Recently a Member of Pat McKeough’s Inner Circle asked him about investing in a Canadian REIT with a high dividend yield.

Artis REIT has 237 properties—nearly 60% in Canada and the rest in the U.S. The company grew steadily by acquisition until 2016 and has since focused on upgrading its existing properties. This strategy is a positive move, says Pat, although the concentration of properties in Western Canada adds risk. He adds that the distribution, which yields a high 7.9%, appears sustainable.

Q: Pat: What do you think about investing in Artis REIT? It has a very high dividend yield. Thanks. 

A: ARTIS REIT (symbol AX.UN on Toronto; www.artisreit.com) owns 237 properties, totalling 24.8 million square feet of office (42.3%), industrial (43.7%) and retail (14.0%) space.

The REIT has holdings in both Canada and the U.S.: Alberta (16.5% of the total), Ontario (16.0%), Manitoba (15.7%), Saskatchewan (5.9%), B.C. (3.4%), Minnesota (23.1%), Arizona (7.3%), Wisconsin (6.8%), and elsewhere in the U.S. (5.3%).

Artis has an overall occupancy rate of 93.1%.

Due mostly to acquisitions, Artis’s revenue has risen steadily, from $463.4 million in 2013 to $572.5 million in 2016. It then dropped to $542.9 million in 2017 as the trust sold off some properties.

Cash flow over the same period rose from $150.3 million ($1.21 per unit) in 2013 to $164.6 million ($1.23 per unit) in 2014. It increased again in 2015, to $180.3 million ($1.30 per unit). Revenue then decreased to $168.8 million ($1.16 per unit) in 2016 before falling further in 2017, to $157.5 million ($1.04 per unit).

Since 2016, Artis has scaled back on acquisitions and focused on modernizing its properties in order to attract higher-quality tenants and win more-profitable leases. The REIT also aims to increase its weighting of U.S. property income by 50%; it now represents 39.3% of the total.

Dividend stocks: REIT plans to sell off less profitable buildings in Western Canada

Artis purchased only four properties in 2017, while selling 23. Including five Calgary office buildings, eleven of the properties that the REIT put up for sale were in Alberta. Artis now holds 16.5% of its properties in the province, down from 20.1% in 2016.

All four of the properties that Artis acquired last year were industrial. They now account for 43.7% of all its holdings, up from 41.8%.

During the first quarter of 2018, the company sold an office property in Phoenix, Arizona for $19.1 million US and an industrial property in Winnipeg for $1.9 million.  At the same time, it acquired the remaining 50% interest it did not own in two office properties in Denver, Colorado, for a total of $70,000 U.S.

In the three months ended March 31, 2018, overall revenue fell 5.8%, to $125.7 million from $133.5 million a year earlier. Cash flow fell 6.8%, to $37.9 million, or $0.19 per unit, from $40.7 million, or $0.27.

The trust’s concentration in Western Canada adds risk. Focusing on any one province or region is more speculative than spreading out across the country. That’s especially true out West considering its high dependence on commodity prices. However, Artis plans to sell off less profitable buildings, especially in Western Canada. Its plan to continue cutting back on acquisitions in favour of upgrading its existing properties is also a positive move.

The REIT’s units currently trade at 11.9 times Artis’s forecast 2018 cash flow of $1.13 per unit. They also yield a high 7.9%, and the distribution appears sustainable.

Inner Circle recommendation: Artis REIT is okay to hold for aggressive investors.

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