Letter to Unitholders

Fellow Unitholders,

The current geopolitical and economic climate has us living in interesting, yet challenging and uncertain times. It also has us feeling both pleased and relieved with what we achieved in 2024 – a year of monumental change for Artis. Despite the significant headwinds we faced, the quality and resilience of Artis’s portfolio enabled us to monetize nearly $1.0 billion of real estate, thereby materially reducing leverage and strengthening our balance sheet. As we reflect on the past year, we cannot overlook the evolving commercial real estate market and key trends and developments that have influenced our strategic decisions and impacted our performance.

Heading into 2024, external factors continued to impact the broader real estate sector, including Artis. Economic uncertainty, speculation about an impending recession, persistent inflation levels, and rising interest rates created a challenging environment to navigate. Interest rates have been a focal point of economic policy and market sentiment over the last several years, and 2024 was no exception. After just over two years of rising interest rates with Canada’s central bank’s overnight lending rate peaking at 5.0%, the Bank of Canada announced the first key rate cut on June 5, 2024. Since then, the key rate has been cut significantly to 2.75%. The correlation between interest rates and inflation has been an important factor in shaping market dynamics, sentiment, and investment strategies. 

The 2024 Canadian commercial real estate market has shown resilience amidst a backdrop of economic challenges and evolving monetary policies. We continue to see a flight to quality within the office sector as companies review their space requirements with the intention of rightsizing to suit their current needs. We believe that the office sector will stabilize over time. Industrial real estate remains robust, while retail markets, particularly open-air service-oriented retail, are steady, as they have historically been. Operationally, our portfolio demonstrated stability throughout 2024. During the year, 454,256 square feet of new leases and 740,424 square feet of renewals commenced, with weighted-average renewal rents negotiated at a 2.6% increase above expiring rents. We ended the year with occupancy (including commitments) of 89.2%.

Mindful of macroeconomic factors and Artis’s debt profile, our primary objective over the last several years has been to strengthen the balance sheet, reduce leverage, enhance liquidity, and grow net asset value (“NAV”) per unit. We focused on the things within our control in order to achieve our fundamental goal of maximizing value for unitholders.

In August 2023, Artis announced that its Board of Trustees (the “Board”) had established a special committee to conduct a strategic review (the “Strategic Review”) to consider and evaluate strategic alternatives that may be available to unlock value for unitholders.

 During the Strategic Review, Artis made substantial progress with its disposition strategy, strengthened its balance sheet, and improved its risk profile related to upcoming debt obligations. In addition to the dispositions noted above, we finalized terms on new, three-year, senior secured credit facilities in an aggregate amount of $520 million, including a $350 million revolving credit facility and a $170 million non-revolving credit facility. With the interest rate environment beginning to improve in the latter half of the year, the Board decided to conclude the Strategic Review in December 2024, believing it was in the best interest of Artis and its unitholders to continue to pursue the existing business strategy.

Ultimately, 2024 was a challenging year full of change and evolution, but also progress. We had many successes in the year and in this annual letter, I will provide an update on our key accomplishments in 2024 and share my expectations and aspirations for the road ahead.

Year In Review

For several years, we have focused on strengthening our balance sheet by reducing leverage and enhancing liquidity. Our ultimate objective is to narrow, and over time eliminate, the gap between the intrinsic value of our units and their trading price.

Below is a summary of our significant capital allocation initiatives in 2024.

Disposition Strategy

In 2024, we sold 15 properties, two parking lots, and a parcel of development land in Canada, and 17 properties in the US for a total of almost $1.0 billion. The sale prices were, on balance, in line with the IFRS fair values most recently reported in the quarter prior to the respective disposition. Also, during the year, we sold our ownership interest in Park Lucero East, an industrial development in the Greater Phoenix Area, Arizona. Artis had a 10% ownership interest and a development management contract in place for this project. The development was highly successful and, upon achieving 100% occupancy, we elected to monetize the asset to pursue other strategic capital allocation initiatives. The structure of the development contract also generated one-time income recorded in 2024. We continue to see healthy demand for quality, well-performing, well-located real estate. The quality of our real estate portfolio, and the ongoing demand for attractive and well-located real estate, is affirmed by the success of our disposition strategy and the pricing we have been able to achieve.

