Three years after being installed as president and CEO of Artis REIT and announcing a “bold, pioneering and truly unique vision,” Samir Manji has issued his annual letter to unitholders to outline where things stand and where they’re going.
Broad market forces continue to put pressure on Artis’ trading price (AX-UN-T), resulting in a substantial gap between its net asset value (NAV) per unit and the market value of its units. Many Canadian real estate investment trusts have been dealing with similar issues, Manji pointed out.
“Three years have passed since we announced our redefined strategy,” Manji wrote in the letter. “Since then, our units have continued to trade at a significant discount to NAV. We remain committed in our pursuit of narrowing this gap.”
NAV per unit was $15.03 and the unit market value was $10.58 at the end of 2020 when Manji was still interim CEO following the ouster of previous CEO and board member Armin Martens. Those respective numbers were $13.96 and $6.57 to close out 2023.
“Global events, both economic and geopolitical, continue to change and exert a widespread effect on our daily lives and the businesses within which we operate. While there are many external economic and market-based factors that are out of our control, we will continue to focus on what is within our control – our business.”
To that end, in August Artis’ board of directors announced a strategic review to evaluate alternatives for the REIT to maximize value and it’s still in progress.
The potential sale of the REIT has been explored, but Manji said in his letter under current market conditions there isn’t a buyer willing to pay a reasonable value relative to Artis’ NAV.
Asset dispositions and liquidity
Artis did, however, complete or enter into agreements to sell $161.9 million of office assets, $256.2 million of retail assets and $55.5 million of industrial assets at what it determined to be fair values.
Artis continues to evaluate opportunities to sell additional assets, with a focus on the industrial portfolio, to further deleverage and strengthen the balance sheet, grow NAV per unit and enhance liquidity.
“The current environment is one where cash is king,” Manji wrote. “Continuing on the path of reducing leverage and enhancing liquidity will provide us with flexibility to consider allocating capital to opportunities that we believe provide us with above-average risk-adjusted returns.”
Artis ended 2023 with liquidity of $164.3 million and a total debt to gross book value of 50.9 per cent, compared to 48.5 per cent a year earlier and 50.2 per cent at the end of 2020.
Artis’ leasing team negotiated and signed new leases and renewals for approximately 1.9 million square feet in 2023 and ended the year with occupancy (including commitments) of 90.9 per cent.
“Despite the current market skepticism towards diversified REITs, our operating metrics affirm that the quality of our real estate provides operating stability during an incredibly challenging time for the real estate sector,” Manji stated.
Equity securities investments
The redefined strategy announced in 2021 contemplated value-investing in equity securities investments of other publicly traded companies and REITs.
Artis’ investments in Dream Office REIT and First Capital REIT carried a fair aggregate value of $316.8 million at the end of 2022 but, after selling units, that number was down to $152 million at the end of 2023.
Artis and a consortium of partners closed on the acquisition and privatization of Cominar REIT in 2022 as part of its value-investing strategy. It completed the sale of several of the Cominar assets last year.
Artis is working on various means to reduce its cost of capital in Cominar while simultaneously pursuing additional dispositions and exploring opportunities to substantially enhance density at a number of core retail sites in Greater Montreal.
“Value-investing by definition requires patience and time to realize the full potential of any investment,” Manji wrote. “While we are required to mark to market our investments on a quarterly basis, it is time combined with our active engagement in these investments that will ultimately produce the results we aim to achieve.”
During the last three normal course issuer bid (NCIB) terms, Artis has acquired the maximum number of common units allowable in an effort to enhance value for owners. It plans to continue that strategy of buying back its own units.
“With our units continuing to trade on the market significantly below our NAV per unit, utilizing our NCIB is a low-risk use of capital that increases intrinsic value and benefits our investors by increasing their effective ownership stake in Artis,” Manji observed.
Development projects
Going into 2023, Artis had three development projects underway: Park Lucero East; Blaine 35 II; and 300 Main.
Park Lucero East is a three-building, 561,000-square-foot industrial development in Arizona’s Greater Phoenix Area in which Artis has a 10 per cent ownership interest and a development management contract in place.
Each building was pre-leased to single tenants pursuant to leases that commenced in 2023. Artis anticipates exiting the investment in 2024 and plans to monetize both its equity and carried interest.
Blaine 35 II is the second and final phase of a three-building, 317,483-square-foot industrial development in the Twin Cities Area of Minnesota. The project is completely leased.
The development of 300 Main, a 40-storey residential and commercial project in Winnipeg, was completed last year. The first residential tenants in the 395-unit building were welcomed on July 1 and leasing efforts for the remaining suites are underway.
Growth strategy for 2024
Artis’ organic growth strategy for 2024 has three main objectives:
- managing the existing portfolio to achieve optimal efficiency;
- extracting the maximum value from each individual asset;
- and constructing, as an owner or development manager, state-of-the-art, new-generation real estate in strategic locations that are expected to generate strong development yields.
“We are confident that with the continued execution of our plan, clear communication and demonstrating a track record of success, we will be able to narrow the gap between the value and price of our units, and our owners will be rewarded in the long term,” concluded Manji.
Artis’ annual general meeting is scheduled for May 23.