Artis Real Estate Investment Trust's (ARESF) CEO Armin Martens on Q2 2016 Results - Earnings Call Transcript

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Artis Real Estate Investment Trust (OTCPK:ARESF) Q2 2016 Earnings Conference Call August 5, 2016 1:00 PM ET

Executives

Armin Martens - President & CEO

Jim Green - CFO

Heather Nikkel - IR

Analysts

Jonathan Kelcher - TD Securities

Jenny Ma - Canaccord Genuity

Michael Smith - RBC Capital Markets

Heather Kirk - BMO Capital Markets

Matt Kornack - National Bank Financial

Mario Saric - Scotia Bank

Operator

Good afternoon, ladies and gentlemen. My name is Chris and I will be your conference operator today. At this time, I'd like to welcome everyone to Artis REIT's Second Quarter 2016 Conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions].

Thank you. I would now like turn the meeting over to Mr. Armin Martens. Mr. Martens, please go ahead.

Armin Martens

Thank you, moderator. Thanks again everyone for joining us today. So again, my name is Armin Martens. I'm the President and CEO of Artis REIT, and with me on this call is, Jim Green, our CFO, as well as Heather Nikkel, our Director of Investor Relations.

Again to begin with, I'd like to advise all listeners that during this call we may at times be making forward-looking statements, and we therefore seek Safe Harbor. Please refer to our website as well as our SEDAR filings, such as our financial statements, our MD&A, and our annual information form for full disclaimers as well as information on material risks pertaining to all of our disclosures. Again, thanks for joining us. Now as in the past, I’ll now ask Jim Green to review our financial highlights, and I'll wrap up with some market commentary and then we’ll open the lines for questions. So go ahead, Jim.

Jim Green

Great. Thanks Armin, and good afternoon everyone. I know I’ve been through this before. We will do it again. This is a diversified commercial REIT, and as such, we continue to benefit from the differences in the three commercial asset classes as well as our geographic breakdown. Artis started as a purely Western Canadian REIT, but over the last five, I guess it’s almost six years now, we further diversified our geography to include assets in Ontario and the United States.

Based purely on our Q2 NOI, we are weighted 59.5% in Western Canada, and 10.7% in Ontario, and 29.8% in the United States. The United States weighting will go up in future quarters due to a significant acquisition late in Q2. Consistent with our annual financial report, our MD&A is presented this quarter using primarily numbers after an adjustment for portion of consolidation of our joint-venture interests, as the resulting discussion will generally read about the adjusted numbers.

Artis continues to be active in both new developments and redevelopment of our existing properties. We currently have over $73 million invested in projects under development, approximately $36 million of that on the REIT’s balance sheet directly and a further $37 million in joint-ventures with other developers. As detailed in our MD&A, we also have a number of projects in the planning stages where development has not yet actively started.

It’s been a much busier quarter for us than the first quarter. You can tell just by looking at the details in the highlights in MD&A section, we completed an equity offering for the first time in over two years and acquired a great portfolio of properties located in Madison, Wisconsin. We completed the disposition of two retail properties and one industrial property, and there are further dispositions mentioned in our subsequent events note of one with the balance of the Madison acquisition being acquired subsequent to quarter end.

As we’ve been discussing over the last several quarters, everyone is well aware of the drop in oil prices and the negative effect on the Canadian economy as a whole, and on the Alberta market in particular. Oil did recover somewhat during the quarter towards the $50 range, but recently it seems to be under pressure again. The impact of the oil is definitely being felt in the Calgary office market. Based on results from this quarter, Artis earned 35.4% from its NOI in Alberta. The increase this quarter over last quarter is due to the new lease commencing at Heritage Square and also to some lease termination income that beefed up the NOI, offset by higher vacancies and lower rents achieved on some of the Calgary renewals.

Roughly 40% of our Alberta NOI, which translates to about 14.4% of the REIT’s total NOI, comes from Calgary office properties. Our Calgary office occupancy has actually increased to 86.9% from 82.2% at March 31, and again, a large portion of this relates to the commencement of a new lease at Heritage Square. Good news for us in Calgary is that we’re not facing a huge amount of tenant renewals over the next few years. We have roughly 160,000 feet left to complete this year and 270,000 feet in each of ‘17 and ‘18 and even a little bit less than that in 2019.

