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Executives

Armin Martens – President and CEO

Jim Green – CFO

Kirsty Stevens – Chief Administrative Officer

Analysts

Michael Smith – Macquarie Research

Heather Kirk – BMO Capital Markets

Jenny Ma – Canaccord Genuity

Brad Sturges – CIBC

Matt Kornack – National Bank Financial

Herbert Thompson – Scotiabank

Artis Real Estate Investment Trust (OTC:ARESF) Q3 2013 Earnings Call November 8, 2013 1:00 PM ET

Operator

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

Armin Martens

Hey thank you very much moderator. So good day, everyone. Welcome to our Q3 2013 conference call. Again my name is Armin Martens. I’m the President and CEO of Artis REIT, and with me on this call is Jim Green, our CFO as well as Kirsty Stevens, our CAO. So to begin with, I’d like to advise our listeners that during this call, we may, at times, would be making forward-looking statements and we therefore seek Safe Harbor. So again please refer to our website as well as SEDAR filings such as our financial 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 us at the end of a busy week and I’m sure it’s going to be a busy day for everyone on the call. To beginning now I’ll ask Jim Green to review our financial highlights, then I’ll ask Kirsty Stevens to give us more insight in our operational results and then I’ll wrap up with some market commentary, and question and answers. So, Jim please.

Jim Green

Great thanks Armin and good afternoon everyone and as we’ve said welcome to our third quarter conference call for 2013. Well Artis this quarter has still continued with our strategy of external growth combined with gradual improvement overtime in all of our operating metrics. However it was certainly a smaller scale for us than our last several quarters. We added only two properties this quarter at a cost of about $113 million. Given current market conditions and the pullback of REIT prices in the last few months we expect that Artis along with most of our peers will be less active in the property acquisitions until everyone gets some more comfort that REIT unit prices property cap rates and interest rates have return to a more stable position.

We did complete an equity offering during the quarter of preferred units for gross proceeds of $80 million. We improved all of our operating metrics including NOI, FFO, AFFO and debt to gross book value and on a per unit basis these metrics also continue to show growth. With the reduced pace of acquisitions this has probably been one of the most stable quarter Artis’ having sometime. And we’re pleased that it demonstrated the accretive growth we’ve been able to achieve.

I’ll spend a few minutes reviewing in more details the results of our operations and then I’ll pass it by Armin and Kirsty for a bit more discussion.

So, looking at financial position in an essence balance sheet items our total assets continue to rise we’re now over $5 billion in assets investment, properties of course are by far the largest part of that and are valued at approximately $4.9 billion. We value our investment properties at fair value. The net fair value in this quarter was actually a small loss unrealized loss of about $3 million. We did raise out weighted average cap rate slightly about 3 basis points from Q2 and really have not seen or heard a lot of hard evidence of rising cap rates in Canada. We expect cap rates will stay somewhat flat or raised marginally due to the increased long term bond rates.

In the U.S. cap rates are still firm and in fact may even be compressing a bit further for high quality assets. Well on the debt side convertible debentures of September 30th we had three series of convertible debentures outstanding, a small amount matures in 2014 series F matures in 2020, series G maturing in 2018 is denominated in U.S. dollars unless debentures provide a bit of a natural currency hedge for the assets we own in the United States total amount outstanding on debentures at face value of approximately $183.7 million.

Debt-to-gross book value ratios continue to decline and as we’ve mentioned in prior quarters it’s a conscious decision by management that we will over the time, overtime lower the leverage in the REIT. So, we expect to continue this trend for the remainder of 2013 and into 2014. At the end of the third quarter our total debt mortgages and convertible debentures was 48.7% of our gross book value and mortgages of loan were 45.0%. Artis has some floating rate debt exposure in our mortgage profile we’ve talked about this is prior quarters. We have approximately $245.7 million of floating debt that has not been hedged or swapped to-date and this represents approximately 10% of our total debt that’s down from 13.5% last quarter and probably is in the range where we feel comfortable that we will keep it somewhat close to that level.

We feel we benefit from the low interest rate on the floating rate debt and it also allows us flexibility to sell assets as an opportunity arises with – large debt penalty costs. But our floating rate debt would be exception of our line of credit is all term debt it’s not demand and it can’t be called by the lenders until maturity. We have the ability to poise interest rate swaps at any point in time to fix the interest rates and in fact you saw us do some of that during Q2 which is the reason that percentage of floating rate debt came down.

