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Executives

Armin Martens – President, Chief Executive Officer

James Green – Chief Financial Officer

Kirsty Stevens – Chief Administrative Officer

Analysts

Michael P. Markidis – Desjardins Securities, Inc.

Mario Saric – Scotia Capital Markets

Charles Michael Smith – RBC Capital Markets, LLC

Michael Smith - RBC Capital Markets

Brad Sturges - CIBC World Markets

Matt Kornack – National Bank Financial

Walter Malthin – Ronan Management

Jenny Ma – Canaccord Genuity Corp.

Artis Real Estate Investment Trust (OTC:ARESF) Q4 2013 Earnings Conference Call February 28, 2014 1:00 PM ET

Operator

Good afternoon, ladies and gentlemen. Welcome to Artis REIT's 2013 Annual Results Conference Call. I would now like to turn the meeting over to Mr. Armin Martens. Mr. Martens, please go ahead.

Armin Martens

Thank you, moderator. Good day, everyone and welcome to our Q4 2013 and year-end conference call. So again my name is Armin Martens. I’m the 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, again I’d like to advise all listeners that during this call, we may, at times, would be making forward-looking statements and we therefore seek Safe Harbor. So, please refer to our website as well as SEDAR filings such as our financial statements, MD&A, and our annual information form for full disclaimers as well as information on material risks pertaining to all of our disclosures.

So again thanks for joining us, folks. To begin with and I’ll ask Jim Green to review our financial highlights, and then I’ll ask Kirsty Stevens to give us more color on our operational results and I’ll of course wrap up with some market commentary, before opening the floor to questions. Jim please go ahead.

James Green

Thanks Armin, and good afternoon everyone. Welcome to the fourth quarter and annual conference call for 2013. Well, highlights for the year for Artis include the achievement of an investment grade credit rating from DBRS acquisition of over $500 million of investment properties, continued strong Same Property NOI growth, and in our opinion continued improvement in all of our operating metrics. Artis has continued a strategy of external growth combined with gradual improvement overtime of all of our operating metrics. External growth during the second half of 2013, was in a much lower pace than prior years for us anyway.

The U.S. Federal reserve announced in May of 2013 its intention to begin tapering of the QE program and the announcement caused a spike in bond rates and a corresponding pullback in REIT unit prices. Although bond prices have stabilized in recent month and declined from the spike REIT prices do not yet seem to have fully recovered. We expect Artis along with most of our peers to be less active in property acquisitions until we get some more comfort that REIT unit prices, property cap rates, and interest rates have return to a more stable position.

Internal growth is always been our focus, but internal growth combined with development opportunities has become even more important for us with the slowdown in external acquisitions. You’ll note that we’ve increased the value of our property and development from just over $4 million at December of 2012 to over $47 million at December of 2013. As I mentioned, we improved all of our operating metrics including NOI, FFO, AFFO and debt to gross book value and we’ve also seen nice improvements on metrics on a pre-unit basis. With the reduced pace of acquisitions it’s probably been one of the most stable quarters in sometime for Artis and we’re pleased that it continues to demonstrate the accretive growth we’ve been able to achieve.

I’ll spend a few minutes in reviewing in more details the results from our quarter and then pass it back to Armin and Kirsty for some more discussion.

So starting with the REITs balance sheet, total assets in the REIT are just over $5 billion. Our investment properties make up by far the largest part and are valued at over $4.9 billion. Our investment properties are valued on our balance sheet at fair value. We just did the cap rate slightly on some of our assets this quarter resulting in a rise of about four basis points from Q3 and the weighted average cap rate for all of the assets. We also adjusted a few rental assumptions to be more conservative on growth in the near-term and the net result was an unrealized loss on investment properties of $56 million for the quarter.

Year-to-date is still showing growth of over $4 million based on the cap rate compression in the early part of the year. Despite what I just said, we’ve not seen or heard a lot of hard evidence of rising cap rates in Canada. But we do expect cap rates to stay flat or rise nominally due to the increased long-term bond rates.

In the U.S. we find cap rates are still firm and are still in fact compressing per quality assets. On the debt side Artis has some convertible debentures outstanding at December 31, we had three series, a small balance remains on the Series D maturing in 2014, expected to be paid off in cash, and the Series F mature in 2020. We also have a Series G debentures, which matures in 2018, denominated in U.S. dollars, and this is part of our natural currency hedge for the assets we own in the United States. Total convertible debentures outstanding at face value was $183.7 million.

Touching more on the debt side, debt to gross book value, we remain very comfortable with our debt to gross book value at 49%, including the convertible debentures. And as mentioned in prior quarter’s management has made a conscious decision to lower the leverage in the REIT. And we would expect to continue this trend on through 2014. Artis has some floating rate debt in our portfolio at December 31st, we had approximately $252 million of floating debt that had not been hedged to-date it was approximately 10% of our total debt which we feel comfortable with that ratio the majority of its in the United States, where as I've, I think I've mentioned on prior quarterly calls. Our view is that interest rates are under even less pressure to rise than exists in Canada.

We continue to feel an amount of floating rates debt is appropriate in the debt portfolio and we benefit from the low interest rate on the floating rate debt. Further benefit in the U.S. is it allows us flexibility to sell assets as opportunities arise without incurring large debt penalty costs. Floating rate debt, with the exception of the line of credit, is all term debt it’s not demand and cannot be called by the lenders.

We can place interest rate swaps at any point in time and in fact subsequent to year end we did place two further swaps which on a pro forma basis bring the floating rate debt down to around 8.7% of total debt. Mortgage maturities in the near term coming up in the next 12 months we have $225 million of mortgage obligations its just around 9% of our total debt we are not anticipating any difficulties in REIT financing those mortgages as they mature.

