Artis Real Estate Investment Trust (ARESF) CEO Armin Martens on Q3 2018 Results - Earnings Call Transcript

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About: Artis Real Est In Tr (ARESF)
by: SA Transcripts

Artis Real Estate Investment Trust (OTCPK:ARESF) Q3 2018 Earnings Conference Call November 2, 2018 1:00 PM ET

Executives

Armin Martens - President and Chief Executive Officer

James Green - Chief Financial Officer

Kim Riley - Senior Vice President of Investments

Philip Martens - Executive Vice President of US Operations

Analysts

Mike Markidis - Desjardins

Jonathan Kelcher - TD

Dean Wilkinson - CIBC

Howard Leung - Veritas Investment Research

Matt Kornack - National Bank Financial

Michael Smith - RBC

Operator

Good afternoon, ladies and gentlemen. My name is Lyonie and I will be your conference operator today. At this time, I would like to welcome everyone to Artis REIT's Third Quarter 2018 Conference Call. [Operator Instructions]

Today's discussion may include forward looking statements, which include statements that are not statements of historical facts and statements regarding Artis REIT's future financial performance and it's execution of initiatives to deliver unitholder value. Such statements are based on management's assumptions and beliefs. These forward looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. Please see Artis REIT's public filings for a discussion of these risk factors which are included in their annual and quarterly filings which can be found on Artis REIT's website and on SEDAR.

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

Armin Martens

Okay. Thank you, moderator, and good day, everyone. Welcome to our Q3 2018 conference call. So again, my name is Armin Martens the CEO of Artis REIT. With me on the call is Jim Green, our CFO; as well as Kim Riley, our SVP of Investments; Phil Martens, EVP of U.S. Operations; and Heather Nikkel, VP of Investor Relations.

So thanks again for joining. I'll be starting as usual by asking Jim to review our Q3 financial highlights, but this time more briefly if you will and I'll continue with the review of our Q3 '18 investor presentation that's somewhat customized to the press release that we've issued. And then we will open the line for questions. Furthermore, this call we do have option of extending this call if necessary to get to more questions and then we'll talk more about what happens after that.

And anyways, I'll turn the floor over to Jim and then I'll proceed after that.

James Green

Thanks, Armin, and good morning, everyone. [indiscernible] welcome to our third quarter conference call for 2018. So as Armin mentioned and I'm sure the majority of the people on the call are aware, third quarter earnings press release also announced a series of new initiatives announced by REIT and the outcome is a fairly significant shift for the REIT.

And as I expect, callers will probably prefer to spend time on the review of those announcements. And given the fact that the results from operations this quarter really contain no unusual items or surprises, I'll keep my comments on the financial reports fairly short. I'm happy to answer any financial related questions later if needed.

As we've said before Artis is a diversified commercial REIT. We have assets in five Canadian provinces and six US states. Based on our Q3 NOI, that weighting is still roughly 44.1% in Western Canada or 11.1% weighted in Ontario and 44.8% weighted in the United States. On an asset class basis, Artis is 52.6% weighted to office, 20.4% in retail and 27% in industrial.

We do have a presence, continuing presence in the Calgary office market, which as everyone knows has been very sort for the last five years or so. This quarter that contributed 7.7% of our NOI this quarter. We do have fairly manageable exposure to the Calgary office market for leasing in the near future with just over 83,000 feet left to renew in 2018, owning 141,000 feet in all of 2019 and only 47,000 feet in 2020.

Calgary office actually contributed positive same property growth this quarter, really pleasant to see in a market like that. However, we do still headwinds in Calgary and it is very slow to improve.

As we mentioned before our acquisition and disposition activities are mainly focused on capital recycling to further diversify and improve our portfolio. In this quarter, we completed the acquisition of an office property in Phoenix and we had no dispositions closed in the quarter, although there was one subsequent to the quarter that did close.

Artis continues to be active in both new developments and redevelopment of our existing properties and currently has approximately a105 million invested in projects currently under development. During the quarter the increase in properties under development was roughly $16 million. As Detailed in our MD&A, we have several new development projects that are just getting started including a new residential tower at 300 Main Street in Winnipeg and new industrial space in Houston, Phoenix and Denver.

As detailed in the MD&A, we have several development projects in the planning stages where construction has not actively started and they continue to progress well through the development stages.

We've been able to maintain our balance sheet with debt to GBV currently at 48.6%, down slightly from 49.3 at December 31 of last year. Our interest cover ratios and EBITDA interest coverage ratios remain healthy at 3 times roughly.

Sales program we implemented in 2016 and '17 to sell assets and reduce debt has had a dilutive effect on FFO however, funds from operations, with FFO coming in this quarter at $0.33 versus $0.36 in the comparative quarter last year. On a quarter-over-quarter, FFOs up slightly this quarter, roughly a penny, it was $0.32 in Q2, and that's largely due to growth in Same Property income, as well as the new property we acquired in Phoenix.

AFFO for the quarter was $0.24, which does result in our AFFO payout ratio being above a 100%, is 112.5%, if you want to be exact. And this payout ratio was certainly not the only factor but it was one of the drivers that led the REIT to consider implementing some new initiatives which we'll be discussing shortly.

Overall, we were generally pleased with our results from this quarter, positive Same Property growth even as I mentioned it's Same Property growth from the Calgary office market, very healthy weighted average, growth in rents renewed during the quarter and the balance sheet metrics all staying fairly consistent to prior quarters. So I think I'm going to leave it there for now to allow more times for questions and on the call.

And I'll turn it back to Armin in to more discussion.

