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Artis Real Estate Investment Trust2017 WINNIPEG HEAD OFFICE 600 - 220 Portage Avenue Winnipeg, Manitoba R3C 0A5 T 204.947.1250 F 204.947.0453 www.artisreit.com AX.UN - TSX CALGARY EDMONTON TORONTO PHOENIX MADISON MINNEAPOLIS Suite 660, 1509 Centre Street SW Calgary, Alberta T2G 2E6 T 403.705.3535 F 403.444.5053 Suite 101, 13245-140th Avenue NW Edmonton, Alberta T6V 0E4 T 780.702.3066 F 780.702.3070 Suite 2000, 415 Yonge Street Toronto, Ontario M5B 2E7 T 647.955.3755 F 647.977.9072 Suite 280, 16220 N. Scottsdale Road Scottsdale, Arizona 85254 T 480.483.4111 F 480.556.9987 Suite 1600, 708 Heartland Trail Madison, Wisconsin 53717 T 608.830.6300 F 608.662.0500 Suite 1220, 120 South 6th Street Minneapolis, MinNesota 55402 T 612.843.4905 F 612.217.6409 Annual REport Properties Of Success is one of the Artis largest diversified commercial real estate investment trusts in Canada. Since 2004, Artis has executed an aggressive but disciplined growth strategy, building a portfolio of office, retail and industrial properties in Canada and select markets in the Unites States (U.S.). Artis’ primary objective is to provide a stable, reliable and tax-efficient monthly cash distribution, as well as long-term appreciation in the value of Artis’ units through the accumulation and effective management of a quality commercial real estate portfolio. Artis meets this objective through strategic asset ownership, a disciplined growth strategy and prudent financial management. DISCLAIMER: All figures are presented on a proportionate share basis unless otherwise noted. The information in this Annual Report should be read in conjunction with the REIT’s audited annual consolidated financial statements and management’s discussion and analysis for the years ended December 31, 2017, and 2016. These documents are available on SEDAR at www.sedar.com or on Artis’ website at www.artisreit.com. On the cover: 220 Portage Avenue, Winnipeg, MB 360 Main Street, Winnipeg, MB Bell MTS Building I & II, Winnipeg, MB 2017 WINNIPEG HEAD OFFICE 600 - 220 Portage Avenue Winnipeg, Manitoba R3C 0A5 T 204.947.1250 F 204.947.0453 www.artisreit.com AX.UN - TSX CALGARY EDMONTON TORONTO PHOENIX MADISON MINNEAPOLIS Suite 660, 1509 Centre Street SW Calgary, Alberta T2G 2E6 T 403.705.3535 F 403.444.5053 Suite 101, 13245-140th Avenue NW Edmonton, Alberta T6V 0E4 T 780.702.3066 F 780.702.3070 Suite 2000, 415 Yonge Street Toronto, Ontario M5B 2E7 T 647.955.3755 F 647.977.9072 Suite 280, 16220 N. Scottsdale Road Scottsdale, Arizona 85254 T 480.483.4111 F 480.556.9987 Suite 1600, 708 Heartland Trail Madison, Wisconsin 53717 T 608.830.6300 F 608.662.0500 Suite 1220, 120 South 6th Street Minneapolis, MinNesota 55402 T 612.843.4905 F 612.217.6409 Annual REport Properties Of Success is one of the Artis largest diversified commercial real estate investment trusts in Canada. Since 2004, Artis has executed an aggressive but disciplined growth strategy, building a portfolio of office, retail and industrial properties in Canada and select markets in the Unites States (U.S.). Artis’ primary objective is to provide a stable, reliable and tax-efficient monthly cash distribution, as well as long-term appreciation in the value of Artis’ units through the accumulation and effective management of a quality commercial real estate portfolio. Artis meets this objective through strategic asset ownership, a disciplined growth strategy and prudent financial management. DISCLAIMER: All figures are presented on a proportionate share basis unless otherwise noted. The information in this Annual Report should be read in conjunction with the REIT’s audited annual consolidated financial statements and management’s discussion and analysis for the years ended December 31, 2017, and 2016. These documents are available on SEDAR at www.sedar.com or on Artis’ website at www.artisreit.com. On the cover: 220 Portage Avenue, Winnipeg, MB 360 Main Street, Winnipeg, MB Bell MTS Building I & II, Winnipeg, MB Financial Highlights (In thousands, except per unit amounts) YEAR ENDED DECEMBER 31 Revenue Property Net Operating Income (Property NOI) 2017 2016 2015 $542,929 $572,515 $552,502 $325,645 $348,714 $341,952 Funds from Operations (FFO) $215,360 $225,876 $215,648 FFO per Unit FFO Payout Ratio Distributions per Unit Gross Book Value (GBV) Secured Mortgages and Loans to GBV Total Long-Term Debt and Credit facilities to GBV Investor Highlights $1.43 75.5% $1.08 $1.55 69.7% $1.08 $1.53 70.6% $1.08 $5,386,329 $5,668,337 $5,653,827 31.9% 40.6% 49.3% 51.0% 41.2% 52.4% CANADIAN COMMERCIAL REIT WITH 237 PROPERTIES TOTALLING 24.8 MILLION SQUARE FEET OF LEASABLE AREA TRUST UNITS EARN A STABLE, RELIABLE, MONTHLY DISTRIBUTION OF $1.08 PER UNIT PER ANNUM PREFERRED UNITS EARN A STABLE QUARTERLY DISTRIBUTION DIVERSIFIED BY ASSET CLASS INCLUDING OFFICE, RETAIL AND INDUSTRIAL PROPERTIES, AND GEOGRAPHICALLY IN SELECT CANADIAN AND U.S. MARKETS BBB (LOW) & PFD-3 (LOW) INVESTMENT GRADE CREDIT RATING FROM DBRS Revenue, Property NOI and FFO were impacted by acquisitions, dispositions, completed (re)developments, lease termination income and the impact of foreign exchange. The 2016 and 2015 FFO comparative information has been revised to reflect the impact of the new FFO guidelines issued by REALpac in February 2017. Financial Highlights and Growth Highlights are in Canadian dollars and are inclusive of Artis’ proportionate share of joint venture arrangements with the exception of Distributions per Unit. Growth Highlights (In millions) Funds from Operations $215.4 Property NOI $325.6 2017 2016 2015 .6 $225.9 $215 $ 215.4 2017 2016 2015 $342.0 $348.7 $325.6 Revenue $542.9 Total Assets $5,382.0 2017 2016 2015 .5 2 7 5 5 $ . 2 5 $5 9 . 2 4 5 $ 2017 2016 2015 4.9 6 6 5 3 . 1 5 0 . 