CIBC commentsOur Conclusion
We believe Allied units’ positive reaction mostly reflects greater confidence in the distribution (with potential increases). Further positives include Allied’s improved liquidity position and intent to diversify future funding sources. Operationally, given the >1MM sq. ft. of leases under negotiation, Q4 and Q1 will be key in revealing the path to occupancy recovery. We continue to believe that Allied has potential long-term unit price appreciation, but are choosing to remain on the sidelines until we have a better vantage point on medium- to long-term office fundamentals. Concurrent with Q3/23 reporting, we are rolling out our 2025 estimates. We lower our price target from $21.00 to $19.50 and maintain our Neutral rating.
Key Points Q3/23 Results Recap: FFO/unit of $0.60 was in line with our $0.59 estimate and consensus $0.60. Occupancy of 86.8% (total leased occupancy was 87.6%) was down 280 bps Y/Y and 60 bps sequentially. Rental portfolio SPNOI increased 0.9% Y/Y and the reported IFRS NAV decreased to $49.83 (on a flat 4.64% cap rate).
Balance Sheet: Allied reported a debt/GBV ratio of 34.2%, a 10 bps decrease Y/Y. Interest coverage is 2.5x (down from 3.2x in Q3/22) and Allied has ~$1.28B of available liquidity. Allied continues to demonstrate its commitment to improving overall balance sheet health using proceeds from the recent UDC sale to reduce leverage, decreasing net debt/EBITDA to 7.9x (10.5x as of Q2/23). The REIT expects the ratio to decrease further over the next three years as developments contribute additional EBITDA.
Capital Allocation: Allied is nearing completion of both its committed development and upgrade activity, and as of now does not expect to engage in any further developments or acquisitions. As such, the REIT does not expect to need to pull on its current credit facility over the next five years, resulting in ~$900MM in liquidity during the aforementioned period. The remainder of the proceeds from the sale of the UDC assets have been allocated to existing development and upgrade activity, as well as reducing leverage (see here for further detail).
Special Distribution: Concurrent with the quarter, Allied provided an update on the special distribution (resulting from the sale of the data centres), whereby $65MM ($0.47/unit) of the special distribution will be paid in cash and the (undisclosed) balance in units, in order to assist taxable unitholders in funding the associated tax liability.