Armin Martens

Okay. Thanks, Jim. The Investors can - anybody on the call can turn with me then to our Q3 '18 Investor Presentation. I'm going to jump right in to Page 3; there is a graph there, a history of Artis unit holders' returns. I like to drive everybody's attention to the year's 2008 and 2009, the last large recession. You'll notice how we drop and now you'll remember that our yield went up. But at that time our payout ratio went from 80% range right up to 120% in 2008 and 2009.

Subsequent to that, we were able to raise a lot of equity, we're able to more than double our market cap and go back to a payout ratio of well below 100%. But you fast forward to today, it's a different situation, we're a much larger REIT today, we are basically unable to raise new equity and double our market cap and go back to our payout ratio that's respectably below a 100%, we're not in that situation anymore.

Today as we speak, interest rates, bond yields are in an eight year high, Artis is trading at an eight year low and we still have about 10 years of supply of Calgary office products in the Calgary office market. So the board and management have come to a conclusion that the status quo was an eligible longer an option and hence we've announced the new strategic initiatives.

So just turn with me to Page 4, in a way I think I feel like I covered it. It's 4 - Page 5, the key objectives of our strategic initiatives or the key elements of any good strategic plan are firstly to improve our payout ratio, to improve the balance sheet and deliver growth, delivery AFFO per unit growth and deliver NAV per unit growth, all of which maximize unitholder value. And we feel of these objectives are realistic and achievable and are with our initiatives.

So turn to Page 6, we give you more details on our initiatives of improving unitholders value. So firstly as we've announced we'll be reducing our distribution by 50% to $0.54 annualized and that will free up about 83 million in cash flow. From that perspective we feel it makes Artis a more bulletproof REIT with a great payout ratio and good positive cash flow.

Number two, we will be repurchasing our units through our existing NCIB, and then in our sense it will be maxing out NCIB by way of an automatic unit buyback as of Monday when our blackout is over.

Number three; in over the next two to three years we will sell between 800 million and 1 billion of non-core assets at or above our IFRS value to fund our program. This is something we've done before and we're more than confident of our ability to execute on this again.

And number 4, we'll be paying [indiscernible] strengthening the balance sheet, this in turn should lead not just better price but better price multiple. And number 5, we'll continue to create value to our development pipeline and select acquisitions in Artis' major target markets. And we're focus on industrial development, on existing land and on major markets that we're in. Again we feel these new initiatives are both realistic and effective with minimal execution risk.

Turn to Page 7 then, refer to our improved operating and financial metrics that we're striving to achieve. So as our payout ratio will be in the 50% range, we will be freeing up as I said 83 million of cash flow. We have to generate about 600 million in net proceeds from our asset sales. Our model does show was delivering 4% annualized AFFO per unit growth and 4.5% annualized NAV growth. So [indiscernible] straight line but for example in year three we expect our AFFO to be $1.12 plus and expect our NAV in year three to be $70.50 plus.

Of course, we have a better balance sheet and we continue to be committed to our investment rating. So a better payout ratio, better balance sheet, better AFFO per unit and better NAV per unit, all of this should lead not just a better price, but I think a better price multiple as we move forward.

And that does actually bring me to [indiscernible]. I'm going to ask Kim Riley to take over and then I'll wrap it, and then we'll move on to questions.

Kim Riley

Sure. Thank you, Armin, and good afternoon, everyone. Looking at Page 8, in order to assist us in optimizing the portfolio, we have re-categorized our assets into three types, so they are Core Artis Assets, Development Assets and Non-Core Artis Assets.

The Core Artis Assets, make up just over 4 billion of our portfolio, they are invaluable assets located in target markets where we anticipate maintaining a long-term presence. These markets have historically produced healthy occupancy and same property NOI growth. These properties are also leased to quality tenants, including retail properties with strong weighting towards necessity and service based tenants.

Development Assets account for around $200 million of our portfolio, they include land upon which a development project is either underway or has the potential for future developments. Development Assets also include select assets that have growth potential through redevelopment and repositioning. All of which enable Artis to achieve yields that are 150 to 200 basis points higher than acquisition cap rate. Development properties will also be primarily new generation industrial.

Non-Core Artis Assets, which account for $800 billion to $1 billion of our portfolio are good quality assets, but are which Artis considers to be outliers in terms of types and location, and particularly assets or asset classes where we do not anticipate maintaining a long-term presence. We'll go into more detail on non-core assets in a few slides.

If you turn out to Page 9, you can see several pictures of assets that we consider to be core within our portfolio. An example of an office building would be MAX at Kierland in Phoenix. On the right hand side, top corner you can see Crowfoot Corner in Calgary, which is one of our best performing retail assets. And then 175 Westcreek is a newly constructed industrial property in the GTA. We see these types of assets forming the foundation of our portfolio and they will continue to be prudently managed to realize maximum growth.

Turning to the following Page, you can see examples of developments that are currently underway, which are predominantly a new generation industrial. These include multiple phases of Park Lucero, an industrial park that we own in Phoenix. Cedar Port which is a fully previous industrial property in Houston and Tower Business Center is a new industrial development that's just getting underway in Denver.

Turning to Page 11, you see that over the last decade, Artis has established a solid track record of greenfield developments in both Canada and the US. Examples of these developments include Linden Ridge Shopping Center in Winnipeg, which is a retail site that was acquired with excess land. We preleased this development to several national tenants on long-term leases and developed the site over multiple phases, that property is currently a 100% occupied.

Another example is Midtown Business Center in Minneapolis. This was an industrial land site that was acquired by Artis. During construction, it was fully preleased to a strong medical use tenant on a long-term lease. This property is currently a 100% occupied. Park Lucero, which we referenced in a previous slide, is a more recent example of a development and success story. It is a new generation industrial park in a well and modernized location.