2 8 3 $ 6 5 $ 5 $ Corporate Information Investor Relations investorinquiries@artisreit.com Phone: 1.800.941.4751 Transfer Agent AST Trust Company Phone: 1.416.682.3860 or 1.800.387.0825 Toll Free throughout North America Fax 1.888.249.6189 astfinancial.com/ca-en Auditors Deloitte LLP Indenture Trustee BNY Trust Company of Canada Phone 1.800.254.2826 Fax 1.416.360.1711 www.bnymellon.com Legal Counsel MLT Aikins LLP Toronto Stock Exchange Listings Trust Units AX.UN 2017 Distributions $0.09 per unit per month Preferred Units AX.PR.A AX.PR.E AX.PR.G AX.PR.I Series A $0.353875 per unit per quarter Series E $0.296875 per unit per quarter Series G $0.3125 per unit per quarter $0.3750 per unit per quarter Series I ANNUAL GENERAL MEETING Thursday, June 14, 2018, at 11:00 a.m. C.T. Del Crewson Conference Centre, 360 Main Street, Winnipeg, Manitoba Hudson’s Bay Centre, DENVER, CO Financial Highlights (In thousands, except per unit amounts) YEAR ENDED DECEMBER 31 Revenue Property Net Operating Income (Property NOI) 2017 2016 2015 $542,929 $572,515 $552,502 $325,645 $348,714 $341,952 Funds from Operations (FFO) $215,360 $225,876 $215,648 FFO per Unit FFO Payout Ratio Distributions per Unit Gross Book Value (GBV) Secured Mortgages and Loans to GBV Total Long-Term Debt and Credit facilities to GBV Investor Highlights $1.43 75.5% $1.08 $1.55 69.7% $1.08 $1.53 70.6% $1.08 $5,386,329 $5,668,337 $5,653,827 31.9% 40.6% 49.3% 51.0% 41.2% 52.4% CANADIAN COMMERCIAL REIT WITH 237 PROPERTIES TOTALLING 24.8 MILLION SQUARE FEET OF LEASABLE AREA TRUST UNITS EARN A STABLE, RELIABLE, MONTHLY DISTRIBUTION OF $1.08 PER UNIT PER ANNUM PREFERRED UNITS EARN A STABLE QUARTERLY DISTRIBUTION DIVERSIFIED BY ASSET CLASS INCLUDING OFFICE, RETAIL AND INDUSTRIAL PROPERTIES, AND GEOGRAPHICALLY IN SELECT CANADIAN AND U.S. MARKETS BBB (LOW) & PFD-3 (LOW) INVESTMENT GRADE CREDIT RATING FROM DBRS Revenue, Property NOI and FFO were impacted by acquisitions, dispositions, completed (re)developments, lease termination income and the impact of foreign exchange. The 2016 and 2015 FFO comparative information has been revised to reflect the impact of the new FFO guidelines issued by REALpac in February 2017. Financial Highlights and Growth Highlights are in Canadian dollars and are inclusive of Artis’ proportionate share of joint venture arrangements with the exception of Distributions per Unit. Growth Highlights (In millions) Funds from Operations $215.4 Property NOI $325.6 2017 2016 2015 .6 $225.9 $215 $ 215.4 2017 2016 2015 $342.0 $348.7 $325.6 Revenue $542.9 Total Assets $5,382.0 2017 2016 2015 .5 2 7 5 5 $ . 2 5 $5 9 . 2 4 5 $ 2017 2016 2015 4.9 6 6 5 3 . 1 5 0 . 2 8 3 $ 6 5 $ 5 $ Corporate Information Investor Relations investorinquiries@artisreit.com Phone: 1.800.941.4751 Transfer Agent AST Trust Company Phone: 1.416.682.3860 or 1.800.387.0825 Toll Free throughout North America Fax 1.888.249.6189 astfinancial.com/ca-en Auditors Deloitte LLP Indenture Trustee BNY Trust Company of Canada Phone 1.800.254.2826 Fax 1.416.360.1711 www.bnymellon.com Legal Counsel MLT Aikins LLP Toronto Stock Exchange Listings Trust Units AX.UN 2017 Distributions $0.09 per unit per month Preferred Units AX.PR.A AX.PR.E AX.PR.G AX.PR.I Series A $0.353875 per unit per quarter Series E $0.296875 per unit per quarter Series G $0.3125 per unit per quarter $0.3750 per unit per quarter Series I ANNUAL GENERAL MEETING Thursday, June 14, 2018, at 11:00 a.m. C.T. Del Crewson Conference Centre, 360 Main Street, Winnipeg, Manitoba Hudson’s Bay Centre, DENVER, CO 1 Fellow Unitholders: Our 2017 results are reflective of another year of steady improvement for Artis. During the year, we recycled capital to improve the overall quality of our portfolio, efficiently managed and extracted maximum value from our current assets and improved areas of our balance sheet and certain key financial metrics. These improvements, highlighted in the accompanying annual report, are the result of the hard work of our experienced and dedicated team of employees. Our 2017 results demonstrate our ability to effectively execute our core strategies to produce strong and consistent results for our unitholders. The reported decrease in revenue year over year, which impacted our funds from operations, can be largely attributed to property dispositions in 2016 and 2017 and lease termination income received in the previous year. Overall, we continue make consistent improvements to key financial metrics while practicing patience and diligence to ensure that each financial decision is in the best long-term interest of Artis and our unitholders. In addition to our solid performance and numerous accomplishments in 2017, management and our Board of Trustees reviewed and made Our capital recycling program in 2017 has been a success, creating value significant improvements to our governance and compensation policies for our unitholders while improving the calibre of our real estate portfolio. to better align with industry best practices. These new policies focus on During the year, we sold $353.1 million and US$70.6 million of real estate the importance of gender diversity on the Board and in the workplace, at a weighted-average capitalization rate of 5.8%, while acquiring US$66.9 board renewal and committee changes to encourage new and objective million of assets at a weighted-average capitalization rate of 6.4%, as well perspectives, and various changes to compensation policies including the as the remaining interest in a new development project in the U.S. and a future addition of say on pay and performance units as part of executive parkade adjacent to an owned office building in Canada. In addition to compensation. We trust that our unitholders will be pleased with these the acquisition of this newer generation real estate, funds from asset sales improvements and we remain committed to the ongoing review and were invested in new development projects and the redevelopment of core improvement of our governance and