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

TD cut target price to 7.5

[incomedreamer11]

Event

Forecast update. Impact: SLIGHTLY NEGATIVE (target price lowered on reduced multiple)

Although leverage increased versus Q4/22, Artis reiterated its commitment to strengthening its balance sheet and reducing leverage, with management targeting $400mm of dispositions in 2023 (aiming for majority in Q2/Q3). The REIT has announced ~$135mm asset sales YTD with $22.6mm closed, and unconditional sale agreements for three AB retail properties ($71.6mm, May closing) and a US $28.9mm Minnesota industrial property (June closing).

Our revised forecast has $115mm of sales closing in Q2, $200mm in Q3, and $60mm in Q4 ($388mm 2023 total). Management noted that the average cap rate on the $378mm assets held for sale at Q1 was ~6.1%.

Our year-end 2023E D/GBV forecast (our calculation of Artis' deconsolidated balance sheet) is a still elevated 54.9%, although down from our Q1 calc of 57.6%. With ~62% of debt being floating rate and a weighted-average term to maturity of only 1.6 years, Artis remains the most susceptible to changes in interest rates in our coverage universe. As a result, we would view any further efforts to lower floatingrate debt favourably. Management expects to have to repay its $250mm unsecured debenture coming due at the end of Q3, given current rates in the market (~8%). With $116mm of equity securities dispositions (Q4/22-post Q1/23), we believe management is pausing on its public market equities activities over the near term and could potentially use part of the ~$225mm current balance (only ~5% of total assets) to further reduce leverage or fund its NCIB — although management stressed it was under no pressure to do so (our forecast does not anticipate further equity purchases/ sales).

Forecast. Our AFFO/unit estimates are largely unchanged in 2023, and up slightly (+1%) in 2024 on lower interest costs. Our $12.30 NAV/unit estimate is +1%.

TD Investment Conclusion We believe Artis will continue to trade at a discounted valuation given its elevated leverage position, the high proportion of floating-rate debt and near-term maturities, and the thus-far uneven results from the business transformation plan. We are lowering our target price to $7.50 from $9.00 and maintaining our HOLD rating.