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Executives

Armin Martens – President and CEO

Jim Green – CFO

Analysts

Jenny Ma – Canaccord Genuity

Alex Avery – CIBC World Markets

Matt Kornack – National Bank Financial

Michael Markidis – Desjardins Securities, Inc.

Mario Saric – Scotia Capital Markets

Michael Smith – RBC Capital Markets

Artis Real Estate Investment Trust (OTC:ARESF) Q1 2014 Earnings Conference Call May 9, 2014 1:00 PM ET

Operator

Good afternoon, ladies and gentlemen. Welcome to 2014 First Quarter Conference Call. I would now like to turn the meeting over to Mr. Armin Martens. Mr. Martens, please go ahead.

Armin Martens

Thank you, moderator. Good day, everyone and welcome to our Q1 2014 conference call at the end of a busy week. 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 and Heather Nikkel, is joining us and Heather is our Director of Investor Relations.

So to begin with, again I’d like to advise all listeners that during this call, we may, at times, 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 wrap it up with some market commentary and operational highlights as well. Then we will open the lines for question. So, go ahead please Jim.

Jim Green

Great, thanks Armin, and good afternoon everyone. And welcome to the call. As I am sure most of you are aware these last few quarters have been much quieter in terms of activity as the Canadian REITs and Artis is not exception to that. We have acquired a few properties over the last few quarters. During the current quarter our only acquisition consisted of a land site in Phoenix land for an industrial development. And we also disposed of one relatively small industrial property for which we received an unsolicited offer.

Despite the slower pace of equity offerings in the Canadian REIT market the unsecured debt market has been very active in recent months and a number of issuers including REITs have accessed the market. We took advantage of the active market and issued our first unsecured debenture in late March just before the end of the quarter. The planned use of proceeds for that debenture is primarily to pay-off secured debt and subsequent to the quarter end we did pay off two loans in the U.S. and anticipate paying down more mortgages as their maturity dates come up. In total growth has been a focus for the REIT and internal growth combined with development opportunities has become ever more important to us with the slowdown in external acquisitions.

As we have discussed in prior quarters we have been more active in developments. We were up to over $47 million under construction at year end. This quarter saw the completion of the mid-town industrial project in Minneapolis as well the Linden Ridge retail project in Winnipeg. Both of those developments are 100% lease, have been totally successful and have now been transferred to income producing properties.

We still have just over $10 million of development properties on the balance sheet at March 31. We have other projects we are considering and including the development site in Phoenix that I mentioned earlier and we also have development underway in Winnipeg an office project joint venture that is included in our joint ventures on our financial statements.

With the reduced pace of acquisition our last few quarters have been pretty stable and we are pleased that it continues to demonstrate a growth and stable platform that we have been to achieve. I’ll spend a few minutes reviewing in more detail the results of the quarter and then I’ll pass it back to Armin for some more discussion.

So hitting the balance sheet items first I guess the total assets of the REIT have continued to rise just over $5.2 billion at the end of March. Investment properties make-up by the largest part of this and are valued at over $4.9 billion. They are under IFRS recorded on our statements at fair value. So that has – we have adjusted cap rates slightly on few of our assets resulting in rise of above one basis point from Q4 in the weighted-average cap rate for all of our assets to change the few rental assumptions to be more conservative on growth and then our result was an unrealized loss on investment properties of $10.7 million for the quarter, pretty small.

We are not anticipating major changes in cap rates this year. So at the present time we expected to remain relatively small. We probably will have to show an increase next quarter on some of our Winnipeg officer properties where a Class A building has recently sold in the low 5% cap range whereas in the past because of the low transaction volume it’s always been tough to get the appraisal community to drop much below a six cap.

On the debt side convertible debentures the RIETS still has three series of convertible debentures outstanding, a very small remaining on the series D that matures this year and will be paid off in cash. The series F which matures in 2020 results of our series G debenture which matures in 2018 and that one’s denominated in U.S. dollars. So in our opinion it helps provides a natural currency hedge for the assets we own in the United States. Total convertible debentures outstanding at face value is a $185 million.

Unsecured debt as I mentioned in my opening remarks, we’ve completed our first ever offering of unsecured debentures in the amount of a $125 million, very pleased with the offering and the result that was lower subscribed offering. We expect this source of capital to increase over time gradually using the proceeds to reduce the amount of secured debt on the balance sheet and increase our pool of unencumbered assets. The debt-to-gross book value ratios we’re pretty comfortable with where we sit. It did increase slightly from year end due to the unsecured debenture offering and now stands at 50% including convertible debentures and the new unsecured debenture.

