Artis Real Est In Tr (ARESF) CEO Armin Martens on Q4 2018 Results - Earnings Call Transcript

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About: Artis Real Est In Tr (ARESF)
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Earning Call Audio

Artis Real Est In Tr (OTCPK:ARESF) Q4 2018 Earnings Conference Call March 1, 2019 1:00 PM ET

Company Participants

Armin Martens - President and CEO

Jim Green - CFO

Kim Riley - SVP of Investments

Phil Martens - EVP of U.S. Operations

Conference Call Participants

Jonathan Kelcher - TD Securities

Mike Markidis - Desjardins

Michael Smith - RBC Capital Markets

Jenny Ma - BMO Capital Markets

Matt Kornack - National Bank

Mario Saric - Scotiabank

Dean Wilkinson - CIBC

Operator

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

Today's discussion may include forward looking statements, which include statements that are not statements of historical fact and statements regarding Artis REIT's future, financial performance, and its 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 Web site and on SEDAR. Thank you.

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

Armin Martens

Thank you, Lyonne and moderator. Good day everyone, and welcome again to our Q4 2018 conference call. To begin, my name is Armin Martens, the CEO of Artis REIT. And with on this call is Jim Green, our CFO; you have Kim Riley, our Senior Vice President of Investments; and Phil Martens, our EVP of U.S. Operations; and [indiscernible], SVP of Accounting is with us as well. So we have a big crew here today.

Again, thanks for joining us. And I will start as usual with Jim going over some financial and operational highlights, then I'll wrap up with some commentary, and then we'll open the lines for questions. Go ahead, Jim.

Jim Green

Great. Thanks, Armin, and good afternoon everyone. As I'm sure most people on the call are aware, third quarter earnings press released November 1st of 2018 announced a series of new initiatives for the REIT. And this has been a relatively quite quarter, and I expect most callers are probably more interested in a status update on those initiatives. So, I'll try and keep my comments on the financial results fairly short, but happy to answer any questions later if that comes up.

Artis is a diversified commercial REIT, and we have assets in five Canadian provinces and six U.S. states. Based on the Q4 NOI, that was a 43.4 weighting in Western Canada, 11.4% weighted in Ontario, and 45.2% weighted in the United States. On an asset class basis, we're approximately just over 53% weighted in office, 20% weighted in retail, and almost 27% weighted in industrial. We do continue to have a presence in the Calgary office market, which contributed approximately 7.7% of our NOI this quarter. And luckily it's relatively manageable exposure to the Calgary office market in the near-future, with 197,000 feet growing in 2019, and only 48,000 feet in 2020. So, [indiscernible] Calgary does remain under pressure, but the lease rollovers I think are fairly manageable.

As we'd mentioned before, our acquisition and disposition activities are mainly being focused on capital recycling, and this is obviously a 2018 comment, not so much on the initiatives going forward. We've been looking to further diversify and improve our portfolio. In this quarter, we completed the acquisition of an office property in Minneapolis that was actually the completion of a forward purchase that we entered into almost a year earlier. And a disposition of an officer property in Winnipeg held in one of our joint ventures. Artis continues to be active in new developments and redevelopment of our existing properties. We have roughly $160 million invested to date in projects considered under development. And during this quarter alone, the investment in development properties was almost $50 million.

As detailed in our MD&A we have several development projects also underway, including a new residential tower at 300 Main, and new industrial space in Houston, Phoenix, and Denver. As detailed also in the MD&A, we have several development projects in the planning stages where construction has not actively started but we're progressing well through the development stages to get the entitlements needed to build [indiscernible]. We've been able to maintain our balance sheet; debt to GBV is up slightly this quarter compared to -- 50.6% compared to 49.3% at December 31st of last year. The main driver of the increase, which was not huge, but it was an increase in the debt to GBV, has been the timing of our planned unit buybacks compared to the asset sales which we anticipate will close in 2019.

Our EBITDA interest coverages remain healthy at over three times. And the sales program we've implemented through 2016 and '17 to sell assets and reduce debt has had a dilutive effect on the FFO, with our FFO coming in at $0.33 this quarter, that's unchanged from last quarter, but it is down from $0.35 in the comparative quarter of last year. And the AFFO for this quarter was $0.24, also unchanged from the last quarter. So I mentioned, relatively quite quarter.

