Artis Real Estate Investment Trust (TSX: AX.UN) is an unincorporated closed-end REIT based in Canada. Artis REIT's portfolio comprises properties located in Central and Western Canada and select markets throughout the United States, including regions such as Alberta, British Columbia, Manitoba, Ontario, Saskatchewan, Arizona, Minnesota, Colorado, New York, and Wisconsin. The properties are divided into three categories: office, retail, and industrial. The industrial properties account for most of the portfolio, followed by the office properties and the retail properties.

Revenue Mix

Investment Rationale

• Prudent Financial Management: Artis has a long-term conservative approach to financial management, characterized by diligent management of its balance sheet, and prudent management of financial metrics, such as debt ratios, interest coverage ratios, payout ratios, and per unit metrics. Artis minimizes its risk related to interest rates by utilizing various sources of capital and staggering debt maturities. The group has ample access to cash that is required to fulfil distribution obligations and for on-going operations, which includes re-investing in the portfolio, making accretive acquisitions and funding development projects.

• Strategic Asset Ownership: Artis' portfolio of office, retail and industrial real estate is strategically and diversely located in select primary and secondary markets in Canada, and the U.S. Artis' management conducts an on-going analysis of the performance of its assets and the relevant economic fundamentals of its target markets, identifying opportunities to make accretive acquisitions, develop new generation real estate and dispose of assets that are not aligned with its long-term strategy.

Source: Company Presentation

• Increasing Insider Stake: Over the past one year, insiders have increased their stake for more than 20 times, which implies that management is bullish on the future business performance of the company. More importantly, after a steep fall in the stock price in the month of March 2020, the insider has used the discounted price as an opportunity to accumulate shares and increase their stake. The kind of insider’s interests infused in the stock gave other investors confidence in the business of Artis.

Insider Transactions Over the Past 1-Year (as on October 26, 2020). Source: Refinitiv (Thomson Reuters)

• Offering a Lucrative Dividend Yield: At the last closing price of CAD 8.62 (on October 26, 2020), the stock was offering a lucrative dividend yield of 6.26%, which is significantly higher amid lower interest rate environment. Further the company has consistent track record of dividend payment over the past 10-years. High yielding stocks like Artis with proven track record of dividend payment tend to be popular among investors’ community.

Dividend History. Source: Refinitive (Thomson Reuters)

• Risk Associated to Investment: The group might experience a decline in occupancy rate on account of the sluggish economic environment. Further, the group is exposed to counterparty risk and might face a delay or default in rent collection.

