Allied Properties Real Estate Investment Trust T.AP.UN

Scotia comments

[incomedreamer11]

A Good Step Forward at a Good Price

OUR TAKE: Slight Positive. We’re off a 24-hour restriction post the $1.35B UDC portfolio sale to KDDI Corp (legit buyer, in our view). Exhibit 1 = key estimate changes (down 1%-11%). The price = 9% above IFRS but 6% below our NAV value. We’re surprised with the negative market reaction (AP was -2.2% vs. -1.4% for CAD REITs and -0.4% for U.S. Office peers), with ~$1.0B of the proceeds going towards higher-cost debt repayment. While we can see market frustration with the elevated debt during an uncertain time (in part driven by AP acquisitions during said time), the AP balance sheet becomes one of the best (Exhibit 2), with development completions = lower debt through 2024 (i.e., to ~7.5x). We also get the UDC sale has been discussed extensively, but we still see it as a step in the right direction (accretive debt-reduction). Hitting guided occupancy gains in 2023 (min. 100bp+ to 90%+; vs. the implied 77%-85% at $21.40 – Exhibit 3) and development stabilization = medium-term catalysts, while surfacing value from its unique urban land bank = longer-term catalyst. AP is the only CAD REIT trading at a higher-than-avg. AFFO and implied cap spread to 10YR (Exhibits 4-5). The value is compelling, but admittedly, may require patience.

KEY POINTS

Transaction Details. The $1.35B sales price for the unencumbered portfolio (ex. $107M lease liability) = $118M above IFRS NAV (9%) and is expected to close in Q3/22. A special distribution (magnitude unknown) will be required for unitholders as at Dec 31/23, with the exact distribution structure pending (recent examples = unit issuance and subsequent unit consolidation, thereby lowering existing unit ACB). Hypothetically, assuming a $200 UDC tax value and 50% marginal tax rate, the capital gains tax would amount to $1.50-$2.00/un. Of the $1.35B, AP plans to repay ~$1.0B of debt, with the remainder funding disclosed development needs through 2024 (~$340M), while we expect the overall sale to be very modestly AFFOPU-accretive (by ~1%; already in our #s). Debt/GBV and net debt/EBITDA are expected to fall 380bp and 2.0x to ~33% and 8.0x by Q4/23.

Other Press Release Thoughts. There was a reference to AP’s highly underutilized urban land position with extraordinary mixed-use intensification potential. We think the operative word here is mixed-use, with sentiment likely favouring the addition of more residential over more office (we think value in residential density is perhaps 2x+ that of Office today). AP also reinforced its commitment to its distribution program, which we note has historically involved ~2%-3% annual growth. While we don’t think growth is necessary amidst the uncertainty (or even preferred), we note AP distribution yield spread to 10YR of ~500bp is 2+ STDEV above the meanEstimate changes. Our NAVPU falls $0.50 on the UDC sale, while our 2024E AFFOPU is down 1% on a 50bp higher debt refi cost to 5.2%. We increased our NAV cap by 20bp to 5.5%, while our target multiple falls 1.5x to 14.5x. The 14.5x = AP historical avg. AFFO yield spread to current 10YR GoC (only 4 REITs trading at a wider spread), while pro-forma debt/GBV and debt/EBITDA are a bit better and consistent with historical avg. respectively (Exhibit 7); our 2022A-2024E AFFOPU CAGR of ~3% is consistent with 3.2% historical average.