Artis Real Estate Investment Trust's CEO Discusses Q2 2013 Results Earnings Call Transcript

Aug. 9.13 | About: Artis Real (ARESF)

Artis Real Estate Investment Trust (OTC:ARESF) Q2 2013 Results - Earnings Call Transcript August 9, 2013 1:00 PM ET

Executives

Armin Martens - President and CEO

Jim Green - CFO

Kirsty Stevens - CAO

Analysts

Mike Markidis - Desjardins Securities

Heather Kirk - BMO Capital Markets

Michael Smith - Macquarie Research

Brad Sturges - CIBC

Matt Kornack - National Bank Financial

Mario Saric - Scotia Capital

Operator

Good afternoon, ladies and gentlemen. Welcome to Artis REIT 2013 second quarter conference call. I would now like to turn the meeting over to Mr. Armin Martens. Please go ahead, sir.

Armin Martens

Good day everyone and welcome to our Q2 2013 conference call. My name is Armin Martens. I am the President and CEO of Artis REIT, and with me on this call is Jim Green, our CFO as well as Kirsty Stevens, our CAO. So to begin with, I would like to advise our listeners that during this call, we may at time 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 financials statements or 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 on this very busy week and busy day, beginning of a busy weekend. To begin with that I will ask Jim Green to review our financial highlights, then I will turn the floor over to Kirsty to give us more color on our operational results. Then I will wrap up with some market commentary, and then some Q&A.

So go ahead. Please, Jim?

Jim Green

Thanks, Armin, and good afternoon, everyone, and welcome to the call. I trust everyone is enjoying the summer, it’s one of the most fun times to have quarter end and I suspect there are some analyst on the call who probably don’t even realize it, somewhere out there, but it still is. Artis has continued our strategy of external growth combined with gradual improvement over time of all of our operating metrics.

During the quarter we added a further 305 million of income producing properties bringing year-to-date acquisitions to 382 million and that is the ones classified as the investment properties. We also quite an interest in a US property that’s accounted for us as a joint venture and our share of this investment increased, the investment in joint ventures on our balance sheet pay approximately $27 million.

We completed an equity offering during the quarter for gross proceeds of 172.5 million and subsequent to the quarter we completed our fourth offering of preferred units for gross proceeds of $80 million. We’ve improved all of our operating metrics including net operating income, funds from operations, adjusted funds from operations and debt-to-gross book value and we are also very pleased with the per unit metrics that followed of those calculations.

As we had mentioned on our previously call and our year-end call, we’ve been awarded the investment grade rating from DBRS on the REIT and this has already helped in lowering to keep on required on our preferred units and we trust that this rating will continue to help our overall cost of capital in the future.

Turning to the specific financial performance, we'll look at the more balance sheet related items first. Total assets continue to raise, the REIT is now over $4.9 billion in assets, our investment properties make up of course the largest portion of this and are currently valued around $4.7 billion.

The investment properties on our balance sheet are recorded at fair value, and Kirsty will talk a little more about the valuation methods, in her part, but the net effect was that we recorded an unrealized gain of $29 million for the quarter, certainly slowing a little bit from last years but still showing the impact of continued cap rate compression in our markets, combined with rental increases that we've been able to achieve in the properties.

Our impression and Armin and she will get more into this as probably the cap rate compression has slowed and perhaps virtually stopped, but we still are picking up a little bit of the appraisal that we get catch up to the market. On the debt side convertible debentures at June 30, we had three series outstanding, the Series D matures next year in 2014, the Series F matures in 2020, and we have a Series G that matures in 2018, that is denominated in US dollars and this debenture help form part of our natural currency hedge for the assets we own in the United States.

Total amount outstanding at face value of all series of debentures for the 185.6 million are in Canadian dollar. Debt-to-gross book value is a ratio that we watch very closely and it has continued to decline, partially due to the depreciation in our property values but also due to a decision by management to deliberately lower the leverage in the REIT and we expect to continue this trend in 2013 and likely in 2014.

Debt-to-gross book value at the end of June was 49.2%, total debt including the converts and mortgage debt alone was 45.4%, that’s the lowest is been in our history. Artis does carry some floating rate debt, that’s an issue we talked about on prior calls. At the end of June, we had approximately $326.2 million of floating rate debt that has not been protected by interest rate swaps and this represents about 13.5% of our total debt, however that is down substantially from 15.9% at the end of March 2013.

The majority of this floating rate debt is in the United States and we still feel that interest rates are not under significant pressure to rise and probably even less pressure that exists in Canada. We do feel an amount of floating rate debt is appropriate in the debt portfolio and that we have been benefiting from the lower interest rates achievable on floating rate debt.

The floating rate debt in the US also allow us the flexibility to sell assets and pay up the debt with out incurring large debt penalty cost. The floating rate debt with the exception of our line of credit is our term debt, so it’s not demand and cannot be called by the lenders until maturity.