It was developed over four phases, the first three of which are now complete and the last is just wrapping up construction. This project is also a100% committed. It's these types of developments that provide the REIT with new generation real estate, at higher yields than acquisitions. Over the next three years, we plan to focus on developing more new generation industrial assets in major markets. These developments offer yields of 150 to 200 basis points higher than acquisition cap rates and generate significant value for the REIT.

Turning to our non-core assets on Page 12, over the next three years - sorry, you'll see that we are planning on selling between $800 million and $1 billion of non-core properties. Non-core assets were identified as outliers in terms of location and type within our portfolio. These assets will be sold in a disciplined manner and include the following examples.

Underperforming Calgary office properties, to bring our Calgary office weighting down to a target of 5% of the portfolio, assets and asset classes in markets where we only own a few properties and do not intend to grow further, such as Ottawa, Nanaimo, Hartford and US retail. They also include specific property types were only a few are held, an example, would be enclosed retail.

And finally, select Multi-family densification opportunities which upon receiving rezoning approval will be sold to capitalize on the strong demand for residential development, as well as unlock incremental value for unitholders.

In summary, on the following Slide, over the next three years, we are looking to sell $800 million to a $1 billion of assets which represents approximately 17% of the current portfolio. They are non-core assets in non-strategic markets or asset classes or markets where we lack scale, they also include multi-family densification projects once rebound. These dispositions will align with our goal of owning a more focused and optimized portfolio.

I'll turn it back to Armin to wrap up.

Armin Martens

Yeah, and just move on to Page 14, which is our last Slide, we show you current asset class breakdown by NOI, and then by geography and where we expect to be headed within the next two to three years. You will see, from left to right in our current office portfolio is 45%, Calgary office 8%, so 53% total office will shrink that in total by about 8%.

So Calgary office will come down to 4% or 5%, the rest of the offices will be 40%, retail will shrink to 15, industrial will grow to 40%, we see that happening quite realistically. And of course, the net result will be that we'll increase are weighting in the US and be decreasing weighting in Canada.

In terms of the disposition program that Kim mentioned, you can ask us questions about that, but the low hanging fruit is some of our Canadian real estate, but densification opportunity not for the cap rates at the lowest and the higher achievable yields for new generation industrials real estate will be on the U.S. So Artis will continue to be a diversified REIT, commercial REIT will be in two countries, three asset classes, but will be shrinking in secondary markets, will be shrinking in Calgary office in general, be growing in industrial and will be growing in major markets.

So that brings us to the end of this presentation, folks allow the moderator to open the lines for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question is from Mike Markidis from Desjardins. Mike, please go ahead.

Mike Markidis

Hi, thank you. I was hoping you guys could just walk us a little bit more in detail on the pro forma metrics in the deck and I guess in specific to you - gave a three year FFO figure. Obviously the asset sales are there, but maybe just in terms of how much of the sale proceeds are from non-income producing today, in terms of value extracted from your densification on the multi-family side? And what's - that's the first question. And the second part of that would be what NOI growth from the remaining stabilized assets you're expecting over that three year period?

Armin Martens

Well, Kim is just opening up her model there. I believe your assumption was Kim was flat on NOI growth.

Kim Riley

I don't know [ph], in terms of value, incremental development value maybe about 150 million, so that would be unlocked value for the multi-family rezoning developments.

Mike Markidis

Okay. And would that 150 have 0 carrying value in your books today largely or?

James Green

That's correct, Mike. Yeah, we have no value until we get those densities approved.

Mike Markidis

Okay. And how much of that would be the project which I think is under construction now at - on Main Street, in Winnipeg roughly?

Armin Martens

15, right now.

Jim Green

Smaller piece of it, but expected to be a $15 million to $20 million profit on that development.

Mike Markidis

Okay. So just make sure that you've got correctly flat on the same property growth over the three year period?

Jim Green

Yeah, we just went very conservative in there and didn't estimate anything that we didn't have already locked up sort of, so.

Mike Markidis

Yeah. No, that's fair. Okay. And just that that 112 on AFFO, Kim, what's the FFO number?

Kim Riley

We never calculated FFO, we have to -

Armin Martens

Now, you are the second person to have asked that - we just focus on AFFO, but -

Kim Riley

We can easily calculate. I'll get back to you.

Jim Green

Yeah he could follow-up off line, that's fine. Okay.

Mike Markidis

Now on the - on the CapEx, if we look at your stuff we exclude what you classify as new development and redevelopment in your disclosure, so just TI's and leasing costs outside of those, I guess greenfield and repositioning projects, you've running at about $100 million annually for the last three years, with the initiatives you've announced now, how do you see that unfolding over the next couple of years?

Jim Green

Sorry Mike, so you're saying what will we be to spending on new developments over the next couple of years?

Mike Markidis

No, no, I was actually, so - if we look at your cap intensity or your cap spend including TI's and leasing cost, excluding any new developments and redevelopment, the way you disclose it in your MD&A, annualized you guys are running anywhere from call it $100 million annually, over the last three years '16, '17 and year-to-date. How do you expect that to trend? Do you think that's a good run rate going forward or do you think that's going to increase or moderate?

Jim Green

I would say expecting that to moderate a little bit based on some of the assets we're planning on selling.

Mike Markidis

Okay. And presumably a good chunk of that capital has been going to Calgary office over the last couple of years, would that be fair?

Jim Green

Yeah, that would be fair.

Mike Markidis

Okay. Last question for me before I turn it back, noticed the initiative to focus on industrial rolling that was something that you talked about over the last several calls, but one of the things that stands out is that you've actually been investing quite a bit in US office over the last year and a half or two. And just noticed that if I look at your pro forma metrics, it would appear that that's going to stop, so just curious if you could give us a moment to talk about what's changed perhaps on the office side in the US and why you don't want to put any more capital into that asset class?

