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

cibc: Price Target (12-18 mos.): C$12.00

[perplexed01]

To REIT Or Not To REIT; A Seismic Shift In Scope

Our Conclusion The reveal of AX’s 100-day review presented an entirely new direction that aims to close the ever-present discount to NAV and deliver long-term NAV/distribution growth. We believe the unique approach presented can conceivably do both. However, the seismic shift in scope comes with a heightened level of execution risk, and the transition period is likely to be lengthy. Beyond execution, the market’s perception of how AX should be valued could be a potential key swing factor. If the market continues to view AX as a REIT (our bias for now) rather than an active asset manager, the potential shift in near-term asset class exposure towards less favourable assets could be a short-term headwind for valuation. We also note that such a strategy may ultimately appeal to a very different investor base than the traditional REIT investor (if there is such a thing).

Key Points No Changes To Estimates: Our estimates are unchanged, and we reiterate our Neutral rating, which reflects our view that the current discount to NAV, which is broadly in line with diversified peers, is fair in light of what is largely a “wait-and-see” story at this time. Thoughts On Valuation: If AX executes on its proposed plan, the company will no longer resemble (in a few years’ time) a diversified REIT, and as such, there will be little merit for a “diversified REIT” discount. However, we believe that over the short term, the company will for the most part look and function like many of its REIT peers, and as such, investors are likely to treat it as such. To this end, the company is prioritizing the divestiture of its industrial assets, which have arguably contributed to a narrower discount to NAV as compared to some of its diversified REIT peers. The redeployment of proceeds from industrial asset sales into other favourable asset classes (or maintaining exposure to industrial) could play an important role in mitigating an otherwise potential (short-term) valuation headwind. Conversion To An Open-ended Trust: The company believes that operating as an open-ended trust will provide it with a number of benefits, such as certain tax advantages and increased operating flexibility. It remains to be seen whether ultimately renouncing the REIT status could lead to a potential churn in the current investor base, which to be clear is not necessarily a negative, but nonetheless may be a short-term headwind.

Dividend Increase: The distribution has been increased to $0.60/unit per annum (representing a 11.1% cumulative increase since last October).

[perplexed01]

so SH now face increased uncertainty, increased risk, no expectation of further divy restoration, and a near term correction as REIT oriented investors are replaced by growth oriented ones.  the latter need to see something concrete and the process to quote cibc will be "lengthy"