Good afternoon, ladies and gentlemen. My name is Pam, and I will be your conference operator today. At this time, I would like to welcome everyone to Artis REIT's second 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. I'd now like to turn the conference over to Ms. Heather Nikkel. Please go ahead.
Thank you, operator, and welcome everyone. Thank you for joining us for Artis REIT's second quarter 2022 results conference call. With me on today's call is Artis' President and CEO, Samir Manji, CFO Jaclyn Koenig, COO Kim Riley, and Executive Vice President, US Region, Philip Martens. Our second quarter 2022 results were disseminated yesterday and are available on SEDAR and on our website. A replay of this call will be available until Friday, August 12. 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. In addition, we may refer to non-GAAP and supplementary financial measures that are not defined under IFRS and are not intended to represent financial performance, financial position, or cash flows for the period, nor should these measures be viewed as an alternative to net income, cash flow from operations, or other measures of financial performance calculated in accordance with IFRS. Lastly, 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, and good afternoon, everyone. Thank you for joining us for our Q2 results conference call. As I've done in prior quarters, I will keep my remarks today at a high level and will focus more specifically on the progress we've made in the execution of our business transformation plan announced in March 2021. Our goal is for Artis to become a best-in-class real estate asset management and investment platform with a focus on growing Net Asset Value per unit and distributions for our investors through value investing. There are three components to this strategy. The first is strengthening the balance sheet. This is a critical first step in order to provide the REIT with financial flexibility and liquidity to pursue other areas of this strategy.
Since the announcement of the new strategy in March 2021, we've sold 46 assets, including 31 industrial, nine office, and six retail properties. Proceeds from these dispositions were partially used to reduce outstanding debt. As a result, we ended the second quarter with total debt to Gross Book Value of 46%, a notable improvement compared to 49.3% reported prior to the announcement of the business transformation plan. Since the announcement of the business transformation plan, we have also purchased the maximum number of units allowed under our NCIB in both 2021 and 2022. The second pillar is driving organic growth. This will be achieved by creating value for our unitholders through identifying operational efficiencies, increasing occupancy and in-place rents, and the successful completion and lease-up of new development projects. We're pleased to report that leasing activity was strong during the second quarter.
There has been a noticeable increase in interest from prospective tenants and in tour activity across all of our asset classes and markets. At June 30th, our committed occupancy reached 92%, the highest level we've reported in over a year. With respect to our existing tenants, 388,000 sq ft of renewals commenced in the quarter at a healthy weighted average increase in rental rates of 3.7%, and our weighted average overall in-place rent increased from CAD 13.29 per sq ft in Q1 to CAD 13.56 per sq ft in Q2.
We're pleased with the increase in leasing momentum we're experiencing and expect this trend to continue as people adapt to the pandemic-related restrictions being lifted, and with respect to our office properties specifically, we continue to work with tenants to ensure a safe, healthy, and positive return to the office. Turning to our development projects. Earlier this year, we completed the fifth and final phase of Park 8 Ninety, an industrial development in the Greater Houston area. In addition to the fully leased 1.1 million sq ft across the first four phases, this final phase comprises 675,000 sq ft and is 35% leased. During the second quarter, we completed the first phase of Blaine35 , an industrial development in the Twin Cities area.
Over 70% of Blaine 35 phase I was leased prior to completion, and Blaine 35 phase II, which is still under construction, has been 50% pre-leased. The entire project is expected to total 317,000 sq ft upon completion. At Park Lucero East in the Greater Phoenix area, we have a 10% ownership interest and a development management contract in place. We are pleased to report that we are making excellent progress on the development of this 561,000 sq ft industrial project, and the property is already 82% pre-leased. We look forward to providing additional updates on these projects in the quarters to come. The third pillar of our strategy is focusing on value investing by allocating capital to investments that are undervalued with potential to produce above average risk-adjusted returns over the medium to long term.