Armin Martens

Well you're referring to acquisitions then right, Mike?

Mike Markidis

Yeah, I guess I mean is it all development that's going forward, I guess is that the plan.

Armin Martens

Yeah, all development I would - select acquisition will always look at for industrial, but it's really all developments or development pipelines pretty solid for industrial. We don't see ourselves - we just did by the state as said. We're really happy about assets. It's already gone from 94% to 98% occupied. We're doing really well with that. But we don't see ourselves increasing our weighting in office, We're not just an office REIT, we're diversified REIT and it's no secret that industrial asset class - it's not just an asset class investors like, but it's performing very well for us in both sides of the board as we want to grow in that sector, we focus on industrial for all of our growth. Just to give us more balance in our portfolio, we always wanted more industrial and a little less office.

Mike Markidis

Okay. Thanks very much. I'll turn it back.

Operator

Thank you. Your next question is from Jonathan Kelcher from TD. Jonathan, please go ahead.

Jonathan Kelcher

Thanks. Good afternoon. The first on the size of the distribution cut. How did you guys come around to the 50% number?

Armin Martens

Yeah, it didn't happen in one day. There were two perspectives, one is, do we right size the distribution and carry on or do we elect for a more and more significant cut, we decided on a more significant cut that will give us some good positive cash flow that we can use to grow. And in terms of growing, it's not just about funding our development pipeline, but it's about buying back our units and paying down debt. So we landed on a bigger cut instead of just rightsizing, rightsizing might have been anywhere from 20% to 30% cut, 50% is a large cut, but it sends a good message we feel to investors that our payout ratios always save. We've always got positive cash flow, we've got flexibility now for unit buyback, flexibility for debt to pay down, we've got a lot of options on the table now to create NAV growth, so that's –and then we did some modeling. We modeled 44% cut, 50%, 56% cut, obviously the higher cut the more you can do with the money, more accretion you can generate, but we landed on the 50% cut in that way.

Jonathan Kelcher

Okay. Fair enough. On the assets that you've identified for sale, I guess some are in Mike's question not income producing. If you take the overall sort of 800 to 1 billion, what would be then the cap rate or like say, the IFRS cap rate on those.

Armin Martens

The IRF effort with -

Kim Riley

Yeah, it would be - so 6.25 is where we're modeling.

Jonathan Kelcher

Okay.

Armin Martens

And we really think we'll beat that because there is embedded value there that we haven't yet traded by exiting that. Of the three quarters that of those assets that we expect to dispose of whether it's Poco Place or 415 Yonge [ph] or Concorde have to get the density or a 50% non-managing interest in Winnipeg Square here, all of those cap rates will be closing. And I think it will be sub-5 given, but we feel very confident of our ability to hit the second quarter capital and do better than that - better than IFRS valuation, which again will support our model very well.

Jonathan Kelcher

Okay and then just lastly the 45% longer-term target for leverage. Does that include, - like how do you treat press in that, does that exclude them or include them?

Armin Martens

Yeah, we still like the banks who treat our press as equity. But, yeah, so we don't include our press in that. Looking ahead, the press don't come up for I guess, a couple of years -

Jim Green

Next year, we'll see how that goes whether we redeem that at maturity or not.

Armin Martens

Yeah, we would give serious consideration to eliminating our press in the years ahead and cleaning up our balance sheet. As you know we - we don't have any converts anymore in our balance sheet and now that we're in this situation we'll give serious consideration to eliminating the press as well and cleaning up the balance sheet some more.

Jonathan Kelcher

Okay. Thanks a lot. I'll turn it back.

Operator

Thank you. Your next question is from Dean Wilkinson from CIBC. Dean, please go ahead.

Dean Wilkinson

Thanks. Hey, everyone. Armin, if I could just follow along with the lines of Jon's question there. Looking at the distribution and obviously things have changed. But from last quarter, you kind of did make the comment, 14 years we've never contemplated a cut, we've increased it twice. Have things materially changed that much since August to now and you're seeing a larger deterioration or was - help us sort of get from point A to Point B there?

Armin Martens

Yeah its - I mean last 90 days, I guess it started in July already, but we saw our units trade down a lot aggressively. And all of a sudden, we find ourselves in October trading at an 8 year low and we noticed and of course the Central Bank have come out and with hawkish narrative and bond yields are trading at an 8 year high, that happened very quickly.

In addition to that, Dean, we got a lot of inbound calls from combination of investors and analysts suggesting that they want more clarity from Artis on its strategic direction and how we're going to grow back or get back into payout ratio those was under 100%. And we could highly - couldn't answer those questions well during the last quarter. We brought this to the Board's attention I guess twice in the last two weeks. And then the Board landed on this decision turns a new strategic initiative.

Jim Green

That makes sense. Tough decision but probably the right one to make, right, so -

Dean Wilkinson

In light of that and then looking at sort of this let's cut a $1 billion of secondary market asset sales which there are a few others that are out sort of doing a similar kind of thing and right sizing the portfolio and focusing on their core markets. Are you confident over the next 3 years, particularly in light of possibly rising interest rates and the impact that they may follow-on on cap rates that, that you're going to hit that those IFRS values or how confidence, you know, maybe the next year you - but you go sort of beyond that and there's a little more question as to what those ultimate values could be?