Weighted-average term in our debt is 4.3 years basically unchanged from the 4.4 at the end of 2012. Interest rates continue to decline and weighted average nominal rates on the debt are now 4.1% down from 4.23% at December of 2012. With the low interest rate environment, we have been looking to extend the terms of our financing and we’ve generally looked at terms of seven to 10 years, where possible for new acquisitions and refinancings with some breakdown in the MD&A but you’ll note that weighted average term on refinancing and acquisitions was over seven years and yet the interest rate was under 4%.

Turning to the results of operations, property income from continuing operations was $75 million for the quarter up from $66.6 million in the same quarter of last year, growth driven largely by acquisitions but also aided by growth in the same property operating results. We did have this year some relatively large lease termination income. It’s not unusual in a REIT to have lease termination income but we got what for us was a fairly large number this year. A portion of it relates to termination of a lease with Zellers in our Victoria Square Property in Regina, space was roughly a 105,000 square feet and we’re planning to subdivide it into smaller boxes and we’re pleased to report we've seen some great lease interest one piece is leased and we anticipate getting a substantial portion of it leased shortly.

Same property results, we were very pleased with our results this year, we had an increased in the quarter of $1.8 million or 3.7%, raises our year-to-date same property growth to 3.3%. We’ve seen positive growth in all segments of our properties. Industrial segment was the strongest with overall same property growth of 8.6% for the quarter and 7.6% for the year. It’s driven by both increases in rental rates and occupancy. Retail and office segments, despite a small drop in occupancy, still showed growth of over 2% for the quarter.

If you look at our entire U.S. portfolio, the same store growth was 7.6% for the quarter, and 4.8% for the year. And in our opinion and I think this is a comment I’ve made before, we still think the U.S. economy will outperform Canada in the next few years and we expect to see continued growth in these properties.

Canada by compression showed growth of 2.9% for the quarter and 3% for the year. Not as strong as the U.S. performance for us, but we are still very pleased to achieve these numbers. Coverage ratios, our interest coverage for the – was 2.75 times for the current quarter and 2.82 times for the year-to-date. Debt service coverage was over 1.8 times and remains well within any of the covenants given to our lenders.

Net debt to EBITDA ratio was for us at 8.4 times at December 31, using a simple calculation of just taking the quarterly NOI and multiplying it by four. Foreign exchange gains and losses, as you know Artis holds a significant portion of our assets in the United States and this requires that we convert assets held in U.S. funds back Canadian dollars and that results in the foreign exchange gains and losses on the income statement. The longer term assets, the properties, and the debt translates as well into Canadian dollars with the unrealized gains and losses on translation flowing though other comprehensive income. For the year ended December 31, we booked an unrealized gain of $27.1 million.

Based on what we hear from various currency experts that we listen to, the Canadian dollar could weaken further in the coming year, and if this happens, we anticipate it will provide further growth from our U.S. portfolio. Artis does have a natural currency hedge in place and then we finance the properties in U.S. mortgage debt. So we had just over a $1 billion of assets in the U.S. with $581 million of U.S. mortgage debt, and $96 million debenture that I mentioned earlier payable in U.S. dollars, and one of our series of preferred units is also denominated in U.S. dollars. And in our opinion this gives us a natural currency hedge for about 73% of our U.S. exposure, and we currently have no plans to hedge the remaining piece of that exposure.

Flipping over for a minute to the non-GAAP financial metrics, one of the common ones of course is FFO for real estate trust. Our FFO for the quarter on a diluted basis was $0.35 compared to $0.34 in the same quarter of the year before. And year-to-date FFO was up strongly to a $1.46 from a $1.30 in 2012. FFO payout ratio down to 74% for 2013 versus 83% in 2012.

AFFO, another common metric, we didn’t used to report that, but in our 2012 report we introduced reporting on AFFO, and based on our calculation it was $0.30 for the quarter ended December 31, 2013, bringing annual AFFO to $1.26, resulting in a payout ratio of 90% for the quarter and 85.7% for the year.

Few other highlights that I’ll touch on, the REIT has a DRIP program, or distribution reinvestment plan participation in that continues to run around 15% and provides us with a source of cash flow. REITs are always subject to tax tests and the REIT believes it’s met the REIT exemption for 2013 as well as prior years. In all prior years a 100% of our distributions were return of capital. This year however, we will have distributed taxable income to our unit holders, expecting our distributions to be around 12% taxable, and still 88% return of capital.

Management believes we will be able to meet the REIT exemption for 2014 and beyond. However, you have to meet tests at all points in time during the year. We currently have an operating credit line of $80 million, we had no balance drawn on that at the end of December and have not drawn the lines subsequent to year end.

We ended the year with $48 million cash on hand, as I mentioned no balance drawn on the line of credit, giving us the capacity to acquire further properties. However, we are being very selective in the current market.

That completes my financial review. It completes a very good quarter for us. Completing a great year and we look forward to demonstrating our results in future quarters.

Armin Martens

Thanks Jim, and I’ll turn the floor over to Kirsty as well.

Kirsty Stevens

Thanks fellas. Hello, everyone. Thanks for calling in today. To recap, we closed the year at 232 properties, our leasable area being just under 25 million square feet. We had no acquisitions or dispositions in Q4 2013 and we have no significant acquisitions or dispositions post quarter. So as Jim said, this is a pretty clean quarter for us to report on. Our asset allocation by property NOI, quarterly property NOI was 52% office, 24% retail and 24% industrial. Geographically our four largest segments are still Alberta at 39%, Ontario at 13% and Minnesota at 13% and Manitoba at 12%. About 22% of our property NOI is from the U.S. property, about 18% of our property NOI is from Calgary office properties, and the other two large segments within our portfolio are Minneapolis industrial properties at just under 8% and Winnipeg office properties at about 7%. As I said there is no lumpy lease termination fee income or other items in Q4 to distort the mix.

