Artis Real Estate Investment Trust's CEO Discusses Q4 2012 Results - Earnings Call Transcript

Mar. 1.13 | About: Artis Real (ARESF)

Artis Real Estate Investment Trust (OTCPK:ARESF) Q4 2012 Earnings Conference Call March 1, 2013 1:00 PM ET

Executives

Armin Martens - President, CEO, and Trustee

Jim Green - CFO

Kirsty Stevens - CAO

Analysts

Jenny Ma - Canaccord Genuity

Alex Avery - CIBC World Markets

Mario Saric - Scotia Capital

Matt Kornack - National Bank Financial

Neil Downey - RBC Capital Markets

Operator

Good afternoon, ladies and gentlemen. Welcome to the Artis REIT's Fourth Quarter Conference Call. I would now like to turn the meeting over to Mr. Armin Martens. Mr. Martens, please go ahead.

Armin Martens

Thank you, moderator. Good day, everyone, and welcome to our Q4 2012 conference call. So, again, my name is Armin Martens. I'm the President and Chief Executive Officer of Artis REIT, and with me on this call is Jim Green, our Chief Financial Officer as well as Kirsty Stevens, our Chief Administrative Officer.

Again, to begin with, I'd like to advise all listeners that during this call we may at times be making forward-looking statements and we do therefore seek Safe Harbor. So please refer to our website as well as see our filings such as our financial statements, MD&A and our Annual Information Form for full disclaimers as well as information on material risk pertaining to all of our disclosures.

So again, thanks for joining us, folks. To begin with, now I will ask Jim Green to review our financial highlights. Then I will ask Kirsty Stevens to give us more color on our operational results. Then I will wrap it up with some market commentary. Thereafter, we will open the lines for questions. So, go ahead Jim please.

Jim Green

We've completed internalization of the management of the REIT, we grew by almost $1 billion of external acquisitions, we completed our first ever offering of preferred units and did a follow-up offering of additional preferred units denominated in U.S. dollars.

As part of the structure for the preferred units, we converted the REIT from an open-ended trust to a close-end trust, which change the view of our accounting policies, specifically our convertible debentures and our compound instruments and our unit based compensation is now on an amortized cost basis which does have the ability of making our G&A number more predictable.

We redeemed two series of our outstanding convertible debentures and we completed a partial redemption of a third series. With the increase in our unit price, combined with the new equity raised during the year, our market cap with over $1.8 billion. We improved all of our operating metrics, including NOI, FFO and debt to gross book value and those metrics on a per unit basis also shows nice improvement over the year.

We introduced reporting by the REIT on AFFO and I'll deal with the details of that in a minute or two. And last but certainly not least, we were able to announce yesterday that we've obtained an investment grade rating on the REIT from DBRS. So just a quick review of the REIT's financial position and operating results in more detail.

Our assets have continued to grow. At the end of Q4 '12, we were almost $4.4 billion of assets. Investment properties make up by far the largest amount of that and are $4.2 billion. The investment properties on our balance sheet are valued at fair value and Kirsty will talk more about our valuation methods. But the net effect was that we recorded an unrealized gain of $60.4 million for the quarter, bringing the year-to-date gains to over 223 million driven primarily by separate compression in our markets combined with rental increases in those same markets.

I've mentioned convertible debentures. At December 31st, after the redemptions, we have three series still outstanding. The Series D, debentures mature in 2014. The Series F mature in 2020. The first series, Series G debentures matures in 2018 and these are denominated in U.S. dollars, which in our opinion, provides the natural currency hedge for the assets we own in the United States. Total debentures outstanding at face value is $180.7 million.

Debt to gross book value ratios in the REIT have continued to decline, partly due to appreciation in the property values but also due to a decision by management to lower the leverage in the REIT and we expect to continue this trend throughout 2013. At the end of December 2012, our total leverage including debentures and mortgages is 51.5% of gross book value and mortgages alone are 47.3% of gross book value.

Going back just as far as Q3 2011, the REIT's leverage of debentures on mortgages was 59.4%, so it's come down substantially in a fairly short period of time. Artis carries an amount of floating rate debt and we'd like to talk about that because we feel it's a benefit to us. We have $356 million of floating rate debt that has not been hedged to date. This represents approximately 15.8% of our total debt and that is down a bit from last quarter where we were at 16.4%.