Armin Martens

Right now we're very confident and we were basing this on the assumption that interest rates when they rise don't raise one step at a time and that the Fed in the Bank of Canada are not going to cause a recession. So right now we're very confident and we're not anticipating interest rates to rise too much too soon and as we do we're constantly optimistic as bonds are moving up that at least we can - that spreads will come down a bit and but they cause another financial crisis like they did in 2008 and 2009, well, then things will change.

Jim Green

And would need to move very quickly on the asset sales today, with the exception of the multi-family sites that still need these zoning to come through before we can really sell them at the maximum value.

Armin Martens

Yeah, we really think we can do the bulk of this in less than three years.

Dean Wilkinson

The bulk in less than three years, okay, that makes total sense. And then last question for me is, did you anticipate in your model that entire 600 million of net proceeds going towards the share buyback or how much of you penciled in there?

Armin Martens

No, not all of it, we've got 270 million roughly in the model budgeted for unit buyback and then the rest for our development.

Kim Riley

About 100 million for debt payout

Jim Green

The debt to GBV down a little lower as well, so some of that going to debt repayment.

Dean Wilkinson

Okay, so 370 million in the capital stack and then the rest of it is going to be work in progress and stuff like that. Perfect. I will hand it back. Thanks, everyone.

Operator

Thank you. Your next question is from Walter [indiscernible] from Roman Management Inc. Walter, please go ahead.

Unidentified Analyst

Thank you, operator. Heard a great deal about how you derive the 50%; going forward, do we expect to stay at the 50% payout ratio or not payout ratio but the 50% cut for the full three years or is there a prospect that you might be increasing it again and what would criteria would you be using for an early increase earlier than three year program you've laid out?

Armin Martens

So it'll be locked down for two years for sure, Walter, and here three as we can demonstrate more traction and success in our plan and this is - I don't mind sharing with you, with everybody on the call that we did discuss at that the Board level. And year three we can then review the distribution and then start moving it up, in the long run, our payout ratio between 60% and 70% is very good, it doesn't have to be in the 50% range nor should necessarily should it be. But we will have the opportunity to move the distribution up and that is in the long run what every Board wants to do, it want to be in a situation where they can increase distributions in a predictable manner, not just keep them fixed.

Unidentified Analyst

Right I understand now. Hypothetical what if it went into the 40s as your payout ratio high 30s?

Armin Martens

Yeah, that would beg for an increase then.

Unidentified Analyst

But not until the third year at the earliest?

Armin Martens

We're pretty much committed to two years working through this, if you drop to 30% in year two, I mean if we take things one quarter at a time, you have to stand line beyond several board members that would want to increase at that point as well, right, but it's hypothetical. It's hard to predict, but for sure, lower the payout ratio is the better the possibility is and the chance that it will be raising.

Unidentified Analyst

Thank you very much.

Operator

Thank you. Your next question is from Howard Leung from Veritas Investment Research. Howard, please go ahead.

Howard Leung

Thank you. Just want to ask about a follow-up on that net $600 million that you - would you do suspend from disposition $230 million, I guess the numbers are a $100 million would go down to paying extra debt, $270 million would go down to the buybacks and $230 million would go down to development is that - is that the right split?

Kim Riley

Yes. That sounds correct.

Armin Martens

Yes.

Howard Leung

And I get the NCIB right now, you're allowed to kind of buyback 130 million in total for the year or so, is that the 270 million will be split between two years?

Jim Green

Yeah, it's not quite because the NCIB also allows, there's one block trade a week allowed in addition to the maximum NCIB number. So hard to see where that gets depends on the size of the block trades, but you get one exemption a week for a block trade.

Howard Leung

Okay. So it'll be a little faster than the 130 million.

Jim Green

I hope so.

Howard Leung

Yeah. So then I guess when you talk about AFFO per unit growth at 4 and now pushing at 4.5, is the majority of that going to be because of the buybacks they'll reduce the unit count?

Armin Martens

The buybacks will contribute for sure. And that's the lowest hanging fruit and easiest in terms of execution. But part of it is also our new developments, right.

Howard Leung

Right.

Armin Martens

And the debt paid out, of course, right.

Howard Leung

The debt paid out. Yeah, and I want to touch on that as well. Looking at the debt and when you're deciding where to pay down the debt is that more - are you going to prioritizing more towards the debt that's higher rates, but fixed or the debt that's variable?

Jim Green

Probably just go with it as it matures, so that we're not incurring penalties to pay off at the moment where we're not planning on paying off any debt that's not maturing.

Howard Leung

Okay. Yeah, that makes sense. And then the $900 million split of assets sales, can you kind of give a rough split between the various sectors and geographies, just trying to see how much of that is actually going to go down to, for example, office - the office, retail and you're probably not selling industrial, but I want to see the split between those two?

Kim Riley

Correct. So to give you a break down, approximately 225 million would be retail; 125 million would Calgary office and then the balance would be various office properties in a few different markets.

Howard Leung

Okay. Got it. So I guess, I'm trying to kind of get to that 6.25% cap rate that you're targeting to sell it, so the retail end the Calgary office those would likely be higher than the 6 - higher than the 6.25%, so it's really the other stuff that will be - that will lower your weighted cap rate of sales, is that the right way to think about it?

Armin Martens

Yeah, it's hard to classify the [indiscernible], but for example, 50% non-managing interest in Winnipeg Square that's in the $20 million and $25 million range, it'll be a sub 6 cap no matter what it will be in the low 5s we believe, we did just finished closing Center Point Winnipeg at 5.9 cap rate as an example. And we've got Poco Place retail/office and we're planning for density there at cap rate it's 4%, all day long we've got 4.50 [ph] we own that cap rate sub 5, Concord that cap rate is sub 6. The bulk of this stuff is it will be easy to achieve sub 6 cap rate on the bulk of this stuff. And then as you said, this is the odd thing that where the cap we would be higher than 6.25.