Occupancy at the end of the year was very healthy 95.5%, slightly down from December 31 of last year, but overall we’re very pleased with our results maintaining a steady at or above the 95% mark over the full-year. Same property occupancy was 94.9% at December 31 of this year compared to 95.1% at December 31 of last year. Overall the industrial segments of our same property has performed very well, we had a number of large square footage deals put in place in 2013, particularly in the Minnesota market. We also had very good performance in the retail same property segment, which was up about 10 bps from last year. We had some new vacancy at December 31 of this year in a very small group of office properties in Alberta, Ontario and U.S. other markets specifically, which lead to the decreases in the office sector.

We’re not particularly concerned about any chronic vacancy. This is a point in time calculation but we of course monitor these properties carefully and push hard to get traction on our leasing there.

The weighted average term to maturity of leases in the portfolio at the end of this year was 4.7 years compared to 4.8 years at December 31 of last year. And the weighted average term to maturity of leases for the top 20 tenants is a very healthy 7.4 years. We don’t have any of our top 20 tenants coming up for renewal in 2014 to deal with.

Q4 leasing activity was very strong as it’s been all year. We renewed about 530,000 square footage, square feet of leasable areas within the quarter. And in the course of 2013 we renewed about 2.5 million square feet of leasable area. Retention for 2013 was about 70%, which is little lower than we’ve had historically in the portfolio, but we did have the Zellers lease terminations this year as well as a planned vacancy in a property we acquired during the year, we knew about that going in. If I back those two out we're back around the 80% retention mark, which is fairly difficult for us. The weighted average rental increase on renewals, I’m just going to call that the WARI from now on because that’s such a huge mouthful, the WARI for the three and 12 month periods ending December 31, was 7.5% and 7.2% respectively.

Our office and retail classes were the biggest contributors for the positive WARI increase in Q4. As an example we renewed 134,000 square feet in a BC office property at almost 20% REIT lift. We also had very strong renewal rate increases in the Fort McMurray retail properties, which we’ve had for the past couple of years. We renewed two tenants in that segment of the portfolio one at almost 50% lift and one at almost 30% lift. Overall, the WARI in Q4 was 9% in the retail segment, industrial was neutral and the office segment was almost a 10% increase.

Looking at the upcoming lease expires and market rents, we have a very manageable 11.4% of our portfolio leases expiring in 2014. We’re well under way on it. We’ve got firm commitments in place for over 35% of the square footage expiring in 2014 already. That amounts to almost the million square feet of commitments. First in additional 265,000 square feet that’s committed against vacant space at December 31.

The market rents, which we consider as the very good leading indicator of growth prospects for the portfolio at for 2014 and 2015 lease expiries, the market rent lift is expected to be around 7.1% and 7.9% respectively above the expiring in place rents. This translates to a potential revenue impact of say $5.1 million if you annualize that, which is up a little bit from $4.8 million that we’ve estimated at Q3.

Across the portfolio for all the years of expiry. Market rents increased about 0.8% to $14.03, this is today’s market rents again we don’t forecast for inflation over where rates are going to. We do review our market rents across the portfolio on an ongoing basis. This cycle is a big cycle for us as we bring in all our budget and information from our various property management and asset management teams. We did reflect some slightly more conservative assumptions in a group of Calgary office properties as well as the couple of Ontario office properties, but this was more than offset in total by improved expectations for our remaining markets, most notably in the retail segment.

Across the portfolio for all years of expiry in place rents increased $0.08 to $13.11 at the end of the year. The increase is mostly due to the successful activities we’ve had on the lease renewal front and as well as from rent that’s recommend in the period.

For the total portfolio market rents are estimated to be a healthy 7% above in place rents across the entire portfolio. We also have a really solid development pipeline, as Jim mentioned on a balance sheet basis, what that looks like for us. We like to say we have about $200 million somewhere in the pipeline right now. If you look at our MD&A, we just talk about properties that are held for redevelopment and new development in process.

If I look at the properties held for redevelopment, I’ll just kind of speak to the things have changed since last quarter at 2781 Plymouth, and we completed that property, we leased it up and removed it to stabilize the portfolio in Q4. In the property 1750 Inkster, we’ve now successfully negotiated a new lease with the tenant for 60,000 square feet. The redevelopment and landlord work is now underway. And we’re also happy to see a new lease commitment for some portion of the former Zellers space at Victoria Square, so the commitments now as moved from 60% at Q3 to 71% at the end of Q4.

We have really good interest in the remainder of the space, we’re trading paper with a couple of national tenants right now and there’s nothing we can speak to today, but we’re pretty optimistic will have some announcements in the future, that will be good news for the center.

In the development in process, which we considered to be brand new leasable area mostly constructed on excess plants in the portfolio, just a couple of updates since Q3. The Linden Ridge project here in Winnipeg. We had two tenants take over occupancy before the end of the year, we had a grand opening of Tamarack in January, and the final tenant we expect will be in commercials by the end of March I believe.

So, we are pretty optimistic, that’s going to be returning to the stabilized portfolio with our Q1 reporting as well. And the other one is the 185,000 square foot industrial property that was constructed in Minnesota. It was just about done at the end of the year. I believe it’s done now. There is a new lease that’s kicked in for 100% of the space with excellent covenant tenant, and we expect that to join the stabilized portfolio in Q1 as well. Two other projects under way are Fourell Phase 2 in Edmonton and the Center Point project in Winnipeg. There’s nothing really significant to update on for those proprieties right now.

Turning to the portfolio evaluation, I know Jim touched on it a bit. I guess my comment would just be leased. Please look at the breakdown of the Western Canadian, Central Canadian, Eastern Canadian and U.S. regions on year-on-year basis. And there is cap rate compression on a year-over-year basis in all of our major segments, but within Q4 we did have a loss in the fair values as Jim suggested or as Jim mentioned previously.

This ties back to our views on the market rents, we did take a more conservative view on the market rents in the Calgary office properties, not all of them, just within the certain sub segments within that and based on information available and cap rate surveys, we were slightly more conservative on the cap rate assumptions as well. And there was a couple of tweaks in the Ontario office and Winnipeg office segment. Basically that covered off the full amount of that change in Q4.