The majority of this debt is in the United States, but management's view is that interest rates are under even less pressure to rise than exists on interest rates in Canada. We feel an amount of floating rate debt is appropriate in any debt portfolio and we are benefiting from the low interest rates on variable rate debt. A further benefit to this debt, especially is the U.S., is that it allows us flexibility to sell assets as the opportunity arises without incurring large debt penalty costs.

Our floating rate debt with the exception of our line of credit is all term debt and it's not demand and cannot be called by the lenders until maturity. We have the ability to place interest rate swaps at any point in time which has the effect of fixing the interest rates for the balance of the term.

Looking at the mortgage maturities at December 31 of '12, we had approximately 163.7 million of mortgage obligations maturing in the next 12 months, which is approximately 8% of our total mortgage debt and we're not anticipating any difficulties in refinancing the outstanding mortgages as they mature. Weighted average interest rate on the debt has continued to decline in this low interest rate environment.

Weighted average nominal rate on our debt is now 4.23%, down a further 7 basis points from Q3 and down almost 40 basis points from 4.61% at December of 2011. With the low interest rate environment, we have been looking to extend the maturity dates of our financing and our weighted average term is now 4.4 years, up from 4.3 at Q3 and up from 4.0 at the end of 2011.

Turning to the results from operations, total revenues have risen substantially. Property income from continuing operations was 66.6 million for the fourth quarter, up from 52.1 million in the same quarter last year. The growth is driven largely by acquisitions, but it's been aided by growth in same property operating results.

Looking at same property operating results, I was going to leave this one out but I guess I have to talk about it. The same property operating results for the fourth quarter did show a decrease of 177,000 and that is a smaller decrease than we showed in Q3, but still not a number we're 100% happy with. Growth for the year was still a positive 0.90%.

We anticipate the same property results will improve in Q3. We did anticipate these results. We discussed them on our Q3 conference call and it's primarily a combination of the impact of changes in the Calgary office market where rents are still not at the peak of levels of all seven, combined with expiry of a couple of vendor head leases in a couple of our properties. We've made good progress on leasing all of this space. And while we expect Q1 of '13 to still be relatively flat on the same property growth, we do expect growth to resume in the balance of 2013.

We disclose our market rent in our MD&A and if you look at what we disclosed for 2013, the dollar revenue impact from the 2013 renewals is estimated to be a $2.2 million increase. And while this number is annualized, it will show growth in the same property numbers in 2013. We also anticipate growth in future years as the impact from the improvement in the rental markets is felt in our portfolio.

Turning to some of our coverage ratios, the interest rate coverage in the REIT has continued to improve. For the quarter, it was 2.60 times, improved from 2.49 last quarter. And for the year, interest rate coverage was 2.45 times, up from 2.21 in the prior year. Debt service coverage when you add in the principal reductions was 1.7 times for the year and remains well within any other covenants given to our lenders.

The REIT has continued our plan to expand into the United States and you have probably noticed in our MD&A that we have increased the potential waiting in the U.S. up to 30% with just over 20% at the end of the year. This holding in the U.S. requires the current assets held in the U.S. be converted back to Canadian dollars on our balance sheet and this results in some foreign exchange gains and losses on our income statement. And correspondingly the long-term assets held in the U.S. also translates to Canadian dollars and these unrealized gains or losses go through other comprehensive income section on the income statement.

The REIT has what we consider a natural currently hedge in place against the U.S. dollar. Based on the December 31st financial statements, we had $754.4 million of assets in the U.S. We held 454.7 million of the U.S. mortgage debt and $87 million debenture payable in U.S. dollars and $75 million of preferred units also redeemable in U.S. dollars. And in our opinion, this gives us a natural currency hedge accounting to approximately 82% of our U.S. dollar exposure.

Looking at some of the non-GAAP financial metrics in the REIT, of course one of the key metrics for REIT is FFO or funds from operations. For the current quarter, we had funds from operations on a diluted basis of $0.34 bringing our FFO for the year to $1.30 compared to $1.21 last year. Our payout ratio, using the basic units outstanding and basic FFO, was 83.1% for the year versus 89.3% for the prior year.

As I mentioned in my introduction, the REIT had introduced reporting on AFFO or adjusted funds from operations. In the past, we've always left this to the analysts as we feel they do it consistently across the coverage universe. However, as we note that the majority of REITs calculate and deploy their own AFFO, we have decided to also disclose our calculation. And based on our calculation, AFFO was $1.15 for the year ended December 31, 2012 resulting in an AFFO payout ratio of 93.9%.

