Yes. Thank you moderator.

Good day everyone and welcome to our Q2 2020 conference call. So again, my name is Armin Martens.

I am the CEO of Artis REIT. And with me on this call is Jim Green, our CFO, Kim Riley, our EVP of Investments, Phil Martens, EVP of U.S.

Operations, Jackie Koenig, SVP, Accounting and Heather Nikkel, VP of Investor Relations is on the call as well. So again, thanks for joining us, folks.

I will begin, as usual, by asking Jim Green to review some of our financial highlights and then I will wrap up with some market commentary and then we will open the lines for questions. So go ahead please, Jim.

Thanks Armin and good afternoon everyone. So I guess the strange times we talked about last quarter are continuing, however the economies in both the U.S.

and Canada are gradually reopening and life is getting closer to a new normal despite the ongoing presence of COVID-19 in our economies. For Artis and I think for most REITs, July and August have seen progressively stronger rent collections than experienced in April, May and June.

On the Canadian operations, Artis to-date has not participated in the CECRA program as proposed by the federal government. However, in both countries, we have been working with our tenants as needed to provide rent deferrals or in some cases, we have provided rent abatements in exchange for an early renewal or a longer term on the lease.

To the end of June, our rents receivable were approximately CAD12 million with a further CAD4 million due under deferral agreements that have been executed with our tenants. And while we feel the majority will ultimately be collected, we did book a reserve of approximately CAD3 million against these balances, which we feel is adequate to cover any potential rent defaults.

For July, we have collected 91.8% of our rents due by July 31. And counting amounts collected in July on prior balances, we have collected 93.1% of the rents due in the second quarter.

Based on that statistic, it sounds like I am contradicting myself a little bit about July being stronger. But the way we apply payments is, if a tenant was in arrears at June 30 and they made a payment during July, we treat that as paying off the oldest arrears first before the July rent shows as being paid.

You will recall that our REIT has been working on a planned series of new initiatives and we are nearing completion of that program, including buying back our units as planned under the NCIB. We have really done that component of the initiatives.

However, our ability to sell assets and pay down debt has been impacted by the uncertainty caused by COVID-19. We are, however, starting to see some buyer interest returning and we expect to see sales activity pick up in Q3 and Q4 this year and into the first half of next year.

And as we have stated previously, we plan to use proceeds from further asset sales to pay down debt and further strengthen our balance sheet. Based on our Q2 NOI, the REIT was 47.4% weighted in Canada and 52.6% in the United States.

Some of the swing this quarter to be much larger in the U.S. was that all of our retail assets are located in Canada and this segment has the largest share of the allowance for bad debts.

As we move forward however, we expect the majority of future asset sales will likely be in Canada and we expect this ratio to continue such that greater than 50% of our income will come from assets in the United States. On an asset class basis, we are presently 47.5% weighted in office, 17.2% in retail and 35.3% in industrial.

Artis continues to be active in new developments and redevelopment of our existing properties. We did not start any new this quarter given the COVID lockdowns, but we continue to work on the projects already under development.

And to June 30, we have approximately CAD134 million invested in these projects. During the quarter, there was roughly a further CAD35 million invested in development projects.

And we completed one project and transferred it to regular income-producing properties. As detailed in the MD&A, we have several development projects that remain underway, including the mixed-use residential tower at 300 Main in Winnipeg, new industrial space in Houston and a small retail development already fully leased as additional density on one of our retail sites in Winnipeg.

Also as detailed in the MD&A, we have several development projects in the planning stages where we have not actively started. Some of these are virtually ready to go as soon as the COVID situation seems to stabilize.

Our balance sheet remains relatively consistent with debt to GBV on a proportionate share basis at 52.5% this quarter versus 52.3% at year-end. Something I don't usually touch on, but I will this quarter, is that Artis has a fairly significant portion of our debt maturing in the next 12 months, with CAD564 million of mortgage debt in addition to an unsecured debenture for CAD250 million.

