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

TD down target price

[incomedreamer11]

Impact: SLIGHTLY NEGATIVE

Disposition Progress Ramps up in Q4/22. Artis has made good progress on its disposition strategy, despite the prevailing macro uncertainty. Between the Q3/22 release and the subsequent press release on November 4, Artis announced that it has closed or entered into unconditional sales agreements totaling US$337mm (~CAD$455mm). The dispositions include 23 industrial buildings in Minnesota spanning 3.2mmsf for US$324mm (US$102/sf) and Hartford Corporate Plaza (office building in New Hartford, New York) for US$13.5mm (US$111/sf). The dispositions were all done in line with IFRS fair value.

We anticipate the majority of proceeds will be used to reduce leverage in the near term (Q3/22 D/GBV: 47.9%) while a portion will likely be allocated to expanding the REIT's equity security portfolio.

Our forecast has a further $190mm of unannounced dispositions in H1/23 at a 6.00% cap rate. The REIT's equity portfolio balance continues to grow (+$70mm vs. Q2/22 at ~ $300mm). With most REITs trading at what we view as excessively discounted levels, we expect Artis to remain active with its equity security purchases. We are forecasting an additional $60mm of equity security purchases in 2023 and 2024 (unchanged), which we believe may prove to be a conservative estimate.

Operational Highlights. Q3/22 SPNOI was +4.3% y/y (+1.7% constant currency), led by the office (+6.1%) and Industrial (+4.4%) portfolios. Retail was slightly negative y/y at -0.4%. We expect SPNOI growth to be flat in 2023 (AT&T, the REIT's second largest tenant at 2.3% of revenues, will not renew), before improving to +2.5% in 2024.

Forecast.

Our estimates in 2022/23/24 decline 3%/12%/7% on higher interest costs. With ~53% of debt floating rate and a weighted-average term to maturity of only 1.7 years, Artis is the most susceptible to changes in interest rates in our coverage universe. Our NAV/unit estimate decreases by 7% to $13.90 on higher cap rates. TD Investment Conclusion Although we still believe that there is good value in Artis' units, we anticipate that the units will remain range-bound, as its business transformation plan continues to unfold. We have lowered our target price to $10.50 from $11.00.