On the mortgage maturity side at September 30th 2013 Artis had approximately $170.6 million of mortgage obligations maturing in the next 12 months this represents just over 7% of our total mortgages debt and we don’t anticipate any difficulty in refinancing these as they mature. Our weighted average term is 4.5 years and that’s up slightly from 4.4 at the end of 2012. Weighted average interest rate on outstanding mortgage debt continues to decline in the low interest rate environment. Weighted average nominal rate on our debt is now 4.11% down very slightly from 4.12% at the end of the second quarter. With the low interest rate environment we’ve been looking to extend the terms of financing and are generally looking at terms of 7 and 10 years were possible for new acquisitions and refinancings.

Turning more to the income statement side, total revenues continue to rise property income from continuing operations was $78.6 million for the quarter up from $63.5 in the same quarter last year proven largely by acquisitions but also weighted by growth in our same property operating results. In this particular quarter we did have some significant lease termination fees sort of one-time cost that we get or one-time revenue that we get in the middle future income streams.

A portion of these fees relate to termination of our lease with Zellers and Victoria Square Property in Regina that space was roughly 105,000 square feet and we’re planning to subdivide it into smaller components. We’re pleased to report with that great leasing interest in the space currently trading paper with some new tenants and we anticipate getting a substantial portion of at least shortly. The lease termination fee would be substantially in excess of the lost rent for the period its releasing.

Looking at the same property operating metrics we’re very pleased to report our same property operating results for the third quarter showed an overall increase of $1.9 million or 3.8% raising our year-to-date same property growth at 3.1%. During the quarter as I mentioned earlier we did receive some lease termination fees but we do not count these in the same property store numbers so what’s presented is pure same property growth without factoring in lease termination fees.

Pleased to report we have positive growth in all segments of our properties our industrial segment perform the best this quarter with overall same property growth of 8.1% for the quarter driven by both increases in rental rates and occupancy. Our rental segment this made a small drop in occupancies those showed growth of 5% for the quarter and office rent, office properties even though the vacancy declined around 1.3% quarter-over-quarter still showed same property NOI growth of 1.5%.

If we look just at our U.S. portfolio the same store growth was 6.3% for the quarter, in our opinion we think the U.S. economy will outperform Canada in the next few years and we expect to see continued growth in our U.S. property portfolio. Looking at some coverage ratios, our interest coverage ratio is 2.3 three times for the current quarter bringing it to 2.8 four times for the year-to-date that I think is probably a record coverage ratio for the REIT and we were pleased with it. Debt service coverage was 1.89 times for the quarter and its well within any of the covenants given to our lenders. Our ratio getting more attention these days is net debt to EBITDA ratio our ratio of net debt to EBITDA was 7.6 times based on the September 30 numbers down from 8.3 times at June 30. Our quarterly calculation in our case we just take the actual quarterly results multiplying by four with no adjustment for the timing of acquisitions completed during the quarter.

The REIT has a fairly significant portion of our assets in the United States roughly $1 billion and this requires that we convert assets held in U.S. funded back to Canadian dollars at the end of each quarter. This results in the foreign exchange gains and losses on our income statement and also affect other comprehensive income the longer term assets in essence to the income producing property and the debt get translated and the gain and loss on that flow through other comprehensive income.

The REIT in our opinion as a natural currency hedge in place to the extent that we have roughly $1 billion of assets in the U.S. $568 million of U.S. dollar denominated mortgage debt and $86 million debenture payable in the U.S. dollars and $75 million of preferred units so also redeemable in U.S. dollars and that opinion this gives us a call it natural currency hedge of approximately 73% of our U.S. exposure. Given our anticipation of the Canadian dollar well if anything weakened further against the U.S. dollar we have no plans to hedge the remaining exposure at the present time.

Looking at our non-GAAP metrics I guess funds from operation is certainly one of the biggest ones. There is a guideline by REALpac or the Real Property Association of how to calculate – FFO and Artis calculates our FFO in accordance with this guideline. Our FFO for the quarter on a diluted basis was $0.38 compared to $0.33 in the Q3 last year and our payout ratio in the current quarter was 71.1% versus 81.8% in Q3 of 2012. In our 2012 annual report we also commenced reporting on AFFO or adjusted funds from operations and based on our calculation AFFO was $0.33 for the quarter ended September 30th resulting in a payout ratio of 81.8% versus 90% for the same quarter last year.

Few other highlights I’ll touch on just Artis has a DRIP or distribution reinvestment program in place, participation continues to run in excess of 10% and this provides us with a monthly source of cash flow. From a REIT tax status the REIT believes its net to REIT exemption in prior years and that also in 2013 to-date 100% of our distribution in prior years were return of capital so we do not feel we have any significant risk should the REIT become subject to tax. Management beliefs will be able to continue to meet the REIT exemption for the balance of 2013 and beyond that’s an ongoing test that we must meet at all times.

