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

Good afternoon, ladies and gentlemen. My name is Pam, and I will be your conference operator today. At this time, I would like to welcome everyone to Artis REIT's Second Quarter 2022 Results Conference Call. [Operator Instructions] Thank you. I'd now like to turn the conference over to Ms. Heather Nikkel. Please, go ahead.

Thank you, operator, and welcome, everyone. Thank you for joining us for Artis REIT's Second Quarter 2022 Results Conference Call. 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. Our second quarter 2022 results were disseminated yesterday and are available on SEDAR and on our website. A replay of this call will be available until Friday, August 12. In order to access the replay, please use the telephone numbers and passcode that were provided in yesterday's press release. A recording of this call will also be made available on our website. Before we get started, please be reminded that today's discussion 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. 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. Lastly as we discussed 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, and good afternoon, everyone. Thank you for joining us for our Q2 results conference call. As I've done in prior quarters, I will keep my remarks today at a high level, and we'll focus more specifically on the progress we've made in the execution of our business transformation plan announced in March 2021. Our goal is for Artis to become a best-in-class real estate asset management and investment platform with a focus on growing net asset value per unit and distributions for our investors to value investing. There are 3 components to this strategy. The first is strengthening the balance sheet. This is a critical first step in order to provide the REIT with financial flexibility and liquidity to pursue other areas of this strategy. Since the announcement of the new strategy in March 2021, we've sold 46 assets, including 31 industrial, 9 office and 6 retail properties. Proceeds from these dispositions were partially used to reduce outstanding debt. As a result, we ended the second quarter with total debt to gross book value of 46%, a notable improvement compared to 49.3% reported prior to the announcement of the business transformation plan. Since the announcement of the business transformation plan, we have also purchased the maximum number of units allowed under our NCIB in both 2021 and 2022. The second pillar is driving organic growth. This will be achieved by creating value for our unitholders through identifying operational efficiencies, increasing occupancy and in-place rents and the successful completion and lease-up of new development projects. We're pleased to report that leasing activity was strong during the second quarter. There has been a noticeable increase in interest from prospective tenants and in tour activity across all of our asset classes and markets. At June 30, our committed occupancy reached 92%, the highest level we've reported in over a year. With respect to our existing tenants, 388,000 square feet of renewals commenced in the quarter at a healthy weighted average increase in rental rates of 3.7%, and our weighted average overall in-place rent increased from $13.29 per square foot in Q1 to $13.56 per square foot in Q2. We're pleased with the increase in leasing momentum we're experiencing and expect this trend to continue as people adapt to the pandemic-related restrictions being lifted. And with respect to our office properties, specifically, we continue to work with tenants to ensure a safe, healthy and positive return to the office. Turning to our development projects. Earlier this year, we completed the fifth and final phase of Park 8Ninety, an industrial development in the greater Houston area. In addition to the fully leased 1.1 million across the first 4 phases, this final phase comprises 675,000 square feet and is 35% leased. During the second quarter, we completed the first phase of Blaine 35, an industrial development in the Twin Cities area. Over 70% of Blaine 35 Phase 1 was leased prior to completion. And Blaine 35 Phase 2, which is still under construction, has been 50% pre-leased. The entire project is expected to total 317,000 square feet upon completion. At Park Lucero East in the greater Phoenix area, we have a 10% ownership interest and a development management contract in place. We are pleased to report that we are making excellent progress on the development of this 561,000 square foot industrial project and the property is already 82% preleased. We look forward to providing additional updates on these projects in the quarters to come. The third pillar of our strategy is focusing on value investing by allocating capital to investments that are undervalued with potential to produce above-average risk-adjusted returns over the medium to long-term. From a broader perspective, the real estate sector continues to be impacted by current economic and interest rate environment, particularly related to the rising interest rate situation we are facing. This has presented some opportunities and some challenges for Artis. We are closely monitoring interest rate trends and forecasts and are in regular active discussions with our lenders while working diligently to manage our debt maturity schedule. In the meantime, the downturn in the market has led to inefficiencies in the public real estate sector that has presented compelling opportunities that are in line with our value investing strategy. In time, we look forward to providing additional information about entities that we've invested in, but we believe it is in the best interest of our unitholders to do so in a thoughtful, calculated, and disciplined manner in order to keep our average cost of investment as low as possible, thereby enhancing the probability of maximizing our return on the other side. With respect to previously disclosed investments, during the quarter, we announced that we reached a 14% ownership position, together with our joint actors in Dream Office REIT. Earlier this year, we also announced the closing of the transaction to privatize Cominar REIT. With the closing of this transaction now behind us, we are focused with our consortium partners in executing our plan, and we look forward to reporting on our progress in future quarters. We are confident we will achieve a strong return on our investment over the next couple of years. We've come a long way since the business transformation plan was announced in March of 2021. Our ultimate objective as stated earlier, continues to be growing net asset value per unit through value investing in real estate. At June 30, our net asset value was $19.37 per unit, a nearly 30% increase compared to a net asset value of $15.03 per unit reported prior to the announcement of the business transformation plan. We continue to focus on identifying operational and organizational efficiencies and to work towards adopting best practices in all areas of ESG, a high priority for our Board of Trustees and the team at Artis. We continue to have strong conviction in our vision and strategy. We've made good progress so far, and we look forward to providing further updates in the coming months. With that, I will turn it back over to the operator to moderate the question-and-answer session.

