U.S. Markets closed

Edited Transcript of AX.UN.TO earnings conference call or presentation 10-May-19 5:00pm GMT

Q1 2019 Artis Real Estate Investment Trust Earnings Call

WINNIPEG Jun 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Artis Real Estate Investment Trust earnings conference call or presentation Friday, May 10, 2019 at 5:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Armin Martens

Artis Real Estate Investment Trust - President, CEO & Trustee

* James Green

Artis Real Estate Investment Trust - CFO

* Kim Riley

Artis Real Estate Investment Trust - SVP of Investment & Development

================================================================================

Conference Call Participants

================================================================================

* Jonathan Kelcher

TD Securities Equity Research - Analyst

* Matt Kornack

National Bank Financial, Inc., Research Division - Analyst

* Matt Logan

RBC Capital Markets, LLC, Research Division - Senior Associate

* Neil William Edward Downey

RBC Capital Markets, LLC, Research Division - MD of Global Equity Research and Real Estate Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen. My name is Leonie, and I'll be your conference operator today. At this time, I would like to welcome everyone to Artis REIT's First Quarter 2019 Conference Call. (Operator Instructions) Thank you.

Today's discussion may include forward-looking statements which include statements that are not statements of historical facts and statements regarding Artis REIT's future financial performance and its execution of initiatives to deliver unitholder value. Such statements are based on management's assumptions and beliefs. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. Please see Artis REIT's public filings for a discussion on these risk factors, which are included in their annual and quarterly filings, which can be found on Artis REIT's website and on SEDAR. Thank you.

I would now like to turn the meeting over to Mr. Armin Martens. Mr. Martens, please go ahead.

--------------------------------------------------------------------------------

Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [2]

--------------------------------------------------------------------------------

Thank you, moderator. Good day, everyone, and welcome to our Q1 2019 conference call. So again, my name is Armin Martens. I'm the CEO of Artis REIT. And with me on this call are Jim Green, our CFO; Kim Riley, our SVP of Investment; Jackie Koenig, SVP, Accounting; as well as Heather Nikkel, Vice President of Investor Relations.

So again, thanks for joining us. I'll start again -- as in the past, I'll ask Jim Green to review our financial highlights, and I'll wrap up with some market commentary and we'll open the lines for questions. So go ahead, Jim.

--------------------------------------------------------------------------------

James Green, Artis Real Estate Investment Trust - CFO [3]

--------------------------------------------------------------------------------

Thanks, Armin, and good afternoon, everyone. So as I'm sure the majority of people on this call are aware, our third quarter earnings press release back in November of 2018 announced a series of new initiatives for the REIT. And as this was a relatively quiet quarter and I expect most callers would prefer to spend time on those status update on the initiatives, I'm going to keep my comments on the financial operating results fairly short but happy to answer questions if anybody has detailed questions later.

So Artis is and remains a diversified commercial REIT with assets in the 5 Canadian provinces and 6 U.S. states. Based on our Q1 NOI, the REIT was 53.7% weighted in Canada and 46.3% in the United States. On an asset class basis, it's 53.1% in office, 20.1% in retail and 26.8% in industrial.

We do continue to have a presence in the Calgary office market, although it's becoming a small component of our operations. For Q1, it's down to 6.1% of our NOI. And I'm kind of pleased to say that our MD&A usually discusses our top 5 segments, and Calgary office is no longer one of our top 5 segments. So nice to see that shrinking to a manageable level.

And looking at that Calgary office because it's always a very difficult market, we have relatively small exposure to our current tenant maturities in the near future. We only have roughly 112,000 feet that will mature in 2019 and only 48,000 feet of space in 2020.

Artis has continued to be active in both new developments and redevelopment of our existing properties. We currently have approximately $202 million invested to date in projects currently under development. And during the quarter, we invested about -- $50 million was invested into the development projects this quarter. As detailed in our MD&A, it's several different development projects underway, including a new residential and mixed-use tower in Winnipeg at 330 Main Street, and a new industrial space in Houston, Phoenix and Denver. As detailed in the MD&A, we also have several development projects in the planning stages where we have not actively started construction, and these projects are progressing well through the development stages.

We've been able to maintain the strength of our balance sheet. Debt-to-GBV is up slightly this quarter to 51.7% compared to 50.6% at December of last year. And the main driver of the increase in debt-to-GBV has been timing of the purchases or our planned unit buyback compared to the asset sales, and I'll discuss the asset sales in a little more detail in a minute. So we anticipate bringing that debt-to-GBV back under 50% as the asset sales are completed.