compensation policies in the future. assets in our portfolio. Strategically planned new development projects We are pleased to highlight that our units provided a total return of continue to present a compelling opportunity for us to develop and own approximately 20 percent in 2017. Our operational and financial results new generation real estate that provides a higher return than that from continue to demonstrate the advantage of being a diversified REIT, both by acquiring an existing property. asset class and geography. Thanks to the positive changes we made to our During the year, we entered into two new five-year unsecured non- portfolio over the year, it is more aligned today than ever before with our revolving term credit facilities in the aggregate amount of $300 million. long-term strategy. With this advantage, the benefit of an experienced and We are pleased to report that with the use of these credit facilities and dedicated management team and a strong balance sheet, we look forward proceeds from dispositions, our total long-term debt and credit facilities to delivering another year of continuous improvement in 2018. to gross book value decreased to 49.3% and secured mortgages and loans to gross book value decreased to 31.9%. Concurrently, our unencumbered asset pool reached $1.7 billion, the highest value in the REIT’s history. Armin Martens, P.Eng., MBA President & C.E.O. 2017 ARTIS REIT ANNUAL REPORTMessage from the President & Chief Executive Officer 2 Portfolio diversification, both by geography and by asset class, is a core strategy of the REIT. Diversification provides stability and protection from risks associated with changes in economic conditions of a particular market or industry. In 2017, Artis’ portfolio continued to show impressive occupancy levels, which remained over 90% at all times throughout the year. Artis concluded 2017 with a well-diversified portfolio of 237 properties, the U.S. ensures the REIT’s high standard of real estate performance is totalling 24.8 million square feet of gross leasable area. Artis’ properties achieved. In 2017, Artis added a seventh property management office are strategically located in two countries, across five Canadian provinces in Minneapolis, Minnesota. Artis now has offices in Winnipeg, Calgary, and six U.S. states. Canadian assets represent 57.5% of the portfolio by Edmonton, Toronto, Phoenix, Madison and Minneapolis. Across all gross leasable area, while U.S. assets represent 42.5% of the portfolio by offices, an impressive 3.6 million square feet of lease transactions gross leasable area. Artis’ industrial portfolio represents its largest asset (including new leases and renewals) were completed during the year. class by gross leasable area, followed by office and then retail. Since Artis acquired its first U.S. property eight years ago, U.S. assets have become an integral part of the REIT’s diversification strategy. Artis’ U.S. assets have enhanced the diversification and overall quality of the portfolio and provided a natural hedge against the recent volatility in the Canadian marketplace. In 2016, Artis’ Board of Trustees revised its U.S. target weighing from 35% to 50% of total property net operating income. Artis continues to benefit from a strong U.S. currency and capital appreciation Portfolio by Gross Leasable Area By Geographical Region Looking ahead to 2018, a manageable 12.2% of Artis’ gross leasable area expires, 32.7% of which was renewed or committed to new leases at the end of 2017. Artis’ property managers continue to build relationships and work with tenants to ensure their space is aligned with their business strategy and overall needs. Successful tenants promote tenant retention, an essential factor in effective real estate management. Corporate sustainability is a core value at Artis and is another factor by which to measure the effectiveness of the REIT’s property and asset management. As one of Canada’s largest and most prominent landlords, it is a responsibility as both of its U.S. assets. During 2017, the REIT Minnesota (23.1%) Wisconsin (6.8%) an employer and a member of the community to sold 23 properties in total, seven of which Alberta (16.5%) Saskatchewan (5.9%) set a high standard in sustainable practices and were non-core U.S. properties, and used a Ontario (16%) U.S. Other (5.3%) demonstrate the importance of environmental care portion of the funds to acquire four newer generation U.S. assets in target markets. Management continues to work diligently on Manitoba (15.7%) British Columbia (3.4%) Arizona (7.3%) and protection. At Artis, a corporate culture exists wherein sustainability is valued and prioritized. Investment in, development and management U.S. development projects, which provide an opportunity to own new of buildings in an environmentally prudent and resource efficient generation real estate at a return that is higher than that from acquiring manner is a high priority. In 2017, Artis proudly published its third an existing property. annual Sustainability Report, demonstrating an ongoing commitment Effective asset and property management is key to achieving consistent performance and extracting maximum value from all assets in the portfolio. Artis’ experienced management team, with extensive knowledge of real estate, property management, tenant relations and leasing in Canada and to the accountability and transparency of its sustainability program and reinforcing the REIT’s dedication to continuous improvement in this field. 