And we’ve mentioned in prior quarters management made a conscious decision to continue to lower the leverage in the REIT and we expect this ratio will come down quickly as we deploy the cash from the unsecured debenture. And we expect the trend of continuing to drop leverage to continue through the balance of 2014 and into 2015.

Staying the debt from floating rate debt Artis has $218 million of floating debt that has not been hedged or swap to date and this represents about 8.4% of our total debt. That’s down from 10.2% at the end of December 2013. We did place swaps on a couple of additional mortgages. The majority of the floating rate debt is in the United States. We still feel that an amount of floating rate debt appropriate in any debt portfolio and at any point in time and we are benefiting from the low interest rates on the floating rate debt and we have no immediate plans to reduce it further. Floating rate debt with the exception of our line of credit is all term debt. It’s not demand debt and it can’t be called by the vendors until maturity.

Carrying on with the maturity comment at March 31st, ARTIS had approximately $217 million of mortgage obligations maturing in the next 12 months, looking forward. That’s roughly 9% of our total mortgage debt and the REIT anticipates no difficulty in refinancing outstanding mortgages as they mature or we may elect to pay them off using unsecured debt.

Weighted average term to maturity is 4.3 years basically unchanged from year-end. As I mentioned earlier we have some unencumbered assets on the balance sheet. We’ve been gradually paying off mortgages with the goal of increasing the unencumbered asset pool. Using the fair values on the March 31 balance sheet ARTIS had 24 properties with a fair value of $246 million that are unencumbered. A further $155 million of properties are currently pledged as security for our operating line and subsequent to year-end we paid the mortgage debt on two more properties in the U.S. fair value around $50 million so it increases the unencumbered pool to over 290 million.

Interest rates on the debt, weighted average interest rate is continuing to decline in the low interest rate environment, although in fact we actually showed a little bump up from 4.1% at year end to 4.11% right now and that’s just due to fixing the interest rate on some of our floating rate debt.

Turning more to the income statement, looking at a couple of highlights of operations, total revenues property income from continuing operations was $77.3 million for the quarter up from $71.5 million in the same quarter last year driven largely by acquisitions completed during the first part of 2013 but also aided by growth in our same property operating results. Touching on lease termination fees our lease termination income is of course unpredictable. We had no lease termination income in this quarter which I guess is a good thing as you know we really like to terminate leases. But in the comparable quarter of last year there was $1.7 million of lease termination fees that were included in the results of operations in the first quarter of 2013.

Same property pool of assets, we are very pleased that our same property operating results for the first quarter of 2014 continued to show growth, an increase of $1.9 million or 2.8% across the group of properties. Pleased to have positive growth this quarter in all segments of the properties with the minor exception on the small decline in BC where our assets are not material component of our results.

By asset class the industrial segment has certainly performed the best with overall same property growth of 5.9% for the quarter driven by increases in the rental rates combined with a lift due to some foreign exchange in the U.S. properties. Retail segments performed very well for us as well with growth of 4% and the office segment was a little lighter as most people who are dealing office properties know the office market is little slower but we still showed growth of 0.8% despite a decline in occupancy.

Looking at the entire U.S. portfolio as a standalone the same store growth was 8.7% for the quarter, very strong although some of that certainly does relate from gains in the foreign exchange rate between Q1 of ‘13 and to date. We still feel the U.S. economy will outperform Canada in the next few years and we expect to see continued growth in the U.S. segment of the property. Canada by comparison showed growth of 1.4 % for the quarter which we are very pleased with gains in industrial and retail again offset by our softer office market, not as strong as the U.S. but still very pleased with those numbers.

On coverage ratios and other balance sheet ratios, our interest coverage ratio was 2.83 times for the current quarter. We’re comfortable with that level that service coverage about 1.83 times and is well within any covenants given to any of our lenders. Net debt-to-EBITDA ratio another one that’s commonly looked at, our ratio was 8.11 times based on the March 31st numbers and for us we just do pretty simple calculation, we take the actual quarterly results and multiple them by four and do the calculation that way.

Foreign exchange gains and losses as I mentioned we have a fairly significant portion of our assets, little over 20% in the United States and this requires that we convert assets held in U.S. funds back to Canadian dollars and this results in foreign exchange gains and losses on the income statement. There is – some of that flows into the top part of the income statement under operations and some flows into the lower part of the income statement called other comprehensive income. That in our case is just foreign exchange. REITs assets in the U.S. get translated into Canadian dollars at each reporting period and the unrealized gains or losses on translation of those assets and long term liability flows through other comprehensive income.