A brief update on the initiatives; on November 1, '18, we announced a series of new initiatives with the goal of increasing cash flow, increasing unit values by increasing our net asset value, and improving our focus on quality over the portfolio. The distribution was reset to $0.54 annually, resulting in a much more conservative payout ratio, and freeing up cash flow to fund the development pipeline. Plan also included non-core asset sales of between $800 million to $1 billion, and this process is well underway. And note that at December 31st, we had already moved $320 million of properties into, what's considered for accounting purposes, held for sale. And we anticipate most of these will sell in the first-half of 2019 or early into the second-half.

The initiatives also included using a portion of sales proceeds to buyback our units using our normal course issuer bid, and we started this immediately after the announcement last November. Till December 31st, we had purchased roughly 3.5 million units at a cost of just under $35 million. We used our line of credit to fund these purchases, and plan on repaying the line as the assets are sold. The unit repurchases have continued through January and February using the maximum available under the NCIB, and it's a very similar number to roughly another 3.5 million units at a cost of just over $35 million. In our opinion, the plan and the initiatives are on track and ahead of schedule, and I'm sure you'll get more color from the other speakers on the call after I finish the financial highlights.

So, I'll just touch on a couple more items and then I'll pass it back to Armin. Fair values of the investment properties, I'll touch on that. And they are valued at fair value, in this quarter was a decrease in value giving us a decline for the year of $35.6 million, major changes this quarter, somewhat comparable to last quarter, but continue to build our values in our Calgary office properties as leases roll down to new market rents, along with some lower values for a couple of U.S. office properties based on timing of tenant re-leasing. Debt to gross book value, I touched on that. We remain very comfortable with the ratio. It is up very slightly, but we anticipate that coming back down again as we sell some assets.

We've been gradually paying off mortgages with the goal of increasing the unencumbered asset pool, and at December 31st, our unencumbered property portfolio was up to $1.85 billion. We did increase our unsecured line of credit to $700 million, and we have two non-revolving unsecured credit facilities in the further amount of $300 million. Our both non-revolving facilities have been [indiscernible] which interest rate swaps placed on to effectively fix the interest rate. Touching on a couple of highlights from operations, same property results were -- in my opinion, fairly good this quarter. On a same property basis the results were up 0.9% this quarter in functional currency, and translating into up 2.7% once foreign exchanged was factored in.

We also present a stabilized same-property calculation which eliminates properties planned for disposition or repurposing, as well as the Calgary office sector. And on this basis, we had growth of 2.4% in functional currency, and 4.4% once FX was factored in. By asset class, the office segment in Canada was weakest due to some repurchasing activity at a couple of building. Calgary office sector, interestingly enough, actually held positive same-property growth for the third quarter in a row, up 1.1% this quarter. We do however still continue to treat that as a non-stabilized segment, so that's why we pull it out of stabilized same-property results. Industrial segment continues to show the strongest performance, with 2.4% growth in Canada, and 9.9% growth in the United States.

Touching on a couple of the non-GAAP metrics, as I mentioned in the opening results, our FFO year-over-year has declined, with the largest driver being the dilutive effect of asset sales during 2016, '17, and the early part of '18 with the proceeds being used for debt reduction. FFO on a quarter dilutive basis was $0.33, unchanged from last quarter, down $0.02 from the same quarter last year. FFO payout ratio was 54.5%, and it will be even lower pro forma [indiscernible] new distribution.

Our AFFO is impacted by roughly the same items, sitting at $0.24 unchanged from the last quarter, but down a penny from the same quarter last year. Payout ratio was 75% this quarter and pro forma in the new distribution would've been 56%.

[Indiscernible] our investment properties at fair market value under IFRS and accordingly, we can calculate our net asset value per trust unit just simply using the equity on our balance sheet less the equity held by preferred unitholders and divided by the number of common units outstanding for the quarter and our math comes out to a value of $15.55 per unit up from 2011 last quarter. The biggest driver of that, of course, is FX. But there was a decline from fair value adjustments as I mentioned during the quarter, but the decline from fair values was almost exactly offset by the increase created by our using our NCIB at current prices to buy back our stock.

So we ended the quarter with $66 million on hand, and $225 million undrawn on our line of credit. And we've got several events detailed in the subsequent events note which we believe continue to reflect our strategy of intelligent recycling of capital. We plan to continue our focus on a strong balance sheet and the overall quality of the portfolio. That completes my financial review, we're pleased with the NAV growth under same property income growth and new development activities and we continue to feel the initiatives we announced last November when [indiscernible] better and stronger REIT and we look forward to demonstrating those results in future quarters.

I'll pass it back to Armin for a bit more discussion.

