Canada NewsWire
WINNIPEG, Nov. 1, 2018
WINNIPEG, Nov. 1, 2018 /CNW/ - Today Artis Real Estate Investment Trust ("Artis" or the "REIT") issued its financial results and achievements for the three and nine months ended September 30, 2018, and announced new initiatives focused on maximizing value for unitholders driven by NAV growth. This press release should be read in conjunction with the REIT's consolidated financial statements and Management's Discussion and Analysis ("MD&A") for the period ended September 30, 2018. All amounts are in thousands of Canadian dollars unless otherwise noted.
THIRD QUARTER HIGHLIGHTS
SELECTED FINANCIAL INFORMATION
Three months ended September 30, | |||||||||
$000's, except per unit amounts | 2018 | 2017 | % Change | ||||||
Revenue | $ | 128,097 | $ | 127,008 | 0.9% | ||||
Property NOI | 76,211 | 77,304 | (1.4)% | ||||||
Net income | 25,719 | 64,803 | (60.3)% | ||||||
Total comprehensive income | 2,017 | 19,978 | (89.9)% | ||||||
Distributions per common unit | 0.27 | 0.27 | —% | ||||||
FFO (1) | $ | 50,461 | $ | 53,690 | (6.0)% | ||||
FFO per unit (1) | 0.33 | 0.36 | (8.3)% | ||||||
FFO payout ratio (1) | 81.8% | 75.0% | 6.8% | ||||||
AFFO (1) | $ | 37,583 | $ | 38,590 | (2.6)% | ||||
AFFO per unit (1) | 0.24 | 0.26 | (7.7)% | ||||||
AFFO payout ratio (1) | 112.5% | 103.8% | 8.7% | ||||||
Nine months ended September 30, | |||||||||
$000's, except per unit amounts | 2018 | 2017 | % Change | ||||||
Revenue | $ | 380,006 | $ | 390,072 | (2.6)% | ||||
Property NOI | 227,064 | 236,282 | (3.9)% | ||||||
Net income | 151,416 | 180,372 | (16.1)% | ||||||
Total comprehensive income | 190,484 | 95,377 | 99.7% | ||||||
Distributions per common unit | 0.81 | 0.81 | —% | ||||||
FFO (1) | $ | 141,615 | $ | 162,985 | (13.1)% | ||||
FFO per unit (1) | 0.92 | 1.08 | (14.8)% | ||||||
Normalized FFO (1)(2) | 150,032 | 162,985 | (7.9)% | ||||||
Normalized FFO per unit (1)(2) | 0.98 | 1.08 | (9.3)% | ||||||
Normalized FFO payout ratio (1)(2) | 82.7% | 75.0% | 7.7% | ||||||
AFFO (1) | $ | 103,467 | $ | 119,474 | (13.4)% | ||||
AFFO per unit (1) | 0.67 | 0.79 | (15.2)% | ||||||
Normalized AFFO (1)(2) | 111,884 | 119,474 | (6.4)% | ||||||
Normalized AFFO per unit (1)(2) | 0.73 | 0.79 | (7.6)% | ||||||
Normalized AFFO payout ratio (1)(2) | 111.0% | 102.5% | 8.5% |
(1) | Represents a non-GAAP measure. Refer to the Notice with Respect to non-GAAP Measures. |
(2) | Calculated after excluding a non-recurring pension liability adjustment and non-recurring property management termination fees. |
LIQUIDITY AND LEVERAGE
September 30, | December 31, | ||||
$000's, except per unit amounts | 2018 | 2017 | |||
Fair value of investment properties | $ | 5,128,350 | $ | 4,910,251 | |
Cash | 33,796 | 35,832 | |||
Available on revolving term credit facilities | 209,974 | 61,617 | |||
Proportionate Share fair value of unencumbered properties | 1,761,289 | 1,687,754 | |||
NAV per unit | 15.11 | 14.86 | |||
Proportionate Share secured mortgage and loans to GBV | 30.9% | 31.9% | |||
Proportionate Share total long-term debt and credit facilities to GBV | 48.6% | 49.3% | |||
Proportionate Share total long-term debt and credit facilities to normalized EBITDA | 8.4 | 8.4 | |||
Proportionate Share unencumbered assets to unsecured debt | 1.8 | 1.8 | |||
Proportionate Share normalized EBITDA interest coverage ratio | 3.14 | 3.23 | |||
Weighted-average effective interest rate on Proportionate Share mortgages and other loans | 4.19% | 3.96% | |||
Weighted-average term to maturity on Proportionate Share mortgages and other loans (in years) | 3.4 | 3.6 | |||
Unhedged Proportionate Share variable rate mortgage debt as a percentage of total debt | 19.4% | 17.1% |
PORTFOLIO ACTIVITY
During Q3-18, Artis completed the acquisition of the following property:
Property | Location | Acquisition date | Asset class | Purchase price |
Stapley Center | Greater Phoenix Area, AZ | August 13, 2018 | Office | US $48,500 |
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2018, Artis had $33.8 million of cash on hand and $210.0 million available on its revolving term credit facilities. Liquidity and capital resources will be impacted by financing activity, portfolio acquisition and disposition activities and debt repayments occurring subsequent to September 30, 2018.