We are currently forecasting the NOI to drop on this space. However with the comparatively small size of the square footage, we feel the dollar impact will be quite manageable. As we’ve mentioned on prior calls, our expansion into the U.S. has helped provide us with a great hedge against the falling oil prices in that lower oil prices generally produces a weaker Canadian dollar and this benefits the results of operations from our U.S. properties when translated back into Canadian dollars.

This trend continues, but not quite as large this quarter. We again got a great look from foreign exchange based on the fact that roughly 30% of the portfolio is in the U.S., and as I mentioned, you’ll see that number go up. Our Board has approved a further increase to our U.S. weighting. Current guideline is now that up to 40% of the REIT’s NOI could come from the U.S. and we may even consider increasing this further if circumstances warrant.

I’ll spend a couple of minutes on sort of a detailed highlight of a couple of numbers from the quarter and then I’ll pass it back to Armin. Just to highlight the fair value of the investment properties on our balance sheet. They are valued at fair value. This quarter again reflects a decline as in Q1, roughly $21.6 million this quarter, again the fact bringing the joint-venture adjustments and roughly $15 million of the $21 million relates to Alberta and it’s mainly adjustments booked due to amounts expended on TIs and leasing costs along with some minor changes to the Calgary office valuations created by rent and cap rate changes this quarter.

On our debt to GBV ratios, we remain very comfortable with our ratios, relatively consistent to last quarter and the previous year-end, sitting currently at 52.9% total debt to GBV and roughly 41% secured mortgage debt to GBV. Artis has been gradually paying off individual mortgages with the goal of increasing our unencumbered asset pool. We currently have just over $1 billion in unencumbered assets. We’re planning to increase that further over time. We have an unsecured credit facility with a syndicate of lenders. We’ve added a second tranche to the facility this quarter of an additional $200 million, raising the total line to $500 million, and the second tranche is for a five-year terms so that we don’t have to deal with it again until 2021.

Touching on the little bit of operations. I guess same-property is always a big number. And in this quarter on an overall portfolio basis, we had a negative same-property income growth of 0.3%. It didn’t look back at all our quarters historically, but going from memory, I think this might only be the second or third time in the REIT’s history that we’ve ever reported a negative number in same-property growth. By far the main driver of the negative number, in fact all of it I guess you could say was our Calgary office portfolio. If you exclude the Calgary office sector, same-property results were very healthy 2.7% growth. The remainder of our assets in Alberta, excluding Calgary office, also contributed a positive contribution to same-property income growth.

By asset class, in Canadian dollars, our industrial segment has again performed the best with an overall same-property growth of 7.8% for the quarter. Retail was next at 1.6% and office showed a decline of a negative 4.9%.

Looking at the entire U.S. portfolio, same-store growth in Canadian dollars is 3.9%. It is all due to foreign exchange. Total U.S. growth in U.S. dollars was a small drop of 0.91% this quarter, and in fact largely relates to a decision last fall to move one of our larger tenants from one office building into another office building and we subsequently sold the office building they moved into, so it’s hurting the same-property numbers a little bit.

Non-GAAP measures, FFO and payout ratios. Our FFO for the quarter was $0.37, unchanged from the same quarter last year, giving us an FFO payout ratio of 73%. Based on our calculations, AFFO was $0.31 for the quarter compared to $0.32 in the Q2 of ‘15 and that decrease is mainly due to an increase in our leasing cost reserve. AFFO payout ratio for the quarter was 87.1%.

Artis reports our properties as I mentioned at fair market value under IFRS and as such it’s pretty easy to calculate the net asset value per trust unit and after adjusting for the equity held by preferred unitholders, the net asset value for the common trust units is $15.11. Artis ended the quarter with roughly $155 million of cash on hand and $200 million undrawn on our line of credit.

A further update on the subsequent events including debt repayments, the acquisitions and dispositions is included in the notes to the financial statements. You’ll notice it’s been a pretty active start to the third quarter even though we’re just over a month into it.

So that will complete my financial review. We feel that was a great quarter for us and we look forward to demonstrating results in future quarters. I’ll turn it back to Armin for some more discussion.