2017 ARTIS REIT ANNUAL REPORTReal estate performance 3 3 169 inverness Drive West phase 1, Denver, CO Annualized total unit returns 1 year 3 year 5 year 25% 20% 15% 10% 5% 0% 10% 8% 6% 4% 2% 0% 10% 8% 6% 4% 2% 0% Artis REIT S&P/TSX Capped REIT Index Artis REIT S&P/TSX Capped REIT Index Artis REIT S&P/TSX Capped REIT Index 2017 ARTIS REIT ANNUAL REPORT 4 superstition springs, MESA, AZ roosevelt commons, Tempe, AZ Rocky Mountain Business center, Aurora, co Property Acquisitions Location Asset Class Purchase/Sale Price U.S. Industrial Portfolio (3 Properties) Greater Denver Area, CO & Greater Phoenix Area, AZ Industrial US$40.0 million Clearwater Creek Distribution Center Twin Cities Area, MN Industrial US$26.9 million Dispositions Airdrie Flex Industrial Airdrie, AB Industrial $5.4 million Southview Centre Medicine Hat, AB Westbank Hub Shopping Centre and Westbank Hub Centre North (1) Westbank, BC Retail Retail Office Retail Retail $28.1 million $80.1 million $37.5 million $7.0 million $34.0 million Calgary, AB Edson, AB Calgary, AB Edmonton, AB Industrial $13.5 million Greater Toronto Area, ON Industrial $5.4 million Ford Tower and Alpine Building Edson Shoppers Horizon Heights Sherwood Centre 6075 Kestrel Road Quarry Park Portfolio (3 Properties) 488 Albert Street Calgary, AB Nanaimo, BC Office Office $98.0 million $8.0 million Twin Cities Industrial Portfolio (7 Properties) Twin Cities Area, MN Industrial US$70.6 million Millennium Centre 12 Indell Lane (1)Artis disposed of its 75% interest in these properties. Red Deer, AB Office $33.0 million Greater Toronto Area, ON Industrial $3.1 million 2017 ARTIS REIT ANNUAL REPORT 5 meeting the objective Artis’ primary objective is to provide a stable, reliable and tax-efficient monthly cash distribution, as well as long-term appreciation in the value of Artis’ units through the accumulation and effective management of a quality portfolio of commercial real estate. Artis implements three core strategies to meet this objective: Strategic Asset Ownership • Disciplined Growth Prudent Financial Management Strategic Asset Ownership Artis’ portfolio consists of quality office, retail and industrial real estate In the second transaction, Artis acquired a 402,522 square foot single- that is strategically and diversely located in select primary and secondary tenant cross-dock industrial property located in the Twin Cities Area, markets in Canada and the U.S. To maximize the potential of its Minnesota. The building is fully leased for a 15-year term with annual portfolio, management conducts ongoing analysis of relevant economic rent escalations of 2.0%. The weighted-average capitalization rate of these fundamentals in its target markets and the performance of its assets, two acquisitions was 6.4%. while continuously seeking opportunities to make accretive acquisitions, develop new generation real estate and dispose of assets that are not aligned with its long-term strategy. In addition to the above property acquisitions, Artis purchased the remaining 10% interested in Park Lucero I, III and IV located in the Greater Phoenix Area, Arizona, and a parkade adjacent to an owned Capitalization rates have compressed in many of Artis’ target markets office building in Winnipeg, Manitoba. and there has been a cautious tone in the real estate industry towards raising capital through the issuance of new trust units; therefore, Dispositions Artis has adapted and focused on capital recycling and other growth opportunities. Strategic recycling of capital creates an opportunity to make accretive acquisitions or invest in high-yield development projects by using existing resources along with funds that are generated from selling non-core assets at attractive capitalization rates. During 2017, Artis disposed of 23 non-core properties, which included 16 properties in Canada and seven properties in the U.S. The 16 Canadian asset sales during the year included seven office buildings, five retail assets, and four industrial properties. Of these 16 assets, 11 are located in Alberta, three are in British Columbia and two During the year, Artis disposed of 23 properties in Canada and the U.S. are in Ontario. The aggregate sale price for these properties was $353.1 for aggregate sale prices of $353.1 million and US$70.6 million. Artis million, representing a weighted-average capitalization rate of 5.8%. redeployed a portion of the proceeds from these sales to the acquisition The seven U.S. assets sold in 2017 were sold as a portfolio. All seven were of four assets and the remaining 10% interest in a development project industrial properties located in the Twin Cities Area, Minnesota, and in the U.S. for an aggregate purchase price of US$69.1 million. Artis also were non-core assets that were not aligned with Artis’ long-term strategy. acquired a parkade adjacent to an owned office building in Canada for The portfolio was sold for US$70.6 million, representing a capitalization $13.9 million. Acquisitions In 2017, Artis acquired four industrial properties in the U.S. by way of two transactions. Pursuant to the first transaction, Artis acquired a portfolio of three multi-tenant industrial properties (nine buildings in total), two of which are located in the Greater Phoenix Area, Arizona, and one which is located in the Greater Denver Area, Colorado. The portfolio totals 377,956 square feet of gross leasable area and is 92.5% occupied. rate of 6.0%. These 2017 transactions demonstrate management’s ability to prudently recycle capital by disposing of non-core assets at attractive capitalization rates and strategically redeploy the proceeds to high-quality, accretive acquisitions in the REIT’s target markets. The calibre of real estate acquired in 2017 improves the diversity, stability and quality of Artis’ overall portfolio. Management is confident in the real estate fundamentals in all of Artis’ asset classes and markets and will continue to evaluate and pursue opportunities for continued growth in its target markets. 