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Canadian commercial REIT with 246 properties totaling 25.8 million square feet
Acquired nine properties in 2014 for aggregate purchase prices of $62.4 million and US$123.5 million
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| $5.5 billion GBV and $664.8 million unencumbered assets at December 31, 2014 | Trust units earn a stable, reliable and tax efficient monthly distribution of $1.08 per unit per annum | Preferred units earn a stable and tax efficient quarterly distribution |
 BBB (Low) & PFD-3 (Low) investment grade credit from DBRS |
Diversified by asset class including office, retail and industrial, and geographically in western Canada, central Canada and select U.S. markets | |
Fellow Unitholders:
We are pleased to report another year of improvement and disciplined growth for Artis.
In 2014, we continued to deliver exceptional results for our Unitholders, while demonstrating commitment to improving the quality of our portfolio and our balance sheet. We successfully acquired nine accretive assets in our target markets, completed over 300,000 square feet of new development projects which are now fully leased, and sold three properties, strategically redeploying the proceeds to fund new opportunities. In addition to improving and refining our real estate portfolio, we made pivotal improvements to key financial metrics (including per unit metrics), payout ratios, and overall leverage and interest coverage ratios.
Throughout the year, we made significant advances in corporate sustainability and have proven to our Unitholders, tenants and the community that we are committed to reducing our environmental footprint and improving the energy efficiency of our properties. To date, Artis has 18 properties with LEED® certification, 24 properties with a Building Owners and Managers Association (BOMA) Building Environmental Standards (BESt) certification, and 22 properties with Energy Star certification. Corporate sustainability has been, and will continue to be, a point of significant importance to Artis throughout 2015 and beyond.
In addition to Artis' many business accomplishments in 2014, we were further pleased to be named one of Manitoba's Top 25 Employers for a second consecutive year. I would like to thank our employees, management team, and Board of Trustees for their dedication and hard work, which ultimately led to our significant achievements this year. We look forward to delivering another year of exceptional results and continued improvement in 2015.
Armin Martens, P.Eng., M.B.A.
President & C.E.O.
Artis completed an 87,000 square foot retail development on excess land at Linden Ridge Shopping Centre. This development is 100.0% leased to various national tenants.
Artis completed construction of Midtown Business Center, a 185,000 square foot industrial development on land purchased in 2013. This building is 100.0% leased to a single tenant on a long-term lease.
Artis completed construction of Phase II of a nearly 100,000 square foot development at Fourell Business Park. This development is 100.0% leased.
Construction of Centrepoint, a 96,000 square foot office development with ground floor retail, is underway with completion anticipated in 2015. Artis has a 50% ownership interest in Centrepoint.
Construction of 211,000 square feet is underway for Phase I of Park Lucero. This industrial development project is expected to comprise 600,000 square feet when all phases are complete. Artis has a 90% ownership interest in Park Lucero.
Pursuant to Artis' external growth strategy to acquire high quality accretive assets in our established markets, we successfully acquired nine properties in 2014 for aggregate purchase prices of $62.4 million and US$123.5 million, adding 862,622 square feet of leasable area to the portfolio. These strategic acquisitions represented a weighted-average capitalization rate of 6.92%.
We will continue to be prudent and disciplined in executing our acquisition growth strategy, purchasing assets that meet our minimum investment requirements and provide an opportunity to expand in our existing target markets, or potentially, in carefully selected expansion markets.
Artis' entry into the United States in 2010 has proven to be timely – our United States assets have improved the overall quality of our portfolio and have generated substantial returns for our Unitholders. Artis' United States real estate holdings span six states, with primary focus in Minnesota, Arizona, and Colorado, and are responsible for generating approximately 22.9% of Artis' property net operating income in 2014. The United States economy has experienced significant recovery over the last year. With this recovery and the ensuing strengthening of the United States dollar, favourable GDP growth expectations, and rise in employment rates, we anticipate that there is further growth potential to be realized in 2015. In response to the overwhelming success of Artis' assets in the United States, the attractive yields, the conservative tenant credit and lease expiry profiles, and the relatively higher capitalization rates for United States assets compared to Canadian assets, we intend to increase our target weighting in the United States to 30% of total property net operating income and will continue to explore opportunities to acquire high-quality, accretive assets in our primary markets.
