Artis Real Estate Investment (OTC:ARESF) Trust (REIT) has announced its Q1 2024 financial results, highlighting strategic asset dispositions and measures to strengthen its balance sheet amidst a challenging interest rate environment.
The company reported progress in reducing leverage and increasing liquidity, with $174.3 million garnered from asset sales and further dispositions worth $457.3 million expected soon. Artis has also expanded its stake in Dream Office and is actively managing its debt profile.
Operational fundamentals such as occupancy and leasing activities remain stable, with the company focusing on aligning its market price with intrinsic value.
Key Takeaways
- Artis REIT has sold assets totaling $174.3 million and plans to close additional sales of $457.3 million.
- The company aims to reduce leverage and borrowing costs through these dispositions.
- Artis increased its ownership in Dream Office and is looking at public securities for capital allocation.
- Debt maturities are being managed with renewals and extensions of mortgage debt.
- The weighted average cap rate on disposals is approximately 6%, including the Park 8Ninety sale.
- Canada's investment market is dominated by private buyers, while the US has strong institutional interest, especially in industrial assets.
- Retail assets are often sold for cash, while office assets may involve vendor financing.
- The 300 Main property has seen increased occupancy from leasing, and Phase 2 leasing is underway.
Company Outlook
- Artis REIT plans to explore direct acquisitions and public securities in the next three to four quarters.
- A $50 million contribution to joint ventures has been made to pay off property mortgage debt.
- The company is focusing on strengthening its balance sheet and liquidity.
Bearish Highlights
- The challenging interest rate environment has necessitated a focus on reducing leverage.
Bullish Highlights
- Increased ownership in Dream Office suggests a strategic investment approach.
- Renewed and extended mortgage debt indicates proactive debt management.
Misses
- No specific misses were discussed during the earnings call.
Q&A highlights
- There were no further questions at the conclusion of the conference call, indicating that the presentation was comprehensive.
Artis REIT (AX.UN), with its recent earnings call, has demonstrated a strategic approach to managing its financial health in response to the current economic climate. The company's focus on asset dispositions to reduce leverage and borrowing costs, coupled with its investment in Dream Office, reflects a commitment to optimizing its portfolio and capital allocation.
The stability of operational fundamentals and the active management of debt maturities further underscore the company's resilience. As Artis REIT continues to evaluate opportunities for growth and value alignment, the market will watch how these strategies will unfold in the coming quarters.
InvestingPro Insights
Artis Real Estate Investment Trust (REIT) has been navigating a complex financial landscape, as evidenced by its recent Q1 2024 financial results. To provide a deeper understanding, let's look at some key metrics and insights from InvestingPro.
InvestingPro Data shows a market capitalization of $506.4 million, which reflects the company's size and market value as of the latest data. Despite a challenging year, Artis REIT has seen a revenue growth of 12.73% over the last twelve months as of Q1 2024, indicating its ability to increase earnings. Additionally, the dividend yield stands at a substantial 9.13%, which is particularly attractive to income-focused investors.
An InvestingPro Tip highlights that Artis REIT pays a significant dividend to shareholders, which has been maintained for 21 consecutive years. This consistency in dividend payments is a testament to the company's commitment to returning value to its investors even through economic cycles. Another tip points out that Artis REIT operates with a moderate level of debt, which is a crucial factor considering the current interest rate environment and the company's focus on strengthening its balance sheet.
For investors seeking comprehensive analysis and additional insights, InvestingPro offers more tips on Artis REIT and other companies. By using the coupon code PRONEWS24, readers can get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, unlocking access to a wealth of data and expert tips to inform their investment decisions. There are currently 4 additional InvestingPro Tips available for Artis REIT, which can be found at https://www.investing.com/pro/ARESF.
These insights and metrics offer a valuable perspective on Artis REIT's financial health and strategic decisions, enhancing our understanding of the company's position and outlook in the real estate market.
Full transcript - Artis REIT (ARESF) Q1 2024:
Operator: Good afternoon, ladies and gentlemen. My name is Lara, and I'll be your conference operator today. I would like to welcome everyone to Artis Real Estate Investment Trust First Quarter 2024 Results Conference Call. At this time, I would like to turn the conference over to Heather Nikkel. Please go ahead.
