Tuesday, April 08, 2008

Thinking aloud: AX.UN

(Disclosure: I've owned Artis REIT for more than two years)

Being a long-term value investor, I try not to worry too much about short-term fluctuations, but that doesn't mean I'm not keenly interested in the reasons behind them. If a stock loses, say, 10% of its value, I want to know why. Did earnings fall off a cliff or did they lose a key customer? Or did it simply get knocked back by a broad market sell-off, but still has a decent long-term outlook? If it's the former, I'll probably avoid it, as it may have further to fall. But if it's the latter, I might kick the tires and take a stake if it's suddenly on sale.

The point is, I'm more than willing to live with my stocks being in the red (temporarily) as long as their long-term prognosis looks good, and as long as I can understand, sort of, why the market values it one way or the other. I like my companies to be predictable -- even when they have bad news, is what I'm trying to say.

It's why, despite the fact that's its actually made me money, one stock that's always been a noggin-scratcher for me is Artis Real Estate Investment Trust (AX.UN on the TSX.)

Artis has always been something of an anomaly, because it's done inexplicable things in both directions for as long as I've owned it. Typically, REITs are steady, dependable sources of income, that shouldn't be counted on much for capital gains. I bought Artis in 2006 when I was looking for exposure to two things in my portfolio: real estate, and the booming economy of Western Canada. I figured Artis (then known as Westfield REIT) was a good proxy for both.

In the first 12 months that I owned it, Artis' unit price increased by nearly 30 percent, and that doesn't even include distributions. Nice, but not exactly typical REIT behaviour, especially since the company was shelling out a disturbingly high percentage of its cash flow in distributions. In the year or so since then, it's been picked clean of most of those gains, before recently starting a mini-march upwards again. All this, despite the fact that its holdings and focus (retail and industrial properties in booming Western Canada) have remained largely the same. As I said, it's been quite the head-scratcher.

I'm oversimplifying a little, but conventional wisdom has it that falling interest rates are good for REITs. So you would imagine REITS have been doing quite well since the end of last year -- but you'd be wrong. They've started inching up a little of late, but the sector sank like a stone from about September until early 2008.

As I said, it's not the what that concerns me -- it's the why, and frankly, with Artis and Canadian REITs in general right now, I have no idea. The REIT's FFO recently increased (meaning they have more cash on hand available to pay distributions) which is nominally a good thing, but the marker hasn't really rewarded them too much for that yet.

I like to make informed investment decisions, but to be frank, while Artis was riding high, I didn't understand what was going on, and now that it's doing less well, I still don't get the rationale. That seems like a bad sign to me, so I'm thinking of selling my stake. I'm not in any urgent rush or anything. But since I'm slowly migrating my portfolio over into a passive ETF-based one, at some point soon I'm probably going to sell AX.UN and put the proceeds into a broad-market ETF, or possibly even the REIT ETF, if I want to maintain a real estate presence.

Who am I to ignore Warren Buffett's advice -- holding an asset I apparently don't understand (even one that's managed to make me money) it doesn't leave me with a very good feeling, and might be a pretty good signal to sell.

Nothing imminent, but it's safe to say Artis is officially on notice.

1 comment:

FinancialJungle said...

I’d separate the fundamentals of the REIT from its market price. AX.un (as with other REITs) had been hurt in 2007 from the spill over effect of US housing collapse. If fundamentals look good but stock is down, this is the precise time to buy.

Everything is relative in investing. AX.un is down ~8% ttm, while XRE is down ~22% ttm. You should be bragging.