Armin Martens

Thanks, Jim. On balance, we're glad that 2018 is behind us. It was a challenging year during which we made some very difficult but important decisions, which in turn however we feel has already set the stage for Artis to become a much better REIT.

Again, you'll recall some key strategic initiatives that we announced in Q3 last year as already discussed, and described in our MD&A, but we're pleased to report that things are going well on all fronts. Now, if you look at distribution at least set is of course done, that would be easy part, but we do have a bulletproof payout ratio at this point in time. Our balance sheet is in good shape

Our unit buyback program, we're already 30% there actually -- our plan was to buy back 22.5 million units and average [indiscernible] price of $11.50, but we're way ahead of that in terms of a better unit price so to speak, but we already bought back about 7 million units to date, which is about 30%. So, well ahead of plan. We really hope we could keep continuing on that track. It's a great NAV booster of course and it's accretive to our earnings.

Property dispositions I don't give much color as you want there. We're getting very good momentum. Our target is to sell 800 [indiscernible] of non-core properties over the next three years to streamline our portfolio, and of course redeploy those proceeds and to get debt repayment and unit buyback. So a lot of wood to chop here, but we've done it before. And thus far we think we're getting very good momentum, about 20 agreements have been signed, one property sold, five more are already under contracts, but another $100 million of properties is under contract and active negotiations are taking place for several more. Needless to say we're confident and we're striving to get just get [indiscernible] done in two years or less. Not three years. And this year, for example [indiscernible] $400 million of properties alone and be ahead of plan.

So, meanwhile, our portfolio is performing well. The office market as we can see is somewhat inconsistent and depending on which market or submarket our properties are in but -- not performing bad either. Our retail industrial properties are consistently delivering solid and consistent organic growth. Our same property NOI growth, our weighted-average rental increase and our earnings are always sound. And our development pipeline is on track to deliver good results as well. So again we invite you to look at our MD&A and Investor Presentations for more detail here.

So looking ahead, we'll continue to work hard to keep our buildings full whilst bringing the rents up to market and consistently improving and streamlining our portfolio. To be clear, again, the integrity of our balance sheet and out credit rating as well as implementing our new strategic initiatives are of utmost importance here. And we feel we're in good shape on all fronts. So, again that's our report for this quarter and year-end, folks. Notwithstanding our past challenges, we're very pleased with the results and are most confident with our outlook where we are today and looking forward.

So, I'll now ask the moderator, and you all need to take over and fuel your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question is from Jonathan Kelcher from TD Securities. Jonathan, please go ahead.

Jonathan Kelcher

Thanks. Good afternoon.

Armin Martens

Hi.

Jonathan Kelcher

First question, just on the assets held for sale. Just to clarify, you said there the [indiscernible] Armin, so that's $100 million under contract five properties of the $320 million?

Armin Martens

Yes.

Jonathan Kelcher

Okay. Is any of the write-down you guys took in Q4 related to the $320 million that are held for sale?

Armin Martens

Let's pass it to Jim.

Jim Green

A small portion would relate to the Calgary office buildings, but it was only a couple of million dollars. But the bigger piece is more the U.S. office asset so they're not currently considered held for sale.

Jonathan Kelcher

Okay. And what cap rate are you carrying on the $320 million for IFRS?

Jim Green

Going to have to get back to you offline on that one. I don't know that answer off the top of my head.

Jonathan Kelcher

Okay. And then would your plan be to sell this $320 million and then rollout a portfolio of similar size in the back-half of this year?

Armin Martens

Yes. [Indiscernible] sprinkle in some extra toppings that aren't part of the portfolio that we've listed so far, but yes, there's sort of nothing stopping us, we think. It's our own time constraints right now. The market is good. Interest rates have come down a little bit, we might have [indiscernible] economy might be back. There is still a lot of money chasing real estate. So yes, we'll shift going flat out all year long.

Jim Green

Yes, there's been already a few the year-end, so you'll see that number up at Q1, the held for sale, because we're anticipating that any of the ones that are under contract closed before March 31st, but we have listed more properties, so the held for sale will be higher next quarter.

Jonathan Kelcher

Okay, roughly how much higher?

Jim Green

I think around $100 million higher.

Jonathan Kelcher

Okay. And then just my second question is just on the buyback, you guys have been very aggressive with it so far. I guess with the stock price beginning to move up, do you have any thoughts of slowing the pace down a little bit, a least until you get some asset sales closed?