NEW DEVELOPMENT ACTIVITY
Artis has numerous development projects in process. The table below lists the ongoing projects and completion progress. Additional information pertaining to each project can be found in the Q3-18 MD&A.
Property | Location | Asset class | Owned share | % | % Leased (1) | ||||
Millwright Building | Minneapolis, MN | Office | 139 | 100.0 | % | 62.0 | % | ||
169 Inverness Drive West Phase I | Greater Denver Area, CO | Office | 118 | 100.0 | % | — | % | ||
Park Lucero Phase IV | Greater Phoenix Area, AZ | Industrial | 96 | 90.0 | % | — | % | ||
Tower Business Center | Greater Denver Area, CO | Industrial | 336 | 10.0 | % | — | % | ||
Cedar Port Phase I | Greater Houston Area, TX | Industrial | 519 | 15.0 | % | 100.0 | % | ||
Park 8Ninety build-to-suit | Greater Houston Area, TX | Industrial | 36 | 15.0 | % | 100.0 | % | ||
Park 8Ninety Phase II | Greater Houston Area, TX | Industrial | 543 | 10.0 | % | 40.0 | % | ||
300 Main | Winnipeg, MB | Residential/Commercial | 580 | 6.0 | % | — | % | ||
330 Main | Winnipeg, MB | Retail | 27 | 4.0 | % | 90.0 | % |
(1) | Percentage leased is based on occupancy at September 30, 2018, plus commitments on vacant space. |
FUTURE DEVELOPMENT PROGRAM
Artis has an extensive development pipeline, which consists of projects that are in the early planning stages to be developed over the next several years and projects that are being considered for future development. These development projects are designed to create value for unitholders while improving the overall quality of Artis' portfolio. Artis' pipeline consists of 10 development projects, including both commercial and multi-family assets, totalling up to approximately 4.9 million square feet of gross leasable area.
Additional information pertaining to these projects and Artis' future development initiatives can be found in the Q3-18 MD&A.
PORTFOLIO OPERATIONAL AND LEASING RESULTS
Occupancy at September 30, 2018, was 91.2% (93.5% including commitments on vacant space) compared to 92.4% at September 30, 2017, excluding properties held for redevelopment and new development projects.
