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Artis: Distribution Sustainability Analysis


  • Artis REIT reported Q4 2017 results.
  • Payout ratio remained elevated.
  • We explain why this ratio is elevated and why it will likely move lower in 2020.

Artis REIT (ARESF) announced Q4 2017 results and this quarter marked the fourth consecutive quarter of worsening adjusted funds from operations (AFFO) payout ratio. For the quarter and the year, the AFFO payout ratio went past 100%.

Source: Artis 10-K 2017

We had previously pointed out our cautious stance on this one, thanks mainly due to the big drop in leasing spreads in the Calgary office market. Is the distribution safe? Here are few things to consider in that regard.

Calgary beginning to lose impact

Artis was able to sell 5 Calgary office buildings at or above NAV in 2017. This has definitely lessened the impact of further lease turnovers in this segment. Excluding the impact of currency movements, same property NOI increased in 2017 and the increase was strongest in Q4 2017 (+1.7%) for the fiscal year 2017.

In fact, the overall Canadian office segment, despite of the weight of Calgary office, showed a remarkable 3.5% NOI growth in Q4 2017.

2018 NOI

2 redevelopments were completed in Q4 2017 and those should help boost 2018 NOI. Still, overall rents are below market rents and there will be a drag in 2018 and 2019.

With approximately a $3 million decrease over 2 years projected and 150 million units outstanding, funds from operations (FFO) would drop by about 2 cents/year. Not huge and likely something that can be offset by redevelopments and capital recycling.


A key reason we see the risks as less than projected by AFFO is because we have examined the ratio of FFO to AFFO over the last few years.

Source: Author's calculations from Artis 2014-2017 10-Ks

Historically, AFFO has been in the range of around 85% of FFO. The extraordinary vacancies in the Calgary office space have had tenants demanding extremely crazy inducements, pushing that percentage significantly

This article was written by

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Analyst’s Disclosure: I am/we are long ARESF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Trapping Value is a Co-Author on "The Wheel of Fortune" Marketplace service.

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