We can place interest rates swaps at anytime to fix the interest rate and we have previously said that we are planning to reduce the floating rate exposure we’ve seen this quarter of the drop from 15.9% to 13.5%. In the subsequent events section, we have placed some further interest rate swaps on some of the US debt and pro forma in those subsequent events variable rate debt, now drops to about 10.5% of our total debt.

Mortgage maturity at June 30, we had approximately 140.7 million of mortgage debt that will mature in the next 12 months. This represents less than 7% of our total mortgage debt, and the REIT anticipates no difficulty in refinancing outstanding mortgages. A portion of this is floating rate debt and we expect to very likely renew that as longer term debt when it rolls further reducing our floating rate exposure. As mentioned on prior calls we’ve also been focusing more on longer term mortgages recently, and despite the passage of half a year, our weighted average turn to maturity has risen from 4.4 years at the end of 2012, to 4.6 years at June 30.

Interest rate on our the debt continue to decline in this low interest rate environment and weighted average nominal rate on the debt is now 4.12% basically unchanged from where its at, at Q1. Flipping more to the results of operations are the income statement, total revenues for the quarter, property income was $71.7 million from $57.4 million in the same quarter last year. Growth has been largely driven by acquisitions, however, it’s aided by growth in our rent and same property operating results.

Specifically, on the same property operating results, we're pleased to report that our same property numbers for the second quarter of 2013 showed an increase of $1.6 million or 3.1% and this raises our year-to-date numbers to approximately 2.8% growth in the same property or same store sales.

During the quarter, we did received some lease termination fees, smaller than last quarter but are still continuing to remove these from same property operating stats and the 3.1% growth is not including the lease termination fees.

Coverage ratio as we feel, we're very comfortable with our coverage ratios and interest coverage was 2.77 times for the quarter and 2.8 times for the six months ended June 30. Our debt service coverage is roughly 1.83 times for the quarter and that's well within any of the covenants given to any of our lenders.

Debt-to-EBITDA ratio that seems to be getting more attention. We calculated it at 8.4 times based on the June 30 numbers and I was just simply taking a quarterly calculation of the actual quarterly results multiplying with four with no addition for the impact of acquisitions completed during the quarter that will improve that ratio as time goes on.

The REITs continuing with our plan to expand in to the United States, you've seen that we're now over 20% of our assets. This requires that we convert assets held in US funds back to Canadian dollars at each quarter end and this results in foreign exchange gains and losses on our income statement, both flowing through the current income statement which is really the current assets liabilities and the other comprehensive income section which is really the translation of longer term assets and liabilities.

The REIT has in place what we considered to be a natural currency hedge given that we have roughly $893 million of assets in United States. We hope $486 million of US mortgage debt against that denominated in US dollars and we also have an $87 million debenture payable in US dollars plus $75 million of preferred units redeemable by the REIT in US dollars and this gives us a natural currency hedge of about 73% of the US dollar exposure. We currently have no plans to hedge the remaining exposure.

Looking at the some of the non-GAAP financial metrics, FFO is of course one of the big ones used to evaluate real estate companies and real estate trusts, Artis calculates FFO substantially in compliance with REALpac guideline. We didn’t make any adjustments to this quarter, we have adjusted a couple of prior quarters for some transaction costs and gains and losses on equity securities.

Our FFO for the quarter on a diluted basis was $0.35 this quarter compared to $0.31 in Q2 of '12 last year, we are very pleased with the growth in FFO on a per unit basis, the payout ratio for the current quarter comes in at 77.1% versus 87.1% in Q2 of ‘12.

In our 2012 year-end, we introduced reporting on AFFO or adjusted funds from operations and based on our calculation, AFFO was $0.30 for the quarter ended June 30, 2013, resulting in an payout ratio of 90% this quarter versus 100% in Q2 of 12.

Couple of other things I would highlight the REIT does have a DRIP participation in place or distribution reinvestment plan, that participation in that plan is currently running well over 10% and provides us with a source of cash flow on a monthly basis.

The REIT needs to qualify under Canadian tax laws to meet a REIT exemption, we believe we have met that in prior years and that we've also met in 2013 year-to-date and we feel we'll be able to meet it going forward in 2013.

The REIT has a program in place called an ATM program or at the market securities program, it's good for the next two years. It allows us to issue securities in small amounts and would not likely be used for any major acquisitions, but it could be used to fund development projects or other short-term cash needs. We've not used the program in the past and so no units have been issued under that program.

The REIT has an operating facility of $80 million, we had a small balance withdrawn at the end of June, but we have repaid that subsequently from cash on hand. There's several acquisitions completed subsequent to the quarter, they're all detailed in the notes to the financial statements. And if you do the math on those acquisitions, we still have un-invested cash as well as full capacity on our line of credit.

We do continue to review potential acquisitions, although Armin will tell you we've slowed that down a bit but we look forward to continuing to grow the REIT.