Just a few other highlights to touch on. The REIT has a distribution reinvestment program, our DRIP program in place. Participation continues to run over 10% and this provides us with a source of monthly cash flow. Tax status is important for REITs. We believe we have met the REIT exemption for 2010, '11 and '12. 100% of our distributions for return of capital in each of these three years and should any reassessment happen with CRA, the return of capital will mitigate or eliminate any taxes should it be deemed subject to tax.

We believe we'll be able to continue to meet the REIT exemptions for 2013 and beyond. However that's an ongoing test that we have to meet at all points during the year. The REIT has a small program in place called an ATM program or aftermarket program to issue securities in small amounts. It's good for another two years. And while we would not anticipate using that for any acquisitions, it could be used to assist in funding development projects or other short-term cash needs. We have not used the program to-date and no units have been issued under it.

We replaced our operating line of credit this year. We currently have an $80 million facility and at the end of the year, there was no balance drawn on that facility. We have had several events subsequent to year end that are all set out in the subsequent events section of our financial statements. And if you do the math on those acquisitions, Artis still has some un-invested cash as well as capacity on the line of credit. We continue to review potential acquisitions and we plan on continuing to grow the REIT.

That completes my financial review. We feel it was a great quarter, a great year, and we look forward to demonstrating our results from operations in future quarters.

Armin Martens

Thanks a lot, Jim. I'll turn the floor over to Kirsty to cover some operational highlights.

Kirsty Stevens

Thanks, Armin. So, again as Jim has noted, it's been a great year. We finished 2012 with 220 properties and of course (inaudible) 23.4 million in square feet of leasable area. If we look at our asset allocation now by property NOI at the end of the year, we're relatively unchanged from September; office at 52%, 26% retail and 22% industrial.

Geographically, the mix was also relatively unchanged from last quarter. The four largest segments in the portfolio are still Alberta at 38%, Manitoba at 15%, Ontario at 12% and Minnesota at 12%. Pro forma at the Calgary office NOI is under 19%.

While the asset allocation by property NOI hasn't changed much over the course of 2012, the allocation of our assets by leasable area is quite different. At December 31 of '12, the portfolio is rated about 50% to industrial which is an increase of 9% from last year, 32% office which is down 5% from last year and 18% to retail which is down 4% from last year.

Looking at occupancy, excluding the properties in redevelopment, at December 31, 2012, occupancy was 95.6% which is up 30 basis points from September and 50 basis points from last year. For the entire portfolio of properties, occupancy plus commitments on vacant space at December 31th was a healthy 95.8% which was a small increase of 10 basis points from September 30th results.

Looking at our leasing activities, we had a very robust year to leasing in 2012. Nearly 1.6 million square feet of leasable area was renewed at approximately 2.6% increase in rent rate (inaudible) different increases negotiated over the new term. The increase on renewal activities for Q4 '12 was a solid 4.5%. The weighted average term to maturity of our leases across the whole portfolio at the end of the year is a very healthy 4.8 years.

We've made an excellent start on our 2013 leasing program and I'm pleased to note that 43% of the 2013 expiries are renewed or committed to new leases. Significant commitments in 2013 include the renewals of (inaudible) for over 127,000 square feet of Production Court in BC., a renewal of 154,000 square feet at Corporate Drive property in the GTA, renewal of a tenant at Sherwin Road in Winnipeg close to 150,000 square feet. We're also pleased to say we've got commitments to fill six floors, three of which are currently vacant at Trimac House in Calgary. We've been able to get good term on these. We're looking at five or 10 years in some cases on these deals and all of them, like I mentioned, are at good rates.

Leasing costs were a bit higher in 2012 than we would normally allow for. We do attribute that in large part to the volume of leasing activity that was done in Calgary which was arguably a tenant's market and impacted the costs and our commissions and other leasing fees.

We also elected in many cases to put money into TIs to improve the space, the key market segment for us and sometimes the rollover is a good opportunity to make those improvements. For example, we did large deals in Northwest I & II, Britannia (inaudible) and those are older buildings in that class and we definitely choose to put the money in as opposed to just going with world rates and no new finishes.

We don't expect these costs to be high in future. We've seen over the past number of years the Calgary cycles and we've seen in many areas where leasing costs were much, much cheaper than it were in 2012.

Another factor to consider when we look at our leasing cost overall is the mix of leasable area that's maturing in a given year. In general, our experience is that leasing costs are significantly cheaper in the industrial portfolio. And as we've grown this, as I mentioned, the portfolio over 2012, we do expect on an overall basis leasing cost per square foot will decline.

