Artis <b>Real Estate Investment's</b> (ARESF) CEO Armin Martens on Q3 <b>...</b> | Real Estate Investing |
| Artis <b>Real Estate Investment's</b> (ARESF) CEO Armin Martens on Q3 <b>...</b> Posted: 06 Nov 2015 05:12 PM PST Executives Armin Martens - President and CEO Jim Green - CFO Heather Nikkel - Director of IR Analysts Jonathan Kelcher - TD Securities Jenny Ma - Canaccord Alex Avery - CIBC Heather Kirk - BMO Capital Markets Michael Smith - RBC Capital Matt Kornack - National Bank Financial Mario Saric - Scotia Bank Artis Real Estate Investment Trust (OTC:ARESF) Q3 2015 Earnings Conference Call November 6, 2015 1:00 PM ET Operator Good afternoon, ladies and gentlemen. My name is Leone and I will be your conference operator today. At this time, I would like to welcome everyone to Artis REIT's Third Quarter 2015 Conference Call. All line 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 like to turn the conference over to Mr. Armin Martens. Mr. Martens, please go ahead. Armin Martens Thank you, moderator. Good day, everyone. Welcome to our Q3 2015 conference call. So again, my name is Armin Martens, I'm the President and CEO of Artis REIT, and with me on this call is Jim Green, our CFO; as well as Heather Nikkel, our Director of Investor Relations. Again to begin with, I would like to advise all listeners that during this call, we may at times be making forward-looking statements and we therefore seek Safe Harbor. So please refer to our website, as well as our SEDAR filings, such as our financial statements, MD&A and our annual information form for full disclaimers, as well as information on material risks pertaining to all of our disclosures. So again, thanks for joining us folks. I'll ask Jim Green to review our financial highlights and then I'll wrap up with some market commentary and of course, we'll open the lines for questions. Thank you. Jim, please. Jim Green Thanks, Armin and good afternoon, everyone. As I'm sure you are aware, this is a diversified REIT and as such, we benefit from the differences in the three commercial asset classes as well as our geographic breakdown. Artis started as a Western Canadian REIT, but over the last five years or so, we've further diversified our geography to include assets in Ontario and the United States. Based on the third quarter of 2015 operating results, the REIT is 61.8% weighted in Western Canada, 10.2% in Ontario and 28% in the United States. As we've discussed in prior quarters, the REIT has been slowing down external acquisitions, but have been more active in property developments. We currently have over $93 million invested in projects under development, 41 of this on the REIT's balance sheet directly and a further 52 in joint ventures with other developers. This number is up slightly from last quarter. No new project started, but some additional investing in the work that's underway. As detailed in our MD&A, we also have a number of projects that are still in the planning stages for development activities not actively started. This quarter, on the acquisition side, we acquired one piece of land in the Denver market, which, down the road, will become a development for us. We haven't set a specific timeline to start that yet, and we acquired a portfolio of industrial properties that was in a joint-venture arrangement in the current quarter. We noticed positions closed in the current quarter, however, there is two properties mentioned in our subsequent events that have been sold subsequent to the end of the quarter. As we've been discussing in the last few quarters, everyone is well aware of the drop in oil prices and the potential negative effect on the Canadian economy as a whole and on Alberta in particular. Based on the results from this quarter, Artis earned 35.5% of its NOI from Alberta and less than half of this or roughly 16.5% of the total NOI comes from Calgary office properties. We do expect the Calgary office market in particular to continue to suffer from low oil prices and related lower activity in the oil production and exploration sectors. The expiry of our lease at AMEC and Heritage Square, our Calgary office occupancy has dropped 86%, however, the good news is that AMEC's space is 100% recommitted to a new tenant with a lease commencing in 2016. Barring further changes, if you add the committed space back to the current occupied space, it would bring us back up to 92% occupied. As we mentioned in prior calls, our expansion into the US has helped provide us with a normal perfect hedge against the falling oil prices and the lower oil prices generally produces a weaker Canadian dollar and this has shown a very strong benefit to the results of operations from our US properties when translated back into Canadian dollars. We've got great lift again this quarter from foreign exchange based on the fact that roughly 28% of the REIT's portfolio is in the United States. The board has just approved a small increase in the amount of capital to be allocated to the United States and we may increase further up to 35%. There is no REIT rules that it's going to higher than that, so it's just a board policy at this point in time. I'll spend a couple more minutes reviewing specific highlights from the quarter and then I'll pass it back to Armin. Under IFRR or International Financial Reporting Standards, we booked a fair value of our investment properties at market rate or fair value. This quarter, we've adjusted the cap rate slightly on some of our Calgary office properties and a bigger impact came from reducing the rent in