Description

I am recommending Artis REIT Series I (TSX:AX.PR.I). Usual liquidity and tax caveats for Canadian preferreds apply. 

This is a minimum rate reset preferred - its dividend rate resets every 5 years based on 5-year Gov of Canada bond yield+3.93%, but the dividend rate is subject to a minimum of 6%. The security collapsed back in March 2023 when Artis decided not to redeem it, after redeeming Series A a few months prior and telegraphing that it could extinguish all preferred shares in order to convert to an open-ended trust. The dividend rate reset at 6.993% based on prevailing GoC yield at the time. Its price never really recovered as Artis faced a wall of near-term debt maturities and significant floating debt exposure. 

Activist fund Sandpiper run by Samir Manji took control of Artis in 2020. In Aug 2023, Artis started a strategic review to close its common stock’s discount to NAV. In Feb 2024, Artis announced that it had not been able to find a buyer willing to acquire the REIT at a reasonable value relative to its NAV of $13.96. Instead, since the strategic review started, the REIT has sold/contracted to sell nearly $500mm of assets at values in line with their IFRS values. 

What makes the preferred interesting is that Artis has pending dispositions that will dramatically change the balance sheet. On March 1st, Artis said it had $445mm of pending dispositions (inclusive of $222mm for 8 retail properties in Calgary and Winnipeg). Then in April, Artis acknowledged that it had entered into a conditional agreement to sell an industrial portfolio to KKR for US$234mm, or C$320m, the second largest industrial deal in Houston’s history. In addition, Wesbild, a condo developer, announced last week that it had closed the acquisition of Poco Place, an 8.5-acre shopping plaza in British Columbia. In a 2020 slide deck, Artis disclosed IFRS value for Poco Place was $81.6mm. Finally, it has been reported that Artis has sold Johnston Terminal (73kSF, 9.5% occupied), an iconic mixed-use property located in a major tourist attraction in Winnipeg. All told, it’s likely that these deals will generate $900mm~$1bn proceeds for Artis in 2024, wiping off half of Artis’ $1.9bn total debt at the end of 2023. 

Pro forma for these pending dispositions, Artis would have $180mm NOI. Debt/NOI would improve from 10x to 5.5x, and NOI/Interest coverage would improve from 1.7x to 3x. The two series of preferreds (Series E and I) only have $200mm of face value and $12mm of dividend burden. The pro forma portfolio would be about 50% office, 30% industrial and 20% retail. 

Artis is actively buying back the common and the preferreds. In 2023, Artis bought back 226,700 shares of Series I. In Q1 2024, Artis bought back about 90,000 shares of Series I. The ramped up repurchase in Q1 represents about 16% of AX.PR.I’s traded volume and could continue as disposition proceeds come in. They could even do a Substantial Issuer Bid for the preferreds if they really want to retire a significant amount at a discount. 

Currently AX.PR.I sports a 10% yield and the dividend won’t reset until April 2028. Since there’s a rate floor, the minimum yield you get in 2028 will be 8.3% at current price, protecting you from rate cuts. In fact, AX.PR.I offers one of the highest yields among minimum rate reset preferreds, lower than BPO and ECN. BPO has been acquired by BAM and you’d have to go through the maze of Brookfield complex to find out what’s going on, and ECN has its own issues (there’s a recent VIC write-up). I think once Artis’ balance sheet has been deleveraged, the security should trade at ~7% yield or near par. 

Some odds and ends:

Edgepoint disclosed a 10% position in Artis last year and just took their stake up to 12%. They seem to be smart and thoughtful.

In 2022, Artis participated in the privatization of Cominar REIT. Artis bought 33% of Cominar for $112mm and invested $100mm in a junior preferred stock that’s currently paying dividends in kind. The junior pref balance is currently $144mm. Cominar is also selling properties to focus on a core portfolio, and the junior preferred could be called by Artis in March 2025. The above valuation math does not consider the potential values for the Cominar investments. 

As of 12/31/2023, Artis owned $152mm of Dream Office REIT and First Capital REIT. As of April, Artis has bought another ~$7mm of Dream Office and taken up its stake to 19%. It’s unclear what Manji’s plan is. He might go activist on Dream Office, but I don’t think this investment would move the needle here for the credit quality of the Artis preferreds.

Catalyst

Closing of asset sales