Good afternoon, ladies and gentlemen. My name is Anas, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Artis REIT's first quarter 2022 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd 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. Ms. Heather Nikkel, Vice President of Investor Relations and Sustainability, you may begin your conference.
Thank you, operator. Good afternoon, and thank you all for joining us. Welcome to Artis' first quarter 2022 results conference call. With me on the call today from Artis is Samir Manji, President and CEO; Jaclyn Koenig, CFO; Kim Riley, COO; and Philip Martens, Executive Vice President, US Region. Our first quarter 2022 results that were disseminated yesterday are available on SEDAR and on our website. A replay of this call will be available until Friday, May 13. In order to access the replay, please use the telephone numbers and passcodes that were provided in yesterday's press release. A recording of this call will also be made available on our website. Before we get started, please be reminded that today's discussion may include forward-looking statements.
Such statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied today. We have identified such factors in our public filings with the securities regulators and suggest that you refer to those filings. As we discuss our performance, please keep in mind that all figures are in Canadian dollars unless otherwise noted. With that, I will turn the call over to Samir.
Thank you, Heather. Good afternoon, and thank you for joining us for our Q1 results conference call. As we've done in past quarters, and in light of the fact that most attendees on this call have already reviewed our results, I don't plan to reiterate what is already available in our disclosures. Instead, I will keep my remarks high level and focused on the progress we've made to date in the implementation of our business transformation plan announced in March 2021. The momentum we gained through 2021 continued through the first quarter of 2022. Our ultimate objective continues to be growing net asset value per unit through value investing in real estate. As we have shared previously, this will be achieved through three key pillars in our strategy. The first is strengthening the balance sheet.
During the quarter, we sold one industrial and two office properties, which combined with property sales in 2021, equates to 44 properties sold since last March. Proceeds from these dispositions have been used to fund our NCIB to reduce outstanding debt and to increase liquidity. On the NCIB front, we bought back 4.2 million units at an average price of CAD 12.46, a significant discount to our current net asset value of CAD 19.09 at March 31. We ended the first quarter with total debt to gross book value of 43%, a significant decrease from the 49.3% we reported prior to the announcement of our business transformation plan. Our overall liquidity remains healthy and strong. The next pillar of the strategy is driving organic growth through development of our assets.
This includes enhancing performance at our existing properties as well as growth through new development projects. At March 31, our portfolio occupancy, including commitments, remained stable at 91.6%, and we achieved a 7.8% rental increase on renewals that commenced in the quarter. In terms of development progress, we completed the fifth and final phase of Park 8Ninety in Houston, adding 675,000 sq ft of industrial space to the existing 1.1 million sq ft across the first 4 phases. Also, during the first quarter, we began pre-leasing the first 20 floors of apartments at 300 Main in Winnipeg, and Earls, who occupy space on the main floor of the building, opened for business.
The other development projects that we have underway, Blaine 35, Minneapolis, and Park Lucero East in Phoenix, are coming along nicely, and we're very pleased with the strong leasing interest we've witnessed to date in both projects. The last pillar of our strategy is value investing by redeploying capital into new investments, including core cash flowing hard assets and undervalued publicly traded real estate securities. On March first, we, alongside our consortium partners, closed on the previously announced privatization of Cominar REIT. This was a milestone transaction for Artis and its unitholders. Since announcing the transaction last October, our conviction in the intrinsic value of Cominar's real estate portfolio and the corresponding value upside in front of us has only strengthened. Artis' total investment in this transaction was CAD 212 million.
Of this, CAD 112 million, including our previously owned Cominar units that had a fair value of CAD 13.5 million, was allocated to the acquisition of 32.64% of the common equity units in the newly formed entity. The remaining CAD 100 million was invested in junior preferred units that carry an 18% annual rate of return, an attractive return for our unit holders. The difference between the CAD 112 million invested in common equity units and the fair value of the net assets acquired as part of the transaction resulted in a bargain purchase gain at Artis' share of CAD 111.7 million.