Our EBITDA interest coverage has remained over 3x despite carrying a bit higher debt at the present time. The unit buyback is definitely having an impact, and FFO came in at $0.34 this quarter, up from $0.33 last year. Might be only $0.01, but I'm pretty happy to talk about an increase in FFO because it's been a while since we got to do that. So very pleased to see the impact happening in increases in FFO. AFFO for the quarter was $0.25, actually up $0.01 from last quarter as well but unchanged from Q1 of '18.

Payout ratios are very conservative 41.2% of FFO and 56.0% of AFFO.

So coming back to those initiatives specifically in November 1 of '18, we announced the series of new initiatives in increasing cash flow and increasing unit values and improving the focus on quality of the portfolio. The distribution was reset to $0.54 annually, resulting in a much more conservative payout ratio and freeing up cash to fund our development pipeline.

The plan announced also included noncore asset sales of between $800 million to $1 billion, and this process is well underway. As you may have noted at March 31, we had already moved $518 million of properties into the held-for-sale, and we anticipate most of those will sell over the next 2 quarters. And in the subsequent events section, you'll note one has already closed and further properties have been added to the group of held-for-sale, bringing it up in excess of $800 million. So well along the line of our targeted between $800 million and $1 billion of asset sales. That was sort of a 2- to 3-year target, so we should be well ahead of schedule on getting that done.

Initiatives also included using a portion of the sales proceeds to buy back our units using our NCIB, and we started this immediately after the announcement last November. So from last November when we announced it to March 31, we had purchased 9.1 million units at a cost of just under $94 million. We used our line of credit to fund these purchases and plan on repaying the line as the assets are sold. Unit purchases have continued in April and May using the maximum amount available under our NCIB. So in our opinion, the plan to buy back units is also on track and ahead of schedule.

I'll just touch on a couple more highlights and then pass it back to Armin. Debt-to-GBV I think I covered in my opening comments, so nothing further. Unencumbered assets, the REIT has -- well, we paid off one additional secured mortgage this quarter, bringing the unencumbered asset pool up to $1.9 billion. We have fairly good liquidity. We have a $700 million unsecured revolving credit facility and 2 non-revolving unsecured credit facilities for a further $300 million. The non-revolving facilities are drawn in full with swaps placed to fix the interest rates.

Same-property this quarter we were very pleased with. Positive 5.1% in Canadian dollars, and translating that back to functional currency or the mix dollars of Canadian-U. S., we're still in a positive 2.9%. And we also present a stabilized same-property calculation, which eliminates the property's plan for disposition or repurposing as well as the entire Calgary office sector. And on this basis, growth had -- was 3.3% in functional currency and up to 5.7% once FX was factored in.

Industrial segment continues to show the strongest performance with 3.4% growth in Canada and 10.1% growth in the United States.

Other comments would be the net asset value. We report our investment properties at fair value under IFRS and accordingly can calculate a net asset value per trust unit, so simple calculation of taking the equity on the balance sheet less the equity held by preferred unitholders and dividing by the number of common units outstanding at the quarter. The net asset value per trust unit came in, interestingly enough, at $15.55, which is exactly unchanged from last quarter, although there were a number of movements in both directions, specifically foreign exchange. The Canadian dollar strengthened a little bit during the quarter from where it was at year-end, so there was a decrease in NAV of roughly $0.16 from foreign exchange conversions. The distributions were -- based on the units outstanding at the end of the quarter, a reduction in net asset value of roughly $0.16 as well.

Comprehensive income in excess of the fair values in foreign exchange and financial instruments kind of the noncash items was a $0.34 positive, and we had a gain from the preferred units we canceled of roughly $0.02 and roughly $0.18 on gain from the NCIB on the common trust units. So a whole bunch of things moving now in both directions, and it still comes in at the exact same number as Q4.

So I think that's about it. We ended the quarter with pretty good liquidity. We had $51 million of cash on hand and $190 million undrawn on our line of credit and several events detailed in the subsequent events note, which we believe continue to reflect the strategy of intelligent recycling of capital, plan to focus on the strong balance sheet and the overall quality of the portfolio.

And that pretty much completes my financial review, so I'm going to turn it back to Armin for some further discussion. Thanks.