Q3-18 | Q2-18 | Q1-18 | Q4-17 | Q3-17 | |||||||||||
Property NOI | $ | 76,211 | $ | 75,888 | $ | 74,965 | $ | 74,942 | $ | 77,304 | |||||
Property NOI change (1) | 0.4% | 1.2% | —% | (3.1)% | (1.8)% | ||||||||||
Same Property NOI change (2) | 3.9% | (0.4)% | (1.6)% | (0.3)% | 0.5% | ||||||||||
Stabilized Same Property NOI change (2) | 5.1% | 1.3% | 1.0% | (0.2)% | 1.6% | ||||||||||
Weighted-average rental rate increase on renewals reported | |||||||||||||||
in the period | 5.9% | 5.0% | 1.1% | 1.6% | 0.6% |
(1) | Property NOI has been impacted by acquisition, disposition and (re)development activity, foreign exchange and lease termination income. |
(2) | Same Property NOI results are impacted by foreign exchange. |
Artis' portfolio has a stable lease expiry profile with 48.3% of gross leasable area expiring in 2022 or later and 52.7% of the remaining 2018 expiries renewed or committed to new leases at September 30, 2018. Weighted-average in-place rents for the entire portfolio are $13.50 per square foot and are estimated to be 0.9% below market rents. Information about Artis' lease expiry profile is as follows:
2018 | 2019 | 2020 | 2021 | 2022 & later | |||||||
Expiring square footage | 4.9% | 11.9% | 12.3% | 13.5% | 48.3% | ||||||
Committed percentage | 52.7% | 11.0% | 5.4% | 2.3% | 1.8% | ||||||
In-place rents | $ | 13.92 |
$ | 14.07 |
$ | 13.94 |
$ | 13.22 |
$ | 13.29 | |
Comparison of in-place to market rents | (8.8)% | (3.7)% | 0.5% | 0.5% | 3.3% | ||||||
Comparison of in-place to market rents | |||||||||||
excluding Calgary office segment | 0.2% | 1.2% | 0.7% | 1.7% | 1.8% |
Artis' Calgary office segment represents 7.7% of Q3-18 Proportionate Share Property NOI and 7.0% of the overall portfolio by GLA (excluding properties held for redevelopment). During the remainder of 2018, Calgary office expiries represent 0.4% of Artis' total GLA. Of this expiring square footage, 19.5% has been renewed or committed to new leases. In 2019, Calgary office expiries represent 0.6% of Artis' total GLA.
2018 | 2019 | 2020 | 2021 | 2022 | ||||||
Calgary office expiring square footage as a % of total GLA | 0.4 | % | 0.6 | % | 0.2 | % | 1.3 | % | 3.3 | % |
OVERVIEW OF NEW INITIATIVES
Given the current real estate and economic outlook, including rising interest rates, and in consideration of Artis' units trading at a significant discount to NAV, the REIT will implement new capital allocation initiatives which will improve its growth profile and strengthen the balance sheet. These initiatives will ensure that the REIT is best positioned for long-term and sustainable AFFO and NAV per unit growth. As such, the REIT will implement the following:
For the purpose of these new initiatives, Artis has categorized its current portfolio into three asset types: Core Artis Assets, Development Assets and Non-Core Artis Assets. The following outlines the categorization and the REIT's strategy for each asset type going forward:
Since 2004, Artis has grown from one property into a diversified REIT with a portfolio of over 230 properties representing over $5.5 billion in assets. During this period, Artis has experienced several real estate cycles, including the downturn in the Calgary office market, and has adapted its strategy in response to the changing market conditions in order to continue growing and generating returns. Artis' unitholders have enjoyed an 18.3% annual return since its IPO(1). During this time, Artis has distributed over $1.2 billion to its unitholders. Given the changing market conditions, Artis believes its unitholders will be rewarded over the long-term through the REIT's reinvestment of its capital into available attractive growth opportunities and accretive initiatives.
Over the last two years, Artis has sold and recycled over $1.5 billion of assets and, in addition to redeploying the funds into markets outside of Alberta, has paid down $200 million of debt to maintain the integrity of its balance sheet. Despite improving fundamentals in the Alberta market, management believes that recovery and growth may take longer than previously anticipated. As such, Artis plans to reduce its Calgary office exposure to approximately 5% of the portfolio from 8% currently. Artis intends to focus on investing capital in growth opportunities in the industrial segment with a target of industrial assets representing 40% of the total portfolio within the next three years.
Over the last decade, Artis has established a solid track record of greenfield developments in both Canada and the U.S. which provide the REIT with new generation real estate assets at relatively higher yields. Artis' current development projects consist of primarily new generation industrial developments which, upon completion, will create incremental unitholder value. Based on the REIT's experience in delivering successful developments, Artis believes a yield upward of 7% can be achieved through its development pipeline.