Armin Martens

Well, not yet. We're still maxing it out every day and every week. [Indiscernible] I mean you can see the debt creeps up a little bit because it's a lumpy thing, but we're very confident -- and the proceeds coming our way from the asset sales and being able to bring our debt down by Q3 at the latest.

Jonathan Kelcher

Okay. And then those assets, they're mostly unencumbered, they're all unencumbered?

Armin Martens

Some are. And if some are then if it gets [indiscernible] trickier with there's some mortgage debt on it, but it's a combination. The Calgary office makes a lot of the multi in that clear title, that makes them easier to sell.

Jonathan Kelcher

Okay, thanks. I'll turn it back.

Operator

Thank you. Your next question is from Mike Markidis from Desjardins. Mike, please go ahead.

Mike Markidis

Thanks, Armin, and Jim. I guess kind of another way to ask John, his question on the IFRS cap rate of the $320 million. Perhaps there's some vacancy in those assets. I was just wondering, Jim, if you could probably, after the call, get everybody what the NOI contribution during Q4 was from that pool.

Armin Martens

Yes, we can do that. We'll [indiscernible] to the analyst group…

Mike Markidis

Okay, perfect. Just looking into your capital plans for this year, including sort of inducements in leasing costs and building improvements, whether it's recoverable or non-recoverable, how much would you guys be looking to spend this year, and how does that break down between existing portfolio and the developments and redevelopments?

Jim Green

So, ignore for a minute the developments and redevelopments because that's a bigger spend. But the sort of ongoing capital expenditures be probably comparable with last year, and likely even a bit down through the current year, that the development spends will continue to -- we're still finishing the construction on 300 Main, will be carrying on all year long, and that will be a fairly big numbers. And the industrial projects we have underway in the U.S. will probably generally wrap up about the end of the first-half; we'll be pretty much done then. So, expect the development spends to be higher in the first-half than the second-half.

Mike Markidis

Okay. So you don't have any other projects that you might start in the second-half then?

Jim Green

[Indiscernible]

Mike Markidis

Okay, are we still live? All right, I didn't hear an answer there, but I guess the answer was in…

Jim Green

Sorry. Nothing planned to start and that is not underway yet.

Mike Markidis

Okay. And I guess the last question I have here is just on the -- you guys have a couple of properties, Dunwin and Sierra, the Calgary office property that are classified as redevelopment. And then just in the way you guys are doing the -- excluding the properties held for sale or intended for sale, I guess it says, which and I assume that doesn't necessarily jive with what's held of sale I guess is what you intend to sale over time. But then you also strip out sort of properties that are being repurposed. And I'm just curious what the difference is between what you would consider to be a redevelopment and what's a repurposing?

Jim Green

There's a couple that we're considering repurposing, specifically 360 Main in Winnipeg which is undergoing a fairly extensive renovation for a new tenant that's going to be taking a substantial portion of the lower tower. And also the former Sears Center in Grande Prairie, which is currently vacant, where we're working with a tenant to take it but it's not on conditional yet.

Mike Markidis

Okay. And I guess the last question for me, I promise this time. Occupancy gains going forward, I mean I guess it doesn't really look like you have much rent opportunities in terms of rent growth in your portfolio on an average basis. As you rework the portfolio where do you think you can get the occupancy in this portfolio up to in the next couple of years?

Armin Martens

Well, that's a tough question. If we can get that Sears boxed done in Grande Prairie, for example, we're optimistic, and that's a good chunk of vacancy to absorb. Got 601 in Carson, in Minneapolis, and we're getting good momentum. We're at -- we have done on the middle 80s, we work on the high 80s now for occupancy, we want to get it to the mid 90s. It will be two market point up to almost 100%. And here the max in Phoenix, we lost a big tenant that downsized, but we're slowly but surely backfilling it very nicely. We see occupancy gains. We do see occupancy gains, Mike, but I don't know if we've had to model thinking what percent. Got any comments, Phil or Kim?

Phil Martens

No, overall. And I think there was another issue on Madison where there was a vacancy, and we've backfilled with a 45,000 square foot at 8401 Greenway. So, we're -- and in regards to MAX specifically, we're trading paper on an entire floor, so we're seeing some good occupancy opportunities. And then back to market points, we have expansion and then we have new leases that will get us to 100%, but we're wrapping up negotiations there, so the office has actually performed fairly well in the last two quarters.

Armin Martens

Yes, [indiscernible] we're almost 100% leased there too, and the rents keep going up. Concord is progressing very well, good momentum. But I couldn't give you a number on what the occupancy level will be. But that we're sure that that trend is our friend right now.