Armin Martens

Okay. Thanks, Jim. So folks on balance and under these circumstances, we feel that Artis is enjoying another good year in 2016. The benefits of being diversified REIT both geographically and by asset class continue to be rewarding one for us.

And as you will notice, we continue to seek to diversify even more and geographically and reduce our Alberta footprint. As mentioned before, it continues to be our view that both the U.S. and Canadian economies will perform fair to good this year and next with advantage going to the U.S. economy. So we continue to be along the U.S. economy and the U.S. real estate sector right now.

2016 would be the third quarter in our history really which Artis was sell much real estate as that acquires or develops. So intelligent recycling or accretive recycling of capital is the matter of the day. We think we’re doing a very good job at selling select properties of cap rates well below our implied cap rate, not market cap rate and reinvesting in better real estate at a higher yields as well as funding our development pipeline, which in turn will generate deals north of 7%. All of this of course while improving the caliber of our overall portfolio.

Our guidance for 2016 used to be $200 million to $300 million of new dispositions to be recycled during the year and we’re now confident that it will be between $400 million to $500 million of the dispositions we recycled during this year.

And as we accretively recycle our capital, you will of course notice that our Alberta footprint is shrinking slowly but surely in relation to our total NOI and our diversity of NOI is improving. You will also see us being able to increase our FFO on a per unit basis by renewing mortgage and debt at lower rates during 2016, and we’ll continue to work hard to keep our buildings full whilst bringing the rents up to market and consistently improving our real estate portfolio, our balance sheet and our payout ratio.

So our three drivers of growth right now are first the accretive recycling of capital, renewal of debt at lower rates and increasing our same-property NOI growth in our major markets as best as possible.

And that’s our report for this quarter folks. Yes, these are somewhat challenging times but we’re pleased with our results and confident in our outlook. I’ll now ask the moderator to take over your questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now beginning question-and-answer session. [Operator Instructions]. Your first question comes from Jonathan Kelcher, TD Securities. Jonathan, please go ahead.

Jonathan Kelcher

Thanks. Good afternoon.

Armin Martens

Yes.

Jim Green

Hi Jon.

Jonathan Kelcher

Just first on your development program. Could you maybe give us a little bit of an update there in particular on Phase I of Park 8Ninety and, I guess, Westcreek Boulevard, where you guys stand on the leasing front there? I guess, those properties will be ready in Q4 this year.

Armin Martens

Correct. The leasing is progressing well and there is actually a lot of activity where it’s gratifying to see how diversified the Houston market is than economy is compared to as for example Calgary. I think I believe Houston had that two quarters of negative job growth and now they are back to positive job growth. Yes, the office market in Houston is one you want to stay out of. We’re not in that office market, but our industrial space, our first phase there is about 200,000 square feet. We are in - we have signed LOI with a non-refundable earnings deposit on about half that’s based right now, slightly above pro forma bankable credit rated 10. We’re just in lease discussions.

On the U.S. LOI, they are not binding with regard of Canada. So it’s a binding deal, when we finally got the leased signed up but they did actually - but it’s a very concise LOI with a non-refundable deposit which is a good start. We think we’ve got a deal there and our team - our development and leasing team on the ground is - they’re actually confident. It would be fully leased by the end of this year and we’ll be starting up Phase II in first quarter of next year. So we feel good about all that and the same applies to our Park Lucero project in Phoenix, that first phase is almost done now where we’ve already approved construction of the second phase and a lot of action there. RFPs from tenants, a lot of proposals being made and it’s a right activity. We’re seeing very good activity and expecting that to move along very nicely and hit our performance.

At the end of the day as you heard me say before, it will give us brand new generation industrial real estate, very well located, and it will of course improve our overall NOI and FFO because we don’t put mezz debt on this to juice up our income. That’s all capitalized - all these costs are capitalized and the income doesn’t shock until the tenants paying rent. So that’s conservative business model right now.

Jonathan Kelcher

Okay. And Westcreek in Toronto, how is that leasing going?

Armin Martens

Close. There is good activity. But we’re very close, and again, like we had a deal right. I almost forgotten about that because it was so certain. It will be leased up soon is my prognosis.

Jonathan Kelcher

Okay. And then just, I guess, your focus is reducing your exposure in Alberta. Where do you want to get to as a percentage of NOI for Alberta? Do you have a goal in mind?