Final comment in terms of cash, it’s pretty easy to pro forma our cash this cycle. We had $48.2 million at the end of the year, $80 million available on the credit facility, no subsequent events to materially move those numbers around. So we are well capitalized with liquidity to carry on with our operations and take advantage of opportunities that arrive. So thanks, I’ll turn it over to Armin

Armin Martens

Thanks, Kirsty and Jim. So I’ll just wrap up, and first of all, I think we are gratified to see that things have settled down in the capital markets compared to last year and at least in my case I’m optimistic that 2014 will be kind to the REIT sector. Looking ahead, it continues to be our view that both, the U.S. and Canadian economies will perform well in the years ahead with an increasing advantage going to the U.S. economy. And among other things this will be reflected by a stronger U.S. dollar. A new paradigm is of course upon us all in the REIT sector. As we know the easy money decade of interest rates and cap rates compressed as officially behind us and we are now in a level of rising interest rate environment. So leasing and operations and organic growth will become the key drivers of AFFO per unit growth, not interest rate compression.

With respect to the government driven interest rates, bond yields have come down of late and remain in a relatively more trading range and we’ve also seen spreads remain level for five and 10-year mortgages. So today five-year mortgage rates are in the 3.5% range while 10-year mortgages are in the 4.5% range. Notwithstanding our view that interest rates will stay in a little trading range for a long time, almost all new mortgage has been taken out by Artis have been five, or seven, or 10 year terms, as Jim mentioned. And in addition as you know we’ve been moving to fix and extend the term of our floating debt. So our total floating debt is under 10% and again as Jim mentioned it’s very good debt long-term debt that can be swapped or can be prepaid with no penalties.

In terms of acquisition cap rates during Q4, well they corrected those little back in Q2 of 2013, but are basically leveled off since then. Class A property cap rates would be still level with what they were in Q1 of 2013. Class B and C properties would have moved up 25 to 50 bps compared to Q1 of 2013, but remained fairly level since Q2. Then the U.S. we haven’t seen – we basically seen cap rate compression all year along of all the four quarters especially for the good real estate by withstanding the tapering and the change in volumes.

To a large extent, many of which are cheaper than real estate right now. Given the increasing demand for yield and real estate small investor categories, I would suggest we are also in a new supply and demand paradigm meaning that we should not expect cap rates to move up much due to the structural increase in demand for good real estate. On all of our asset classes office industrial retail, the property markets continue to experience healthy occupancy levels in our target markets.

Looking ahead, as I’ve mentioned before we’ll have to monitor new office development in Toronto, Vancouver, as well as Calgary, as this will invariably put negative pressure on occupancy rates and potentially rental rates there. In our case, we don’t feel vulnerable in Vancouver or Toronto, but we have to keep an eye on and get ready to work real hard as we always have in the past in managing our Calgary office portfolio.

Last year was not as good year for the Calgary office market, the last three years were excellent, but last year was not a good year and so we got– so we do need the Calgary office market to normalize for absorption rates to come back to – where they have been historically in 800, 000 square feet per year range and then things will be just fine when the new products come on stream in 2016 and beyond. So other than that real estate fundaments in all of our asset classes and submarkets are quite good.

In our U.S. markets, we are enjoying the fruits of a steady economic recovery that is in turn producing positive real estate fundamentals, as well as increasing liquidity in the debt markets. New commercial construction to spec project is still on the low side. The general consensus is that the wind is now behind the real estate market in the U.S. and our organic growth in U.S. portfolio is of course 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 good rental increases and Same Property NOI increases, as well.

Our leasing progress is good over half of 2014 of our leasing programs already finished and we will enter 2015 also. We continued to demonstrate a long standing track record of 95% plus or minus occupancy level in our portfolio which speaks well to our management team and the reliability of our income. In terms of our geographic diversification we like the markets we’re in, we continue to be primarily Western Canadian REIT was about a 67% weighting now in Western Canada, 13% weighting in Ontario, but that’s just a GTA in Ottawa and 20% in the U.S. and three markets Minneapolis, St. Paul, Denver and Phoenix, in all of these markets that we’re in. Again we stress we’re not everywhere in Ontario just a GTA and Ottawa and we’re not East of Ontario.

Now these markets that we are in GDP and employment growth is outperforming the respective national averages, so moving that in turn will continue to support real estate fundamentals. And as previously mentioned, we continue to see a sound value proposition in the U.S. and we anticipate increased our gross weighting to the 25% to 30% range as opportunities permit. The economy, real estate fundamentals and deployed exchange are all moving favorably less right now.

But having said that as you’ve noted Artis has pushed the pause button on new acquisitions pending more visibility in a capital markets. And 2013 we acquired about 520 million of new properties, excellent real estate. So we’ve had a good year in that front and now we’ll be patient and continue our strong focus on internal growth. At the end of day it’s all about value creation for us.

So in addition to making accretive acquisitions in our target markets when possible we continue to work hard to keep our buildings full while bringing the rents up to market. We’re slowly but surely increasing our value enhancement and development pipeline as well, which Kirsty and Jim have described in detailed. And we look forward to seeing our development pipeline as it matures these projects coming on-stream and increasing our earnings on a per unit basis.

So in three key metrics folks our balance sheet, our pay out ratio and the caliber of our real estate we feel Artis has made significant improvements during 2013 and that continues to be our core strategy for 2014 and beyond, one step at a time. That’s our report for this quarter folks. As you know a lot of liquidity on a balance sheet. We ended the year well, we like our balance sheet, we like our payout ratio, we like real estate and we like our outlook.

Thanks again I will now turn the floor over to the moderator for questions.

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. [Operator Instructions] The first question is from Michael Markidis with Desjardins. Please go ahead.

