Artis Real Estate Investment Trust offers its unitholders one of the highest yields of all members in the S&P/TSX composite index real estate sector. Its 8-per-cent yield is eye-candy to income investors.
While the REIT offers investors an attractive yield, over the past few years the unit price has languished, trading down from the high teens to the low teens.
As an investment reporter, I receive plenty of correspondence from Globe and Mail readers. I recently received an e-mail from a reader asking me to review the REIT.
To help investors make their own informed investment decision, let's briefly review some of the REIT's key underlying influences, beginning with factors that appear to be putting pressure on the unit price.
The REIT
Winnipeg-based Artis REIT had a portfolio of 250 properties as of year-end, located principally in Western Canada as well as in the United States. In terms of geographical weightings, Western Canada represents 53 per cent of net operating income (NOI), the U.S. portfolio weighting is 37 per cent of NOI, and Ontario's weighting is at 10 per cent.
Artis holds a diversified portfolio, with office properties representing 55 per cent of NOI, industrial properties comprise 24 per cent of NOI and retail properties accounts for 21 per cent of NOI.
The unit price has been under pressure, driven lower by the following headwinds.
Calgary office market exposure
In the fourth quarter, Alberta represented 30 per cent of NOI, of which approximately 13 per cent was from office properties located in Calgary. Same-property NOI has been negative for the past three consecutive quarters, negatively affected by the Calgary office-property exposure. To address this, management has been steadily reducing its presence in Calgary, selling properties, and is targeting a reduction from 13 per cent of NOI to roughly 10 per cent over the next 12 months.
Lacklustre quarterly results
Fourth-quarter financial results were in line with expectations. Funds from operations (FFO) a unit came in at 37 cents, down 2.6 per cent year-over-year. Same-property NOI declined 0.6 per cent year-over-year with the Calgary office segment slipping 9.3 per cent compared with the prior year. Same-property occupancy was stable year-over-year at 92 per cent, but the Alberta region saw a decline in occupancy to 86 per cent from 88 per cent compared with the same period last year.
High leverage
Management continues to reduce its debt levels, targeting a debt-to-gross book-value figure below 50 per cent. At the end of 2016, the company's total debt-to-gross book value stood at 51.0 per cent, down from 52.4 per cent at the end of 2015.
Interest-rate risk
Rising interest rates are a key risk to consider. This risk can be mitigated by holding a diversified portfolio of securities, as well as by owning REIT's that are trading at reasonable valuations that can sustain any potential multiple contraction in the sector.
There are some positives to consider.
A REIT in transition
Management is focused on reducing its Albertan footprint, while increasing its U.S. portfolio. The board of trustees recently approved an increased exposure to the U.S. market, lifting the maximum U.S. weighting to 50 per cent of total property NOI of 40 per cent.
Management believes there are more attractive acquisition opportunities in the U.S. market relative to the Canadian market.
In addition, Artis has six properties currently in development, five of which are located in the United States, and one property is located in the Greater Toronto Area. All projects are scheduled for completion in 2017.
High yield
Artis pays its unitholders an attractive yield, which appears sustainable. The monthly distribution is 9 cents a unit, or $1.08 a unit yearly. This equates to an annualized distribution yield of more than 8 per cent. Artis has maintained its distribution at 9 cents a unit since 2008. In 2016, the adjusted funds from operations (AFFO) payout ratio, after adjustments, was 88.5 per cent.
Financial forecasts
The Street is forecasting muted, albeit positive growth. The consensus FFO a unit estimates are $1.48 for 2017, rising to $1.51 in 2018. The AFFO a unit forecasts are $1.19 in 2017 and $1.23 the following year.
These forecasts have been relatively stable with relatively minor revisions over recent months.
Valuation
According to Bloomberg, the REIT is trading at a price-to-FFO multiple of approximately 8.7 times the 2018 consensus estimate, below its five-year historical average of approximately 9.9 times.
On a price-to-AFFO basis, the units are trading at a multiple of more than 10 times the 2018 consensus estimate.
The consensus target price is $13.42, implying the unit price has limited upside potential over the next 12 months. Analysts' target prices range from a low of $12.50 to a high of $14.
Analysts' recommendations
According to Bloomberg, 10 analysts have issued research reports in 2017, three analysts have "buy" recommendations and seven analysts have 'hold' recommendations.
Chart watch
The unit price appears to be consolidating, locked in a range principally between $11.50 and $13.75 over the past year.
In terms of key resistance and support levels, the unit price has major resistance just below $14.
There is initial downside support around $12.50, close to its 50-day and 200-day moving averages. Failing that, there's strong support between $11 and $11.50.
The bottom line
For income investors, Artis offers investors an attractive yield, while the downside unit price risk appears to be contained given the REIT's current valuation.
As always, I strongly encourage readers to consult a financial adviser, consider potential tax implications, and to do their own proper due diligence before taking any investment action.
The author does not personally own units in the security mentioned in this story.
Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market.