Real estate investment trusts to keep an eye on

Benj Gallander, Ben Stadelmann, and Philip MacKellar
March 29, 2021

The first of Artis’ Calgary office buildings to undergo redevelopment will be Sierra Place: a 92,000-square foot downtown office building of 10 storeys, constructed in 1958 and connected to the Plus 15 skywalk.

Days after our previous article on Artis REIT, the real estate investment trust announced a major pivot after a 100-day review. The goal is to transition from being the standard REIT to an organization that will trade closer to its net asset value. That valuation works out to $15.09 and the stock trades under $11, a significant discount. The logic somehow evades us as companies in this sector typically trade well below NAV.

Irrespective of the failure of reason from this angle, when organizations pursue major changes, often it is costly. We suspect that there will be writedowns ahead that will impact the NAV. That would bring it closer to the share price, but is obviously not the desired methodology to reach this end.

Benj fielded a number of reader questions on whether he was going to dump his position given the updated strategy. The answer is nope, he’s just going to sit and hold. Insiders appear to agree as none of them is selling and their buying remains heavy and on multiple fronts. That bodes well. Meanwhile, boots on the ground suggest that the rejig will take two to three years with numerous properties being sold, if not the whole enterprise. One nice aspect coming out of the trust’s navel gazing is that the distribution was increased 11 percent to 60 cents a unit. We like that.

In January, around the same time of the purchase of Artis, Benj dove in for another real estate investment trust, Cominar REIT, at $8.02. This is the No. 1 commercial property owner in Quebec. Currently trading at around $9.30, like Artis it is priced well below the NAV, which in this case is just south of $15.

The enterprise is loaded with debt, like many of its peers, currently registering $3.54 billion. That dwarfs last year’s revenue of $661 million. At our end, when analyzing possible purchases, that would normally be a deal-breaker. But for REITs it is the nature of the beast and simply accepted as the norm. Still, scrutiny has been done to ensure that money will be in the kitty to pay costs and allow the enterprise to remain viable.

Shopping malls have endured a difficult year with the arrival of Covid. While Cominar has not been immune, rent collection for the past quarter registered 95.8 percent. That is a slight drop, but nothing huge. Average net rents increased 7.4 percent in 2020 over all, with the occupancy rate being stable at 91.7 percent. While the average rent in retail dipped 4.3 percent, that was counterbalanced by the average rent for its industrial properties, which rose 18 percent.

Fortunately for Cominar, of the 311 properties, only 42 are commercial. Seventy-nine are office and the remaining 190 are industrial, a segment that is firing on all cylinders. Meanwhile, the loss for the year was a whopping $329 million, largely owing to a decrease in the value of investment properties by $470 million. In 2019, net income was $462.5 million, including a $276 million positive move to “fair value” — part of a constant re-evaluation done on properties.

A primary reason that Benj is keen on this organization is that it is doing a strategic review. There is a reasonable possibility that it will result in a takeover and if it happens, that will almost assuredly be at a premium to the current trading price.

Cominar’s initial sell target is $16.84, potentially a gain of better than 100 percent from the purchase price. While that goal might remain well down the road, there is the handsome distribution, currently almost 4 percent.

Naturally, this investment is a play on a recovery when Covid is largely in the rearview mirror, including a belief that people will head back in throngs to the shopping malls. That appears to have happened in China, and though internet shopping is here to stay, there will always be people who will want to try on their slippers, etc., before they buy them.

A big reason for this purchase was socking away some money in a diversification move, plus a payout that clobbers the rate of guaranteed investment certificates.