Michael P. Markidis – Desjardins Securities, Inc.

Hi good afternoon everyone.

Armin Martens

Hello.

Michael P. Markidis – Desjardins Securities, Inc.

Just looking at the development pipeline and the new space that's coming online, Kirsty, I may have missed it, but do you have like an expected value for the Linden Ridge development and the expected value for the Minneapolis industrial? I'm just trying to get a sense of what the NOI contribution might be from those two?

Kirsty Stevens

No, I didn’t specially have that in there. Are we ready to those numbers in there…

Armin Martens

Is it about our MD&A?

Kirsty Stevens

I think it’s in the MD&A.

Armin Martens

Yes, the value in terms of IFRS you're saying Mike, not just the NOI?

Michael P. Markidis – Desjardins Securities, Inc.

Yes, well assuming a value and just a rough yield. I don't need an exact but just trying to get a quick sense of what the contribution might be.

Armin Martens

Got the number handy there?

James Green

We didn’t actually disclose it but we have a – but the Linden Ridge would be a little over a $20 million I guess and the…

Armin Martens

Yes Linden Ridge $20 million, I thought a $21 million, 8% cap and Minneapolis was $18 million.

James Green

Yes.

Armin Martens

$18 million and 7.6% cap.

Michael P. Markidis – Desjardins Securities, Inc.

Okay, and just looking beyond that then in terms of obviously…

Armin Martens

We’ll follow-up with an e-mail to give you more specifics.

Michael P. Markidis – Desjardins Securities, Inc.

And you know what, those numbers are great so thank you for that. And then just following up in terms of you've obviously got the project with Longboat that's under way in Winnipeg. How are the opportunities to sort of recharge the development pipeline looking, like for example, Minneapolis is there any other vacant parcels that you could build on there given the market strength, I think it's about Linden Ridge and excess land you bought there as well.

So just trying to get a sense of what we could be seeing in the next, to recharge development pipeline in the next back half of this year?

Armin Martens

Yes, Kirsty mentioned the $200 million pipeline, really about $100 million is under construction and $100 is on the drawing boards if will. We don’t have anything close in Minneapolis, we are looking for more there. It could be that some time this year we’ll launch a new industrial development in the Metro Phoenix area that we're optimistic about.

And other than that, we'll just finish the stuff we've got right now and with the Fourell Business phase 2 we're going to finish up the redevelopment in Regina, that will bring earn – increase earnings.

We're finishing, Center Point will take all this year to finish up, over 80% of that NOI is leased on Center Point project. On balance our leasing, but 90% of all the projects that we’ve under construction actually it’s - so we think we are in good shape. But our development, in terms of developments under construction it’s about $100 million is could maybe about $200 million under construction of the pipeline could be about $400 million, $20 million under construction, $20 million under drawing board but if we take into one step at a time because it’s such the right way to do it right now.

Michael P. Markidis – Desjardins Securities, Inc.

Sure, and just then switching over to your comments on the Calgary office market and obviously you've become a little more conservative in your assumptions going forward there. I don't have it exactly in front of me, but I think when I looked at your Calgary office leasing for 2014 it looked like you pretty had most or a good chunk of that already spoken for. Was that correct?

Armin Martens

We'll skate through all this. We will be in good in good shape this year and next year. back in the last recession of [indiscernible] all dropped a lot and there is a lot of over building, spec over building, we came through it okay. Our occupancy level didn’t drop much and all we have to correct some range, but we still came out and we will came. This time around – I’m still I’m not being pessimistic but I am being cautious 2010, 2011 and 2012 each of those years is the Calgary office market observed about 3 million square feet which is a lot, and last year however there was negative absorption of 1.6 million square feet.

So that’s not good news, we’re dealing to see that stabilize on balance what we always look for is about average of 800,000 square feet a year of absorption in the Calgary office market and assuming they get back to that then the new construction that’s coming on stream, I believe starts in 2016 and on that new market approach but we need to get that to a more normal level of absorption at Calgary.

Michael P. Markidis – Desjardins Securities, Inc.

Sure, but in the near term there's nothing in your Calgary office portfolio that's worrying you in the near term or?

Armin Martens

No, no at all. We are quite optimistic.

Michael P. Markidis – Desjardins Securities, Inc.

Okay. Just lastly looking at your same property NOI, I know obviously with the large amount of lease termination that you had, largely due to Zellers that you guys, rather than introduce volatility decided to amortize the payment over the remaining term or what was the remaining term of the lease, how is that going to look next year as we move forward? Are you guys, will the organic growth stat be negatively impacted by some of this amortization running off or do you still have a lot of runway there?

Armin Martens

Do you want comment?

James Green

I guess the short answer, Mike is just depends on the leasing picks up of the space. There was some substantial term on that Zellers lease which is the reason the payment was so big, so it does spread out over quite longer time.

Michael P. Markidis – Desjardins Securities, Inc.

Okay. Are we talking like a number of years to go?

Armin Martens

Yes.

James Green

I’m just, I mean we think that Zellers redevelopment will be fully leased by the end of this year and we will come out as well ahead by lease termination fees and we had a lease termination fee in [indiscernible] as well, we replace that tank almost the same month we’d like, we really don’t like the negotiating lease termination fees no matter how hard they are unless we have a lot of confidence in the releasing of that space and our strategy there. So we'll be doing – we've been just fine with, I know we’ve made good money on the lease termination fees this year. And looking ahead, if it happens again, as I said we’ll be very careful to make sure we’ve got a good Plan B to replace that tenant.

Michael P. Markidis – Desjardins Securities, Inc.

Okay so if I understand you correctly it doesn't look like there will be a negative impact on your same property NOI stats by some of that running off next year?

James Green

No, no.

Michael P. Markidis – Desjardins Securities, Inc.