Looking at market rents, average market rents for 2013, expires in 2014, expires are estimated to be 6.2% and 7.9% above the expiring in-place rents. That translates to a potential revenue impact of $4.5 million annualized over a two-year period. The retail segment is expected to be the biggest generator of operating increases in the short term, but the office segment in the long term is the strongest performer.

Market rents for the entire portfolio at the end of the year are about 8.8% above in-pace rents across the portfolio, which is up from 6.5% at September and 4.3% at the start of the year. This reflects our more optimistic expectation with certain markets, particularly in Calgary office, Alberta and Saskatchewan retail and the Minnesota office in industrial segments. As well with 15 properties being acquired over the year, the year-over-over comparison is a little tricky.

Also, of note, the in-place to market cap in the Calgary office segment starts to improve due to the fact that a number of above market leases rolled off in 2012 and there is significant (inaudible) of market leases in the portfolio to manage through 2013 and beyond.

In terms of growth of the portfolio, there were several ways we achieved this. One of this is to look at redevelopment opportunities in the portfolio, 59.5 (inaudible) with this property in Winnipeg we added to redevelopment at the end of the year. It's a good example of our approach here. This was a 73,000 square foot property. [Demised] for two tenants currently. One tenant remains in the properties that are quality spaced. They are taking about 42% of the square footage.

The newly vacant space, which was originally constructed in the 60s is going to be redeveloped to comprise about 40,000 square feet of new generation warehouse space, a 28 foot clear ceiling height front office improved building an exterior component. We expect that markets will nearly double as a result of this improvement. We've seen leasing activity for this type of products in Winnipeg over the past number of months and we're confident we'll see that leased up shortly after completion.

Two redevelopment projects were added at December 31 also in Winnipeg. These projects are underway and we expect to have them redeveloped by spring and look forward to improving the quality of tenants and the rates we can attract on completion. We also have various excess lands which provide opportunities for intensification. We've completed a couple of built suites recently, one is [Clareview] project in Edmonton, 7,800 square feet that we integrated to the portfolio this year and we've got another one underway which just started in '13 on (inaudible). It's preleased to a tenant with a 10-year term with options to renew. We were hoping to (inaudible) as well.

Acquisition activity, of course, keeps coming. We've got two new properties acquired towards the end of the year. [1110] Pettigrew grew 120,000 square feet, 100% leased tenant -- single tenant industrial building in Regina and Century Crossing III about 83,000 square feet, a 100% leased newly developed retail center in Spruce Grove, which is just outside of Edmonton. We've got two new unconditional agreements underway. One is Richmond Road in Ottawa also 100% leased and finally a 50% interest in 220 Portage Avenue just down (inaudible) in Winnipeg, 97.5% occupied, 170,000 square foot office tower.

In terms of portfolio valuation, the statistics are in the MD&A, we come down to about 6.32 as an overall cap rate on the Canadian portfolio and 7.13 on the U.S. portfolio. In terms of our approach, we do review and where appropriate revised our fair values throughout the models on a quarterly basis. In addition, every quarter we get a number of external valuations signed from third-party accretive firms and we reconcile and that goes back to our internal assumptions.

Cap rates are estimated using market surveys, available appraisals and market comps or transactions that were reported by the balance sheet date. We are already aware of the number of significant transactions that has been announced or occurred since the end of the year, which indicates significant compression has occurred in Canada since we completed our year-end work. So we anticipate that further gains will be likely in 2013 as we and the external appraisal firms integrate those comps into our valuation model.

Just on a final note I would just mention that a number of the analysts and investors have asked for a mortgage maturity chart for us and we should have a more maturities chart up on the website today if you're looking for that.

I'll turn the presentation back to Armin Martens.

Armin Martens

Thank you, Kirsty. I'll continue a bit more, folks, before we go to questions. So looking back at 2012, it appears that we basically ended the year with the same problems we had at the beginning of the year. Like said overall, I think 2012 was another great year to be in a real estate business and it wouldn't surprise me if I end up saying basically the same thing at the end of this year, the same problems at the end of 2013 that we had at the beginning but I think 2013 will be a very good year to be in the business we're in.