There is also a tax component to the transaction, and we have recorded a deferred tax liability of CAD 27.8 million as a partial offset to the CAD 111.7 million bargain purchase gain. The bargain purchase gain we recorded this quarter demonstrates the value we are both committed and highly motivated to build for our owners. The significant transaction, we hope, is reflective of what is possible for Artis and its owners as we continue to evaluate and explore other opportunities. During 2021, we also began accumulating a position in Dream Office, which culminated in the announcement that we, together with our joint actors, had acquired a 10% ownership position in Dream Office. Subsequent to the end of the quarter, we further announced that our ownership position had increased to 12%.
This is one of several strategic public securities investments we have made. We look forward in time to expanding our narrative around specific entities we've invested in, but we will do this in a thoughtful, calculated manner that we believe is in the best interest of Artis' unit holders, so as to ultimately keep our cost of investment as low as possible, thereby enhancing the probability of maximizing our returns on the other side. We are off to a good start in 2022. We're looking forward to providing further updates on our progress after Q2. We're also looking forward to holding our annual general meeting in person on June ninth in Toronto. We look forward to the opportunity to meet our fellow owners and other stakeholders at our AGM.
With that, I'll turn it back over to the operator to moderate the question and answer session.
Thank you, sir. Ladies and gentlemen, we now conduct the question and answer session. If you'd like to ask a question, press star then the number one on your telephone keypad. If you'd like to withdraw your question, press star two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Jonathan Kelcher with TD Securities. Please go ahead. Jonathan, your line is now open.
Sorry about that. Was on mute. Good afternoon. Just so first question on the asset sales. You did CAD 65 million in Q1. You've got CAD 60 million held for sale. How should we think about that this year?
Thanks, Jonathan. I would suggest, as we have previously disclosed, you know, we have earmarked about CAD 500 million of dispositions for 2022, and we remain committed. While it's clear that most that will be back-ended by virtue of what we have reported in properties held for sale and what we've completed in Q1, we nevertheless are confident we'll be able to achieve what was previously disclosed.
Okay. Are you seeing any changes in the market with the increase in interest rates over the last six weeks or so?
To date, we have not, but as we all know, you know, the things continue to move in a fairly meaningful manner, including the volatility we're seeing. At this point, we have not seen any significant change, but obviously a lot remains to be determined as we continue to navigate forward.
Okay. If there is a change, would that impact the amount? Like, would you pull back on your sale target?
I don't believe we will, and I say that on the assumption that if there are changes, they will not be material in nature. Now, obviously, again, we're living in volatile times, so nobody can really clearly predict what the next several months holds in store. Right now we remain committed to the path we're on, and general indications suggest healthy demand in the private transaction environment.
Okay. Just on your operations, you had CAD 1.8 million in lease termination income in the quarter. Was that a bunch of small ones, or was there one large one? Maybe a little bit of color on that and if you have any lease termination coming up in the next couple of quarters.
In terms of in the quarter, no individually significant ones to bring to the attention of the group. Is there any?
You can use their Kim on any future expectations?
Nothing that I'm aware of at the moment. That's more of a one-time item.
Okay, thanks. I'll turn it back.
Thanks, Jonathan.
Your next question comes from Mario Saric with Scotiabank. Please go ahead.
Hi, good afternoon, and thanks for taking the questions. I wanted to come back to this, the bargain purchase option, just to get a better understanding of kind of the mechanics of quantifying it. Samir, based on kinda what you highlighted, essentially CAD 112 million is the difference between what you think the fair value of the assets you acquired and your purchase price, essentially, which I guess indirectly would have been CAD 11.75 a share, which is where Cominar is privatized. Like, just thinking about it differently, are you essentially saying that the assets that you acquired are worth closer to CAD 23 per unit, per Cominar unit, which is essentially double what was paid? Like, how should I think about the mechanics behind all of it?
Yeah. Thanks. Thanks, Mario. Remember that, you know, we're talking about gross asset values, whereas the equity component of our investment is a much smaller ratio. One should not take our equity component, which is again a significantly smaller ratio of the overall consideration paid for the privatization and the fact that we're seeing an almost double of that number, that doesn't suggest the gross transaction price is double. If you adjust accordingly, it really on the equity we invested, which at 100% level is about CAD 350 million, you know, one could and correctly translate that into an additional CAD 350 million of upside through the value delta that we estimate.