And for the three months ended March 31st based on a weakening of the Canadian dollar we showed an unrealized gain of $18.5 million. Based on what we hear from various currency experts I think the trend is that the Canadian dollar will perhaps weaken a little further in the coming year and if it happens you’ll see growth in the U.S. portfolio also being driven by more foreign exchange gains.

I talked briefly about our natural currency hedge and based on the segmented information in the March 31st financial statements the RIET has $1.1 billion of assets in the U.S. We hold $5.53 million of U.S. mortgage debt, $96 million debenture payable in U.S. dollars and $75 million of preferred units redeemable in U.S. dollars. And that gives us a natural currency hedge if you want to call it that over 73% of our U.S exposure. And today we have no plans to hedge the remaining exposure.

Touching on some of the non-GAAP financial metrics, of course a common one for REITs is FFO or funds from operations, Real Pac has issued a guideline under IFRS and Artis calculates our FFO in accordance with the Real Pac guideline. FFO for the quarter for us on a diluted basis was $0.36 compared to $0.35 in the prior quarter when you adjust for some lease termination fees. FFO payout ratio was 75% for the current quarter. REIT also reports AFFO or adjusted funds from operations and based on our calculation, AFFO was $0.31 for the current quarter compared to which was actually up from Q4 of ‘12, although it is down from Q1 of ‘12 because as I mentioned we had some lease termination fees in Q1 – sorry ‘13 not ‘12.

AFFO payout ratio for the current quarter was 87%, we are pretty comfortable with that payout ratio although we have been signaling in our investor meetings that we intend to lower that further in coming quarters.

Participating in our DRIP continues to run 15% or higher providing us with a source of regular cash flow and some stability. Our tax status, always interesting to meet a non-taxable vehicle, spent so much time working on tax status but we have met the REIT exemption in 2013 and prior years. We also believe we have met all the tests as that closed in, crust to continue meeting those tests and year 2012 and prior years a 100% of our distributions were return of capital so that those will protect us from the taxation authority.

There was a small amount of taxable income generated in 2013, roughly 12% on the amount distributed. So we still showed 88% return of capital in our distributions. As far as we can tell, we believe we will be able to continue to meet the REIT exemptions for 2015 and beyond however that’s an ongoing process that you have to meet regularly during the year.

On facilities, we currently have an $80 million credit facility, it is unused so the entire balance is available to be drawn should we need it in the future quarters. We ended the quarter with $153 million of cash on hand as I mentioned that is largely pushed up by the debt offering that we did close to the end of the quarter with no balance drawn on the line of credit, so we have capacity to acquire further properties but we are being very selective in the current market.

That really wraps up my portion of the financial review. We think it was another great quarter and we look forward to continuing to demonstrate our results in future quarters. So thanks and I will turn it back to Armin.

Armin Martens

Thanks Jim and I will continue the market commentary and some more operational highlights. Again folks first of all we are gratified to see how things continued to gradually improve in the capital markets and are all commenting that this year will be kind to the weak sector.

Looking ahead it continues to be our view as both the U.S. and Canadian economies will perform for this year and the years ahead with an increasing advantage going to the U.S. economy and among other things, this will be reflected by healthy U.S. dollar.

And I always respect the government driven interest rates, bond yields remain in a relatively low trading range, we have also seen spreads remain level for five and 10 year mortgages but this could even improve this year I think as banks and insurance companies will lower the mortgage funding allocations and possibly liquidity improves a bit. So today five year mortgage rates are still in the 3.5% range whilst 10 year mortgages have moved up to about 4.5% range. And the U.S. five year money would be about 3.4% and 10 year money would be about 4.0%.

So notwithstanding a view that interest rates will remain in a low trading range for the foreseeable future, almost all new mortgages been taken out by Artis have been for either seven or 10 year term as Jim mentioned we have been moving to fixed and to extend the term on some of our floating rate debt as well.

In terms of acquisition cap rates in during Q1, we know they corrected a little mid last year but continued to remain level since then and in essence some REITs are still cheaper than real estate right now.

Given the increase in demand for yield and real estate from all investor categories, we are also in a new supply and demand paradigm, meaning we should not expect cap rates to move up and a structural increase in demand for good real estate in Canada and good real estate means B plus to A to AA and not just AA core anymore.

