This is an excerpt from a post published earlier today: Bought 2 LINN Energy LLC 8.625% Senior Unsecured Bonds at $81 (4/15/2020 Maturity)/Bought 50 ARESF at $12-REIT Basket Strategy
This purchase of Artis Real Estate Investment Trust (OTCPK:ARESF) ordinary units is part of my Equity REIT Common and Preferred Stock Basket strategy. This strategy was started in September 2013 for the reasons discussed in this March 2014 post: Equity REIT Common and Preferred Stock Table as of 3/5/14
This particular basket contains both U.S. and Canadian REITs and equity preferred stocks issued by U.S. equity REITs. It does not include any mortgage REITs.
Several of the U.S. REITs purchased in December 2013 are near 52 week highs. While I initially experienced success with the Canadian REITs, harvesting profits in several of them, the Canadian REIT sector has been a major detractor in this basket's performance over the past several weeks with several of them hitting new 52 week lows or all time lows.
As far as I can surmise, some investors have concluded in typical group think fashion that Canada is about to fall into an abyss, never again to see daylight or prosperity, due to the most recent sharp decline in crude prices. All is lost, bad now and will never get any better.
Tenants will abandon their leases in droves, just prior to jumping off tall buildings en masse. That is a really scary thought.
My unrealized losses in the Canadian REIT sector now exceed my realized gains in 2014. I thought that I was doing pretty good until the herd decided that Canada was going kaput. I am exaggerating just a little bit here.
Many of the Canadian REITs are now yielding over 9%, and some are now over 10% yields, based on their recent share prices. All of them pay monthly distributions.
The carnage inflicted in the Canadian REIT sector has caused the Old Geezer to become more timid with his purchases.
When I last bought Artis, discussed below, I used my CADs to buy 300 units on the Toronto exchange.
Having sold that 300 unit lot at C$15.71 on 9/12/14, I managed to generate only enough courage to buy 50 ordinary shares traded on the U.S. pink sheet exchange and priced in USDs for the reasons discussed hereafter.
Bought 50 ARESF at $12 (Equity REIT Common and Preferred Stock Basket)(see Disclaimer):
Snapshot of Trade: I bought the ordinary shares priced in USDs that are traded on the U.S. pink sheet exchange: Artis Real Estate Investment Trust.
Closing Prices Day of Trade: Friday 12/12/14
ARESF: $12.02 -0.28 (-2.28%)-Ordinary Shares Priced in USDs
AX-UN.TO: C$13.92 -0.24 (-1.69%)-Ordinary Shares Priced in CADs
Currency Conversion on Day of Trade:
Security Description: Artis Real Estate Investment Trust is a diversified Canadian REIT that owns office, retail and industrial properties in Canada and the U.S., with a focus on Western Canada.
As of 9/30/14, Artis had 244 properties in its portfolio with 25.6M square feet of leasable space. Portfolio occupancy stood at 96%.
On a net operating income basis, Artis had a 51.9% weighting in office buildings, 23.8% in industrial properties and 24.3% in retail properties. The U.S. properties provided 22.6% of net operating income. (page 4 Third Quarter Earnings Report)
Property Map: Portfolio Map
U.S. properties are concentrated primarily in Minneapolis and Phoenix and Denver to a lesser extent.
It owns 40 properties in Minneapolis consisting of 4 office, 6 retail and 30 industrial properties Pictures Those properties accounted for 13.4% of net operating income YTD through 9/30/14.
The company owns 6 office and 1 industrial property in Phoenix. Pictures
Three office buildings were owned in Denver.
For assets owned in the U.S., the U.S. funds are converted back into Canadian Dollars which produces "largely unpredictable foreign exchange gains and losses on our income statement" which impacts "results from operations, as well as the other comprehensive income". For the three months ending 9/30/14, Artis booked an unrealized gain in "other comprehensive income of $32.5 million, a large number due to the size of our U.S. portfolio". Page 3 Q3 2014 Results-Earnings Call Transcript | Seeking Alpha
A list of properties, with occupancy rates can be found at page 5 of the last earnings report.