--------------------------------------------------------------------------------

Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [4]

--------------------------------------------------------------------------------

Okay. Thanks, Jim. So folks, on balance sheet, I'd say we feel off to a very good start this year. We're working hard on all fronts and feel we're getting good traction and making good progress for our unitholders.

So again, let me call some key strategic initiatives that we announced in Q3 last year, and we're pleased to report that things are going well on all fronts. First of all, the distribution has, of course, been reset to a stabilized AFFO payout ratio of under 60%. And this is in fact the lowest payout ratio in the REIT sector. Given our earnings profile, we feel this is quite a bulletproof payout ratio right now.

Our unit buyback program has, of course, been active and successful. Our 2-year target was to buy just 23.5 million units at an average price of $11.50, and to date, we're already about halfway there, however, at an average price of $10.35. So needless to say that we're pleased with our progress and it's highly accretive to be buying back at the price we are right now and puts us -- this also again puts us well ahead of plan.

Property dispositions, I think this program is making good progress. Our target is to sell $800 million to $1 billion of noncore properties over the next 3 years. A lot of wood to chop here, but we've done it before, and we are doing it again. Thus far, about 20 listing agreements have been signed, 5 properties sold for about $200 million, 7 more under conditional contracts for about $330 million and active negotiating is taking place on several more properties. We're confident being able to sell over $600 million of properties this year alone on time and on price to correspond with the IFRS NAV of over $15, which again would put us well ahead of plan. And nobody should be surprised if we do even better and finish it all in -- by the end of this year and at least in principle.

So meanwhile, our portfolio is performing well. Our earnings profile is improving. The office markets that we're in are somewhat inconsistent. But this is a year, folks, this is a year that our Calgary office portfolio will stabilize and begin contributing to our organic growth even if just a little. Meanwhile, our retail and industrial portfolios have a very good track record and continue to deliver organic growth, and our industrial development pipeline is on track to deliver good results as well. We invite you to look again at our MD&A and investor presentations for more information here.

So looking ahead, we will continue to work hard to keep our buildings full whilst bringing the rents up to market consistently -- and consistently streamline and improve the real estate portfolio. To be clear, integrity of our balance sheet, our credit rating and implementing our new strategic initiatives is of utmost importance to us.

Brief word about our special committee that we announced has been formed. So the Board has formed a special committee of 5 independent trustees to review and consider strategic alternatives in addition to the initiatives that we're implementing now. Again, it's all about maximizing unitholder value.

If you look at our improved earnings profile and our portfolio, we have almost $2 billion of great industrial properties. We've got $1 billion of well-performing retail properties, about $3 billion of stabilized office properties. If you look at these sectors, we're trading at a multiple of 10 to 11x AFFO compared to industrial REITs trading at 16; office, 17; retail, 14. So we're not even close to a multiple of one of the asset classes that we own. So this mispricing is not only silly, it's also annoying, and the Board is going to work hard and the management team, of course, will work hard to narrow the gap between our current price and our true value.

So that's enough on that front. Again, that's our report for this quarter, folks. We're pleased with the results and the progress we are making on all fronts and, of course, confident in our outlook.

I'll now ask the moderator, Leonie, to take over and field your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question is from Jonathan Kelcher from TD Securities.

--------------------------------------------------------------------------------

Jonathan Kelcher, TD Securities Equity Research - Analyst [2]

--------------------------------------------------------------------------------

First question, just on the special committee. Was that formed in response to anything in particular? Or is that more of a proactive -- or more on a proactive basis?

--------------------------------------------------------------------------------

Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [3]

--------------------------------------------------------------------------------

A combination. In principle, proactive. We've -- we announced our distribution cut and our new initiatives in Q3 last year. We're trading at $11 range then. And even though we've been buying back our units, Jonathan, at a weight of 3x, 3x the value of our distribution cut, we're still trading below where we were when we first cut. So that's just not good. We've been monitoring that. We're surprised that we even went down. So that's one thing -- one consideration. And then the other consideration is yes, there have been some inbound calls and interest expressed in the REIT and so it behooves the Board to be proactive and stay in front of that kind of activity.

--------------------------------------------------------------------------------

Jonathan Kelcher, TD Securities Equity Research - Analyst [4]

--------------------------------------------------------------------------------

Okay. Are you guys -- are you negotiating anything right now?

--------------------------------------------------------------------------------

Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [5]

--------------------------------------------------------------------------------

No, no, no. Nothing. Nothing to announce on that front. We will -- the Board has not yet engaged financial adviser. They'll be going through that process, that will take 30 to 60 days. And I think at Q2, you'll hear a lot more about the steps being taken, but we are not negotiating with anybody right now.