The global economic fundamentals continued to be on the weak side but in our case, we've continued to believe that in a relative term both Canada and the United States will lead the seven countries in their economic growth in the years ahead. In Canada, now we have some of our issues to deal with. For example, we will have to treat the need for one or more East-West oil pipelines as a top priority sooner rather than later and we'll have to acknowledge that our total debt, including household and all levels of government is actually the same as United States of 80% of GDP and needs to be addressed. So we're actually in the same debt boat as the United States, not a different debt boat.

Looking ahead, it is now my view that the U.S. economy will outperform the Canadian economy in the years ahead and among other things, this will be reflective of our stronger U.S. dollar (inaudible) as right now, we're seeing that the United States is becoming an energy powerhouse. This in turn is going to reduce their trade deficit, their current comp deficit, push the dollar up, be a great thing for their economy and that's what (inaudible) natural gas are ready which is the largest cost factor in the manufacturing industry and there will be self-sufficient oil in the years ahead. You combine that with the very flexible diverse economy and notwithstanding what we're hearing from politicians in the United States is in fact the least governing and least tax country in the G7 group. There's a lot of reasons to be bullish on the U.S. in the years ahead.

Now with respect to government driven interest rates, bond yields remain in the relatively low trading range. It continues to be my view that interest rates will, in both Canada and the U.S. will remain low for the foreseeable future. Both equity and debt markets are open for business with spreads and bond yields trending well, so our current spreads right now our effective five-year mortgage rates are in their 2.0% to 3.5% range and effective 10-year mortgage rates under 3.75% to 4.25% range. And this continues to contribute to a healthy real estate market.

Notwithstanding our view that interest rates will remain low for a long time and even decline a bit more, this is now moving to fixing or extending the term on some of its slowing debt to seven or 10-year terms. And we also have noticed in the last half of 2012 when we announced acquisitions and the debt financing, we were always – we were taking up seven-year and 10-year mortgage money on our properties. And again, as Jim mentioned, only the 15% of our debt is floating basically all that in United States. And between now and the end of the year, we expect to bring that closer to about 10% and then some of our slowing debt we'll consider extending the term as well.

In terms of acquisitions, cap rates while they came down a lot last year more than we thought they would, it's safe to say in the 40 to 60 point range depending on the asset class and cap rates still at the level are declining depending on asset class and specific property. But there is really no evidence whatsoever for cap rates rising anywhere. So in terms of cap rates 4 then to 5 and 5 then to 6, 6 then to 7 and there basically is no 7 or 8 cap any more. Generally I feel like cap rates will remain leveled this quarter but continue to compress at least another 25 to 50 points across the board to now and the end of the year. And we should expect to see the same or more cap rate compression in the United States.

In the U.S. in particular, we're continuing to see lot of more liquidity in the debt market. For the first time, we're able to -- in the four years, we're seeing effective interest rates mortgage interest rates lower than Canadian interest rates for five and 10-year money, it was not the case at the beginning of 2012. All of our asset classes; office, industrial and retail the profit market continued to experience healthy occupancy levels in our targeted markets and that includes the Calgary office market which demonstrated remarkable turnarounds in 2012.

In our U.S. markets, we are enjoying the fruits of our labor and a slow but steady economic recovery that is in turn producing positive realty fundamentals. The general consensus is that the wind is now behind the real estate market in the U.S. and our same property NOI growth in our U.S. portfolio is reflecting this.

In terms of our portfolio performance, we feel our metrics are quite good. We have a healthy gap between in-place rents and market rents for the positive trend and we are achieving very good weighted average rental increases. Our same property NOI growth is going to reflect this and improve this year in 2013 as well. Our leasing progress is good. Over half of our 2013 leasing program is complete as well as over 20% of 2014.

In terms of our geographic diversification, we've continued to be primarily a Western Canadian REIT. Over 65% waiting in Western Canada and about half of this in Alberta, and about a 12% waiting in the GTA and 20% in the United States. However, looking ahead we've continued to see a significantly better value proposition in the U.S. and we anticipate increasing our waiting in the United States to the 25% to 30% range. Again, this will depend on opportunities. We're definitely seeing better opportunities in terms of newer generation real estate, high unlabored yields, low price per square foot in the United States. The economy, the real estate fundamentals, foreign exchange, all of these factors are moving in favor of the Unites States right now.

To sum it up and not to have it have simplified, all three key metrics for Artis REIT, our balance sheet, our P&L ratio, the cap of our real estate (inaudible) significant improvements during 2012, so we are – Artis is definitely a better REIT today than a year ago and we're confident of having another good year in 2013 with improving metrics across the board and being able to give the same positive news next year.

