Artis Real Estate Investment Trust (AX.PR.E) Q2 2024 Earnings Call

0:01 Good afternoon. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Artists Real Estate Investment Trust Second Quarter 2024 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, press star, then the number one on your telephone keypad. If you'd like to withdraw your question, please press star, then the number two. Thank you. I would now like to turn the conference over to Heather. Nicole, you may begin your conference. Thank you, Operator. Good afternoon, everyone. Welcome, and thank you for joining us for ARDIS REIT's second quarter 2024 results conference call. Our results were disseminated yesterday and are available on CEDAR and on our website.

0:52 With me on today's call is ARDIS' President and CEO, Samir Manji, CFO, Jacqueline Koenig, COO, Kim Riley, and Executive Vice President, U.S. Region, Phil Martins. As we discuss our performance today, we would like to acknowledge that the discussion may include forward-looking statements that involve known and unknown risks and uncertainties. These risks and uncertainties may cause actual results to differ materially from those expressed or implied today. We have identified these factors in our public filings with the securities regulators, and we suggest that you review 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.

1:47 Throughout this discussion, please note that all figures will be presented in Canadian dollars unless otherwise specified. Before we proceed, I'd like to note that a replay of this conference call will be available until September 9th. You can access it by using the telephone numbers and passcode that were provided in yesterday's press release. Additionally, a recording will be made available on our website. I will now turn the call over to Sameer to discuss ARDIS's second quarter results.

2:15 Thank you, Heather. Hello, everyone, and thank you for joining ARDIS's second quarter earnings call. During the second quarter, we continued to focus on our key objectives, strengthening our balance sheet and enhancing liquidity. While the Bank of Canada has cut its key policy rate twice in the past two months, the real estate sector continues to face some near-term challenges. We remain dedicated to delivering maximum value for our unit holders and focusing on factors within our control. Reducing leverage and increasing liquidity to bolster our balance sheet is critical to ensuring we are positioned to navigate current market conditions that are impacting the broader real estate sector. In pursuit of achieving our internal leverage and liquidity targets, we continue to use the tools available to us as appropriate in the context of the current economic environment, including asset sales, refinancing existing mortgages, and obtaining new mortgage financing.

3:17 In the second quarter of 2024, we sold two office properties in the United States and three office properties, six retail properties, and a parcel of development land in Canada for an aggregate sale price of $292.4 million. To date, we have sold $651.6 million of real estate in 2024. and have unconditional sale agreements scheduled to close in the coming months for an additional approximately $371.2 million. These numbers include two significant portfolio sales. Park 890, a portfolio of industrial properties in the greater Houston area that closed in July, and the Arizona and Minnesota industrial portfolio comprising nine properties that is unconditional and expected to close in the third quarter.

4:11 We are also in active discussions with potential buyers regarding additional asset sales. As we have communicated in the past, the liquidity generated from these sales will be primarily directed towards reducing our debt. We consider the ongoing success of our disposition plan to be a strong indication of the high quality of our real estate portfolio, and we expect this trend to continue throughout the rest of 2024 and into 2025. Given the interest rate environment over the last two years, mortgage maturities have been a key area of focus for ARDIS. During this time, we have been working closely with our lenders to manage our debt maturities. We have $184.8 million of mortgage debt maturing during the remainder of 2024, 35% of which will be paid out upon disposition of the relevant investment properties.

5:08 We have extension options in place for 41%, and we anticipate no difficulty in managing the remaining 24% of maturities in the normal course. ARDIS's $150 million non-revolving credit facility and the first tranche of its revolving credit facilities mature this year, and we are in active discussions with lenders with respect to these maturities. Looking ahead, with a substantial pool of unencumbered assets in our portfolio, securing new mortgage financing and refinancing existing mortgages will remain vital tools for us. Our normal course issuer bid is a compelling tool available to enhance unit holder value.

5:54 During the second quarter, we utilized our NCIB to purchase 2,212,000 common units at an average price of $6.43 per unit. Under the current NCIB term, we have acquired a total of 3,344,824 common units, representing nearly 50% of the maximum units permitted to be purchased through the NCIB term. The weighted average price for these units was $6.32 per unit, a significant discount to our net asset value per unit of $14.11 per unit at June 30th. With respect to our equity securities investments and value investing strategy, during the quarter, we announced that our ownership position in Dream Office REIT, together with our joint actor, increased to 20.75%.

6:50 We are exploring all options available with respect to this investment. In terms of our commoner investment, we, alongside our partners, continue to make progress towards additional sales of non-core properties within the portfolio and the densification underway on a number of core assets in the greater Montreal area. To date, we have finalized several additional asset sales with further dispositions in the pipeline. Through our efforts over the last several quarters, including asset sales and other capital management strategies, our debt to gross book value decreased to 49.8% at June 30th from 50.9% at December 31st. We are committed to sustaining this momentum in the quarters ahead And with anticipated proceeds from unconditional sales over the next several months used to continue to reduce debt, we expect overall leverage will drop below 45%.