And that really, for me, completes the financial review. We feel it was another great quarter for us, and we look forward to demonstrating great results from operations in future quarters.

Back to you, Armin.

Armin Martens

Well, great thanks, Jim. And I'll ask Kirsty

Kirsty Stevens

Thanks, Armin. So we closed the quarter at 232 properties with our GLA at just about 24.7 million square feet. Our asset allocation by property NOI at June 30, was relatively unchanged from the previous quarter.

Geographically, our four largest segments remain Alberta, about 39%, Manitoba at 13%, Ontario at 14%, and Minnesota at 12%. Subsequent to June 30, 2013 we have closed on 161 Inverness and the sale of Mid City North and announced the planned acquisition of North Scottsdale Corporate Center II. Factoring these in our portfolio is expected to stay at about $24.8 million mark pro forma NOI mix will shift to 53%, office 24% retail and 23% industrial.

Geographically, the mix will be 39% in Alberta, 9% BC, 12 in Manitoba, 6% in Saskatchewan, 12% in Ontario, 12% Minnesota and 10% in our other US markets. The occupancy at June 30, '13 which was 95.1% which was a 50 basis points increase from June 30 last year.

On a sequential quarterly basis occupancy plus commitments on vacant space actually increased to 10 basis points to 96.9%, occupancy decreased slightly. The occupancy decrease is attributable to timing of lease commencement in two Calgary office properties since June 30, a significant 98,000 square foot lease commitment has now commenced.

And a further 20,000 square foot of lease commitments are slated to commence in September. Those commitments alone would increase occupancy nearly 5% in the Calgary office segment and 50 basis points for the portfolio overall.

We are actually overall very pleased with the stable trends in our occupancy across the portfolio having stayed above the 95% mark for, I believe this is the fifth quarter.

On to our leasing activity, we had a very good quarter and Q2 '13 approximately 598,000 square feet were renewed and the weighted average rate increase on those renewals was that's 10% that's 8% on a year-to-date basis.

In Q2 we completed a significant lease renewal with 150,000 square foot industrial tenant in Toronto, at an excellent list lift in rental rates almost 18%. We did a number of renewals in our Winnipeg office properties most notably in 360 Main and in the Grain Exchange Building also at significant rental rate increases.

And our Regina and Fort McMurray retail properties in particular with and particular had very healthy renewal rate increases.

As of today 65% of the remaining 2013 expiries have been renewed or committed to new leases. Significant deals include 33,000 square foot renewal in Medicine Hat, 31,000 square feet of renewals in Calgary downtown office properties at [list] in rental rate and renewal of 30,000 square feet in one of our Winnipeg office properties, as well as absorption of about 52,000 square feet coming out of vacancy in industrial in Minnesota and industrial in Calgary.

As previously mentioned on the last conference call, we have concluded the renewal of the [Emex] lease in Calgary, 200,000 square feet. We're now pleased to say that the renewal rates have been at [32] and we're looking at $25 square foot rates for the next two years which is excellent. The only other key tenants in our top 20 list that roll within the next area is PMC Sierra and we're pleased to note that since June 30, we've also renewed them for a further three-year term.

The weighted average terms and maturity of leases in the portfolio at June 30 was 4.9 years unchanged from March 31 and up slightly from 4.8 at December 31 of ‘12.

On to the market rents, average market rents for the remaining 2013 expiries and the 2014 expiries are estimated to be 4.2% and 8% respectively above the expiring in-place rent. That translates to a potential revenue impact of $3.5 million on an annualized basis. Market rents for the entire portfolio at June 30 are estimated to be a healthy 7.6% above in-place rents across the portfolio.

Compared to Q1 of ‘13, the gap for our 2014 expiries is up a little from 7.7% to 8.0% and the incremental revenue estimate for the 2015 expiries is also up from last quarter.

For the total portfolio, there is a slight decrease in overall market rent gap from Q1 and this is attributed to the successful Q2 leasing activity that we completed, the integration of new acquisition to leases in some cases where we are closer to market, and some one-off retail and office properties where we adjusted market rents for some leases falling during 25 say years or later out.

In terms of portfolio growth, we continue to take advantage of opportunities to redevelop our properties or intensify where we can. In construction or recently completed, we have build-to-suit project in the [NIMO], which is now done, and tenant took possession in June.

We estimate the IRR on that project was over 10%. Linden Ridge is a big project underway in Winnipeg. It represents 87,000 square feet, 100% committed as of now to high profile national retail tenants. This development is occurring on excess land at our other Linden Ridge property. We anticipate yields will be better than 8%, and as well as to have positive impacts on the rest of the center.

Other properties that we have got in redevelopments are 1595 Buffalo Place. We don’t have any significant updates since last quarter on this, but leasing prospects remain strong for a new generation asset in this particular market.