You there? Release the call.

Operator

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

Michael Smith

Thank you, and good afternoon. Just have a few questions. So, just speaking of 415 Yonge Street and your Gateway property, are any -- I know you still have a lot of re-zoning still to do. You spent a lot of time doing it, or are in the process and there's still more time to go and more work to do. But any interest in selling or any demand for selling it un-zoned? There's some un-zoned res sites in Toronto that are going for very high numbers?

Armin Martens

Yes, there's demand, I think. And we're really contemplating that. We think by the second-half of this year we'll launch the sale of that property. We've been at this for two years with the city planners, and we feel optimistic that we're going to be getting a positive report and support from the planners in the near future. And because of that -- and again, you can't quote me on this, but we just feel good about the momentum, we're getting the progress, and that is a bit of a game changer in terms of getting the actual entitlements after that. So, we're plugging away, and the more visibility we can get on the re-zoning, I think the higher -- the more value we get when we sell. So, that's the balancing act right now for 415 Yonge. But meanwhile, it's a great asset.

If we don't re-zone that site, Mike, in the next 10 years, that NOI will double. That's just the way it is, it's just a great asset to hold right now. And so the same applies to Concord. Concord, we're being well received [indiscernible] we'll have some entitlements, and we'll look to launch Concord in the second-half of this year as well.

Michael Smith

And any chance you'll sell some Calgary office this year?

Armin Martens

Well, sure. Well, I mean two of those four that we mentioned are under contract, and as the numbers get smaller as we -- only own $330 million roughly of office properties in Calgary, but it's still -- we want to get off more of them. I mean, Stampede Station has been listed, [indiscernible] has been listed, [indiscernible] are both under contract to just two different qualified buyers. And we'll be looking at trends out the next and we'll see. We'll see what happens after that. But, we expect that will all be dealt with this year.

Michael Smith

Okay. And the properties that are in the contract, guessing the -- including Sierra and Britannia, but all the other ones as well. Are they under a conditional contract or have conditions be waived?

Armin Martens

Yes, not yet, still conditional. If they're unconditional we'd be happy to report. But those qualified buys that really have a good use for the property, and yes, I do feel good about that.

Michael Smith

Okay. And so, if I heard correctly, I think you said earlier that probably about $400 million will be done this year. You're pretty confident about that?

Armin Martens

Sure.

Michael Smith

Okay. And I know you're busy selling -- you got a lot of selling your assets, buying back your stock, funding your developments. But just on the acquisition, could we safely assume that there'll be no acquisitions? Or if there is they'll be part of previously sort of contracted acquisitions or --?

Phil Martens

Yes, there's a second phase of that office project in Minneapolis that will close in probably the second-half of this year, that's been under contract for a long time, it's 100% leased, and we don't take possession until the tenant [indiscernible] will happen in the…

Armin Martens

Yes, and that's in Q3 of this year, right?

Phil Martens

That's right.

Armin Martens

But that said, we're not buying, we're selling assets and buying back our shares.

Michael Smith

Okay, perfect. All right, thank you. That's it for me.

Operator

Thank you. Your next question is from Jenny Ma from BMO Capital Markets. Jenny, please go ahead.

Jenny Ma

Thanks. Good afternoon.

Armin Martens

Hey, Jenny.

Jenny Ma

Just on the topic of the Calgary office asset, could you give us a little bit color on the buyer profiles or the type of buyers who are looking at Calgary officer properties?

Armin Martens

Private families, opportunity funds, hotel operatives and apartment operators that want to reposition a property, user-buyers as well, but buyer that will want to occupy half the building. That's the profile. REITs are not on the list, and pension funds I think the club of operators, but there's always some opportunity fund out there, and then [indiscernible] Canadian market, at least a little bit, if there are opportunity it's really in the Calgary office market right now.

Jenny Ma

I'm curious to know, if there's any global buyers who are kicking the tires, or are these mostly Canadian buyers and users?

Armin Martens

It's good question. It could be global money but using local North American operators, that is a sub U.S. operator, that shop and I'm not always sure where the money is coming from.

Jenny Ma

Okay. Switching to the write-downs to the U.S. office portfolio, Jim, I think you mentioned that of the amount, there was a very little bit related to Calgary office, the rest of U.S. And then, you mentioned it was due to some timing of vacancies if I heard you correctly. I'm just trying to get some color on sort of what prompted that is it on the NOI side, is on the cap rate side and is it on a few properties or is it a little bit across more properties?