some of the expected rents from Calgary office. The impact of this was a reduction of roughly $67 million on our Calgary office portfolio and this write-down was by far the largest contributor to the aggregate net loss of 65.6 million for the quarter shown on the income statement. Cap rate movement in Alberta is not really supported by any significant volume of transactions, in fact, I'd say they are almost none. We deemed it prudent to reflect a small adjustment here, although the rental rates were by far the biggest factor in the change in value, based on what we see today, we think there could still be a bit more reduction to come in rents in the coming quarters. Cap rates in Calgary office will become clearer in time. This transaction volume starts to increase and get reported, but we do expect them to vary widely depending on whether the average rents and the subject property are closer to today's market or whether there is still prior rent levels from a year to two years ago. We're not anticipating major cap rate fluctuations in our other markets over the balance of 2015 and into the early part of 2016. Some of the REIT's metrics commonly looked at debt to gross book value is one. We remain very comfortable with our debt to gross book value, it's slightly changed from year end due to the fair value loss on income producing properties and the fact that we've drawn our line of credit. There is no major changes at Q3 15, REIT's mortgage debt to gross book value is 38.8% and total debt when you factor in our convertibles and unsecured debentures is 49.1%. Artis has been gradually had a goal to increase our unencumbered asset tool. You may have heard Armin say in the past that we have been targeting to get at least 1 billion of unencumbered assets and we have finally hit that target. So this quarter, the unencumbered asset accrual is just over $1 billion, including some assets that are held in joint ventures. Looking briefly at the results of operations on the income side, a number that's been fairly material in prior quarters is lease termination fees, it's not unusual, but it is unpredictable. It was pretty small this quarter. It was $170,000, compared to 21,000 in the same quarter last year, but year-to-date, we do have a fairly big number sitting in lease termination fees. Same property operating statistics is another metric that is used to evaluate REIT operating results and for us this quarter showed a substantial increase of 4.2 million or 5.5%. It does include a substantial foreign exchange gain, which underscores the benefit of our decision to acquire assets in the United States. By asset class, the industrial segment has performed the best with overall growth of 10.9% for the quarter and 8.7% year-to-date. Retail was next at around 4% and office followed at 3.7%. By geography, we had a loss in Alberta, not overly unexpected due to the impact of the decline in oil prices, a small decline in Manitoba, no specific tenant there. It's just a variety of small issues in the properties and a larger decline in Ontario created by the bankruptcy of Sports Authority of Ontario at Concord Square. All other regions recorded gains. If we look at our entire US portfolio, the same-store growth was over 30% in Canadian dollars for the quarter, a great lift from foreign exchange, but total US growth in US dollars was a very healthy 8.4%. The stronger sector for us in the US specifically was office with office in US dollars, up 10.5%, driven by stronger occupancies and rents, followed by industrial up around 6.8% in US dollars. US retail is a very small segment for us, but it was flat for the quarter, still showing a gain due to foreign exchange when translated back to Canadian dollars. Canadian portfolio had some ups and downs this quarter. Net result was a negative 961,000 or negative 1.6% for the quarter, with gains in industrial and retail offset by losses in the office sector. As I mentioned, Ontario office suffered due to a bankruptcy of a major tenant, and the Calgary office portfolio had a further loss of $927,000. A good portion of that Calgary loss was contributed by the move out of the AMEC's space, which has been released to a new tenant. Net debt to -- just carrying on with debt ratios, net debt to EBITDA for us was 8.19 times based on the September numbers. EBITDA interest coverage was 3.19 times. The REIT has a partial natural currency hedge in place. We've got -- if you look at the segmented information in the notes to the statements, we had 1.65 billion of assets in the US and a portion of our joint venture arrangements are also in the US. The REIT holds $720 million of US liabilities and we also have an $88 million debenture, payable in US dollars and $75 million of preferred equity that would also be redeemable in US dollars. So it's a natural currency hedge, somewhere around 54% of our US exposure and today we have no plans to hedge the remaining exposure. Turning to the non-GAAP metrics, funds from operations or FFO for the quarter on a diluted basis and once we adjust for the lease termination income was $0.38 and in that $0.38, we also called out a one-time income that the REIT got in settlement of a property that was sold a while ago. So FFO payout ratio after factoring those adjustments was 71.1%. Based on our calculation, AFFO for the quarter was $0.33 compared to $0.31 in Q3 of 2014 and an AFFO payout ratio of 81.8%. For other highlights in the quarter, net asset value, Artis reports investment properties at fair market value, so you can calculate a net asset value