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

TD comments after conference

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THE TD COWEN INSIGHT

Q2 results were below expectations after adjusting for lumpy one-time revenues (development incentive fees) and our revised '24/'25 estimates now carry estimated payout ratios north of 100%. Management remains committed to the distribution and announced/ completed YTD dispositions should bring leverage to management's target level, and allow the REIT to look for more growth opportunities.

Impact: SLIGHTLY NEGATIVE

Initial views: 

Management continues to prioritize asset sales in the nearterm, having now announced/closed over $1bln in dispositions in the year (at pricing +/- IFRS value). With several sales set to close later this year, management now expects overall leverage to drop below its sub-45% target (Artis' calc in Q2: 49.8%). Looking ahead, management noted it would start to pursue growth opportunities once its leverage goals have been met. While a target for further asset sales was not set, management remains active in its discussions with buyers. Leverage moving in the right direction. D/GBV (our calculation using a deconsolidated balance sheet including the Iris/Cominar investment) moved lower to 56.5% (-210bps q/q). With forecast asset sales set to close this year, we expect leverage to decline meaningfully to 50.5% by Q4/24. On the upcoming $184.8mm in 2024 mortgage maturities, management has received term sheets for 41%, expects to repay 35% (with dispositions proceeds), and anticipates no difficulties in managing the remaining 24% of maturities.

Equity Investments. During Q2, Artis purchased $13mm in equity securities, including increasing its investment in Dream Office (with joint actors up to 20.75% from 18.77%). We forecast no additional equity security purchases/sales.

NCIB activity also accelerated in the quarter, with Artis repurchasing 2.2mm units at $6.43/unit (~55% discount to IFRS NAV) and another 112k units post Q2.


Forecasts:
Our AFFO/unit estimates decline 3% in 2024 and 8% in 2025 largely on higher/lower NOI assumptions (2024 is marginally higher owing to the $6mm in development fee income reported in Q2). We expect most of the proceeds from the $370mm in dispositions anticipated to close in H2/24 to be used for reducing leverage. Our forecast does not include any additional dispositions or any additional equity security purchases/sales. Our new 2026 estimates call for 12% y/y growth. Our $10.30 NAV/unit estimate is -6%

Justification of Target Price
Our $6.50 target price (unchanged) is based on a 11.0x-11.5x multiple to our 2025E AFFO/unit (previously 10.0x-10.5x). We believe that Artis should trade at a discount to its peers given its high proportion of floating-rate debt, combined with a weighted average term-to-maturity of only 1.5 years. Our target represents a 37% discount to our $10.30 NAV/unit estimate.