Roughly CAD33 million of the mortgage debt will be repaid just by the regular scheduled principal repayments and we have already renewed approximately CAD80 million of the mortgages or roughly 33% of the amount that falls due in 2020. We are not anticipating any difficulty in refinancing the rest.

The mortgage debt is spread across approximately 20 properties. Our NOI this quarter was CAD70.2 million compared to CAD71.9 million last quarter, a drop of CAD1.7 million created primarily by almost CAD3 million as a provision against doubtful accounts and some lower parking revenue as some of our tenants worked from home.

They can't necessarily cancel the leases, but they can stop paying for parking if they choose to on a month-by-month basis. And that was partially offset.

We were almost CAD1 million gain on foreign exchange due to higher rates during the quarter. And we also had, other than the bad debt allowance, we had positive same-property income that also contributed to the NOI.

So despite the drop in NOI, FFO for the quarter was up to CAD49.4 million from CAD46.4 million last quarter, with the CAD1.7 million drop in NOI being substantially more than offset by lower interest expenses on our debt as well as reduced corporate expenses. FFO on a per unit basis came in at CAD0.36 this quarter compared with CAD0.33 last quarter and was flat unchanged at CAD0.36 from the same quarter last year.

We added a little bit of new disclosure this quarter, breaking out our FFO from each asset class, just using the percentage of NOI as a method of allocation. So on this basis, we earned CAD0.17 of FFO from our office portfolios, CAD0.13 from industrial and CAD0.06 from retail.

AFFO for the quarter was CAD0.27, again up from Q1 but flat to Q2 of 2019. Our payout ratios for the quarter are a very conservative 38.9% of FFO and 51.9% of AFFO.

Results from operations on a same-property basis were down to a negative 2% this quarter. You may recall, in prior quarters, we had presented a stabilized same-property calculation, which eliminated properties planned for disposition and also backed out the Calgary office portfolio.

We were planning on just eliminating the stabilized result this quarter, but as a major factor in the negative same-property result was the allowance booked for doubtful accounts. We did present the number excluding the allowance and that would have resulted in positive same-property growth of 1.2%.

The industrial segment continues to be the strongest performance in both countries, with 6.1% growth in Canada and 3.3% growth in the United States. On the income-producing property portfolio, we are valued on our balance sheet at fair value and this quarter continued to be a little bit challenging to determine fair value as there has not been a lot of asset sales recently.

However, there's no hard evidence that cap rates, discount rates or market rents have moved substantially during the quarter. You may recall that we recorded a fairly substantial reduction in value at the end of Q1, which we felt was adequate coverage.

And at the end of Q2, we did not feel any significant further adjustment was warranted. We actually wound up with an increase being booked with the main driver of the increase being the industrial segment, led by the Ontario industrial properties, where the increase in value is largely driven by increasing rental rates.

So as we report those investment properties at fair value, we are able to calculate a net asset value per trust unit on an IFRS basis and our calculation just uses the equity on our balance sheet, less the equity held by the unitholders and then divided by the number of common units outstanding at the end of the quarter. So net asset value per trust unit on that basis was CAD15.40 this quarter compared to CAD15.52 last quarter, a net decline of CAD0.12 due to several factors, the largest of which was foreign exchange, which on a stand-alone basis would have decreased our NAV by CAD0.42.

Other financial instruments, which consists mainly of the debt swaps contributed a further CAD0.03 drop in the falling interest rates and our distributions for the quarter were CAD0.17. And offsetting those three reductions was a gain of CAD0.34 from our income for the quarter, plus a CAD0.09 gain from the fair value adjustment and a CAD0.07 gain due to the purchases under our NCIB.

So Artis ended the quarter with CAD40 million of cash on hand and CAD172 million undrawn on our line of credit. And based on what we know today, we feel that's more than adequate liquidity to get us through the remainder of the COVID crisis and we look forward to more normal times.

So that completes the financial review for now. I am happy to answer questions later, but I will pass it back to Armin for a bit more discussion first.