2QFY20: Financial Highlights

Source: Company Filing

• At the end of Second Quarter, the group's portfolio occupancy (including commitments) was 92.9%, compared to 92.7% on March 31, 2020. During the second quarter, the group completed 592,872 square feet of lease renewal transactions. The weighted-average change in renewal rents compared to the expiring rents during the quarter decreased 3.3%, primarily due to a large industrial renewal in the Greater Toronto Area, Ontario, with an expiring rent that was negotiated in consideration of leasehold improvements.
• Revenue, net operating income, FFO and AFFO decreased period-over-period, primarily due to the impact of dispositions as the REIT disposed of 13 office and 12 retail properties in 2019 and 2020. The overall decrease is partially offset by completed new developments and acquisitions. In 2019, Artis completed the development of three fully leased industrial properties located in the US and acquired Boulder Lakes Business Park II, a 100% leased office property in the Twin Cities Area, Minnesota and a surface parking lot adjacent to an office property in Winnipeg, Manitoba.
• Net income (loss) and total comprehensive (loss) income were also positively impacted by a decrease in interest expense (CAD 21.065 million in Q2-20, compared to CAD 27.916 million in Q2-19), the fair value gain on investment properties (gain of CAD 8.283 million in Q2-20 compared to a loss of CAD 24.508 million in Q2-19) and by the loss on derivative instruments and other transactions (loss of CAD 3.961 million in Q2-20 compared to a loss of CAD 7.195 million in Q2-19). Also contributing positively to the change is, income from investments in a joint venture (income of CAD 5.615 million in Q2-20, compared to a loss of CAD 0.691 million in Q2-19) primarily due to the completion of development projects and the fair value gain on investment properties.
• Foreign exchange also continues to positively impact Artis' financial results, due to a higher US dollar to Canadian dollar average exchange rate of 1.3859 in Q2-20, compared to 1.3375 in Q2-19.
• FFO per unit for the quarter ended June 30, 2020, was CAD 0.36, unchanged when compared to the quarter ended June 30, 2019, while AFFO per unit for the same period was CAD 0.27, unchanged when compared to the quarter ended June 30, 2019.
• The Company reported conservative FFO and AFFO payout ratios of 38.9% and 51.9%, respectively, for the quarter ended June 30, 2020. Same Property NOI period-over-period decreased by 2.0% or increased by 1.2% when calculated, excluding bad debt expense.
• On June 30, 2020, NAV per unit was CAD 15.40 compared to CAD 15.56 at December 31, 2020. The change is primarily due to the year-to-date fair value loss on investment properties and derivative instruments and distributions to unitholders, partially offset by net operating income, the foreign currency translation gain and the impact of units purchased under the NCIB.
• In Q2-20, the Canadian office segment decreased due to dispositions in 2019 and 2020 and a decline in parking revenues in Manitoba. The Canadian retail segment decreased due to dispositions in 2019. In Q2-20, the Canadian office, retail and industrial segments decreased CAD 0.387 million, CAD 1.516 million and CAD 0.170 million, respectively, primarily due to bad debt provisions as a result of the COVID-19 pandemic. In Q2-20, the US office and retail segments decreased due to dispositions in 2019. The US office segment decrease was partially offset by acquisition in 2019. The US industrial segment increased due to the completion of the Cedar Port I, Park 8Ninety II, Park 8Ninety III and Tower Business Center developments in 2019. In Q2-20, the US office and industrial segments decreased CAD 0.508 million and CAD 0.235 million, respectively, primarily due to bad debt provisions as a result of the COVID-19 pandemic. The US portfolio was also impacted by the effect of foreign exchange.

Source: Company Filing

Top-10 Shareholder

Top-10 shareholders in the company held around 24.84% stake Joyce (Ronald Vaughan), and The Vanguard Group, Inc. are among the largest shareholder in the company and carrying an outstanding position of 11.24%, and 3.19% respectively. The institutional ownership in “AX.UN” stood at 18.64%, and ownership of the strategic entities stood at 12.37%.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to EBITDA based Valuation Metrics

Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters)

Peer Comparison

Source: Refinitiv (Thomson Reuters) 

Stock Recommendation: Despite a challenging business environment, the group anticipate that the majority of rent deferrals and rents receivable will be collected; however, there are certain tenants that may not be able to pay their outstanding rent.

Despite the challenges caused by the pandemic, the company continue to have an active pipeline of renewals and new leases, including the recent renewal of a 130,000 square foot tenant occupying an entire building in the Greater Phoenix Area, Arizona, for an approximately eight-year term, and securing a new 12-year lease with a 134,000 square foot tenant at Tower Business Center, a new industrial development in the Greater Denver Area, Colorado.

Further, subsequent to June 30, 2020, the company has completed construction of Park 8Ninety IV, a 100,000 square foot build-to-suit development for a multi-national tenant. This lease commenced in July 2020. They have a 95% interest in Park 8Ninety IV in the form of a joint venture arrangement. Their portfolio occupancy at June 30, 2020, was 90.6% (92.9% including commitments) compared to 90.7% (92.7% including commitments) at March 31, 2020.

More importantly, the company is offering a lucrative dividend yield of 6.26%, which is significantly higher amid lower interest rate environment. Further, the company has a consistent track record of dividend payment over the past 10-year.

Therefore, based on the above rationale and valuation, we have given a ‘Buy’ recommendation at the closing price of CAD 8.62 on October 26, 2020.

1-year Price Chart (as on October 26, 2020). Source: Refinitiv (Thomson Reuters)

Disclaimer

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