This wraps our reports for this quarter and this year and folks, I'll now turn the floor over to the moderator and ask her to field your questions.

Question-and-Answer Session

Operator

Thank you, Mr. Martens. We will now take questions from the telephone lines. (Operator Instructions). The first question today comes from Jenny Ma of Canaccord Genuity. Please go ahead, Ms. Ma.

Jenny Ma - Canaccord Genuity

Good afternoon, everybody.

Armin Martens

Hi, Jenny.

Jenny Ma - Canaccord Genuity

I just want to explore the issue of expanding your presence in the U.S. Now on the last conference call, it didn't sound like you were really going to move that by too much and if you would get 25 and now you've taken it to 30. So I was just wondering if you can walk through your thought process and what's changed? Is it the view on the U.S. economy? Is it getting [passages] for cliff, things like that?

Armin Martens

First of all, not just – all the emphasize aside, what we've just done at the Board level has changed our policy from a maximum of 20% to maximum of 30%. That doesn't mean that we'll go, for example, over 22%. But we've given ourselves an extra 10% room in the event of opportunity. And again, as I mentioned in terms of the value proposition it's really there in the U.S. right now in terms of newer generation in real estate at high unlabored yields, lower price per square foot, real estate fundamentals trending well and this is our target markets. So we want to leave that opportunity -- to expand our opportunity there and not take away from our investors. We're experiencing very good same property NOI growth in the U.S. And we'd probably comment – I'm getting more and more bullish on the U.S. economy. A year ago, I would have said the Canadian economy will outperform the U.S. I wouldn't necessarily say that anymore. The U.S. economy is going to outperform the group or just perform very well. It's still the largest economy in the world at 20% of the global economy. In terms of the global natural economic order will lead the U.S. economy to perform best first anyways in order for China and the emerging markets to sell into this market and countries like Canada and Australia need to then sell to China and India. And the emerging markets need to buy what we sell and then they have to sell in terms of United States and Europe. The lag here is Europe as they're about 18% of the global economy as that economy is not performing well. And so that in turn keeps the GDP low globally. But all of that is good for industries. But anyways, I'm more than -- I'm very optimistic about the U.S. They are becoming an energy powerhouse. They are actually the lowest taxed country in the world, very flexible diverse economy, always achieving productivity gains in the labor sector, the manufacturing sector. A lot of reasons to be bullish on that economy right now. And we're seeing an increased liquidity in the debt markets which again is just helping with the spreads significantly between cap rates and the cost of the debt. So we're a little – so the gap is half full, not half empty for that market right now. Does that help you a bit?

Jenny Ma - Canaccord Genuity

Well, with that in mind, are you looking at any new target markets in the U.S. or do you feel ample opportunity in Minneapolis and Phoenix?

Armin Martens

We're still seeing good opportunity in our two target markets, Minneapolis and Phoenix. We're keeping an eye on other markets but it would have to be classier (inaudible) properties. There has to be good reason to grow the markets, to have the markets and if there aren't any good other markets then it'd be mid-Western markets consider to be large markets by Canadian standards but considered to be secondary markets by U.S. standards in order to stay away from the larger players.

Jenny Ma - Canaccord Genuity

Okay. My second question relates to your floating rate debt. Now you're thinking of taking that exposure down to about 10%. Do you intend to fix it with actual term debt or would you do it synthetically through the hedges or both?

Armin Martens

A combination, but we're looking primarily at insurance company at conventional debt (inaudible) insurance companies are quite aggressive right now.

Jenny Ma - Canaccord Genuity

Okay. And just one last housekeeping question. You disclosed a couple of acquisitions back in December one of which include the PTI Building. Is that acquisition in the $100 million you discussed in your subsequent events?

Kirsty Stevens

Yes.

Jenny Ma - Canaccord Genuity

Okay, great. Thanks. I'll pass it on.

Operator

Thank you. The next question comes from Alex Avery of CIBC. Please go ahead.

Alex Avery - CIBC World Markets

Thanks. So I just wanted to touch on some of your comments again on the U.S., Armin. As you're looking at I guess swapping out some other -- maybe not swapping out, but refinancing some of your floating rate debt, most of that debt is U.S. denominated and when you consider that debt balance as well as your U.S. dollar run secured, you're pretty heavily hedged against the U.S. dollar in terms of Canadian dollar terms. Is there any chance that you might look at refinancing some of that U.S. floating with Canadian dollar debt?

