October 28, 2021
Allied Properties REIT
Getting it done, but valuation has room to catch up
Our view: Post AP’s Q3/21 results that were broadly in line with our call, we see plenty of reasons to remain constructive. Supported by its high quality assets, return to work ramping up, and further strides in economic activity, we expect organic growth to clip along at a healthy pace as occupancy regains traction. As well, a sizeable pipeline of developments teed up for completion should provide some extra juice to growth. While sentiment on office may take time to rebuild, we see an attractive discounted valuation and drivers to shrink the gap. Outperform, PT raised to $52 (+$1).
Key points:
Solid organic growth, with tailwinds to support recovery through 2023.
SP NOI rose 6.3% YoY (2.8% YTD), incl. +5.4% in office and +10.7% in UDCs. Still, occupancy slipped to 90.3% (-80 bps QoQ, -260 bps YoY) and may slide lower in Q4 from vacancies in Montreal and Kitchener. Importantly, however, leasing and tour activity has accelerated on re-opening, while spreads are solid (13% in Q3). Notably, AP remains confident in occupancy recovering to pre-COVID levels of ~95% in 2023 (100 bps = ~$0.05 of annual FFOPU, on our math). We expect the combined effects of building economic traction, return to work, and strong demand from tech tenants to drive healthy, low-single-digit percentage SP NOI growth through 2023.
Getting it done, as development leasing advances. AP’s putting finishing touches on 158K sf of leases at The Well, which should lift the $734MM project’s office leasing to 99.5% (+300 bps from Oct-12 update). With rents commencing for most tenants from Q2/22-Q4/23, we estimate ~$40MM of annualized NOI coming on line over the next 2+ years. Also, as previously announced, the $84MM QRC West Phase II project was fully leased to a US educational institution. Importantly, net rents achieved are ahead of AP’s underwriting, particularly at QRC West where the unlevered yield rose by ~40 bps to ~5.5%. Considering the challenges through COVID, we believe the progress underscores the unique offering of AP’s assets, the strength of its platform, and rising demand from is target user base.
Growth stacks up well...Our FFOPU estimate revisions are minor, with 2021E-23E at $2.42 (+$0.02), $2.48 (+$0.02), and $2.62 (+$0.03). Our 2020A-23E FFOPU CAGR is a solid 5%, a bit ahead of our universe (4%). Our $47 NAVPU is intact, with our 1YR FWD NAVPU rising to $50 (+$1) on further anticipated value creation at The Well. The implied 6% YoY growth ranks slightly ahead of the sector (5%).
...yet valuation has some catching up to do. AP’s trading at 7% below NAV (20x 2022E AFFO/5.1% implied cap rate), below its historical 7% premium and the sector’s current 2% discount. While we acknowledge tepid investor sentiment on office fundamentals, we believe the discount to AP’s intrinsic value remains wider than warranted given its history of operational outperformance, healthy growth profile, strong balance sheet, value-add pipeline, and solid track record of capital allocation. Maintaining Outperform, PT raised to $52 (+$1) on the uptick in our forward NAVPU.