Edited Transcript of AX.UN.TO earnings conference call or presentation 28-Feb-20 6:00pm GMT - Yahoo Finance

Q4 2019 Artis Real Estate Investment Trust Earnings Call

WINNIPEG Mar 25, 2020 (Thomson StreetEvents) -- Edited Transcript of Artis Real Estate Investment Trust earnings conference call or presentation Friday, February 28, 2020 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Armin Martens

Artis Real Estate Investment Trust - President, CEO & Trustee

* James Green

Artis Real Estate Investment Trust - CFO

* Philip Martens

Artis Real Estate Investment Trust - EVP of U.S. Region

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Conference Call Participants

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* Jenny Ma

BMO Capital Markets Equity Research - Analyst

* Jonathan Kelcher

TD Securities Equity Research - Analyst

* Matt Logan

RBC Capital Markets, Research Division - Analyst

* Michael Markidis

Desjardins Securities Inc., Research Division - Real Estate Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to Artis REIT's 2019 Annual Results Conference Call. (Operator Instructions)

Today's discussion may include forward-looking statements, which include statements that are not statements of historical facts and statements regarding Artis REIT's future financial performance and its execution of initiatives to deliver unitholder value. Such statements are based on management's assumptions and beliefs. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from those statements. Please see Artis REIT's public filings for a discussion of these risk factors, which are included in their annual and quarterly filings, which can be found on Artis REIT's website and on SEDAR.

Thank you. I would now like to turn the meeting over to Mr. Armin Martens. Mr. Martens, please go ahead.

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [2]

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Thank you very much, moderator. Good day, everyone, and welcome to our Q4 year-end conference call. Happy Friday to us all. Again, my name is Armin Martens, President and CEO of Artis REIT. With me on this call is Jim Green, our CFO; Kim Riley, our EVP of Investments; Jackie Koenig, our SVP of Accounting; and Phil Martens has joined us today as well, our EVP of U.S. operations.

Again, thanks for joining us. And we'll start. As always, I'll ask Jim Green to review our financial highlights, and I'll wrap up with some commentary as well, and then we'll open the lines for questions.

So go ahead, Jim.

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James Green, Artis Real Estate Investment Trust - CFO [3]

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Thanks, Armin, and good afternoon, everyone. So going back to our third quarter earnings press release in November of 2018, it seems like it was a long time ago, but it's been a busy time since. So we've announced a series of new initiatives at that the time for the REIT. And we're now over 1 year into that plan, and it's been a very busy time executing on the strategy. The impact of executing that strategy continues to impact our metrics and will for a few quarters yet to come. And we are nearing the end of it, but we have some more assets yet to sell. We look forward to the continuation of the strategy in future quarters as the next steps will consist mainly of asset sales with the proceeds used for debt reduction, and that should demonstrate continued improvement in our balance sheet metrics.

Artis is a diversified commercial REIT, office, retail and industrial, with assets in 5 Canadian provinces and 6 U.S. states. Based on the Q4 NOI, it was 52.3% weighted in Canada and 47.7% in the United States. And as the majority of future asset sales will likely be in Canada, we expect this ratio to continue to move, such that greater than 50% of our assets will be in the United States.

On an asset class basis, we're 48.6% weighted in office, 17.9% weighted in retail and 33.5% weighted in industrial. Artis continues to be active in both new developments and redevelopment of our existing properties. We have, at the year-end, roughly $103 million invested in projects currently under development. During the quarter, we invested a further $15 million roughly into the development projects and transferred one property completed at the value of about $42 million from underdevelopment to completed properties.

As detailed in the MD&A, we have several new development projects that remain underway, including a new mixed-use residential tower at 300 Main Street in Winnipeg, a new industrial space in Houston and a small retail development as additional density on one of our retail sites in Winnipeg. Also, as detailed in the MD&A, we have several development projects in the pipeline, and the planning stages for construction has not yet actively started, and these projects are progressing well through their development stages.