Heather Nikkel: Thank you, operator. Good afternoon, everyone. Welcome, and thank you for joining us for Artis REIT's first quarter 2024 results conference call. Our results were disseminated yesterday and are available on SEDAR Plus and on our Web site. 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, Phil Martens. As we discuss our performance today, we want 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 files. 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. Throughout this discussion, 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 Friday, May 31st. 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 Web site. I will now turn the call over to Samir to discuss Airtis' first quarter results.
Samir Manji: Thank you, Heather. Hello, everyone. And thank you for joining Artis' first quarter earnings call. We are pleased to report our Q1 2024 results and provide an update on our progress thus far in 2024. While the real estate sector continues to face pressure related to the current interest rate environment, our board and management team remains squarely focused on levers within our control to achieve our goal of maximizing value for unitholders. With that in mind, we’ve continued to pursue our primary near term objective, reducing leverage and increasing liquidity to strengthen our balance sheet. This objective is key to ensuring Artis is positioned to withstand less favorable market conditions that may continue to impact the real estate sector, including the potential higher for longer interest rate environment. We are executing on strategies designed to achieve our internal targets related to liquidity enhancement, including asset dispositions, refinancing existing mortgages and securing new mortgage financing. So far this year, Artis has unlocked $174.3 million through key asset dispositions, demonstrating the healthy demand for quality real estate despite the challenging interest rate environment. In addition, we have $184.4 million of unconditional Canadian asset sales and $272.9 million of unconditional US asset sales scheduled to close in the coming months. This includes the sale of Park 8Ninety, a significant milestone and addition to our list of unconditional asset sales expected to close in the near term. Collectively, we anticipate that these dispositions will reduce our overall leverage below 45% and will lower our overall borrowing costs moving forward. At the same time, the fact that we are achieving sale prices in line with IFRS provides compelling validation of our $14.6 net asset value per unit. We view in the successful progress of our disposition plan a positive reflection of the quality of our real estate and anticipate that the traction we've been able to achieve with our dispositions will continue through the remainder of 2024. We have ongoing discussions with potential buyers for additional asset sales, the proceeds from which will enable us to continue reducing our overall debt and improving financial flexibility, important steps in navigating the current environment marked by higher interest rates, inflation and market volatility. During the first quarter, we announced that Artis together with our joint actors had increased our ownership position in Dream Office to 16.76%, and subsequent to the end of the quarter had further increased our ownership position to 18.77%. Our investment in Dream Office represents a capital allocation decision that followed the monetization of real estate assets at fair market value. We then allocated a portion of the sale proceeds to a company that we believe is materially undervalued. We see value in Dream Office's portfolio, and more specifically, in the downtown Toronto office market where Dream Office has a high concentration of well located assets. Going forward, we will continue to evaluate our public securities from a capital allocation standpoint as we navigate the current environment and prioritize capital allocation opportunities that will maximize net asset value per unit for our owners. With higher interest rates and other macroeconomic factors impacting the real estate sector, we have been working closely with our lenders to manage our upcoming debt maturities. We have $211.9 million of mortgage debt maturing in the remainder of 2024. We have renewed 14% of these maturities, have extension options in place for 50% of these maturities and anticipate no difficulty in managing the remaining 36% of the maturities in the normal course. With a substantial pool of unencumbered assets in our portfolio, looking ahead, securing new mortgage financing and refinancing existing mortgages will remain an important tool available to us. Turning now to our credit facilities. In Q1 2024, we renewed our $100 million non-revolving credit facility for a two year term, and we are in active discussions with respect to the renewal of our $150 million non-revolving credit facility that expires in July. Also in 2024, the first tranche of the revolving credit facility matures and we are in active discussions regarding this maturity. Our operational fundamentals key to the resilience of any real estate portfolio continue to demonstrate stability quarter-over-quarter. Occupancy rates, including commitments, remained near 91% this quarter. Additionally, lease renewals that commenced in Q1 were negotiated at a weighted average rate increase of 2.2% over expiring rates, continuing a 13 quarter streak of growth in weighted average rental rates secured upon renewal. Year-over-year, same property NOI growth for the three months ended March 31st was strong at 4%. These fundamentals are critical measures of our portfolio's performance and are reflective of the leasing momentum that has been growing over recent quarters, underscoring the foundational strength and potential growth profile of our real estate operations. With respect to our Cominar investment, we continue alongside our partners to collaborate and make progress towards our objectives. To date, we have finalized several additional asset sales with additional transactions in the pipeline. In summary, during the first quarter of 2024, Artis achieved several important internal objectives and generated positive momentum to build on throughout the remainder of the year. Going forward, we will continue with our efforts to strengthen the balance sheet and enhance liquidity. And as our balance sheet and liquidity continue to improve, we will look at capital allocation opportunities that we believe will ultimately grow NAV per unit, objectives that we have been focused on since 2021. We are optimistic about the remainder of 2024 and confident that with the continued execution of our plan we will be able to narrow the gap between the intrinsic value and market price of our units. I will now turn it back over to the operator to moderate the question-and-answer session.