Armin Martens

Yes. It’s hard to say, I mean, at first of all we’re very happy with our industrial and retail in Alberta. It’s just Calgary office. We don’t have any office in Edmonton otherwise we’d be concerned about that too, but back in 2008 and 2009 you might remember, Jonathan, our total Alberta exposure was 70% and our total Calgary office exposure was 35% of our NOI. So now less than half of that in both categories, I think 30% of our NOI is Calgary office that we’re down to 31% from 33% now for all of Alberta.

And we’re able to change those ratios by growing out of Alberta, if you will, by going externally in other markets. Now we’ve got to do it by recycling our capital signs in certain markets and investing in other markets. We think by the end of this year we will have sold a few properties in Alberta. I can't give much more color than that, and in addition to that we’ll sell properties in some of our other markets and reinvested. It appears right now that the only place where we can get decent accretion and diversification is in the U.S. markets. Should expect to see us grow more in the Minneapolis St. Paul market for example than possible Denver and Phoenix as well.

Jonathan Kelcher

Okay. Do you think any of those Alberta asset sales will be Calgary office?

Armin Martens

Well, I could tell you there is discussions in this paper being traded on some Calgary office. I could tell you that, but I just don’t like to predict much because the probability of our deal certainly isn't there until somebody is unconditional. But the retail properties, we have a couple more that we expect our strong retail properties sold not just the two that we mentioned. And by the end of this year - and it’s possible that some of our industrial portfolio between now and the end of the year will be dealt with as well.

Jonathan Kelcher

Okay. Thank you. I’ll turn it back.

Operator

Thank you. Your next question comes from Jenny Ma, Canaccord Genuity. Jenny, please go ahead.

Jenny Ma

Hi, good afternoon. Armin, you mentioned there is some papers being traded on Calgary. Would you be able to comment on who the buyers are in the market, not necessarily those specific properties but sort of who is kicking the tires out there?

Armin Martens

We got all Calgary is looking. If you know that the Canadian real estate market is such that it’s priced to perfection really that the lack of products on the markets it’s hard to buy something in Canada and if you do, it’s going to be a lower cap rate than you ever imagined. But we’re still seeing a cross-section of institutional investors and the private equity fund managers and then the entrepreneurs, the local entrepreneurs looking. In some cases, we’ve got some office properties that may be - that are candidates for the repurpose to multifamily or into three or four star hotels. And other cases, we’ve got money that’s looking to buy at a better price than they would have paid a year or two years ago.

Jenny Ma

Now are these generally domestic players or is there any foreign interest?

Armin Martens

A little bit of foreign but foreign money is definitely more tire kicking but they are looking.

Jenny Ma

Okay. And further with Calgary, there seems to be a view on the consumer side that now that we’re two years into the downturn with oil that the stress is really starting to show and so the cracks. Can you comment on maybe some of your smaller tenants in the market? I realize there is not a lot rolling over the next few years but are some of the smaller tenants facing some stress now, now that we’re two years into the downturn?

Armin Martens

Retail and industrial side, the answer would be no actually and we just went through this experience with Fort Mc with the fires people - tenant leaving and coming back to opening up the stores. We’ve got a couple of tenants here that aren’t happy in Fort Mc but those are the same two or three they weren’t happy before the fire as well. We’re doing well there in all of our asset classes but at Calgary office, to be honest we feel like we’re bumping along the bottom now and we’re even seeing some green suites this quarter that we never saw before in a sense that reset of pricing costing is taking place for buying land lease for exploration cost for buying existing wells, all of that and we’re seeing small tenants, entrepreneurs shopping take a couple of thousand square feet for short-term and expected to get back in business because if go back in time and it’s one - there was a time $40 [ph] we’re just fine. It was all about the cost and the margins, right and same with the gas prices.

So it’s all about the resetting of the pricing and the costs related to making money. The bottom line is that nobody wants to be unemployed now. You want to keep going. But part of that reset unfortunately is resetting offices and it’s not the end of the world per se, I’d rather reset the office rates than have an empty building.