And then just lastly Jim, I think I know the answer to this one, but just to confirm, obviously the currency, the U.S. currency is giving you guys a bit of a tailwind here in the first half of 2014. You’ve got your natural currency hedge, but you don't have any other cash flow hedges in place on your U.S. assets do you?

James Green

No, we don’t.

Michael P. Markidis – Desjardins Securities, Inc.

You don’t. Okay. Thanks very much.

Operator

Thank you. The next question is from Mario Saric with Scotia Bank. Please go ahead.

Mario Saric – Scotia Capital Markets

Hi good afternoon.

James Green

Hi, Saric.

Mario Saric – Scotia Capital Markets

So just maybe coming back to the Calgary office market, Armin, so it sounds like the occupancy for the portfolio was 92.2% for Calgary in Q4, committed 94.4% I guess going forward. So it sounds like at least in the next couple years you don't see that occupancy going any further below kind of 92%, would that be a fair comment to make?

Armin Martens

That would be fair, as I said back in the worst recession we've seen for awhile in 2008, 2009 when there was a lot of over building as well oil had come off and it was fear of interest rates, I don’t believe we went below 92% then, and so we expect we’ll have to manage our way through that, it's all about absorption picking up and I think it will. I don't see the years ahead, the economic fundamentals deteriorating the way they did in that recession, I don't see another financial crisis recession ahead of us in the next couple of years.

Mario Saric – Scotia Capital Markets

I guess part of the outlook is the hope that we get back to 800,000 square feet per year of absorption in Calgary which is needed to kind of balance the market 2016 onwards. But how much concern do you have over the trend that we're seeing, at least in Eastern Canada, in terms of tenant contraction, so smaller footprints per employee and whether that may invalidate that 800,000 square foot absorption level in 2016 onwards?

Armin Martens

Yes, we’ve seen that trend to less area per employee in the U.S. as well I don’t think we’re seeing this much forward with the oil and gas companies. Engineering companies are already compressed as much as they can I don’t think we should expect many more changes there. So I don’t think that will be material in Calgary, even though it's all about efficient use of space.

Mario Saric – Scotia Capital Markets

Okay, so you don’t see any catalyst for the oil and gas companies to say we don’t – maybe don’t need 400 square feet per employee or 350 whatever the number is, maybe we only need 200?

Armin Martens

Not for those tenants, hardly at all. It's not top line in their G&A, it’s not in the top of that G&A category. As really going to be about visibility, comfort and it wouldn’t hurt to get one or two pipelines confirmed and to give the oil companies more visibility.

Mario Saric – Scotia Capital Markets

Okay, that's fair. In terms of kind of capital allocation in 2014, you're sitting on a decent amount of cash, you've been patient on the acquisition side, how should we think about deployment of capital in 2014 in terms of development acquisitions, recycling of capital from existing assets, whether it's in the US or in Calgary, into new product or into improvements in existing buildings. So if you had kind of a rank order how would you think about it in 2014?

Armin Martens

Yeah, we always looking to add value to any of our projects if that’s going to increase the NOI with running out of existing properties in terms of surplus land, we are hoping to expand one of our industrial properties in Toronto and the GTA that we can build about a 150,000 square feet of additional industrial on surplus land we have. We will be finishing up the Fourell Industrial Park there in Edmonton. New developments in Canada are pretty pricey land is pretty pricey. So we keep looking, but we don’t see ourselves doing new Greenfield development necessarily in Canada, other than that surplus land I just mentioned that we are in the GTA. You should not be surprised though to see us increasing our overall development pipeline in the U.S. And then as I said we had a $100 million now properties under construction that could go as high as $150 million to $200 million by the end of 2014.

Mario Saric – Scotia Capital Markets

Okay, and how about recycling out of assets in the US or in Calgary which is something that we've talked about in the past?

Armin Martens

Yes, we are just not good vendors. On occasion you will see us sell a small property because we've been given an unsolicited offer for a price that’s more than we deserve and then we’ll sell it. But we are not in sell mode yet in terms of recycling.

Mario Saric – Scotia Capital Markets

Okay, last question, maybe just, I know it was a really small amount but I guess you used your ATM for the first time in January, issuing 320,000 units. I guess given your cash balance at the end of the year I'm just wondering kind of the rationale for doing so.

Armin Martens

Yes, that’s a good question if we had it on our books, the cost and the program for almost three years. We've always said that if we – we should try once to see how well it works and we'll try it on a small scale and we want to tried out of time, when we definitely do not need the money and we thought well let’s try it now, we don't need the money, there's a bit of tailwind in the market and let's see how well it works. It worked okay. We raised $5 million and that was it. As you notice we didn't need the money but we wanted to see how well it could work and you never know until you finally do it. In our discussion with DBRS, they like the fact we have this in place. They refer to it as another arrow in our quiver if you will, but the fact that we did raise $5 million during January with this ATM does not mean that we'll do it again.

Mario Saric – Scotiabank

I see. Okay, thank you.

James Green

Mario you may have noticed in the subsequent events that we took out a little bit more of that Series D debenture, so it was just a nice easy use of flip the money into raise some money within equity and pay off some debt with it.

Operator

Thank you. The next question is from Michael Smith with RBC Capital Markets. Please go ahead.

Michael Smith – RBC Capital Markets

Yes, thank you. I just wanted to touch on some of your goals. Jim, you were saying that you've made a conscience effort to lower leverage and you see that continuing, and Armin, you've talked about the pipeline, development pipeline. All these goals are good, and then increasing your US exposure to – from 20% to 25%.

So my question is, first off, which is the higher priority? And two, how are you going to fund it given your comments about capital recycling kind of not really on the table too much?

Armin Martens

In terms of funding, there's sort of a natural cap line. We’re not going to go little crazy with ramping up our development but I'll know a bit more we can afford it. And as I mentioned, as you've seen, we have a very good track record, we have an excellent track record, albeit a limited one, but an excellent track record with our development deals and then they will bring up, they will improve our pay out ratio which in turn does improve the balance sheet. In terms of priorities it's sort of twofold, right, if we can increase our earnings per unit we have got flexibility then on improving our balance sheet. We like our balance sheet, we like our pay out ratio right now, but needless to say it can still be better and we want it to get better. Have anything to add Jim?