From a broader perspective, the real estate sector continues to be impacted by the current economic and interest rate environment, particularly related to the rising interest rate situation we are facing. This has presented some opportunities and some challenges for Artis. We are closely monitoring interest rate trends and forecasts and are in regular active discussions with our lenders while working diligently to manage our debt maturity schedule. In the meantime, the downturn in the market has led to inefficiencies in the public real estate sector that has presented compelling opportunities that are in line with our value investing strategy.
In time, we look forward to providing additional information about entities that we've invested in, but we believe it is in the best interest of our unit holders to do so in a thoughtful, calculated, and disciplined manner in order to keep our average cost of investment as low as possible, thereby enhancing the probability of maximizing our return on the other side. With respect to previously disclosed investments, during the quarter, we announced that we reached a 14% ownership position, together with our joint actors in Dream Office REIT. Earlier this year, we also announced the closing of the transaction to privatize Cominar REIT. With the closing of this transaction now behind us, we are focused with our consortium partners in executing our plan, and we look forward to reporting on our progress in future quarters.
We are confident we will achieve a strong return on our investment over the next couple of years. We've come a long way since the business transformation plan was announced in March 2021. Our ultimate objective, as stated earlier, continues to be growing Net Asset Value per unit through value investing in real estate. At June 30th, our Net Asset Value was CAD 19.37 per unit, a nearly 30% increase compared to a Net Asset Value of CAD 15.03 per unit reported prior to the announcement of the business transformation plan. We continue to focus on identifying operational and organizational efficiencies and to work towards adopting best practices in all areas of ESG, a high priority for our board of trustees and the team at Artis. We continue to have strong conviction in our vision and strategy.
We've made good progress so far, and we look forward to providing further updates in the coming months. With that, I'll turn it back over to the operator to moderate the question-and-answer session.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press star followed by one on your touch tone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. If you wish to decline from the polling process, please press star followed by two. If you're using a speakerphone, please lift your handset before pressing any keys. One moment for your first question. Your first question comes from Jonathan Kelcher with TD Securities. Please go ahead.
Thanks. Good afternoon.
Hi, Jonathan.
First question, just on the assets held for sale, they did jump up, I think, quarter-over-quarter. Can you maybe give a little bit of color on those assets, where you stand in terms of timing of selling them, the location, expected Capitalization Rate, that sort of stuff?
Sure. The majority of assets held for sale are on the U.S. side, where, as you know, we have assets that are exclusively focused on industrial and office. We, within that overall figure, can confirm that a significant proportion relates to our industrial assets in the Minneapolis market.
Okay. Are any [crosstalk].
From a timing standpoint, Jonathan, we are reasonably confident that most of that asset held for sale figure will be completed prior to December 31st of this year.
Okay. If I was to sort of handicap it, would it be sold largely end of Q3, beginning of Q4? Is that kind of what you're thinking, or closer to the end of the year?
No, I think the timeline you've suggested is appropriate.
Okay. Now, are any of these under contract or are they just being marketed now?
We have within the office side a few that are under contract. A couple that are in the late stages of having PSAs negotiated. On the Minnesota Industrial, we anticipate that should be under contract over the next short while.
Okay. Switching gears just on the Cominar investment, and I know you guys aren't giving a lot of information on it, but if you exclude the preferred shares that you guys have, roughly how much did it contribute to FFO this quarter? How much should we sort of think about it contributing to FFO on an either quarterly or annually basis over the next couple of years?
Hi, Jonathan. The Q2 contribution from Cominar is around CAD 0.03 on our FFO.
Okay. There is nothing unusual or anything in there, no one-time cost or gains or anything. That's something we should think about sort of the next couple of quarters as well, anyways?
Correct.
Okay. That's helpful. I'll turn it back. Thanks.
Thanks, Jonathan.
Your next question comes from Matt Kornack with National Bank Financial. Please go ahead.
