EQUITY RESEARCH
RBC Dominion Securities Inc.
Michael Smith, CFA
(Analyst)
(416) 842-7805
michael.smith-tor@rbccm.com
Matt Logan, CFA
(Senior
Associate)
(416) 842-3770
matt.logan@rbccm.com
Neil Downey, CFA, CA, CPA
(Analyst)
(416) 842-7835
neil.downey@rbccm.com
Alexei Siniakov, CFA
(Associate)
(416) 842-3803
alexei.siniakov@rbccm.com
Sector: Real estate, REITS & Hospitalities
Sector Perform
TSX: AX.UN; CAD 12.27
Price Target CAD 14.50
↓ 16.00
WHAT'S INSIDE
Rating/Risk Change
Price Target Change
In-Depth Report
Est. Change
Preview
News Analysis
Scenario Analysis*
Downside
Scenario
10.00
10%
Current
Price
12.27
Price
Target
14.50
27%
Upside
Scenario
16.00
39%
*Implied Total Returns
Key Statistics
Shares O/S (MM):
138.9
Dividend:
1.08
NAVPS:
15.75
BVPS:
16.15
Float (MM):
138.9
Debt to Cap:
52%
Market Cap (MM):
1,704
Yield:
8.8%
P/NAVPS:
0.78x
P/BVPS:
0.76x
Avg. Daily Volume:
589,502
Debt to Cap = D/GBV excluding preferred equity. Our LTV estimate,
which counts preferred equity as debt, is 59%.
RBC Estimates
FY Dec
2014A
2015A
2016E
2017E
FFO/Unit
1.42
1.53
1.55
1.59
Prev.
1.51
1.53
1.61
P/FFO
8.6x
8.0x
7.9x
7.7x
AFFO/Unit
1.23
1.34
1.34
1.36
Prev.
1.33
1.37
1.45
P/AFFO
10.0x
9.2x
9.2x
9.0x
Distribution/Unit
1.08
1.08
1.08
1.08
Payout Ratio –
FD
88%
81%
81%
79%
FFO/Unit
Q1
Q2
Q3
Q4
2015
0.38A
0.39A
0.39A
0.38A
Prev.
0.36E
2016
0.38E
0.39E
0.39E
0.38E
All market data in CAD; all financial data in USD; dividends paid in CAD.
March 1, 2016
Artis REIT
Pressing the reset button
Our view:
Though expected, the sizable write-down of Artis’ Calgary office
portfolio was eye-catching. Looking ahead, Artis now has double the
exposure to the U.S. compared to Calgary office (30% vs. 15%) following
growth in the U.S. and shrinking Calgary office NOI. While we don’t expect
the Calgary office headwinds to let up anytime soon, we think Artis is
in good shape thanks to its U.S. expansion and its decision to grow its
way into a lower payout ratio. We believe the current discount to NAV is
excessive.
Key points:
•
FFO/unit:
$0.38, up 5.6% YoY, 2¢ ahead of our estimate
•
Headline SP-NOI growth:
+4.0; Canada: -0.7%; US: +1.6% (+19% inc. FX)
•
Occupancy:
92.7%, -40 bps QoQ & -190 bps YoY
•
Leasing spreads:
-0.1% on 676,000 sf in Q4; +3.7% on 2.3MM sf in 2015
•
Pre-tax IFRS NAV:
$16.15, -$1.54 QoQ & -$1.49 YoY. IFRS cap rate: 6.59%
Oil patch headwinds weigh on valuations
– As expected, Artis took a
major write down of its portfolio with a total fair value loss of $252
million during the quarter ($372MM in 2015 or $2.68/unit), of which,
roughly $150 million was related to Calgary office ($288MM in 2015).
Management highlights cap rate expansion of roughly 50 bps YoY in the
Calgary office market, which drove a 23 bps increase in the REIT's overall
IFRS cap rate to 6.59%. Fortunately, Artis derives 30% of its NOI from the
U.S., which continues to provide positive FX tailwinds and a $56 million
translation gain during the quarter ($275MM in 2015 or $1.98/unit). In
our view, taking a sizable fair value write down was the right thing to do.
FX tailwinds continue to drive growth
– Artis reported fourth quarter
FFO per unit of $0.38, up 5.6% YoY, coming in 2¢ ahead of our estimate.
Same-property NOI growth remains healthy at 4.0%, driven by significant
FX tailwinds. Excluding a transitional vacancy related to the former AMEC
Americas space which has since been re-leased, SP-NOI growth came in
at 6.5%. Despite macro headwinds in the Calgary office market, SP-NOI
growth in Alberta came in at 1.7% excluding the AMEC Americas vacancy,
driven by growth in the retail and industrial portfolios.
Capital recycling on track
– During the quarter, the REIT completed the
sale of its lone office property in Florida with the disposition of the
Mosaic Office Building for US$25 million at a 6.0% cap rate. In total,
2015 capital recycling included the disposition of six properties for US$57
million and
C$
72 million and ten acquisitions (via three transactions) for
US$88 million and
C$
74 million. Overall, we are pleased to see the REIT
prune its portfolio and sharpen its focus in select U.S. markets. Looking
forward, Management re-iterated guidance for further capital recycling in
2016, with a slight bias towards net selling.
Priced as of prior trading day's market close, EST (unless otherwise noted).
For Required Non-U.S. Analyst and Conflicts Disclosures,
see page 14.
https://www.rbcinsight.com/WM/ResearchViewer/1924-406631-1/1654?docType=PDF&
We are lowering our PT by $1.50 to $14.50