James Green

No, I think they are kind of all priorities Michael. I guess the, we'll sort of work on each of them roughly equally. And I might add Mike historically, if you go back at the beginning of every year I've suggested Artis will grow by $400 million to $600 million of – externally of new acquisitions. This year, I don't know maybe $100 million to $300 million, we don’t know, that’s a different year right now, there's some headwinds and a lot of REITs, including Artis, in terms of our cost and capital, but the flip side is we're in a very good place. We are going to demonstrate good results this year, improving results this year and we are optimistic if we're patient the market where we want order.

Michael Smith – RBC Capital Markets

And given the, let's see the more attractive tone of the U.S. market, would you see most of that being in the U.S. through developments and/or acquisitions?

James Green

Yes, that's the short answer, yes.

Michael Smith – RBC Capital Markets

Okay, and just switching gears, I think Kirsty, I think you said there's about 35% of your 2014 leasing done. Roughly what kind of percentage bump are you getting on those deals? I think you said those were firm in place and then you had a bunch more that were – you're negotiating on.

Kirsty Stevens

We’re definitely seeing lifts on lease-by-lease we will through the renewal program and there is really just a few exceptions that sometimes pop-up, specific to timing of last deals done in the Calgary office market particularly. We don't have a lot of those coming up in 2014. So overall, it looks pretty good. The WARI of that average rate increase is always going to be the more industrial we do, the lower the WARI is the more retail and office we do the better the WARI is simply because of the impact of steps on the rents in the industrial deals as we do them, but overall we’re seeing at were about implies rent finding the majority of the lease renewals that were putting through.

Michael Smith – RBC Capital Markets

Okay, good, and last question just on Victoria Square, so you've got one space leased. If you just took that income and compared it to the Zellers income that was there before, what percentage, because assuming that the new lease is much higher than what the Zellers was, what percentage of the Zellers income would that have covered?

Armin Martens

Well, I think that commented, I think its comes pretty close to covering it your right, it doesn’t cover the cost redevelop the space yet, but certainly from our rent standpoint of probably covers the rent that we had on the whole space of Zellers, because you are Zerllers lease is typhinically or pretty lower rate per square foot. We mentioned some relatively high unleveled yields for [indiscernible] office project we expect this one will be double-digits.

Michael Smith – RBC Capital Markets

Okay, thank you.

Operator

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

Brad Sturges – CIBC World Markets

Hi there. Just to go back a little bit on the payout ratio comments and you said you're pretty comfortable where you are. Ideally on a longer term basis what would your target be?

James Green

Well, $0.30 either size of clean 96% payout ratio we think over for the year was 85% roughly within during the course of this year our AFFO per unit by the end of the year we'll demonstrate payout ratio closer to 85% again. 80% is our goal for payout ratio, 140% is our goal for debt – for total debt. And it won't be get there in a short period of time, but that's what we prefer to be 80% payout ratio and debt below 45%.

Brad Sturges – CIBC World Markets

Okay, and just on the commentary there on positive leasing spreads, I think you achieved on a same property NOI basis about 3% growth in 2013. Is that something similar you think you could achieve in 2014?

Armin Martens

Yes, the guidance were give roughly is 2.5 to 3.5. But, we’re optimistic we’re going to work hard, are you can see the WARI that we’re achieving. And so we’re optimistic about being productive in this year again.

Brad Sturges – CIBC World Markets

Okay, great. Thank you.

Operator

Thank you. The next question is from Matt Kornack with National Bank. Pleas go ahead.

Matt Kornack – National Bank Financial

Hi, guys, just one quick question. In your same property NOI stats do you include currency changes there?

James Green

They would be recorded in U.S. sorry – in Canadian dollar. So, it’s on the balance sheet converted to Canadian dollars – sorry the income statement converted to Canadian dollars both the revenue and operating costs but not the actual FX gain.

Matt Kornack – National Bank Financial

Okay.

James Green

Any FX gain is down below the line and not include in same property.

Matt Kornack – National Bank Financial

Do you know what it would be just for U.S. if you’ve done it just in U.S. dollars and not recorded any currency difference?

James Green

I think the weighted average currency rate for the year, I should know that number but it was like 105 maybe for the year. The dollar was pretty close to clarity in early part of the year and then dropped a lot in the last couple months so.

Matt Kornack – National Bank Financial

Right. So needless to say into Q1 we should see a bit of the numbers are going to be quite high on the same property NOI basis potentially if the currency stay there's?

James Green

The U.S. yield into when stated in Canadian dollars should be good, yes.

Matt Kornack – National Bank Financial

Okay, great, thanks.

Operator

The next question is from Walter Malthin with Ronan Management. Please go ahead.

Walter Malthin – Ronan Management

All right, yes, thank you. I'm an investor. I'm not an analyst so my question comes from an investor's point of view. You've talked about your allocation of capital. You've talked in terms of your payout ratio objectives, relatively fewer external capital expenditures, good FFRs, all the rest of these things. You started one of your very first comments on this conference call was about the REIT price recovery, how it has not kept pace with interest rate recoveries. I would suggest to you that the REIT price is a function of yield we aren’t talking about REIT, we aren’t talking about a corporation. And it’s not only the distributions and cents per unit, but it also the increase in distributions. Do investors have to wait until you get to an 80% payout ratio and 40% debt to equity ratio on your balance sheet or is there room for you to get modest increases in the distributions to investors?

James Green

Thank you Walter, heard me mention also the new paradigm we are in terms of interest rates being at a level or raising the years ahead. So it does help us to extract cautious with our surplus cash, but and if you look at the REIT pricing, REIT multiples, the REIT was lower debt and lower payout ratios are being largely rewarded by the markets and we’ve even seen REITs in last year, REIT distribution some REITs and being punished for it.