Keep well, everybody.

Okay. Thanks Jim.

So folks, this has been a volatile and unprecedented year, of course, as you know. But as it applies to Artis, we feel that the worst is already behind us.

We really do. Artis is performing very well this year.

We continue to make good progress in all key strategic fronts and are delivering strong performance metrics to our unitholders. Our rental increase of same-property NOI or FFO and AFFO per unit are all solid numbers.

Our rent collections are good and already improving. Watch for more monthly updates from us in August and September as we move forward that will demonstrate an improving trend.

So we are in great shape and things are looking up. Looking ahead, given our very conservative payout ratio of AFFO for 52% and the progress we have made on our strategic initiatives, debt reduction is and will be a top priority for us.

As Jim mentioned, falling floating interest rates are a natural boost to our earnings, which we think is structural and will remain with us long term. So lower for longer or lower for even longer is clearly the new normal for interest rates.

It is our view that liquidity and availability of credit will continue to improve as we get to the other side of this shutdown. And all of this, of course, will be good for real estate and REIT valuations.

Our property disposition program slowed during Q2, of course. But looking ahead for this year, we anticipate selling at least another CAD200 million of property by year-end and another CAD200 million during the first half of next year.

So CAD400 million of properties during the next 12 months, all retail and office properties. And again, that price is consistent with our IFRS NAV of CAD15.40 and again, used for debt reduction.

I might add that we already have over CAD20 million of properties under contract or LOI for sale and another CAD100 million under discussions with paper being traded. So nobody needs to be concerned about our ability to get this done and pay down our debt.

And nobody should even be surprised to see us get all CAD400 million done by the end of this year. And when I say done by the end of this year, I mean either closed or at least unconditional.

But we see good momentum, good traction in our disposition program now coming back to us. It's important to note, of course, that as our financial metrics improve, so do our portfolio of properties.

We are continuing to reduce our office and retail weighting and increasing our ownership of industrial properties. We are streamlining and high-grading our portfolio as well as reducing the number of secondary markets we are in.

So one could say, this is basically a private equity model that we are implementing to maximize unitholder value. It's just that we are also minimizing debt in the process.

On balance, our overall portfolio is performing well. Again, we own almost CAD2 billion of industrial properties, which have a very good track record and continue to deliver solid organic growth on both sides of the border and our industrial development pipeline is on track to deliver excellent results as well.

Now stay tuned for more good news on this front as we move to expand our industrial development pipeline with institutional joint venture partners this year and into the very near future. And as a little fun fact, we don't disclose it as well as we could or should, but in the past five years, Artis has, in fact, developed over $300 million of new generation industrial properties that are generating IRR for us, an average IRR of over 30%.

So we feel good about that asset class. We have a very good track record in developing new generation industrial.

We will continue to grow that. Now in terms of our retail properties, it's important to note that they represent just 17% of our total NOI.

And they are all open-air service sector strip malls. And of that retail component, we estimate that approximately 80% of our tenants are selling products or services that are "essential," if you will.

Essential, in the sense that the shopping has to be done primarily in person, not online. So folks, by now, you have noticed that Artis is not your grandmother's diversified REIT anymore, all right.

We are not your typical diversified REIT anymore and we feel we really should not be compared to diversified REITs anymore. And at an 83% weighting, Artis is now an office and industrial REIT with just some retail on the side, which is very resilient retail.

And as mentioned, we will be continuing to shrink both our retail and office weighting whilst growing our industrial. And just to go back a little bit in history and we have done a lot of heavy lifting in the last three years to transform and improve Artis.

In the last three years alone, we have reduced our Alberta weighting from 36% to 16%, our Calgary office from 15% down to 2%, our retail is down from 26% to 17%. So in the last three years, office is down from 51% to 48% and industrial is up from 23% to 35% and climbing.

So again, a lot of heavy lifting in the past three years. If you look at investor presentations, we are targeting by the end of next year to be at 10% retail, to be at 50% industrial, that's 50% and 40% office and we will get there.

