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

Good afternoon. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Artis Real Estate Investment Trust's 2021 Annual Results Conference Call. [Operator Instructions] And I would like to turn the conference over to Heather Nikkel, Vice President, Investor Relations and Sustainability. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to Artis' Fourth Quarter and Year-end 2021 Results Conference Call. With me today is Artis' President and CEO, Samir Manji; CFO, Jaclyn Koenig; COO, Kim Riley; and Executive Vice President, U.S. Region, Phil Martens. Our fourth quarter and year-end 2021 results were disseminated yesterday and are available on SEDAR and on our website. A replay of the call will be available until Monday, April 4, 2022. The telephone numbers and passcodes for the replay were provided in yesterday's press release, and an archived recording of this call will also be made available on our website. Before we get started, please be reminded that today's call may include forward-looking statements. Such statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied today. We have identified such factors in our public filings with the securities regulators and suggest that you refer to those filings. As we discuss our performance, please keep in mind that all figures are in Canadian dollars, unless otherwise noted. With that, I will turn the call over to Samir.

Thank you, Heather. Good morning to those of you in the West, and good afternoon to those that are in the East. Welcome, and thank you for joining us for our 2021 annual results conference call. As we've done in previous calls, I'll keep my comments today brief before handing it back to the operator to moderate the question-and-answer session. I appreciate that most attendees will have already reviewed our Q4 results, so we will not repeat most of the qualitative and financial information you are already familiar with. Instead, I will focus the majority of my remarks on the progress we've made in the implementation of the business transformation plan we announced on March 10 last year. Let me start by saying what a year it has been both for Artis and for the industry as a whole. When I reflect on the last 12 months, since we announced our new vision and strategy, time seems to have flown by. Yet when I look at what we've accomplished in that time, I'm reminded of the hard work that the Board and every member of the team at Artis has put in each and every day to help move our vision and strategy forward. One of the first steps in what I refer to as the linchpin to implementing our strategy was to unlock value through the monetization of certain assets in our portfolio. This important step provided us with the resources and financial flexibility to execute on other elements of the strategy. In 2021, we sold 41 assets for an aggregate sale price of CAD 858.6 million. These dispositions include the sale of our GTA Industrial Portfolio, which represented a milestone transaction for Artis, and in Q4, we sold all of our remaining Calgary office properties. These transactions contributed to improving our debt metrics while also enabling us to focus on a key aspect of our strategy, specifically our capital allocation plans. In Q3, we announced our participation in the investor group to acquire Cominar REIT. My apologies. In Q4, we announced our participation in the investor group to acquire Cominar REIT for $11.75 per unit, a price we believe is significantly below the intrinsic value of the underlying assets we were acquiring. Along with the CAD 112 million we invested in common equity units as part of the transaction, we also invested CAD 100 million in junior preferred units that carry a distribution rate of 18% per annum, an attractive return for our unitholders. Since the announcement in October, we've been working with our consortium partners towards the closing that happened earlier this week. During this time, our conviction in the intrinsic value of Cominar's real estate portfolio and the corresponding value creation we will achieve for our unitholders has only strengthened and solidified further. During 2021, we also began accumulating a position in Dream Office, which culminated in the announcement earlier this year that we together with our joint actors now have a 10% ownership position in Dream Office. We look forward to providing updates on both these important capital allocation initiatives in the quarters to come. In addition to these investments, we continue to reinvest in what to date has been the best investment we can make for our owners. By October 2021, we had purchased the maximum number of common units allowable under the NCIB until such time as it was renewed on December 17, 2021, following which we continued with our buyback program. During the year, we acquired over 11 million units for a weighted average price of CAD 11.29, a price well below our year-end net asset value per unit of CAD 17.37. We continue to see our NCIB as a powerful tool for enhancing value for our unitholders, and we will not hesitate to continue to use it anytime our units trade at a significant discount to net asset value. The last area of our capital allocation strategy that I wanted to touch on is our development projects. During the year, we made significant progress at 300 Main, our 40-storey commercial and residential development project in the heart of downtown Winnipeg. Later this month, Earl's Kitchen and Bar will be opening their new location on the ground floor at 300 Main. We look forward to welcoming them to the property. We also have several industrial development projects underway in the U.S., including Blaine 35 in the Twin Cities area, the fifth and final phase of Park 8Ninety in Houston, and Park Lucero East in Phoenix. These projects are generating strong pre-leasing interest, and we look forward to providing updates on leasing progress at these properties over the next several months. In general, we continue to benefit from significant value creation on development projects as building costs continue to be well below our estimated fair market values upon completion. Switching gears from capital allocation initiatives to another important component of our go-forward vision for Artis, and that is our commitment to creating an ESG-minded culture. This commitment is of paramount importance to our Board and to our management team. Behind the scenes, an incredible amount of work has gone into ESG at Artis over the last year from reviewing all Board and committee mandates, charters and policies to overhauling our executive compensation framework to align with best practices in performance-based compensation to the creation of an internal ESG committee that brings together a team of employees across all of our offices that have diverse perspectives, and most importantly, a real commitment to ESG. These are only a few examples of the exciting work we've been doing, and we're looking forward to publishing our annual ESG report in the coming months to share updates on the progress we've made over the last year. So here we are almost at the 1-year anniversary of last year's business transformation plan announcement and we can say with confidence that execution of our plan is well underway. Artis is not the company today that it was a year ago. Our debt metrics have improved. Our net asset value per unit has increased significantly, and we've taken considerable strides towards transforming Artis into a value-investing asset management and investment platform, but there is still lots of work to do. I'd like to thank our trustees and the strong and dedicated team we have at Artis on both sides of the border for their hard work over the last 12 months. It has been an exciting year, and we continue to have strong conviction in our strategy and optimism for the opportunities that lie ahead in 2022. With that, I'll turn it back over to the operator to moderate the question-and-answer session.