In our case, you have heard me correctly in the sense that we do feel our payout ratio should be 80% and our debt should be below 45% before we consider another distribution increase and part of the reason is this new environment that we are in, we are not in an environment where with the tailwind of interest rates work in our favor, so we have to be cautious.

Walter Malthin – Ronan Management

I guess, thank you.

James Green

So, Walter maybe its Jim is speaking. So I think that my comment you were freeing to at the start about the REIT pricing and I was probably refereeing more to where the REIT trade today versus their net assets value and given the REITs are reporting balance sheets under IFRS or at fair value, it’s pretty clear to see that most REITs are trading below the fair value of their assets. So at some point you would expect the market to correct for that whether that happens in the near term is beyond our control.

Armin Martens

Yes another point I’ll add Walter, is that historical spreads become regional and ten year bonds would narrow back in good old days overall 6 or 7, between 100 to 200 points, I think we are yielding 400 points higher than ten year bonds. And I think that just a bit too higher and I think there is – I’m optimistic that the market kind of adjust in favor of REITs in the year ahead.

Walter Malthin – Ronan Management

And okay, I’m skeptical about your analysis, I don’t believe that it goes to the balance sheet, as much as it goes to the yield and in my view, you have an opportunity to increase the yield and I’m not talking dramatically, I’m just talking incrementally.

Armin Martens

Thank you.

Walter Malthin – Ronan Management

Thank you.

Operator

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

Jenny Ma – Canaccord Genuity Corp.

Thanks good afternoon everybody, most of my questions have been answered but one thing I wanted to ask about was the acquisitions. Armin, you mentioned that you have put your finger on the pause button last quarter I believe and the environment looks a lot better now than it did in mid November as far as your unit price and even cap rates appear to have been fairly stable. So considering that, what needs to change before you get more constructive on acquisitions?

Armin Martens

Jenny thanks for that. If you look at the properties we bought 2012 and 2013 based about $1.5 million of properties in the last three years, its all been newer generation real estate it’s all been on balance better quality than our current existing portfolio, we worked hard to improve the caliber of our portfolio. And for the – if we want to go back to older build --generations of buildings if you will, including industrial with low, edge then we can make accretive acquisition, but we are focusing on buying better real estate and improving our caliber.

So as you’ve heard me mention, the good real estate, cap rates for the good real estate haven't really adjusted or correct so we are finding accretive acquisitions in Canada for good real estate it is very difficult, in United States its also difficult but there are few more opportunities, so we are just we are within, we’ve being we like to think to we are being disciplined we are not going to buy those anything for this because its accretive free, it got to be a real estate with outside potentials.

Jenny Ma – Canaccord Genuity Corp.

Okay, now is this a function of that good real estate not even being available or is it just your cost of capital versus the cap rates on these properties?

Armin Martens

Combination in Canada not much as come to market but our cost of capital even thought its improved and its still its need to get improve more.

Jenny Ma – Canaccord Genuity Corp.

Okay and on the US side, I mean, there has been a bit of a tailwind to the unit price but clearly the properties are more expensive in Canadian dollar terms. Would you look to maybe increase the leverage you use on US acquisitions to build up the natural hedge on these or how should I think about when you look at US acquisitions in terms of your cost of capital overall?

Armin Martens

On terms natural hedge, there was a time when we were contemplating ramping and that’s sort of what was we are very bullish on the US dollar now longer term as well as short term. So we are not looking for any more in natural hedge in US dollars I don’t know and then in terms of our debt I don’t know if it matters too much to Jim its all about total debt at some time we’ve got some properties in all that GSA building in Phoenix that was about 90% debt 20 year term all fixed we got other properties that have no debt on them but is all about the debt for the whole portfolio.

James Green

Yes, I guess my comment to that Jenny is probably as we are going through it you may see us we place higher debt on some of the U.S. properties, but we would offset that with delevering something in Canada, so that we’re not affecting total leverage in the REIT as a whole.

Jenny Ma – Canaccord Genuity Corp.

Okay. thank you very much.

Operator

Thank you. (Operator Instructions) The next question is follow-up question from Mario Saric with Scotia Bank. Please go ahead.

Mario Saric – Scotia Capital Markets

Hi, thanks – sorry. Kirsty, you’re WARI term is really catching on fire here. Just had one really quick follow-up, in kind of looking at that BC asset that you highlighted, so the 134,000 square feet with the 20% increase in the WARI, how would that increase look on a net effect of rent basis on that property? And then just in general, the quotes that we’re seeing for the WARI, would we see similar type of growth on a net effective rent bases as well?

Kirsty Stevens

Not necessarily, it does depend on the assets, largely the deals are more likely you are – have to put TIs into there. I mean we look at both numbers, when we look at the lease flow, we look at the actual space rate and we look at the NER and a general comment is you’re always doing deals that NER was very, very rare exceptions, when it’s the right move for the long-term assets liability. So I mean I can’t give you the specific number on the specific, when I don’t think there was a large TI component in this particular one.

And in the Fort McMurray, for example, the TI components would be minimal. in the ordinary course, we’re not putting significant TI and landlord work unless it's a very long-term office deal for example, or a new retail tenant, or a brand new long-term industrial. But typical renewals do not attract huge TIs and additional costs.

Mario Saric – Scotia Capital Markets

Okay, so you’re still very well in positive territory, on an NER bases as well?

Kirsty Stevens

Absolutely.

Armin Martens

Yes.

Mario Saric – Scotia Capital Markets

Okay. Thank you.

Operator

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

Armin Martens

Thank you again, moderator, and thank you everyone for joining us. Enjoy the weekend, I know you’ve got a lot of work to do. And Jim, Kirsty and I will now take a little time off.

James Green

Have a good weekend.

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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