2781 premise was added to redevelopment in 2013. We were pleased to say that almost 27,000 square feet of the 38,000 square feet is now leased at rates higher than previous tenant was paying. The tenant is now taking possession of this space as of August 1 and prospects for the remainder of the space are still very good.

1750 Inkster is the 196,000 square foot property located in the Inkster Industrial Parking, Winnipeg. It did come back to us unexpectedly and we will be redeveloping that for single or multi-tenant use once suitable replacement tenants were lined up.

We've also made some big new announcement for future development opportunities which are in the MD&A. We won’t read through all of that, but we'll update on that in future quarters as they progress.

I'll finish up with just a comment on the cap rates for the fair value. We closed the quarter at 6.33% overall cap rate which is down slightly from 6.4% at March 31. This was largely due to cap rate compression in the Winnipeg office and Winnipeg retail segments as well as some market rent increases in the Winnipeg industrial, [casual] and retail segments.

So I'll end with the announcements that we've made the units, the Series G unit offering which closed. We have got about 87 million in cash on hand, plus the full availability of $80 million line of credit. The pro forma gross book value with all the announced acquisitions would be about 5.06 billion and debt to GPV was just slightly over 49%.

And that concludes my part of the presentation. I'll turn it back to Armin.

Armin Martens

Great, thanks, Kristy. Some additional commentary from me folks and then we will wrap it up. So first of all, I think it’s fair to say that the second quarter of 2013 has taken us all by a little surprise, an unexpected increase of 30 to 75 bps in the 5 and 10-year Canadian and US bond yields which caused the lead index to pull back significantly causing many to push the pause button on new deal pending more visibility in the capital markets.

In the meantime Canada and the US continue to lead the G7 countries in terms of economic growth, but the European and global economic fundamentals continue to counterbalance on the weak side. Looking ahead it is our view that both the US and Canadian economy will perform well in the years ahead with the slight [entry point] to the US economy and among other things this will be reflected by a stronger US dollar.

With respect to government driven interest rates, bond yields have moved against us but remain in a relatively low trading range. Fortunately we are seeing spreads compressed a little for short-term mortgages up to 5 years, but spreads on 10-year terms have not come down yet. However, this should improve hopefully in the New Year when banks and insurance companies [reload] their mortgage funding allocation.

So today 5-year mortgage rents are still in the 2.5% range while 10-year mortgage rates have moved up to the 4.5% plus range.

Notwithstanding our view that interest rates will remain in normal trading range for long time, almost all new mortgages taken out by Artis have been either for 7 or 10-year terms. In addition, [as the next] we have been moving to fixed and extend terms on some of our floating debt and also Jim mentioned (inaudible) 11% of our debt is floating at this point. And by the end of the year we expect to reduce that a little more.

In terms of acquisition cap rates in Q2, they have leveled off or moved up slightly depending on the asset class and specific property. So Class A property cap rate would still be level, but Class B and C properties would have moved up 25 to 50 point. In any event we are not seeing cap rate compression any more.

On all of the asset class, office, industrial, and retail property markets continue to experience healthy occupancy levels in our target markets. Looking ahead, we will have to monitor new office developments in Toronto, Vancouver as well as Calgary and this may put negative pressure on occupancy rates, potentially rental rates as well. Other than that, real estate fundamentals in all of our asset classes and submarkets are quite solid.

In our US we are enjoying the fruits of a slow but steady economic recovery that is in turn producing positive real estate fundamentals. General consensus is that the wind is now behind the US real estate market and our same property NOI growth in our US portfolio is reflecting this.

In terms of our portfolio performance we feel that our metrics are quite good. We have a healthy gap between in-place rents and market rents and we are achieving good weighted average rental increase on our renewals. Again and again our same property NOI growth is reflecting this. So our leasing progress is quite good, almost all of 2013 has done now and about 25% of our 2014 leasing program is also complete.

In terms of our geographic diversification, while we continue to be primarily a Western Canadian REIT with about 65% weighting in Western Canada, 12% in GTA and 22% in the US And as previously mentioned, we continue to see a solid value proposition in the US and we anticipate increasing our US weighting to the 25% to 30% range over time.

The economy, the real estate fundamentals and foreign exchange are all moving in favor of the US health. So having said that, Artis has pushed the pause button on new acquisitions now, lending more visibility in the capital markets. Year-to-date we have acquired less than about 500 million of new properties, all excellent real estate. So we've done about a year’s work already on this product and now we’ll be patient and continue our strong focus on internal growth.

At the end of the day, it's all but value creation for us. So in addition to making accretive acquisition in our target market when possible, we will continue to work hard to keep our buildings full, whilst bringing the rent up to market and then slowly but surely increasing our value enhancement and development pipeline as well.

So now three key metric. Our balance sheet (inaudible) real estate Artis management is making improvements and that continues to be our core strategy one quarter at a time and that would bring (inaudible) folks that it's been a very good quarter. We're pleased with the results and now I'll ask the moderator to take hold and field your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question is from Mike Markidis with Desjardins Securities. Please go ahead.