Our disposition strategy is an important component of our overall business plan. The liquidity generated from asset sales provides flexibility to pursue capital allocation initiatives that support our objectives and our commitment to unitholders.

Equity Securities Investments

An equally important aspect of Artis’s value-investing strategy is our investment in equity securities of other publicly traded companies or real estate investment trusts. Specifically, our focus is on investing in public securities of companies that we believe to be undervalued because of a disconnect between the company’s or trust’s trading price and the actual NAV per share or unit that the company or trust is worth. This provides an attractive opportunity to acquire an ownership percentage of companies or trusts that have exceptional properties in attractive, well-performing markets at what is often a significant discount to what it would ultimately cost to buy these properties directly.

Considering the evolving economic environment and the significant impact it has had on the real estate industry, we continuously review our existing equity investments and potential investments. In doing so, we aim to strike the right balance, from a capital allocation standpoint, between achieving our objectives of enhancing liquidity and strengthening our balance sheet and pursuing opportunities that we believe position us for future growth.

At December 31, 2024, our equity securities investments carried an aggregate fair value of $84.8 million, compared to $152.0 million at December 31, 2023. During the year, to achieve our liquidity objectives, we monetized certain securities and crystallized the gains on these securities in order to position Artis to pursue other capital allocation initiatives, including paying down debt and utilizing our normal course issuer bid (“NCIB”). The year-over-year decrease in the total fair value of equity securities is primarily due to the sale of equity securities, partially offset by equity securities purchases and fair value gains.

In 2022, as part of our value-investing strategy, Artis and a consortium of partners acquired and privatized Cominar Real Estate Investment Trust (“Cominar”). At the time, we saw this as an opportunity to acquire quality, well-located real estate for much less than its true value. This investment has been significantly impacted by the interest rate environment over the past three years. We are actively engaged in addressing the structural challenges that the investor group is facing and anticipate resolving this matter in the near term. Until then, we have followed accounting principles to book an expected credit loss that we believe reflects a conservative estimate related to our preferred investment. Since December 2024, there have been discussions with interested parties to acquire either a portion or the entire portfolio of investment properties, with a resolution to settle the outstanding senior and junior preferred units. The settlement may include a discount to the senior and junior preferred units. As more information becomes available, Artis will adjust the allowance in future reporting periods, as appropriate.

Normal Course Issuer Bid

Our NCIB is one of the most effective tools available to enhance unitholder value. During the last four NCIB terms, we acquired the maximum number of common units allowable. With our units continuing to trade on the market significantly below our NAV per unit, utilizing our NCIB is a low-risk use of capital that increases both intrinsic value and our investors’ effective ownership interest in Artis.

Under the most recent NCIB term that expired on December 18, 2024, we acquired 7,021,296 units at a weighted-average price of $7.03 per unit, which is a significant discount to our NAV per unit of $13.75 at December 31, 2024. We also acquired 311,500 Series E preferred units at a weighted-average price of $17.74 per unit and 342,084 Series I units at a weighted-average price of $18.69 per unit.

We expect to continue allocating capital to buy back units using our NCIB throughout the year to further enhance unitholder value.

Real Estate Holdings

In 2024, we sold properties to help achieve our balance sheet and liquidity goals. Through this active disposition exercise, we materially reduced leverage and de-risked Artis’s balance sheet.

Continuing on the path of reducing leverage and enhancing liquidity will provide us with greater flexibility to consider allocating capital to opportunities that we believe provide us with above-average, risk-adjusted returns. From a capital allocation standpoint, we remain committed to maintaining a meaningful allocation of our capital to direct ownership of income-producing real estate assets.

