CIBC commentsOur Conclusion
Completion of a significant volume of asset sales in the near-term (over 15% of the portfolio) would mark further progress in the REIT’s transformation plan and fuel up the REIT’s capital allocation strategy (which to-date has centered around unit buybacks and investments in public securities).
We expect Artis to continue capitalizing on public market dislocations to advance its value-investing strategy. Fundamentally, we note decent lease-up progress this quarter, particularly in office, as occupancy improved sequentially, and management commentary points to a broader improvement in leasing activity.
We increase our FFO estimates following Q2 results. We lower our NAV to $14.50 on an NOI adjustment, and accordingly lower our price target to $13.00, applying a 10% NAV discount.
Key Points Q2/22 Results: FFO per unit was $0.38, above our $0.33 estimate, mainly due to higher-than-expected distributions from equity securities and preferred investments, plus buybacks. SPNOI grew 0.7% (-1.5% excluding foreign exchange), with +4.5% in industrial and -1.4% in office, and a 0.6% decline in retail.
By region, Canadian SPNOI was down 1.8% (mainly reflecting Alberta) and U.S. SPNOI declined 1.2% (driven by Minnesota and Arizona).
Significant Pending Dispositions: The REIT sold one industrial and one office property for ~$68.7MM in Q2. The REIT has ~$670MM assets held for sale, comprising 28 U.S. industrial properties, four office properties, developments and land parcels. The proposed dispositions exceed management’s previously stated target of $500MM and are expected to close by year-end at pricing in line with IFRS.
Public Securities Investments: Artis invested $158MM in equity securities in the quarter, which included Dream Office units wherein the REIT has a ~14% interest (including Sandpiper Group’s share).
Balance Sheet: Consolidated Debt to GBV was 46% vs. 43% last quarter. IFRS NAV grew from $19.09/unit last quarter to $19.37/unit. The REIT continued to be active on its NCIB, having repurchased ~3.5MM common units in Q2/22, and has purchased the maximum allowable units per its NCIB.
Cap Rate Tracking: Weighted average IFRS cap rate was 6.12% (vs. our 6.75% estimate), unchanged from last quarter, and down 10bps over the past six months. Artis recorded a modest $19MM fair value loss, mostly reflecting office, and partly offset by U.S. industrial rent expectations and Canada retail cap rate compression.
Investment Thesis Artis is in the midst of a transformation plan, heading towards building an asset management and investment platform by divesting hard assets and value investing in real estate. While reasonable progress has been made to-date, uncertainty remains as to the ultimate execution of the strategy.
Price Target
(Base Case): C$13.00 Our price target of $13.00 reflects a ~10% discount to our NAV estimate.
Upside Scenario: C$14.50 In our upside scenario, we assume that units trade at NAV parity
Downside Scenario: C$8.25 In our downside scenario, we decrease our NOI assumption by 2.5%, increase our cap rate by 25 bps and apply a 40% discount to NAV.