Jenny Ma

Right. Okay, that’s good color. And then my last question is with regards to the Madison acquisition. I’ll be the first to admit that Madison doesn’t hit my radar. Wondering if you could talk about how many markets like Madison there are in the U.S. and what I’m trying to drill down to is whether or not that might translate into opportunities for Artis in the U.S. that’s outside of your targeted markets right now?

Armin Martens

Yes, Madison is - I call it the Austin of the north, even though nobody can say it’s good as Austin. Tenants would [indiscernible] Austin for a long time but it is in a sense that it’s a secondary market by Canadian standard secondary, by U.S. tertiary - secondary market but it’s a state capital. It’s the home of the state’s university. As we got urban planning the state capital is right downtime. University is downtown. Basketball is there. Football stadium is there. Great urban planning and when you do all of that, there is great jobs then. So Madison is evolved to our top five employment - it’s IT employment growth center. It’s one of the top 20 IT employment centers now. New employment, good growth. So lot of things I like about that market.

A little fun fact, the University of Wisconsin is a top school. A little fun fact about that is it does have the number one real estate school in America MBA program. Most of the guys from CBRE, the top guys they’ve all come from Madison. Now we’ve got a couple of schools one in New York in particular trying to catch up, but Madison was the number one for years and it’s always going to be in the top two or three real estate schools in the country. So we expect to go and interview people just to meet them because they are going to go places in their career.

So what we like about Madison is all of the above. And in addition to that, you won't see the big players, institutions or the REITs going to Madison, buy a bunch of land and build a building on spec or build a building or spend two years trying to put somebody’s tenant and then building a building and stuff like that. You’re not getting the same disruptive forces in that market that you wouldn’t even in Minneapolis or even in Winnipeg, but so stay stable and predictable.

We’re really grateful that we’re able to acquire so of speak the property management platform with that, that will give us an extra boost in NOI that we haven't built in or forecasted yet, but it will be there and we just - it’s got good potential. We’re the first portfolio on our history as a REIT where the NOI went up during our due diligence. It actually went up and we’ve bought it at 87% occupancy. We’re going to be at 90% by the end of Q3 occupancy and will be more. So we have no buyers' remorse, that’s for sure.

Jenny Ma

Okay. So sounds like markets like Madison are sort of one-off opportunities then?

Armin Martens

Yes, because again small secondary markets state cap and home of the university you don’t often get that.

Jenny Ma

Okay, great. I will turn it back. Thank you.

Operator

Thank you. Your next question comes from Michael Smith, RBC Capital Markets. Michael, please go ahead.

Michael Smith

Thank you and good afternoon.

Armin Martens

Hi there.

Michael Smith

You make your compelling argument about Madison, the acquisition there, but help me understand why you would issue equity close to a 15% discount to net asset value to buy brand new market that is really of no strategic value to you?

Armin Martens

We didn’t do that, Michael. We raised the equity to redeem that Series F Debentures to improve our - we raised our equity to improve our balance sheet. We always had the mind to buy Madison. We weren’t going to raise the equity for that. So when we raised the equity below NAV and to redeem that debenture, it was all about improving the balance sheet. We knew it was dilutive. But we think it was a wise decision given that in this environment we’re in the last couple of years you’ve noticed that whether it’s Artis or other REITs that have all real estate in Alberta and Calgary office. We are forced with some write-down. It’s not necessarily always the cash write-downs, non-cash write-down but we’re forced to do that. And so we thought it would be wise to raise equity when the markets will open just a little bit, not too much, and improve our balance sheet.

Michael Smith

So, I mean, at the end of the day you could have, I guess, instead of buying Madison just paid down those debentures?

Armin Martens

Well the yield - first of all, Madison is a very good market. As I said, stable, predictable and it gives us more diversification and all of that is within our business model. And it’s a very accretive acquisition on day one, no matter what. When we sold real estate on balance at cap rates at a 6% or lower and Madison is at cleaner property management income will be cap rate of 8%. We have got a 200 point gain there and we have a growth profile on Madison, and again in a market that doesn’t have disruptive forces like a lot of other markets.

Michael Smith

I understand like if you just put the real estate issues or the real estate metrics aside, I’m just trying to figure out what the strategy is, like I was under the impression that you were getting more focused in trying to build concentrations in certain markets and that your capital allocation was getting more tight in the sense of not issuing equity below NAV to make acquisitions. So I’m just wondering what the direction of the company. What was the discussion like at the board?