We've been actively marketing our Calgary office properties, with the goal of selling into the market at the best prices we can achieve in the current Calgary market. And pro forma, the Q1 2020 dispositions that have now closed, this sector is down to a very small, ballpark, 2.1% of our total portfolio NOI. Disposing of assets in the Calgary market today has caused some further write-downs in value. However, we feel it's still the right decision as we think the Calgary market will require several more years to recover and stabilize before it sees growth again.

We've been able to maintain our balance sheet with debt improving slightly from 52.6% last quarter to 52.3% this quarter, so a small change but moving in the right direction, despite incurring fair value loss this quarter caused largely by the sale of those Calgary office properties and also a foreign exchange loss, both of which affected our GBV. Debt to GBV is up a bit from 50.6% at December of last year. And the main driver of the increase of debt to GBV has been the timing of purchases for the planned unit buybacks as compared to the asset sales, which will continue to happen in future quarters. We continue to target a range of 45% to 48% for debt to GBV over time. Our EBITDA interest coverage also remains healthy despite carrying a bit higher debt at the current time. And with debt to GBV improving slightly this quarter, we also achieved an improvement in the debt-to-EBITDA ratio as well. We're pleased to see that trending in the right direction.

Despite the dilutive effect of asset sales, the unit buyback program, combined with good same-property growth and completion of some of our development properties having a positive effect, and FFO came in at $0.37 this quarter, up from $0.34 last quarter and up from $0.33 in the comparative quarter last year. AFFO for the quarter was $0.25, up $0.01 from the same quarter last year. Our payout ratios for the year are very conservative 38.3% of FFO and 51.4% of AFFO.

Just coming back to those initiatives for a moment. On November 1, we had a series of initiatives announced, including increasing unit values by increasing NAV and continuing to focus on the quality of the portfolio. The distribution was reset at that time to $0.54 annually, resulting in a very conservative payout ratio and freeing up cash to fund our development pipeline. The plan also included non-core asset sales of between $800 million to $1 billion, and this process is well underway. We've completed and closed on $603 million of sales to December 31 and have closed a further $118 million subsequent to the quarter end. We have a further $22 million under unconditional contracts set to close in February. A basket of properties listed as held for sale at December 31 was $222 million, including the properties just mentioned as closed and some furthers that are in various stages of sale, with some under conditional contract. We anticipate most of these will sell over the next 2 to maybe 3 quarters.

Initiatives also included using a portion of the sales proceeds to buy back our units under our NCIB, and we accelerated this portion of the plan by starting immediately after the announcement in November in advance of asset sales. And from last November to December 31, we've repurchased almost 16 million units at a cost of just over $173 million. We used our line of credit to fund these purchases and plan on repaying the line as assets are sold.

In addition to the NCIB purchases, we redeemed the maturing series of our preferred equity at a cost of $78.4 million. If you include the redemption of preferred equity with the common equity, we basically met our target for equity redemption. Proceeds of asset sales will be focused on debt reduction in the near term. However, we have renewed our NCIB, and we are in a position to purchase further equity if circumstances are favorable for that. In our opinion, the plan is on track and ahead of schedule.

Touching just for a minute on a couple of operational numbers, and then I'll pass it back to Armin. So fair value of the investment properties on the balance sheet at fair value this quarter was a net adjustment of approximately $20 million. We didn't record some further gains on our industrial properties, however, it was offset by the -- some reductions needed to get to the net realizable value in today's market of the Calgary office properties.

We remain very comfortable with our debt-to-GBV ratio. It's starting to show improvements as we continue to sell properties, and we expect this to continue into future quarters. We're still dealing with the temporary effect of using the line of credit to fund our NCIB until such time as purchases are received from asset sales. And we also used the line of credit to redeem the Series G preferred units, also planning to repay that from asset sales.

We've been gradually paying off mortgages and reducing our secured debt to GBV. So as at December 31, our unencumbered property portfolio was valued at $1.96 billion. On the financing side, we have a $700 million unsecured revolving credit facility with a syndicate of lenders and 2 non-revolving credit facilities in the aggregate amount of $300 million. Both of the non-revolving facilities are drawn in full, and we placed swaps to fix the interest rates on those facilities as we expect they'll be outstanding for the full term.

