Allied Properties Real Estate Investment Trust T.AP.UN

for your interest

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What If It Was Allied RESIDENTIAL Properties REIT?

We think residential intensification = cap rate expansion repellent. AP has identified ~10Msf of incremental density; the figure represents office GLA, which we suspect would be notably higher if it was residential GLA. We est. ~25% is already zoned, 10% in progress and ~65% remains (Exhibit 3). As shown in Exhibit 4, we est. the “residential” NPV per buildable sf is ~$7.25/un (27% of unit price; implies ~$240/sf), or ~$3.50/un if we assume the issuance of ~120M units (i.e., doubling existing unit count) to fund the $6B-$7B est. construction cost over time. We spent a lot of time reviewing condo pricing in Allied’s neighbourhoods and est. current market average of ~$1,000/sf, ranging from ~$600 in Calgary to $1,700 in Vancouver (Exhibit 5). Assuming a 15% development margin = avg. condo replacement cost of ~$850-$900/sf, materially above Allied’s implied ~$370/sf at ~$27/un. In essence, we est. AP is trading at ~40% of Residential replacement cost today. While this analysis may ring hollow for Office REITs with less potential “change of use optionality”, we firmly believe Allied can surface material value over time, with residential = 50%+ of portfolio upon our described hypothetical build-out. The key-word here = “over-time” as we also firmly believe investors will pay zero for this in the imminent future. Exhibit 6 compares Allied long-term intensification upside to Retail REITs, as well as near-term development completions (which we think the market will pay for upon completion). As shown, AP densification pipeline rivals the best of them, however, it also has the most near-term completions, something we think is a 12-month catalyst as discussed 

New 2024 Estimates

New 2024 estimates keep the gains in 2023, but not much more. Exhibit 8 = our key assumptions. Our new 2024E FFOPU and AFFOPU are $2.66 and $2.25 (3%/0% vs. consensus). We still expect 6%-7% 2023 y/y FFOPU/AFFOPU growth (consistent with AP soft guidance of “low-to-mid single-digit growth”), followed by ~2% growth in 2024. With 2024E SPNOI of ~1% offset by higher interest expense ($0.03 impact on “re-pricing” of 2% CHP promissory note to ~4%), the primary driver of growth in 2H/23 and 2024 = development completions. 2024E lease and debt expiries as % of total = 7% and 8% (2023E = 11% and 2%). Our 2022E-2024E occupancy = 92%-93% range (vs. AP Q4/22 target of 94%; Q2/22A = 89.5%). We reflect a 2023E and 2024E avg. market rent decline of 5% and 1.5%, resulting in negligible 2023E-2024E lease spreads. Exhibits 9-10 compare AP occupancy and SSNOI to CAD Real GDP growth over time (2024 consensus CAD Real GDP = 1.2%). On capital allocation, we reflect no acquisitions/dispositions, nor unit buy-backs and avg. 2%-2.5% annual distribution/un growth, although we attach a decent probability to the sale of a stake in its UDC portfolio by 2023.