In Canada there is a basic shortage of new real estate being brought to market. Not all of our asset class is, office, industrial and retail, the property markets continued to experience healthy occupancy levels in our target markets, looking ahead we will have to march the new office developments and market CBD markets like Toronto, Vancouver as well as Calgary as this will invariably put negative pressure in occupancy rates and potential rental rates.

Now Artis has minimal exposure to the CBD Vancouver, and Toronto office markets, but are well invested in the Calgary office markets. With respect to Calgary according to the recent Q1 report, there was 400,000 square feet of net positive absorption in the Calgary CBD and dot line office market in Q1. And that CBD and dot line project covers the whole city. But this is a very good news, will continue.

Again there is a real estate fundamentals in all of our asset classes and sub markets are quite sound. In our U.S. markets, we are enjoying the fruits of a steady economy recovery that is in turn producing positive real estate fundamental as well as increasing liquidity in the debt market. New commercial construction including Spec projects is still relatively low.

A general consensus is that the wind is now behind the U.S. real estate market. The real estate market in the U.S. and they were likely in the third inning of the economic recovery in total. In terms of our portfolio performance, we feel our metrics are good. We have a healthy gap between in place rents and market rents are 7.1% and are achieving a healthy level of weighted average rental increase and same property NOI growth.

We are seeing progress is also good, our 2014 program is now 70% complete as well as 20% of 2015. Our portfolio continues to demonstrate a longstanding track record of an occupancy level in the 95% range which speaks well to our management team and the reliability of our income.

In terms of our geographic diversification, we continue to be primarily a western Canadian REIT with about a 64% weighting today in western Canada, 13% weighting in the GTA and Ottawa and 23% weighting in the U.S. and we think this makes Artis a very unique and compelling Canadian REIT to invest in.

As previously mentioned, we continue to see a sound value proposition in U.S. and we anticipate increasing our U.S. allocation to the 25% to 30% range. The economy, the real estate fundamentals for exchange will be in favor of the U.S. right now. Having said that, as Jim alluded to as well and I think we mentioned at the previous conference call, Artis has pushed a pause button under acquisitions pending more visibility in the capital markets.

For 2014 our guidance continues to be that we will acquire between 100 million and possibly 200 million of new properties during the course of the year which is significantly lower than previous years.

At the end of the day, value creation is most important to us. So we continue to work hard to keep our buildings full, whilst bringing the rents up to market and we are slowly but surely increasing our value enhancement and development pipeline as well.

Our development pipeline has been quite successful to-date as we mentioned with the completion of a lease-up of Midtown industrial development in Minneapolis involved and [Inaudible] shopping center in Winnipeg. We are now down to about $200 million in our development pipeline and that would, to break that would be about $100 million of new developments under construction with a 100 million on the drawing board.

Projects like Centre Point in Winnipeg, our joint venture has been mentioned. Victoria on the East project and [Inaudible] a brand new industrial development and MSA Phoenix. So that’s still on the low side, we still have a very good track record thus far and a long track record in development but a very good track record and our current development pipelines on the west side, overtime we expect to increase our development pipeline with this a little bit more as well.

So in all three key metrics, folks our balance sheet, our PL ratio and the caliber of our real estate and our Artis management continues to work hard at improving the REIT one step at a time. So that’s our report for this quarter, folks we are pleased with results and are very confident in our outlook for this year and beyond but the market [Inaudible] to take over and field your questions.

Question-and-Answer Session

Operator

Thank you Mr. Martens. (Operator Instructions). And your first question is from Jenny Ma of Canaccord Genuity. Please go ahead.

Jenny Ma – Canaccord Genuity

Hi, thanks. Good afternoon everyone.

Armin Martens

Good afternoon, Jenny.

Jenny Ma – Canaccord Genuity

So, Armin you were talking about how there is pretty decent demand across the market for good quality properties and that should provide support of the real estate market. How do you reconcile that with your continued caution with regard to acquisitions? And you mention just a $100 of 300 million this year which is low for standards?

Armin Martens

On in Canada and it’s about cost equity capital not cost of capital improving slowly but surely but in Canada you know good real estate the cap rates are really an time low and looking ahead to this year I expect cap rates to fall a little bit more. I don’t see anything pushing cap rates up. So that’s our challenge we have to make accretive acquisitions in Canadian market. The odd time you know we can find one and make one on a one-off our basis and that’s good how we started the REIT one step at a time one acquisition a time. And the U.S. cap rate continues to fall as well. They haven’t caught up to Canadian cap rates yet but their might some cases they are same or lower than Canadian cap rates some super markets if you will and then some but in general they are still 50 points to 75 points higher than Canadian cap rates. Does that help with it?

