Artis REIT plans to spin-off its retail assets into a new Artis Retail REIT.

Artis Real Estate Investment Trust (AX.UN-T) says its board of trustees has approved a plan to spin-off its Canadian retail properties into a new REIT. Artis Retail REIT would include up to 42 properties, comprising 2.9 million square feet of GLA and valued at $819.3 million.

“We believe our high-quality, diversified commercial portfolio is being significantly undervalued by the market and that the proposed strategies will serve to unlock value for our unitholders,” said Armin Martens, the CEO of Artis REIT, in the announcement on Tuesday morning.

The REIT has been under a strategic review for an extended period of time, and is in the midst of repositioning its portfolio and reducing debt through the sale of up to a billion dollars worth of “non-core” assets.

Artis will host a conference call Tuesday afternoon to further discuss its plans, which also include a strategic debt reduction initiative.

The existing Artis REIT (AX.UN-T) will focus on its “institutional-grade North American industrial and office businesses” the release states.

Continue disposition of non-core properties

Artis plans to continue its expanded non-core disposition program, using the proceeds for debt reduction. The REIT is currently marketing more than a half-billion dollars worth of assets, and proceeds would be used to reduce Artis’ debt-to-GBV to 46 per cent by the end of 2021.

Splitting the assets into two entities will allow Artis REIT to simplify its business and focus on its industrial and office properties, the trust says.

At June 30, 2020, Artis REIT’s portfolio comprised 115 industrial and 59 office properties encompassing a total of 21.0 million square feet of gross leasable area in five Canadian provinces and six U.S. states. Artis REIT’s property NOI for Q2-20 was 35.3 per cent industrial and 47.5 per cent office.

Artis REIT’s retail properties focus on defensive, needs-based retail assets. The portfolio is primarily non-enclosed properties and is comprised of tenants providing needs-based services including food and beverage, and personal service providers.

Artis REIT’s retail portfolio was 89.7 per cent occupied at June 30, 2020, and has averaged 92.3 per cent occupancy over the last three years.

The 42 properties in the portfolio are 92 per cent open-air, and eight per cent enclosed retail. In Q2-20, the retail portfolio generated property NOI of $12.1 million, representing 17.2 per cent of the REIT’s property NOI.

At June 30, 2020, the retail portfolio was 89.7 per cent occupied. They are located in Alberta (54 per cent), Saskatchewan (27 per cent) and Manitoba (19 per cent).

Artis says it expects to sell two of the properties prior to the spin-off taking place, leaving it with 40 retail properties. Artis REIT will continue to manage the retail properties of Artis Retail REIT through an external management arrangement.

On completion of the spin-off, Artis REIT’s portfolio will consist of 58 per cent office and 42 per cent industrial properties, based on its Q2 2020 property NOI. Geographically, 37 per cent of its properties are in Ontario and four Western Canadian provinces, with the balance in the U.S.

The transaction is intended to occur on a non-taxable basis for Artis REIT and its existing Canadian common unitholders. Artis REIT is seeking a tax ruling from the Canada Revenue Agency prior to closing.

Transaction conditional on approvals

The transaction remains subject to numerous conditions and approvals, including:

* the approval of at least 66 2/3 per cent of the votes cast by unitholders and at least 66 2/3 per cent of the votes cast by preferred unitholders;

* approval of the Manitoba Court of Queen’s Bench;

* regulatory approvals;

* consents and approvals Artis REIT lenders;

* and approval for the listing of the Artis Retail REIT units on the TSX.

In November 2018 Artis announced its plan to dispose of $800 million to $1 billion of non-core assets over a three year time-frame. Since that announcement, Artis REIT has sold about $800 million of asset sales, placing it ahead of that schedule.

Together with the retail spin-off, Artis plans to sell a further $550 million of non-core assets with the net proceeds used for debt reduction at Artis REIT. Approximately $200 million of non-core assets are currently under conditional sale agreements, expected to be completed by the end of 2020, before the retail spin-off closes.

The remaining approximately $350 million of non-core asset sales, which are listed with external brokers, are expected to be completed by Q2 of 2021. Artis REIT expects to have sold $1.35 billion of assets between Q4 2018 and Q2 2021.