Allied Properties Real Estate Investment Trust T.AP.UN

Scotia comments on result

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Q2 Glance: Guidance Lowered to Match the Street; UDC Portfolio Sale Closing Expected in Three Weeks

OUR TAKE: Net Neutral. AP FFOPU was slightly below internal forecast, while AFFOPU was slightly higher; same as in Q1/23. 2023 FFOPU/SSNOI/AFFOPU guidance was reduced to flat-to-low-single-digit y/y growth (i.e., 0%-2%) from low-to-mid previously (i.e. ~3%); Exhibit 1 (first downward revision since 2020). We’re already in the flat-to-low range, as is consensus (-1.2%), so shouldn’t be too surprising.

Recurring FFOPU of $0.58 vs. $0.61 y/y was 1.5% above our $0.58 (on lower G&A) but ~2% below $0.60 consensus (range = $0.57-$0.62). The y/y FFOPU erosion slowed to -2.7% (vs. -4.1% in Q1/23; YTD = -3.4%).

UDC portfolio sale expected around August 16. Prior guidance was “closing by Q3/22”. See link to our original note (A Good Step Forward at a Good Price).

We chose “Net Neutral”. Positive = clarity on UDC portfolio closing date (important given 10.5x debt/EBITDA would move to ~8x by Q4/23). Neutral = Occupancy fell 80bp q/q (20bp light ex. PUD reclass). Slight Negative = downward guidance revision (albeit to Street expectations). AP is down 6% post Q1 results vs. +9% for Dream Office, +13% for U.S. Office REITs and flat for CAD REITs. We think UDC sale remains key.

Full update post c/c set for tomorrow at 10 am ET (1-800-599-2055).

UDC Sale details. It is worth noting (unclear in the original AP press release) the sales price was ~$1.46B given KDDI Corp is assuming a ~$100M lease liability at 250 Front. Tonight, AP broke down the use of proceeds ($740M to repay credit facility; Q3/23), $200M promissory note repayment (Dec/2023), ~$50M in mortgages in 2024, with the balance funding development through 2024. We didn’t see any update re: special distribution expected for holders as of Dec. 31/23.

High-level results. Disclosed AFFOPU fell 1.3% y/y (Q1 = fell 4.5%). Reported Leased and Economic occupancy fell 120p and 80bp to 87.6% and 87.4% (Q1 = -200bp and -140bp), with the 87.4% matching our forecast (~115,000sf of known departures by Q3/23 had an ~80bp impact). We est. the ~33k of RCA Building reclass into PUD raised occupancy by ~20bp. The “same-store” decline of ~100bp (i.e., including RCA reclassified portion; Q1 = ~90bp decline) compares to ~35bp for the broader market (Q1 = ~100bp). SANOI for Urban Office was +0.2% y/y vs. +0.2% in Q1/23. In-place rent growth grew 0.7% q/q to $23.51/sf (2.7% annualized; Q1 = 1% q/q or 4.3% annualized).

IFRS NAVPU increased $0.39 q/q (+0.8%) to $50.80 (Q1 = fell 1.1% q/q), well above our $33.50 and ~$38.00 cons. FV gain of ~$30M vs. $72M loss q/q, largely attributable to the UDC portfolio sale above IFRS NAV (~$100M), offset by development losses (at Adelaide/Duncan) and select asset write-downs. Overall IFRS cap rate fell 1bp q/q to 4.61% (Q1 = flat q/q) vs. our ~5.4%. Potential incremental density fell 0.1Msf q/q to 12.7Msf (vs. 14.5Msf current GLA).

See page 2 for Operational and Liquidity Update + Exhibit 1...

Operational update. AP tenant tours were +20% q/q and 13% y/y to 292, leasing 0.7Msf vs. 0.4Msf q/q and 0.7Msf in Q2/22. Tenant retention was 52% vs. 47% q/q, still well below historical 70%+. The lease renewal spread was 7.6% on yr.1 (Q1 = 11.4%) and 13.7% over lease term (Q1 = 18.2%). Disclosed NER on Q2 leasing was $15.50 (incl. ~$6.75 of lease cost) vs. $19.50 q/q (~$4.00). We est. near-term market rent was ~2.6% higher q/q (Q1 = ~0.5% lower q/q). Sublet (as a % of portfolio) was +10bp q/q to 5.8% (Q1 = +240bp q/q); although each market was lower, except Toronto. We estimate sub-let space as a % of total vacancy = 46% vs. 48% q/q.

Leverage is largely flat and liquidity is lower q/q; Debt/GBV rose 40bp q/q to 36.9% (Q1 = +90bp q/q) and Net Debt/EBITDA was flat at 10.5x (Q1 = rose 0.7x q/q). PUD as a % of GBV fell 10bp to 11.4% q/q on the Well incremental reclass to rental portfolio (Q1 = fell 110bp). Target development yields at the midpoint were flat, aside from Adelaide & Duncan falling 45bp to 4.60% at the midpoint). 700 Saint Hubert rose 35bp at the midpoint to 3.60% (Q1 = fell 20bp at the midpoint to 3.25%). Development completion on 700 Saint Hubert moved from Q3/23 to Q1/24 . Note, AP has $345M of total debt maturities in 2023 (8% of total) and $298M of remaining development (Q1 = $351) spend on ongoing developments.