Howard Leung

Right, that makes sense. So I guess - I see that you have your four - I guess one active residential and three future residential developments lifted, so all four of those are kind of on the - they'll be sold right, that's the plan?

Armin Martens

Right.

Howard Leung

Okay, that's helpful. And then I think there is a question about the maintenance CapEx and leasing, just following up on that. Do you expect that to go back down to let's say like 2012, 2013 levels before the Calgary office, so what's the big train [ph], I guess on a per square foot basis?

Jim Green

I'm sort of just going to say probably not quite that low as we reduce our waiting in office, you should see that cost start to come down, but tenants these days seem to still be expecting more tenant improvements than we used to have to pay in these dry days in Calgary for sure.

Howard Leung

That make sense. And is that driven mainly still by Calgary properties or you seeing that across the board like even -

Armin Martens

No, it's kind of driven across all geographies. Calgary used to probably be the anomaly that it was very low in prior to 2014. Today Calgary, of course, is high but so some of the other markets seemed to be gradually creeping up.

Howard Leung

Okay. Great. Thanks for this. I'll turn it back.

Operator

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

Matt Kornack

Hi, guys. With regards to timing on the asset sales, just wondering from a tax standpoint, you're going to time it such that you don't have to pay any special distribution I assume?

Armin Martens

That's the plan, Matt. Yeah. We think we've got the tax structuring worked out that - yes.

Matt Kornack

Okay. So - because some of those assets that you mentioned that are lower cap rates, I would assume that's pretty low cost base as well for what you bought them for.

Jim Green

Correct. But on the on the flip side of that unfortunately some of the Calgary offices [indiscernible], so it should be some losses to -

Matt Kornack

Gives and takes. Okay. Now that makes sense. And then just from an operation standpoint, your lease renewal spreads have been pretty good of late, not entirely jiving with your view on market versus maturing leases at least in the table that shows sort of negative lease renewal spreads. Wondering if you're just outperforming expectation or if it's a specific leases and have come up for those generated positive returns and if we should expect sort of outperformance going forward if those are very conservative numbers in the lease maturity profile you've put forward?

Jim Green

Let me try to keep those on a pretty conservative basis, so we hope we can deliver better results in those. But I think those are kind of our estimates -

Armin Martens

Yeah, we're doing pretty good in that front for sure all year long. But without a doubt every time we renew largely this in Calgary we get beat up bad and that's the one place where we're not able to outperform.

Matt Kornack

And with the current occupancy where it is, I mean, obviously got higher committed occupancy than in place, but is the expectation to stay in the low 90% range for a while now or would you expect some occupancy improvement over the next couple of years as well?

Armin Martens

It's going to be lumpy. We've got some good news coming from markets, but we think our Calgary office vacancy will increase. And our Calgary office NOI will decrease before - next year before things get better for us there.

Matt Kornack

Okay. And presumably -

Armin Martens

It will be north of 90% collectively, we sure expect that.

Matt Kornack

Okay. And I guess those were higher rent markets at a time, so there's probably more rent there than there is actual square footage.

Jim Green

And as we moved more into the U.S., the stabilized vacancies in the U.S. are a little bit higher than the traditionally here in Canada, so not unusual to be 8% to 10% vacant in the U.S. market, whereas in Calgary that would be less than that.

Matt Kornack

Okay, great. Thanks, guys.

Operator

Thank you. Your next question is from Tony Troiano [ph] with Tofino Capital. Tony, please go ahead.

Unidentified Analyst

How are Armin?

Armin Martens

I'm good Tony.

Unidentified Analyst

Armin, after you being so adamant that you weren't going to cut the distribution and then cutting it by 50% and disclosing it on page four of your press release, was like a kick in the teeth. Now, out of the $83 million that you're going to be saving from distribution, can you please confirm how much is going to be going back to buying back units?

Armin Martens

So our plan, as we've said and I'll repeat it now is about 270 million of our total capital will be going to buyback units. We expect to average about $130 million a year in that range, but as Jim mentioned, there may be time because of block trades when we buy back more, so that we're still blacked out. As of Monday, we will be back in and will be matching our NCIB buying back units.

Unidentified Analyst

Thank you.

Operator

Thank you. We have a follow up question from Mike Markidis from Desjardins. Mike, please go ahead.

Michael Markidis

Hi. So just a couple clarifications, on the 800 to 1 billion, 150 million if I had that correctly was the no income producing. And then the 6.25, is that on the remainder i.e., the 6.50 or whatever that number would be if you subtract it from the total bucket or is it on the entire envelope?

Kim Riley

It's on the entire envelope, so it's a weighted average on the whole portfolio including their value\ from the non-performing or non-income contributing assets right now.

Michael Markidis

Okay. So now I see why 6, 6.25 is a pretty low benchmark to hit. Okay, that's fair. And then just thinking about your segments going forward and looking at sort of the occupancy performance of the individual segments, if I just focus on sort of the big ones, Canadian offices, obviously, one for you guys a 20% of NOI, Calgary office is a drag there. It does seem that you're in-placing –gap between your in-placing committed has been growing as well. Is that something over the next several years that you think will continue to persist? Or do you think that as we move forward here in-place will start trending hire and the gap between place and committed will start to narrow.

