The Facts (as of July 19, 2010)

Unit price: $11.38. Book value per unit: $9.56. Market cap: $563 million (medium). Distribution: $0.09 per month or $1.08 per year. Yield: 9.5%. P/FFO: 8.5x. Price/NAV: 92%. This is a REIT, a real estate investment trust. REITs were given an exception to SIFT legislation, meaning the taxation doesn’t change in 2011. Because of depreciation and amortisation, non-cash expenses, the distributions in 2009 were considered “return of capital” for tax purposes.

The Story

Artis REIT is focused on producing a stable and growing stream of cash distributions for Unitholders from the ownership and management of high quality retail, commercial and industrial properties in primary and growing secondary markets in western Canada.

In early 2006, unit price reached $15.00. Beginning in 2007, they began distributions of $0.09 per month. Distributions continued without exception through the market crash in 2008 and 2009. However, the unit price dropped to $5.00 before rising steadily back over $11.00 at the end of 2009. The trust continues to grow by acquisition, purchasing good quality assets at reasonable prices. In this way, they improve their cash flow and their total size. They should be able to increase their economies of scale to keep down their property management and capital borrowing costs. The management team is highly respected in the industry.

Pros

Not widely followed by investment analysts. Liquidity is good, making it fairly easy to trade. The yield is attractive and would be adequate, even if there is no growth in share value. The taxation is also attractive, in that distributions of return of capital reduce the ACB, taxed as capital gains when units are sold.

Cons

The return of capital means two things. First, calculating the ACB becomes more difficult and time-consuming. Second, it means that as mortgages are paid down, new loans are taken to fund operations and distributions, so leverage is not decreasing. A large (but shrinking) proportion of office space owned by the fund is in Calgary, a market with a poor outlook. As current projects are completed, lease rates are expected to drop.

Impression

The trust has a large, relatively diverse portfolio of quality real estate. With a yield of almost 9.5%, the return is fairly dependable. Because of the financial position, as well as the relatively healthy economy, cash flow is probably safe. There is also potential for gains, if the units reach $15.00 again.

Artis REIT AX.UN

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