CA - Artis REIT: Deleveraging Makes High-Yield Preferred Attractive

2024-06-19 23:51:33 ET

Summary

• On our last coverage, Artis REIT was paying a lofty dividend that was uncovered by its AFFO.
• We look at the Q1-2024 results and update our views.
• The recent asset sales are definitely helping in derisking the case, but we are still staying away from the common units.
• We tell you why.

All values are in CAD unless noted otherwise.

We noted that the threat of a distribution cut was real for Artis Real Estate Investment Trust ( AX.UN:CA )(ARESF). This was in our March 2024 piece and we called for it to happen over the next 12 months. We reviewed the Q4-2023 financial results in that article and while all the segments of the portfolio (Office, Industrial and Retail) showed a growth in NOI, the red flags were hidden in plain sight. The funds from operations or FFO and its adjusted counterpart did not join the NOI party due to asset sales and rising interest expenses. The double digit reduction in FFO and AFFO looked uglier in light of a year over year reduction in outstanding units. The management also came to see the value of its properties through the eyes of the market and consequently raised capitalization rates across the board. We did not see any existential threat for the REIT, but advised caution as things could get hairy if the financial conditions tightened rapidly. The close to 51% debt to gross book value was outside our comfort zone....

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