Jenny Ma – Canaccord Genuity

Sure, okay. So, my next question is with regard to increase in use of the unsecured debt so you got that first deal done this quarter congratulations. In terms of the percentage of your debt stack, do you have certain target of where you want unsecured debt to be let’s say over the next you know 12 to 24 months?

Armin Martens

Yeah, good question in our marketing to our debt investors we suggested that our unencumbered assets on the longer-term 10 to 24 month it is difficult but that’s longer-term we’d like to see in our total mortgage debt 30% of our capital stack, our unsecured debentures at 10%. So, total debt at 40% and that’s longer-term. Maybe within two years we can bring it all down in total, our total debt down to 45% or sub-45% but we do want to continue with issuing some unsecured debentures on a selective basis and increase our unencumbered asset pool. I think as Jim we are almost at $300 million now. Our first goal is to bring that to about 500 million of unencumbered assets and then we will go there. $1 billion of unencumbered assets for us would probably be a wise decision as well but there is no hurry.

Jenny Ma – Canaccord Genuity

Okay. So in other words is it fair say you said you want to take levels down to 40% 10% of it being unsecured so for your debt it will probably 25% unsecured debentures 75% fixed? Thank you.

Armin Martens

That’s right, Jenny.

Jenny Ma – Canaccord Genuity

Okay, that’s all for me. Thanks.

Operator

Thank you. The next is from Alex Avery from CIBC. Please go ahead.

Alex Avery – CIBC World Markets

Thank you. Could you just I guess provide a little bit more color on the Park Lucero investment you know what the timeline looks like on that and perhaps what the magnitude of the total investment might be?

Armin Martens

Yeah, so, I think as we might have address – it’s in the MD&A to certain extent. This will be a 600,000 square foot new generation industrial development in the sub-market of Gilbert in terms of demographics GDP growth of Gilbert is up there. Number two, in terms of household income behind Scottsdale and Paradise Valley. It’s a great site on the 202 Beltway Loop that connects to the interstate that goes west to the Inland Empire East all the way to Jackson, Florida if you want to go that far. We like the location with its proximity to retail amenities, another office park and another industrial.

The first phase will be about a third of it, just under about 200,000 square feet, the first phase will be smaller spect and as at leases up we will continue then with the second phase. It will part – about one-third will be small bay, small bay industrial and possibly some showcase industrial and then in the spec half to two-thirds will be for larger box users. The scale of the land came in at about $20,000 per acre fully serviced with long entitlements. We like that kind of a starting point, our land in Minnesota at Midtown was about 225. So, we like that starting point in terms of risk management. And there is total value of the project then Alex you know you can I think it roughly coming about $75 per square feet all-in $600 million square feet so what you get there, it’s about $40 million there.

Alex Avery – CIBC World Markets

Okay. And the timeline I guess you are going to move fairly quickly on the first phase?

Armin Martens

Yeah, we are all set to go we are moving – we are mobilized on this site and by summertime construction will start in the first phase for sure.

Alex Avery – CIBC World Markets

Right. And then just I guess, your comments earlier about you know targeting an increasing allocation to U.S. investments and some of the recent investments and you have got a pretty hefty chunk of cash sitting on the balance sheet right now. Is it safe to assume that, that’s held in U.S. dollar and earmarked for U.S. dollar investments?

Armin Martens

It’s not been flipped into U.S. dollars yet Alex but it’s certainly right now we’ll be focusing more on U.S. acquisition so.

Alex Avery – CIBC World Markets

Is it, is that something you plan to do to roll it into U.S. dollars I mean it sounds like your…

Jim Green

Yeah, we kind…

Alex Avery – CIBC World Markets

From the Canadian dollars.

Jim Green

Kind of watch the market and when you get a recent weakness like we have seen recently yeah we try and take advantage of it so – weakness spend in the Canadian dollar when it moves up we try to buy some U.S. dollars.

Alex Avery – CIBC World Markets

Okay, that’s great. Thank you.

Operator

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

Matt Kornack – National Bank Financial

Hi, guys. Just a quick follow-up on Alex’s question with regard to the cash on balance sheet. Is that some of that going to be used for debt repayments as well or is it all going towards acquisition?

Armin Martens

Some for debt repayment as well.

Matt Kornack – National Bank Financial

Do you know sort of what the spilt will be in terms of the two or…?