--------------------------------------------------------------------------------

Jonathan Kelcher, TD Securities Equity Research - Analyst [6]

--------------------------------------------------------------------------------

Okay. Fair enough. And then just -- you're up to the $800 million, I guess, and -- over $800 million in assets held for sale. Couple of questions on that. Does the -- do the assets held for sale, does that include any of the ones where you were looking to get rezoning done and then you were going to list them, I think 415 in Yonge and couple of the others?

--------------------------------------------------------------------------------

Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [7]

--------------------------------------------------------------------------------

The answer is yes, for sure, yes. And there's great interest in these properties even before we get the rezoning, and so they're definitely on the table.

--------------------------------------------------------------------------------

Jonathan Kelcher, TD Securities Equity Research - Analyst [8]

--------------------------------------------------------------------------------

Okay. And then secondly, how much NOI would be associated with the -- or current NOI would be associated with the assets held for sale?

--------------------------------------------------------------------------------

Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [9]

--------------------------------------------------------------------------------

Maybe we'll just give you a rough cap rate instead.

--------------------------------------------------------------------------------

Jonathan Kelcher, TD Securities Equity Research - Analyst [10]

--------------------------------------------------------------------------------

All right. Either/or, it's just for modeling that.

--------------------------------------------------------------------------------

Kim Riley, Artis Real Estate Investment Trust - SVP of Investment & Development [11]

--------------------------------------------------------------------------------

Maybe a rough calculation here.

--------------------------------------------------------------------------------

Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [12]

--------------------------------------------------------------------------------

Kim will give you the number. I mean...

--------------------------------------------------------------------------------

Kim Riley, Artis Real Estate Investment Trust - SVP of Investment & Development [13]

--------------------------------------------------------------------------------

I'm getting a number around $40 million, around $40 million of NOI for properties held for sale.

--------------------------------------------------------------------------------

James Green, Artis Real Estate Investment Trust - CFO [14]

--------------------------------------------------------------------------------

Are you talking the whole $850 million? I think if you include the stuff transferred afterwards, it's from -- it may be a little higher than that, Kim. I think we're closer to the $48 million range on the entire bucket of properties that have been transferred into held for sale.

--------------------------------------------------------------------------------

Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [15]

--------------------------------------------------------------------------------

Okay. About $48 million.

--------------------------------------------------------------------------------

Jonathan Kelcher, TD Securities Equity Research - Analyst [16]

--------------------------------------------------------------------------------

Okay. And that would include the stuff that's sold post Q1, right?

--------------------------------------------------------------------------------

Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [17]

--------------------------------------------------------------------------------

Correct.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

(Operator Instructions) Your next question is from Matt Logan from RBC Capital Markets.

--------------------------------------------------------------------------------

Matt Logan, RBC Capital Markets, LLC, Research Division - Senior Associate [19]

--------------------------------------------------------------------------------

You guys are off to a great start with your disposition program. Can you talk a little bit about what your plans are for the proceeds this year when some of those funds start rolling in?

--------------------------------------------------------------------------------

Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [20]

--------------------------------------------------------------------------------

So we'll continue maximizing our unit buyback. It's an automatic unit buyback. And when we get opportunities, and we do, we'll look at a block sale across as well. As we get near to, say, 3 -- it's a function of the unit price, how high we're trading as well as the number of things we bought back. But the next is debt reduction. We want a debt -- first goal is to keep it below 50%, of course, the GBV, and then we want to get it closer to 45%. And then after that, an SIB is not off the table. But with a very conservative payout ratio we have, the next thing is to make sure I've done this on the conservative side as well and then we look at other alternatives.

--------------------------------------------------------------------------------

Matt Logan, RBC Capital Markets, LLC, Research Division - Senior Associate [21]

--------------------------------------------------------------------------------

And the SIB, would that be a consideration after you guys get below 50% or after you get below 45%?

--------------------------------------------------------------------------------

Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [22]

--------------------------------------------------------------------------------

I'd say somewhere between 45% and 47%, that kind of thing.

--------------------------------------------------------------------------------

Matt Logan, RBC Capital Markets, LLC, Research Division - Senior Associate [23]

--------------------------------------------------------------------------------

Okay. And if you manage to sell all -- the bucket of held-for-sale assets this year, do you think there would be more as we move into 2020?

