RFA Financial Inc. (RFA) Earnings Call Transcript & Summary

Any opposed? [Voting]

None opposed. Thank you. I declare that motion carried. The next item of business is to consider a resolution approving the adoption of a fourth amended and restated unitholder rights plan agreement as detailed in the management information circular. I have requested that Bruce Jack move and Armin Martens second the following motion: be it resolved that: a, the fourth amended and restated unitholders rights plan agreement to be dated on or about September 24, 2020, be and is hereby approved, which will renew the existing unitholder rights plan of Artis with such nonmaterial amendments as may be approved by the Chairman of Artis for a period commencing on the date of this meeting and ending on the date of Artis' annual meeting of unitholders to be held in 2023; and b, any one trustee or officer of Artis be and is hereby authorized and directed to execute and deliver on behalf of Artis all such agreements and documents and to do all such acts and things, as in the opinion of such trustee or officer may be necessary or desirable to give effect to the foregoing. Bruce? Thank you. Armin?

Second.

Thank you. Any questions on that? No questions. All those in favor, please indicate. [Voting]

Any opposed? [Voting]

None opposed. Thank you. I declare that motion carried. Now this concludes the formal business part of the meeting. I'd now call on Armin Martens to present and address questions. There have been no questions submitted in advance. However, questions from the floor may still be asked. Armin?