Artis put in place a couple of years ago a small program called ATM or at the market program to issue securities in small amounts, it’s good for the next roughly year and a half wouldn’t be used to fund acquisitions but could be used to fund smaller development projects or other short term cash needs. We have not used that program to-date at all. We currently have an $80 million credit facility we have no balance drawn on the line and have not needed to draw it subsequent to quarter end.

Artis ended the quarter with $86.6 million of cash on hand, no balance drawn on our line of credit giving us the capacity to acquire further properties. However as I mentioned earlier we’re being very selective in the current market.

And that basically completes my financial review. We feel that was another great for us and we look forward to demonstrating our results from operations in future quarters and I’ll turn it back over to Armin.

Armin Martens

Well thanks a lot Jim and I’ll turn the floor to Kirsty to give us more insight in our operational results as well.

Kirsty Stevens

Thanks fellas. So we closed the quarter at 232 properties that leasable area was about 24.8 million square feet. Q3 as Jim said was pretty quiet for us North Scottsdale Corporate Center in Arizona and the Direct TV property at 161 Inverness in Denver, Colorado were acquired for an additional 49000 square feet of leasable area. We also sold in the quarter two industrial properties one in Minneapolis and one in Alberta together about 385,000 of leasable area. There has been no significant acquisition activity post quarter either.

So our asset allocation by property NOI at the end of Q3 remains relatively unchanged were still about 50% office, 26% retail and 24% industrial. Geographically the four largest segments are Alberta at 39%, Manitoba at 12%, Ontario at 13% and Minnesota at 12%. In total about just over 22% of Artis’ property NOI is from U.S. properties. And if you disaggregate our property NOI further the largest sub segments of our portfolio are the Calgary office properties at both 18%, Winnipeg office properties at 17.5% and Minneapolis industrial properties at 7%.

Turning now to occupancy. At September 30, we were at 95.8% which was up 50 basis points from the same time last year. We are pleased to say that occupancy has stayed at or above the 95% mark across the portfolio for full year now. Occupancy increased 70 basis points from June 30 to September 30. Occupancy plus commitments decreased just slightly but this was largely timing as commitments announced at June 30 came into effect, our tenants were in occupancy at the end of September.

Same property occupancy was relatively unchanged 95.3% at September 30 compared to 95.4% this time last year. The weighted average turn to maturity of leases across the portfolio at September 30 was 4.9 years, did not change from June 30 and its up slightly from 4.8% at the end of the year. The only tenant in our top 20 list which will open in the next year is PMC Sierra and we’re pleased to report we’ve now renewed them for further three year term.

Turning to leasing activity. We had another very strong quarter in Q3 of 2013, about 700,000 square feet was renewed. The weighted average rate increase on renewals for the three months and nine months period ending were 5.2% and 7.1%. Our rate increases are calculated based on rates and affect at the time without averaging or straight-lining the rates over the term. All three of our asset class segments contributed strongly to the rental revenue increases here. Most notably in Q3 we did a renewal of 60,000 square feet for an office tenant in Saskatchewan where we were able to secure almost a 20% lift in rental rates. We renewed four tenants in two different properties in Fort McMurray’s retail portfolio. Once again we’re pleased with the results here and rates moved up on average $8 with the commencement of the renewal term. We also renewed at 21,000 square foot Calgary industrial tenant at almost a 24% increase in the rate.

Lease rollover risk for the balance of 2013 is well enhanced. We only have about 1 million square feet left to the report on for this year the majority of that was already committed as you can see from our MD&A at September 30. Retention for 2013 is been pretty good over 70%. Average market rents for the remaining 2013 expiries still have a bit of a lift we estimate about just over 2.1% above the expiring-in-place rates. So at this point we feel the 2013 leasing program is effectively complete and we’re making excellent progress already on our 2014 expiries.

Looking a little further ahead into 2014 market rents for 2014 and 2015 lease expiries are estimated to be 7.3% and 7.8% above the expiring-in-place rent. If you annualize that, that would translate to a potential revenue impact of $4.8 million. Across the portfolio for all of our years of expiry estimated market rents increased about a quarter to 1.8% or 1.8% to $13.92 at the end of September. Market rents we generally are today’s market rates, we don’t try and place them on forecast come into the future. We review them every quarter and make adjustments as required. Between September 30 and June 30 we couldn’t make a lot of changes, we didn’t see any significant changes in any of our market segments that would more – substantial revision to the rate.

Across the portfolio all years of expiry are in-place rents are also increasing, they were up 2.4% from June 30. Our in-place rents are those in effect at the balance sheet date and again we don’t straight-line or average them out. So the overall increase in our rates between September 30 and June 30 is mostly due to the very successful year we’ve had in renewing at much higher rental rates as well as to some step rents that took effect this period. In total across the entire portfolio we still estimate a very healthy 6.8% gap between in-place and market rents.