We will get there. When we say we are going to sell CAD400 million of real estate at our NAV and we might pay down our debt, we will.

And when we say we will hit these targets and asset class allocation, we will. Or we will even do better.

As I said, a lot of heavy lifting is behind us and we feel like we are going downhill now. This pandemic was a serious distraction.

But in our case, given the nature of our portfolio, being office and industrial primarily, the worst is behind us. But anyway, that's enough about us.

So that's our report for this quarter, folks. It was a good quarter, for sure.

We feel we are going to end the year well. We will have a very good year this year and next year will be an even better year.

So now I will turn the floor over, the mic over to the moderator and open the lines for questions.

Thanks. Good afternoon.

Armin, can you maybe, I guess, in your prepared remarks there, you kind of hinted at maybe some sort of JV development fund or something like that. Can you maybe expand on that a little bit?

Yes. So we are targeting a fund of $100 million in equity that in turn could be levered to develop CAD300 million of new generation industrial.

We have got, at the beginning of our pipeline already tied up in terms of properties a large and new industrial development in Phoenix and another smaller one in Minneapolis to get the ball rolling. And there's two ways to skin the cat, Jonathan.

One way or another, we are getting a lot of interest, like a lot of interest, from institutional equity partners. An easy way out is for us to just do one joint venture at a time as we move forward with our pipeline.

In a perfect world, we would like to have the fund established in advance and committed. But either way, we will be moving ahead with name.

You will recognize the names when we have the deal done for the industrial, for the joint venture, new generation industrial in Phoenix. And the reason we are doing this, I mean, in a perfect world, we would like to use our own capital and own 100%.

But right now, all of our positive cash flow is being used to pay down debt as we sell our buildings, to pay down debt, improve the balance sheet, which will give us a better price multiple. But in parallel with that, we don't want to stop doing industrial development deals.

So we would be the GP. It will be a 90-10 deal, 10% equity from Artis, 90% from the JV partner.

We will get an asset management fee. We will get an override on the leasing and we are going to promote structure as well and that would use up our IRR a lot.

That help you?

Yes. That is helpful.

Thanks. And then just switching gears a little bit.

Jim, you talked about having a lot of mortgage debt coming due in the next 12 months. What sort of rates are you seeing right now?

So the spreads have definitely gone up in both Canada and the U.S. But with the declines in both BA rates and LIBOR rates, I think the all-in coupon to the borrower, we would be pretty close to our expiring rates.

So call it, five-year debt, still sub-3%. And you get out to 10-year debt, it might be a little over 3%.

And then would you be looking to fix more of that?

On some properties, yes. If it's a property that we plan to hold long term, then we would look to place a longer term piece of debt on.

Fixed rates, is that right?

We either fix the rate or protected by a swap, yes.

Okay. That works for me.

I will turn it back. Thanks.

Thank you and good afternoon. Armin, looking through the Q2 bad debts, can you give us a little bit of color on the operating performance of your Canadian office assets?

And how those compared to your office properties in the U.S.?

So I am going to, you got the data there, Jim? You have the breakdown?

Yes, I know, well, look. We are meddling with mix some way in there.

I think we are a little bit shier on the Canadian side than the U.S. side.

What have you got there?

Correct. The allowance for doubtful accounts is larger in the Canadian office than in the U.S.

office. The biggest piece, of course, is the retail allowance.

But total office allowance is roughly CAD850 million out of the two point.

Yes. It's a tough one to call.

In the last 90 days, tenants, it was a little easier to renew a lease, I guess, if a tenant was forced to renew. But to do a new lease was challenging.

It however, was spotty. I know in Toronto at our Concorde Corporate place there, we have got some good leasing done in the last 90 days actually.

We made some good progress. And then other situations, tenants were just not making any decisions.

We do the virtual tours and all that, but they are not making decisions. Now specifically, we can't really tell you which tenants, it might be a challenge.