Armin Martens

Madison, we view that as a very unique opportunity and a good opportunity, playing it simple. Being in - so we’re in four U.S. markets, major U.S. markets by Canadian standards, Houston, Phoenix, Denver, Minneapolis would be major markets by Canadian standards and then Madison would be a secondary market by Canadian standards. So that may bring us five but we’ve always - as you’ve heard me say for long time now that we continue to belong U.S. economy, U.S. real estate, the largest economy in the world that is no energy self-sufficient, so we feel good about that direction. And among other things as you already mentioned it’s very difficult to grow externally here in Canada. It’s also is difficult not to put - have a productive and development pipeline in Canada because the development yields in Canada are lower than the U.S. as well as of course acquisition cap rates.

So yes, we made a conscious decision to raise that equity below NAV to repay that debt and we knew it would be dilutive but we wanted to improve our balance sheet. It’s simple. We stand by that decision.

Michael Smith

And going forward can we expect more?

Armin Martens

We’ve got another series - another convertible debenture out there that we don’t like. We want to get that off our balance sheet sooner or later but that doesn’t mean we’ll raise equity. We may just repay proceeds of selling properties. That would have been our first preference - is normally our first preference and I gathered by your question that’s probably your first recommendation too. But that’s - in terms of improvement of balance sheet, we want get rid of our other convertible debenture as well and then we’ll see after that.

Michael Smith

Okay. Thank you.

Armin Martens

Yes.

Operator

Thank you. Your next question comes from Heather Kirk, BMO Capital Markets. Heather, please go ahead.

Heather Kirk

This is a follow-up to Michael’s question. I guess you talk about accretion and I’m just - in terms of your growth outlook, I think there is NAV accretion and there is AFFO accretion. And I was just trying to understand what’s your number one driver is at this point in terms of the go-forward?

Armin Martens

Well, it is AFFO per unit. We were confident in the NAV by the way what we’ve got there. Now with the last acquisition, we’re confident that that NAV is going to go up. It’s in a very good trend line. The building are getting fuller and the rents are moving up. So in a perfect world, it’s both NAV and AFFO or maybe NAV against the higher grant but we’re a REIT, so our investors are looking for both yields and NAV, but if you’re retail investor, they care less about NAV and more about yield. If you’re an institutional investor, I think you would look at NAV first and yields second.

From our perspective, we don’t - we’re in a certain move that we are. We’re committed to our distribution and so it’s slowly but surely we’re moving forward in the right direction, but we all know about the headwinds. Calgary is a little bit of an anchor on us right now. It could be worse. It could be better. But that’s the challenge that we’re working with. Doing nothing if we just sort of stay put and [indiscernible], I believe our AFFO would move to south. So I’m very confident that what we’re doing and selling at lower cap rates, buying at higher cap rates and working hard to continue to diversify our portfolio is the right thing.

Heather Kirk

So the other thing that was notable this quarter was that the U.S. same-property NOI was at the current pre-adjustment was actually negative and I’m just wondering given that fundamentals are pretty solid across the U.S., whether there were some things specific from a geography or an asset type going on that would have driven that?

Armin Martens

Yes, that was the comment I made Heather that we took a fairly substantial tenant out of one of our buildings, moved them into another building and then sold the building we moved them into. So that’s where you’re seeing the negative result of and we get the negative on one without unless the offsetting positive.

Heather Kirk

Okay. I apologize, I missed part of that - early part of the call. But just as a general trend, I mean, it has been trending down from earlier levels. Are you seeing sort of a softening a little bit?

Armin Martens

I thought last quarter was pretty good. I mean, the U.S. economy - Canada’s latest GDP figures are low, light low growth is a new high growth and U.S. economy is not on fire but I just call it still the cleanest sheet in the laundry and at the best of the G7 group. So that’s we’ve got the main reason we’re there and again being energy self-sufficient is the game changer I think for job creation for that economy.

We’re still not seeing a lot of over building and the thing about same-property as you know I don’t need to tell you that it doesn’t always go in a straight line. It’s lumpy but at the end of the year we expect to deliver a positive number in the U.S. in mixed currencies and expect to be positive in Canada, needless to say as a result of the Calgary office market, there is still another year to go at least before all the [indiscernible] comes to market. We’re looking at flat in Canada.