Mike Markidis - Desjardins Securities

Just a quick question. I saw that the office occupancy in your occupancy stats went down about 270 basis points sequentially and I see that the committed is actually regained sort of a dip. Was that just related to the Q1 lease terminations that you had at those two properties?

Kirsty Stevens

Not necessarily, we’ve just got some timing differences. We’ve got as I mentioned in my notes Mike, there is two big deal kicking-in in two Calgary office properties or actually in fact one of them was one of the lease termination that we mentioned in Q1 and we do expect to see most of that occupied by the fall.

Mike Markidis - Desjardins Securities

Okay. And I think the other one was, I think it was Concord in Toronto right in GTA?

Kirsty Stevens

That’s correct that will be the other one.

Mike Markidis - Desjardins Securities

And when is that one schedule come back online?

Kirsty Stevens

We have some commitments against it, but I don’t think its been fully replaced yet.

Mike Markidis - Desjardins Securities

Okay. And just with respect to the other terminations and I apologies if I missed this in your opening comments, but the 0.5 million that you registered this year, what properties was that (inaudible) or was it sort of broadly based?

Armin Martens

It was more broadly based this time, Mike they were just kind of a number of smaller tenants that.

Mike Markidis - Desjardins Securities

Okay.

Jim Green

Mike pass that first question, we’ve got a tenant called (inaudible) just signed a new 10 year lease in our Trimac building. The lease has been signed and they are moving in September that’s about 42,000 square feet lease. So we’ve got a tenant called [Calvert] owned by Schneider Electric that’s part of the (inaudible) part portfolio, its one of the three building single tenant and so that’s another tenant moving September, so that’s the gap in terms of occupancy versus concession.

Mike Markidis - Desjardins Securities

Okay. Thanks that’s helpful. Just with respect to the development that you disclose in the MD&A, just give us a little bit more color about how that what exactly is happening there I guess with Longbow and Manitoba Public Insurance?

Armin Martens

Yeah. When we update our Q2 investor presentation on the website, there will be more color there. So with Longbow that's about a $75 million joint venture, that’s under construction might be about 25% up.

Jim Green

Well we have two with Longbow; one is at [Center Point] that’s under construction and there will be (inaudible) Stantec Engineering and two restaurants and the main tenants is about 80% preleased. That’s across the street from the (Inaudible) Arena then just getting closer to the (Inaudible) Arena on south (inaudible) we have a memorandum of understanding that we just renewed with the NPI on a joint venture basis to develop a parking lot and they are constituting two office towers and a hotel pad. So we hardly put a dollars value and (inaudible) a $100 million project and on (Inaudible) wouldn't be part of our, but there would be two office building of about 200,000 square feet, and we are optimistic that overtime that will go ahead. And then as Kirsty mentioned we've got (Inaudible) shopping center under construction and some other. Up in Edmonton we are just finishing up the second phase, we are starting do it on an industrial development. And so things like that are what’s starting to work on.

Mike Markidis - Desjardins Securities

So, just with the potential second deal that you mentioned with Longbow, how does that deal work like you said you've got a one year exclusivity arrangement.

Armin Martens

That's correct. So, it's at good pace, it’s non-binding in the memorandum of understanding that (inaudible) go to letter of intent and then later to binding agreement. But we're in the preleasing stage for the office towers as well the negotiations or discussions at least with the hotel operator for the hotel pad. And it is joint venture with us and Longbow and then the government. So that inherently take a little bit longer, but there’s a lot of good space in this process right now, we have a lot of confidence in the relationship.

Mike Markidis - Desjardins Securities

Okay, and then just given the center points underway, what do you see as the sort of the prospects for that project on timeline basis because this is something that the Winnipeg market can absorb in the near term?

Armin Martens

That is not a lot that’s left in here. I think we have 23,000 square feet left to lease there. The building is scheduled to be at the end of next year so we’ve got sometime, new generation (inaudible) so we will but the – so being 89% preleased is pretty good.

Mike Markidis - Desjardins Securities

That is the first project, and then the second project do you have a preleasing threshold, now that you target before you put [something] around?

Armin Martens

It will be pretty high in terms of percent of the building, it will be very high, because Winnipeg has a good stable predictable market, but not necessarily a lot of depth and velocity, so it will be well over 20% in terms of pre-leasing before we start.

Mike Markidis - Desjardins Securities

Okay, and just last before I turn it back. You made some comments about the New Supply Act coming online in Toronto, Calgary and Vancouver and I don’t you are (inaudible) with what anybody else is expecting there, and I guess the majority of your offices in Calgary as we know obviously you have very much exposure to Vancouver and Toronto. So I think the Calgary office occupancy is around 9, you know some of that is just due to timing, but where do you kind of see the portfolio in the next year two or maybe even three. Do you think having a 95% occupancy rate and the market rents that you have in place, do you see those kind of holding steady or do you think we might see some pressure on those backups?