7:48 With leverage in our near-term debt maturities looked after, we will now pursue growth opportunities that align with our key long-term goal of growing net asset value per unit. Operationally, our portfolio continued to demonstrate stable performance throughout the quarter. Occupancy rates, including commitments, remained over 90% this quarter. Additionally, lease renewals that commenced in Q2 were negotiated at a weighted average rate increase of 3.1%, continuing a 14-quarter streak of growth in weighted average rental rates secured upon renewal. During the quarter, 456,510 square feet of new leases and renewals were negotiated.

8:36 Further, as the lease up of our latest development, 300 Main, continues and NOI at the property increases, We expect a positive impact on our adjacent office and retail tenants and parkades, creating greater vibrancy in downtown Winnipeg and an opportunity for individuals to work and live at one of Winnipeg's most prominent intersections. Lastly, as many of you are aware, on August 2nd, 2023, Artists' Board formed a special committee to initiate a strategic review process to consider and evaluate alternatives that may be available to the REIT to unlock and maximize value for our unit holders. Since the announcement of the strategic review, we have completed or entered into unconditional agreements for $180 million of office assets, $219.3 million of retail assets, and $651.7 million of industrial assets at values and on terms that were acceptable to the REIT.

9:38 This equates to over $1 billion of asset sales in line with the REIT's IFRS values, including unconditional transactions since the inception of the special committee. The work undertaken over the past year has enabled us to properly assess the current environment, and the Board remains committed to pursuing strategic alternatives that may be available to the REIT to unlock and maximize value for unit holders, including pursuing near-term opportunities available to enhance and grow net asset value per unit. We look forward to providing further updates on the strategic review process in due course. I will now 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.

10:27 If you'd like to ask a question, press star 1. To withdraw your question, press star 2. One moment, please, for your first question. Your first question comes from Jonathan Kelcher from TD Cohen. Please go ahead.

10:42 Thanks. Good afternoon. First question, and I don't think I'll get a huge response on this, but on the Special Committee's strategic review, Samir, another $500,000 in costs or so this quarter. How long will that committee remain in place?

11:07 Yeah, thanks, Jonathan. The board is continuously evaluating the need for the special committee to remain and the strategic review to remain in place. And I anticipate that, you know, we'll be able to provide a further update on that within the next one or two quarters.

11:34 Okay. If I recall back a year ago, it doesn't seem to me that the strategy that you guys had doesn't seem all that different than what you guys have done with the special committee in place. Am I right in reading that?

11:51 Yeah, Jonathan, that's a fair comment. Hindsight's a wonderful thing. I think where the exercise initially was heading at that time was one that had a very, I would say, broad and open canvas to look at any and all opportunities and time and the actual work that was then undertaken, including with our financial advisors, pointed to certain specific avenues that made practical sense that have been executed upon that we touched on in the narrative just now.

12:43 But again, I think it's important to acknowledge that when we started the exercise, there were no sort of stones that we were unwilling to turn over to look at what options and opportunities were available to us. even though in hindsight now it's clear that where we ultimately landed was a path that, as you put it, has generally put us back on track to where we started.

13:17 Okay, fair enough, and I agree. Hindsight is definitely not 20-20, or is 20-20. Just next on the incentive fee, I don't think it was disclosed the exact amount, but it looks to be around $6 million. Can you maybe give us a little bit of color on what that relates to? And I guess, secondly on that, are there any more sort of opportunities like that on your balance sheet?

13:49 Yeah, thanks, Jonathan. I think the important starting point here, before we get into the specifics of this item we have for quite some time in fact since 2021 when we established a new strategy and vision for the REIT we made it clear that over the medium to long term we anticipated that we would see lumpy forms of income that could take different forms whether related to direct real estate and development opportunities or on the public securities investing side. And this perhaps is the first meaningful example of that quote unquote lumpy income. It relates to a development initiative that we have been successful in executing upon and that attached to it provided artists with the opportunity to earn an additional fee that we have chosen to recognize a portion of this quarter. We believe the fee will be even greater than what has been recognized, but wanted to take a conservative approach in what we

15:23 decided to capture in the quarter.

15:27 Okay, so when the, when the asset closes this quarter or Q4, whenever that one closes, we'll get the full amount then?

15:37 Yeah, there's, there's, there's, correct. There's mechanics in place that enable us to then fully recognize and receive the total fee payable to artists. And we expect that we should see that come to fruition in the next one or two quarters.

16:02 Okay. And even though that's in NOI, that doesn't count as any sort of same property NOI, correct?

16:08 No. This is separate from property level NOI.

16:13 Okay. Thanks. I'll turn it back.

16:16 Okay. Thanks, Jonathan. Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star 1. And there are no further questions at this time. I will turn the call back over to Heather for closing remarks. Thank you, Operator. That concludes ARDIS' Q2 results call. We appreciate you taking the time to join us today. Have a nice weekend. Ladies and gentlemen, this concludes your conference call for today. You may now disconnect your lines. Thank you.