per trust unit. After adjusting for the equity held by preferred unitholders, the net asset value per trust unit would be 17.34, somewhat unchanged from year-end with the positive effect from foreign exchange offsetting the loss and value in the income producing properties, primarily related to Calgary office. Subsequent events, Artis ended the quarter with $70 million on hand and $125 million undrawn on our line of credit. Subsequent to the quarter end, we did draw further $35 million and is a more detailed update on subsequent events including debt repayment, acquisitions and dispositions included in the notes of the financial statements. For now, that will wrap up the financial review. We think it was great quarter for us to heading towards the completion of a great year and we look forward to demonstrating results in future quarters. I will turn it back to Armin. Armin Martens Thanks, Jim. Couple more comments. First of all folks, we are pleased that on balance the year continues to go well for us and are confident that Artis is on track for a record year, this year in 2015 and for another one next year. Our FFO on same property NOI growth is in the top percentile of all Canadian REITs. So the benefits of being a diversified REIT geographically and by asset class has proven to be rewarding one for Artis unitholders. Indeed in our 10-year history as a REIT, we have never had a year where all of our asset classes in our all of our submarkets perform equally well. This year and next will be no different. Our Calgary office portfolio will underperform, but as in previous years, as we are currently demonstrating, Artis will collectively generate positive results at quarter and one year at a time. As mentioned before, it continues to be our view that both the US and Canadian economies will perform fair to good this year and next with advantage going to the US economy. It's good everyone as long the US economy, the US real estate sector right now. In terms of our portfolio performance, as you've heard, we feel our metrics are good, there is a healthy gap between increased rents and market rents and are achieving good rated average rental increases and same property NOI growth, which in turn is driving strong FFO growth for units. Our leasing progress is good, our 2015 leasing program is basically complete as long as 25% over quarter of 2016. Also as mentioned, few have limited and manageable leased renewal exposure to our – in our Calgary office portfolio for this year 2016 and 2017 as you can see in our MD&A. Our portfolio continues to demonstrate a long-standing track record of an occupancy level in the 94% to 96% range, which speaks well to our management as a reliability of our income. So 2015, you may have noticed, it's only a second year in our history during which Artis will sell more real estate than acquire. So intelligently shaping up capital is the matter of the day and I think we are doing a good job at selling select properties that calculates well below our implied unit cap rate as we are investing in better real estate at higher yields as well as funding our development pipeline, which in turn it will generate a little bit north of 7% whilst improving the caliber of our overall portfolio. At the end of the day, value creation is most important to us and we continue to work hard to keep our buildings full whilst bringing the rent up to market and consistently improving our real estate portfolio, our balance sheet and our payout ratio, one quarter and one year at a time. So that's our report for this quarter folks, we are pleased with the results and are more confident in our outlook. I'll ask the moderator to take over and field your questions. Question-and-Answer Session Operator [Operator Instructions] Your first question comes from Jonathan Kelcher from TD Securities. Please go ahead. Jonathan Kelcher Thanks, good afternoon. First question, just on the -- I guess the strong same property NOI growth in the US office portfolio, can you maybe give us a little bite more color on that? Armin Martens A good portion of that Jonathan is we've had two buildings in the US, one 605 Waterford and one Union Hills that we had suffered some vacancy challenges in and those have both been released up and it's largely those two office buildings that are contributing to the strong office growth. Jonathan Kelcher Okay. How long did you have the challenges in them? Armin Martens Well, about a year. Jim Green It probably took almost a year to get them released up. Armin Martens 605 Waterford is not sold, you might have noticed as well. Jonathan Kelcher Okay. So we should see continued strong same property NOI the next three quarters, although not as strong because 605 Waterford is sold. That would be the fair way to look at it? Armin Martens Yes. Jonathan Kelcher And then secondly, can you remind us when AMEC vacated Heritage Square? Were they out for the whole quarter or partial or? Jim Green No, they vacated in August for most of the space, they however held a little bit of the space into the September and now they are gone 100%. Jonathan Kelcher Okay. And then the lease you have there next year, is that similar to rates to what AMEC was paying or? Jim Green It's down about, I think what we have said before is the expiry was at about $25 and this one is dropping to a little below $20. Jonathan Kelcher Okay. When do you expect that to come out? Jim Green Start of Q2. Jonathan Kelcher Start of Q2, okay. Thanks, I will turn it back. Armin Martens Yeah, they are in [indiscernible] at least