Artis Real Estate Investment (OTC:ARESF) Trust (REIT) has reported its second-quarter results for 2024, emphasizing its strategic focus on strengthening the balance sheet and enhancing liquidity in the face of ongoing challenges in the real estate sector. Despite interest rate cuts by the Bank of Canada, the company has continued its disposition plan, selling a significant amount of real estate and expecting further sales in the upcoming months.
Artis REIT has also managed its debt effectively, with a notable decrease in the debt to gross book value ratio and anticipates leverage to drop below 45%. Operational performance remained stable with occupancy rates over 90% and a continued increase in weighted average rental rates upon lease renewal.
Key Takeaways
- Artis REIT focused on balance sheet strength and liquidity amid real estate sector headwinds.
- Sold properties totaling $292.4 million in Q2, with $651.6 million in sales for 2024.
- Anticipated asset sales expected to reduce overall leverage to below 45%.
- Occupancy rates remained over 90%, with lease renewals showing a 3.1% rate increase.
- Artis REIT's Board is pursuing strategic alternatives to unlock and maximize unitholder value.
Company Outlook
- Artis REIT plans to continue reducing debt and leverage, aiming for a leverage ratio below 45%.
- The company will focus on growth opportunities to increase net asset value per unit.
- Artis REIT expects positive impacts from the lease-up of 300 Main and increased NOI.
Bearish Highlights
- The real estate sector is facing near-term challenges despite interest rate cuts.
- Artis REIT incurred additional costs related to the special committee's strategic review.
Bullish Highlights
- Artis REIT's disposition plan has been successful, indicating the high quality of its real estate portfolio.
- The company's debt management strategy has been effective, with a decrease in debt to gross book value.
- There is strong interest in Artis REIT's asset sales, suggesting robust market demand.
Misses
- No specific financial performance misses were disclosed in the earnings call.
Q&A Highlights
- The special committee's strategic review process is ongoing, with an update expected in the next one to two quarters.
- An incentive fee related to a development initiative will be fully recognized in the coming quarters.
- Artis REIT clarified that the recognized incentive fee is separate from property-level NOI.
Artis REIT (ticker: AX.UN), with a focus on maintaining a strong balance sheet and liquidity, has navigated through the current economic environment by actively managing its real estate portfolio and debt maturities. The company's strategic initiatives have been geared towards unlocking and maximizing value for unitholders, as reflected in the successful sale of properties and the reduction of leverage. The Board's commitment to exploring strategic alternatives suggests a proactive approach to enhancing shareholder value amidst market challenges. As Artis REIT continues to execute its strategic plan, investors and stakeholders will be looking forward to further updates on the strategic review process and the company's growth trajectory in the real estate sector.
InvestingPro Insights
Artis Real Estate Investment Trust has demonstrated a commitment to maintaining a strong balance sheet and managing its debt, as highlighted in the recent earnings report. These efforts are reflected in the InvestingPro Data, showing a moderate level of debt and a consistent strategy of rewarding shareholders with dividends.
InvestingPro Tips for Artis REIT indicate a long-standing history of dividend payments, with the company maintaining dividend distributions for 21 consecutive years. This consistency is a positive signal for investors looking for stable income, especially in a fluctuating real estate market. Moreover, Artis REIT's significant dividend yield of 9.09% stands out as a compelling feature for income-focused investors. For those interested in a deeper dive into Artis REIT's financial health and strategic positioning, InvestingPro offers additional tips on their platform.
From a valuation standpoint, the P/E ratio of -2.21 suggests that Artis REIT is not profitable over the last twelve months as of Q1 2024. This metric, paired with a poor free cash flow yield, indicates potential concerns about the company's current profitability and cash generation capabilities. However, the company's strategic dispositions and focus on reducing leverage aim to improve these financial metrics over time.
Key InvestingPro Data for Artis REIT includes:
- A market capitalization of $506.11 million USD, reflecting the company's size in the real estate investment trust market.
- Revenue growth of 13.38% in the last twelve months as of Q1 2024, signaling an ability to increase earnings despite market headwinds.
