Artis REIT (AX-UN-T) has announced a “milestone” transaction, an unconditional agreement to sell its 28-property, 2.5-million-square-foot Greater Toronto Area industrial portfolio for $750 million.

The transaction represents a per-square-foot price of $297 for the portfolio.

It also exceeds the REIT’s most recently reported fair value of $550.7 million for the properties by 36 per cent, as demand, asset prices and leasing rates continue to rise in the sector across the GTA.

In an interview with RENX, Artis president and chief executive officer Samir Manji said the transaction allows the REIT to make significant progress in the business transformation plan which was announced in March following a change in management.

“In that announcement, we conveyed that one of the near-term objectives was to fortify our balance sheet so as to No. 1 reduce our leverage and No. 2 at the same time provide financial flexibility to the REIT so as to enable us to pursue on a go-forward basis, opportunistically . . . investment opportunities that surface and that we identify,” he explained.

“This transaction and the effect it will have on our balance sheet, on our liquidity, on our debt reduction objective . . . all those boxes check off and hence the reference to the term milestone.”

Manji declined to identify the buyer.

New management’s most significant move

Artis’ GTA-and-area industrial portfolio includes properties stretching from Burlington and Oakville, north to Brampton and east to Markham and Scarborough. The buildings range up to about 160,000 square feet, with most in the 40,000- to 110,000-square-foot range.

“This translates into, on the GTA assets, a sub-three per cent cap rate based on our 2021 expected NOI. Granted, the buyer knows there is upside on the rent,” Manji said, which makes the deal attractive to both parties due to their differing strategies.

“As far as Artis is concerned and how we are looking at this from a capital allocation strategy standpoint, we think taking this liquidity opportunity, to then be able to redeploy that capital in opportunities where we think there is greater upside, that is where our thinking is.”

The transaction is the most significant since Manji and a group of dissident unitholders ousted Artis’ previous senior management group in 2020 after going public with their complaints about the REIT’s performance and operations.

Manji, also the founder and CEO of investment firm Sandpiper Group, became CEO pledging to improve on its track record and make a number of significant changes to its portfolio and strategies.

In March, Manji and Artis management announced Artis would focus on growing net asset value per unit and distributions through debt repayment, return of capital and value investing in real estate. It also identified industrial as an area of strength within the portfolio, and that it intended to capitalize on that.

Big interest in Artis REIT industrial holdings

“We, following our March 10 announcement had a significant inbound interest from principals, buyers of various real estate asset classes and unsurprisingly, where there was the greatest interest was in our industrial assets,” Manji said.

“From that universe of inbound interest, where we saw the strongest interest, including volume of inbounds, was with our GTA industrial. So we strategically, with the support of our board, made the decision to focus on that and evaluate how we might, based on that demand, monetize our GTA industrial assets.

“Suffice to say that we were able to meet and I would say exceed our expectation.”

After adjusting for the repayment of one outstanding mortgage of approximately $15.2 million and anticipated closing costs, the transaction will generate net proceeds of approximately $734 million. Manji said one option management will consider for redeploying some of those funds is more industrial development.

“We are still very bullish on industrial. We noted in our March 10 announcement that one of the areas we would look at from a value investing standpoint was new developments,” he said.

“This is an interesting scenario where, with the efforts of our teams on the ground, if we are able to identify within industrial development opportunities where we are confident and have a high conviction we could execute on our opportunity to develop a new industrial asset at a cap rate between 5.5 and 6.5 per cent, in a market where transactions are happening say at a four cap, that’s a pretty attractive delta.”

Manji said Artis has industrial developments underway in Houston and Phoenix and “we have others that we are exploring or considering.”

Retooling of Artis is a “marathon”

In terms of Artis’ overall strategy and its intention to rename and rebrand the trust, Manji said there are no other updates at this time.

“We’re not looking at this as a sprint, it’s a marathon. Having that financial flexibility to be opportunistic when it comes to value investing our owners’ capital on their behalf, we are going to be patient, thoughtful, disciplined and look forward to what lies ahead.”

He also said this does not change the status of about a half-dozen Artis retail and office assets which had been allocated for sale.

“This doesn’t change that,” he said. “I don’t anticipate in the back half of this year, (we) are going to see another transaction of this magnitude, but that’s not to say there won’t be other transactional activity.”

He also said while there are no current plans to sell additional industrial assets, Artis is always willing to listen to offers.

Artis is a diversified Canadian real estate investment trust with a portfolio of industrial, office and retail properties in Canada and the United States.

EDITOR’S NOTE: This article was updated with significant new information and quotes following an interview with Artis REIT president and CEO Samir Manji.