Very good. Thank you very much, Ed. And thank you, again, everyone, for joining us today at our 2019 AGM. We're already in the second half of 2020 and might have forgotten, but last year was a good year. We'll talk about it a little bit and maybe more primarily, and then we'll talk about the present and what we're thinking about for next year as well. So first, as always, we'll talk a little bit about Artis REIT, what we are as an investment vehicle, the year behind us and the year we're in and the year ahead. So again, folks, when you're investing in Artis REIT, you are investing in a diversified commercial REIT. We find ourselves saying, we're not your typical diversified REIT anymore. We're not your grandmother's diversified REIT anymore. We're primarily industrial and office and only 17% retail. Our retail is primarily needs-based retail, very good retail, performing well. And our office is primarily suburban office, which also performing well, particularly in this paradigm shift we're experiencing now. Industrial always performed well and continues to do well. We invest in capital cities. By that, we mean provincial capitals or state capitals and also where universities are based. These are significant drivers of real estate valuation. We have, of course, a very robust yield, a reliable yield, what we call bulletproof payout ratio of 52%. That's one of the lowest of the commercial REITs. Cash yield is over 6%. Our AFFO yield is double digits, very good situation. We continue to maintain our investment-grade credit rating, which we feel is a seal of approval for the REIT. And we are creating value through development. I'll talk about that more a little bit later, but we have an excellent track record of creating value through our industrial development pipeline that's significant. It can be a relatively high unlevered yield and very high IRR. So this map shows you what we own and where we own it. Our retail properties are in Western Canada, which is a good focus for us. Our office and industrial are in Toronto, Winnipeg, Regina, Saskatoon, Calgary, Edmonton and Vancouver. And in the United States, we're down in the central corridor, if you will, in Madison, we're in Minneapolis, we're in Denver, we're in Phoenix and we're in Houston. So about 216 properties, about 24 million square feet, $5.4 billion of book value, and of course, a fully internalized management platform. The pie chart show you where we were at the end of last year 2019, and how we've moved forward for the first half of this year. On the left, you can see we're at 18% retail. Today, we're at 17%. Office was 49%. We brought it down to 48%. And we moved industrial up from 33% to 35%. All steps in the right direction in terms of improving our portfolio and our growth profile. This table here shows you the sum of our parts, the office valuation, the retail valuation and industrial valuation and how it corresponds to our book value and our net asset value or NAV per unit. So the left column, you see office is 48% of our NOI. On the far right, you see $2.6 billion in value. Retail, 17% of our NOI. In the far right, you see $0.8 billion of our value. Industrial is 35% of our NOI. In the far right, almost $2 billion of our value, adding up to $5.4 billion in book value, which translates, if you look in the center of that table, at the bottom center, that translates to a net asset value of $15.40 per unit. This is important. It's quite higher than what we're trading at and higher than analysts' NAV for us, but this is a NAV that we continue to deliver on. We've sold over $1 billion of properties in the last 2 years, and we continue to sell at a price that correspond to our NAV of $15.40. That's a pretax NAV, but we're hitting that number day in and day out. And right now, as we speak, we have properties under contract at that same price per unit. This bar graph will show you then the year behind. You can see 2018 and '19 being compared there. 2019 was a good year for sure. We increased our FFO and our AFFO per unit by about 8%. On the far right, you can see what the analysts are projecting for this year. Now we're already, we printed 2 quarters already folks. We're into our third quarter now. We feel comfortable with being able to achieve analysts' NAV. It's a little bit lower than what we achieved last year. But given that this is a once in 100-year pandemic we're experiencing, these will be very good results for us. And if we hit these numbers, I think we can congratulate ourselves and the market will be very pleased with those kind of results in this kind of an economic environment. In the bar graph, again, this was a good year, 2019. The red line shows you how Artis performed last year in total unitholder returns. So we did deliver 35% total return to our investors last year. And we beat all of our peers. Our peers are the other diversified REITs, other diversified such as Cominar, it's H&R and it's Morguard. And we also benchmark ourselves against the TSX REIT Index, which is there in green. So that was a very good year for us, but it's behind us now. And this year-to-date is a much more sobering year for us, on the next slide you'll see. And we're still beating our peers by a lot, but we're just barely even with the REIT index so far. We're optimistic that as we continue to deliver good results 1 quarter at a time that those things will improve for us. But it is a different year this year. I think we all know that. We want to take the next couple of slides here to remind ourselves of the great quality of properties that we own. We own very good, institutional caliber real estate. And we've classified them in 3 different categories, about $4 billion in core assets that we want to own, manage and grow long term and about $200 million in development assets. Again, we have a very good track record of creating value by doing greenfield development, primarily industrial. And we have noncore assets of about $1 billion. These are assets that we have been selling. We're about 3/4 of the way through this selling, buy back our units and pay down our debt and streamline the REIT and improve our growth profile. This slide shows an example of some of the core assets we are holding with 8 different pictures there. Upper left is our head office for the U.S. It's located in Scottsdale, Arizona, a LEED Platinum building. The next building is a LEED Gold building in Winnipeg, the TD Bank building. We all know that one. And we have a LEED Silver building, the Cara Foods building in Toronto. There on the far right you see a retail property in Calgary that's performing very well. Bottom right in the left, you see 2 industrial buildings that we developed ourselves, one in Minneapolis and one in Toronto. And bottom middle is an office building in Denver and another suburban office building in Minneapolis, all great real estate. This slide gives you an example of some of the completed industrial developments that are in our portfolio. These are Class AA institutional caliber industrial developments. We've developed them from scratch. We achieved an unlevered yield of about 7%, IRR of over 30%. Moving forward, you'll see us developing more properties, and we'll be partnering with some institutional investors. These are global players, by the way, with household names who want to invest with us because they have confidence and they see what we've done, they know what our track record is, they have confidence in our platform, our ability to create value in the industrial development sector, so stay tuned on that front. So now we'll move to 2020 and talk a bit about that. We've heard the expression, what a difference a year makes. And we can also say what a difference a 100-year pandemic makes. And there has been a paradigm shift that's affected all kinds of real estate, ranging from hotels to personal care homes and then, of course, to the real estate we own. We own office, retail and industrial, and there's been a paradigm shift. Look to the right, a couple of boxes on the right of this