Sandpiper Group has published a strongly worded critique of Artis REIT management as a follow-up to last week’s announcement it is seeking to have CEO Armin Martens and four other members ousted from the board of trustees.

In a release that comprises almost 3,000 words, Vancouver-based Sandpiper and its CEO Samir Manji allege a pattern of action by Artis’s board of trustees which has not always been in the best interests of Artis unitholders.

It also reiterates Sandpiper opposes Artis’ (AX-UN-T) plan to spin off its retail properties into Artis Retail REIT, which would include up to 40 assets in Alberta, Saskatchewan and Manitoba with a value of $779 million (as of Q2 2020).

In return, Sandpiper pledges to increase dividends (cut in half in late 2018 and currently $0.045 per month per unit), reduce operating costs and compensation, and “eliminate extensive familial transactions” with companies related to the Martens family.

“This is a referendum on the future direction of the REIT,” Manji says in the release.

Sandpiper and Artis REIT

Sandpiper is known as an activist investor which has shaken up the boards and operations of several other entities in which it held significant positions (including Granite REIT and Agellan Commercial REIT). It has launched www.abetterartis.com to host its full presentation.

Sandpiper controls about five per cent of Artis’ shares, having built the investment since 2017. The company was successful in placing one of its own nominees, Lauren Zucker, onto the seven-member board in 2018.

“This is about a long-standing history of poor capital allocation, extensive transactions with entities connected to the CEO’s family, an ineffective and overpaid CEO, and an entrenched board that has failed to successfully govern, manage, and maximize value for all unitholders,” Manji says in the release, issued early Wednesday.

Last week, Sandpiper requested a special meeting of Artis’ unitholders and presented a slate of five independent nominees to the board of trustees – Manji, Heather-Anne Irwin, Mike Shaikh, Aida Tammer and Lis Wigmore.

It seeks to replace existing board members Martens, chair Edward Warkentin, Bruce Jack, Victor Thielmann and Wayne Townsend. Other than Jack, who has been a trustee for three years, all have been board members since the REIT’s 2004 inception.

None of the claims have been proven, and Artis has yet to make any significant response, other than acknowledging receipt of the requisition for a special meeting.

“The Board is reviewing and considering the requisition with its professional advisors. It will respond appropriately in due course,” says a statement from Artis. “In the meantime, there is no need for unitholders of the REIT to take any action.”

No one from Artis was immediately available for comment when contacted by RENX.

Sandpiper’s claims

Specifically, Sandpiper lays out a series of claims to support its position, including a statement taken from Artis’ 2019 annual information form:

“There can be no guarantee that the Trustees and Officers of Artis, in acting in a capacity other than as a Trustee or Officer of Artis, will act in the best interests of Artis in connection with such other real estate activities,” the form states.

Combined with the “familial transactions” involving companies connected to Martens’ family, Sandpiper calls this “troubling.”

Other complaints include:

* Artis is trading at a 45 per cent discount to management’s stated NAV, which Sandpiper claims are due to poor decisions by the board;

* Martens’ compensation package pays him an average of more than $3 million annually, while the REIT’s unit price has declined by 41 per cent since the REIT was internalized in 2012. Sandpiper also says Martens received a $6.6 million lump sum payment in 2019 under an agreement signed when Marwest Management was internalized’

* Trustees Warkentin, Thielmann, and Townsend collectively own 0.09 per cent of Artis. After 16 years as chair, Warkentin owns 0.03 per cent of the outstanding REIT units while earning $2.3 million in trustee fees since inception – and has taken 95 per cent of this in cash rather than units. “With marginal skin in the game, the trustees are only nominally affected by Artis’ unit price performance with no incentive to close the value gap,” Sandpiper says.

Artis stock traded above $17 back in 2012, but in recent years was trading in the $12 to $13 range through 2019 and early 2020. Since the pandemic, like many other REIT stocks it has been negatively affected, trading mainly in the $8 to $8.50 range in recent months.

It was just above $8.60 in noon trading on the TSX.

Firm Capital also opposes retail spinoff

Artis is also seeing opposition to spinning off the retail assets from an equity holder and preferred shareholder. Firm Capital Private Equity Realty Management Corp., in a separate Oct. 1 release, identified a series of concerns.

It claims the new structure would benefit only common shareholders and cites potential conflicts of interest among other issues. Firm sought both an independent committee to represent preferred shareholders and independent legal counsel, but Artis rejected the proposal, according to the statement.

Firm also expressed concerns about removing $235 million in equity from Artis REIT, and that Artis REIT would continue to be the guarantor of mortgages on the properties within Artis Retail REIT. It considers this “a level of increased risk for Artis REIT . . .”

“In light of the fact that the Preferred Unitholders are being asked to vote on a transaction that has: (i) nothing being provided to them in the form of consideration; (ii) losing approximately $235 million in the form of eroded equity; (iii) seeing a restructured Artis REIT having no retail real estate that produced income to protect Preferred Unitholders distributions; and (iv) the increased risk from the mortgage guarantees as outlined above, we cannot see how the Board of Trustees can recommend this transaction as being in the best interests of Preferred Unitholders,” the release states.

It also calls for common equity holders to oppose the plan, noting Artis should continue its current path selling off the retail assets one-by-one.

“The creation of a small capitalization 100% Western Canada Retail REIT will not trade properly in the markets and will become its own problem for Unitholder’s (sic) as the Unit price will plummet once listed,” the release states. “Artis REIT has clearly stated the reason for this transaction is that the retail assets, being in Western Canada are a valuation issue to Artis, so management feels the answer is to toss those assets into a stand alone REIT to ‘house’ the bad assets, which in our opinion is completely illogical.”

In a conference call for analysts following its announcement of the spinoff, Martens said management believes the retail REIT can stand on its own and prosper.

“We’re in good markets, good neighbourhoods, there are good fundamentals to support these properties,” Martens said at the time. “The cash flow is positive and it is designed to be successful, the balance sheet will be just fine and improving, the payout ratio will be low and it will be a cash-flow positive REIT.

“It will not be a REIT that is under stress looking for capital.”