start beginning of Q2 next year. Operator Thank you. Your next question comes from Jenny Ma from Canaccord. Please go ahead. Jenny Ma Thanks, good afternoon everyone. I mean, I want to ask about the move to bringing up the weighting of the US to 35% and sort of what was behind that decision? When you look at it, is it a function of getting the number up, because of some Canadian asset sales or are you looking to buy more property in the US? Armin Martens It's a combination. We see our development pipeline more in the US and Canada at good returns. We started growing there sort of by default. The other is opportunity and value proposition notwithstanding the FX right now. Canadian real estate is priced to perfection everywhere. In Alberta, we are waiting to see if there is a good deal to be at anywhere in Alberta, but there is a bit of stand-off there, there is just on the transactions there. So we still have got a value proposition in the US, we have a pipeline that's strongest in the US and we just – client up to about 28% and we thought it to be safe, we should move it up to 35% or at least messages that are out there. Jim Green We didn't want to also accidentally fall off site our Board policy, Jenny just from FX if the Canadian dollar weakens further. Jenny Ma So aside from that are there any other consequences of going off site on that number in theory? Jim Green No, just a word policy, but --. Jenny Ma Okay, I understand. I guess, at least my next question is the obligatory Q3 acquisition outlook for next year. Can you comment on that? Armin Martens Yes, I guess I'll be saying that I usually don't comment on next year's acquisitions until Q4, but it will be right now based on what we know and next year will be selling as much as we buy or maybe selling a bit more than we buy depending on our development pipeline collectively will be matching dollar for dollar, but we still ourselves recycling capital next year. We don't see ourselves raising new equity or issuing units in any way because we are trading too far below now. So the right thing to do – continue to improve right now is to recycle the capital in a smart way. Our unit cap rate is north of seven right now, our trading cap rate any way. So we can do better, just managing our portfolio in a smart way. Jenny Ma Okay. And then just lastly, a housekeeping question probably for Jim, that settlement you got from the property in BC, you said, it was included in the $0.38 FFO? Jim Green No, excluded. It was – Jenny Ma It was excluded. Jim Green It was $0.39 without that. Jenny Ma Okay. I just want to confirm that. Great, thanks. I will turn it back. Operator Thank you. Your next question comes from Alex Avery from CIBC. Please go ahead. Armin Martens Hi, Alex. Alex Avery Hi, sorry about that. I was on mute. Just on the Canadian Pacific Plaza acquisition, you noted that the purchase price and what the eight-year mortgage financing interest rate was, but you didn't mention what the amount of debt was on that? I didn't see it in the subsequent events or in the press release. Armin Martens Okay. Well, Heather will step on and get that number and then we will let you know. Heather Nikkel Yeah, I can circulate that number. Alex Avery Okay. And then on the Sports Authority of Ontario at Concord Square, last quarter you talked about how I guess, the direct tenants had gone bankrupt, but you had the – what sounded like almost like a traveling group of gypsies that were occupying some of that space in the short term think suspicious [ph] but what's the status of that space right now in terms of current occupancy and can you give us an update on re-leasing opportunities? Armin Martens Yeah, so they have transformed from gypsies to squatters and we love them all. I mean, I remember in Manitoba, the culture of many years involved with the sports authority or whatever, the same non-profit organization we have in Manitoba, yeah, it is like hurting the caps and we're effectively operating regional style operation there for them. Almost all of them are still on same body, we are not getting the same rent, because they never paid rent. They paid a lower rent to the sports authority of Ontario. And that's the rent we are getting. So people are still there. Having said that, we got the right to terminate and re-lease the space if a better prospect comes along and I don't know – we don't have a space re-leased at the same time space isn't empty. We are just collecting rents that we used to collect. Jim Green I think the last time I talked to guys in Ontario, they had at least some prospects during the space. We are not doing – Armin Martens Yeah, that is obviously true with the things that we have got, but we don't like to announce the lease until it's signed. Alex Avery Okay, and I guess the subtenants that became direct tenants on a month-to-month basis, that revenue that you are receiving, you would be recognizing and would be included in the same-property numbers that you are quoting as well as the occupancy or are you reflecting that in – Armin Martens That's correct. They are in both numbers, the revenue and the occupancy. Unfortunately for most of those guys, they can just barely afford to pay operating costs if that – Alex Avery Okay, that's very helpful. Thank you. Operator Thank you. Your next question comes from Heather Kirk from BMO Capital Markets. Please go ahead. Heather Kirk Unfortunately it won't be as interesting as gypsies and squatters, but we are laughing over that. It's Calgary, I am just looking at your 2016 maturities