2017 ARTIS REIT ANNUAL REPORT 6 Disciplined Growth Organic Growth The objective of Artis’ organic growth strategy is to identify and extract the maximum value from each asset in the portfolio. The key to achieving this objective is efficient and effective management of assets, maintaining high occupancy levels, capitalizing on increases in renewal rents and realizing the gain between in-place or expiring rental rates and market rental rates through leasing activities. During 2017, Artis’ management team successfully renewed 2.4 million square feet of gross leasable area, reporting a weighted-average increase in renewal rents of 2.3%. This demonstrates an exceptional rate of organic growth. In addition to this impressive increase in renewal rents, Artis reported that stabilized same property net operating income before the impact of foreign exchange (which excludes the Calgary office portfolio and properties planned for disposition or repurposing), increased by 2.0% year-over-year (or relatively consistent year-over-year at -0.3% when calculated in Canadian dollars and inclusive of the Calgary office portfolio and properties planned for disposition or repurposing). Management estimates that, exclusive of the Calgary office portfolio, market rents are 1.9% above in-place rents across the portfolio (or 1.3% above in- place rents when calculated inclusive of the Calgary office portfolio). These metrics are indicative of potential revenue growth to be gained from future leasing activities. Value Creation Over the last several years, value creation has been an important component of Artis’ growth strategy. With capitalization rate compression in many of Artis’ target markets and, thus, fewer viable opportunities to acquire real estate, value creation through development and redevelopment projects provides a compelling opportunity to achieve growth at attractive yields. New development projects also increase the overall quality and leasable area of Artis’ portfolio, which correspondingly increases revenue potential and asset value. Value creation projects improve the aesthetics of Artis’ assets, while simultaneously increasing the energy efficiency and revenue growth potential of its buildings. Artis completed numerous new development projects in 2017, including Millwright Building, Park Lucero Phase II, Park Lucero Phase III, 175 Westcreek Boulevard and Park 8Ninety Phase I. Millwright Building is an office development project located in Minneapolis, Minnesota. This project, a new best-in-class mid-rise office building, is located in close proximity to the new US Bank Stadium, home of the Minnesota Vikings, in the Downtown East office market. Artis has an 80% ownership interest in this project, which comprises approximately 174,000 square feet of leasable area. Millwright Building is 35.0% leased and construction was substantially complete in the first quarter of 2017. Park Lucero Phase II and III are part of a four-phase industrial development on a 48-acre parcel of land in the Greater Phoenix Area, Arizona. Phase I of this project was substantially complete in 2015 and consists of three state-of-the-art industrial buildings totalling approximately 208,000 Park Lucero phase II, phoenix AZ 175 Westcreek boulevard, toronto, ON 169 inverness drive west phase 1, denver, co 2017 ARTIS REIT ANNUAL REPORT 7 square feet of leasable area. Construction of Phase II and Phase III, comprising approximately 132,000 and 147,000 square feet of leasable area, respectively, was substantially complete during the first half of 2017. Phases I, II and III are fully leased, leaving one slab-ready pad at the site for future development. Once complete, all four phases of Park Lucero are expected to total approximately 580,000 square feet of leasable area. In 2017, Artis acquired the remaining 10% interest in Park Lucero Phases I, III and IV and now owns 100% of these three phases. Artis owns 90% of Phase II. millwright building, minneapolis, mn 175 Westcreek Boulevard is a new industrial development in the Greater Toronto Area, Ontario, on 10 acres of excess land which was acquired by Artis in 2011. Construction of a 130,000 square foot multi- tenant building was substantially complete in the first quarter of 2017. The property is fully leased to two tenants pursuant to leases that commenced in 2017. Park 8Ninety Phase I is part of a multi-phase development project on a 127-acre parcel of land located in the southwest industrial submarket in Houston, Texas. Construction of Phase I of this project was substantially complete in the second quarter of 2017, comprising four state-of-the-art industrial buildings totalling approximately 440,000 square feet of leasable area. Artis has a 95% ownership interest in Park 8Ninety Phase I. 169 Inverness Drive West Phase I is an office development in the Greater Denver Area, Colorado, situated on a 10-acre parcel of land adjacent to the AT&T Building, an office building acquired by Artis in 2013. Phase I of this multi-phase project includes a Class A office building totalling approximately 120,000 square feet of leasable area. The site is located on the I-25 with immediate connectivity to the light rail transit system. Construction of 169 Inverness Drive West Phase I is expected to be complete in early 2018. In addition to the above development projects, Artis has numerous projects at various stages of planning in its development pipeline. These value creation projects that are in early planning stages include a commercial/residential and a retail densification project in Winnipeg, Manitoba, two residential densification projects in the Greater Toronto Area, Ontario, and a residential development in Calgary, Alberta. Artis also has numerous new development opportunities in its pipeline for future development. More information about these projects will be released as progress is made. Value creation can also be achieved through the redevelopment of existing assets within the portfolio, by capitalizing on opportunities to realize the highest and best use for a property or by modernization to attract long-term credible tenants and remain