Touching briefly on same property. We had a great year-end quarter for same-property results. So for the quarter, our results were a positive 3.2% this quarter in functional currency. And when we factor in some foreign exchange gains, it was a positive 3.3% in Canadian dollars. We also presented a stabilized same-property calculation, which eliminates both the properties planned for disposition as well as the Calgary office sector. And on this basis, we had growth of 4.4% in functional currency, and it was the same number, 4.4%, once FX was factored in. And our industrial segment continues to shows the strongest performance in both countries, with 9.4% growth this quarter in Canada and 6.3% growth in the U.S. This now represents 6 consecutive quarters of positive same-property growth for us, and we're very pleased to see that progress.

Touching on the net asset value. As we report our investment properties at fair value, we can calculate our net asset value per trust unit, just simply using the equity on our balance sheet less the equity held by the preferred unitholders and divided by the number of common units outstanding at the end of the quarter. If you do that math, the net asset value per trust unit is $15.56, up only $0.01 from $15.55 at the start of the year. It's interesting to see only a $0.01 change, but there were a lot of moving parts. Foreign year contributed a negative impact on net asset value of $0.44, and the fair value loss was a further $0.45. Offsetting that was a gain of roughly $0.40 due to our NCIB purchases and the remaining gain from the fact that our income, excluding fair value and foreign exchange, was in excess of our distributions and also contributed to net growth in NAV.

Artis ended of the quarter with roughly $51 million cash on hand and $112 million undrawn on our line of credit, and we've got several subsequent events detailed in our notes to the statements, which we believe continue to reflect our strategy of intelligent recycling of capital. We plan to continue our focus on a strong balance sheet and the overall quality of our portfolio.

And that completes my financial review. We feel the initiatives announced in November of 2018 will make Artis a better and stronger REIT, and we look forward to demonstrating that in future quarters.

So I'll pass it back to Armin for a little more.

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [4]

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Thanks, Jim. And I also have additional commentary from me. Again, folks, on balance, we feel we've done very well this year over last year, delivering a total return to our investors of above 35%. We've made good progress on all fronts and delivered strong performance metrics for our unitholders. So as we've pointed out and Jim mentioned, 6 consecutive quarters of same-property NOI growth. Our weighted average rental increases are healthy. Our FFO and AFFO per unit are all solid numbers of growth and growing well. Our debt metrics improved just a little bit quarter-over-quarter. Looking ahead, given our very conservative payout ratio and the progress we've made on our strategic initiatives, debt reduction will be a top priority for us. We do feel that by the end of this year, we can bring it down to 45% to 47% of our book value. And that's well received by the investment community.

Again, you'll recall some key strategic initiatives we announced over a year ago. And of course, we made very good progress on all fronts. Distribution continues to be ultra-low and conservative on both (inaudible). Investors may be nervous for a lot of reasons. There are, therefore, a lot of reasons to take a hard look at Artis given our bulletproof payout ratio. Again, the buyback program went very well. Our property disposition program, of course, went very well and continues. And it has been business as usual. We announced $800 million to $1 billion of dispositions, and we're not there yet. We've completed $750 million, on time and on price, to correspond with our IFRS NAV of $15.30, a very good number, which compared, of course, very well to our unit price. And we're talking about assets that are tough to sell. I mean the easier -- the low-hanging fruit is still ahead of us. So I think we've -- we're continuing to demonstrate very good value as we progress with our disposition program.

It's important to note, of course, that as our financial metrics improved, so is our portfolio of properties, and it's about real estate. We're reducing our office and retail weighting, increasing our ownership of industrial properties, also reducing the number of secondary markets we're in. We're un-diversifying, if you will. Our Calgary office exposure is consistently shrinking. It will be 2% at the end of Q1. And by the end of this year, it will be down to 0. Our remaining retail investments will be open-air service sector properties in the Western Canada only, which we feel is a very good focus for us. Meanwhile, our overall portfolio is performing well, and our industrial development pipeline is on track to deliver excellent results. Also, we invite you to look at our MD&A and investor presentation for more color here.

