Allied Properties Real Estate Investment Trust T.AP.UN

for your interest

[incomedreamer11]

Good to See Deal Flow; Should Help Office Sentiment... On the Margin

OUR TAKE: Slight Positive. Bloomberg reported (see link) Deka Group (out of Germany; already has a CAD Office presence; seems foreign demand > domestic) has agreed to buy 402 Dunsmuir/401 West Georgia in Vancouver (~420,000sf) from CPP/Oxford for $300M, or ~$720/sf. No cap rate disclosed, but we suspect it is in the middish-6% range, assuming ~98% occupancy and an avg. mid-$40/sf net rent; this would compare to (our understanding) of a mid-5% cap initial ask. Allied & Dream trade at ~7.8%/~8.2% and $300/sf and $290/sf, (Exhibit 1); granted, Vancouver is the highest rent/sf and lowest CAD Office cap rate market; Exhibit 2) and our AP Vancouver cap rate = 5.75%.

Net-net, we view this as a constructive data point for office sentiment (more so AP given D is not in Vancouver; Exhibit 3 shows asset proximity to AP portfolio). While negligible to our AP NAVPU estimate (AP Q4/23A IFRS Vancouver = 4.18%; Exhibits 5-6), it can partly boost Office market sentiment given the big uncertainty about a deal getting done. As in our Allied Q4 Results note (Don't Call It a Guidance; It's Been an Outlook for Years), we think most near-term unit price catalysts = macro, incl. more Office market deals at cap rates below REIT implied cap rates.

KEY POINTS

Some Property specifics. The two properties (Exhibit 4) sit on ~1.4 acres in Downtown Vancouver (located right across from Amazon’s Post Development) and include a recently constructed and recently renovated asset. Amazon occupies 100% of 402 Dunsmuir (we understand with a WALT sub-5 years; constructed in 2022), while AON occupies ~20% of 401 West Georgia (originally built in 1985). The property was being marketed with contractual rents below market (gap not quantified).

If this asset can’t trade…Regardless of deal valuation, we think a pulled transaction would have reinforced negative Office market sentiment amidst poor lender appetite (Exhibits 7-8). On the Allied Q3 Results call, Mr. Michael Emory (Chairperson) cited confidence in this transaction being executed, contrary to public market sentiment at the time. In terms of additional implications, we note the asset is essentially next door to 400 West Georgia, an office property that AP has the right to acquire a 50% interest in (at cost) from Westbank (that is currently ~82% leased; on its way to 90%+ should existing tenant discussions lead to executed leases). As discussed in our Q4 AP Results note (page 2), our model assumes the acquisition of a 90% interest for $280M at 5.75% (every 25bp = $0.006 of annual FFOPU or ~0.3%). Lastly, a Bloomberg report was out on January 26 citing Dream Office has begun marketing 438 University in Toronto for sale, joining 655 Bay Street that was put on the market last year. We recall the positive impact on AP and D unit price (+9% and +11% that day vs. +5% for CAD REIT Index) post announced sale by H&R of its Corus Quay asset in Toronto (admittedly at a lower 5.7% cap rate); see link to our note.

How did we get to our estimated cap rate? We looked at it from two angles. First, our understanding at the time of initial asset marketing was a vendor ask in the mid-5% range, which would imply $19M of NOI at $350M; therefore $300M = 6.4% (assuming no change in NOI). Second, by taking a look at the asset building fact sheets per Oxford website, we understand occupancy = ~98% and asking rents are $41/sf-$51/sf (low- to mid-rise). While we don’t know avg. in-place rent, using the mid-point ($46/sf) = ~$19M of NOI. We assume the 416,000sf excludes 235 underground parking spots (at an assumed $400/month and 60% margin) = ~$1M of additional NOI. So all-in-all, a middish-6% cap rate appears reasonable to us, albeit above the Q4 CBRE disclosed 5.0%-5.75% for Vancouver Office Class AA (Class A = 5.25%-6.0%).