[Operator Instructions] And your first question will be from Jenny Ma at BMO Capital Markets.

One with regards to Artis' equity ownership in the Cominar entity, will there be a formal distribution associated with this equity ownership? And also, how do you expect the P&L from that piece to be accounted for within Artis' income statement?

Thanks, Jenny. I'll cover the first part of the question and pass it over to Jackie for the second part. As it relates to distributions, we will, in the coming quarters, be providing more information and updates as we make progress in the execution of our plan and strategy with our consortium partners on Cominar. We're going to try to do that in a thoughtful way while also respecting the responsibilities and fiduciary duties we have to our partners in that consortium from a information management standpoint and disclosure standpoint. Suffice it to say that one can do the back of the envelope math on what the structure looks like with the Cominar investment and the near-term focus is going to be on debt reduction versus equity repatriation and/or distributions to equity holders. So again, more to come on that in the months and quarters to come, but we are not anticipating any equity distributions over the course of the, certainly, next 2 or 3 quarters. And I'll pass it over to Jackie.

Jenny, this investment is going to be an equity accounted investment. So it will show up as a singular line on the balance sheet as well as on our income statement. And then disclosure on our proportionate share of the investment will be in our Note 5 or equity accounted investments.

Okay. Okay. Great. So when you think about the strategy overall and the business transformation plan, maybe the question is for Samir. Is there any division or component or geography of the portfolio that you would consider to be core to Artis REIT, i.e., not something you would really look to sell ever, if you can help it? Or is everything on the table when you consider how to structure the portfolio over the longer term?

Thanks, Jenny. So again, we will comment further on the plan and strategy in time to come. But suffice it to say, our primary motivation here alongside our consortium partners was what I expressed earlier, and that is our ability to have transacted at a value and price well below what we believe the intrinsic value of the roughly 83 assets that we have retained are worth in the private market, and we look forward to the value creation that this is going to provide to Artis' owners alongside our consortium partners.

Okay. Maybe I wasn't clear. I meant Artis' current portfolio putting aside the Cominar.

Thank you very much. Thank you very much for clarifying. And so from Artis perspective, specifically, I would say that we continue as we have been working through the implementation of our plan to evaluate where we believe the best growth opportunities lie in our direct ownership component of our asset base. And I would say that when I think about North America, there are several markets that continue to have very strong growth factors in play or growth forces that bring us confidence. And the idea that some markets and some assets will remain core is an interesting one. What I would say is, generally speaking, we look at a market like Greater Phoenix, we look at markets and more specifically, asset classes within those markets, such as Western Canada and our retail assets, our industrial assets in those markets as core. Having said that, we are going to be entrepreneurial and as stewards of the capital of our owners, if something preemptive, unsolicited comes our way at a minimum, we have to consider it, and we will share that and present that to the Board's Investment Committee for their knowledge and ultimately, their deliberation and consideration.

Okay. Great. And then maybe one last question on the operations side. Looking at the mark-to-market on the in-place rent versus market and for the industrial portfolio, it seems to be fairly flat. I'm just wondering why that is the case given how strong the industrial market is. I know you've got various geographies and some assets are on the smaller side, but maybe a bit of color on why there isn't much of a differential and what you might be expecting over the near term?