competitive in the marketplace. Artis conducts ongoing strategic review of each asset in its portfolio to identify such opportunities. Artis had one property held for redevelopment at the end of 2017; Sierra Place, an office asset in Calgary, Alberta, that is undergoing an extensive redevelopment to be converted from an office to a residential property. Sierra Place, which is conveniently located downtown on a light rail transit line and provides access to the city’s Plus 15 walkway system, will have approximately 100 suites upon completion of the redevelopment. Construction is anticipated to begin in early 2018. The success of Artis’ redevelopment projects to date demonstrates the value that can be created from reinvesting in and improving the calibre of assets in Artis’ existing portfolio. park 8ninety phase 1, houston, TX park lucero phase III, phoenix, az 7 2017 ARTIS REIT ANNUAL REPORT 8 8 A Canadian commercial REIT with 237 properties totalling 24.8 million square feet of gross leasable area, diversified by asset class including office, retail and industrial properties and geographically in select Canadian and U.S. markets. Top Ten Tenants by percentage of gross revenue in Canadian and US dollars 2.2% 1.7% 1.6% 1.5% 1.3% 1.1% 1.1% 1.0% 1.0% 0.9% 2017 ARTIS REIT ANNUAL REPORT 2017 ARTIS REIT ANNUAL REPORTMetro VancouverKelownaCranbrookNanaimoportfolio map 9 Map Legend Office Retail Industrial 2017 ARTIS REIT ANNUAL REPORT CranbrookEdmontonCalgaryWinnipegMinneapolisTorontoDenverPhoenixHoustonFortMcMurrayGrandePrairieRed DeerMedicine HatSaskatoonReginaMoose JawEstevanGTAOttawaMadison 10 10 Park Lucero Greater Phoenix area, arizona Park Lucero is a four-phase Class A industrial development project located along the South Loop 202 Freeway in the Greater Phoenix Area, Arizona. Artis acquired a 90% interest in this project in 2014, and the remaining 10% interest in Phases I, III and IV in 2017. Once complete this multi-phase project, located on approximately 48 acres of land, is expected to comprise six buildings totalling approximately 580,000 square feet of leasable area. The buildings feature 24 to 32 foot clear ceiling heights and dock high, truckwell and grade level loading options. Park Lucero is one of the newest and largest developments of its kind in the southeast valley. In 2017, Artis announced that it entered into a new long-term lease of 12 years at Park Lucero Phase II. This represents the fifth fully-leased building at Park Lucero, with one slab-ready pad remaining for future development. Phase I, II and III totalling approximately 490,000 square feet of leasable area are fully leased, while Phase IV is yet to be developed. As of the end of 2017, Artis had invested US$51.4 million in this project, generating stabilized net operating income of US$3.8 million, which represents a 7.3% yield, with anticipated value creation of US$13.5 million. 2017 ARTIS REIT ANNUAL REPORT 11 Prudent Financial Management During 2017, Artis delivered a solid overall performance and made several improvements to key financial metrics. The REIT entered into two new five-year unsecured non-revolving term credit facilities in the aggregate amount of $300.0 million, to be utilized for general corporate and working capital purposes, property acquisitions and development financing. At year end, Artis had a healthy balance sheet and ample liquidity, including $42.8 million of cash on hand and unsecured term credit facilities totalling $800.0 million, of which $61.6 million was available. Additionally, Artis substantially increased its pool of unencumbered assets, totalling 82 properties and seven parcels of development land and representing a fair value of $1.7 billion. At December 31, 2017, Artis’ unencumbered assets to unsecured debt ratio was 1.8 times. Artis’ growth strategy and effective financial and operational management continues to be driven by the REIT’s capital recycling initiatives. Revenue in 2017 was $542.9 million, compared to $572.5 million in 2016, and property net operating income in 2017 was $325.6 PORTFOLIO BY NET OPERATING INCOME (Q4-17) By Geographical Region million, compared to $348.7 million in 2016. The decrease was primarily Alberta (23.1%) Arizona (8.0%) driven by the dispositions completed in 2016 and 2017. In the real estate Minnesota (17.6%) Saskatchewan (6.7%) Manitoba (14.3%) Ontario (12.2%) Wisconsin (9.1%) U.S. Other (4.6%) British Columbia (4.4%) In addition to these achievements, Artis continued to maintain its investment grade credit rating from DBRS Limited 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 been awarded an investment grade credit rating. Artis earned 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 and reliable tenant mix with national and government tenants accounting for 56.1% of gross revenue. Artis’ top 20 tenants account for 21.3% of total gross revenue. industry, other key performance indicators include funds from operations and adjusted funds from operations. In 2017, funds from operations were $215.4 million, compared to $225.9 million year-over-year, a decrease of 4.7%. On a per unit basis, funds from operations decreased to $1.43 from $1.55 year-over-year. Adjusted funds from operations decreased from $168.7 million to $157.5 million year-over-year. This translates to a per unit decrease in adjusted funds from operations from $1.16 to $1.04. The decline was primarily due to the disposition of properties and the repayment of debt to overall improve Artis’ liquidity. Artis is pleased to report that, at December 31, 2017, secured mortgages and loans to gross book value improved to 31.9% from 40.6%, and total long-term debt and credit facilities to gross book value improved to 49.3% from 51.0%. Concurrently, the REIT improved the interest coverage ratio to 3.05 times for the year, compared to 2.99 times reported for 2016. 