The REIT believes that, following the execution of these new initiatives, Artis will emerge with a stronger real estate portfolio, an improved growth profile, a more defensive balance sheet and the financial capacity to finance an attractive development pipeline. While the immediate distribution reduction is necessary to enable the REIT to execute on the new initiatives, the REIT is confident that, over the long-term, these new initiatives will grow Artis' AFFO and NAV per unit and maximize total returns to the unitholders.
Further information pertaining to Artis can be found on Artis' website at www.artisreit.com and details pertaining to the new initiatives can be found in the Q3-18 Investor Presentation at www.artisreit.com/investor-link/investor-presentations/.
(1) | Including distribution re-investment. Source: Bloomberg October 29, 2018 |
UPCOMING WEBCAST AND CONFERENCE CALL
Interested parties are invited to participate in a conference call with management on Friday, November 2, 2018, at 12:00 p.m. CT (1:00 p.m. ET). In order to participate, please dial 1.416.764.8688 or 1.888.390.0546. You will be required to identify yourself and the organization on whose behalf you are participating.
We recommend that all participants access the simultaneous webcast, which will include a Q3-18 Investor Presentation summarizing Artis' new initiatives, by following the link on Artis' website at www.artisreit.com/investor-link/conference-calls/. You may also access the Q3-18 Investor Presentation at www.artisreit.com/investor-link/investor-presentations/ during or after the conference call and webcast. Prior to the webcast, you may follow the link to confirm you have the right software and system requirements.
If you cannot participate on Friday, November 2, 2018, a replay of the conference call will be available by dialing 1.416.764.8677 or 1.888.390.0541 and entering passcode 825682#. The replay will be available until Friday, November 30, 2018. The webcast will be archived 24 hours after the end of the conference call and will be accessible for 90 days.
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Artis is a diversified Canadian real estate investment trust investing in office, retail and industrial properties. Since 2004, Artis has executed an aggressive but disciplined growth strategy, building a portfolio of commercial properties in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario and select markets in the United States. As of September 30, 2018, Artis' commercial property comprises approximately 24.8 million square feet of leasable area.
During the three months ended September 30, 2018, Property Net Operating Income ("Property NOI") by asset class, was approximately 52.6% office, 20.4% retail and 27.0% industrial. Property NOI by geographical region, was approximately 3.0% in British Columbia, 21.0% in Alberta, 6.5% in Saskatchewan, 13.6% in Manitoba, 11.1% in Ontario, 10.4% in Arizona, 18.1% in Minnesota, 8.8% in Wisconsin and 7.5% in U.S. - Other.
NOTICE WITH RESPECT TO NON-GAAP MEASURES
In addition to reported IFRS measures, the following non-GAAP measures are commonly used by Canadian real estate investment trusts as an indicator of financial performance. "GAAP" means the generally accepted accounting principles described by the CPA Canada Handbook - Accounting, which are applicable as at the date on which any calculation using GAAP is to be made. Artis applies IFRS, which is the section of GAAP applicable to publicly accountable enterprises. These non-GAAP measures are not defined under IFRS and are not intended to represent operating profits for the period, or from a property, nor should any of 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. Readers should be further cautioned that the following measures as calculated by Artis may not be comparable to similar measures presented by other issuers.
Proportionate Share
The REIT has properties held in its investments in joint ventures, which are accounted for using the equity method in its consolidated financial statements in accordance with IFRS. Amounts presented on a Proportionate Share basis include Artis' interest in properties held in its joint ventures based on its percentage of ownership in these properties in addition to the amounts per its consolidated financial statements. Management is of the view that presentation on a Proportionate Share basis is meaningful for investors as it is representative of how Artis manages its properties as well as certain operating and financial metrics. Artis does not independently control its unconsolidated joint ventures, and the presentation of pro-rata assets, liabilities, revenue and expenses may not accurately depict the legal and economic implications of the REIT's interest in its joint ventures. Unless otherwise noted, comparative period amounts have been updated to reflect the current period's presentation.