and I was wondering if you could just comment on if there is any difference in terms of depth of demand between the downtown space and the belt line in the suburbs? You are concentrated in the downtown in terms of the maturities, I am just trying to get a sense of where the demand might crook up? Armin Martens Well, right now the demand is fairly flat everywhere and the best candidate is the one that we can renew. Sometimes they are shrinking but we are renewing them. We are glad that – by both ankles and with our hands and we are doing – and we are renewing pretty well. We've got good track record of retaining them slowly, but surely needless to say this market, Calgary office NOI is declining, but it's not a – it's not that damaging for us in terms of our overall exposure. We are holding our own and considering the situation we are in. And as we say, the end is near in terms of the bottom. It sooner or later will get to the bottom and things will turnaround. The flipside to that is, we will see where it all goes, $45 oil and $60 Canadian, these kind of things happen, natural gas never really got hurt that much, we all got hurt and you divide that by CAD0.75 to US$1, there is some blood on the streets in Calgary, it's just not as -- our Alberta retail and industrial portfolio is doing just fine and I think they outperformed as well Canada and now based on our experience in the last recession of '08, '09 even though it was a shorter one, Alberta industrial and retail did just fine. It was the Calgary office that – it's always overbuilt at the wrong time that gives you a challenge. Heather Kirk So, beyond just the fighting for renewals, do you have any concerns with respect to bankruptcies. I mean, there has been a rush of announcements from a variety of employers in the area of additional cutbacks this fall? Armin Martens I guess no more than usual. We've had a couple or we've had kind of say, look, we've got a downside and we are working with all of them, but we don't have -- more vulnerable than we already are, you know what I am saying. Heather Kirk Sorry, I missed that last comment. Armin Martens I mean, all of us, landlords, little vulnerable, more vulnerable than we used to be to tenant bankruptcy, but it's just hard to predict, but we suffered a couple in the last year I guess, that's a smaller tenant going bankrupt, but we've gone through that. There may be more, but I don't have a list to example of tenants saying we are on the verge of bankruptcy in front of us, we don't know of any right now that we haven't already experienced and disclosed. Jim Green We are not seeing our receivables creep up for most tenants, so that's usually our warning sign when that starts to happen, but – Armin Martens Our accounts receivables are in a very good shape everywhere in Alberta. Heather Kirk And in terms of the sort of asset sales and the desire to increase the weighting to the United States, would the Toronto portfolio be something that would be easier to find buyers for and potentially on the table for sale? Armin Martens It would be easier to find buyers for, yes, and basically everything is I think it's easy to find buyers for almost everything except Alberta right now and also the Calgary office, but that's not on the table. I think it's no secret that there is one property in Toronto that we may sell or sell a partial interest to, but – and we are not ready to announce it, it's sort of been out there, but other than that nothing in Toronto is for sale. Heather Kirk Thank you very much. Operator Thank you. Your next question comes from Michael Smith from RBC Capital. Please go ahead. Michael Smith Thank you. In your MD&A, I think this is the second quarter in a row I think you say that you have for your US strategy you have a primary emphasis on Arizona, Minnesota and Colorado. So I wondered if you could just give us some color on that and what that means. You are in some other markets and you will grow in some other markets like Texas if you execute on some of the developments, but anyhow I wonder if you could just give some color on your US strategy. Armin Martens Sure. I guess to certain extent the MD&A is just stating the obvious, we are primarily in Minneapolis, Denver and Phoenix right now. We've got two outline properties if you will in Hartford and in Tampa, those two properties and we've got development land in Houston and that said, our exposure in Texas, we do expect our industrial development in Houston to begin construction this month, our first phase. We are really excited about it and bullish about it. Houston is very diversified, and we are not about building office, building the energy corridor in Houston, but we are satisfied we are on the right track with beginning the first phase of our industrial development in Houston. So, yeah, slowly but surely we could be expanding our presence in Houston and we might start seeing that as part of our major presence. The Mosaic Building in Tampa is officially listed for sale now. We just in the last 90 days were able to really go and shoot our lease with Mosaic. It's a good covenant as you know. So we now have new 15 year lease with an annual rental increase that's very marketable. We are getting, we get a lot of interest in that property. So we expect that will be at least under contract for disposition by the end of this year. And then in Hartford, that property we are at the point now where we are going to wait and it goes into an extension at least renewal with the tenant before we put it on the market, but we don't