Aside from the leasing program there are also opportunities for growth from development opportunities, there we have a potential pipeline of about $200 million right now, we break that down into properties that are held for re-development, new developments that are in process and longer term opportunities or initiatives that we are working on. In terms of properties held for re-development these are primarily opportunities to reconfigure, rebuild our substantially improved existing GLA in the portfolio mostly to reposition this space for new tenants and to attract higher rental rates. Our properties held for re-development right now includes five industrial properties and one retail property.

In total it’s about 3% of the portfolio GLA. Construction is currently underway at 15.95 Buffalo and Winnipeg. We expect to have that complete in the spring of 2014 and work on the other four industrial properties will commence once we’ve – reach final deals with new tenants. Victoria Square is also in this category. As Jim mentioned we had a termination with the Zellers which is not a surprise. We’ve now put that into re-development, we have very good interest from a variety of tenants and we think this will be a very good news story in terms of our earnings potential and the center itself for next year.

When you look at developments that are in process we would categorize these as brand new leasable area which is constructed on excess lines in the portfolio. We have three of these projects underway comprising over 307,000 square feet of leasable area. The most notable and further strong is the Linden Ridge, we’ve got Sport Chek and Dollar Tree now on possession of their space and they are doing their TI work and we expect to turn over the space Marshall’s and PetSmart early next year to conclude their TI work.

We also have two industrial projects underway one in the Twin Cities area and one in Edmonton. Although we didn’t have the excess blend we also have the joint venture project underway on CenterPoint which is being constructed as a mix to its project right across from the MTS center very high profile place in the city here and we look forward to providing updates on completion of the thesis of that project in 2014. Thank you everybody spoke to the fair value program this quarter so I won’t talk to you on that other than to confirm that our program at September 30 did not reflect any significant changes and cap rates across all the market segments we simply didn’t see it in the market comparables at this point in time.

For Q3 we had minor adjustments in some Toronto office properties which led to this small overall loss and offsetting that minor increases and rent rate adjustments in the central and Western portions of the portfolio which led to the overall small minor loss. That would conclude my part of the presentation.

I’ll turn it back over to Armin.

Armin Martens

Thank you, Kirsty. Well first of all folks well we are gratified to see that things are settled down somewhat in the capital markets, I think it’s fair to say that the third quarter of 2013 continues to disappoint us a little bit in terms of the reaction of the equity markets to just a small increase in the bond yields. In any event this increase in the five and 10 year Canadian and U.S. bond yields has caused the read index to pull back relatively significantly from (indiscernible) causing many REITs including Artis to push the pause button if you will on new deals pending more visibility in the capital markets particularly the equity markets. In the meantime the U.S. and to some extent Canada continue to leave the G7 countries in terms of economic royalty, but the European economic fundamentals also continue to counterbalance on the weak side.

Looking ahead it continues to be our view that both the U.S. and Canadian economies will perform well in the years ahead with a slight edge going through U.S. economy and among other things, this will be reflected by a stronger U.S. dollar. But our new paradigm is of course (indiscernible) in the REIT sector, the easy money decade of interest rate and cap rate compression is officially behind us. We are now in a level of raising interest rate environment. So leasing and operations and organic growth will become the key drivers of AFFO per unit growth not interest rate compression.

Now with respect to government driven interest rates, bond yields have moved against us but remain in a relatively low trading range. Fortunately, we have seen spreads compressed a little for short-term mortgages up to 5 years as well but spreads on 10-year terms have not come down yet. This could improve in the New Year when banks and insurance companies reload their mortgage funding allocation. So today five year mortgages are in the 3.75% range while 10-year mortgages have moved up to the 4.5% range.

Notwithstanding our view that interest rates will stay in a low trading range for long time, almost all new mortgages been taken out by Artis as Jim as mentioned and have been either for 5 or 7 or 10-year terms. In addition, we have been moving to fixed and extended term on some of our floating debt and which a year ago 17%, 18% range – stays in the 10% range and we may even bring that down a little bit more in the quarters ahead. The floating debt we have we like and it’s good floating debt long-term 7-year term options to stand up to 10-year term no prepayment penalty we can swap and fix it any time. And it’s all basically in the U.S, at a low rate we’re averaging about 2% right now in our floating rate debt.

In terms of acquisition cap rates during Q3, while they corrected a little in Q2 but have leveled off since then. Class A property cap rates would still be level with Q1, and in my view they will stay remain level for the foreseeable future or even compressed a little bit, but Class B to C properties would have moved up 25 to 50 bps compared to Q1 but have also remained fairly leveled since Q2. So basically REITs are cheaper than real estate right now given the increase in demand for yield in real estate for more investor categories we feel we offer a new supply and demand paradigm meaning that we should not expect cap rates to move up much due to their structural and balance and the demand for good real estate.