Balance Sheet and Liquidity

We ended 2024 with liquidity of $297.8 million (compared to $164.2 million at December 31, 2023). This included $32.8 million of cash on hand and $265.0 million available to be drawn on the secured revolving term credit facility, which Artis plans on utilizing to repay the $200.0 million Series E debenture maturing in April 2025. During the year, we repaid mortgages in the amount of $20.3 million, repaid mortgages related to property dispositions in the amount of $257.1 million, and received new mortgage financing in the amount of $24.3 million. We ended the year with total debt of $1.1 billion, compared to $1.9 billion at December 31, 2023. With proceeds from property sales used primary to reduce debt, we materially improved debt to gross book value (“GBV”) from 50.9% at December 31, 2023, to 40.2% at December 31, 2024.

At December 31, 2024, NAV per unit was $13.75, compared to $13.96 at December 31, 2023. This change is primarily due to distributions made to unitholders, interest expense, expected credit loss on preferred investments, fair value loss on investment properties, and corporate expenses, partially offset by net operating income, the impact of foreign exchange, units purchased under the NCIB, interest and other income, the fair value gain on financial instruments, and distribution income from equity securities.

The Road Ahead

I am very pleased with the progress we have made over the last year towards reducing leverage and de-risking our balance sheet, given the headwinds we faced and the new factors that have surfaced in 2025 that are creating an uncertain and volatile economic climate. At a macro level, the interest rate environment has improved significantly in recent months as reflected in government bond yields, with the Government of Canada five-year yield now well below 3%. With the tides turning on interest rates and a stronger balance sheet and improved liquidity, we are better positioned to pursue opportunities that we believe will produce above-average, risk-adjusted returns for our unitholders.

Despite our healthier balance sheet and lower leverage, our units continue to trade at a significant discount to NAV. We remain committed to our pursuit of narrowing this gap. Volatility in global markets has returned to levels last seen during the 2020 global pandemic, so we will focus on what is within our control – our business – as further detailed below.

Key Performance Indicators

Our key performance indicators are NAV per unit, adjusted funds from operations (“AFFO”) per unit, AFFO payout ratio, debt to GBV, and distributions per unit. As we have conveyed in the past, given the nature of our strategy, we expect FFO and AFFO to be lumpy from quarter to quarter. In 2025, we are committed to further strengthening our balance sheet and increasing liquidity. This will enable us to pursue opportunities and allocate capital to initiatives that we believe will achieve the highest possible return over time, with an ultimate goal of growing NAV per unit.

Drive Organic Growth

Organic growth continues to be an important component of our strategy. In the near term, our two main objectives for driving organic growth are: 1) managing our existing portfolio to achieve optimal efficiency; and 2) improving our portfolio’s income profile by extracting the maximum value from each individual asset.

Establishing strong relationships with our tenants is critical to the success of Artis’s organic growth goals. Ensuring that our tenants’ space is aligned with and complimentary to their business strategies and overall needs is a high priority. Tenant engagement is fostered through various communication channels, including Artis’s company website and LinkedIn profile. The Artis property management team also utilizes various tools and methods to meet and engage with tenants. In 2024, we conducted our third annual tenant satisfaction survey. The results from this annual survey provide us with valuable feedback and allow us to ensure that we are providing the best possible service to our tenants. We look forward to sharing more information about the survey results in our upcoming ESG Report.

Normal Course Issuer Bid

Effective December 19, 2024, we renewed our NCIB. Under the terms of this bid, we can acquire up to 4,975,917 common units, 291,560 Series E preferred units, and 421,775 Series I preferred units. On December 19, 2024, we entered into an Automatic Purchase Plan, allowing us to purchase common and preferred units under the NCIB at times when we would otherwise not be in the market due to company-imposed trading blackout periods. Our NCIB continues to be one of the most effective tools available to enhance unitholder value. With our units continuing to trade on the market at a price that is significantly below our NAV per unit, utilizing our NCIB is beneficial to our unitholders and is a low-risk use of capital. We expect to continue using our NCIB to buy back our units, so long as a discount to NAV of this magnitude persists.