That valuation exercise is consistent with a prior practice at Cominar with respect to updated appraisals on a certain ratio of assets that rolls on an annual basis, and then additional valuations based on prevailing market cap data from third-party sources. Overall, you know, we feel reasonably comfortable in what we're seeing on the valuation front, and that's further validated by a handful of dispositions that we've actually made on the net 83 assets that we retained in that privatization, where we've been able to divest of those properties at values equal to or greater than the underwritten values or IFRS values that we have on our books.
Okay. That was gonna be my next question because I guess it was noted that the external appraisal done during the quarter, none pertained to the equity investment, as classified. I would inquire if there were actually any assets disposed of within that equity investment that would kind of support an evaluation of a $350 million delta that you're presenting.
Yeah. No, we feel very comfortable. Again, having a few dispositions under our belt is certainly very comforting.
Are there plans going forward in terms of appraising that equity accounted investment on a routine basis? Or, will it be similar to what happened this quarter in terms of just, you know, looking at assets as you sell them and using those as support?
Yeah. Correct. It goes along with our accounting. The net equity investment is recorded at fair value. You'll see fluctuations quarter to quarter, but everything will be marked to the IFRS for fair values.
Okay. Can you remind us in terms of Dream Office, how do you treat the valuation for your IFRS purposes? Is it estimated based on the value of Dream that you hold internally, Dream's IFRS NAV or the trading price?
The investments in our equity securities are recorded at the market price at the end of the quarter.
Okay. Maybe switching gears then to the disposition program, which Samir, you mentioned, the CAD 500 million still kind of intact, notwithstanding some of the market volatility that we're seeing here today. You know, you're in the beneficial spot of being able to invest in both public securities and private market assets. The latter or the former has seen quite a bit of pressure in the last couple of weeks, creating some potentially really attractive opportunities that may have not existed, you know, a month ago. Does the volatility in the public market change the eagerness or willingness to sell assets in the private market in order to fund those potentially incremental opportunities?
Do you think you have enough liquidity, enough balance sheet capacity to really take advantage of the recent volatility in the public markets without kind of redefining or rejigging the disposition program?
Generally speaking, Mario, we are on track for our 2022 plan. If anything, as you've noted, the current environment is presenting some very compelling opportunities that I would say may not result in an acceleration of asset disposition, but certainly will result in an acceleration of redeploying some of our liquidity to capitalize on those opportunities. That's something that management and our board are aligned on and continue to have very high conviction around insofar as the objective that I touched on in my commentary that remains unchanged insofar as what our long-term priority is regarding NAV growth and value creation for our owners.
How much capacity do you feel comfortable with on the balance sheet? Like, let's say hypothetically, the private market starts to become more complicated, how much capacity on the balance sheet that you can execute on public market purchases without selling interim assets?
Right now we have ample liquidity as you know. Again, we don't think that will be impacted whatsoever by the timing and outcome of the asset or property dispositions that are either planned or already underway.
Okay. Just last question. On the operational side, the same-store NOI growth came in negative 2.5% in Q1. Do you think it's still possible to get the positive same-store NOI growth in 2022, or is that more of a 2023 trend?
Yeah. Thanks for the question. It's really four office buildings that are contributing to that negative same-property NOI. In the U.S., it's North Scottsdale Corporate Center, which has been fully re-leased, and that lease will commence in June. It's also Stinson, which is in Minneapolis. We lost 128,000 sq ft tenant in that asset, and that space has also been re-leased in June. On the U.S. side, things are looking really positive. In Canada, it is two properties as well. It is our Bell MTS building in downtown Winnipeg. Bell MTS downsized by 100,000 sq ft, and that was really driven by a reorganization of Bell taking over MTS and ongoing reorganization there. EMC, we lost a small tenant and are looking to backfill.
I think Q2 could be similar, but towards the latter part of the year, there should start to be improvements with those June leases starting to kick in.
Got it. Can you remind me, are there any question marks about the AT&T lease in the U.S., the 200,000 sq ft tenant? The term is, I think, less than a year.
Yeah. I believe in a previous quarter, we had talked about the tenant is gonna be vacating. They'll vacate February 2023. We have some time. We're actively working on re-leasing that space, but it'll be at least, you know, almost a year before we have to deal with that. We're hopeful that we can get that pre-leased before they vacate.