just start expanding our presence up in the upstate searches or in that area. We expect that will be sold once we renegotiate the lease there and the lease extension with Hartford Insurance. We met with the tenant several times, interviewed them, we've been in the building of course. They are fully occupying the premises and they even need expansions basically, we will see, but we are optimist they won't leaving that location and we will do something there. So then in terms of US strategies, Minneapolis, Denver, Phoenix and Houston is where we see ourselves going further ahead. I don't believe that we wouldn't be in Dallas or Austin for good reason or the Texas as a large market, like a country of its own with 28 million people, four large markets, but that's where we see ourselves going longer term. Michael Smith So basically those four states? Armin Martens Correct. Michael Smith Okay. So, Armin, you have pretty clear views on where interest rates are going, where the economy is going in your MD&A, in your prepared remarks, where do you think oil is going? Armin Martens Yeah, well, I mean not if oil goes from $100 down to $40, right. I think it was just last year just I think we were all still celebrating high oil prices and maybe just beginning to drop the bomb. So that's a difficult one. It's good to see all the rigs shutdown mass production, slowly but surely even the frackers are slowing down and we have the deal that Iran made. Iran is going to be joining OPEC cartel to sell oil. Right now it does look that there is going to be more supply out there than demand with the emerging markets un-cooperating. Last recession of '08, '09 Canada got pulled out very quickly ahead of the United States but because of the emerging markets, the demand for our commodities. Now the emerging markets including China if you will, are not buying our commodities. Our commodity index is down very low, not just oil. And so we will see. I always say that every cycle is different. This is we are not in the 1990s, but this certainly isn't 2008, '09 with us. I see oil slowly but surely drifting up to US$60 and 70 and 80, I can't predict to go much higher than. I do know that OPEC is generating a deficit of $500 million a day, that's 150 billion for the year, they can't afford that – I am OPEC, Saudi Arabia. Saudi Arabia cannot afford $150 billion deficit, they are hurting themselves as much as anybody else in the OPEC cartel. So they also, the whole cartel needs to see a higher price of oil, because it's they can talk about their low cost of production per barrel, but meanwhile they need the money. They need more money per barrel to survive. So I am little optimistic that things can change. I don't know, you don't if there is a wildcard, there we have a new Sheriff in town in the Middle East called Putin. [ph] Russians worked in the Middle East for decades and decades, they were out of the Middle East, and not they are back, geopolitical consequences and might be of that. I do see oil and I do see us in the bottom range for oil. I do see oil drifting upwards as a result of supply and demand equation and/or OPEC cropping in a bit more. I can't imagine oil not being at $60 next year. Michael Smith Okay, if your view – it sounds like you are reasonably positive that we are at the bottom and we are going to see some upside, if your view changes will you reduce your exposure to oil markets like Calgary? Armin Martens Yeah, it's difficult, the answer is yes. Remember the last recession we said, we were at 40% of our portfolio NOI was Calgary office and 80% was Alberta, believe it or not with some 8 and 9. And we said we are going to diversify, we are going to do it by growing, so we moved out of Alberta into the GTA, into the United States and other markets, but it's not like we could push a button and we sell half of our Alberta portfolio or half of our Calgary office portfolio, but I do believe we will be successful in tweaking our portfolio and reducing our Alberta and in particular Calgary office portfolio in the quarters and years ahead. Michael Smith Okay. And just last question, how are your street front retailers doing in Calgary, the retailers at the bottom of your office buildings? Armin Martens So we don't [indiscernible] unless you tenant vacating. We got a lot – I mean, there is barber shop and the small deli and those kind of people we have. We don't have the same kind that you might see on the low street but they do well. The main floors are all mixed up. Our retail in Alberta is doing well including Fort Mc. Michael Smith Thank you. Operator Thank you. Your next question comes from Matt Kornack from National Bank Financial. Please go ahead. Matt Kornack Just wondering if you can provide a little bit of a background in terms of capital recycling you've done of late just in terms of switching out 605 Waterford into Canadian Pacific Plaza, as well as the sale of Willingdon Green, and BC, just want to know your rationale behind those trades? Armin Martens 605 was anti for about a year, or not anti but under leased shall we say for about a year, we were able to get it up to about 90% with a very good lease profile. We want that building several years ago; I think it was $100 a square foot, 8.5 cap rate, almost the same pricing you want to pay for an industry building for several years ago. But anyways long story short, over time, we've come to a conclusion that we don't need to be in that node in that market and we are in a very good area on the front end forward to market point, we like that