It's a bit challenged obviously, but the tenants sort of, who we were having rent collection problems are generally the ones that have some tie-in to retail. So if they were either a head office or servicing the retail sector, then those tenants were struggling a little bit.

Yes. If you have got a head office of a retail tenant or a retail operator, a head office of a restaurant operator, then that's a bit of a challenge.

Sometimes, tenants just wanted to push back and say, during these unprecedented times, let's be partners and rent reduction's in them. So we would go back and say, nice try.

So let's get back to paying rent. And as you can demonstrate, I mean for a good reason, we always help a good tenant.

But if they don't need help, then we won't give them help. But we definitely feel that as we move forward, office market, I mean industrial market is back to pre-COVID times.

Industrial market is strong and robust, really. Office markets, not 100%, not back to pre-COVID times yet, but improving.

And retail is what it is. It does depend what kind of retail you have.

We definitely feel and see our retail NOI improving and we think the bomb is behind us with retail.

Well, would it be fair to say the difference between Canada and the U.S. from an office standpoint might be more tenant specific as opposed to cultural differences or how the tenants are perceiving the value of office space on one side of the border or the other?

I would say that as well. We are hearing and reading about the trend to more work from home.

And larger corporations can afford that, I guess. I think as the dust settles, there won't be as much work from home as we think.

But there will be more work at home than there used to be. And then on the other side of that, that measure is that tenants will invariably need more space square feet per employee than they used to need as well.

And hopefully, that balances out in favor of the landlord over time.

And have you done any notable office leasing on either side of the border since the pandemic began? Or has the leasing mostly been in the industrial portfolio?

Mostly industrial and a little bit here in Canada as well. And Phil, I don't know if you want to weigh on that at all?

And Kim, any new leasing on the office side? And we will have our next leasing meetings next week, the next monthly meeting.

But it's been neutral. It's been fairly neutral on the office on both sides of the border.

But I know our Concorde Corporate plans are there that we saw some good improvements there. And I mean down in Vancouver at the Kincaid office out, they are getting good momentum there as well.

So it's a bit spotty, but these are times when people were just caught like deer in the headlights. They put their pens down and said, let's just wait and see.

But now, people have got the pens in their hand again and they want to do business again.

Yes. I could add that we have also ramped up our virtual tours.

So we have done, I guess, a video of vacant space and hosts have been able to post that online, which has also helped with leasing activity. So as we were able to ramp that up, you can kind of see the leasing activity pick up as well.

That's good color. And maybe just changing gears here.

The fair value marks during the quarter were about CAD12 million. Can you tell us what drove those write-ups and tell us if there have been any changes in your valuation inputs from an IFRS standpoint?

No. The valuation approach remains unchanged.

We do most of our values on a discounted cash flow basis. And so what was driving the increases in value were generally rent increases.

We didn't change discount or terminal cap rates on our original cap rate type assumptions. That's largely what we receive from the external appraisers.

And we get a certain number of external appraisals done each quarter and then we make sure that our valuation models are mirroring theirs.

And last question for me, just on your disposition program. Last quarter, you talked about selling about CAD100 million to CAD200 million in 2020 and laid out a 2021 target for about CAD600 million.

Are those plans still largely unchanged? And maybe just an update on where those stand?

So we are definitely confident of our ability to sell CAD200 million by the end of this year and sell the CAD200 million by end of first half next year, again, office and retail. We will see what, if we continue, we want to get our debt down to closer to 45% of GBV and our debt to EBITDA to eight times.

And I don't think CAD400 million gets us quite there. So in the second half of next year, you should expect us to continue selling down to do that.

I appreciate the commentary. That's all for me.

Thank you.

Busy day for all the analysts and a busy week. Anyways, I want to thank you, moderator and thank you, everyone, who has participated on the call for your interest and looking forward to updated analyst reports next weekend for more dialogue as we move forward.

Feel free to reach out to us any time with questions and more information and more dialogue, as we said. Thank you very much.

Have a good weekend, everyone.