Okay. Great. Thanks for the reminder.
Thank you. Your next question comes from Matt Kornack with National Bank. Please go ahead.
Hi, guys. Just trying to understand some of the proportional or equity accounted information that you've provided. And particularly trying to understand how we should model it going forward. If I take IRIS and just multiply by three to kind of prorate it, is that okay on NOI? And then on the other operating income or expenses, I think it's an expense. What sort of interest rate should I be using to get to the interest expense associated with that investment?
I can take that one. There are some one-time items included in that other expense. The NOI, I do believe, multiplying by three is a reasonable assumption. On the other, due to there being some one-time acquisition costs, of the, I believe it's CAD 11.865 million, approximately CAD 5 million would be ongoing interest expense.
Okay. Perfect. That's very helpful. Then just in terms of the balance sheet, I think you report your leverage excluding kind of the leverage associated with these joint ventures. But it seems like leverage is quite high for IRIS. Is that all mortgage debt or what is the nature of the lending on that portfolio?
We made reference to this on our last quarterly call, and I'll try and repeat what we shared at that time. When we look at the overall cap structure that was established by the consortium for the privatization of Cominar, we used an LBO model to organize the transaction and structure it. One can work backwards insofar as what is publicly available information, including what we've laid out from an equity component of that transaction.
It wouldn't take long to then underwrite or analyze that, while it's got various components. Essentially, you've got a roughly CAD 2.2 billion transaction with about CAD 350 million of equity. Again, the fair value of that CAD 2.2 billion we believe is higher, and we've already touched on what that quantum or delta equates to approximately. Then beyond that, just so I could sort of finish the storyline because it's important to understand this, and we again conveyed this on the last call.
The consortium is very committed to reducing that leverage in 2022, and that'll be achieved through the disposition of certain assets that, again, in early days, we are seeing very good signs both in terms of interest level from buyers and on the valuation front. I hope that helps in terms of just providing that clarity.
Yeah. No, that's very helpful. In terms of those sales, I mean, what is your anticipated timeline? Presumably, you started maybe even before the acquisition looking at selling some of those trophy assets there. Yeah, how should we think of that leverage coming down over a period of time? Is that debt ultimately recourse to Artis or is it cured some way through the joint venture?
Yeah, both good, really good questions. Let me start with the latter. There's no recourse to Artis. That was, again, made clear last call, but I will reiterate that because I think it's important to all our stakeholders to know that. Then secondly, on the timeline standpoint, time is on our side. Having said that, again, there's a complete alignment amongst the consortium partners that we want to see a significant reduction in the leverage by the end of 2022. We're very confident that we'll be able to achieve that.
If it's helpful in terms of trying to quantify, I would say that at a minimum, 30% reduction in the leverage, but my expectation is it'll be well north of 30% if we are successful in executing what is on our radar for 2022.
Yeah. Last one for me. Is the buyer base for those assets, mostly private entities, pension funds, foreign, domestic? Can you give any indication as to who's looking at, buying the properties?
The 83 assets that we retained are across a wide spectrum of both size, dollar value, location. Although over 80% on a GLA basis is in Montreal, which is certainly very positive in our view. Nevertheless, you know, we do have Quebec City assets, we have assets in the Ottawa-Gatineau area, and there's similarly a very diverse range of buyers. In some instances, strategic buyers who are private and who may have individual or cluster of assets in the same or similar location within a certain catchment area. We've seen incredible unsolicited inbound interest. In other instances, we have consciously undertaken a process with third-party advisors who are actively marketing assets for sale. It's a fairly broad spectrum, but the buyer interest remains healthy and remains diverse.
That's again, before we even start talking about any of the trophy assets that we anticipate will garner equally strong interest when we move forward in taking any one or more of those to the market.
Okay, great. Thanks. Appreciate the color.
Thank you. Your next question comes from Jimmy Shan with RBC. Please go ahead.
Samir, just on the market sell-off, I think you mentioned likely we're gonna see an acceleration of buying securities. Does that mean you'll buy more of Artis, more of Dream or are you looking at other securities? I'm just curious whether you're constrained in what asset class you can buy when it comes to equities.