market, the 494 market like the 394 market where Carlton, where 61 Carlton Complex is, we bought extra land there and we like the down time market as well. So that 605 Waterford that we decided it we don't need to be a long term, we'll take some money of the table and recycle that money. Willingdon, it's in the Burnaby market, the building is fully leased, and we've got an unsolicited offer that we've got a 5.5 cap rate we would have probably put anyway, but being in the Burnaby market which is still soft. So Willingdon was just a smart thing to do again. Matt when you look at our implied cap rate of over 7% that the REIT is trading at, it doesn't hurt to sell something below six and we deploy that capital. But that's the rationale there and you will see us start a couple more of things before the end of year, we may not close by the end of the year but you'll see us sell buildings at very nice prices and recycle that money as well. Matt Kornack US REITs today are having a bit of a tough day on the back of interest rate fears which is bit of an interesting thing from a Canadian perspective. But just wondering where you see the market from a cap rate perspective and a growth perspective, what inning are we in the US in terms of growth and do you still like it, obviously it's growing from a percentage component in your portfolio. Armin Martens We're for sure the economy and real estate fundamentals in the sense that it's going to grow up with rental rate growth, you can't help but notice that they've got concerns about interest-rate risings so they had a good job number today, bond yields went the wrong way, may be Fed's go up and zero now in December. It's not going to be Fed rate that will give anybody concerns plus cap rates up instead of down, natural market bond yields but spreads are lower there, debt is still about the same there as here and it's effective interest rates. We still have this thing called again a growing economy, growing rental rates, growing NOI and the wall of capital, especially US that's chasing both equity and debt on the real estate side and we're seeing this in Canada too, cap rates -- nothing pushing cap rates up in Canada except may be kind of the office cap rates will drift up but there is still so much money out there offsetting any rising rates now to what extent can drop off. I think rates, bonds can go up100 points and cap rates don't change, it goes up more than that cap rates don't change but -- so much money chasing real estate right now, so that's counter balance we haven't seen for decades. Matt Kornack And just one small point, I was looking at the industrial numbers quarter over quarter, it looks like the GTA had a positive 140 bps occupancy increase, but Edmonton was down I think 320 basis points. Is that one tenant or is that a number of different moves in each of those market. Heather Nikkel Are you talking about the same property occupancy? Matt Kornack I think, well you acquired the ground portfolio, but that was 100% leased right? Heather Nikkel We do have a new, we have one new industrial vacancy in Edmonton and then we've got one property that we had, has been reported, of course we had cinema vacated awhile back, which were – Armin Martens That's retail all right, which has been replaced. So I think it's just a one-off vacancy at Edmonton, we expect to get leased up; we lease soon and travel to a mixture of tenants. We've made some good progress on leasing; industrial portfolio is performing very nicely and strong. Matt Kornack Perfect, thanks guys. Operator Thank you. Your next question comes from Mario Saric from Scotia Bank. Please go ahead. Mario Saric Coming back to Alberta, really quickly, so you got a pretty representative portfolio, you're downtown, you're in the beltline, and you're in the suburbs. Is there anything from this recent downturn, or may be the one back in '08, '09 that would lead you to try to alter that mix going forward, and like if you had a blank or a clean slate, how would you kind of structure your portfolio, your office portfolio specifically within Calgary from geographic standpoint? Armin Martens Oh boy, it's like you ask me, I should have just bought a lottery ticket too. I guess it's fair to say we're a little less downtown, a little more about and a little more, I don't mind the south-east corridor there, suburb of more quality parks in terms of balance, but the short answer today is that with the benefit, the hindsight would have been better just to have everything, right. Mario Saric But more in beltline and south-east Calgary versus downtown with all those people. Armin Martens Correct. Mario Saric And then you mentioned or I guess Jim mentioned from the lack of trades in market, outside of oil firming oil, like is there any other catalysts that you can see that with instigated trades taking place like it seems like a big part of the market is institutional and there is no liquidity issues, or there is very few liquidity issues. So what actually institutes or instigates trade in the market? Armin Martens I don't have a handle on as how many of these properties are owned by small private investors, but I expect there'll be some pressure on some of the smaller privates when they, when it comes to refinance their properties. And there may be some pressure and the lenders will have a different trade appraisal and come up with loan to value, I'm pretty sure the lenders will still renew in the building. But there could be some pressure like that that could be a catalyst or it could just be you know