Artis' Canadian portfolio represents 77.1% of property net operating income generated in 2014. 84.3% of this property net operating income generated in Canada comes from assets located in Manitoba, Saskatchewan, Alberta, and British Columbia, primarily located in major cities such as Vancouver, Calgary, Edmonton, Saskatoon, Regina, and Winnipeg, as well as other select submarkets. Artis also owns select assets in the Greater Toronto Area and Ottawa.
Despite the recent softening of GDP growth forecasts for Saskatchewan and Alberta resulting from the decline in oil prices, we remain confident in Western Canadian economic fundamentals. While occupancy and rents in these markets (largely the office market) will likely be impacted in the short-to-medium term, we expect that non-resource based economies will be positively impacted by increased household spending and the weaker Canadian dollar will have a positive impact on the manufacturing sector and on Canadian exports in general. While Artis' management will continue to closely monitor these markets, we anticipate that our portfolio diversification across three asset classes, five provinces, and six states will minimize the overall effect on Artis.
In summary, we are confident in the real estate fundamentals in all of our asset classes and markets, and will continue to acquire accretive properties in our key United States and Canadian markets that will improve the diversity, stability and quality of our portfolio.
| Property Name | Acquisition Date | Location | Asset Class | Owned share of GLA | Purchase Price (in 000's) |
|---|---|---|---|---|---|
| Hudson's Bay Centre* | April 15, 2014 | Denver, CO | Office | 86,456 | US$20,750 |
| Estevan Shoppers Mall | May 1, 2014 | Estevan, SK | Retail | 129,732 | $10,100 |
| 601 Tower at Carlson | June 11, 2014 | Minneapolis, MN | Office | 288,458 | US$75,000 |
| Crosstown North Business Center II & VI | June 16, 2014 | Minneapolis, MN | Industrial | 140,856 | US$8,750 |
| Shoppes of St. Vital | September 9, 2014 | Winnipeg, MB | Retail | 24,266 | $12,425 |
| Crowfoot Village | November 14, 2014 | Calgary, AB | Retail | 63,295 | $39,835 |
| Cargill R&D | December 16, 2014 | Minneapolis, MN | Industrial | 106,519 | US$15,700 |
| Union Crossings II | December 31, 2014 | Minneapolis, MN | Retail | 23,040 | US$3,259 |
* Artis acquired a 50% interest in this joint venture
Asset Class Diversification
Geographic Diversification
| % of Gross Revenue | Owned Share of GLA (000's of square feet) |
|
|---|---|---|
MTS Allstream Inc. |
1.9% | 322 |
AMEC Americas Ltd. |
1.8% | 200 |
DirecTV, LLC |
1.3% | 257 |
Shoppers Drug Mart |
1.0% | 173 |
TransAlta Corporation |
1.0% | 336 |
Bellatrix Exploration Ltd. |
1.0% | 94 |
Telvent Canada Ltd. |
1.0% | 98 |
CB Richard Ellis, Inc. |
0.9% | 119 |
TD Canada Trust |
0.9% | 128 |
Stantec Consulting, Ltd. |
0.8% | 98 |
Retail
Office
Industrial
We finish 2014 and begin 2015 with a strong balance sheet and significant liquidity, including $49.8 million of cash-on-hand and two new unsecured revolving term credit facilities totaling $125.0 million, which replaced the former $80.0 million secured line of credit. Additionally, we increased our pool of unencumbered assets to $664.8 million from $227.7 million in 2013 (this includes balances included in Artis’ investments in joint ventures). Artis’ unencumbered assets to senior unsecured debentures ratio was 3.3 times at December 31, 2014.