slide. We make the point, and we stressed this at our Q2 conference call already, that we have turned the pandemic corner. It really isn't our pandemic. It affects a lot of REITs. It's not our pandemic. We've turned the corner. Leasing has improved and is stabilizing. Rent collections are back up to 97%. Income is trending up. Our retail rent collections are at 95% for goodness' sake. It's very good. Office at 97%, industrial at 98%, things are going very well for us, and we're optimistic that our NOI will be increasing and trending up. Our portfolio is the right portfolio. It's a great REIT. Industrial, of course, performing well on both sides of the border. Our retail is needs-based retail. That's performing well. And our office is primarily suburban. It used to be a bit of a negative. Now it's a big positive because there is a paradigm shift in favor of suburban office performing well. We virtually do not have -- we do not have any tenant subleasing their space in any of our office buildings because of the COVID-19. So back to the paradigm shift, I'll talk a bit about office first. There will be more WFH, which is not a swear acronym. It means work-from-home, but there will be more work from home, but not so much because creativity matters, productivity matters, teamwork matters, mentorship matters, so many things matter and quality of life matters. Not everybody wants to work from home, it's overrated. We'll see more and more work at the office happen, but we should expect to see office tenants settle down and stabilize at, say, 1 to 2 days of working from home per week. We should also expect in terms of a paradigm shift office tenants to need more space per employee, and this is what the science tells us. So we'll remind the tenants of that as they renew their leases. We should also expect, therefore, demand for suburban office space to increase, and this is happening real-time. As tenants need more space, it's a lot cheaper to rent suburban space. The parking is cheaper if it's not free, and it's all closer to home. Well, being closer to home is not such a bad thing in this environment. And in that sense, there's been a paradigm shift for office. So retail has been -- we've all experienced the shock effect. You can make the case that peak online shopping has transpired because the economy shutdown, all shut it down and maximum online shopping took place. And now we're going the other direction as the economy opens up, and people are shopping more in person. They also like doing that. So I think we're close to equilibrium, equilibrium in terms of online shopping and in-person shopping, which will be good for the retail sector, retail landlords to get there instead of taking a long way there. We need to remember that not all retail is bad retail. Needs-based retail will always be in demand because the shopping has to be done in person, and it really is a key to showcase industrial, which is a good asset class. In terms of industrial real estate, well, we could talk a long time about it. But basically, industrial, the tide is lifting the industrial ship, all asset classes of industrial, all forms of industrial reality are performing well. So lease rates and pricing are right back to pre-COVID times and improving. Industrial has benefited from this paradigm shift as a result of COVID-19 experience or effect. So looking ahead, I do want to make mention, 2 weeks ago, announced a strategic initiative, a very major one. Artis announced the spin-off of retail portfolio into a pure-play retail REIT. Look at the right side of this slide, the bar graph indicate an example of our rationale, what supports our rationale. The part of the red bar graph is Artis. You can see us trading at a discount to our NAV of about 27%. The blue is diversified. They trade at about 37% average. So we're doing better than the diversified but not better enough. Retail, you can see it trading at a 19% discount, office 15%, industrial trading at a premium, very good. So Artis and other diversified, we are not trading at one of the discounts of the 3 asset classes that we own. In a minute, I'll show you the price multiple comparative. And it is what it is. It means diversifieds offer a very good value proposition. But institutional investors, wealth managers and retail investors all over: Toronto, Montreal, Vancouver, New York, London, Singapore, Hong Kong, we've talked to them all, we've met them, and they've made the case that they do not invest in diversified REITs anymore. There was a time when they did, but they don't want to do that anymore. They will pay more, yes. They'll pay a higher price multiple, accept a lower discount for pure-play REITs. They do not want diversified REITs to diversify for them. They will do it themselves. So there's an old saying that customer is always right. If that's what the customer wants, if that's what investors want, then we have to move in that direction. Now it's not easy to unscramble an omelette and do this, but this is something we can do now and we're doing. We can effectively spin off our retail into a pure-play retail REIT. And then a year later, we will take the next step if it's the right thing to do. Our retail REIT will be a very good REIT. It will have about $800 million in assets and will have a conservative balance sheet and will have a conservative payout ratio and a positive cash flow and own very good needs-based retail, be a very good investment product and yield product. You need not be afraid to invest in this product. It will be an excellent idea, and it's something we can do now, as I said, and we are moving forward on that. This slide shows you the price multiples of industrial REITs, retail and then office, really the bottom of the pack, not all of them, we're taking the average of the bottom. This is another example that supports, this is more data that supports our rationale. This is based on empirical data. If you look at what the bottom 2 are trading, these are all good REITs, by the way, except that they're trading at low multiples, the lowest in their sector. If you look at the industrial REITs, average of the bottom 2, have an average multiple of 14.85. Average of the bottom 2 retail REITs, average multiple of 6.85. The average of the bottom 3 office REITs have an average multiple of 10. If you take those multiples correspondingly, multiply them against Artis' industrial, office and retail FFO, and you got a price today of over $15. And that's in this COVID time. You want to take the worst-case scenario. I take the lowest trading REIT industrial, lowest trading retail REIT, lowest trading office REIT and with those multiples, you would get a price today of $12 for Artis compared to the $8 that we're trading at. So quite a compelling data. And again, empirical, it changes every day a little bit. But in principle, this is where it is. And in terms of balancing our payout ratio, we have a better payout ratio than all of these REITs. And our balance sheet is very comparable, if not better, than most of these REITs as well. So there's nothing, we're not playing with numbers here. There's a strong case to be made to spinning off into a pure-play REIT and moving forward. So that brings me to the end of this part of the presentation. In terms of the retail spin-off, there is an information circular coming up in a couple of weeks, which will give everyone more fulsome information. And we look forward to receiving, obtaining investor support when we have the vote in the middle of November. Again, why invest in Artis? As I said, we have a very sustainable and robust yield. It's a bulletproof payout ratio, very conservative. We have a positive earnings profile that's improving. We have a great value proposition. We have a great value proposition, and we have a proactive Board and management team that's fully committed to advancing the REIT and unlocking value. That brings me to the end of my presentation, Mr. Chairman. I'll turn the floor over to you and/or to the moderators to hold questions.