Thanks, Jenny. I can take that one. So the industrial rents, I would agree with you. They are growing in every market. And in looking at the detail, it looks like there's a few leases that are coming up that have amortization that's built into the rates. So those rates that we put into the table are conservative. And obviously, we're going to work with our leasing teams to do the best that we can. In the last few leases that have come up, we've been able to achieve rates that are higher than the rates that are in place. So we have every confidence that we're going to be able to do better than what's in that table. And again, those numbers are just conservative.

Can you give us a bit more color on how much better the recent leases have been coming in at?

I don't know if we have a percentage in mind, but a few percent -- so this year, our [ wary ] was 4%, so hopefully, we can be able to achieve something similar going forward. Industrial rates are increasing in every market, literally day by day, we see them getting higher and you do a deal at one rate and a month later, you think you could have done a better deal. So I think it's probably a little bit difficult to say exactly what percentage we could get. But given the growth in the industrial market and the strength of the industrial market, I think it's easy to say that we will be able to do better and do as best as we can.

Next question will be from Jonathan Kelcher at TD Securities.

Just going back to the Cominar investment. The 18% prefs, how long do you expect those to be outstanding?

Jonathan, thanks for the question. We have structured the 18% so that we have a 1.18 MOIC. So at a minimum, even if that pref gets extinguished in less than a year, we will achieve the full 18%. We will provide a bit more color and disclosure on that as we move forward. But it is not required to be repaid earlier than a year, and in fact, has a 3-year term attached to it.

Okay. And that's cash, 18%...

No. We have incorporated a big provision. So there is the option for the consortium to accrue and compound it.

Okay. So that's more likely scenario?

In the short term, yes, again, the overall structure requires for preference to certain participants in the capital stack from a debt perspective to have priority in debt reduction, which we are very comfortable with in light of the -- as I commented earlier, the intrinsic value of the underlying assets.

Okay. And then I guess, in your $213 million or $14 million into the Cominar investment. Would I be right in thinking that Sandpiper will get paid just over $1 million annually on the Cominar investment? Or how should we think about that?

No. This is no longer a public security investment. So Artis will not be paying Sandpiper any fees from the investment that Artis has made.

Okay. And then lastly, you announced the stake in Dream. How many names would be in your public securities portfolio right now?

Jonathan, we're not going to comment on that at this point. What we will continue to do as we navigate forward is to disclose either on a need to basis or when we believe it is of strategic value and benefit. And I appreciate that's not your question, but that will include the number of public securities that we have on our balance sheet. One can do the back of the napkin math in so far is what we have disclosed to date and the fact that the dollar value of those investments relative to what we announced on the 10% crossing on Dream Office represents.

Okay. And then -- and just lastly, back to the 18%, that will be in FFO, correct -- that's income in FFO?

That's correct.

The next question will be from [ Nick Rock at the The Score REIT ].

It's nice to see the leasing spreads going up about 100% over last year, so well done on that. One of the indicators, the SP NOI. Just curious if you can provide a little color on the plan to get that back into a positive territory. And second question is, do you have a sensitivity laid out for SP NOI spreads above or below 0 about how much it hits the NAV?

I can address the first question. So in reviewing the SP NOI over the last year, the main drivers of SP NOI kind of the same as they were last quarter. Most of those properties have been re-leased, so in the coming quarters, that should be improving. There are a couple of pockets in our Minneapolis industrial portfolio that we are working on right now. And so we hope to have some positive news on those going forward. So overall, in the year, looking ahead, there should be significant improvements to SP NOI. And then could you repeat the second question? I'm not sure that we understand...

Sorry about that. Yes, I was wondering if you're willing to provide any sensitivities as far as SP NOI relating to net asset value, knowing that when you're percent below 0 versus a percent above your sort of adds or moves net asset value to the company. Just curious if you have any color on that. But I think you did sort of asked the question that you expect a significant improvement over the year. Are you saying that you -- it appears that they'll be starting to have positive NOI or SP NOI by the end of this year?

Yes. Maybe I'll -- now that we have that clarity, thank you for that, Nick. This does not generally impact our net asset value per unit calculation. Generally, from a valuation standpoint, the approach that one uses is to use normalized NOI market cap rates and then market cap rates in establishing fair value on our assets. And so the short- to medium-term fluctuation in NOI will not have a bearing on net asset value per unit.

Next question will be from Matt Kornack at National Bank Financial.

Just a quick follow-up on the Cominar questions that you had earlier. Is there a potential -- or can you kind of speak to your ability or control to potentially purchase some of the assets and bring them on balance sheet? Or is this purely kind of realize the discount to NAV story in that vehicle?

Thanks for the question, Matt. The opportunity to acquire assets within that portfolio is available to Artis as it is to each member of the consortium, but we anticipate our focus in regards to this investment is going to lie more towards the latter scenario that you touched on in seeing value creation without having to put any assets onto our balance sheet. It doesn't mean we won't. Again, that's open for consideration as we move forward. But that's not going to be the driving factor in the execution of our investment strategy here.