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 2017 ($1.08 per annum). Artis’ funds from operations payout ratio and adjusted funds from operations payout ratio, which are key financial metrics used to determine the sustainability of a real estate investment trust’s distribution payments, were 75.5% and 103.8%, respectively. 2017 ARTIS REIT ANNUAL REPORT 12 12 1700 Broadway, denver, CO 2017 ARTIS REIT ANNUAL REPORT 13 Artis’ objective is to provide a stable, reliable and tax-efficient monthly Artis continues to be rewarded by its’ diversification strategy and cash distribution to unitholders and long-term appreciation in the value management remains confident in the future potential of Artis’ Canadian of Artis’ units through the accumulation and effective management and U.S. target markets. Commodity markets have shown modest of a quality portfolio of commercial real estate. Looking forward to improvement during 2017 and management believes these signs of 2018, Artis’ experienced and dedicated team will continue to diligently stabilization will continue through 2018, eventually having a positive execute its core strategies to meet this objective. impact on the real estate markets in commodity driven regions. In the Management will strive to maximize returns by finding new ways to meantime, the U.S. economy continues to show solid growth, providing create value through the redevelopment and repositioning of assets to Artis’ unitholders with the benefit of a strong U.S. dollar and continued improve the overall quality of the portfolio and by undertaking high- capital appreciation of Artis’ U.S. assets. yield densification and new development projects. Capitalizing on In accordance with Artis’ ownership strategy, management is committed opportunities to realize the gain between in-place rents and market to ongoing review of current assets to identify opportunities to maximize rents and maintaining stable occupancy levels through tenant retention value from assets that are aligned with Artis’ long-term strategy, identify and new leasing initiatives are also important strategies management non-core assets and capitalize on strategic opportunities to recycle capital. will utilize to maximize returns. Overall, Artis is pleased to demonstrate to unitholders its ability to produce results that are reflective of its focused, dedicated and experienced management team, strong earnings, a healthy balance sheet and significant cash liquidity. With these and other valuable resources, the REIT is well positioned for another successful year and will strive to deliver strong results for unitholders again in 2018. All metrics are either as at December 31, 2017, or for the 12 months ended December 31, 2017, unless otherwise noted. Readers are cautioned that this Annual Report may contain forward-looking statements. Artis cannot assure investors that actual results will be consistent with any forward-looking statements and assumes no ob- ligation to update or revise such forward-looking statements to reflect actual events or new circumstances. All forward-looking statements contained in this Annual Report are qualified by this cautionary statement. Refer to Artis’ management’s discussion and analysis for a full forward-looking disclaimer. 2017 ARTIS REIT ANNUAL REPORToutlook MANAGEMENT TEAM 14 Armin Martens President and Chief Executive Officer executive Vice-presidents jim green Chief Financial Officer David Johnson Executive Vice-President Asset Management (Central Region) Philip Martens Executive Vice-President (U.S. Region) frank sherlock Executive Vice-President Property Management Dennis Wong Executive Vice-President Asset Management (Western Region) senior Vice-presidents patrick devine Senior Vice-President Leasing (U.S. Region) marie dunn Senior Vice-President Asset Management (U.S.Region) Brad Goerzen Senior Vice-President Leasing (Central Region) JOHN MAH Senior Vice-President Asset Management (Eastern Region) Amy Melchior Senior Vice-President Asset Management (Minnesota) kim riley Senior Vice-President Acquisitions / Dispositions Ronald Wieler Senior Vice-President Development Leon Wilkosz Senior Vice-President Asset Management (Wisconsin) 2017 ARTIS REIT ANNUAL REPORT corporate Sustainability 15 Artis is committed to minimizing its carbon footprint and promoting the use of energy efficient practices in its buildings. At Artis, energy certification is considered an asset, both with respect to our existing portfolio and when acquiring new properties. The three major sustainability certifications pursued are: LEED (Leadership in Energy & Environmental ENERGY STAR is Star Energy a voluntary U.S. BOMA BEST (Building Owners and Managers Association Design) Environmental Protection Agency (EPA) Building Environmental Standards) LEED or Leadership in Energy & program that certifies buildings in the U.S. BOMA or the Building Owners and Environmental Design is a green building for superior energy performance. Managers Association promotes energy tool that addresses the entire building lifecycle, recognizing best-in-class building strategies. efficiency and sustainability for new and existing buildings by assigning certification levels based on achievement of energy targets. two marketpointe, minneapolis, MN 2017 ARTIS REIT ANNUAL REPORT Board of Trustees Corporate Governance 16 Artis’ Trustees are proven business leaders with a significant breadth of experience in the areas of real estate, finance, securities, investments and law. They also collectively have extensive public company board experience. Artis’ Board of Trustees believes that sound governance practices are essential to the long-term interests of Artis and the enhancement of value for all of its unitholders. The Board of Trustees recognizes that proper and effective corporate governance is a top priority for investors Armin Martens President and Edward Warkentin Chairman