Thanks, Jimmy. Again, I'll start with the latter question. We are not constrained whatsoever in terms of asset class. We're gonna approach it, as we have been to date, with our board of trustees, and the investment committee of the board, on a purely fundamentals basis in what we're looking at and/or exploring, or that we've invested in, and whether we turn the dial up on some of the existing, entities that we now have an ownership position in. Having said that, you know, going back to the first part of your question, again, you know, we've got an active NCIB that we've reported on. You know, when the unit price trades lower, then obviously our NCIB will remain active.
When the unit price moves up, then we'll probably turn the dial down on our NCIB so as to then allocate that capital to other uses.
Not to put words in your mouth, but it sounds like that's the first priority is to do the NCIB to the extent that it hits your target.
That's correct. I mean, when our unit price is trading at a discount of greater than CAD 6 relative to our CAD 19 NAV, it would be hard. We'd be hard pressed to find on a risk-adjusted basis, better opportunities for our unitholders. Having said that, you know, as I touched on earlier, thanks to the hard work of our team under the direction of our board of trustees last year, we made significant progress that put us in a very healthy balance sheet position, not anticipating the world would look like what it is or what it looks like today. You know, that's why, you know, that's going to, we believe, prove to be very beneficial for our owners.
Okay. Yeah. Then just to follow up on the Cominar purchase gain. If I were to just take the NOI for the one month in the quarter and annualize that, you know, I would get a very rough implied cap rate of about 5.5%. I'm pretty sure I'm missing something, but there's probably other values in there that cannot be captured in NOI. Maybe if you could share some, you know, like what are the assets that you've sold so far within Cominar, so it gives you the confidence in the value that's been marked.
Again, Jimmy, we've got a very diverse range of assets. You have what I would describe as ultra small assets, i.e., some CAD 10 million in value, where, between strategic buyers and/or, other buyers that would have an appetite for that type of deal size, there's no shortage of buyer interest. You've got what I would describe as medium-size assets between, call it CAD 20 million-CAD 50 million or CAD 60 million. You've got large assets that, you know, are CAD 50 million or CAD 60 million to upwards of several hundred million dolars when I think about certain of the two largest assets, Gare Centrale and, Place Alexis Nihon. Again, as I touched on earlier, particularly the inbound interest unsolicited that we've seen across the spectrum of assets has been significant.
Some of that inbound unsolicited interest has already translated into a handful of dispositions that have been completed. Again, those will be smaller in dollar size relative to a PAN or a Gare Centrale. Others are actively either under contract and/or in negotiations. You know, we have ample data points and experience to date that enables us to maintain that confidence that I've referenced.
Okay. Okay, last one, just on the industrial portfolio, in particular, the Twin Cities area. The vacancy, I think, looks like it's hovering around 8% for a little while. Is there anything particular within that portfolio that's sort of weighing on the performance? I would have thought the vacancy would be lower and just kinda looking at the broader market. Maybe if there's anything you could point out in that segment.
Sure. I can take that one. It's really just one asset, Maple Grove Industrial. We lost a tenant there, and we are actively working with a prospect right now and optimistic that will lead to a deal. It's really just one asset that's driving it. Hopefully once that gets done, occupancy will significantly improve.
Okay. Sorry, did you say it was Maple Grove?
Maple Grove, correct.
Okay. Okay, great. Okay. Thank you.
Thanks, Jimmy.
Thank you. Your next question comes from Alex Leon with Desjardins Capital Markets. Please go ahead.
Hey, good afternoon. My first question is on the Cominar investment, just specifically on the debt. I'm wondering if you can disclose how much of the debt is maturing in 2022 and 2023.
Offhand, I don't have that number, but I can circle around after the call and provide you an update.
Okay, that'd be great.
What I-.
Um-.
Alex-.
My next.
Alex, what I-.
Yeah [crosstalk].
Sorry, Alex, what I would say is, there's no near-term concern that we have with respect to any debt maturities that are on the radar, both in terms of the ability to renew and/or refinance that maturing debt.
