastly, there was a lot of moving parts in FFO this quarter. I guess I'm normalizing around CAD 0.33. Is that more or less what you're expecting for Q2?
No, I would think there'll be a lift in Q2, if from nothing else, from the second series of preferred units being taken out at the end of March.
Okay. Thank you. That's it for me.
Thank you.
Thank you. Your next question is from Fred Blondeau from Echelon Wealth Partners . Fred, please go ahead.
Thank you, good afternoon. I just had one high-level question. Armin, you just mentioned you still have this sizable development pipeline. How did your expected returns evolve over the last year or so? I guess in parallel, how did your appetite for development evolve as well? Should we expect, or would you like the pipeline to grow further from here? You could become a bit more conservative?
I feel we've hit all of our targeted yields. For sure in industrial, in some cases, we've invested a little bit more money, but the yield has always kept pace with the cost. All of our industrial has been excellent for us. The office development has been a 7.5% cap rate, I think became a 7.25% cap rate. North of seven, it's all new generation real estate, so we're really pleased with it. As we move ahead, we still only have less than 2% of our GBVs in our development pipeline. We think it could get closer to 4%. As long as we continue to achieve success, Fred, it'll be a wonderful thing. We're developing new generation real estate at higher unlevered yields than we could get by buying the yields. All start with a seven. It's going to be accretive for us.
More importantly, the exit cap rates start at a five in the U.S., we can always take some money off the table and cash in on, say, one out of every four developments, then just keep making a profit and keep recycling that money as well.
Okay, perfect. No, that's fair. Thank you. I'll leave it there.
Thank you. There are no further questions at this time. You may proceed.
Okay. Well, thank you again everyone for joining us. Happy Friday to us all. I'm sure everyone is cheering for the Winnipeg Jets. Given that Winnipeg we're doing our best to keep playing hockey and representing Canada. I'm sure we're going to get a couple of upgrades for Artis as a trickle-down effect. I can hardly wait. Anyways, thanks again, everyone, and have a good weekend.
Ladies and gentlemen, this concludes today's conference call. We thank you for participating, and we ask that you please disconnect your lines.