Jim Green

It's on a few and it's based on some news terminations that we know are coming up and when you factor that into Artis that discounted cash flow drops the value because it factors in a vacancy factor and whether vacancy factor materializes as an Artis is unknown at the present time because they are second half of this year but that's just the way Artis runs valuation software, so…

Jenny Ma

So what is the threshold that would trip that like if something goes vacant? Is it because you don't see any prospect of leasing it for the next two quarters or the next year like at what point do you take the right down as opposed to waiting it out while you lease it up?

Jim Green

We value the majority of those properties more on a discounted cash flow basis and the assumption in Artis is generally going to be at least a six-month lag time on a turnover, so that's where the hit comes to the valuation.

Jenny Ma

So it's from the lag that you basically built something in after like you make and assumption?

Jim Green

Correct. So that value can come back up again as you release the space but you do take hit when you know you have a vacancy coming up.

Jenny Ma

Okay. And then, just a question sort of on the higher level, you talked -- you give us a lot of good detail on the strategic initiatives. I'm just wondering what the discussion has been around the table about I guess what the ultimate, not the end game but sort of where you want to be in three to five years as a result of the strategic initiatives. I'm looking at some of the you know the pie charts here you got a sliver of retail in U.S. Calgary office, you're down to 8% with a bunch of listed for sale you know, can that go to zero. When we look at three to five years after all the efforts that you put in over the next 12, 24 months will be done. How do you want Artis to look?

Armin Martens

Well, take a look at our investor presentation. I guess will be uploaded by the end of the day today or first thing next week or Q4. But at the end, we'll do so for example, the pie charts where we are today in terms of our NOI and geography breakdown by asset class in geography and where we expect to be. I mean, office will shrink, so it's about 55% now it'll shrink to 45 and pause [indiscernible] the industrial will increase up to 40% and retail will shrink down to 15% until the geography we see ourselves flipping. We are under now 55% Canada, 45% U.S., we see that flipping and going to 45 Canada and 55 U.S. primarily because most of our selling is in Canada.

Jenny Ma

Okay.

Armin Martens

And then looking further ahead as things stabilized and you know our unit price moves up and things, other things judged by the time. We want to ramp up our industrial development pipeline. And our acquisitions can be expensive. But we do want to ramp up on industrial development pipeline when the time is right.

Jenny Ma

The industrial pipeline in the U.S.?

Armin Martens

Yes, that's what we are achieving un-levered deals north of 7% and you know getting good results; one project at a time, so we are prepared to increase our waiting there as well but not this year, this year we've got other things to do.

Jenny Ma

And then what about on the leverage side.

Armin Martens

Lucky, I think on the shoulders bring our total debt down to about 45% in by year three and that's still the objective 50 is -- we don't want, 50 works obviously but it's not good enough we want to get down to 45.

Jenny Ma

45, so by say 2022 or so?

Armin Martens

Yes.

Jenny Ma

And that's just through the initiatives that you've currently announced?

Armin Martens

Right.

Jenny Ma

Okay. That's helpful. I'll turn it back. Thank you.

Operator

Thank you. [Operator Instructions] Your next question is from Matt Kornack from National Bank. Matt, please go ahead.

Matt Kornack

Hi, guys. Along the lines of the questioning with regards to dispositions, wondering if the portfolio that you're looking to sell if the vacancy in places is sort of equivalent to what the portfolio is today, or if there's more vacancy there, or maybe there's higher occupancy and how that would translate to your overall occupancy?

Armin Martens

Yes, I mean, the Calgary office buildings have high vacancy rate.

Matt Kornack

Okay.

Armin Martens

Across the board, most of them, so I think that our NOI contribution is not that higher from the problems we are selling.

Matt Kornack

Okay. So you'll actually, you'll get a net benefit of higher occupancy in less fixed cost across your portfolio, I guess. And then this is nit-picky but your top tenants, PDS, telecommunications, I don't know if it's a typo, but it went from 6.3 years remaining to one year remaining in this DNA just quarter-over-quarter, are they leaving or…

Armin Martens

Well, that's a typo, that's you want to comment [indiscernible]. That's a typo, that's…

Jim Green

Yes, that lease was actually extended in it for whatever reason, it didn't pick up in our system, is it just that so that is…

Matt Kornack

Okay.

Jim Green

There's five years and nine months left on that, they did have an option and our software was tracking the option and not the full terminally, so it's just the [indiscernible].

