Artis Real Estate Investment Pref Shs Series E T.AX.PR.E

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Their upside scenario target is now $18.00. GLTA

March 4, 2022

Sector Perform

Speculative Risk
TSX: AX.UN; CAD 12.93
Price Target CAD 13.00 ↑ 12.00

Artis REIT

A few moving parts to earnings; Advancing 'private equity' strategy

Our view: Artis REIT (“AX”) reported an in line Q4. We expect muted operating performance near term. There are a few moving parts to earnings based on capital allocation activity. AX is advancing its ‘private equity’ strategy. Maintain Sector perform.

Key points:

Operating performance: SP NOI growth: -2.3%; Office -4.0%; Industrial -3.0%; Retail +3.5%; Overall occupancy was 89.4%, +30bps sequentially, -120 bps y/y; Occupancy is being dragged primarily by its office segment (83.5%), particularly Madison/Twin Cities/Winnipeg office which sit in the 82-88% occupancy range. Lease renewal spread was +3.9%, although market rents are tracking 1.4% below in-place rents for 2022 expiries. We expect relatively muted performance in the near term.

Capital allocation activity:
• Dream Office: AX, together with Sandpiper’s LPs, now control 10% of

D.un (~$144m). AX may have increased its exposure having bought further $49m of ‘equity securities’ YTD. Management indicated that the investment is not necessarily passive and has had good engagement with D.un.

• Cominar: AX’s exposure is through a $100m junior pref equity (18% PIK) and a $112m equity investment (33% of newly formed entity). Combined, we pencil the initial income return at ~10-15% with the common equity being highly levered and the pref equity likely called away upon sale of assets.

• NCIB: We expect AX to remain active ($126m in 2021, $44m YTD).

• Asset sale: AX sold two Mississauga office assets for $35.5m (~$247 psf) and its only remaining GTA industrial asset for $29m (~$380 psf), both at seemingly healthy valuations. Thus far, asset sales have hit the mark (and then some) but this should get progressively harder, especially when it comes to some of its office assets in the US mid-west and Winnipeg (~1/3 of NOI), where there has been very few trades. AX plans to dispose a

  minimum $500m in 2022.

  AX trades at 19% discount to our NAV estimate (admittedly, with room for error given lack of trades in certain of its assets). We also provide our thoughts on other issues weighing on the stock: 1) Private equity mindset in a public REIT format, 2) Capital allocation strategy, 3) Potential for conflict of interest.

  Estimates: There is some volatility to our 2022 & 2023 estimates given the various moving parts. We are reflecting $500m of dispositions in 2022, the Cominar prefs being called in 2023 and a fairly active pace of unit buyback.

  Maintain Sector Perform rating. Our price target moves to $13 from $12, and represents a 20% discount, (25% previously) to one year hence NAV