On all of our asset class, office, industrial, retail property markets continue to experience healthy occupancy levels in our target markets and includes the Calgary office market which demonstrated remarkable turnaround last year and the years before that. But as we are thus far in 2013 have contracted somewhat. Looking ahead, we will have to monitor the new office developments in CBD, Toronto, CBD, Vancouver as well as CBD Calgary and this as this where we put negative pressure on occupancy rates and potentially rental rates as well. Other than that, real estate fundamentals in all of our asset classes and submarkets are quite good.

In our U.S. markets we are enjoying the fruits of a slow but steady economic recovery that is in turn producing positive real estate fundamentals. New commercial construction is still at a 7-year loan and there is minimal spec development taken place. The general consensus is that the wind is now behind the U.S. the real estate market in the U.S. and the organic growth and Artis’ 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 and are achieving healthy weighted average rental increases and our organic growth our same property NOI growth is also reflecting this. Our leasing progress is quite good as Kirsty mentioned 2013 leasing program is basically complete almost have done and in terms of dealing with renewals is 2014 are working on major lease in 2014 as well.

Now in terms of our geographic diversification continue to be primarily a Western Canadian REIT with about 65% weighting in Western Canada, 12% in the GTA and 23% in the U.S. as previously mentioned, we continue to see a solid value proposition in the U.S. and we anticipate increasing our U.S. weighting to the 25% to 30% range.

The economy, the real estate fundamentals and foreign exchange are all moving in favor of the U.S. right now. Having said that, as mentioned Artis has pushed the pause button on new acquisitions now, lending more visibility in the capital markets. Year-to-date we have acquired about $520 million of new properties, all very good real estate. So we’ve done a year’s work already on that front 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 acquisitions in our target markets when possible we will continue to work hard to keep our buildings full, whilst bringing the rent up to market and we are slowly but surely increasing our value enhancement and development pipeline as well.

So now three key metrics. Focus our balance sheet, our payout ratio, the caliber of our real estate Artis management has made significant improvements and that continues to be our core mission one step at a time. So we’re pleased with the results of this quarter as Jim and Kirsty mentioned.

And that concludes our report and our conference call for now. I’ll turn the floor over to the moderator and ask her to entertain questions.

Question-and-Answer Session

Operator

Thank you, Mr. Martens. We will now take questions from the telephone lines. (Operator Instructions) Our first question is from Michael Smith with Macquarie. Please go ahead.

Michael Smith – Macquarie Research

Thank you. I just wanted to get some color on the same property NOI growth. it look – it seems quite clear that Western Canada and Alberta and U.S. are driving the bus with very good numbers, Ontario is a bit of a drag, and it doesn’t seem to be occupancy that’s driving it so obviously rental rates are, for Alberta I think you’ve given some color with some of the renewals in Fort Mc but I’m wondered if you could just sort of give us some more color on what’s driving that – driving Western Canada and U.S.?

Armin Martens

Michael, I mean we’re – continue to be bullish on the Western Canada economy and even more now in the U.S. economy. Recall when we started out as REIT that’s you know a 7, 8 years ago we were in Western Canada only we’ve diversified selectively in Eastern Canada just the GTA and then although we’re not everywhere in Ontario we’re not everywhere in Québec.

And so I mean and I think it’s no secret Ontario economy is not that strong GTA is generally a – a best place to be in Ontario and always been a safe place to be. And so we to a certain extent we’ve been disappointed with our organic growth in – with Ontario portfolio but we do see that turning around and we know where we’ve been and where we are now and based on where our visibility for the year end we expect Ontario – our organic growth in Ontario to improve there as well. However, we continue to be the long-term those are on an optimist on the western Canada economy in general and the U.S. economy for in a structural way very significantly we’re very bullish on the U.S. economy on U.S. dollar right now.

Michael Smith – Macquarie Research

As in the high same-store NOI growth there is that driven just by would be contractual increases in rent and or renewals or a combination of the two or better margins or what’s behind that I think you guided about 7.6% growth in Alberta and Minnesota 6.6%, U.S. there 5.5% for now and then the total was 3.8% for the quarter?

Jim Green

It’s kind of a combination of all three Michael the rents especially in the U.S. have gone up, we’re getting permanent rents that’s largely in our industrial portfolio but also somewhat in the office space. Certainly industrial in the U.S. we’ve seen a nice uptick in occupancy I think we’ve talked about that in prior quarters that certainly the piece of that portfolio that we bought from AMB and Prologis is up about 7% or 8% in occupancy from the time we bought it till today.