So looking ahead, folks, we'll continue to work hard to keep our buildings sold whilst bringing the rents up to market and consistently streamlining and improving our portfolio of real estate. To be clear, the integrity of our balance sheet, our earnings growth and implementing our strategic initiatives continues to be of utmost importance to us.

So that's our report for this quarter and year. We're pleased with the results and the progress we are making on all fronts. And I'll now ask the moderator to take over and field your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from Jonathan Kelcher from TD Securities.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [2]

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First question, just on the -- I guess there's $100 million or so left held for sale on the balance sheet. Would that -- does it -- will that effectively -- once you guys sell that, will that effectively end the asset disposition program?

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James Green, Artis Real Estate Investment Trust - CFO [3]

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It'll end the -- what was announced under the strategic initiatives. But over the years, we have consistently sold anywhere from $200 million to as much as $400 million of assets per year and recycled the capital. That plan would probably continue.

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [4]

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Yes. There's always more recycling to be done, Jon, if the -- it could be -- at that point in time, the Board will take a good look and see what the next step is. It could be we'll double down on our strategic initiative or it could be we'll just continue, as we have in the past, recycling between, say, $200 million to $300 million of our properties and improving our portfolio that way.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [5]

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Okay. But I'm assuming that would entail either buying -- or like if you're going to sell $200 million to $300 million, you'd be looking to put that into either development or new acquisitions.

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [6]

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It's primarily debt reduction. We got to get our debt down. That's -- we've been promised a much higher price multiple when we do that and that would get that debt down to 45% and then selectively grow, and we will be growing in the industrial sector primarily.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [7]

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Okay. How high a percentage would you like to -- are you -- like industrials are up 30% right now, how high would you want to get that?

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [8]

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At least up to 40%. And after 40%, we'll take a second look and maybe bring it up to 50%.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [9]

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It sounds like what you guys did when you went into the U.S.

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [10]

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Yes. And the opportunity here, we're actually acquiring additional development sites, industrial development sites right now in Phoenix and in Houston and making good in many offers. We expect to grow our industrial development pipeline. We're still achieving 7% unlevered yields. And buildings that -- we're building the buildings. We're planning them well. We're building them. We're leasing up and delivering great value for our unitholders.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [11]

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Okay. And then just one little modeling question, the G&A was -- it came in pretty good in Q4. What would be a run rate for G&A for 2020?

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James Green, Artis Real Estate Investment Trust - CFO [12]

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That's always a bit of a tough one to project. I guess if you take out the swings that can be created by the unit-based compensation, fair value number and particularly the Special Committee, whatever they choose to spend, I would say we'd be running in the $2.5 million to $3 million a quarter range.

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Operator [13]

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The next question comes from Matt Logan from RBC Capital Markets.

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Matt Logan, RBC Capital Markets, Research Division - Analyst [14]

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Armin, on your comments, you mentioned that you're targeting a 45% to 48% debt to GBV. Did you say that was by the end of 2020?

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [15]

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Yes, I did.

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Matt Logan, RBC Capital Markets, Research Division - Analyst [16]

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And so could you help us reconcile that figure with your comments for $100 million of dispositions because by my back-of-the-napkin math, you probably need to do $300 million to $400 million to hit that target?

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [17]

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Yes I think you heard me also mention that, traditionally, we do a $200 million to $300 million a year as well anyway, so that's what I'm thinking. And frankly, the 100 -- we still have about $100 million in our plan, and then you should expect us to do what we've done in the past, another $200 million to $300 million.

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James Green, Artis Real Estate Investment Trust - CFO [18]

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Matt, to get to the 45%, there's about a further almost $600 million of asset sales.

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Matt Logan, RBC Capital Markets, Research Division - Analyst [19]

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And so $600 million of asset sales will be just kind of what you've gotten held for sale today, plus what you see as normal-course dispositions but without the acquisitions.

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James Green, Artis Real Estate Investment Trust - CFO [20]

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Yes. That would be over the next 2 years, let's say. I think we can hit that.

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [21]

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Your math numbers are right.

