IRIS AnalysisARTIS HIGHLIGHT:
Repaid a net balance of $355.8 million on revolving and non-revolving credit facilities.
IRIS/COMINAR – Bad to worse, with more clarity
Positive:
· Cominar continues to generate profit (before FMV adjustments for investment properties) – $7,815 during the quarter ended June 30, 2023 (net income + fair market value adjustments for investment properties and in joint venture).
· Same property NOI up 4.7% driven by increased revenue and decreased operating expenses.
· Committed occupancy up quarter-over-quarter to 90.1% from 89.3%
Retail occupancy flat quarter-over-quarter at 92.4% from 92.3%
Office occupancy up quarter-over-quarter to 87.7% from 86.7%
· Cash distributions to IRIS of $151,782 for the quarter and $180,982 year-to-date.
Meaningful asset sales:
· Number of properties down to 39 (24 office, 15 retail) from 60 (44 office, 16 retail)
Positive to see Cominar has the ability to sell office assets.
· As at June 30, 2023, Cominar had 14 properties and 1 land parcel held for sale totalling $211.4, each of which were subject to definitive sale agreements.
· Sold 2 retail properties per subsequent events note for combined total of $45.5. Therefore, 12 properties and 1 land parcel subject to sale agreements for $165.9 as at August 2, 2023.
Negative:
Trend developing where Cominar has added debt to its capital structure, while selling assets and distributing cash from financing and sales to Iris. Unclear at this time how many assets Cominar could sell, without reducing debt, and continue to remain profitable.
· Artis’ preferred investment continues to grow. IRIS continues to pay interest on preferred units with units in-kind, despite meaningful cash distributions from Cominar to IRIS (see above).
IRIS balance sheet:
· Iris and its balance sheet is simply Cominar plus a significant amount of debt – more than the Cominar business can carry, it would appear.
· Equity or net assets continues to decline quarter-after-quarter, due in part by further negative fair market value adjustments, and negative profit at IRIS level before FMV adjustments (see below).
· As at December 31, 2022 IRIS (non-consolidated aka excluding Cominar) had $2,583 assets and $781,481 liabilities – of which we know $114,184 was the Artis preferred units.
· As at June 30, 2023 IRIS (non-consolidated) had $1,518 assets and $683,104 liabilities – of which we know $128,134 was the Artis preferred units.
· The reduction of debt during the six months ended June 30, 2023 of $98,377 while IRIS received distributions of $180,182 is concerning.
· It is unclear what these liabilities are and to whom they are owed, except for the preferred units held by Artis.
· It is worth noting, net proceeds from asset sales in Cominar are being distributed to IRIS, rather than reduce most expensive debt at Cominar level, which bears interest at prime + 0.7% (note 10 of financials). Within IRIS, the cash is not being used to reduce preferred debt bearing 18%, or even pay the interest on preferred debt (allowing it to compound). The cash appears to be used to subsidize IRIS loss and reduce other debt at the IRIS level.
IRIS income statement:
· Net income before fair value adjustments continues to bleed this entity dry. IRIS had net income of $(43,373) during the quarter, which included fair market value adjustments of $(20,202) – Cominar, and $1,828 – Cominar JV. Excluding fair market value adjustments, IRIS lost $24,999 during the quarter.
Conclusion:
As noted for three quarters now, I believe the IRIS model is not sustainable. I remain confident in my conservative assumption that the equity of IRIS is $nil.
Rationale: Debt, including preferreds, continues to compound, while underlying asset values continue to be adjusted downward. Artis owns a smaller percentage of IRIS debt than it owns of IRIS equity.
Thoughts on Artis to follow... in summary I am happy with the fundamental strength of the portoflio, and reduction in credit facilities (nearly exact per my projections shares earlier). I am baffled Mr. Manji did not continuing selling assets after the very positive news release. I am just as puzzled by the strategic review given the simple solution here would have been to sell ~$500M of assets, completley pay down credit facilities, and use the remaining proceeds to run a SIB - then signal to the market, that future sales will be done oppertunistically and that all proceeds moving forward will be used to buyback units and close the NAV gap.