Armin Martens

Surprising to see some negative pressure, but the new construction is not coming on for a couple of year right and it’s staggered. Right now the new spec construction that is planned in Calgary it’s no longer pre-leased and it matches fairly well with theoretical historical absorption, historically the average about 600,000 square feet of losses absorption in Calgary, but you can get a quarter or two and nothing happens and then you will get a big boom so there is big swings there. So it’s hard to predict, we remember couple of years ago when vacancies were pretty high and the net absorption was zero and then all of a sudden it picked up significantly and we all got, if you will, and before we knew the new spec buildings got announced.

So it’s hard to predict but generally, looking ahead we should expect a negative effect on occupancy levels and rental rates. We might manage to it very nicely, but it’s hard to predict. We don’t have much exposure to CBD Vancouver or Toronto but we don’t know where the trickle down part or trickle down affect will be right. So its worthy of mentioning, it is no offence suggesting that every thing is (inaudible) because everything isn’t. In our case I guess 25% of our portfolio would be Toronto and then Calgary and Vancouver office. But as I mentioned in my preamble other than that things are going very well, either good to very good in all of the other markets and submarkets and asset classes.

Operator

Thank you. The next question is from Heather Kirk with BMO Capital Markets. Please go ahead.

Heather Kirk - BMO Capital Markets

Just on the internal growth should I have two end point Ontario being at the low end then the US being very strong in the double digit, could you talk a little bit about what your expectations are for those two market and whether the Ontario was strictly related to that Concord lease?

Armin Martens

I'll let Kirsty correct me. The Concorde and I think Cancross, those two properties that gave us the drop in same property NOI. And we're going to cycle through that. We've got prospects in Concorde, and that we're dealing with, we've got excellent, while we've got some good news announced soon at Cancross.

So we'll cycle through that, Heather, and then before you know [show] positive NOI growth at our same property basis and our GTA portfolio as well. Then on rest, not going to shift a little bit but we still continue to believe that we'll has good, balanced, healthy same property NOI growth out west.

Kirsty Stevens

Just now we had, there were three properties, and just pardon me, Ontario office that had occupancy decreases on a year-over-year basis. So that was the Cancross and Concorde, that Armin mentioned as well as Meadowvale which was one of the properties, would the early termination that I believe we reported on a Q1.

And we've got about, we got over 50,000 square feet of that committed, now, I didn’t run out the math on the NOI. That's all, but of that but I can tell you that we've got commitments in place, and that was the big chunk of what that negative was.

Heather Kirk - BMO Capital Markets

And do you see that as part of a trend of the Toronto market in general or can you just comment on what kind of leasing velocity you're seeing?

Armin Martens

While we feel that things are getting better with our specific portfolio and those properties that suffered, so as I said, I don't think roughly negative, same property NOI growth for long, and we'll see improvements there. And that means that Toronto market is still, I would call a healthy office market. I wouldn't call it strong but I'd call it fairly good.

And in terms of the new construction with CBD, well that, we're not there yet in terms of feeling the repercussions there and if there will be a trickledown effect the B and G buildings into the core and outside into the suburban market, but I'm not -- and we're still cautiously optimistic in general, about our portfolio, yeah.

Heather Kirk - BMO Capital Markets

Okay. And turning to the balance sheet, in terms of fixing the floating debt, what kind of rate shave are you going to expect and how much of that would you expect to do over the next 12 months?

Jim Green

Sorry, Heather, on the stuff, that we've already done you're asking or the stuff, we're looking forward to [doweling] forward?

Heather Kirk - BMO Capital Markets

Yeah. The stuff you're looking to do going forward, I'm just kind of trying to get a sense of what kind of interest rate increase you might have on fixing.

Jim Green

Depends a little bit on term, floating rate money in the US right now is generally costing us around 2.6 call it and if we fix it for a blend of 5 to 10 year money we're probably talking 3.5, so it'll be in the range of 90 to 100 basis points on the debt as if we lock it out for longer terms.

Heather Kirk - BMO Capital Markets

And how much of that are you planning on would you be prepared to fix?

Jim Green

May be another $80 million roughly, which will bring us down to around the 8% mark of volume rate that, between 7 and 8.

Heather Kirk - BMO Capital Markets

Okay. And just one quick little question, AMEC lease if I understood correctly, you said it was extended for two years?

Jim Green

Correct.

Heather Kirk - BMO Capital Markets

And I'm just wondering if that was, why it would have been such a short term

Armin Martens

That was the option that the tenant had in their lease and the exercised it.

Heather Kirk - BMO Capital Markets

Was extending that further explored or…?

Jim Green

Yeah, it was, we certainly offered them to do it and I think the AMEC was interested, but they're kind of governed by Exxon or Imperial Oil, who their customer for that space and the decision was just to keep it at the two-year term.