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Matt Logan, RBC Capital Markets, Research Division - Analyst [22]

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And maybe just changing gears here a little bit, your Calgary office exposure is down to just 2%. With that portion of your portfolio effectively in the rearview mirror, do you think negative fair value marks are also a thing of the past?

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [23]

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Getting there. Getting there. Yes, we feel we're stabilizing in terms of our NOI very nicely and in terms of our NAV.

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Matt Logan, RBC Capital Markets, Research Division - Analyst [24]

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And on the NOI, it seems like the organic growth is trending ahead of your 2% to 3% guidance. Do you see any chance that, that might actually come in better than that number in 2020?

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [25]

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Yes, we're optimistic. We moved to the left, I think, of guidance in the past, but we're optimistic that we can beat it.

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Matt Logan, RBC Capital Markets, Research Division - Analyst [26]

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And would that be driven by the office portfolio given there's maybe a little more occupancy upside in that segment of the business?

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [27]

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Industrial will still continue to lead. Then -- and our retail will do better this year than last year.

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Matt Logan, RBC Capital Markets, Research Division - Analyst [28]

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Okay. And maybe last one for me in terms of just a modeling question, can you just give us any color on the interest income this quarter?

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James Green, Artis Real Estate Investment Trust - CFO [29]

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Sure. So we carried a vendor take-back mortgage on the sale of 415 Yonge as well as a smaller vendor take-back on the sale of 800-5th, so that's contributing to the extra interest income.

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Matt Logan, RBC Capital Markets, Research Division - Analyst [30]

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So should we expect that to be recurring next quarter?

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James Green, Artis Real Estate Investment Trust - CFO [31]

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Yes, it's a 3-year term on that DTV.

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Operator [32]

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The next question is from Jenny Ma from BMO.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [33]

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So I know the Calgary office segment is largely behind you. But I just wanted to get some color on how we should look at valuation. In terms of the Calgary assets you sold, it looks like the cap rate came in at about 9% to 10%. But could you talk to us about the occupancy and the term that's remaining in there and maybe how pricing was determined? Was it still based on in-place cash flow? Or was it more on a price per square foot basis?

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [34]

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Are you talking about the TransAlta building?

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [35]

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I'm talking about the one that you guys did subsequent to year-end, actually, for January, the recent one.

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [36]

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Yes. Okay. Yes, I mean they're behind us. The TransAlta building is the one that impacting us the most. It was 100% occupied. It had 3 years left to go on the lease, just a shade under 3 years. They've already given us written notice that they're leaving. I think they're moving very shortly into another building. And so we just did the math, the sensitivity analysis, what -- we looked at the present value of their lease. We looked at the value of that empty building, how long would it take for us to lease it up, the cost involved and the IRR, and we just came to the conclusion that the price we sold on that was the right price. Now meanwhile, on a short-term basis, it's a high cap rate. We certainly know that's too bad. But that tenant was leaving anyways, and we were going to experience some pain. We thought the best time to crystallize a value would be right now, and so that's what we did.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [37]

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Okay. And can you just give us some general color on how investors are approaching valuation in Calgary office? Like I said earlier, is it really looking at the in-place cash flow? Or is it on a price per square basis?

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [38]

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In this case, it was a combination. There's some carrying income, a carrying income there. We get paid while we wait and while we plan to redevelop and lease. And I'm hoping the buyer has a lot of success. They have a strategy to lease it to tech companies and others. But generally, it's a price per square foot, for sure, as in 9 out of 10x, and they're looking then at the leasing cost and how long it takes to lease, not just the cost to buy a tenant and the IRRs. And the cost per square foot, I'd say they've come down in Calgary in the last -- year after year, quarter after quarter, they haven't gone up. I don't think we've seen the bottom yet in terms of valuations. In that sense, we're satisfied we've done the right thing in basically getting out of the Calgary office market.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [39]

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Okay. That's good color. Turning to industrial, I know you've mentioned in past conference calls that you've gotten a lot of unsolicited inbound interest on industrial. Just given market -- this week not aside -- just given the strength of the demand for industrial assets and your -- versus your desire to grow that asset class, I'm just wondering, for a good portion of your industrial assets, is there a price that you would be willing to sell it at? Or are you more committed to expanding the strategy that you're -- you'd want to hang on to all of it?

