CIBC comments on resultAllied reported Q2/23 results that were marginally short of consensus expectations, attributable to an increase in interest costs and a decline in occupancy (largely due to the Calgary portfolio). An update on the UDC sale was provided, and as expected the majority of the proceeds are allocated to improving the balance sheet and eliminating the majority of Allied’s floating rate debt exposure. SPNO remained flat Y/Y (-1.5% including the UDC portfolio), led by +4.8% growth in Montreal. Perhaps more importantly, the regional laggard was the REIT’s key market of Toronto, posting an SPNOI decline of 3.4%. Concurrent with this report, we increase our cap rate by 25 bps to 6.25%, and lower our forward NAV estimate to $28.00. Accordingly, we maintain a modest discount to NAV and lower our price target to $26.00 (from $27.00). As the office market recovery may yet take some time to play out (we do believe that it will recover) our Neutral rating remains unchanged, as we “let it be”.
Key Points
Q2/23 Results Recap: FFOPU of $0.59 was marginally below our $0.62 estimate and $0.60 consensus – the difference in FFOPU was due to higher interest expense and extended lease-up timeframes. Occupancy of 87.6% (consisting of 88.3% in the stabilized portfolio and 64.0% in the transitional portfolio) was down 330 bps Y/Y and 120 bps sequentially. Rental portfolio SP-NOI was essentially flat Y/Y and the reported IFRS NAV increased to $50.80 (on a flat 4.61% cap rate).
Balance Sheet: Allied reported a debt/GBV ratio of 36.9%, a 300 bps increase Y/Y. Pro forma the closing of the UDC sale, we estimate leverage to drop to ~32% (on book value). Interest coverage is 2.6x (down from 3.3x in Q2/22), and Allied has ~$129.7MM of available liquidity (pro forma the UDC sale up to $900MM will be available through its credit facility).
Pending UDC Sale: The UDC portfolio sale remains on track and is expected to close on August 16, 2023. $740MM of the proceeds will be used to repay all amounts drawn on its credit facilities, with an additional $200MM set aside to repay the Choice Properties promissory note and $49MM to repay remaining first mortgages in 2024. Allied will use the balance to fund its development and upgrade activity over the next year. The tax consequences resulting from the “substantial” capital gain on the sale remain a question mark. Using the most recent historical special distributions as a guide, we believe that the most likely scenario is a non-cash distribution in which the ACB of the unitholder is increased in lieu of receiving cash.
Guidance Revision: Management lowered its fiscal year guidance to a range of flat to low-single-digit growth (previously guiding low- to mid-singledigit growth).
Price Target (Base Case): C$26.00 Our $26.00 price target reflects a 7% discount to our current NAV estimate, assuming a 6.25% cap rate, based on 2023 NOI estimates; this equates to 10.8x 2023E FFO.
Upside Scenario: C$44.00 Our upside scenario of $44.00 reflects a ~15% premium to our NAV estimate with NOI 5.0% above forecast on higher rent & occupancy growth and 50 bps cap rate compression.
Downside Scenario: C$15.00 Our downside scenario of $15.00 assumes a stagflationary environment and reflects a 30% discount to our NAV estimate with NOI 10.0% below forecast on lower occupancy & rent declines and 50 bps cap rate expansion.