Okay. Fair enough. And then there are some gems obviously, and what you've got there. Are you in the process of selling any of those kind of core assets at this point? Or is that process -- I mean, I guess you've just closed, but what should we think timing-wise on that process?

This is going to be a multiyear strategy. And what I would say, and this I think is a reflection of what we commented on earlier in so far as the intrinsic value of what we have acquired together with our consortium partners. But for the benefit of our owners of Artis for our pro rata share is that we, leading up to and even in the short period after closing earlier this week, have had a significant inbound interest unsolicited with buyers who have interest in, I would say, a wide range of individual assets, not just the trophies, and there are some, as you put it, real gems in the portfolio. There's a -- quite a mix of assets. And again, this was part of our thesis, both on the Artis Sandpiper front, but also as a consortium as a whole that there were in this portfolio not only some jewels, but really assets across the spectrum that in the current market environment, have significant liquidity and value, and we look forward to seeing that play out as we move forward.

Okay. Fair enough. I had a thought for that one as you can imagine. But I'm sure you guys will do well on top of those assets. On the Calgary office portfolio that was sold, can you just give us a sense, I know that there was a large vacancy. So I'm not sure if there would be a big NOI impact subsequent. Could you give us any sense as to what the NOI in Q4 attributable to that portfolio would have been?

Yes. I can comment. So we can get that number for you. We don't have it right now, but I would say there was a significant amount of vacancy in the portfolio overall. So I think it will be a fairly small impact. Obviously, there will be an impact. But yes, they definitely were not sold on a cap rate basis. It was more on a price per square foot basis.

Fair enough. Yes, if it's possible, just so we don't miss on the modeling side and trying to attribute the cap rate because, yes, it seems like it was more per square foot number. And then lastly for me from a modeling standpoint, just on 360 Main in terms of the remaining capital outlay on that as well as kind of timing. I know multifamily, in particular, can be a little bit lumpy in terms of when it comes on and lease-up and the impact there. But can you give us a sense as to how that's progressing, how we should think of lease-up and the NOI contribution there?

Yes. So we have occupancy, as Samir mentioned, Earl will be opening in the next few weeks, which is very exciting. So there will be some NOI contribution towards the end of the year. They have a few months of free rent. And then we're looking at occupancy for the first 20 floors kind of towards the latter part of the year. So again, NOI coming on late Q3, early Q4. And we're already pre-leasing and have a lot of good activity and interest there. So we're excited about that. Excited to see some NOI coming on and the project getting closer to completion.

And I guess, as we look at 2023, is that a fully stabilized year? Or should we kind of think of it as being stabilized in the second half of 2023?

Yes, definitely in the second half of 2023. So the first 20 floors will be 2022, still just coming online and lease-up progressing. In 2023, the second half will come on, so the top 20 floors. So they will still be in that leasing stage probably throughout most of 2023. So kind of towards the end of 2023, hopefully stabilizing in 2024.

And your next question will be from Jimmy Shan at RBC Capital Markets.

I just wanted to get a better understanding of the cap structure of the new entity of Cominar. Presumably, you'll be disclosing that next quarter, but kind of on the numbers, what does the capital stack look like?

More interest in Cominar than there is in Artis on this call. But thank you for the question, Jimmy. We have not disclosed the overall cap structure. One, again, can do some back of the envelope math on what our equity ownership interest and the corresponding ratio that those dollars represent would reflect in so far as the total equity that has been invested in the privatization. And from there, one can glean that behind that equity is a significant amount of leverage, but it's a level of leverage that the consortium is very comfortable with relative to the intrinsic value of the underlying real estate. And so it does have multiple components in so far as the debt side of it, including mortgages, line of credit. We still have some work to do and some determination to be confirmed around what the debenture holders wish to do that have the option in the next 30 days to be able to redeem or to maintain their ownership in most of the series involved within the historic Cominar structure. And so again, we're very comfortable with what this all translates into. We are going to focus, as I mentioned earlier, over certainly 2022 in reducing significantly the leverage within that overall capital structure, and that should get us to a far more reasonable overall leverage ratio as it relates to fair value or intrinsic value of the assets.

Okay. And then the pref equity beyond the $100 million [indiscernible] what's the size of the total pref equity bucket?

So again, that's part and parcel of the overall capital structure. I actually view both the junior and the senior pref as leverage. So consider the $100 million and whatever the senior tranche or piece of the structure is consider that as, again, part of leverage, and we anticipate that alongside the other debt elements that, that collectively will continue to reduce in an accelerated manner over the course of 2022.