Hey, guys. Just wanna follow up on Jonathan's questioning with regards to the capitalization rate on the industrial. Do you carry it on your books, at least the U.S. portfolio in general at a 5.3% cap? Is that ballpark what we should be using if we're adjusting for the disposition?
We're reasonably confident that we will achieve an exit no less than our IFRS value and possibly higher.
Okay. We can use something along the lines of that figure. On the accounting for the joint venture, I saw the FFO impact that you referred to, but in terms of some of the line items, there's I think CAD 17.8 million or something in other costs, and then there's a fair value adjustment. In terms of the interest expense associated, should we just take the difference between the CAD 9 or CAD 10 million of fair value adjustment and the FFO contribution and basically assume that that's the interest expense? I didn't know what the other costs would have been in that disclosure.
Yeah, I think that's reasonable when you're trying to determine the FFO asset. That's where we land around our CAD 0.03 a quarter.
Okay, perfect. Occupancy did pick up in office in particular. Can you speak to kind of who's taking space, what you're seeing there, any leasing costs or CapEx that was needed to go into that? Also, any progress on AT&T. I think you had mentioned on the prior call that that space will be vacating at the end, but it seems like you're making traction on office. Any comment you can make there?
Yeah, for sure. This quarter, definitely we've seen a pickup in office activity, which is great to finally see. It's kind of all across the portfolio. We've done a few deals at MAX and some deals in Canada as well. It's from a mix of tenants. But it does feel like tenants are getting ready to make decisions and getting ready to get back to the office. That's great to see. Then on AT&T, we do have it listed, and we're working through that process right now. It is currently still occupied until early 2023. No new leasing activity to report, but we are actively working on it.
Is that a property that you would list essentially for a tenant to take up on leasing or potentially purchase, I guess, if an end user wanted to own it?
That's not something that we've contemplated. At the moment, we're looking at leasing it first. That's our priority, but.
Okay. Nope. Fair enough. Thanks, guys.
Thanks, Matt.
Your next question comes from [Sumaya Suhail] with CIBC. Please go ahead.
Thanks. Good afternoon. Just to go back to the held for sale assets, you know that mostly it's U.S. industrial. Just wondering what your thoughts or plans are for the remaining Canadian industrial you do hold and the prospects there, just given how desirable Canadian industrial is currently.
Hi, Sumaya. You broke out at the end there, but I think we caught the question. The plan right now is to continue to hold the remaining industrial assets that we have in the other U.S. markets and here in Canada. We're feeling pretty comfortable with where this current group of dispositions that are within the held for sale category will get us to insofar as our overall liquidity position, our debt levels, and the focus that we have on a couple of specific investment initiatives. There's nothing planned beyond the Minnesota Industrial as it relates to our overall industrial portfolio.
Okay. Just on the same topic. You know, some of your peers have noted a bit of a pause in transaction, some CapEx expansion depending on the asset. It sounds like you guys are pretty close. Just wondering what's been the impact to your disposition plans and if you've had to adjust pricing or timing, and to what extent?
Sorry, Sumaya. Pricing and timing on what?
On just the held for sale assets. I mean, it sounds like you guys are pretty close, but have you had to make any adjustments to reflect, I guess, the current sort of pause in the market?
No, it's a good question. I think that the way the current environment has unfolded, we're seeing no doubt a decline in the universe of buyers and the number of bidders we're seeing on assets. What's interesting is, you know, those parties that are at the table, whether it's a conventional investor buyer, family office, institutional private equity, or whether it's a strategic buyer that is looking at a specific asset, we're seeing that, you know, there's generally strong traction with respect to values, cap rates.
Yes, there's been a little bit of compression, but as I stated earlier regarding our Minnesota industrial, and here I would also add, you know, the other assets that we are actively in discussions with, generally speaking, you know, we're reasonably comfortable and confident that we're gonna transact at values that are not materially off of our IFRS values.
Okay, thank you. I'll turn it back.