--------------------------------------------------------------------------------

Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [24]

--------------------------------------------------------------------------------

Not necessarily. I we get to -- we can go up to about $1 billion. We have to watch our EBITDA and our debt metrics. Maintaining our investment-grade credit rating is still job 1 for us. We don't want to give that up. So I don't see us selling more without a good reason.

--------------------------------------------------------------------------------

Matt Logan, RBC Capital Markets, LLC, Research Division - Senior Associate [25]

--------------------------------------------------------------------------------

And I guess lastly, in terms of the cadence of some of the transactions closing, how should we think about that in the balance of 2019?

--------------------------------------------------------------------------------

Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [26]

--------------------------------------------------------------------------------

Sorry, the...

--------------------------------------------------------------------------------

James Green, Artis Real Estate Investment Trust - CFO [27]

--------------------------------------------------------------------------------

(inaudible) how close -- how quickly you close on that.

--------------------------------------------------------------------------------

Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [28]

--------------------------------------------------------------------------------

The pace, yes. Well, for us, deal certainly is #1. If they take a little time closing, it's not the end of the world because we'd still enjoy the NOI. I think on balance, 3 quarters would -- there will always be something closing the following year, right, if you look at the whole package and it's always closing -- it's always taking a little longer sometimes. But sort of -- that's not a problem at all. Once we've got certainty on the deal, a nonrefundable money in our pocket as a minimum, we'll be able to move forward with the -- we continue -- can continue to move forward with the unit buyback. And then as the money comes in, we'll use it to pay down debt. So it will be lumpy, but -- so there might be a 90-day to even 180-day trailing in terms of some closings, but at least we have deal certainty.

--------------------------------------------------------------------------------

Matt Logan, RBC Capital Markets, LLC, Research Division - Senior Associate [29]

--------------------------------------------------------------------------------

Of course. Totally makes sense. And in terms of your development spending, do you think the $50 million invested this quarter would be a good run rate for the balance of the year?

--------------------------------------------------------------------------------

James Green, Artis Real Estate Investment Trust - CFO [30]

--------------------------------------------------------------------------------

It will probably be lower than that. There are some developments, there's -- the Phoenix one is now done. The -- one of the ones in Houston is almost done. Tenant will take occupancy in May -- June, I think. So anticipate it will be a little smaller in Q2 and probably even smaller yet again in Q3.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

Your next question is from Matt Kornack from National Bank Financial.

--------------------------------------------------------------------------------

Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [32]

--------------------------------------------------------------------------------

Just a follow-up on that line of questioning. With regards to the development timing, how much has been spent on those projects that are about to come online? And what was the yield on that investment?

--------------------------------------------------------------------------------

Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [33]

--------------------------------------------------------------------------------

Do you have a number, Kim?

--------------------------------------------------------------------------------

Kim Riley, Artis Real Estate Investment Trust - SVP of Investment & Development [34]

--------------------------------------------------------------------------------

I don't know off the top of my head. I don't have [totals], no.

--------------------------------------------------------------------------------

Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [35]

--------------------------------------------------------------------------------

The development. For development, on industrial, the development yields are coming in north of 7%.

--------------------------------------------------------------------------------

James Green, Artis Real Estate Investment Trust - CFO [36]

--------------------------------------------------------------------------------

I was going to say generally hitting a little above the 7% yield on the industrial developments in the U.S.

--------------------------------------------------------------------------------

Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [37]

--------------------------------------------------------------------------------

And you've spent about, I guess, over -- it's ramped up over the last few quarters and I guess it's -- industrial doesn't take too long to build. So I guess we should assume sort of $100 million to $200 million, with that type of yield over the course of 2019. Is that a -- I know that's a broad range, but...

--------------------------------------------------------------------------------

Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [38]

--------------------------------------------------------------------------------

I don't think it'll be that much. I mean Denver is half-built right now, and that's 220,000 square feet. And Houston with Phase 2 and 3 are done. We're getting ready to build build-to-suit for another -- for a large credit tenant there, another 100,000 square feet. I don't think -- it won't be that much. But to Jim's point, Q2 and 3 will be a bit lower, and I think Q4 will be back up as we ramp up another phase in Houston. I just want...

--------------------------------------------------------------------------------

Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [39]

--------------------------------------------------------------------------------

Fair enough. And then...

--------------------------------------------------------------------------------

Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [40]

--------------------------------------------------------------------------------

Go ahead.

--------------------------------------------------------------------------------

Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [41]

--------------------------------------------------------------------------------

No, sorry, I was going to completely change, so if you have something else to add on that.