[Operator Instructions] Your first question comes from Jonathan Kelcher with TD Securities.

First question, just on the assets held for sale. They did jump up, I think, quarter-over-quarter. Can you maybe give a little bit of color on those assets, where you stand in terms of timing of selling them, the location, expected cap rate, that sort of stuff?

Sure. The majority of assets held for sale are on the U.S. side, where, as you know, we have assets that are exclusively focused on industrial and office. And we -- within that overall figure can confirm that a significant proportion relates to our industrial assets in the Minneapolis market. From a timing standpoint, Jonathan, we are reasonably confident that most of that asset held for sale figure will be completed prior to December 31 of this year.

Okay. So if I was to sort of handicap it, would it be sort of largely in the Q3, beginning of Q4? Is that kind of what you're thinking or closer to the end of the year?

No, I think the time line you've suggested is appropriate.

Okay. Now are any of these under contract or are they just being marketed now?

We have, within the office side, we have a few that are under contract, a couple that are in the late stages of having PSAs negotiated. And on the Minnesota industrial, we anticipate that should be under contract over the next -- short while.

Okay. Switching gears, just on the Cominar investment that I know you guys aren't giving a lot of information on it. But if you exclude the preferred shares that you guys have, roughly, how much did it contribute to FFO this quarter? And how much should we sort of think about it contributing to FFO on a either quarterly or annually basis over the next couple of years?

The Q2 contribution from Cominar is around $0.03 on our FFO.

Okay. And there is nothing unusual or anything in there, no one time costs or gains or anything, so that's something we should think about sort of the next couple of quarters as well, anyways?

Correct.

Your next question comes from Matt Kornack with National Bank Financial.

Just want to follow-up on Jonathan's questioning with regards to the cap rate on the industrial. You carry it on your books, at least the U.S. portfolio in general at 5.3% cap. Is that ballpark what we should be using if we're adjusting for the disposition?

We're reasonably confident that we will achieve an exit no less than our IFRS value and possibly higher.

Okay. So we can use something along the lines of that figure. And then on the accounting for the joint venture, I saw the FFO impact that you referred to. But in terms of some of the line items, there's, I think, $17.8 million or something in other costs and then there's a fair value adjustment. In terms of the interest expense associated, should we just take the difference between the $9 million or $10 million of fair value adjustment in the FFO contribution and basically assume that that's the interest expense? I didn't know what the other costs would have been in that disclosure.

Yes. I think that's reasonable when you're trying to determine the FFO add-back. And that's where we land around our $0.03 a quarter.

Okay. And then occupancy did pickup in office, in particular. Can you speak to kind of whose taking space? What you're seeing there? Any leasing costs or CapEx that was needed to go into that? And then also any progress on AT&T? I think you had mentioned on the prior call that, that space will be vacating at the end, but it seems like you're making traction on office. So any comment you can make there?

Yes, for sure. So this quarter, definitely, we've seen a pickup in office activity, which is great to finally see. And it's kind of all across the portfolio. We've done a few deals at MAX and some deals in Canada as well. And it's from a mix of tenants, but it does feel like tenants are getting ready to make decisions and getting ready to get back to the office. So that's great to see. And then on AT&T, we do have it listed and we're working through that process right now. It is currently still occupied until early 2023. So no new leasing activity to report, but we are actively working on it.

And is that a property that you would list essentially for a tenant to take up on leasing or potentially purchase, I guess, if an end user wanted to own it?

That's not something that we've contemplated. At the moment, we're looking at leasing it first. That's our priority.

Your next question comes from Sumayya Syed with CIBC.

Just to go back to the held for sale assets. You know that mostly it's U.S. industrial. Just wondering what your thoughts or plans are for the remaining Canadian industrial you do hold and the prospects there just given how the viable Canadian industrial is currently?

You broke out at the end, but I think we caught the question. The plan right now is to continue to hold the remaining industrial assets that we have in the other U.S. markets and here in Canada. We're feeling pretty comfortable with where this current group of dispositions that are within the held for sale category will get us to in so far as our overall liquidity position, our debt levels and the focus that we have on a couple of specific investment initiatives. So there's nothing planned beyond the Minnesota industrial as it relates to our overall industrial portfolio.

Okay. And then just on the same topic. So some of your peers have noted a bit of a pause in transactions, some cap rate expansion depending on the asset. And it sounds like you guys are pretty close. But just wondering what's been the impact to your disposition plan and if you've had to adjust pricing or timing and to what extent?