from cibc Price Target (12-18 mos.): C$6.50 Q4/19 Earnings; Eyeing The Sunshine State Our Conclusion With the proceeds from recent dispositions, the REIT is looking to execute on its ~$3 billion acquisition pipeline, with a suggestion that the U.S. Southeast will be primarily the focus. Deals are likely to take place in the 7% cap range, and based on reported CBRE cap rates, we think it is likely that there will be plenty of opportunities to transact in this range. At the same time, the unit price has been soft. SOT has the approval to execute another $10MM on its NCIB. Trading below our $7.75 NAV (and the REIT’s self-reported IFRS NAV of $8.99) and at an implied cap rate of ~7.7%, repurchasing more REIT units in a known portfolio at a discount could be a more compelling use of proceeds than new acquisitions. SOT screens attractively on valuation and we believe it should recover from the recent market-driven sell-off. However, given where U.S. office REITs are currently trading (20%+ discount to NAV), we are not sure if the increased forays into the U.S. will close the valuation gap further. While we are getting more constructive on the REIT, continued progress on leverage and occupancy are required for us to change our Neutral rating. Key Points SOT reported core FFOPU of $0.18 vs. CIBC and consensus at $0.19. Organic Growth: SPNOI was -0.3%, primarily driven by vacancy at 4211 Yonge Street that was disclosed last quarter. This property has been sold subsequent to the year-end. Excluding redevelopment properties, occupancy was 88.3%, in line with the year-end expectations. Market rents are estimated to be 13.8% above in-place rents, and rents for 2020 maturities are estimated to be 24% below market. For 2020, the REIT aims to end the year with occupancy approaching ~90%. Capital Recycling: The REIT has largely completed its disposition program (though may remain opportunistic), culminating with the sale of 4211 Yonge Street in January. SOT has the capacity to acquire up to $150MM and has been guiding towards entering markets in the Southeast US, calling out the “non-Miami” Florida markets of Tampa Bay, Jacksonville, and Orlando. In addition, the REIT could be active on its NCIB for up to $10MM of units for repurchase and cancellation. Valuation SOT trades at 6.8x 2020E FFO, a 31% discount to our NAV of $7.75 (from $8.00) at a 6.7% cap rate (from 6.6% to account for the recent disposition of lower cap rate GTA properties). Our price target of $6.50 (from $7.00) reflects a 16% discount to NAV, in line with long-term averages.