Armin Martens

Good question. If we were a private company, I guess we can say that, because I do think the U.S. dollar has got a better trend line versus the Canadian dollar as consensus now seem to be among (inaudible) and foreign exchange experts that the [$10] heading towards a $0.90 in the next five years. But for now, we just look at conventional U.S. dollar debt. We don't see ourselves doing any more preferred equity or debentures in less denomination. So in that sense, slowly but surely, our natural currency hedging will decline a little bit. We'll just stick to conventional mortgage money but it will be 50% to 55% as well as it will be – and then we get the best terms, the best non-recourse financing.

Alex Avery - CIBC World Markets

Then you renewed your normal course issuer bid but weren't really very active under it last year. Just wondering now that you're comfortable covering your dividend and your EBITDA interest coverage has gone up pretty significantly, any chance you're going to be more active under that in 2013?

Armin Martens

Yes. I'm looking at Jim with a little more of a chance than last year, but we'll let you know. It's not something we would announce if necessary. I guess it will be part of the 30 days…

Alex Avery - CIBC World Markets

What were the things that you'd be looking at when you make that decision include?

Armin Martens

Well, I guess relative valuation, we're looking at our own implied cap that we're trading at compared to the cap rate that we can buy real estate in. We think Artis is a good buy rate now.

Alex Avery - CIBC World Markets

You're not seeing anything in the market trading at 6.5 cap or higher that you'd like to buy?

Armin Martens

Well, not much in Canada and maybe nothing in Canada. It's a good quality tool, if you ask. It can still be acquired in U.S. markets at cap rates then that makes sense. So that's in the back of our minds, but there's also the matter of scale. We just achieved our investment grade rating and it was important for us to be closer to 5 billion [sites] than 3 billion. So we're recognizing the rapidity but still wanted slowly but surely grow in an accretive and disciplined manner in order to sustain our investment grade rating and to be (inaudible). We want to go from BBB lower to BBB mid as soon as we can as well.

Alex Avery - CIBC World Markets

Good, that's great. Thank you.

Operator

Thank you. The next question comes from Mario Saric of Scotia Capital. Please go ahead.

Mario Saric - Scotia Capital

Good afternoon. Just coming back to the U.S. and realizing that 30% is just a number, I'm more interesting in perhaps how you come about the 30%? So, I mean it sounds like you're pretty positive on the U.S. going forward. How do you get the 30%? Why not 40%? Why not 25? Just to be curious as to what kind of thought process is involved with coming to 30%?

Armin Martens

It's not an exact science, Mario, to be on this REIT. At the Board level, we talked on 25 or 30 -- 30 is the right number (inaudible) if we hit 30, but we might never get passed 25. It still does depend on opportunities in our targeted market. It doesn't mean that we're going to focus only U.S. acquisitions. In a perfect world, we'd like to buy more in Canada than United States and we would actually buy only at accretive cap rates. But the thing about changing U.S. is not just cap rates are low, but it's not always the best quality that we're buying for these low cap rates. So again, it's not an exact science but generally as I've said, the economic trends, the terms in real estate fundamentals will continue to improve in the U.S., more and more liquidity and shrinking of spreads in the U.S. debt markets. More and more money is coming into real estate in the United States. I expect that we're seeing it percolate and more and more money is going find its way into the mid-Western markets and the secondary markets where Artis is and that will punch up our valuation. With the currency trend the way it is, again we find ourselves saying, well, now is a good time to pay attention to opportunities in those markets. It's just an excellent value proposition. So we don't know how long that opportunity will be there.

Mario Saric - Scotia Capital

Okay. I guess with this renewed optimism in the U.S., does that change the capital allocation decision within the U.S.? For example, you have a couple of assets that aren't in Phoenix or the Minneapolis market. Are you more inclined to keep those assets at this stage?

Armin Martens

We're neutral. We'd like to go for the right price. We're hardly pursuing it there. We think we've got a lot of tailwind and I think that's, to be frank I think between the next three to five years things will only get better in the U.S. real estate market and there's no hurry for us to be disposing of any assets or making a strategic decision on our portfolio there.

Mario Saric - Scotia Capital

Okay. So you reclassified, I guess, two assets as held for sale I believe during the quarter. Presumably those two are assets in Calgary and not in U.S.?

Armin Martens

Correct.

Mario Saric - Scotia Capital

Okay.

Operator

Thank you. The next question comes from Matt Kornack of National Bank Financial. Please go ahead, sir.

