December 12, 2007 - 9:39pm EST by
2007 2008
Price: 15.40 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 560 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Artis REIT (AX.UN on TSX) is a Canadian publicly traded real estate investment trust whose properties are located in Western Canada, with an emphasis on Alberta. Please note that all numbers in this write-up are in Canadian dollars.  An investment in Artis offers a lower risk way to invest in the growth in the commodities markets in Western Canada.
Investment Thesis
At its current price of $15.40, Artis trades at an implied cap rate of 7.3%.  The REIT has a built-in growth profile due to the fact that its current in-place rents are substantially below market rents in its property markets.  As its leases come up for renewal over the next few years, Artis should be able to raise rents significantly.  The following are estimated AFFO numbers including marking up lease rates to market:
2007                2008                2009                2010
$1.02               $1.21               $1.30               $1.40
Market rents would have to fall approximately 30% in order for the AFFO numbers to stay at 2007 levels.  Assuming that Artis trades at 14x AFFO in 2010 (similar to current AFFO multiples for comparables for 2007), Artis would trade at approximately $20 for 30% price appreciation over the next 2 to 3 years.  In addition to this, there is the current annual yield of 6.7%.  Assuming it takes 3 years to trade at $20 and including the current yield, this would result in 15% per annum compounded returns.
In terms of NAV, using a 6.75% cap rate, Artis would have a NAV of $17.70.  If Artis traded at NAV, this would result in upside of 15%.
Artis is a growth-oriented real estate investment trust focused exclusively on commercial properties located in primary and growing secondary markets in western Canada, particularly in Alberta.  The REIT’s goal is to provide Unitholders the opportunity to invest in high-quality western Canadian office, retail and industrial properties, as well as to provide monthly cash distributions that grow over time.
Including all of its completed and proposed acquisitions, Artis will own approximately $1.1 billion of commercial property, comprising approximately 6.3 million square feet of leasable area in 84 properties.  Leasable area will be approximately 31.1% in Manitoba, 6.6% in Saskatchewan, 55.4% in Alberta and 6.9% in British Columbia; by asset class the portfolio will be 31.4% retail, 43.3% office and 25.3% industrial.
Other details
The REIT is 50% leveraged (debt to book value).  There is no floating rate debt, the weighted average coupon is 5.5% and debt maturities are staggered.  
The REIT’s current annual distribution of $1.05 is covered by its AFFO.
In terms of class of properties, the retail properties are low A class/ high B class; the industrial properties are also low A class / high B class; and the office properties are mainly B class.
Artis is externally managed which acts as a poison pill for an acquirer.  The company has indicated that they are willing to consider takeover proposals as long as the price is reasonable.
- economic slowdown in Western Canada, substantial decrease in the price of oil and natural gas, interest rate increases that cause cap rates to increase
- leasing for most of 2008 should be completed in early 2008 and Artis will then reassess the monthly distribution for an increase; the company just announced a stock buyback program


- leasing for most of 2008 should be completed in early 2008 and Artis will then reassess the monthly distribution for an increase; the company just announced a stock buyback program
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