- An operating income of $79.36 million USD in the same period, which is significant for evaluating the company's core operational efficiency.
Investors can access a comprehensive list of InvestingPro Tips for Artis REIT at https://www.investing.com/pro/ARESF, which includes further insights into the company's financial performance and market positioning.
Full transcript - Artis REIT (ARESF) Q2 2024:
Operator: 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 Artis Real Estate Investment Trust Second Quarter 2024 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Heather Nikkel. You may begin your conference.
Heather Nikkel: Thank you, operator. Good afternoon, everyone. Welcome, and thank you for joining us for Artis REIT's second quarter 2024 results conference call. Our results were disseminated yesterday and are available on SEDAR and on our website. With me on today's call is Artis' President and CEO, Samir Manji; CFO, Jaclyn Koenig; COO, Kim Riley; and Executive Vice President U.S. Region, Phil Martens. 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. Throughout this discussion, please note that all figures will be presented in Canadian dollars unless otherwise specified. Before we proceed, I would like to note that a replay of this conference call will be available until September 9. 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 Samir to discuss Artis' second quarter results.
Samir Manji: Thank you, Heather. Hello, everyone, and thank you for joining Artis' 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 unitholders, 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. In the second quarter of 2024, we sold two office properties in the United States and three office properties, six retail properties, and a partial 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 8Ninety, 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. 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 Artis. 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. We have extension options in place for 41%, and we anticipate no difficulty in managing the remaining 24% of maturities in the normal course. Artis' $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 unitholder value. 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 30. 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%. We are exploring all options available with respect to this investment. In terms of our Cominar investment, we, alongside our partners continue to make progress towards additional sales of noncore 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 30, from 50.9% at December 31. 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%. 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. 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 2, 2023, Artis' 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 unitholders. 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. 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 unitholders 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.
Operator: Thank you. [Operator Instructions] Your first question comes from Jonathan Kelcher from TD Cowen. Please go ahead.
Jonathan Kelcher: Thanks. Good afternoon. First question, and I don't think I'll get a huge response on this. But on the strategic - or the special committee strategic review, Samir, another $500,000 in costs or so this quarter. How long will that committee remain in place?
Samir Manji: Yes. 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 we'll be able to provide a further update on that within the next one or two quarters.
Jonathan Kelcher: Okay. Now is it like - if I recall back a year ago, like it doesn't seem to me that like your - the strategy that you guys had doesn't seem all that different than what you guys have done with that - with the special committee in place. Am I right in reading that?
Samir Manji: Yes, that's - yes, Jonathan, that's a fair comment. Hindsight is 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 advisers pointed to certain specific avenues that made practical sense that have been executed upon that, we touched on in the narrative just now. 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.
Jonathan Kelcher: Okay. Fair enough, and I agree. Hindsight is definitely not in 2020 or is 2020. Just next on the incentive fee that I don't think it was disclosed the exact amount, but 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?
Samir Manji: Yes. 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 "lumpy" income. It relates to a development initiative that we have been successful in executing upon and that attached to it provided Artis 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 decided to capture in the quarter.
Jonathan Kelcher: Okay. So when the asset closes this quarter or Q4, whenever that one closes, we'll get the full amount then?
Samir Manji: Yes - correct. There's mechanics in place that enable us to then fully recognize and receive the total fee payable to Artis, and we expect that we should see that come to fruition in the next one or two quarters.
Jonathan Kelcher: Okay. And even though that's an NOI, that doesn't count as any sort of same property NOI, correct?
Samir Manji: No. This is separate from property level NOI.
Jonathan Kelcher: Okay, thanks. I'll turn it back.
Samir Manji: Okay. Thanks, Jonathan.
Operator: [Operator Instructions] And there are no further questions at this time. I will turn the call back over to Heather for closing remarks.
Heather Nikkel: Thank you, operator. That concludes Artis' Q2 results call. We appreciate you taking the time to join us today. Have a nice weekend.
Operator: Ladies and gentlemen, this concludes your conference call for today. You may now disconnect your lines. Thank you.
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