Your next question comes from Jimmy Shan with RBC Capital Markets. Please go ahead.
Thanks. Just a clarification on the asset sale. The four office sales, those are the ones in Texas? The value that you're looking to sell them at would also be consistent with the IFRS value?
No. Jimmy, sorry. I don't know where that may have come across, but we don't have office assets in Texas. The office assets that we currently have either under contract or are in the process of having PSAs negotiated would be in other markets, specifically, Minneapolis and Denver.
Oh, okay. Sorry, I got confused. So, the but the four Texas industrial assets, those are not as part of that portfolio sale?
No, they're not. We have more than four assets in.
More than four. Okay.
Greater Houston. If you're referring to the Park 8 Ninety phase I to phase IV.
Yeah.
that I referenced in my commentary, no, those are not for sale.
Okay. Maybe it's a bit ahead of time, but how do you plan to allocate the funds from the sale? Maybe if you could, you got, you know, obviously a few things you could deploy and get paid down, unit buyback, buying other securities. How are you thinking about it at this point?
Yeah. We're not gonna comment on specific dollar amounts or ratios. What I can say generally, number one, we will continue to look at our overall debt levels, and the objective is to have a more conservative balance sheet, as has been stated, from the time that we announced our business transformation plan, last year. Then secondly, as we touched on in our commentary earlier, the current environment that we're in presents some extraordinary opportunities, and there is a strong intention to allocate additional capital to one or two specific investee entities that we believe represent a very attractive opportunity for us and for our unit holders.
Okay. By that you mean public entities, right? I assume.
That's correct.
I think just last one, a technical one. I think there was a lease termination income of about CAD 1.7 million in the quarter. It was a little bit more than prior quarters. Maybe if you could comment on that, what kind of that related to. And likewise, it sounds like leasing activity has picked up, so leasing costs has picked up as well. How do we think about the leasing costs going forward?
The termination income is related to AT&T, which we had discussed on a previous question. Then in terms of the leasing costs, they definitely have picked up this quarter. Looking back at previous quarters into 2019, 2020, they're in line with those quarters. Obviously, during the pandemic, office leasing decreased, and then our leasing costs decreased. We're actually happy to see them picking back up. It means that office leasing is picking back up, which is a great sign.
A number somewhat similar to 2020 to 2019 would be in the ballpark?
Correct.
Okay, thanks.
Ladies and gentlemen, as a reminder, if you do have any questions, please press star one. Your next question comes from Mario Saric with Scotiabank. Please go ahead.
Thank you. Good afternoon/good morning. Just following up on the last question on leasing costs. Your renewal rate or your lease spread was 3.7% this quarter. Do you have any sense, high level, what that would look like on a net effective basis?
Sorry, I missed the end of your question. On a same property basis?
No, on a Net Effective Rent basis, once we factor in those costs, what would the 3.7% look like?
Yeah, I think honestly, I think it would be similar. We haven't seen leasing costs change that significantly. Obviously, that's something that we have our eye on with inflation and cost increases in general. I think it would be fairly similar to previous quarters.
Okay. Just maybe shifting to capital recycling. I think the assets held for sale, the net equity is roughly about $475 million, give or take, based on the disclosure, with the comment that most of it's in the U.S. You know, how should we think about the redeployment of that equity in terms of, you know, special distributions, the tax efficiency associated with taking the capital out of the U.S. at this stage? Does the fact that it's in the U.S. dictate your kind of capital recycling policy in any way?
Yeah, in terms of the tax impact and any potential distribution, we're currently working through those numbers with our tax specialists. As well as we move along in finalizing the dispositions, we're gonna continue and be in a better position to provide more information in the coming quarters.
Okay. That's it for me. Thank you.
Thank you, Mario.
Ms. Nikkel, there are no further questions at this time. Please proceed.
Thank you, operator. We appreciate you all for taking the time to join us today, and wish everyone a great weekend ahead.
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.