--------------------------------------------------------------------------------

Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [42]

--------------------------------------------------------------------------------

Just to say it's just hard for us to predict because the timing of the next start of another phase, that can vary. But go ahead.

--------------------------------------------------------------------------------

Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [43]

--------------------------------------------------------------------------------

Fair enough. I mean if at some point, when you look at your MD&A disclosure, if it's possible to give a sense of how much has been spent versus cost to complete and yield on the total project, it would just make our lives a little easier for modeling it. But just to note. And then with regards to CapEx on the remainder of the portfolio, it seems to have come down, maybe that's a function of you sold some assets in areas that were more difficult to lease. But what's your view on CapEx for the overall portfolio as well, including leasing costs?

--------------------------------------------------------------------------------

James Green, Artis Real Estate Investment Trust - CFO [44]

--------------------------------------------------------------------------------

We're budgeting less this year than last year. I think our CapEx budget is down fairly substantially from last year.

--------------------------------------------------------------------------------

Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [45]

--------------------------------------------------------------------------------

Yes. And part of that is to shrinking our office portfolio and in particular our Calgary office portfolio.

--------------------------------------------------------------------------------

Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [46]

--------------------------------------------------------------------------------

Fair enough. No, that makes sense. And in terms of after sort of the pro forma Artis, what does it look like? And what's your outlook, I guess, once you've gone through this, what you want to be? Do you want to be more development focused? Are you going to be in Western Canada and U.S. entity? Just interested in the overall sort of theme to Artis going forward.

--------------------------------------------------------------------------------

Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [47]

--------------------------------------------------------------------------------

Yes. At the end of the plan, you'll see us go from 45% Canada to -- 45% U.S. up to 50 -- even 55% U.S. just by virtue of the fact that we're selling mainly Canadian properties. In terms of what we're selling, it's office and retail, no industrial at all, and we want to grow industrial on the development side. We don't see ourselves with our cost of capital being able to afford to buy industrial, but we can develop slowly but surely a new generation of industrial. It's all the -- our properties are performing very well, and again, it yields north of 7%.

So looking -- at the end of the plan, you can see us doing 55% U.S., 45% Canada. See us doing 40% industrial and 15% retail, and that brings it down to about 45% office after that. And we'd still be diversified in order to maintain the credit rating. For us to do anything more strategic after that involves the whole REIT or involves big chunks of the REIT portfolios at the REIT and also rethinking our line of credit and things like that.

--------------------------------------------------------------------------------

Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [48]

--------------------------------------------------------------------------------

Fair enough. Okay. No, that makes sense. And then just one quick point of clarification. So $48 million on $850 million total sales, so about a 5%, 6% cap rate on what you've sold or in the process of selling at this point.

--------------------------------------------------------------------------------

Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [49]

--------------------------------------------------------------------------------

Right. Again, it's fixed. It's still lumpy. Some of these things are coming in below our IFRS NAV and some are coming in above, but on balance, the cap rate is going to be in the sub-6% on balance, right? So that makes it very accretive to be selling these assets.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

(Operator Instructions) Your next question is from Neil Downey from RBC.

--------------------------------------------------------------------------------

Neil William Edward Downey, RBC Capital Markets, LLC, Research Division - MD of Global Equity Research and Real Estate Analyst [51]

--------------------------------------------------------------------------------

Just given the accelerating cadence of the disposition program, are there any tax constraints or any tax factors that we should be cognizant of this year? And if the pace of this program even exceeds your $600 million expectation, is tax in any way a governor? Like you would consider having to push some sales into 2020?

--------------------------------------------------------------------------------

James Green, Artis Real Estate Investment Trust - CFO [52]

--------------------------------------------------------------------------------

Just one qualification on that, Neil. As long as we can get the remaining Calgary office buildings done this year, then the tax will be (inaudible). If the Calgary office moves into next year, then there could be some tax impact this year.

--------------------------------------------------------------------------------

Operator [53]

--------------------------------------------------------------------------------

There are no further questions at this time. Please proceed.

--------------------------------------------------------------------------------

Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [54]

--------------------------------------------------------------------------------

Okay. Well, thanks again, everyone, for joining us on this call. We know it's a busy time of the year again, so we wish everybody a happy Friday and a great weekend. We'll talk soon. Bye-bye.

--------------------------------------------------------------------------------

Operator [55]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes your conference call today. We thank you for participating and ask that you please disconnect your lines.