We are pleased to report that during 2014 our total long-term debt and bank indebtedness to gross book value improved to 48.4% from 49.0%, and secured mortgages and loans to gross book value improved to 41.3% from 45.4%. Concurrently, we reduced our weighted-average effective rate of interest on mortgages and other loans secured by properties to 4.18% from 4.27% last year and improved our interest coverage ratio to 2.80 times for the year, compared to 2.82 times for 2013.
The reward for our disciplined and accretive growth strategy and diligent management of the business and operations is reflected in revenue, which increased 9.5% year-over-year, and property net operating income, which increased 7.7% year-over-year (exclusive of lease termination income). Adjusted funds from operations, a key financial measure for real estate investment trusts in Canada, increased to $1.23 per unit in 2014, which is an increase of 1.7% when compared to 2013, exclusive of lease termination income received from tenants.
Artis accessed the capital markets three times throughout the year, raising $115.1 million of equity and $200.9 million in two public offerings of Series A senior unsecured debentures. The proceeds were primarily used to fund strategic acquisitions, as well as for debt repayment.
In accordance with Artis’ objective to provide a stable, reliable, and tax efficient monthly cash distribution, Artis paid its Unitholders a monthly distribution of $0.09 per unit in 2014 ($1.08 per annum), 84.3% of which was classified as return of capital. Our adjusted funds from operations payout ratio, which is a key financial metric used to determine the sustainability of a real estate investment trust’s distribution payments, improved to 87.8% in 2014 from 89.3% in 2013, again calculated exclusive of lease termination income received from tenants.
In addition to these successes, we are further pleased to report that we have maintained our investment grade credit rating from Dominion Bond Rating Service (“DBRS”) of BBB (low) and Pfd-3 (low). This rating is highly respected in the real estate industry where only select real estate investment trusts and real estate operating companies have earned an investment grade rating. Artis was awarded this rating as a result of its impressive financial profile and credit matrix, along with its fully diversified commercial portfolio by geography and asset class with a majority of investment grade national and government tenants.
Artis is committed to minimizing potential adverse effects on the environment and promoting the use of energy efficient tenant practices in our buildings. We value building energy certification and consider it an asset, both with respect to our existing portfolio and when acquiring new properties. The three major property certifications we pursue are:
Armin Martens
Jim Green
Dennis Wong
Doug McGregor
Dave Johnson
John Mah
Frank Sherlock
Philip Martens
Marie Dunn
Brad Goerzen
Bruce Nimmo
Kim Riley
Armin Martens
Edward Warkentin
Delmore Crewson
Cornelius Martens
Ron Rimer
Patrick Ryan
Victor Thielmann
Wayne Townsend
CST Trust Company
Phone 1.416.682.3860 or 1.800.387.0825
Toll Free throughout North America
Fax: 1.888.249.6189
canstockta.com
BNY Trust Company of Canada
Phone 1.800.254.2826
Fax 1.416.360.1711
bnymellon.com
Deloitte LLP
Aikins, MacAulay & Thorvaldson LLP
Toronto Stock Exchange |
2014 Distributions |
|
| Trust Units | AX.UN | $0.09 per unit per month |
|---|---|---|
| Preferred Units | ||
| Series A | AX.PR.A | $0.328125 per unit per quarter |
| Series C | AX.PR.U | US$0.328125 per unit per quarter |
| Series E | AX.PR.E | $0.296875 per unit per quarter |
| Series G | AX.PR.G | $0.3215 per unit per quarter |
| Convertible Debentures | ||
| Series F | AX.DB.F | |
| Series G | AX.DB.U | |
84.26% of distributions to Unitholders in the taxation year were classified as return of capital. 15.74% was classified as investment income.
Thursday, June 18, 2015
11:00 a.m. C.T.
Main Floor Conference Centre
360 Main Street
Winnipeg, Manitoba
investorinquiries@artisreit.com
Phone: 1.800.941.4751
