Added 50 ARTIS (OTCPK:ARESF) at $11.86 (Equity REIT Common and Preferred Stock Basket Strategy)(see Disclaimer):
This add was part of my equity REIT basket strategy last updated in a SA Instablog: Update For REIT Basket Strategy As Of 3/19/15 - South Gent | Seeking Alpha A snapshot of my then current holdings can be found in that blog.
I frequently use basket strategies for industry sectors and rotated into both equity REIT common and preferred shares after they were plastered in 2013.
The Vanguard REIT ETF (NYSEARCA:VNQ) fell $.62 (4/15/15) to close at $81.97. I believe that most of my Canadian REITs rose in price looking at both the ordinary shares priced in CADs and as converted into USDs (one was unchanged and another lost C$.01, both gaining in USDs). The gains in USDs were significantly higher due to the CAD rising in value on 4/15/15 against the USD due most likely to a surge in crude prices. US crude rises 5%
I include a number of Canadian REITs in my REIT basket. All of them, except for Artis, were purchased in Toronto using my CAD stash. All Canadian REITs that I own now, and have owned in the past, make monthly distributions.
I have discussed a few purchases here at SA.
Of the foregoing securities, I currently own 500 shares of Northwest Healthcare, Dream Industrial and Dream Global and 200 of Agellan.
Snapshot of Trade: Unlike most other Canadian REITs whose ordinary shares are traded only in the U.S. Grey Market, where bid and ask prices are not displayed and volume is close to non-existent, the USD priced Artis shares trade on the U.S pink sheet exchange that has more volume and bid/ask prices are displayed to the investor. Artis Real Estate Investment Trust (OTCPK:ARESF)-OTCMarkets.com A symbol ending in "F", rather than "Y", indicates that the investor is buying the ordinary shares priced in USDs.
This add brings me up to 100 ARESF shares. I will be dragging and dropping part of my earlier discussion here, updating the information where appropriate with developments since my last purchase: Bought 50 ARESF at $12-REIT Basket Strategy (12/13/14 Post).
That post was reproduced as a SA Instablog and then as an article: Equity REIT Basket Strategy: Bought 50 Units Artis Real Estate Investment Trust (OTCPK:ARESF) At $12 - South Gent | Seeking Alpha; Equity REIT Basket Strategy: Bought 50 Units Artis Real Estate Investment Trust At $12 | Seeking Alpha I have given SA permission to publish my Instablogs as articles, when they choose to do so, without payment of any compensation to me.
The ordinary shares closed at C$14.9 on 4/10/15. That closing price converted into about $11.85 (4/10/15) and at $12.15 (4/15/15), as the CAD gains some since my purchase.
Security Description: Artis Real Estate Investment Trust (OTCPK:ARESF) 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 12/31/14, Artis had 246 properties in its portfolio with 25.8M square feet of leasable space. Portfolio occupancy stood at 96%. Page 5 Q4-14 Investor-Presentation.pdf
On a net operating income basis, Artis had a 51.9% weighting in office buildings, 23.6% in industrial properties and 23.6% in retail properties. The U.S. properties provided 22.6% of net operating income.
U.S. properties are concentrated primarily in Minneapolis and Phoenix and a few other localities as noted below. Those properties accounted for approximately 22.9% of net 2014 operating income. The company intends to grow its U.S. portfolio to 30% of net operating income. (pages 4-5 of 2014 Annual Report.pdf)
It owns 44 properties in Minneapolis consisting of 5 office (100% leased), 7 retail (100% leased) and 32 industrial (100% leased) properties. Property-Listings-Q4-14/PDF
The company owns 6 office and 1 industrial property in Phoenix.
Three office buildings were owned in Denver and one in NY and Florida both 100% leased. Two of the 3 Colorado offices are only 50% leased.
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".
A list of properties, with occupancy rates can be found at pages 6-7, 2014 Financial Report.pdf.
The weighted average rental increase on renewals was 7.2% in the 4th quarter, page 11 Q4/14 Investor Presentation.pdf.
As of 12/31/14, the weighted average interest rate was 4.04%. The weighted average term was 3.9 years. Total debt to gross book value stood at 48.4%. The interest coverage ratio was 2.8 times. Page 12, Q4-14 Investor-Presentation.pdf
Distributions: The monthly distribution rate is currently C$0.09 per share. It is not accurate to call the distribution a dividend. A distribution paid by a Canadian REIT into a U.S. investor's IRA is not eligible for the "dividend" exemption under the U.S.-Canadian Tax Treaty.
The distribution will be converted from CADs to USDs after a 15% Canadian withholding tax. At the exchange rate from 4/10/15, C$.09 would buy $.0716 before the adjustment for the Canadian tax.
For owners of ARESF, and assuming the distribution rate remains constant at C$.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 7.24% at a total cost per unit of $11.86, assuming no dividend change and a constant currency exchange rate that produces a $.0716 monthly rate for ARESF unit holders. The actual annualized yield will depend on the conversion rate for each monthly dividend payment.
It is a futile exercise to actually calculate the yield for ARESF due to the fluctuations in the exchange rate. Last Wednesday (4/15/15), the CAD rallied as oil prices surged and the C$.09 closed that day at USD$.0732 raising the yield to 7.4% assuming a total constant cost at $11.86 per unit and a constant exchange rate as of 4/15/15.
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.
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).
Annual 2014 Earnings: All amounts are in Canadian Dollars.
For 2014, FFO was reported at C$1.41 and AFFO was $1.23 with an AFFO payout ratio at 87.8% down from 89.3% in 2013. That 2014 payout ratio is still high but moving in the right direction for a distribution increase at some future time. Property net operating income increased 5.4% and revenues rose by 8% compared to 2013.
Rationale: Both the dividend yield and valuations are good in my opinion, particularly compared to U.S. REITs which do not have the currency risk for U.S. investors.
Using the CAD closing price on 4/10/14 of C$14.9, and based on 2014 annual results, the TTM P/FFO was at the time of purchase 10.49 and the P/AFFO was 12.11.
I would use the P/AFFO number since that is a better measure of free cash flow than FFO.
The average P/FFO for American REITs was 19.4 in February 2015, page 3 Lazard_US RealEstate Indicators Report
Risks: (1) Currency Conversion Issues: The following discussion is fairly typical whenever I buy a foreign security.
The CAD has already lost a lot of its value against the USD over sdthe past 2+ years as shown in this 5 year CAD/USD chart: CAD/USD Interactive Chart In July 2011, 1 CAD bought USD$1.05 for awhile. On 4/10/15, 1 CAD would buy about $.79, roughly a 25% decline in the CAD's value since that peak exchange rate in July 2011. That decline flows through into the USD price of a Canadian stock traded on U.S. exchanges.
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:
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.
Comparison Chart ARESF vs. AX-UN.TO
The two shares are both the same ordinary shares. The difference is that the shares traded in Canada are priced in CADs and ARESF is priced in USDs.
The current declines in the CAD and the ordinary shares priced in CADs may not be 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.
It is just hard to say whether the recent energy price spurt is the real deal or another head fake.
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.
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 but not exciting: Canada | Economic Indicators
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 in its 2014 annual report: 2014_Annual_Report.pdf
Future Buys: I may buy up to 100 more ARESF shares at or below $11.
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.
Disclosure: The author is long ARESF.