Okay. Thanks for that. My last question is a bit of a two-parter on the investment in equity securities. First, I'm wondering for the security purchases that have been announced to date, if you could disclose what the current market value of those are. Secondly would be, whether you've got any, hedging programs in place on the securities.
We don't have any hedging program in place, and we don't have, Alex, at our fingertips the current value. Obviously, everyone can see what's happening in the markets in terms of the broad sell-off. As Jackie mentioned earlier, we will continue to report the ownership dollar amounts at fair value at each quarter end moving forward.
Okay, that was it for me. I'll turn it back. Thank you.
Thanks, Alex.
Thank you. Your next question comes from Mason Roth with Atlas Holdings. Please go ahead.
Hi there. Thanks for taking my question. I just wanted to zoom out a little bit. I know that you've made a lot of progress creating NAV since the current management was installed. Under prior management, for many years, Artis was an underperforming and undervalued REIT. With all of the investment activity, how do you think about protecting against the risk that Artis simply becomes an undervalued holding company with no cash monetization going directly to shareholders?
Thanks, Mason. Just over a year ago, when we announced the business transformation plan, we made it clear at that point that insofar as achieving the outcomes that we believe are possible, this would be a two to three -year exercise in terms of executing the plan. Being now just over a year into that two to three-year period, combined with obviously macro factors that are impacting the entire, not only real estate public environment, but just the broader capital markets environment. You know, I think that we know what the opportunity is, we know what the potential is, and we remain committed to staying focused and disciplined in what we're doing to try and achieve that two to three-year timeline that we communicated to our unit holders.
Thanks. I'll let it go. We look forward to continued progress throughout the year. Thank you.
Thanks, Mason.
Thank you. Your next question comes from Jenny Ma with BMO. Please go ahead.
Hi, good afternoon.
Hi, Jenny.
Going back to the investment in equity securities, you gave us some color on the recent market volatility, but I'm just wondering, as far as investment philosophy, are there any limitations in terms of, your holding period, and whether or not you would be looking to be opportunistic, and be trading securities during this volatile period, or is it really more of a strategic long-term hold positioning that would underpin the philosophy of this bucket?
Yeah. Thanks, Jenny. I would say from a both philosophical, but I would also add strategic standpoint, we're not looking to get into the active trading business. That's not what this is all about for us. It is, as I touched on earlier, largely fundamentals based. We have very high conviction both in terms of our board and its investment committee and the management team on the names that we are invested in and/or evaluating. Within those investee entities, we are not time constrained in any way whatsoever.
Having said that, you know, we do on an entity-by-entity basis, you know, have a certain desired timelines and ideas related to how we ultimately can look forward to monetizing these investments over time in a manner that will, we believe, generate for our unit holders a healthy overall returns.
Okay. Is it fair to say that there aren't necessarily limitations, just philosophically, trading securities would not be what you're aiming to do, but there's nothing stopping you from doing it either?
That's correct.
Okay. Wanna turn to the floating rate debt profile. It's been coming down a bit to about 13%, but still relatively high. I know Artis has traditionally for many years carried a higher proportion of that, which has generally been helpful and accretive to earnings. With the tide's having turned on rates, are you still comfortable in that low teens range on floating rate debt, or is that a number you would be looking to bring down through fixing or hedging that exposure?
We're looking at our maturing debt as we go along. Right now, we are kinda internally evaluating the balance between variable and fixed rate debt. I agree with rates coming up. That's gonna be something of our focus in the next coming quarters as our maturities come due.
For the mortgage maturities that are coming up, and it looks like the majority of your floating rate debt is on the U.S. properties, but is there any room to refinance these mortgage maturities to bring down the floating rate exposure over the next, you know, 12-18 months?
Yeah, there is room in the portfolio for that.
Okay. Would you be able to disclose, or give us an idea of what the floating rate debt exposure might be inside the Artis portfolio, or would it be similar to what we saw from Cominar, prior to the takeover?
I believe it's similar to what we saw prior, but I can pull up that number for you and circulate it after this call.
Okay, I'd appreciate that. That's all for me. Thank you.
Thank you. There are no further questions at this time. Jaclyn , you may proceed.
Okay. Thank you, operator, and thank you all for joining us today. Have a great weekend.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.