Bisnow cites Green Street in reporting that KKR will buy the Park 8Ninety Industrial Park for US$234mm (about US$130/sf), equivalent to about C$320mm. The news has not yet been widely reported. LINK to SOURCE
I believe Artis will use the proceeds for:
NCIB
Deleveraging (Debt/Assets was too high at 51% at 12/31/23)
Continued execution of the Plan, whatever that is
I believe Artis should also participate in a recapitalization of Cominar/IRIS to give that entity more time to realize value with reduced pressure to sell assets in a weak market.
Thanks for the update. Any guess on what is happening at Dream? Looks like multiple large buyers, I assume one of them is Artis who is upping their position. Think they go activist or are they working gracefully with Michael Cooper? Love your views. ~ NCP
I'm not surprised that Dream Office is at $22. I've been saying for months that it was relatively well positioned for current market trends and that it was a unique and attractive acquisition candidate. But I don't have any idea why it's up 36% in April.
The purchases that Artis reported last week were only a small portion of total volume and not enough to move the price like that. For example, D was +$2.27 on 4/5 on volume of 330,855 units, of which AX bought 26,900. Somebody else is buying with urgency.
I think it's unlikely that AX will go activist. Manji has no credibility as a public advocate for change until he fixes Artis. Sandpiper gained control of Artis because it had low insider ownership, a weak strategy, an underqualified board, and governance issues. Artis/Sandpiper/Manji completely failed in attempting a similar strategy at FCR where management made very effective counterarguments. I believe a public activist campaign at Dream Office would accomplish nothing and be an unwelcome distraction of no benefit to unitholders.
I infer that Manji has some behind the scenes influence with D. He probably pushed for last year's placement of DIR units and the subsequent SIB. In hindsight the DIR sale looks like a good idea, but the SIB was an error. It would have been better to run a continuous NCIB and use the rest of the DIR proceeds for capex and deleveraging.
Manji said he sees D as an M&A target. I infer that Cooper would be willing to sell, at a fair price of course. DRM was willing to sell a substantial block at $31 through the SIB. DRM has a surplus of other opportunities about which Cooper seems more excited. The DRM Investor Day Presentation included an illustrative conservative model showing a 2028 DCF of $48/unit, equivalent to a 6.9% cap rate, and $400-425/sf. If Cooper's own presentation says D could be worth $48 in 2028 then it's logical to conclude that he would be open to an offer approaching that value - I have arbitrarily been saying $40.
Traditional institutional investors are not buying Office real estate right now so I don't think a strategic alternatives process and auction would be the best approach. Contacts with family offices and wealth funds might find some interest.
Artis developed the whole park so it will realize a substantial US taxable capital gain. It could potentially be offset before year-end if Artis realizes a loss on sale of some other US assets or through reinvestment of the proceeds in other US real estate assets (1031 exchange).
Artis paid US tax of $4mm in 2023 and $50mm in 2022. The Annual report explains:
"The REIT's U.S. properties are owned by subsidiaries that are REITs for U.S. income tax purposes. These subsidiaries intend to distribute all of their U.S. taxable
income to Canada and are entitled to deduct such distributions for U.S. income tax purposes. As a result, the REIT does not record a provision for current federal
U.S. income taxes on the taxable income earned by these subsidiaries. These U.S. subsidiaries are subject to certain state taxes and a 21% to 30% withholding tax
on distributions to Canada. Any withholding taxes paid are recorded with the related distributions."
I'm long the preferred shares, do you see those as relatively "safe"? Office sentiment is really bad, they must not be able to unload anything. Do you have an opinion of their office properties and if they will be able to keep them rented to survive? The common terrify me. Appreciate any feedback
Financial metrics look pretty good to support the 10% yield on the AX preferreds. The common price of $6.46 implies a property cap rate of 9.9%, or 8.8% ex IRIS/Cominar. If the common were wiped out then the preferred would imply a property cap rate of 15.4%, or 13.0% ex IRIS/Cominar. Hard to lose if you own the assets at that level. AX has been repurchasing preferreds which is smart because it is accretive to common unitholders and also deleverages the REIT.
The risk is that the future assets and balance sheet could be substantially different. Manji said from the start that Artis would have a "fortress balance sheet", but asset quality has weakened and leverage has moved higher, especially if you do a proportional consolidation of IRIS. The low valuation of Artis securities reflects lack of investor confidence in his vague vision. The preferred looks relatively safe now, but as an example what if Artis decides to borrow $700mm to privatize Dream Office? Or what if Sandpiper finds a way to privatize Artis, but leaves the preferred outstanding?
You can look at the details of Artis' Offices on this page:
They aren't necessarily bad properties, but they are concentrated in small markets and investor demand is really weak, even if property cash flow is OK. Some buildings are 100% leased, like the recently constructed Boulder Lakes Business Park where Prime Therapeutics is signed for 10 years+. That's a low risk asset. The risk for these suburban properties is that if a main or sole tenant leaves then they may be difficult or impossible to replace so the assets are higher risk than downtown Toronto, Montreal, Vancouver where the leasing market has much greater depth.
Thanks for the update. Any guess on what is happening at Dream? Looks like multiple large buyers, I assume one of them is Artis who is upping their position. Think they go activist or are they working gracefully with Michael Cooper? Love your views. ~ NCP
I'm not surprised that Dream Office is at $22. I've been saying for months that it was relatively well positioned for current market trends and that it was a unique and attractive acquisition candidate. But I don't have any idea why it's up 36% in April.