Heather Kirk

And just turning to the asset sales, it sounds to me like you’re trying to just decrease the overall Alberta weightings and I’m just wondering whether the desire to sell the industrial and the retail as well. Is that an indication of something that you’re seeing in the pipeline with respect to the operating performance also potentially eroding, or is it just the headline reduce Alberta strategy?

Armin Martens

Yes, primarily headline, also pricing is still pretty good in Alberta. Pricing for retail product and industrial product valuations are quite respectable, and so that’s the other reason.

Heather Kirk

Thank you.

Operator

Thank you. Your next question comes from Matt Kornack, National Bank Financial. Matt, please go ahead.

Matt Kornack

Hi guys. Just wanted to quickly turn back to the USSP [ph] NOI. Have you backfilled that space for the tenant departure or still looking for a tenant there?

Jim Green

We haven't got a big tenant to fill it. We have filled some of it with smaller tenants but no, there is still a gap there that we’re working on filling.

Matt Kornack

Okay. With regards to the lease terminations in the quarter, what did that relate to?

Armin Martens

Biggest piece of that was a tenant in Grand Prairie.

Matt Kornack

Okay.

Armin Martens

I don’t know if I should mention specific tenants but it’s one everybody would know that was closing stores and they terminated and we put a different retail tenant but everybody would know into the space.

Matt Kornack

So there is no - so was there a drag in terms of timing on that tenant moving in from the same-property standpoint or was it pretty seamless?

Jim Green

Well, it’s pretty seamless. So there might have been a little - a short gap but it was - those two deals were worked at the same time that the new lease commenced at the same time as we accepted the termination from the other tenant.

Armin Martens

I mean, we can tell you. It was a future shop lease supported by Best Buy that we replaced with the Winners.

Matt Kornack

Okay. And then with regards to the AMEC space, did the Worley Parsons lease come on at the beginning of the quarter or was there any timing difference there?

Jim Green

Commenced at the beginning of the quarter.

Matt Kornack

Okay. And so in terms of the impact then for same-property NOI growth in the Calgary office, was it all just the rent differential on that AMEC versus the Worley Parsons space or was there something else that was driving the 13.9%?

Armin Martens

It’s all the Calgary office buildings as a whole basically pretty much everyone is down except for the single tenant buildings.

Matt Kornack

Okay. On rent renewals and as such?

Armin Martens

Yes.

Matt Kornack

Okay. And then finally with regards to - I mean the market is - the tone at least has gotten significantly better in Q2 and into Q3. We’ll see what this recent pullback in energy prices does, but have you seen lenders on the mortgage financing side at least be also a little bit more positive with regards to their approach to Alberta, or do we still have the same fears that we were looking in Q1 with regards to non-renewal on some mortgages?

Armin Martens

It’s an interesting market. There are a couple of lenders who are resisting new loans in Calgary but most of them are prepared to offer renewal and there are lenders who are still actively providing new loans. So not as difficult to get mortgage financing as we thought it might be. If you wanted 65% or 70% financing, you probably really struggle to get that but call it at the 50% level it’s still pretty easy to do.

Matt Kornack

Okay, great. Thanks.

Operator

Thank you. [Operator Instructions]. Your next question comes from Mario Saric, Scotia Bank. Mario, please go ahead.

Mario Saric

Thank you and good afternoon. Just coming back to Madison, I was curious in terms of what type of terminal or revisionary cap rate would have been assumed in the underwriting?

Jim Green

Terminal or revisionary or do you mean our initial yield, initial cap rate?

Mario Saric

Not the initial yield but…

Armin Martens

Underwriting what you assume is a terminal.

Jim Green

Yes, higher than average. We went in at 7.75% cap rate and I think the day will come when - I don’t think we went below 7.5% on our analysis. But I do believe that that would be 7.0% to 7.25% real estate by next year.

Mario Saric

Okay, but longer term let's say like a five, 10-year hold, you would still look at it as 7% or 7.25% cap?

Armin Martens

Yes, worst case 7.5%. Again the good news is as I said we bought north of 7.5% and we’re filling the buildings up and then the rents are moving up.