In Western Canada, in Alberta as you mentioned has been strong for us this quarter that’s a combination of occupancy and rents, some of it is here taking some old leases that we’re done in sort of a bottom of the market when things crashed and starting to actually see a bit of improvement in those leases as they roll over with the tenants.

Michael Smith – Macquarie Research

Okay. What would you say, what’s the reasonable long-term assumption for same property NOI growth for the REIT as a whole?

Armin Martens

We haven’t given guidance yet and not this year we’ve going to have a good year this year and well said as we’re too forward optimistic about producing go to organic results and if at guidance we give you Michael would be a little cautious but we’re more than confident that we – there would be good results next year for same property NOI growth that’s the only thing we can say we wouldn’t give you a number per say. And as you heard us talk – discuss it’s very important here wanted to produce same property NOI growth and our organic growth in the years ahead to stay off for any counter effect that we might get from rising interest rates.

Michael Smith – Macquarie Research

Okay and just a last question just switching gears, I noticed you reclassified about $58 million of property from held for sale I guess back into the income portfolio, wondered if you could just give us some color on that?

Jim Green

Yes, a couple – a small chunk of that was the little industrial building that we did sell it had been moved into held for sale at June and it’s sold in Q3, the larger part is that two office buildings we held for sale in Calgary which I think you heard us talk about before. There is still basically for sale but the criterias for the accounting treatment of held for sale is as you have to have both Board approval, active marketing program and a reasonable expectation to sell it within the next 12 months. I think we might have less of a reasonable expectation that we’re going to get the price we want. So, if we don’t get our price, we were just prepared to hold on to those assets. And so they’ve been moved back into granular income producing properties.

Michael Smith – Macquarie Research

Okay. Thank you.

Operator

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

Heather Kirk – BMO Capital Markets

In terms of the development expectations you’ve got the $200 million at this point in terms of pipeline. How do you see that evolving in terms of the amount you expect to spend every year and your ability to refill the pipeline as you deliver on development projects?

Armin Martens

Yes, difficult to project, Heather. Of that $200 million, 100 might be under construction now, in total, that represents maybe 2% of our book value. Look, we had I think that can move up to maybe 4% of our totality could double. It’s all about opportunity but developments, there is a little more risk involved in them, so we have to be careful. So, far we’ve done very well, each and every new development are against the case of project we have undertook in and we want to keep it that way. So, on an annual basis I think rather some entry where we’ve done about a 100 million underway now but contributed cash on the spending on the quarter, I couldn’t give you that number right now.

Heather Kirk – BMO Capital Markets

And so, you’d be comfortable sort of going up to the 4% level. What kind of…

Armin Martens

Our $200 million pipeline (indiscernible) $400 million but a pipeline I mean you got things that are in the planning stages of course and that can take a while. As you were to expression it’s just like watching ice melt sometimes to get these things completed.

Heather Kirk – BMO Capital Markets

But you would have sufficient. I guess I’m trying to get a sense of the quantum of what you have within the portfolio that could potentially move in, you have like how much of this sort of you were to look at intensification opportunities like how easy is it for you to move to that 4% level?

Armin Martens

Currently it won’t be easy we’ll have to work hard to add – to get it up from $200 million the pipeline to jump up to $400 million and the amount under construction is 100 to 200 it won’t be that easy. But it’s very – but they also very realistic, when we started just two years ago we had nothing in our pipeline as you recall so we brought it up to $100 million under construction, $200 million in the pipeline and we are working at new developments but we’re going to be very selective.

Heather Kirk – BMO Capital Markets

And do you have a hurdle return for what you would like to achieve on that?

Armin Martens

Well the general rule is that we have to be able to – to seek better results that we were to buying the property right on a risk adjusted basis new generation real estate at a high longevity yields that we – then we could buy. The yields are never below 7 right now and often they start with an 8.

Heather Kirk – BMO Capital Markets

I’m just picking up on some of Michael’s question with respect to the same property outlook. As you look at the different asset classes, clearly industrial has been a bright spot, it seems especially on the strengths out of the U.S. market. As you look forward, what do you see in 2014 as being sort of leaving the park among asset classes for internal growth?

Armin Martens

We’re still optimistic with retail industry, we expect it to continue to perform well, our office properties in the U.S. we expect to perform well also and here in – in Canada we already mentioned in a couple of markets where there is some new spec construction all the building taking place but otherwise it moved well with their office properties in Winnipeg and in other markets also. I expect today our history of having – we’ve got a very good track record at achieving above average same property NOI growth and we’re optimistic we’ll be up in January with healthy same property NOI growth next year that the markets we like.

Heather Kirk – BMO Capital Markets

Great. Thanks very much.

Operator

Thank you. Our next question is from Jenny Ma with Canaccord Genuity. Please go ahead.