Jim Green

Certainly more driven for debt than for acquisitions.

Matt Kornack – National Bank Financial

Sure, and you mentioned there are some price dislocation for public entities on at least at the side of the board I am not sure about in the U.S. Do you monitor sort of some of peers as acquisition opportunities as well on a public perspective or are you just looking at the broader market at this point?

Armin Martens

Well investment bankers make sure that we [inaudible]. So, yes we do that’s all are on our radar screen it is nice at least to be in position to be able to afford to be the buyer instead of the target if you will. So, that’s all good. But we certainly don’t have anything to announce yet. Historically if you look at our history we’ve never actually an M&A deal we have always found it simpler and clean to do the – to be buying real estate because underwriting is much more secure and guaranteed but have more confidence in the underwriting and if we buy a property and we say it’s accretive then we know it’s accretive if you know M&A transaction it’s always accretive what the day you announce it but a year later you have signed off the tools–

Matt Kornack – National Bank Financial

Fair enough. Great, well that’s it. Thanks have a good weekend.

Armin Martens

You too.

Operator

Thank you. The next question is from Mike Markidis from Desjardins Capital. Please go ahead.

Michael Markidis – Desjardins Securities, Inc.

Hi, everybody. Just an easy one to start off and I may have missed it opportunity in M&A I apologize the timing of the two projects that came online in the first quarter was that towards the very beginning quarter or was it towards the end?

Armin Martens

Yeah, the one in the U.S. was right of the start of the quarter, was a January 1st commencement on the lease the Linden Ridge development was about I think about 60% to 70% ready or occupied at the start of the year and then the lastly lease which was with Marshall’s kicked in later in the quarter.

Michael Markidis – Desjardins Securities, Inc.

Okay, okay. And then just switching gears you are looking at the rent increase that you had on renewals came in a little lower than what you have been seeing maybe last year and a little bit lower than what your gap between in place and market rents than the MD&A would suggest for your 14 lease. Was that just due to a timing like there is big lease that was a lower roll over in the first quarter and should we expect to see that number increase about as we go forward in 2014?

Armin Martens

Yeah, it’s just – Mike and we expect to see that – it’s ever level you know it shouldn’t we certainly expect it to be between 6 and 8% even sort of `ever quarter. So with that like we can show one month that’s on the lower side another month that’s double-digit but and on the quarters come in a certain number but it is a bit spotty but we are confident that we can be north of 5% between 5 and 10% and we have rental increase by the end of the year.

Michael Markidis – Desjardins Securities, Inc.

Okay. and just lastly following-up on the question with respect to the cash and it sounds like most that would probably got to debt replay just knowing if there anything I think Jim did you mentioned what the amount that coming to was in the next 12 months. But quickly is your ability to actually start repaying debt is it going to take two or three quarters to get that done or when we see deployed relatively quicker?

Jim Green

You’ll see some of it deployed in Q2 and probably some of it not until Q3.

Michael Markidis – Desjardins Securities, Inc.

Okay, but the majority of them should be deployed by end of Q3.

Armin Martens

Yeah.

Michael Markidis – Desjardins Securities, Inc.

That’s it for me. Thank you.

Operator

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

Mario Saric – Scotia Capital Markets

Hi, good afternoon.

Armin Martens

Hello

Mario Saric – Scotia Capital Markets

Just may be on the leasing front I may have missed this number in the MD&A but the same property NOL at 2.8% what would that have been on a local currency basis?

Jim Green

The Canadian side was 1.4%, the US side is 8.7 with exchange build into it. I think on a good piece of the 8.7 is foreign exchange but it was positive.

Mario Saric – Scotia Capital Markets

Okay, so something like two third is foreign exchange, one third local currency organic growth?

Jim Green

Yeah, probably in that range.

Mario Saric – Scotia Capital Markets

Okay and I guess – back of the previous question leasing spreads were a bit low – up again on the same property – basis I guess the same comment were this quarter we are still kind of very good at almost 3% came in a bit lower than the five previous quarters you see that playing out for 2014 and may be into early 2015?

Armin Martens

Yeah we see it slowly getting better Mario and like we know the reasons why it wasn’t better. I will call it a good number in this economy but we expect to we know exactly – were the reason and we know exactly how those buildings are improving and how slowly but surely one quarter in a time that’s – growth can be a better number. So we are optimistic that we are confident that the quarters add will give us better numbers in that respect.

Mario Saric – Scotia Capital Markets

Okay and that’s you are referencing local currency number there?