Matt Kornack

Fair enough. That's an easy answer then. And then, waiting, any update they're with regards to negotiations or renewal?

Armin Martens

Well that's one of the write-downs Jim was talking about, so waiting will be at least expired at the end of this year and they will be leaving that's can close that building their average rate is $25 gross, we feel we've already got four of those 10 floors spoken for, at higher rents, the market rents was about 35 gross there. So we're working hard to get to that space back but right now, that's it. And we're in a good place for that building to have a good location in Uptown and downtown Denver in general. The lower downtown, there is a very strong market right now.

Matt Kornack

Okay. So it'll just be a timing related issue, if anything in terms of space coming off and coming back on.

Armin Martens

Right. All leads to deal with our candidates plus.

Matt Kornack

Okay, fair enough. And then, any view with regards to financing on the floating versus fixed and just interested I mean, the markets been very volatilely with regards to interest rates, and they pulled back a bit here, you did, you did an unsecured deal, which I think was interesting to show that market is still open to you. But yes, generally, how do you think of financing this business going forward? It seems like you're committed to keeping your credit rating. So what's your view mortgages versus the six floating and unsecured?

Armin Martens

Mortgages are fallen for us down to around the 30% mark, expect that that lead and follow a little bit further.

As we use more unsecured debt, we need to increase the unencumbered asset rule. The cheapest debt for us is the secured debt, so we'll bring it down a little bit but to watch overall cost of capital like a whole lot different than where it sits today.

Matt Kornack

And I mean, it may be ways off but is -- if you're committed to the unsecured market, are you committed to trying to in time New Year rating higher end and would you look to leverage levels that would make that possible and you mentioned 45 but I would assume because you got a little bit higher yield on your assets your debt to EBITDA number can get fairly attractive the lower you bring that down.

Armin Martens

Yes, that is definitely a goal for us and then we look to the next step in the credit rating, move it from BBB loaded, BBB I mean would be great where you know we've had those discussions with the TBRS but we have to get through this initiative process first before will be able to go back to them and say now we think we qualify, so…

Matt Kornack

Okay and size wise they have their thresholds but even with selling your assets are you still big enough that you make the EBITDA threshold to be BBB [indiscernible]?

Armin Martens

The EBITDA threshold that gets a little bit tight and so does the market cap that's the risk that we have to monitor as we go through this initiative process, but so far, our discussions have been that, I think the rating will stick as we go through it and hopefully come out the other end with an improvement rating.

Matt Kornack

Okay, great. Thanks. That's interesting.

Operator

Thank you. Your next question is from Mario Saric from Scotiabank. Mario, please go ahead.

Mario Saric

Hi, thank you, and good afternoon. Maybe just speaking to the asset dispositions and the top 20 kind of [indiscernible] I know it expires in about 4.5 years so there's still some time. Have there been any discussions in terms of renewing the tenant prior to asset disposition, or how do you balance the two?

Jim Green

Yes, the trends out there property is becoming more and more of a redevelopment play. As you know there will be a green line if the multibillion-dollar project has been approved and our blop there, just between our site and the Oxford site, there's going to be a space, a subway station there that'll connect to both of our properties. So we'll have a full on TLD [indiscernible] development there and the city's encroaching a lot of density there. Right now I'm into rezoning [indiscernible] to add a lot of density to that site, multi family primarily. And parallel with that, Mario, we have reached out to [indiscernible] made proposals. They are looking to downsize it to just the main building and we are in discussions. But because it's four years away, and they've got other things on their mind, there is nothing conclusive there. [Indiscernible] value in this, in any buyer interested in this site, want it for the redevelopment potential primarily and the office Secondary. That's what's happened there.

Mario Saric

Got it. So the ultimate evaluation will be more along the lines of a price per buildable square foot as opposed to some kind of cap rate on [indiscernible]?

Jim Green

Yes.

Mario Saric

Okay.

Jim Green

Yes.

Mario Saric

And then just sticking to the initiatives, Armin, I think at the onset you mentioned on the NCIB, when you initiated there was a kind of a target $11.50 per unit kind of average purchase price or repurchase price. Is it fair for us to kind of think of that level as being the level where you potentially do slow down if [indiscernible] there?

Armin Martens

Potentially, I mean, I think we'll be buying [indiscernible] threshold for sure. And then we'll see. Needless to say, the higher our unit price goes, the more we'll consider [indiscernible]. I mean, we're very disappointed that our stock dropped as much as it did last fall and through December, but we're also grateful for being able to get 30% of our program, at flexible prices ahead of plan.

