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

Scotia comments

[incomedreamer11]

Q2 Glance: Another Tough Q, but Dispositions Accelerate + Strategic Review Announced

OUR TAKE: Mixed (many moving parts). Reported and recurring FFOPU was ~$0.265 vs. $0.288 q/q and $0.364 y/y, below our $0.291 and consensus of $0.283 (range = $0.26-$0.29); The print = 28% y/y erosion (Q1/23A = 12% y/y erosion).

Dispositions accelerated in Q2. $280M of completed sales (7% of Q1/23A IPP), on track with Q1 call commentary ($400M+ in 2023). Assets HFS fell $235M q/q to $143M and = 3.5% of IPP, implying an extra $45M of asset sales expected vs. Q1/23. We think dispositions are critical to easing market worries over near-term debt maturities, and therefore, unit price (assuming going concern).

Special Committee formed. In light of AX unit price trading at a 57% of IFRS NAVPU (45% discount to our NAV), the expectation of higher debt costs continuing to impact FFOPU in the short-term, and the original 2-3 year timeframe set in March 2021, AX is pursuing a review process to evaluate strategic alternatives. The immediate thought that typically comes to mind re: REIT strategic reviews = privatization. Our initial thought is doing so under current credit conditions for a diversified portfolio with high leverage may prove quite challenging.

Full update post c/c call tomorrow, at 1:00 p.m. ET (1-416-764-8688, or webcast).

Capital recycling update. AX sold $280M of assets in Q2 (totaling 1.6Msf), including five CAD retail, eight Industrial and development land, generating net proceeds of $198M, which were used to repay credit facilities and NCIB activity (repurchased 4.4M units @ $7.10/un for $31M total (= 4% of Q1/23 units; Q1 = 1.4M units @$8.24/un). Post-quarter, another 0.5M units were purchased at an avg. $7.04. AX FV investment in equity securities of $169M fell $94M q/q (Q1 = fell $55M q/q), incl. the disclosed sale of 2.2M D units as part of the SIB for $34M implying AX sold FCR units during Q2 in our view; disclosed realized loss on security sale was $18M (vs. total portfolio AFFO of $17M).

IFRS NAVPU fell $0.81 (5%) q/q to $16.28 vs. our $12.75 (Q1 = fell $0.29), incl. a $109M FV loss ($0.95/un; Q1 = $28M FV loss). SPNOI was +6.9% in CAD and 3.5% in local currency (Q1 = +8.4%/+4.3%). The $95M FV loss (Q1 = 4% of IPP (Q1 = 0.8%) was driven primarily by a $89M FV loss in Office (Q1 = -$22M), plus a $18M loss in Industrial (Q1 = -$5M). Portfolio IFRS cap rate was +18bp q/q to 6.60% (vs. our 6.86%; Q1 = +2bp q/q), driven by Industrial +19bp (6.02%; Q1 = +2bp), Office +20bp (7.20%; Q1 = +6bp to 7%) and Retail +15bp (6.80%; Q1 = flat). Residential was flat (4.50%;Q1 = flat at 4.5%).

Occupancy is relatively flat. In-place occupancy fell 20bp q/q to 90.3% (Q1 = rose 40bp q/q), while committed occupancy was +30bp q/q to 91.9% (Q1 = fell 70bp q/q). In-place CAD fell 80bp q/q to 89.7% (Q1 = rose 30bp q/q), while U.S. was +20bp q/q to 90.7% (Q1 = rose 60bp q/q). Avg. total portfolio rent on lease renewal was +4.6% (Q1 = +4.8%). In-place rent ($14.85/sf; Q1 = $14.32/sf) is 0.6% below AX-est. market (Q1 = 0.7% below). Canada and the U.S. SSNOI +9.0% and -0.6%, respectively (Q1 = +1.3%/+8.2%). By asset class, y/y SPNOI in CAD was: Industrial (+10.3%; Q1 = +7.6%), Office (+8.0%; Q1 = +11.7%), Retail (-0.5%; Q1 = +2.3%).

Discosed liquidity and leverage improve, while floating rate debt exposure increases. Q2 liquidity rose $307M q/q to $451M (Q1 = +$17M q/q), incl. $35M in cash and $415M in available revolving credit; = 1.36x 2023 mortgage debt maturities (Q1 = 0.3x 2023). Total debt/GBV fell 190bp q/q to 47.2% (Q1 = +60bp q/q) on asset sales; AX does not disclose proportionate. Disclosed debt/EBITDA fell 0.5x q/q to 7.8x (Q1 = flat q/q). Unhedged variable-rate debt as a % of total debt increased 940bp q/q to 25.5% (Q1 = rose 190bp q/q). Unencumbered assets to unsecured debt increased 0.2x q/q to 1.77x (Q1 = +0.03x q/q ).