Thanks, Armin. I'm not sure any questions are coming in online. That's not possible. Are there any questions? There's a question from the floor there, Armin.

There's a number of questions here. The first one that came in is, with the reorganization, what is your expectation in terms of the rate?

That information will come out in the info circ. But if you own a unit of Artis REIT today, then tomorrow you'll own one unit of the retail REIT and another unit of Artis REIT and the distribution in total will be the same.

The second question, what of the 300 Main, multifamily and the 330, what is going to happen with those properties?

So all support retail in this complex, 360, 330 and 300. The 360 and 330, that will stay with 360 Main, will stay with the office and industrial REIT. The multifamily property, it definitely will be sold, will be put up for sale next year. We do not want to own a fourth asset class.

For people that are on the preferred shares of Artis, what's going to happen with those after the reorganization?

Preferred units will stay with Artis REIT, the office, industrial REIT, which will still have its investment-grade credit rating. And there will be no changes there. If you stay tuned in the info circ, you'll get more information of what the benefits of continuing to be a preferred unitholder.

Artis will be lower in asset value, is that going to cause you problems with any of the covenants applicable?

No. We've double checked all of that. And it's one of the reasons we're doing this sort of one step at a time. The retail is a spin-off we can achieve, but we will not be offside any of our covenants, and we will continue to maintain our investment-grade credit rating. We even are optimistic that our credit rating will improve.

Any other questions?

And I do want to say and thank everybody again. And I want to say thank you to all of our stakeholders, starting with our unitholders, our holders, our investors for their engagement and support, our Board of Trustees for the corporate governance they provide on behalf of the unitholders and their guidance. Our tenants are the top line of our income. We appreciate our tenants. We consider them to be major stakeholders. We appreciate them all, our financial institutions and the relationships we have with them. Real estate is a very capital-intensive industry. We appreciate all of those relationships in that sector. And our team of employees, we have about 220 employees collectively in Canada and the United States, a great team of employees, a great culture. We have a culture that embraces diversity and inclusion in terms of gender and in terms of demographic. And it's something that comes quite natural to us. We all get along well and teamwork is #1 with us. And we do want to thank all of our employees, each and every one of them, for their positive contribution to Artis' success. And that's all for me for now. Thank you very much.

Thanks, Armin. And before we conclude, I'd like to continue on that vein and express my appreciation to our trustees. Their dedication, diligence and engagement were especially demonstrated this past year. As you know, we formed a special committee to review and evaluate strategic alternatives to maximize unitholder value. After a thorough and rigorous process, that undertaking was discontinued as a result of market conditions and uncertainty caused by the COVID-19 pandemic. However, the work and engagement of the Board continues, as evidenced by our recent announcement and as Armin mentioned of the proposed spin-off of our retail assets into a new REIT, and all these efforts are being undertaken to unlock value for our unitholders. So thank you, trustees. Finally and most importantly, I acknowledge the Artis management and staff for their dedicated performance during this past year. We acknowledge and appreciate their commitment and focus during these unprecedented times and look forward to the opportunities that lie ahead. And on behalf of the trustees and unitholders of the REIT and others represented here today, thank you to the Artis team. This then concludes our meeting, and I would ask that Wayne Townsend move and Bruce Jack second a motion to terminate this meeting. Wayne? Thank you. Bruce? Thank you. I declare the meeting terminated. Once again, thank you, everyone, for attending online and in person.

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