Mario Saric

Got it. Okay. So the sensitivity to the unit price is there but at the same time you're also taking into consideration kind of the timing of the asset sales and levels and whatnot?

Armin Martens

Yes. And again as I think I imagine, it won't be a straight line, it'll be a little lumpy, but for now we think it's a good use of capital, good use of our line if it's necessary to keep maxing out our NCIB. It's an automatic NCIB, we're maxing it out. Sometimes we're doing a block trade as well. And we'll keep doing that and we're very confident that this position will get done, and by summertime we have lots of money to pay down debt.

Mario Saric

Understood, okay. And then just maybe an operational question, obviously, the portfolio is really changing over the next couple of years so that the same property NOI metric may be a little less relevant than has been in the past, but when you look at the same property NOI delivered in 2018, kind of flattish in Canada, representing the U.S. So let's call 1% on a local currency basis, how do you see that shaping up for 2019?

Armin Martens

I think similar -- how long will depend on how fast we can sell this Calgary office property, because that's why -- I mean, we had a good quarter with the Calgary office last quarter, but that's where the big decline always comes right, from the Calgary office, office renewals. But I wouldn't project -- I expect the U.S. don't perform in Canada until we get through all of our Calgary office dispositions.

Mario Saric

Okay. But aside from Calgary office on a steady-state portfolio basis, so ignoring kind of the assets that you may sell -- kind of core portfolio, what type of run rate do you think a core portfolio is capable of?

Armin Martens

You know why, industrial, for example, very good numbers, right, and industrial can be between 46% and retail -- we only had that one problem in Grand Prairie which I think we're going to solve and get some good news, but our retail has always been good -- given us good, respectable growth as well. So, very comfortable with our industrial and our retail right now.

Mario Saric

Okay. [Indiscernible] the office side?

Armin Martens

Pardon me, I didn't --

Mario Saric

The near term wildcard will be kind of the pace of lease up in the U.S. office portfolio in terms of your aggregate?

Armin Martens

Yes, correct, yes.

Mario Saric

Okay. Thank you.

Armin Martens

Okay, thanks.

Operator

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

Dean Wilkinson

Thanks, afternoon, everyone. Armin, I'd just like to ask you a follow-on on Mario's questioning there. Not on the assets that you're selling, but focusing on the stuff that you're keeping. Just looking at that 2019 renewal program, I mean, it looks like a fairy higher year in terms of expiries that stayed over 14%. When you look at the lift on renewals during Q4 of '18 at zero, is that something that we can expect looking at 2019 just given that it looks like your rents are at or maybe 1% above market across the Board. So kind of getting to the point of do you think that the same property NOI growth for 2019 is maybe a shade lower than 2018, FX aside?

Armin Martens

Well, I hope not. I know in Q4 we had some big industrial renewals that didn't work out as long as we thought that -- we still feel we can do better and maybe [indiscernible] a bit better, but I'm pretty optimistic about positive NOI growth across the Board. I don't -- and the economy is what it is. There's always a rumor about a economic slowdown so that can change the outlook and change the facts, but right now, we're seeing good velocity across the board for even our retail, not just our industrial and -- fragmented market, you get -- Winnipeg has gone soft. Certain submarkets of Minneapolis are soft. You got [indiscernible] is progressing very well.

So the [indiscernible] market is fragmented and inconsistent. But the retail industry is doing well for us in all of our markets. And we still expect it to give us pretty good, positive numbers.

Dean Wilkinson

Okay. On the 22% of the stuff that you've already signed, how have those penciled in, I mean have you seen the gains there or are they -- do they look more like the Q3 Q2 or look more like the Q4?

Armin Martens

So I don't have my [indiscernible].

Dean Wilkinson

Okay, that's fair enough. Maybe if…

Armin Martens

[Indiscernible] find out soon, Q1 is around the corner.

Dean Wilkinson

True enough.

Armin Martens

Certainly not.

Dean Wilkinson

Okay. That's all I had to -- thanks guys.

Armin Martens

Okay, thank you. Thank you.

Operator

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

Armin Martens

Well, thanks again everyone for joining us and a special word of congratulations and best wishes to Michael Smith if he's still on the line, this was his last conference call with us. And we're wishing you Godspeed in all that you do and the best of luck in all the endeavors, Michael. So thanks again everyone, we look forward to catching up at our next call as well. Jim will get back to you with an e-mail on that answer on the NOI, and feel free to reach out to us any time offline as well. Thanks a lot, bye-bye.

Operator

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