Armin Martens

Yeah that’s regarding the currency gain.

Mario Saric – Scotia Capital Markets

Okay may be I guess associated with that comment the fundamentals look kind of pretty good, pretty strong I did notice a quarter-over-quarter decline in occupancy in from your industrial portfolio in Edmonton as well as in Winnipeg, so I don’t know if those are some of the properties that you are referring to in terms of getting better but just curious to hear perhaps what drove that and what the expectations are going forward in those two markets?

Armin Martens

In Winnipeg again as we got some new leases signed we see some improvement with that industrial that you are referring to. Edmonton I think that we bring that for our business market.

Jim Green

No it’s just actual – but the Edmonton industrial market is still pretty strong. We are not anticipating any difficulties in reducing that pace up for it.

Armin Martens

Yeah, and needless to say we are – long time nothing goes in a straight line but I can tell you that Alberta market, industrial markets, Edmonton industrial market is quite healthy and robust. Now we are going to make – we have a good track record of filing up that vacancy again.

Mario Saric – Scotia Capital Markets

Okay, yeah that makes sense. And then just on the Calgary office side you have exposure about 150,000 in 2014 and 350 in 2015 – in previous conversations there is no material leases in those two numbers in greater than 50,000 square feet?

Armin Martens

Nothing this year at the end of next year there is another renewal option with the Engineering, this is exactly about a 150,000 square feet. This is tied into the Lake [inaudible] project. We are all moving that – we are discussing things with them but it is sort of driving the process. We fully expect that to trigger their option to renew for another two years and we will go forward on that basis.

Mario Saric – Scotia Capital Markets

Is way of – or sentiment in these cancellations kind of any different than what you experienced I guess was probably two years ago?

Armin Martens

You know I am not a – no there is no negative need there, and everybody is in the business to grow and to make money. – production – still continues to increase our production in general in Alberta continues to increase it continue to find way to get all the long term market now standing there is headline scare about pipelines but eventually we do need at least one of those pipeline to go ahead. Now everything is – just fine the circle is been well spread.

Mario Saric – Scotia Capital Markets

Okay I guess just on the pipelines during the quarters you increased your cap rates on the class B assets and Calgary a little bit. Has that changed at all your thoughts on potentially disclosing of any assets in Calgary so cap return moving up a little bit and there is hardly a bit more uncertainty on the approvals keystone to that change or capital allocation such as in Calgary and all.

Armin Martens

Well you won’t see looking to buy more office premise in Calgary. I don’t know what’s his position and truth there is you heard me talk about a good real estate and that’s starting with B Plus real estate not to mention A and AA real estate. Being an high demand cap is very low.

Once the while we attended the – moreover eight buildings very low cap rate and take some money out of the table and look to redeploy it but we haven’t done that yet. And at the end of the year more than one of those pipeline goes agile probably the Kinder Morgan pipeline first and the west, east to pipeline reversal will happen and we will see it but more than gateway and all. I think it’s only a matter of time even if takes a different presence and likes days to prove it.

So I am not very interested on the partner in that market yet I – we will bring very good shape in the west.

Mario Saric – Scotia Capital Markets

I guess if you did decide may be – little bit is there is do you see a market out there for class B office assets in terms of potential buyers?

Armin Martens

Well that market is the shallowest right now. But I do feel seeing it – time with a lot variety the top brokers in Canada on this. We are seeing the markets slowly but steadily improve just again because of the natural trend is there, the demand velocity is so high in this sort of a stand up the buyers look for good real estate, there is no good real estate being put on the market. They – that they have to deploy their money, they are going to have to go down the cap rate curve and get good on that – and get the B real estate.

So there is upward pressure on the B real estate now and downward pressure on B real estate cap rate. We haven’t and I think so far its anecdotal same not that scientific but the points we are getting is that the trend in our friend in terms of valuations of the B real estate as well.

Mario Saric – Scotia Capital Markets

Last question just what kind of ROEs are you looking to achieve there?

Jim Green

Yeah the undelivered development deals for the US deals are similar. They are always not the 8% and this is a 90% versus 10% joint venture – across out of this 90%. The idea is that when the project is finished or stabilized we will buy – the 10%. It might recall on the large US developer based in – there and all of the major US having mid time industrial development – office we did with. So this is the second deal – good confidence in them with good track rate thus far.

So after there we bottom out there 10% which involves a success fees similarly will be success – our yield would be closer to 8%, sorry roughly 7.75% to 8% average yield. Similarly this is a – schedule. So we think we have got some room for error there it will meet our Class A industrial real estate valuation, market will be a 6.0 cap on the market may be lower it won’t be higher.

