Artis REIT acquired nine properties—a mix of retail, industrial and offices—in the US and Canada in the fourth quarter and grew its adjusted funds from operations per share by 3.3 percent from year-ago levels. Meanwhile, funds from operations increased by 3.5 percent for properties that the trust has owned for at least one year.
When energy prices collapsed in late 2008 and early 2009, Artis REIT’s below-market rents and creditworthy customers limited the damage from the firm’s outsized exposure to the Alberta energy patch.
This time around, Artis REITs’ average rent is still below market. The company has already renewed 38.1 percent of its expiring leases this year, and the average rents on the rest of its available units are about 4 percent below the prevailing market rate.
The trust has also diversified its portfolio since the last time commodity prices plunged.
Oil-rich Alberta accounts for only 25.4 percent of its gross leasable area and 39 percent of its net operating income. US properties contribute about 22.9 percent of its net operating income, providing a welcome currency tailwind. Minnesota represents about one-quarter of the trust’s net operating income.
Artis REIT’s portfolio includes pockets of weakness, including Red Deer, Alberta, where the occupancy rate came in at 86.6 percent. But the trust boasts 100 percent occupancy rates in a baker’s dozen of major markets, more than offseting these trouble spots.
At 18 percent of the REIT’s portfolio, Calgary remains an important market. However, occupancy rates have held up thus far, and the percentage of expiring leases looks manageable over the next few years.
Artis REIT’s 95.6 percent occupancy rate represents an improvement over 2013, and this momentum should continue into 2015. But justified concerns about trends in the Calgary market likely will ensure that management continues to take a conservative stance on dividend growth.
During the company’s fourth-quarter earnings call, CEO Armin Martens reiterated a long-standing goal of reducing the payout ratio to between 80 and 85 percent of adjusted fund from operations and lowering the debt-to-capital ratio to 45 percent before hiking the dividend.