Operator: [Operator Instructions] Our first question comes from the line of Jonathan Kelcher from TD Cowen.
Jonathan Kelcher: First question -- first, congrats on getting Park 8Ninety sold. Would you would you be able to give us a cap rate on that asset?
Heather Nikkel: We can’t actually disclose the cap rate on that asset but we would direct you back to the MD&A. So for US industrial cap rates, they're around 6% and what we can say is that we did slightly better than that.
Jonathan Kelcher: And I guess just looking at your asset sales, you've got another -- you've got 550 unconditional now looks like 300 in the held for sale, and that gets you, I guess, below 45%. What's -- like how much is too much, how much -- like how small will you take this, your investment portfolio?
Samir Manji: Just to be clear, it's not the asset for -- assets held for sale that'll take us sub 45, it's just the 550 approximately Canadian dollar equivalent figure that you referenced, Jonathan, that'll take us sub 45%. And anything above and beyond that will only further improve that objective of ours of lowering our debt to total asset ratio. I think the question related to sort of how low can we go or are we prepared to go? At this point, we're not setting a target. I would suggest that subject to the ability to achieve IFRS values on assets that have been earmarked for disposition or that as is the case from time-to-time we get unsolicited offers on, we're prepared to, as a board and management team, to push the envelope as much as we can to bring that ratio as low as possible. And as I conveyed in my remarks, in doing so to really put Artis in a position of financial flexibility, so that we can then be more opportunistic in the current environment from a capital allocation standpoint.
Jonathan Kelcher: So does that -- can I take that to mean that you might be -- like, you are buying Dream Office units. I guess two things on that. One, is it fair to say that the -- basically all of the equity dispositions that you did in Q1 would be First Capital and then the acquisitions all Dream Office?
Samir Manji: That's a fair assumption.
Jonathan Kelcher: And would you -- if you keep selling here and to improve your liquidity position, would you be looking to ramp up your equities securities program or how do you think about capital allocation going forward?
Samir Manji: From a near-term perspective, Jonathan, I don't anticipate -- we don't anticipate that we're going to be ramping up the public securities investments as opposed to again, from a near term perspective, looking at continuing to monetize assets, continue to delever. If we can take 45% to below 40% then even better. Again, the whole -- the uncertainty that we continue to experience from a macro perspective with respect to interest rates and this higher for longer scenario, we're -- as a board and management team, we're heavily focused on risk mitigation. And we believe just delevering is in and of itself going to enable us to materially reduce Artis at risk. And then, again, we can be opportunistic whether it's two, three, four quarters from now and whether that's opportunistic or those opportunities are through direct acquisitions, whether it's public securities, whatever the different buckets of opportunities are that are out there, we're going to be in a good position to explore any and all possibilities.
Jonathan Kelcher: And then just one last one for me. Just in the cash flow statement, I noticed $50 million addition to joint ventures. Can you give us some color on what that relates to?
Heather Nikkel: That was -- one of our Park 8Ninety properties had a mortgage within the joint venture, and it was a contribution to payout that mortgage prior to acquiring the remaining 100%. So it was on Park 8Ninety. So it wasn't for CapEx, it was just for the mortgage repayment.
