Why this is our top pick among the REIT sector’s bevy of beaten-up options
BENJ GALLANDER, BEN STADELMANN, and PHILIP MACKELLAR
Monday March 8, 2021
You’re walking by a storefront that you’ve passed countless times before and there is a “For Lease” sign. And you can’t believe that memory does not serve to come up with the name: What store used to be there? These vacancies are a huge indicator of the collateral damage of the lockdowns, with many people’s livelihoods and life work relegated to the scrapheap.
When Benj did his fast filter of all the stocks listed on the Toronto Stock Exchange and in the United States, the REIT sector stuck out the most as downtrodden. As the shutdowns remain de rigueur in many provinces, more and more enterprises are dying. Suffering also are the holders of real estate investment trusts, many of which have slashed their dividends as cash flow diminished. These include BTB REIT, Cominar REIT, H&R REIT, RioCan REIT and at least eight others. RioCan is one of the stocks in the Contra Vice-President’s Portfolio manned by Ben and Contra the Heard analyst Philip MacKellar. (It has risen 33 percent since a purchase last September.)
A few REITs are bucking the distribution trend, such as CT REIT and Firm Capital Property Trust, which have recently increased their payouts.
In January, Benj hopped into the sector with a purchase of Artis REIT at $10.41. This one is a long stretch below the $17 level where it traded in 2013. But like so many stocks, it was at its nadir last March, touching $5.41. The current distribution of 4.64 cents was just increased a tad from 4.5 cents, still about half the 9 cents monthly payout of 2018.
Why was Artis first choice compared with all of the other possibilities in this sector? Though Benj is not big on confrontation and shareholder battles, as they normally prove very costly for stakeholders, he did like the results of the clash last fall. Vancouver-based private equity firm Sandpiper Group, a major Artis shareholder, effectively pushed out most of the trustees, as well as the chief executive and chief financial officer.
Sandpiper’s slate of five directors who joined the enterprise have extensive experience: Samir Manji, Sandpiper CEO and Artis’s interim CEO, is a “wheeler and dealer” who founded and sold Amica Mature Lifestyles Inc. to the Ontario Teachers’ Pension Plan. Heather-Anne Irwin is a long-term Bay Streeter who was key in the sale of InnVest REIT. Mike Shaikh specializes in financing mergers and acquisitions in the oil and gas sector. Aida Tammer and Lis Wigmore also have been active in the disposition of assets, among other things. Perhaps you get where Benj is going with this: It would not surprise to see Artis sold in the next few years, and likely at a premium to the stock price.
REITs have been punished as retailers at many malls have closed their doors as customer traffic plummets and some have delayed or stopped rental payments. And of course, office buildings appear lonely, as a huge swath of employees are working from home. That will likely remain the case to some degree. In the apartment sector, vacancies have jumped, stemming cash flow as many tenants are choosing to look to own. Students (foreign or domestic) who would normally occupy apartment buildings are staying at home.
The one arena that seems to be prospering is industrial, as internet ordering, which was growing before the pandemic, became the situation of the day. That means more distribution and storage centres are mandatory and much of the growth in online ordering is here to stay. About 36 percent of Artis’s properties are industrial, 46 percent office and 19 percent retail.
Annual results reported this month were somewhat disappointing, but not unexpected. Revenue dropped 12 percent and net income 82.4 percent to $459 million and $22 million, respectively. The occupancy rate dipped slightly from 91.5 percent to 89.9 percent, with renewal rates increasing by 2.4 percent. The net asset value fell from $15.56 to $15.03, still a distance above the current stock price of $11.37. The adjusted funds from operations payout ratio remained reasonably conservative, moving up from 51.4 percent to 52.9 percent, thus making it unlikely there will be a distribution cut in the near future.
The initial sell target on this company is $15.24. While hoping and waiting, Benj will happily clip the distribution coupon, which is currently just under 5 percent. While passing empty stores, he will bemoan that while some lives have been saved by the lockdowns, a multitude of others have fallen into despair.