Allied Properties Real Estate Investment Trust T.AP.UN

Alternate Symbol(s): APYRF

Allied Properties Real Estate Investment Trust (Allied) is a Canada-based open-end real estate investment trust (REIT). Allied is an owner-operator of distinctive urban workspace in Canada's cities. Its business is providing knowledge-based organizations with workspace that is sustainable and conducive to human wellness, creativity, connectivity and diversity. Allied operates in seven urban markets in Canada, which includes Montreal, Ottawa, Toronto, Kitchener, Calgary, Edmonton and Vancouver. Its urban office properties are managed by geographic location consisting of approximately four groups of cities. Its subsidiaries include Allied Properties Management Trust, Allied Properties Management Limited Partnership, and Allied Properties Management GP Limited.

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Allied Properties Real Estate Investment Trust

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Post by incomedreamer11on Jan 17, 2023 12:20pm

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Post# 35228259

Scotia comment on transaction

Seeking 100% UDC Sale; Redeployment Is Critical, In Our View

OUR TAKE: Neutral. We’re off a brief restriction. Allied updated its unencumbered urban data centre (UDC) portfolio sales process, concluding that selling a 100% interest is now optimal financially and operationally (implementing a comprehensive sales process). AP seeks to “supercharge” the balance sheet and lower reliance on equity markets + execute on its distinct urban workspace consolidation strategy over time. AP noted any sale proceeds will lower leverage, fund ongoing developments (~$275M), and possibly repurchase units (6.4% implied cap). Importantly, AP does not expect a sale to be dilutive to FFOPU.

We’re suprised with a potential 100% sale. Our prior base-case = 50%, in part due to possible special distribution requirements that we felt did not satisfy the criteria laid out for a transaction (i.e. selling the UDCs to pay special distributions). That said, we still believe there is tangible Current NAVPU upside on a sale (i.e., 3%+; Exhibit 1) and material debt reduction (Exhibit 2) sans AFFOPU dilution is a good thing. Ultimately, we think structural debt reduction and development completion would be viewed positively by the market, with near-term re-deployment into external growth a bit more mixed.

KEY POINTS

UDC portfolio sale. To reiterate our prior research (see our Q1/22 and Q3/22 results notes), we believe the UDC portfolio could be worth $1.5B+ vs. the ~$1.4B in our NAVPU and $1.3B AP IFRS value (Exhibit 1 = UDC portfolio sensitivity to cap rate and NOI). We had highlighted our view that a sale of a stake better fits Allied’s disclosed disposition criteria (which included paying down debt, bringing in complementary leasing expertise, and a “good trade”). We also believed there are special distribution considerations given the asset tax basis is likely far below current fair value (recall, AP acquired 151 Front in 2009 for $192M).

A 100% sale would bring debt squarely back to AP long-term target. We estimate a sale at $1.5B would lower net debt/EBITDA and debt/GBV by 2.6x and 9.7% to 7.0x and 24.6%, respectively (Exhibit 2), immediately transforming AP into one of the best CAD REIT balance sheets. Factoring in expected development completions (and assuming a 15% FV uptick), we estimate the pro-forma net debt/EBITDA and net debt/GBV = 5.9x and 26.5% (every 1.0x = $0.7B of purchasing power at a 5.5% cap).

Still some juice to squeeze, despite strong start to the year. AP is +17.0% vs. +7.4% for CAD REITs and +6.8% for U.S. Office REITs YTD, following a -37.8% total return in 2022. As shown in our REIT Stuff earlier today, AP was a bottom-5 performing REIT in 2022 (was our Top Pick). AP has seen the most AFFO multiple erosion during COVID in our universe (42%; Exhibit 3) and lost the most on P/NAV (Exhibit 4) vs. historical average. In contrast, we believe AP can deliver above-avg. ~10% NTM NAVPU growth (Exhibit 5), with the possible UDC sale additive to our forecast.