Allied Properties Real Estate Investment Trust T.AP.UN

Q4 preview

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Q4 Preview: Should Be Interesting

OUR TAKE: Mixed. Our key estimates fall 0%-8% heading into AP Q4 reporting Wednesday AMC (Exhibit 1). The key drivers = a 15bp cap rate jump, a 15% haircut to Q3/23A IFRS development values, and alignment of development completions with mezzanine interest cessation. Overall, AP is +44% since Q3 results (vs. +17% for CAD REITs and +55% for U.S. Office REITs), eating into some of the significant upside we saw and creating a more balanced risk-reward heading into Wednesday, in our view. That said, we’re keeping our SO rating based on what we still believe is a very discounted valuation (Exhibits 4-7; implied ~$325/sf), including a highly attractive (and we think sustainable) ~9% distribution yield (Exhibit 2), which is a reasonable minimum total return CAGR through 2025 (upside = 300bp+ occupancy gains, capital allocation targeting immense residential value, M&A or a “soft landing”). As discussed in our 2024 Focus Outlook, we believe CAD Office can do well should recession fears ease. Despite a minimal 2023E-2025E AFFOPU CAGR of 0.3% (vs. 3.9% historical avg; Exhibit 3), we think AP can deliver one of the better 2-4 year total returns in our coverage if a couple of the aforementioned materialize.

KEY POINTS

Q4 Focus Areas. In our December 5th Distribution note (we think 2024 = better timing for taxable investors to buy AP vs. December 2023), we cited the following catalysts: 1) AP implied Q4/23E FFOPU of $0.67 (based on intact 2023 guidance) vs. our and consensus ~$0.61 (we were at $0.616). 2) AP retained some hope of hitting original ~91% target occupancy (we think less likely now; language pointing to any imminent progress would be constructive, in our view). 3) Private Office market deals (i.e., we saw one with H&R a week later; AP was +8.8% that day vs. +5.4% for sector). While not mentioned on Dec 5th, the market is interested in any news on the Shopify sub-let at The Well (would be positive, in our view). Lastly and perhaps most interestingly, is 2024 guidance/financial forecast, which could be complicated by the outcome of any Westbank development JVs (see below).

Model changes. First, given our est. 80bp Q4/23E q/q AP market occupancy decline (Exhibit 1 in our Q4 Office Market Update note), our Q4/23E economic occupancy falls by an equal 80bp to ~87% (flat q/q); our 2024E and 2025E are intact at ~88% and 90%. Second, our 2024E and 2025E G&A are +$1M to $24M and $25M to reflect lower forecast capitalization. On that, the bigger driver behind our lower estimates = assumed repayment of Westbank loans receivable (and cessation of interest income) in-line with AP Q3-disclosed transfer-to-rental portfolio dates. To the extent it happens much sooner (for whatever reason), our 2024E and 2025E FFOPU would fall another $0.06 and $0.02. Third, our NAVPU estimate falls ~$2.50 to $27.50; ~$1.50 on a 15% haircut on Q3/23A Development IFRS (considering our prior $30 NAVPU = ~40% discount to AP Q3/23A IFRS NAVPU of ~$50) with the remaining ~$1.00 mostly due to a 15bp cap rate increase to 6.10% (vs. the 18bp noted in yesterday’s Q4 CBRE Cap Rate note).