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

RE:CIBC comments

[SusanBolland]

incomedreamer11 wrote: Making Strategic Progress

Our Conclusion

Focus continues to be on capital allocation to further new strategic objectives, towards which Artis made significant progress in 2021. The successful close of the Cominar acquisition provides more clarity around the REIT’s investment criteria, which is centred around undervalued public companies with the potential of closing the NAV discount.
The ultimate financial impact of the transaction remains to be seen. A potential ~$500MM of dispositions places Artis in a favorable capital allocation position with several investment opportunities available.

We raise our NAV to $15.00 and applying a 10% discount to our NAV, in line with longer-term averages, we raise our price target to $13.50.

Key Points Results and Pandemic Update: Q4/21 FFO per unit was $0.32 and in line with our estimate and consensus. At year-end 2021, the REIT had collected 98.2% of rent, and bad debt has been improving with $1.7MM in an allowance for doubtful accounts.
Operations: SPNOI declined 2.3% (+0.2% excluding foreign exchange), with declines of 3.0% in industrial and 4.0% in office that were partially offset by a 3.5% increase in retail. By region, Canadian SPNOI was up 5.2% (led by +14.8% in Manitoba) and U.S. SPNOI declined 4.6% (driven by -11.5% in Arizona).
Transactions: Post Q4, the REIT sold a portfolio of two office buildings in the GTA for ~$35.5MM and entered into an unconditional sale agreement for an industrial property in the GTA for $29.2MM, with the deal expected to close in March 2022. The REIT also completed its exit from the Calgary office market in Q4. Artis anticipates a minimum of $500MM in asset dispositions for the upcoming year, and remains open to additional unsolicited offers. The REIT expects future net proceeds from dispositions could be allocated towards debt reduction, unit repurchases, developments, and acquisitions of assets or public securities.
Investments: In addition to acquiring a 33% interest in the common equity of the entity formed as a result of the Cominar privatization, Artis invested an additional ~$71MM in public securities in Q4 and subsequent to the quarter. The REIT also disclosed a ~10% interest (including Sandpiper Group’s share) in Dream Office REIT.
Balance Sheet: Consolidated Debt to GBV was 42.9% and was stable on a sequential basis. IFRS NAV grew +16% from last year to $17.37/unit. The REIT continued to be active on its NCIB, having repurchased ~1.2MM common units in Q4/21 (~11.1MM common units for the full-year). Post quarter, the REIT repurchased an additional ~3.6MM common units.nvestment Thesis 1) Valuation Discount: Artis trades at a relatively wide discount to our estimate of NAV.2) Early Stages Of Business Transformation Plan: In early 2021, the REIT commenced a new plan which aims to eventually build a leading asset management and investment platform through value investing in real estate.3) Divesting Across Asset Classes: As part of the plan above, the REIT is currently divesting assets accross all of its subsectors, with industrial assets representing a key priority. Proceeds will be redeployed opportunistically in both public and private investments.

Price Target (Base Case): C$13.50 Our price target of $13.50 reflects a ~10% discount to our NAV estimate  Upside Scenario: C$15.00 In our upside scenario, we assume that units trade at NAV parity. Downside Scenario: C$9.00 In our downside scenario, we assume that units trade at a ~40% discount to our NAV.

Leasing: Portfolio occupancy was 89.4% (committed occupancy of 91.5%) and the REIT completed ~787k sq. ft. of renewals in Q4 at a +3.9% average rental spread over prior inplace rents. For all lease renewals that commenced in 2021, the REIT achieved a weighted average renewal rent lift of +4.1%. Across the entire portfolio, management estimates that market rents are generally in line with current in-place rents (market is ~0.2% above). For 2022, the REIT has lease expiries totaling ~13.2% of overall GLA and also has a similar footprint of lease expiries the following year. 2022 expiries are primarily comprised of industrial space while 2023 expiries are weighted towards industrial and office. The REIT estimates that market rents for 2022 lease expiries are 1.4% below in-place rents while market rents for 2023 lease expiries are comparable to in-place rents.

Development Pipeline: The REIT completed the conversion of 2145-2155 Dunwin Drive in the GTA to commercial condominiums and sold all units for $17.9MM. The REIT also continued to progress on ongoing developments including the mixed-use residential project 300 Main and industrial project Blaine 35 phase 1, while the REIT also moved Blaine 35 phase 2 from its longer-term pipeline to current projects. The near-term development pipeline totals ~900k sq. ft. and the longer-term pipeline consists of three projects totaling ~880k sq. ft. of owned GLA upon completion.

Investments: Artis participated in a consortium that acquired all outstanding units of Cominar REIT for $11.75 per unit in cash, with the transaction closing on March 1, 2022. Artis contributed $112MM to acquire a ~32.6% interest in the common equity of the newly formed entity and also acquired $100MM of junior preferred units that pay a distribution yield of 18.0% per year. The REIT also acquired ~$22MM of equity securities in Q4 and recorded a fair value gain of ~$5.9MM on total equity security investments. Post Q4, the REIT acquired an additional ~$49MM of equity securities. Post Q4, the REIT announced that together with its joint-actors, have acquired a 10% ownership interest in Dream Office REIT.

Distribution : Artis currently pays an annualized distribution of $0.60 (last increased in April 2021), which represents an AFFO payout ratio of ~61% on our forward 2022 estimate. This payout ratio is in line with an average ~62% forward AFFO payout across Canadian diversified REITs and ~74% across the Canadian real estate universe. As operations continue to normalize, we believe there remains potential for the REIT to return more capital to unitholders, including the potential for distribution increases in the future.

Historical Valuation and FFO Progression: AX is currently trading at a ~12% discount to consensus NAV, close to its long-term average discount of ~11% to consensus NAV. While our 2022 estimate remains below pre-pandemic levels, we note the lag between deploying net proceeds received from asset dispositions, anSustainabilityd that we foresee an improvement in earnings for the following year