As of 9/30/14, the weighted average interest rate was 4.09%. The weighted average term was 4 years. Total debt to gross book value stood at 48.6%. The interest coverage ratio was 2.8 times. Page 12 Investor-Presentation
AFFO per unit has risen steadily, though slowly, from C$1.15 per unit in 2012 to an estimated C$1.22 in the 2013 third quarter. The AFFO payout ratio was 87% in the last quarter, which is high, but still within the high end of my comfort range. (page 14) The consensus 2015 estimate is for AFFO C$1.28 per unit.
Based on the closing price of C$13.92 last Friday, the P/AFFO based on the C$1.28 estimate would be 10.875 which I view favorably.
As of 11/6/14, the consensus estimates were as follows: net asset value per share was C$16.51; implied capitalization rate of 6.7%; and consensus target price of C$17.16 (page 18)
Distributions: The monthly distribution rate is currently C$0.09 per share.
The distribution will be converted from CADs to USDs after a 15% Canadian withholding tax. At the exchange rate from last Friday, C$.09 would buy $.0777 before the adjustment for the Canadian tax.
For owners of ARESF, and assuming the distribution rate remains constant at C$.09, it is important to keep in mind that a decline in the CAD after a purchase results in a dividend cut, while an increase in the CAD's value operates as a dividend increase.
Given the currency fluctuations, it is impossible to compute a dividend yield. The dividend yield would be about 7.77% at a total cost per share of $12, assuming no dividend change and a constant currency exchange rate that produces a $.0777 monthly rate for ARESF unit holders. The actual annualized yield will depend on the conversion rate for each monthly dividend payment.
Link to Distribution History
Prior Trades: My prior trades were made on the Toronto exchange which requires an explanation of how profits are reported by my broker, an issue that is avoided when the investor buys the ordinary shares using USDs on the U.S. pink sheet exchange.
For a U.S. taxpayer, the taxable profit reportable on a 1099 by the broker will not be determined by the investor's profits in CADs. Instead, both the cost basis and the proceeds will be converted from CADs into USDs. If the CAD declines in value against the USD during the period of ownership, the U.S. taxpayer will realize a lower taxable profit than the amount actually realized in CADs. Different permutations of that scenario could also apply. The investor might have a profit in CADs and a loss in USDs, for example, or a loss in CADs and a profit in USDs.
Since I sold a number of Canadian REITs earlier this year, my reportable tax profit was less than my CAD profit due to the decline in the CAD during my ownership period.
One example is provided by my disposition of 300 Artis shares bought on the Toronto exchange using my CADs. I sold those shares in Toronto and received C$397 more than I used in CADs to make that purchase. My reportable USD profit was $6.92. The accounting related to currency conversion for tax reporting purposes eliminated about C$390 in profits.
Last Friday, I could have bought the ordinary shares in Toronto at a lower price than that previous September 2013 purchase.
Prior to the foregoing round trip, I had flipped two 100 share units back in 2011, realizing a total gain of $281.27 (snapshot in both prior linked posts).
Recent Earnings Report: All amounts are in Canadian Dollars. For the quarter ending 9/30/14, Artis reported revenues of $125.425M and AFFO of $42.128M or $.31 per shares:
The AFFO calculation can be found at page 24. The AFFO number subtracts from FFO reserves for capital expenditures, reserves for leasing costs and straight-line rent adjustments.
I will use the AFFO numbers, rather than FFO, when making a valuation judgment.
Rationale: Both the dividend yield and valuations are good in my opinion. I noted the consensus P/AFFO was 10.875. The P/FFO would be lower. The average P/FFO for American REITs was 17.8 in November 2014, page 3 Lazard_US RealEstate Indicators Report
I can never predict how long irrational pricing will continue. I thought that investors had lost their collective minds in 1998 and had gone berserk. Yet, prices continued to rise through 1999 and into 2000. The same kind of mindset was prevalent in March 2009, when investors were pricing securities based on an economic scenario that had already been eliminated through the collective actions of central banks and governments. Common Valuation in Bear Markets: It is Bad and Will Never Get Better (3/22/09 Post)
(1) Currency Conversion Issues: The following discussion is fairly typical whenever I buy a foreign security.