Jenny Ma – Canaccord Genuity

Good afternoon. Just thinking ahead on acquisitions for 2014, you’ve mentioned for a while but you pushed the pause button, but for the last several years, you kind of guide to a long-term average of about $400 million per year. So, given your recent comments where and assuming things stay fairly stable, where do you think 2014 will fall relative to that $400 million figure.

Armin Martens

Good question, Jenny. It could – I think $200 million to $400 million is little bit of guidance that we would be giving there and I wasn’t thinking about giving guidance until Q4 conference call. Historically I’ve said $400 million to $600 million but it’s – I fully – I expect that to drop not to $200 million to $400 million range and maybe it will be zero.

Jenny Ma – Canaccord Genuity

Okay. And let’s say that you do find some fairly attractive and sizeable acquisition opportunities. In light of the comments about keeping leverage relatively low around current levels and where you – and your unit price being where it is. If you have an opportunity to make a big investment to – would you be inclined to push leverage temporarily?

Armin Martens

Well, it should have to be a compelling transaction right, it would have to be good real estate with a very good growth profile but the short answer is no, right now we’re looking to put our balance sheet in our payout ratio, we can see that. I think the weeks that are trading well at good multiples and lower AFFO yields if you will are the ones with the most conservative balance sheet and conservative payout ratios combined with a growth profile. I think we have a good growth profile, we will have a good balance sheet, good payout ratio we want to keep improving that.

Jenny Ma – Canaccord Genuity

Okay. And in terms of the prefs, when you evaluate opportunities, do you view them more so as debt versus equities, I know that you include them in your calculation when looking at your limit internally but efficiently if not on your leverage ratios. So, where does it really fall?

Armin Martens

Well prefs are equity preferred equity, in our capital stack looking ahead eventually are convertible debentures, we expect them to disappear as it converts. We expect our mortgage debt to be 35% to 45% shall we say 35% to 40% we expect to layer on that some on fixed debentures and then we’ll have some prefs in our capital stack but the total our mortgage debt our unsecured debentures and prefs we want that to be no higher than 50%.

Jenny Ma – Canaccord Genuity

50% including prefs?

Armin Martens

Right.

Jenny Ma – Canaccord Genuity

Okay. Great. That’s helpful. Thank you.

Operator

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

Brad Sturges – CIBC

Hi, just the follow up I guess on the acquisition discussion that you had there and in light of your preference to increase exposure of the U.S. and maybe not to increase the leverage. If there was a really compelling opportunity, what is your standstill on dispositions and changing the composition of the portfolio to complete one of these investments. Is there a willingness to do so and how do you think about that?

Armin Martens

We hope into that and then the willingness to certain extent you may see us do that in the next 12 months but not in a structural way, we like our rating, we like to be – are happy to be invest in the GTA and then Ottawa to the extent we are we don’t want to reduce that too much for a good reason we increase that but cap rates in Canada are still relatively low in terms of the U.S. and the growth profile which you have to look at. So, we consider that but not in a structural way.

Brad Sturges – CIBC

Okay. And you had a nice uptake in occupancy overall and with commitments it looks like you’re so in the 96.5 range is there much – more room do you think you can push that and if so where do you see the growth opportunity?

Armin Martens

There might still be industrial in Canada I think in the U.S. we’re at a healthy level with over 95% with our industrial portfolio. We’ve got a pretty good track record, if you look at the DBRS we reported in the last eight years for a diversified commercial real estate in the 95% range for occupancy and that’s just what we like to do but you won’t see us bringing it I don’t think we’re bringing up the 99% for example so it might be 1% up, it could also come down 1%. In total, it’s about organic growth, it sometimes you can achieve organic growth close to 1 losing a point on the occupancy level.

Brad Sturges – CIBC

So, essentially you’re looking at more stable occupancy levels and really driving same property NOI through increasing rents?

Armin Martens

That’s what we’re expecting, again but more volatile, you heard me say very bullish on the U.S. economy and so far we’ve been pleased with our results there to occupancy levels improving as well as rental rates. We like the retail and the industrial marketing everywhere where we are in Canada right now, that’s performed very well also.

Brad Sturges – CIBC

Okay. Thank you.

Operator

Thank you. Our next question is from Matt Kornack with National Bank Financial. Please go ahead.

Matt Kornack – National Bank Financial

Hi, guys. Just quickly, in terms of your Victoria Square property in the Linden Ridge development, how well those be impacting NOI sort of into Q3 sorry Q4 and next year. And does the Victoria square Zellers vacancy, is that been accounted for into occupancy at this point?