Armin Martens

Anybody want to grab that call? So specifically, Mike, I mean, in Calgary that gap won't improve for a while, right. The increase in these markets that's not going to improve for a while and we still haven't recycled all of our leases - all of our leases from the market - from the in-place in again down to market, yes. So we've got least another year or two to call this probably stabilize in Calgary and then hopefully by then one or two pipelines shows up as well. I mean, the office market in Canada is stable or good everywhere except Calgary is bad of course and Winnipeg becoming a bit of a battle zone, it doesn't take much talking about the Winnipeg. We feel comfortable with our situation here. You go down to the states that office markets are pretty good, but even in many offices it's been small the building, we've got to watch the wholly owned [indiscernible] many office, but we've got to watch it there. Once in a while you get a tenant leaving in markets like Phoenix or Denver and we've got to work through that but at least you have good markets to be in. But on the balance sheet, I feel it's all about the Calgary what skews the number. But on balance, I'd like to think that the metrics are improving. In the U.S. real estate fundamentals are good not just industrial but about office. But I think the trend is our friend providing that interest rates don't ruin the party.

Michael Markidis

Okay. And then just think about the Canadian Industrial, I would imagine your GTA portfolio is doing tremendous right now from an occupancy and re-leasing perspective, how are the assets [indiscernible]?

Armin Martens

Also very good, I mean, our industrial vacancy in Toronto is basically - the GTA is basically 1%. Yes, we are very strong at same property NOI, Winnipeg is 2% and Alberta is about 3% but improving and as it holding up very well. The Alberta, industrial retail sectors still perform very well. I think multifamily turned ones it's not our category but we should still base on [indiscernible] turnaround. Office is much weak, it has been too much overbuilding, the pipelines are maxed out, they need more pipelines, so they can produce more and sell more and make more money and that's where the - now, the bottleneck is right now. And of course in DC is an average [indiscernible] they really have one industrial or two industrial buildings in DC they're both fully leased.

Michael Markidis

Are rents rolling down in the industrial segment in Calgary? I mean the occupancy is obviously holding up very well, but are rents rolling down or they kind of stable?

Armin Martens

No, they're stabilized for sure. And if anything they'd be moving up now is - at least what we're seeing, they're stabilized for sure and they're trending north.

Michael Markidis

Okay. The cap rate on Staples look really attractive at 8%, is that an anomaly, I'm just wondering how we should think about that in terms of the quality of that building and how we should think about that relative to your offices assets in Phoenix?

Armin Martens

I'd call that a historical anomaly, but this year what we have seen - check with brokers down there is a bigger split if you have bigger dichotomy between suburban office cap rates and downtown urban office cap rates and suburban office cap rates have moved up at higher rate than urban which maybe they haven't moved at all. So we found that to be a good opportunity and that's - it's a heck of a good suburban office location at Staples Center. Our property manager and our leasing manager in our Phoenix office used to both lease and manage that building, so they recommend a newer building, well they recommended it to us and so - and so we bought it and since we barely own that it's only outperforming. So we'll see a lot of that last, but there's a big dichotomy right now in many U.S. markets between suburban office valuations and downtown office valuations.

Michael Markidis

And how would that building compare to MAX at Kierland , so I think MAX at Kierland is trophy, right, in Phoenix?

Armin Martens

MAX at Kierland class AA, this one is A minus, Phil is right here, you want to comment on that Phil?

Philip Martens

Yeah, the Staple building is also older and in a much more mature location that's proven itself, but overall that Staple building has never been below 90% in its entire history, it was built in the late 1990s. And MAX was built in 2008, and yes, it is a Class AA. But both are in high [indiscernible] locations.

Michael Markidis

Okay, last question for me, sorry for the long laundry list here. But Millwright and the new Denver office property that you built on land adjacent to your existing asset there. Well, Denver is an easy question. Is Millwright contributing anything from an NOI perspective right now or was it in Q3?

Armin Martens

Jim was it - while we are committed at 60 - two-thirds committed now at Millwright in terms of leasing.

Jim Green

One of those tenants is in occupancy and one not yet.

Philip Martens

Correct, the latest tenant is still undergoing TIs, that's United Health Care, that's a Fortune 5 company, and so we're excited about Millwright which is in Minneapolis, that is up in the Millwright building and we continue to get quite a bit of interest from co-working as well for that Millwright building.

Armin Martens

Yeah, in Denver it's not - you don't have anything signed yet, but right trading papers with two different tenants to take a floor each in this. We can conclude those deals that would be 50% leased with that smaller building at 159 [indiscernible]. So we feel we're getting traction on a lot of good fronts.

Michael Markidis

Okay. And those properties are not in your part anymore, right? Those are in IPP?

Philip Martens

Correct.

Michael Markidis

Correct. Okay -

Philip Martens

I was hesitating on the Denver asset, but I believe you're correct, yeah.

Michael Markidis

Okay. Well, if in addition to the year three FFO number, if you could confirm the carrying value of those assets and the NOI contribution in aggregate in Q3 that would be fantastic.

Armin Martens

Okay.

Michael Markidis

Thank you.

Operator

Thank you. [Operator Instructions] Your next question is from Michael Smith from RBC. Michael, please go ahead.

Michael Smith

I guess over the last couple of years you've sold $1.5 billion of assets, a lot of which are - the lot of Calgary office, which you've taken a loss. So you've got a bunch of buildings for sale now, including Calgary office for a loss. I guess, my question is, is it fair to assume that you don't really have any cash considerations. In other words, if you sold the full 800 million next year, for example, like there is nothing really preventing you from doing that from a tax point of view, maybe from a strategic timing point of view of getting them you may want to stretch it out, but is it correct to assume that there is really nothing from a tax perspective from stopping you from doing that?

Jim Green

I would say that's generally correct, if you could sell the - yeah, there's no tax reason that we would hesitate on selling those assets.

Michael Smith

Okay. Thank you. And so you have given yourself three years, but I think, Armin, you said, you think the bulk of it will be done in two years. And I'm just wondering if there is any motivation to doing it quicker? And the second part of that it sounds like you ruled out a substantial issuer bid. I wonder if you could just give us your thoughts on those things.