Mario Saric

Got it. Okay. And then maybe coming back to the U.S. strategy, clearly there is a strong performance on your behalf expand in the U.S. and arguable rightfully so the trajectory in the economic condition in Canada versus the U.S. arguably benefits or favors the U.S. so there is I guess a couple of different ways that you can kind of pursue that strategy. One being focusing on existing markets. The second being looking at new markets, like in Madison. I’m curious to see whether potential third strategy could involve looking at a different asset. So for example residential you’re looking at doing opportunity the mixed used opportunity in Winnipeg with 36-storey apartment building there. Is residential in the U.S. something that you would consider?

Armin Martens

It is something we’ve looked at before Mario because - I know from the development perspective, the unlevered deals are not bad, they are a lot higher than in Canada. It’s just not on our - it’s not just on our list and our imminent list of imminent things to do so to speak right now. And as we add a site that we owned and that’s best way to densify with our existing site was to develop apartment building. As you mentioned the one in Winnipeg, we’ll go ahead. It won't be long, we would be talking about a high-rise apartment in Toronto as well on property that we own, again densification play. But we’re not looking at a multifamily platform in the U.S. right now.

Mario Saric

Got it. Okay. Any other incremental updates with respect to the mixed use proposal in Winnipeg? I know last quarter, you kind of indicated being told - later on in the year anything else to have this time around?

Armin Martens

Well, yes, so 360 Main Street, if you drop in you’ll see that we’re making very good progress on reclading the office tower and with 300 Main, the apartment tower our plans are underway and it was - we expect the working plans finished ready, tender package ready by the full of this year. Planning on starting construction, the best thing to project it right now is Q2 of next year. March or April next year when the snow is gone, and that is when we want to start construction.

Mario Saric

Okay. Any better visibility in terms of the targets on unlevered development yields?

Armin Martens

No. Even my board asked me that yesterday too. I said I’m not going to tell you. I mean, it will be lower than we like because it’s multifamily but the cap rate, the terminal cap rates is always be lower as well and the NAV will be there. It will be definitely a good NAV play. But we’ll let you know by the fall. As I said we’ve got a pretty big head start. The lands are ready in. The book is paid for. The foundation is paid for and the park is in place. All those things are in place and in addition to that, we’ve qualify for the City Winnipeg’s program called Live Downtown, qualified for 14 years of property tax abatement, helps a lot. So the starts have never lined better for making the numbers look good. The only thing is apartment rents in Winnipeg are in the $2 per square foot range, not $3 or north of that like they are in Toronto.

Mario Saric

All right. Okay, last question on my end and coming back to the balance sheet, you mentioned that there is another preferred, so you don’t necessarily wait. Longer term, and by longer term let's say within kind of 24 months, what is optimal leverage for you whether it’s on a defer value basis which may ultimately impacted by shift in cap rates or on a debt to EBITDA basis. Is there a specific target that we should think about that you’re striving to achieve over the next 24 months?

Armin Martens

Yes, so you’re right about the converts. We don’t want any converts on our books. In terms of balance sheets, we always said we want 40% to 45% total debt but that strategy got hijacked with the Alberta, the decline in oil prices and then the reset, if you will, in the market value of our assets in Alberta. So that’s taken some of the fun of our strategy and slowed down our progress but we definitely - our objective is to have less debt.

Jim Green

Probably current shorter term targets would be to get back down to 50% or under 50% and then we’ll work on it from there.

Mario Saric

Okay. And then any incremental thoughts on debt to EBITDA, or are they are primarily just focused on...

Armin Martens

I didn’t quite hear that. Was that on EBITDA you said?

Jim Green

Sorry, the metric I just throw would be debt to fair value but debt to EBITDA is something we watch.

Armin Martens

I think we’ve got a pretty good number there and our EBITDA interest coverage ratio is pretty good too, right?

Mario Saric

Okay. Great. Thank you.

Operator

Thank you. There are no further questions at this time. Please proceed.

Armin Martens

Okay. Well, then thanks again everyone for joining us today’s call and trust that you will have an enjoyable weekend. Looking forward to seeing you all again in September back to work season at Real [ph] REIT and other conferences. Take care.

Jim Green

Thanks a lot.

Operator

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

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