Artis Real Estate Investment Trust Q1 2022 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Jonathan Kelcher - TD Securities Equity Research - Analyst : So, first question on the asset sales. You did $65 million in Q1. You've got $60 million held-for-sale. How should we think about that this year?

Question: Jonathan Kelcher - TD Securities Equity Research - Analyst : Are you seeing any changes in the market with the increase in interest rates over the last 6 weeks or so?

Question: Jonathan Kelcher - TD Securities Equity Research - Analyst : Would that -- if there is a change, would that impact the amount, like would you pull back on your sales target? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 06, 2022 / 5:00PM, AX_u.TO - Q1 2022 Artis Real Estate Investment Trust Earnings Call

Question: Jonathan Kelcher - TD Securities Equity Research - Analyst : And then just on your operations, you had $1.8 million in lease term termination income in the quarter. Was there any -- 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?

Question: Mario Saric - Scotiabank Global Banking and Markets, Research Division - Analyst : I wanted to come back to this -- the bargaining purchase option, just to get a better understanding of the mechanics of quantifying it. So Samir, based on kind of what you highlighted, essentially the $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 $1.25 a share, which is where Cominar is privatized. So just thinking a bit of differently, are you essentially saying that the assets that you acquired are worth closer to $23 per unit for Cominar unit, which is essentially double what was paid. How should I think about the mechanics behind all of this?

Question: Mario Saric - Scotiabank Global Banking and Markets, Research Division - Analyst : That was going to be my next question because, I guess, it was noted that the external appraisal was done during the quarter and then pertain to the equity investments as classified. So I wasn't sure if there were actually any assets disposed of within that equity investment that would kind of support the valuation of the $350 million delta 2%.

Question: Mario Saric - Scotiabank Global Banking and Markets, Research Division - Analyst : And 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 looking at assets as you sell them and using all of this to support?

Question: Mario Saric - Scotiabank Global Banking and Markets, Research Division - Analyst : And then 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 end of the year or the trading prices?

Question: Mario Saric - Scotiabank Global Banking and Markets, Research Division - Analyst : And maybe switching gears then to the disposition program, you mentioned the $500 million still kind of intact notwithstanding some of the market volatility that we're seeing here today. You're in the beneficial spot of being able to conduct in both public securities and private market assets. And 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 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? Or do you think you have enough liquidity in that balance sheet to pass it on to really take advantage of the recent volatility in the public markets without redefining or redoing the disposition program?

Question: Mario Saric - Scotiabank Global Banking and Markets, Research Division - Analyst : 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 tenacity on the balance sheet do you have, do you think that you can execute on public market purchases without selling interim assets?

Question: Mario Saric - Scotiabank Global Banking and Markets, Research Division - Analyst : Okay. Just last question. On the operational side, the same-store NOI growth came in kind of negative 2.5% in Q1. Do you think it's still possible to get the positive same-store NOI growth in '22? Or is that more of a 2023 trend?

Question: Mario Saric - Scotiabank Global Banking and Markets, Research Division - Analyst : And can you remind me, are there any question marks about the AT&T lease in the U.S., 200,000 square feet (inaudible) I think less than a year.

Question: Matt Kornack - National Bank Financial, Inc., Research Division - Analyst : 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. So if I take IRS and just multiply by 3 to kind of prorate it, is that okay on NOI? And then on the other operating income or expenses, I think it's in expense, what sort of interest rate should I be using to get to the interest expense associated with that investment?

Question: Matt Kornack - National Bank Financial, Inc., Research Division - Analyst : And 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 IRS. Is that all mortgage debt? Or what is the nature of the lending on that portfolio?

Question: Matt Kornack - National Bank Financial, Inc., Research Division - Analyst : Yes. That's very helpful. And 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? But how should we think of that leverage coming down over a period of time? And is that ultimately re-coursed to Artis or is it cured some way through the joint venture?

Question: Matt Kornack - National Bank Financial, Inc., Research Division - Analyst : And 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?

Question: Khing Shan - RBC Capital Markets, Research Division - Analyst : So Samir, just on the market sell-off. I think you mentioned likely we're going to see an acceleration of buying securities. Does that mean you will buy more of Artis, more Dream? Or are you looking at other securities? And I was just curious whether you're constrained in what asset class you can buy when it comes to equities?

Question: Khing Shan - RBC Capital Markets, Research Division - Analyst : So not to put word in your mouth, but it sounds like that's the first priorities to the NCIB to the extent that it hits your target?

Question: Khing Shan - RBC Capital Markets, Research Division - Analyst : Okay. Yes. And then just a follow-up on the Cominar purchase gain. If I were to just take the NOI for the 1 month in the quarter and annualize that, I would get a very rough implied cap rate of about 5.5. And I'm pretty sure I'm missing something, but there's probably other values in there that cannot be captured in NOI. So maybe if you could share some -- like what are the assets that you sold so far within Cominar, so it gives you the confidence in the value that's been marked?

Question: Khing Shan - RBC Capital Markets, Research Division - Analyst : And then last one, just on the industrial portfolio, in particular, the Twin Cities area. So the vacancy, I think, looks 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 kind of looking at the broader market. But maybe if there's anything you could point out in that segment.

Question: Khing Shan - RBC Capital Markets, Research Division - Analyst : Okay. Sorry, did you say it was Maple Grove?

Question: Jenny Ma - BMO Capital Markets Equity Research - Analyst : Going back to the investment in equity securities, can you give 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?

Question: Jenny Ma - BMO Capital Markets Equity Research - Analyst : So is it fair to say that there aren't necessarily limitations to philosophically trading securities would not be what you're aiming to do? But there's nothing stopping you from doing that either.

Question: Jenny Ma - BMO Capital Markets Equity Research - Analyst : I want to turn to the floating rate debt profile. It's been coming down a bit to about 13%, but still relatively high. And I know Artis has traditionally for many years carried a higher proportion of that, which has generally been helpful and accretive to earnings. But with the pipe having turned on rate, are you still comfortable in that low teens range on porting rate debt? Or is that a number you would be looking to bring down through fixing or hedging that exposure? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 06, 2022 / 5:00PM, AX_u.TO - Q1 2022 Artis Real Estate Investment Trust Earnings Call

Question: Jenny Ma - BMO Capital Markets Equity Research - Analyst : So for the mortgage maturities that are coming up, and it looks like the majority of your floating rate debt is on the U.S. property. But is there any room to be up financing these mortgage maturities to bring down the floating rate exposure over the next 12 to 18 months?

Question: Jenny Ma - BMO Capital Markets Equity Research - Analyst : And would you be able to disclose or give us an idea of what the floating rate debt exposure might be inside the IRS portfolio? Or would it be similar to what we saw from Cominar prior to the takeover?