Mario Saric – Scotia Capital Markets

Okay. And then may be last question, just on that project there has been a lot of discussion with respect e-commerce and the potential positive implications for industrial kind of in some markets. How do you think about both industrial development going forward as it pertains to satisfying that demand and significantly on this project is there going to be something within this project that kind of targets that incremental demand?

Armin Martens

The question generally the more e-commerce there is the better new for industrial development in general in that. So we are optimistic about that. Industrial market is in good space to be in right now. We don’t think we are not expecting FedEx to be a – here, Amazon is already in west Phoenix we don’t expect to get them or eBay for example. But there is trickle down that benefit as well. The big benefit for Phoenix is you are just a short one day drive towards an inland Los Angeles, Phoenix is always benefited by being a suburb as well of Los Angeles and California, low cost business, low income tax everything out – that benefit.

Phoenix is growing. Phoenix is one of the top six cities right now in job creation, things have turned around very nicely on many fronts for Arizona.

Mario Saric – Scotia Capital Markets

Okay, thank you very much.

Operator

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

Michael Smith – RBC Capital Markets

Thank you. I just wanted to cut about your US strategy. If I understand you correctly you are saying that there is A, you want to take your weightings up to 30%, B, there is higher yield available there relative to Canada, there’s better growth outlook in the U.S. than in Canada, so why would you sell some of your lower quality Canadian assets and use that to step up your growth in U.S.?

Armin Martens

Well I guess it’s not as easy as to pushing a button like the rest of that one of the reasons, but I guess all above is right now and we were taking things one step at a time so that’s the short answer if you will but we get consideration to those kind of things and – real estate and then redeploying in the U.S. we’re always our penny one quarter at a time, selling some assets, dilutive we have a good use of proceeds with the asset.

So we don’t want to do anything too big in hurry and because we’re still obtaining REIT we slowly come down to 23% allocation in the U.S. and we’re slowly coming to 25% and as in Canada we hope things getting better here somewhat ironic we’re hoping that companies get better here or accounts in company gets better so that we can do even more in Canada. But that’s this one fits there we don’t see ourselves to taking any big steps in that direction but we do – one step at a time we’ll measure the cause in effective throughout the results and then we’ll decide about next steps after that.

Michael Smith – RBC Capital Markets

And if you do more in Canada as you alluded to like you wanted to do more in Canada will that take a form of development or would it take the form of acquisitions?

Armin Martens

Likely acquisition I mean here in GTA we just leased up now West Creek industrial development you can check it on our website we have some surplus land there to do about a 100,000 square feet and that’s in the Middleton area and so we expect we’ll go ahead with that new development that might be our aspect to go build 100,000 square feet industrial aspect, the land is really in books paid for so I believe its incremental yield will be nice there.

But it’s tough the development yields in Canada lower by the – than in the U.S. and there’s a lot of competition but the anticipation institutional money development yield especially the large ones whether it’s industrial or whether it’s office and then of course retail so we feel like it’s very competitive in the developments here in Canada but acquisition you know what I mean we are always on the look for acquisitions.

Michael Smith – RBC Capital Markets

So still in Canada so if you had to if you had a $100 million portfolio in the U.S. and a $100 million portfolio opportunity in Canada and you had to pick one what will it be?

Armin Martens

Well based on history if you will, the U.S. account rate will be 50 points higher and the U.S. real estate would be ten years newer and so it would be growth markets like Minneapolis, Denver and Phoenix so we’re probably into the U.S. right now that reflects the way things are plate on.

Michael Smith – RBC Capital Markets

Okay thank you.

Operator

Thank you. (Operator Instructions) And the next question is from [Walter] from Roland Management. Please go ahead.

Unidentified Analyst

Good morning gentlemen. Do you see yourself addressing the payout per unit, the distribution per unit?

Armin Martens

At the moment what we have been saying is that we would look to lower payout ratio and or at debt before we would consider any increase in our distribution so current guidance would be expected distribution to remain unchanged.

Unidentified Analyst

For how long?

Armin Martens

Well it’s safe to say for all this year.

Jim Green

Say for this year yeah.

Unidentified Analyst

Thank you.

Operator

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

Armin Martens

Yes thank you moderator. Thanks again everybody for joining us on this call for your interest – week and have a busy week and have it everyone so have a good weekend and we look forward to talking to you again in the future. Good bye.

Operator

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

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