Armin Martens

Yeah, just to add to that Heather, what they got is two-year in options to renew and it just triggering one at a time, but their head office is in the UK, it is what they -- we tried to make it a 5-year renewal of that but we couldn't get any traction at the local level.

Heather Kirk - BMO Capital Markets

And they have any additional two-year option?

Armin Martens

After this they can trigger another two-year option and after that, and we started negotiating again.

Heather Kirk - BMO Capital Markets

Okay, great. Thanks I'll past it over.

Operator

Thank you. The next question is from Michael Smith from Macquarie. Please go ahead.

Michael Smith - Macquarie Research

Thank you. Armin you talked about 25 to 50 basis points expansion in cap rates for B and C type properties. Was that just Canada or can you comment on what's going in the US?

Armin Martens

Yeah, it's based on my informal survey and I'm in discussions with brokers in Canada all the time in that space and the feedback I'm getting from them. In the US I wouldn't say, I guess it's hard to say just I know that the Class A properties we have gained is that for sure we haven't gone up, the cap rates would be level.

But the B and C, I think it's fair to say, that they moved up there, but in the US, if you look at what we're buying in the US we're always looking to buy the Class A properties or will it B, B plus property at in a Class A location.

Michael Smith - Macquarie Research

Okay, given the world has changed a little bit in terms of cost of the equity and access to equity. Are you thinking about selling assets to, you've got some good value creation opportunities it looks like with the [Lynridge] and Nanaimo, and all the other stuff outlined Center Point and your preference for the US would you consider selling assets and more assets to fund expansion in those areas, various and can you give us an update on the two assets that you put up for sale in Calgary?

Armin Martens

In terms of assets, yes, we consider that. We consider things like our [NCIB], but we don't trigger it. We consider a lot of things we consider selling an asset or two, buyback our units or redeploying into better quality assets, nothing to announce there though.

The two properties that [Britannia] shared, and listings been given out and the market will be launched in September. If you drag down below than I thought with the things that have happened in Northern Calgary, we just thought we'd just take a summer off in terms of marketing that property. Also with the capital markets, let's better just let things settle down a bit, and if we have something to sell, we'll target the sale and marketing for the fall. So no opting on that either.

Michael Smith - Macquarie Research

So but you're definitely the decision is made to sell those properties?

Armin Martens

It's listed.

Michael Smith - Macquarie Research

Okay.

Armin Martens

And we have to be happy with the price, this is not a fire sale, if we're not happy with the prices, we'll keep it, we'll mange it, we're making money on it so we'll sell it, but at the right prices, certain things they are for sale.

Michael Smith - Macquarie Research

You talk about considering it, like has there been any change in strategy like you’ve now achieved the size you want to achieve you've expanded sufficiently in the US and are you changed, you've been making conscious effort to upgrade your assets through acquisitions in your latest acquisitions.

So is there anything more like I guess what I am reading between your lines is there's not really any change in terms of selling assets, is about your thinking of selling assets that’s kind of on the table but not, it’s not a major item?

Armin Martens

That’s fair assessment, more consideration to that, that we have certain scale. And we’ve got a credit rating but we’ll - it’s not as if we, we're in a position that we would announce a strategic transformation, safe selling $500 million of property and redeploying the money in the different direction, we're not at that stage at all.

Operator

Thank you. The next question is from Brad Sturges with CIBC. Please go ahead.

Brad Sturges - CIBC

Hi, I was just wondering a couple general questions just more on your development redevelopment strategy just wanted to get a sense on when you do commence the project and achieved your pre-leasing, is there a particular return on capital IR, that you typically look to achieve before commencing a project?

Armin Martens

Well, generally leave a [gild], that's high as possible but as a minimum better than market, right. So we’re not - as REIT, we're not always IRR-driven, we're looking at accretion at yield instance gratification and of course the long - as long as we have to (Inaudible) long term value of that property meaning that the IRR will look good. So, for example, in (inaudible) Alberta there a year ago, we added two stories and we added 40,000 square feet to an existing building there. We got it fully leased. That was about a 10% unlevered yield on that. This building and foundation was in place.

We built a 15,000 square foot office property in Edmonton, North City there on surplus land, now that would have been a 7% unlevered. We are just starting phase 2 in Edmonton on the (inaudible) industrial park, new generation industrial real estate. Cap rate will be 7.5ish. We're building a small -- quickly I am going to show one of these national (inaudible) Canadian oil change in (inaudible) on the surplus land we have and their about 12% return given that we had the land already.

Here in Winnipeg, Linden Ridge office, the returns will be north of 8% so that they vary a little bit and it will be positive pints north of 7%. It all vary. We want the best that we can get as the minimum threshold, that is certainly better than market in terms of buying. And the benefit of all of this as we know, that we're getting new generation real estate and then as I mentioned, a higher unlevered yields than we could get by months.