Matt Kornack - National Bank Financial

Good morning.

Armin Martens

Hello, Matt.

Matt Kornack - National Bank Financial

Just a quick question with regards to your investment grade rating. Do you foresee a change in the capital stack as a result of this or will be seen on secured debentures added?

Armin Martens

Right now not necessary. First of all, the balance sheet we think it's good and it's got to stay where it is in terms of our debt to equity. So we haven't given that a lot of thought. We're not going to jump on the train now and go load up on a bunch of debentures and things like that. But it could be in terms of future acquisitions, instead of taking a more – five-year mortgage debt, we'll do a five-year debenture and leave those assets (inaudible) giving us more flexibility in our balance sheet and for our resolving line of credit and things like that. So between now and the end of the year, it's possible but we prefer just to have mortgage debt and preferred equity, common equity and we prefer a mortgage – right now, we're at about 48%. In a perfect world, I'd like to see that come down to 48 to 45 range and later on about 5% to 10% preferred equity at the most, nonetheless common equity. Preferred equity is still equity.

Matt Kornack - National Bank Financial

Great, that's helpful. And just also on the debt, I know you had said you're going to post debt maturity schedule on the website. Will that include weighted average interest rates for the term or…?

Kirsty Stevens

Yes.

Armin Martens

Yes, it will.

Matt Kornack - National Bank Financial

Okay, that will be very helpful. And on the Ontario and BC head lease properties where that lease expired, has there been any progress on the leasing of those properties?

Armin Martens

In the BC one, yes. It was leased up. It kicked in, in December fully leased and that was in Production Court. And in Ontario, we're trading paper and making proposals but it's not dealt with yet.

Matt Kornack - National Bank Financial

Okay. That's it for me. Thanks.

Operator

Thank you. And it seems that Mr. Saric was cut off too soon. He had an additional question. I'll just turn it back over to him.

Armin Martens

Sure.

Mario Saric - Scotia Capital

Great. Thank you. Sorry about that. Just wanted to delve into the normal course issuer bid question a bit further. So we have your implied cap rate kind of in the high 6s today and when we look at the acquisitions that you did in 2012, it was in an average of 6.8%. So I'm just wondering when you're looking at capital allocation and you're thinking of what your units are versus acquisitions, presumably arguably there's less risk in buying back your units given you know the properties extremely well. So internally do you look at it on a cap rate by cap rate basis or just how do you think about the relevant risks from that perspective?

Armin Martens

Certainly a consideration would be cap rate basis, Mario, but we're also cognizant that we just got the investor grade rating and we don't want to necessarily shrink the size of the REIT and lose that rating. So, it's a factor if our units are substantially mispriced and I'm sure you've heard this from everybody but we would say today they are. So is that something we'd look at today? It's possible, yeah.

Mario Saric - Scotia Capital

Okay, that's great. Thank you.

Armin Martens

Okay.

Operator

(Operator Instructions). The next question comes from Neil Downey of RBC Capital. Please go ahead, sir.

Neil Downey - RBC Capital Markets

Good afternoon, everyone. Armin, has anyone traded the IDS Center in Minneapolis yet?

Armin Martens

Not officially trade. I understand they're under contract with an entity out of Florida again for a higher price and what we wanted to settle at, and now we'll see how it all plays out.

Neil Downey - RBC Capital Markets

What do you think the implied yield would be a cap rate on that pricing?

Armin Martens

It was still going to be north of 7% range and to tell you that property was underwriting the lease renewals because many of them have turned over in the first five years and that's all good. It's just about underwriting. We still like that building. It's still the main location in Minneapolis, a great design and all that. But the gap between FFO and AFFO is pretty big in the first five years and that's what we're struggling in terms of our price. At the end of the day, we did offer them a price that we thought was probably fair but they went a different direction.

Neil Downey - RBC Capital Markets

Okay. Sorry, I'm having a memory lapse here. The Ontario asset with the head lease, what property is that?

Armin Martens

That was Concorde Corporate Plaza.

Neil Downey - RBC Capital Markets

Yeah, okay. Okay, that's it. Thank you.

Armin Martens

You're welcome.

Operator

Mr. Martens, there are no further questions registered. I'll turn the meeting back over to you.

Armin Martens

Okay. Thank you then moderator. Thanks, again, everybody for joining us. The week is over for us. I hope it's over for you guys too. Have a good weekend. We're looking forward to a little more contact and communication in the year ahead. Take care.

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