Armin Martens

You want to comment on that Jim or, I guess the first center on the Linden Ridge I believe there is, I don’t think the rent really kicks into our Q1 of 2014. I don’t think there is any impact in the Q4. So, you’ll see that pick up in partially in Q1 and the balance in the Q2. For the Vic Square its – I guess it’s a little bit out of the occupancy levels because its included in the properties that we call it as under redevelopment. So it’s in that list but it’s down at the bottom part of the list. I mean, in terms of timing in that actually for Linden Ridge Q1, Q2 that’s when the NOI kicks in for that property. Vic Square it will take until fall of next year before its redeveloped but we are – again it’s a really good project for us we’ve, Zellers rent was only 4 bucks a square foot we deal with four tenants to take up all that space right now national retail tenants the face rent will be four to five times what Zellers was paying will end up with a better real estate higher NOI better valuation all to together. And then as Jim mentioned we feel we came out and head very nicely on at least termination fee with them. But the new NOI the new and improved NOI for that project will kick in, in Q4 next year I believe.

Matt Kornack – National Bank Financial

Alright sounds good. Also you’ve got I guess now almost $90 million in cash on the balance sheet you’re putting a bit of a pause on the acquisition activity. What do you think in terms of that cash balance will you repay debt or are you investing your own units or just sort of keep it as a strike power going forward?

Armin Martens

We’ll see we may shift, knock-off a couples of convertible debentures if we can just to improve the balance sheet a little bit. But we like the position we’re in balance sheet is improved, our payout ratio is improved and lest we forget our liquidity position is quite good also. This is a good time to have those things going forward pending more visibility in the markets. For compelling reasons sure we’d look at a new acquisition as well but as the compelling reason right now the right thing to do I believe is to just focus on organic growth and be patient in terms of new acquisitions.

Matt Kornack – National Bank Financial

Great. Thanks.

Operator

Thank you. (Operator Instructions) Our next question is from Herbert Thompson with Scotiabank. Please go ahead.

Herbert Thompson – Scotiabank

Hi good afternoon. Just a couple of quick questions here could you just discuss me with your thoughts or update us in your thoughts on the Victoria Square Center and the proposed 116,000 square foot office tower in Winnipeg?

Armin Martens

Victoria Square, did you say Victoria Square…

Herbert Thompson – Scotiabank

Actually no, I mean – actually just go to the 116,000 square office tower in Winnipeg what sort of leasing prospects are there what sort of pre-leasing you might need to kick start that development?

Armin Martens

Yes, so you’re referring to the MPI…

Herbert Thompson – Scotiabank

Yes.

Armin Martens

MPI Development it’s a joint venture with Artis the Longboat Development which is the Chipman family in Winnipeg and MPI which is a (Corn) Corporation. And so it’s a bit of a label of love. I’m very optimistic that project is going to go ahead but I couldn’t guarantee the timing of it. There are some perspective tenants out there and I wouldn’t want to speak online about who our perspective tenants are to kick start it. 160,000 square really is too smaller office building I believe not just one but to give you an example the center point property under development its under construction across the street on Portage avenue across the street in (indiscernible) about 80% pre-leased and that we’re kind of feel comfortable and in Winnipeg we feel comfortable with pre-leasing closer to 80s and 50th just to let you know what – where our heads are right now. I think by the end of next year by setting out the next year we’ll be up to non-stopping if not sooner.

Herbert Thompson – Scotiabank

Okay that’s good color thanks. And then just quickly on the IFRS cap rates I know the Canadian office portfolio is up quarter-over-quarter could you be able to break down that increase between down town and suburban and by region?

Kirsty Stevens

Pretty hard and I don’t know.

Armin Martens

No, we don’t have that, (indiscernible).

Herbert Thompson – Scotiabank

Okay, great. Thanks for that. And I think you mentioned in your remarks there. I mean a bit earlier that you sort of think office cap rate since they sort of flat in the next sort of six months given 10 years I think below 2.75%?

Armin Martens

What I’m saying is good real estate and that’s not even necessary just a Class A or (indiscernible) real estate, but good real estate cap rates have really not moved up and there is a lack of supply out there in my conversation is with hedging fund institutional investors and even a lot of them here with the private investors. There is a bit of imbalance in the supply versus the demand for that product. So, I don’t see cap rates moving up there at all as I mentioned the cap rates for class B or C real estate has moved up a little bit but I believe its leveled. Again the increased demand for real estate in general is going to keep a cap – lid on the cap rates rising.

Herbert Thompson – Scotiabank

Okay, great. Thanks. That’s all from me. Thank you.

Operator

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

Armin Martens

Alright. Thank you very much, (indiscernible) and everyone on the call again. We know it’s been an extra busy week and busy day and everybody will be working hard this weekend writing reports and a lot of REITs. So, thanks again for joining us on this call. We look forward to catching up with everybody in the weeks ahead. Take care, have a good week end.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.

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