The purchases that Artis reported last week were only a small portion of total volume and not enough to move the price like that. For example, D was +$2.27 on 4/5 on volume of 330,855 units, of which AX bought 26,900. Somebody else is buying with urgency.
I think it's unlikely that AX will go activist. Manji has no credibility as a public advocate for change until he fixes Artis. Sandpiper gained control of Artis because it had low insider ownership, a weak strategy, an underqualified board, and governance issues. Artis/Sandpiper/Manji completely failed in attempting a similar strategy at FCR where management made very effective counterarguments. I believe a public activist campaign at Dream Office would accomplish nothing and be an unwelcome distraction of no benefit to unitholders.
I infer that Manji has some behind the scenes influence with D. He probably pushed for last year's placement of DIR units and the subsequent SIB. In hindsight the DIR sale looks like a good idea, but the SIB was an error. It would have been better to run a continuous NCIB and use the rest of the DIR proceeds for capex and deleveraging.
Manji said he sees D as an M&A target. I infer that Cooper would be willing to sell, at a fair price of course. DRM was willing to sell a substantial block at $31 through the SIB. DRM has a surplus of other opportunities about which Cooper seems more excited. The DRM Investor Day Presentation included an illustrative conservative model showing a 2028 DCF of $48/unit, equivalent to a 6.9% cap rate, and $400-425/sf. If Cooper's own presentation says D could be worth $48 in 2028 then it's logical to conclude that he would be open to an offer approaching that value - I have arbitrarily been saying $40.
Traditional institutional investors are not buying Office real estate right now so I don't think a strategic alternatives process and auction would be the best approach. Contacts with family offices and wealth funds might find some interest.
Artis is also selling a WInnipeg office building:
https://www.newswire.ca/news-releases/leyad-acquires-iconic-johnston-terminal-in-winnipeg-from-artis-reit-849610978.html
Johnston Terminal is 73,212sf and was 99.5% leased at 12/31/23. Price probably less than $200/sf so below $15mm. Not significant, but still positive.
https://www.artisreit.com/office/johnston-terminal/
Buyer said: "We see tremendous potential in Winnipeg's commercial real estate market". Artis could certainly offer them more opportunities.
4/11 Artis confirms sale of Park 8Ninety for $234mm with closing in 2Q24
https://arwebstore.blob.core.windows.net/artisreit-com/2024/04/Artis_News_041124.pdf
Interesting sale. Proceeds likely go to share repurchases and debt. Do they need to do a special distribution?
Artis developed the whole park so it will realize a substantial US taxable capital gain. It could potentially be offset before year-end if Artis realizes a loss on sale of some other US assets or through reinvestment of the proceeds in other US real estate assets (1031 exchange).
Artis paid US tax of $4mm in 2023 and $50mm in 2022. The Annual report explains:
"The REIT's U.S. properties are owned by subsidiaries that are REITs for U.S. income tax purposes. These subsidiaries intend to distribute all of their U.S. taxable
income to Canada and are entitled to deduct such distributions for U.S. income tax purposes. As a result, the REIT does not record a provision for current federal
U.S. income taxes on the taxable income earned by these subsidiaries. These U.S. subsidiaries are subject to certain state taxes and a 21% to 30% withholding tax
on distributions to Canada. Any withholding taxes paid are recorded with the related distributions."
I'm long the preferred shares, do you see those as relatively "safe"? Office sentiment is really bad, they must not be able to unload anything. Do you have an opinion of their office properties and if they will be able to keep them rented to survive? The common terrify me. Appreciate any feedback
Financial metrics look pretty good to support the 10% yield on the AX preferreds. The common price of $6.46 implies a property cap rate of 9.9%, or 8.8% ex IRIS/Cominar. If the common were wiped out then the preferred would imply a property cap rate of 15.4%, or 13.0% ex IRIS/Cominar. Hard to lose if you own the assets at that level. AX has been repurchasing preferreds which is smart because it is accretive to common unitholders and also deleverages the REIT.
The risk is that the future assets and balance sheet could be substantially different. Manji said from the start that Artis would have a "fortress balance sheet", but asset quality has weakened and leverage has moved higher, especially if you do a proportional consolidation of IRIS. The low valuation of Artis securities reflects lack of investor confidence in his vague vision. The preferred looks relatively safe now, but as an example what if Artis decides to borrow $700mm to privatize Dream Office? Or what if Sandpiper finds a way to privatize Artis, but leaves the preferred outstanding?
You can look at the details of Artis' Offices on this page:
https://www.artisreit.com/our-portfolio/portfolio-map/
They aren't necessarily bad properties, but they are concentrated in small markets and investor demand is really weak, even if property cash flow is OK. Some buildings are 100% leased, like the recently constructed Boulder Lakes Business Park where Prime Therapeutics is signed for 10 years+. That's a low risk asset. The risk for these suburban properties is that if a main or sole tenant leaves then they may be difficult or impossible to replace so the assets are higher risk than downtown Toronto, Montreal, Vancouver where the leasing market has much greater depth.
Wow, great information and color on the situation. The preferreds are trading where they are for a reason. Thanks for the wet blanket. :)