capitulation so to speak, you got the long road on as low in the mall, reality does set it versus the opinion that it will snap back. It will always snap back the market when we don't see it coming right, so there are factors like that out there that could cause trades and right now we're just not seeing any trades at all, maybe some small ones. Anecdotally, I mean the brokers are telling me we can still sell retail and industrial properties for last year's cap rates. Right Jim? Jim Green I think the catalyst also maybe, may come from non-Canadian buyers, you're starting to get rumors of US and foreign buyers starting to look at that market they may not sense we're right at the bottom yet but if there is going to be a deal to be had in Canada that's the market it's going to be in. Armin Martens Yeah that's the flip side, if the dollar down, and oil down, now is the time for US buyers for example, to be circling around NBR we're looking hard, now our preference is that they buy REIT securities instead but there is no shortage of portfolio managers and investors that have made a career out of running the currency after they've bought Canadian REIT securities. So there is that, and if they're buying real estate directly, they know they can't a deal anywhere else but Alberta that's where there will be a deal sooner or later so there's that potential catalyst as well. Mario Saric And you mentioned that brokers are referencing last year's cap rates on the retail industrial side, are they referencing last year's rents in those asset classes as well or is the expectation for rent to cost in there? Armin Martens For retail and industrial, no they're not, it's just a softer rents for retail and industrial. The norm is up in Fort McMurray where industrial rents have come down, multi-family has come down, hotel has come down, but I can tell you our retail properties are doing a full in Fort McMurray. However, we're not expecting rental increases to be double digit there in Fort Mack and we're expecting rental increases to level off that would be only anomaly right now but we're having pretty good success in Grand Prairie and of course anywhere else we own retail. And back to that first part of your question Mario mentioned it in downtown versus beltline and suburbs. The thing about the downtown is that, if there is ever older building you that's where it going to – that's what almost always, it's huge large mammoth buildings get built by institutions, investors and that's what there is always all the building at the wrong time. We don't [indiscernible] Mario Saric Okay and then maybe just switching gears to the US strategic, so it seems like you're going from net-net fine more or be a net buyer in the US as opposed to a net seller but at some point, oil recovers maybe the Canadian currency starts to appreciate that, US currency tailwind starts to fade a little bit pricing in the US maybe out of a better. From a structural standpoint how easy or challenging is it for you to repatriate that capital into Canada and become net buyers in Canada once again. Armin Martens Structural or --? Mario Saric Just from a tax perspective, I guess selling US assets at peak valuations when US currency is at a peak you know may make sense but how tax was – Jim Green You would definitely occur with all-in taxes as you bought that money back across the border. So it's not that you can't do it, obviously one of our competitors is looking at perhaps exiting a bunch of their US real estate but easier strategy is probably to pull that off and treat it as a separate entity to simply bring the money back and our structure would be not the most tax efficient, way to go. Mario Saric Okay, thank you. Operator Thank you. [Operator Instructions] There are no further questions at this time, please proceed. Armin Martens Thanks again everyone for listening in and participating and looking forward to having a good weekend and we'll see you all at the Real Estate forum in early December, take care. Operator Ladies and gentleman this concludes your conference call today; we thank you for participating and ask that you please disconnect your lines.  |
| Georgia <b>real estate investors</b> opt for renting over flipping | The Biz <b>...</b> Posted: 18 Dec 2014 02:41 PM PST Flipping houses in metro Atlanta and other parts of the country was once the rage. The idea: Buy a fixer-upper on the cheap, make repairs, sell it for a quick profit and move on to the next property.
Now flipping appears to be taking a back seat to renting. The online real estate marketplace Auction.com said more investors are now acquiring homes to rent rather than flip, especially in Georgia. In November, 54 percent of investors bidding on properties in Georgia planned to rent out the homes they purchased, compared with 42 percent who planned to flip the property, Auction.com reported. In the South, 57 percent planned to rent, compared to 54 percent nationwide. The investors locally and elsewhere are finding more profit with rents on the rise, given shortages of available houses for sale and rising home prices. A report this week from the Atlanta Board of Realtors showed the median price of a home sold in metro Atlanta in November was $207,000, up 15.6 percent over the same month of last year. ""Higher prices can translate to a faster and potentially more significant short-term return on investment," Auction.com Executive Vice President Rick Sharga said in releasing the November data. Categories: Uncategorized |
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