Environmental, Social and Governance

Artis is committed to conducting its business in a sustainable manner, with a focus on continuous and measurable improvement and transparency in all areas of its environmental, social, and governance (“ESG”) performance. In addition to operational efficiencies that can be achieved by implementing sustainability initiatives, analysis of environmental risks (including both physical and transitional climate risks) allows us to be proactive in our allocation of capital, with a focus on ensuring our properties are best positioned to produce long-term sustainable growth for our unitholders. Our commitment to sustainability extends to all aspects of overall ESG. Across our organization, we are committed to making ESG a focal point and establishing a company-wide ESG-minded culture at Artis.

Over the last several years we have made significant progress towards our goal of ensuring Artis’s sustainability program and initiatives are aligned with best practices, and 2024 was no exception. We are pleased with the progress we have made so far and we acknowledge that there will always be opportunities to improve in this ever-evolving area. We look forward to providing a more fulsome update on the progress made over the last year in our 2024 ESG Report, to be published in the coming months.

Final Thoughts and Our Annual General Meeting

Needless to say, 2024 was a very busy and productive year at Artis. It was highlighted by the successful completion of a very ambitious disposition and debt reduction plan that we established for the year and the end of the “higher-for-longer” interest rate stance taken by the Bank of Canada. Last year, we said that success in executing our disposition plan will provide greater flexibility and will put us in a position where we can move from defence to offence. I believe that is where we are today as we approach the end of the first quarter of 2025.

The Board and management team understand that Artis’s unit price continues to trade at a significant discount to its NAV per unit. None of us are pleased with this and we remain committed to considering and exploring all options and opportunities available to address this issue. I believe the positive evolution in the interest rate environment will be a catalyst for M&A activity to pick up in the public real estate space. Lower interest rates typically translate into lower cap rates on the transaction front, yet we see public REITs and real estate operating companies (“REOCs”) continuing to trade at significant discounts. This will inevitably either lead to a correction in the public markets or serve as serious motivation to private capital allocators to arbitrage the massive disconnect by pursuing privatization of public entities. I firmly believe this is not an “if”, but a “when”. Nobody can predict the exact timing, but I believe we will see this materialize and, when it does, the unitholders/shareholders of any REIT/REOC that becomes the target of a privatization exercise will benefit from this. In the meantime, they will enjoy the distribution/dividend they receive and will therefore be in the always enviable position of getting paid while they wait! As quoted in my letter last year, Warren Buffett once said that “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. Today, the REIT/REOC universe is filled with “wonderful” REITs/REOCs. Even at what Warren Buffett refers to as a “fair price”, these companies would sell for meaningful premiums to their current trading prices. As I said last year, there is no guarantee this will happen; however, I do believe that the longer the disconnect in trading values to NAV persists, the greater the likelihood we will begin to see “wonderful” REITs/REOCs getting cherry-picked through “go private” exercises. Lower interest rates combined with the substantial dry powder currently on the sidelines and ready to go to work will make these privatizations almost a certainty, in my view.

When we announced a new vision and strategy for Artis four years ago, some people were excited about our unconventional plan while others were hesitant, if not outright opposed. We knew we would have to earn people’s trust through successful execution and results. External factors have made the past three years very difficult, but history has demonstrated that there will always be ebbs and flows, periods of time when the economy provides tailwinds for our business and periods when it creates headwinds. We will continue to focus on the big picture. This means focusing on the value of our units, not the price of our units. We are confident that with the right plan and its effective execution, we will be able to narrow the gap between the value and price of our units, and our owners will be rewarded in the long term. We will continue to stay true to the commitment we presented to our owners in March 2021. This will require patience, a fundamental criteria of value investing. We know this patience is not easy to maintain, but I believe we will see the benefit on the other side as interest rates continue to decrease and real estate values begin to increase.

Most importantly, thank you for trusting us with your capital. While we still have a lot of work ahead of us, we look forward to a successful 2025 with even greater determination and resolve to work hard for our unitholders and to close the gap between Artis’s trading price and the intrinsic value of our units.

In closing, on behalf of the Board and management, I would like to extend an invitation to all our stakeholders to join us at our next annual general meeting, to be held at the Hilton Toronto hotel in downtown Toronto, Ontario, at 2:00 pm ET on May 27, 2025. I look forward to seeing you there.

Samir A. Manji

President and Chief Executive Officer