The ARESF price is linked to the ordinary share price priced in CADs as converted into USDs. If the CAD continues to decline against the USD, the ARESF shares will underperform the ordinary shares traded in Toronto and priced in CADs. The CAD has been declining in value, so I would expect to see ARESF underperforming the Toronto listed shares priced in CADs which is the case as shown by this two year chart:
That chart looks like the stock decided all of a sudden to jump off a cliff. As I have noted, I am a contrarian investor and a bit contrary too.
The USD priced ordinary shares will outperform the ordinary shares priced in CADs when the CAD has gained value. To show how this works, I looked at a five year chart for the CAD/USD. I noted that the CAD was rising in value between 7/1/2010 to 7/29/12. I then entered those dates as the time period for another comparison chart:
Putting side all other currency conversion issues, the buyer of ARESF would want the CAD to rise against the USD after purchasing shares.
The worst scenario for the ARESF owner, which I simply call the double whammy, is for the CAD to continue declining against the USD and for the ordinary shares priced in CADs to decline in price at the same time.
The best scenario is for the CAD to increase in value after the purchase and for the ordinary shares priced in CADs to increase in price at the same time.
In my opinion, I prefer to buy foreign securities when the USD has significantly risen in value against the relevant foreign currency and the ordinary shares have declined significantly in local currency terms for non-fundamental reasons. Both of those conditions have now occurred with ARESF, unless one believes that Canada is in for a long term economic decline. The current declines in the CAD and the ordinary shares priced in CADs may be far from over too. I can not predict the future. When and if I believe that I can, I would hope my family appoints a conservator to manage the money.
(2) Investor Perception about the Canadian Economy: As noted earlier, the Canadian REIT sector decline gathered momentum as energy prices accelerated their decline. A persistent long term decline in crude oil prices will have a negative impact on Canada's GDP. I suspect more of that negative impact would be felt in the Alberta and Saskatchewan provinces.
Canadian banks may be negatively impacted by increased credit risks. Several western Canadian governments will have less revenues.
For the Ontario and Quebec provinces, the overall impact would probably be positive as consumers have more money to spend due to lower heating and gasoline costs. Investors have already overreacted in a major and irrational way when pricing Canadian REITs, in my opinion. When the herd starts engaging in group think that assumes Armageddon is near, fear has gained control over the rational Left Brain decision making process.
Recessions will take a toll on REITs. It remains to be seen whether Canada will slip into a recession. Recent economic numbers are generally positive. Gross domestic product, expenditure-based (quarterly); GDP growing at 2.8% pace-CBC News (11/28/14 dated article)
3. Company Description of Risks: Every company that I buy regularly produces a summary of risk incident to its operations. Generally, an investor can find those risks in an Annual Report. Artis describes those risks starting at page 22 of its 2013 annual report: Artis-REIT-2013-Financial-Report.pdf
Future Buys/Sells: Sometimes, when I purchase foreign ordinary shares on the pink sheets, my broker converts the shares to the ordinary shares priced in the local currency. That ends up being a cheaper way to buy the foreign security, since the commission is more than 50% lower than the cost applicable for Toronto trades. This will not happen until I own 100 shares and may not happen at all. I have to trade round 100 share lots in Toronto.
When and if the ARESF price sinks below $11.5, I will consider buying 50 more shares and another 50 below $11.
I do not have a target price. Most likely, I would sell the highest cost lost first to lower my average cost per share, and then buy that lot back whenever it would reduce my average cost per share. If my shares are converted to the symbol used in Canada, then I would only average down with a 200 share lot, using my existing CAD stash to fund the purchase, given the C$19 commission rate.
Disclosure: The author is long ARESF.
Disclaimer: I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members.
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