Artis: Asymmetric Risk-Reward

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About: Artis Real Est In Tr (ARESF)
by: Trapping Value
Summary

Artis REIT has been our strongest recommended real estate play.

The company is putting its money where its mouth is via relentless buybacks.

A new development might accelerate value creation for shareholders.

Note: All amounts discussed are in Canadian dollars.

When we last covered Artis REIT (OTCPK:ARESF) we left with a "strong buy" message.

Our 12 month target price for this is $14.00/share as we believe the stock deserves to trade at no more than a 10% discount to its NAV. This discount we believe should be there due to the high vacancies in the Calgary office portfolio.

Artis actually thereafter traded a bit lower until its Q1-2019 results were revealed. On earnings, the stock moved up by 6%. We examine the results and tell you why we still think this may be one of the best risk adjusted plays on real estate.

Overall results

After spending all of 2018 showing deteriorating metrics, it was good to see the traditional funds from operations (FFO) and adjusted FFO (AFFO) start to move up.

Source: Artis Financials

While those numbers made us happy, we very more impressed by the traction in same property net operating income (NOI)

Source: Artis Presentation

When these numbers are broken down further by country we see that other than US retail, all segments did well.

Source: Artis Financials

US retail is a very small portion of the overall picture and should not stop Artis from delivering improving numbers in the back half of 2019.

Occupancy & rents in place

The primary reason for strong NOI growth is the continuous improvement in occupancies over the last year.

Source: Artis Financials

Interestingly with office (Artis' biggest portfolio segment) occupancy at 89.7%, Artis still has some big upside possible.

Another area that is improving is the "in-place rents". This metric compares the current market rents with the rents on the portfolio that are coming up for renewal. About 17 months back when we showed caution on this name, we were mostly worried about this metric. Specifically as shown below, we were concerned with the large negative numbers for late 2018, 2018 and 2019.

Source: Artis Financials

Artis has worked through the bulk of tsunami and the future looks a lot better.

Source: Artis Financials

Buyback

Artis gave a recent update on the buyback activity extending till May 1 (results cover till March 31).

From November 1, 2018, when the REIT announced its intention to purchase units through its NCIB, to April 30, 2019, Artis has bought back 11,059,371 trust units at a weighted-average price of $10.35, 45,100 Series A preferred units at a weighted-average price of $21.47, 49,800 Series E preferred units at a weighted-average price of $20.00, and 41,900 Series G preferred units at a weighted average price of $21.18. As of the date hereof, there are 142,936,674 trust units, 3,408,800 Series A preferred units, 3,955,600 Series E preferred units, 3,161,300 Series G preferred units and 5,000,000 Series I preferred units outstanding.

Artis has bought back about 7.2% of its outstanding shares in 6 months. That is an extremely accelerated pace and exceeds even that of our chronic buyback real estate play, Morguard Corp.

Artis confirmed its intention to keep the pedal to the metal as long as the stock price remained low and far below its NAV of $15.55.

Source: Artis Presentation

This is exactly how a buyback should be done-at maximum pace when the value creation is maximum. We expect buybacks to slow down materially and trickle to a crawl should Artis move over $13.00 CAD a share.

New committee

Artis announced the formation of new special committee alongside release of the results.

The REIT's Board of Trustees (the "Board") is committed to maximizing unitholder value and reiterated its confidence in and dedication to the implementation of the New Initiatives. The Board has formed a Special Committee of Independent Trustees to review and evaluate additional strategic alternatives that may arise.

Source: Artis Financials

There are three potential directions here that they could take.

  • They could accelerate the buyback even further via asset sales. Essentially as long as they are selling in line with their $15.55 NAV and buying back below that in the market they are creating value. With the share price being resistant to moving up they may go this route.
  • They could also do a substantial issuer bid. This tactic has recently become popular with Power Corporation and its family of companies and Dream Unlimited employing it.
  • Finally, this might be giving a nod to a direct sale near NAV. We got the feeling from Q3-2018 conference call that Artis was giving the buyback as a last ditch effort to raise the share price quickly, failing which it might contemplate selling itself. This might just be our impression but this special committee bolsters the possibility.

Conclusion

Artis' high quality real estate trading at a big discount to fair value gives investors a good entry to play real estate in both the US and Canada.

Source: Artis Presentation

The buyback and possibility of a sale improve prospects for forward returns substantially. In fact, a dip again below $10 would likely cement the possibility of a sale. We are long to the maximum and have no intention of selling.

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.

Additional disclosure: Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.

TIPRANKS: BUY