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [40]

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Well, it becomes a question of how much we leave on the table. We're printing 8% growth right now. If we bring it down to 4 or 5, and you look at our portfolio of $1.8 billion, it goes up to about $2.3 billion in the 5-year period, creating NAV -- increasing NAV at $3 per unit. That's just our industrial portfolio. If we just manage it optimally and grow it in a conservative manner in the next 3 years, and then we might be building more industrial in the next 5 years, rather. So then what's that growth worth that you like, so we've given all that away now, what's it worth today, what's the present value of that. So I don't know. If somebody gave us a 4 cap on all of our industrial, I guess, we'd look at it. But if they're saying it's 5 in all of industrial, we're going to say, well, we can do a lot better by having it managed by ourselves. That will give you a better deal out of retail if you want to retail.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [41]

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And what has the -- has the volume of inbound calls been about the same or more or less to industrial?

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [42]

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Yes. Look, it's always there. I mean we can sell our industrial before dinnertime tonight, any night, any day of the week, right? It's always there. But if we were really interested in selling just industrial, that would be basically a global marketing process there. As I said, we have conservatively about $1.8 billion of industrial right now. And that's a good, chunky portfolio. It's a great -- a well-diversified portfolio in terms of tenant mix and building types. And it's an ideal portfolio for anybody. So we're not entertaining it right now.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [43]

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Okay. And then lastly, do you have any updates on any conversations you've had with the Strategic Review Committee, anything you could share with us?

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [44]

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So that's a fair question, and we have a scripted answer for you. So again, none of us on the management team are on this. Members of the Special Committee know, and we're spokespeople for the Special Committee. You can see by our financial statements that they're busy and they're working. We've hired advisers. And you can be rest assured they're being as productive and efficient as possible. And that as soon as they have something material to announce, they will be doing that. But otherwise, I can't say anything.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [45]

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I think previously, you had mentioned a time line sort of midyear. Is that still the case?

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [46]

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Well, if I did -- I'm not officially -- I can't officially predict anything, but they started last year. And I think the best benchmark you have is to look at industry practice, what other special committees have done for other REITs and how long it takes, and you can use that as a guideline. But they got started last year in August. And I think there's every good reason for investors to be patient and optimistic.

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Operator [47]

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The next question is from Mike Markidis from Desjardins.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [48]

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Just on the Tower Business Center, I guess, the industrial property that came onstream in the fourth quarter. Jim, do you have a sense of when? Like, was that a full quarter contribution for the space that came online? Or was it back-end loaded?

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James Green, Artis Real Estate Investment Trust - CFO [49]

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Tower was -- it's a 2-building portfolio. One's 100% leased. The other one is not leased yet. But the first building did come onstream, and I think it was for the whole third quarter. Is that right?

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [50]

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Yes.

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Philip Martens, Artis Real Estate Investment Trust - EVP of U.S. Region [51]

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For the fourth quarter, yes.

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [52]

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Was it done in fourth quarter?

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Philip Martens, Artis Real Estate Investment Trust - EVP of U.S. Region [53]

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Yes. October.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [54]

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Sorry. So there's 2 buildings that are leased, one came onstream and the second...

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James Green, Artis Real Estate Investment Trust - CFO [55]

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It's a 2-building portfolio, one's leased and the other one not leased came onstream.

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Philip Martens, Artis Real Estate Investment Trust - EVP of U.S. Region [56]

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So Tempur Sealy took the whole of the first building of 289,000 square feet, October 1. And the second building is completed, but it is vacant. And we are getting very good traction for our lease activity. So we hope to have that leased up this year.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [57]

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Okay. And then -- okay. So beyond that, I mean, in terms of your plan to keep growing the industrial portfolio, I guess first question would be, just looking at your developments that you have underway right now, you've still got a little bit of space left at Park 8Ninety that you could do, but there isn't anything else active. So should we be expecting some more activity to percolate as the year goes on?