Brad Sturges - CIBC

So just concerned about maybe about that spread, but really more about investing in markets that have strong fundamentals and you can capture some growth out of it?

Armin Martens

So the general guideline is if a Class A industrial property would cost up to 6% cap in Edmonton, and we can develop 100 points or more than better, then we like it, then we go ahead but the development yields, once they are same as buying, then we wouldn't develop, we just buy.

Operator

The next question is from Matt Kornack with the National Bank Financial.

Matt Kornack - National Bank Financial

Just a quick clarification on the occupancy front, in terms of the committed space which you said would increase the in-place occupancy by about 50 basis points, was that space vacant for all of Q2 and how much of Q3 will be taken for before its rent paying and will it be in in-place occupancy by the end of Q3?

Kirsty Stevens

In the one case, it was related to an acquisition within the quarter, which we bought with the commitments in place, but the tenant not in place. So it was only there for the partial quarter. And for the other, I don’t have the answer in hand, I don’t recollect unless you (inaudible) recollect when that Trimac termination took effect.

Armin Martens

I think the Trimac termination took effect, what was in, it was very close to the start of the second quarter and tenant takes this occupancy again in September I believe, in September.

Unidentified Speaker

Yeah.

Matt Kornack - National Bank Financial

Okay. So Q2 to Q3, it should be relatively stable and then we’ll see the impact in Q4?

Armin Martens

Right, correct.

Operator

(Operator Instructions). The next question is from Mario Saric with Scotia Bank.

Mario Saric - Scotia Capital

Just coming back to capital deployment, the units are trading (inaudible), just wondering entire sector is kind of sold off here, but I am wondering what the trigger is to perhaps look at your NCIB a bit more actively?

Armin Martens

Yes, it’s a question because we are just qualified for our DBRS investment grade rating and that life we got from DBRS is that we want to improve that grade rating just to get bigger. They are comfortable with our balance sheet, and our payout ratio and our metrics. So without incline to and decrease our market cap without a good reason. We are getting consideration however to deploying NCIB enough to offset the drift, that we can consideration to that, but we haven't done anything yet.

Mario Saric - Scotia Capital

And then just coming back to the in equities, given your affiliation with internal oil, was there any suggestion during your discussions with them that they may migrate down to Quarry Park in a couple of years time?

Armin Martens

We haven't heard, and we think it's completely different space and this is project space or the -- I can’t in pronounce that while in all status project than any of that (Inaudible). I don't they would, I think they will stay here as long as they are working on that particular project, they spent fair a bit of their own money on the improvement coming into the space.

So I can tell you was that we have a good relationship with the parent on site, it's full of bodies and people working there. We were moving, we're in a LEED certification program with that building towards couple of our properties and we know that's the part of the tenant and parts that’s been as landlords on a go forward basis.

So we would think we want to see there in Quarry Park and that was their downtown or different people. We will see what happens overtime, but Exxon is one of those global tenants that does seem to migrate to the suburbs more than other tenants, downtown isn’t always a preferred location.

Mario Saric - Scotia Capital

Great. And do you have any sense of how much new more work is required on that project?

Armin Martens

Which one the Quarry Park?\

Mario Saric - Scotia Capital

No, like correlate for example is there enough work for that?

Armin Martens

(inaudible) probably you can go private because once again going they keep expanding them. So I can’t give you appropriate answer on that, but oil sand production continues to increase year-over-year as long as they can get to fund the pipeline space so that the real cars and trucks get the product to the market. They all keep expanding.

Mario Saric - Scotia Capital

Okay. And maybe a broader question with respect to the tenants in your building, can you just talk about any trends you are seeing in terms of space contraction or space rationalization?

Armin Martens

No, and we are reading the same articles about Class A tenants in particular buying the best space but leading on a current employee basis and we would like for a floor here in Winnipeg and that (inaudible). We think it different. So like for example always have the efficient space but there was no shrinkage there at all. We are renewing a long-term now. We don’t see any shrinking at all, because may be -- because they also plan on growing al little bit as well. But we are not seeing that. Think about the new generation space is that all cost a lot of money, then you have to do it right this time , but to do it right this time, we are guiding and just paying a lot of money $100 and more per square foot, not finishing. So it’s not where we can it that moving, and you are not obey to do and do the calculation and we can still work because we have less space per employee. So we are now seeing a pretty good and all thought we are not seeing that type of trend we’re experiencing.

Operator

Thank you. There are no further questions registered at this time. I’d now like to turn the meeting back over to Martens.

Armin Martens

Well, thank you again moderator and thank you everybody for joining us. We appreciate the very busy week and busy day everybody. We wish you all a very good weekend and look forward continue doing them in the near future. Have a good day.

Operator

Thank you, Mr. Martens. The conference call has now ended. Please disconnect your line at this time. Thank you for your participation.

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