serious downgrade from CIBC new target 11.50Artis Real Estate Investment Trust New Strategic Initiatives Announced; 50% Distribution Cut
All figures in Canadian dollars, unless otherwise stated. 18-156573 © 2018 CIBC World Markets Corp., the U.S. broker-dealer, and CIBC World Markets Inc., the Canadian broker-dealer (collectively, CIBC World Markets Corp./Inc.) do and seek to do business with companies covered in its research reports. As a result, investors should be aware that CIBC World Markets Corp./Inc. may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
For required regulatory disclosures please refer to "Important Disclosures" beginning on page 8. Please see "Price Target Calculations" and "Key Risks to Price Target" information on page(s) 5 to 6.
November 4, 2018 Real Estate Stock Rating: NEUTRAL Key Ratios and Statistics 12-18 mo. Price Target $11.50 AX.UN-TSX (11/2/18) $10.08 Key Indices: None 3-5-Yr. EPS Gr. Rate (E) NM 52-week Range $9.98-$14.42 Shares Outstanding 153.8M Float 153.8M Shrs Avg. Daily Trading Vol. 309,000 Market Capitalization $1,550.3M Dividend/Div Yield $0.54 / 5.4% Fiscal Year Ends December Net Asset Value $14.50 per Shr 2018 ROE (E) NM LT Debt $2,122.4M Net Asset Value Common Equity $2,723.9M FFO Per Unit 2017 2018 2019 2020 Current $1.43A $1.31E $1.35E $1.38E Prior $1.31E $1.36E Estimates (Dec. 31) 2017 2018 2019 2020 AFFO Per Unit-Curr $1.24A $1.13E $1.07E $1.09E AFFO Per Unit-Prior $1.12E $1.17E Valuation (Dec. 31) P/FFO-Curr 7.0X 7.7X 7.5X 7.3X P/FFO-Prior 7.7X 7.4X P/AFFO-Curr 8.1X 8.9X 9.4X 9.2X P/AFFO-Prior 9.0X 8.6X
Company Description Artis REIT is a commercial property REIT with a portfolio of 230 assets comprising ~24.4 million sq.ft. of office, retail, and industrial space, primarily in Western Canada, and the U.S. www.artisreit.ca
Our Conclusion
We believe Artis' new initiatives, in part motivated by a widening NAV discount, are prudent, if not necessary. As the REIT's three-year disposition and buyback program plays out, we believe the significance of quarterly performance will fade, placing more focus on management's ability to meet its strategic objectives and milestones thereto.
We have lowered our price target to $11.50, from $13.50, applying a 20% discount to our unchanged NAV, largely reflecting execution uncertainty around asset sales. Given the three-year timeline, and a rising interest rate environment, the ultimate valuations on dispositions could be realized at potentially lower-than-currentlyanticipated prices (although such an outcome is not our base case).
What's The Event?
The REIT announced a three-point strategic plan designed to improve its liquidity and investor confidence. The plan includes 1) a 50% reduction to distributions; 2) $800MM to $1B of non-core asset sales over the next three years; 3) Net proceeds to fund unit repurchases, debt reduction and developments.
Artis also reported Q3 FFO of $0.33/unit (in line with our $0.33/unit estimate), down from $0.36/unit a year ago, mostly due to dispositions. Organic Growth Stable: SP-NOI was 1.9% in functional currency, reflecting +0.5% growth in Canadian operations, +4.5% SP-NOI growth in the U.S. assets. Including the FX tailwind, SP-NOI was 3.9%.
Valuation
AX.UN trades at ~7.5x 2019E FD FFO, ~30% below our $14.50 NAV (6.5% cap rate), and yields 5.4%. Our price target is $11.50 or ~20% below NAV, and equates to ~8.5x 2019E FD FFO.