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [58]

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Yes. I mean we just got to face the rest of (inaudible) and leasing up. We just bought another 40 acres adjacent to Park Lucero here in Phoenix. And was it 40%, Phil?

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Philip Martens, Artis Real Estate Investment Trust - EVP of U.S. Region [59]

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37%.

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [60]

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Yes. And so we've got plans to do about 400,000 square feet of industrial there -- was that right?

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Philip Martens, Artis Real Estate Investment Trust - EVP of U.S. Region [61]

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Yes.

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [62]

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So it's not 500 -- 4 buildings, 500,000 square feet. It blends in very well as it gives -- it's good efficiency for our Park Lucero. (inaudible) So we've got that coming up, and we'll get that ramped up this year, at least the commencement of it will get mobilized. And then while we're bidding on properties in other markets that wins such as many offices as well. But we're a little bit behind, and we're careful with new investments and new developments. We built -- we can overdevelop, we can't underdevelop because we're also working on paying down our debt.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [63]

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Okay. And then is your future growth in industrial all planned for U.S. and all planned for development? Or are you contemplating acquisitions as well?

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [64]

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Yes. And that -- at that point, as we get our debt down, we'll be able to ramp up our development pipeline. Right now, we are focusing on the U.S.; Canada, selectively. The barriers to entry are high, and the IRRs are pretty low in Canada. But we're doing very well with our U.S. development pipeline. And as we paid down the debt, we would expect to ramp that up even more and grow it more.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [65]

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Okay. Just thinking about -- obviously, you can't give an update in terms of what the Strategic Committee is doing, but have you -- as a management group, have you given any thought to, in the event that -- well, I guess, as part of the strategic review, you must be proposing one alternative at least, which is course of action if this company is not sold, would that be correct?

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [66]

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That's always a consideration. That's definitely a strategic consideration.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [67]

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Okay. So on that, are you able to discuss what your ideas are in the event that it doesn't result in a sale? With the -- how are you -- I mean you put out a plan that you've executed quite well on. The market, arguably, hasn't necessarily given any credit for it or not the credit that you'd want to see. So with that in mind, how does that change or how does that impact your thoughts for the -- I won't call it status quo, for the going concern plan, if -- in the event that there's no sale transaction?

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [68]

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So I mean anything material would have to be approved by the Board before we can even discuss it. But the course -- the path that we're on now is to shrink offers selectively, shrink retail selectively and to grow industrial. And as we've disclosed we have to first to pay down debt, fix the balance sheet. And then once that's fixed and stabilized, we can ramp up, growing our industrial. And so I think that gives you a good perspective. I couldn't say much more than that.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [69]

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Okay. And then just last one for me before I turn it back, just in terms of the sales, obviously, you've got assets for sale. We know the $100-or-so million -- sorry, can't remember the exact number, but you completed some, and there's another $100-or-so million left to go but another sort of $600 million-ish, I think, was the number to get down to your planned debt target. And I know you're talking about Canada. So can you give us flavor in terms of what assets would be included in that other $600 million? Is it specific markets or regions? I mean it sounds like industrial isn't one that you want to look at, but is it specific cities? Is it specific -- is it retail versus office? Just getting a sense of what you got planned.

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [70]

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So not much more color. It will be more office. I mean as you heard me mention, we want to shrink that Calgary office down to 0. But it will be more office. And I don't want to give kind of what city but primarily in Canada, more office and then more retail, both cases on a select basis. And when we get to that point, we'll probably identify the properties quite clearly, and then we'll get to that at Q1.

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Operator [71]

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Thank you. And at this time, we have no further questions. Please proceed.

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Armin Martens, Artis Real Estate Investment Trust - President, CEO & Trustee [72]

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Well, thanks, again, everyone. And a happy Friday to us all of you, hope you all have a good weekend. It's a crying shame what the markets are doing us, but such is life, I'm sure we will all come out of this just well. So thanks again for your interest, and keep saying good things about us. Keep showing an interest in Artis REIT. And everyone, please have a good weekend. Talk to you soon.

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Operator [73]

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Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.