Armin Martens

So - yeah, if we can hit plan our pro forma and model and achieve these dispositions in these results a year sooner we will do a little fast as we as can and move from there. As I'd be - you know, if we don't see ourselves doing that a couple of leads I guess is the capital available - the available capital also. We are watching our market cap is a limit to how many we want to buy back. The Board is still committed to maintaining its investment grade credit rating and I guess and as I'd be suggest a lot of units at one time above market and we're just not in that position to do that right now.

Michael Smith

Okay. And just switching gears, can you just about your retail strategy?

Armin Martens

We still like retail, and we don't own any retail in the U.S., and we've got two small enclosed malls left our portfolio both in Saskatchewan we're selling those. After that we know - it's outperforming well and [indiscernible] is performing well, Fort Mc is stabilized moving north of either landscape all the retails are performing well and giving us good same property NOI growth. Still we don't mind owning it, we got that retail and [indiscernible] densification opportunity, so we expect to be - that's on our books to be sold now. But

all of the retail we have on balance - most of the retail we have on balance sheet performing very well and we still like it. So we not have the opinion that you just get out of retail, we're not of that opinion, but we will get out of the little bit of retail we have left in the States, we will get out of those two small malls we have in Saskatchewan and we'll move on from there.

Michael Smith

Okay. Thank you. That's it for me.

Operator

Thank you. Your next question - actually it's a follow up from Walter from Roman Management Inc. Walter, please go ahead.

Unidentified Analyst

Thank you. Just to be a little bit controversial. As one of your alternate strategies, did you ever look at Artis REIT from the perspective of an investor and ask yourself what would be the investors' return if you were to sell everything and distribute to current unit holders?

Armin Martens

I'll give that some consideration in terms of a strategic review if you will and which wasn't for me undergone. And there's two directions one is you sell the REIT and - to the best maximum price you can get another as implement a new strategic plan. And our largest shareholder that owns 11% of our units is on our board, our largest shareholder as well as other - all of the board members unanimously were of the opinion that now is not a good time to pursue selling the REIT or selling all of the real estate and shutting down. They think we've got a good plan here, a good opportunity to increase value, increase unitholder value, increase our NAV. The idea of selling the REIT, entertaining office for the REIT, it can always be revisited at another date, but - so that's not the direction. The board unanimously agreed that the best way to maximize unitholders value would be to implement these new strategic initiatives.

Unidentified Analyst

Even with the difference between the NAV and what the REIT is trading for on the market now?

Armin Martens

Yeah, there is a concern that, in a rising interest rate environment, we might not get bids at our NAV of $15, there's a concern that as the bid would come in lower they'd be underwhelming and it wouldn't and then we'd be just wasting our time. Notwithstanding what I just said, the board will entertain any reasonable offer that maximizes unitholder value if it comes in. We never for example had a friendly offer, any offer at all, that we've said no to that we've never engaged and we've just never had any offers at all in the first phase.

Unidentified Analyst

Well that's why I went to the selling of all of the assets and the distribution out to unitholders?

Armin Martens

And so that takes it to - I guess that's - would need - my understanding is and Jim's right here, we would need unitholder approval to sell all of the assets and return the money to our investors. Yeah, we have to call a special - to call a special meeting on that or we'd have to deal with that as a special agenda at our next AGM. But that's - yeah, it's sometimes as to best way to maximize value does liquidate all the assets right. Now, it's very disruptive thing to do, you've got G&A issues, management team issues, before you're negotiating with tension, bonuses and change and control bonuses with a lot more employees -

Unidentified Analyst

I understand all of that, yeah.

Armin Martens

So it's very disruptive. But I don't know that scenario might be the best one that maximizes value to date, but the board is not - doesn't want to pursue that right now.

Unidentified Analyst

Well when the board reconsiders that have them understand that, let's say I got back my NAV on that minus a few transaction costs. If I got back my NAV, I would be able to go elsewhere and invest it so that I could rebuild not as well as Artis of course, but approach –approaching what Artis accomplishes, just a thought?

Armin Martens

Point noted. Thank you.

Operator

Thank you. We have a follow-up from Howard from Veritas Investment Research. Howard, please go ahead.

Howard Leung

Thank you. Just want to ask about the follow-up on the development properties. On your, I guess in your MD&A, you have the value at like just over 100 million and in the presentation you're listing 200 million, is the difference because some of those future developments are - that are not intact that that will be - that's part of the 200 million?

Jim Green

That's correct.

Howard Leung

Okay. And then just in terms of timing, this is kind of a three year plan, do you expect the 200 million in development assets to all be complete and kind of fully functional income producing properties by the end of the three years or end of two?

Jim Green

In the two to three range I would say, yeah.

Howard Leung

Okay. And then I guess in terms of thinking about how much NOI those properties can bring, if kind of equity in that 7.5 cap rate for development, is that kind of where you're thinking to or too high or too low?

Jim Green

That's exactly where we are.

Howard Leung

Okay, great. That's helpful. Thanks. I'll turn it back.

Operator

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

Armin Martens

Well, thank again, moderator and thank again everybody for joining us on this call. Just as a –as a put another sidebar Jim and I will of course be in Toronto during the Toronto Form the last week in November. It's a debt conference that we will be participating in that marking conference then on Tuesday and Wednesday of that week to November 27 and 28 we will be making ourselves available to follow-up meetings with Real Estate bank analysts and institutional investors. You can feel free to reach out to us if you want to book meetings with us on November 27 and 28 in Toronto. So thanks again everybody for joining us and have a good weekend.

Operator

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