Operator: [Operator Instructions] We have our next question coming from the line of Jimmy Shan from RBC Capital Markets.
Jimmy Shan: It also looks that you've had some success on office, the five office assets that you sold fourth quarter. I was wondering if you could provide, similarly like a rough cap rate on those assets?
Heather Nikkel: I don't have a breakdown in terms of cap rate on asset class. But I can say overall on our disposition program, we're achieving a weighted average cap rate of around 6%. So some are a little bit higher, some are a little bit lower, but they're all kind of in and around that 6% mark.
Jimmy Shan: So just to be clear. So that 6% is in reference to entire sales so far year-to-date?
Heather Nikkel: Yes, that's correct.
Jimmy Shan: Including, Park 8Ninety?
Heather Nikkel: Yes.
Jimmy Shan: And then I wondered, maybe, Samir, if you could comment more in general about the investment market today and whether you see -- if it's changed at all, levels of interest, we've seen bond rates being a little bit more volatile. And so maybe anything you could share would be appreciated.
Samir Manji: I don't think I'm going to share anything that's earth shattering here. We're seeing an interesting dynamic at play between Canada and the US, and having exposure in both markets certainly in some respects is beneficial to us. And to be more specific there, it's really interesting. With some of the recent office asset sales and then the upcoming firm retail asset sales on the Canadian side, these are largely all private buyers, family offices that are looking to allocate capital in an environment on the Canadian side where we're not seeing yet any significant institutional buying activity. On the US side, and Park 8Ninety will be the reference point here, it was quite -- it was interesting and quite beneficial to us in that exercise where ultimately, through a multi round process, we had a very strong universe of institutional buyers, including many all cash buyers, and that allowed us to achieve an outcome that we feel very good about. And while the price that we reported on that sale is in line with the with IFRS, that IFRS number for Q1 was marked up, relative to the Q4 IFRS value for that asset. And, again, I think it speaks to what we're seeing on the US side, particularly with respect to industrial appetite and a very, very healthy, sellers market for good quality institutional grade industrial assets. I hope that's helpful.
Jimmy Shan: And then so just to follow-up on this side of the border, you mentioned here it sounds like it's mostly small private buyers. Are you having to provide then the take back financing on those sales? Because presumably, if you can sell them in that 6% range, there's not a lot of spread for the buyer in terms -- not a lot of investing spread. What does that look like in terms of structuring the deal?
Samir Manji: Generally speaking, when it comes to retail assets, these are all cash transactions. There's, generally speaking, very little requirement or need to provide vendor financing. And then as it relates to office assets that we've had some success with, it's been a mixed bag. We've done all cash transactions, i.e., no [VTB]. And then in a couple of instances, in order to achieve a higher price and better overall terms for Artis, we've agreed to carry some vendor financing. But again, it really is case by case. Directionally, we have, obviously, a leaning towards cash transactions versus structured transactions that require vendor financing, but we're going to look at this on a case by case basis.
Jimmy Shan: And then just a couple of small ones. So on 300 Main, was there any NOI contribution in the quarter? And I'm assuming that $10 million that you referenced, $10 million NOI that you talked about last quarter, that's still the case?
Heather Nikkel: Yes, that's correct. So we've done a little bit of leasing over the last couple of months since we had our last call. We're ticking up occupancy. We're starting to work on Phase 2 leasing now. We've released -- in the middle of April, we released 50 suites to the market and we're seeing good leasing momentum on those. So all moving in the right direction. But still really -- the first phase of the building is really the part that's occupied. So we'll start to see more contributions to NOI as we get closer to full occupancy and start leasing up that half of the building.
Jimmy Shan: And then the last one for me is the retail occupancy jumped more than 300 basis points from Q4 to Q1. Can you remind me what that related to?
Heather Nikkel: Retail occupancy moved up…
Jimmy Shan: Yes, moved up. Yes.
Heather Nikkel: Yes, I think it's actually related to the removal of Prairie Ridge, it's moved to underdevelopment. So right now, we're working on redeveloping of the former space that was occupied by peers, we're splitting it into multi tenant space. So that was contributing to occupancy, and so that was really why it moved.
Operator: [Operator Instructions] There seems to be no further questions at this time. 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 lovely day.
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