Chief Executive Officer Investment Committee Governance & Compensation Committee and other stakeholders. The Board of Trustees has three committees which, at December 31, 2017, were structured as follows: the Audit Committee (Chaired by Bruce Jack, FCPA/FCA), the Governance and Compensation Committee (Chaired by Bruce Jack, FCPA, FCA) and the Investment Committee (Chaired by Wayne Townsend, CFP). Each of the committees’ members are independent of management. The Disclosure Committee is a subcommittee of the Governance and Compensation Committee (Chaired by Bruce Jack, FCPA/FCA). Additional information about Artis’ Board, Trustees and Committees, as well as key governance documents such as the Code of Conduct, Whistleblower Policy, Board Mandate and Declaration of Trust can be downloaded from Artis’ website at: www.artisreit.com/about-us/corporate-governance/ Bruce Jack Audit Committee Governance & Compensation Committee Cornelius Martens Ron Rimer Audit Committee Investment Committee Patrick Ryan Investment Committee Victor Thielmann Audit Committee Governance & Compensation Committee Wayne Townsend Audit Committee Investment Committee Governance & Compensation Committee 2017 ARTIS REIT ANNUAL REPORT Financial Highlights (In thousands, except per unit amounts) YEAR ENDED DECEMBER 31 Revenue Property Net Operating Income (Property NOI) 2017 2016 2015 $542,929 $572,515 $552,502 $325,645 $348,714 $341,952 Funds from Operations (FFO) $215,360 $225,876 $215,648 FFO per Unit FFO Payout Ratio Distributions per Unit Gross Book Value (GBV) Secured Mortgages and Loans to GBV Total Long-Term Debt and Credit facilities to GBV Investor Highlights $1.43 75.5% $1.08 $1.55 69.7% $1.08 $1.53 70.6% $1.08 $5,386,329 $5,668,337 $5,653,827 31.9% 40.6% 49.3% 51.0% 41.2% 52.4% CANADIAN COMMERCIAL REIT WITH 237 PROPERTIES TOTALLING 24.8 MILLION SQUARE FEET OF LEASABLE AREA TRUST UNITS EARN A STABLE, RELIABLE, MONTHLY DISTRIBUTION OF $1.08 PER UNIT PER ANNUM PREFERRED UNITS EARN A STABLE QUARTERLY DISTRIBUTION DIVERSIFIED BY ASSET CLASS INCLUDING OFFICE, RETAIL AND INDUSTRIAL PROPERTIES, AND GEOGRAPHICALLY IN SELECT CANADIAN AND U.S. MARKETS BBB (LOW) & PFD-3 (LOW) INVESTMENT GRADE CREDIT RATING FROM DBRS Revenue, Property NOI and FFO were impacted by acquisitions, dispositions, completed (re)developments, lease termination income and the impact of foreign exchange. The 2016 and 2015 FFO comparative information has been revised to reflect the impact of the new FFO guidelines issued by REALpac in February 2017. Financial Highlights and Growth Highlights are in Canadian dollars and are inclusive of Artis’ proportionate share of joint venture arrangements with the exception of Distributions per Unit. Growth Highlights (In millions) Funds from Operations $215.4 Property NOI $325.6 2017 2016 2015 .6 $225.9 $215 $ 215.4 2017 2016 2015 $342.0 $348.7 $325.6 Revenue $542.9 Total Assets $5,382.0 2017 2016 2015 .5 2 7 5 5 $ . 2 5 $5 9 . 2 4 5 $ 2017 2016 2015 4.9 6 6 5 3 . 1 5 0 . 2 8 3 $ 6 5 $ 5 $ Corporate Information Investor Relations investorinquiries@artisreit.com Phone: 1.800.941.4751 Transfer Agent AST Trust Company Phone: 1.416.682.3860 or 1.800.387.0825 Toll Free throughout North America Fax 1.888.249.6189 astfinancial.com/ca-en Auditors Deloitte LLP Indenture Trustee BNY Trust Company of Canada Phone 1.800.254.2826 Fax 1.416.360.1711 www.bnymellon.com Legal Counsel MLT Aikins LLP Toronto Stock Exchange Listings Trust Units AX.UN 2017 Distributions $0.09 per unit per month Preferred Units AX.PR.A AX.PR.E AX.PR.G AX.PR.I Series A $0.353875 per unit per quarter Series E $0.296875 per unit per quarter Series G $0.3125 per unit per quarter $0.3750 per unit per quarter Series I ANNUAL GENERAL MEETING Thursday, June 14, 2018, at 11:00 a.m. C.T. Del Crewson Conference Centre, 360 Main Street, Winnipeg, Manitoba Hudson’s Bay Centre, DENVER, CO 2017 WINNIPEG HEAD OFFICE 600 - 220 Portage Avenue Winnipeg, Manitoba R3C 0A5 T 204.947.1250 F 204.947.0453 www.artisreit.com AX.UN - TSX CALGARY EDMONTON TORONTO PHOENIX MADISON MINNEAPOLIS Suite 660, 1509 Centre Street SW Calgary, Alberta T2G 2E6 T 403.705.3535 F 403.444.5053 Suite 101, 13245-140th Avenue NW Edmonton, Alberta T6V 0E4 T 780.702.3066 F 780.702.3070 Suite 2000, 415 Yonge Street Toronto, Ontario M5B 2E7 T 647.955.3755 F 647.977.9072 Suite 280, 16220 N. Scottsdale Road Scottsdale, Arizona 85254 T 480.483.4111 F 480.556.9987 Suite 1600, 708 Heartland Trail Madison, Wisconsin 53717 T 608.830.6300 F 608.662.0500 Suite 1220, 120 South 6th Street Minneapolis, MinNesota 55402 T 612.843.4905 F 612.217.6409 Annual REport Properties Of Success is one of the Artis largest diversified commercial real estate investment trusts in Canada. Since 2004, Artis has executed an aggressive but disciplined growth strategy, building a portfolio of office, retail and industrial properties in Canada and select markets in the Unites States (U.S.). Artis’ primary objective is to provide a stable, reliable and tax-efficient monthly cash distribution, as well as long-term appreciation in the value of Artis’ units through the accumulation and effective management of a quality commercial real estate portfolio. Artis meets this objective through strategic asset ownership, a disciplined growth strategy and prudent financial management. DISCLAIMER: All figures are presented on a proportionate share basis unless otherwise noted. The information in this Annual Report should be read in conjunction with the REIT’s audited annual consolidated financial statements and management’s discussion and analysis for the years ended December 31, 2017, and 2016. These documents are available on SEDAR at www.sedar.com or on Artis’ website at www.artisreit.com. On the cover: 220 Portage Avenue, Winnipeg, MB 360 Main Street, Winnipeg, MB Bell MTS Building I & II, Winnipeg, MB
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