Property Net Operating Income ("Property NOI")
Artis calculates Property NOI as revenues less property operating expenses such as utilities, repairs and maintenance and realty taxes. Property NOI does not include charges for interest or other expenses not specific to the day-to-day operation of the REIT's properties. Management considers Property NOI to be a valuable measure for evaluating the operating performance of the REIT's properties.
Same Property NOI
Artis calculates Same Property NOI by including Property NOI for investment properties that were owned for a full quarterly reporting period in both the current and comparative year, and excludes properties held for (re)development. Adjustments are made to this measure to exclude non-cash revenue items and other non-recurring revenue amounts such as lease termination income. Management considers Same Property NOI to be a valuable measure for evaluating the operating performance of the REIT's properties due to changes in occupancy, rental rates and the recovery of property operating expenses and realty taxes.
Funds from Operations ("FFO")
Artis calculates FFO substantially in accordance with the guidelines set out by the Real Property Association of Canada ("REALpac"), as issued in February 2018. Management considers FFO to be a valuable recurring earnings measure for evaluating the REIT's operating performance as it adjusts net income for gains or losses that are not recurring in nature such as fair value gains or losses on investment properties.
Adjusted Funds from Operations ("AFFO")
Artis calculates AFFO substantially in accordance with the guidelines set out by REALpac, as issued in February 2018. Management considers AFFO to be a valuable recurring earnings measure for evaluating the REIT's operating performance.
FFO and AFFO Payout Ratios
Artis calculates FFO and AFFO payout ratios by dividing the distributions per common unit by diluted FFO per unit and diluted AFFO per unit, respectively, over the same period. Management uses the FFO and AFFO payout ratios to measure the REIT's ability to pay distributions.
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") Interest Coverage Ratio
Artis calculates EBITDA as net income, adjusted for interest expense, transaction costs, income taxes and all non-cash revenue and expense items. Management considers this ratio to be a valuable measure of Artis' ability to service the interest requirements on its outstanding debt.
Debt to Gross Book Value ("GBV")
Artis calculates GBV based on the total consolidated assets of the REIT, adding back the amount of accumulated depreciation of property and equipment. The REIT has adopted debt to GBV as an indebtedness ratio used to measure its leverage.
Debt to EBITDA Ratio
Artis calculates debt to EBITDA based on annualizing the current quarter's EBITDA as defined above and comparing that balance to Artis' total outstanding debt. Management considers this ratio to be a valuable measure of Artis' leverage.
Net Asset Value ("NAV") per Unit
Artis calculates NAV per unit as its unitholders' equity, adjusted for the outstanding face value in Canadian dollars of its preferred units, divided by its total number of dilutive units outstanding. Management considers this metric to be a valuable measure of the REIT's residual equity available to its common unitholders.
CAUTIONARY STATEMENTS
This press release contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Particularly, statements regarding the REIT's future operating results, performance and achievements, including the implementation of Artis' new initiatives, are forward-looking statements. Without limiting the foregoing, the words "expects", "anticipates", "intends", "estimates", "projects", and similar expressions are intended to identify forward-looking statements.
Artis is subject to significant risks and uncertainties which may cause the actual results, performance or achievements of the REIT to be materially different from any future results, performance or achievements expressed or implied in these forward-looking statements. Such risk factors include, but are not limited to, risks related to the implementation of Artis' new initiatives, risks associated with real property ownership, availability of cash flow, general uninsured losses, future property acquisitions and dispositions, environmental matters, tax related matters, debt financing, unitholder liability, potential conflicts of interest, potential dilution, reliance on key personnel, changes in legislation and changes in the tax treatment of trusts. Artis cannot assure investors that actual results will be consistent with any forward-looking statements and Artis assumes no obligation to update or revise such forward-looking statements to reflect actual events or new circumstances. All forward-looking statements contained in this press release are qualified by this cautionary statement.
The Toronto Stock Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of this release.
SOURCE Artis Real Estate Investment Trust
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