Allied Properties Real Estate Investment Trust T.AP.UN

Scotia comments

[incomedreamer11]

OUR TAKE: Mixed. Reported & recurring FFOPU (incl. $4M of deposit income) of $0.60 vs. $0.59 q/q and $0.61 y/y was 2.5% and 1% below our $0.614 and $0.605 consensus (range = $0.58-$0.63). The y/y FFOPU erosion slowed to 1.3% (vs. 2.7% in Q2/23; YTD = 2.7%).

2023 FFOPU/SSNOI/AFFOPU guidance intact. We felt there was a non-0% chance of another reduction; recall, it fell to flat- to low-single-digit y/y growth (i.e., 0%-2%) from low-to-mid in Q2/23. No mention of target occupancy for the 2nd consecutive q (Allied target was “min-90%” by year-end as part of Q1/23 results). Our 2023E y/y FFOPU growth is flat (i.e., at lower-end of AP intact guidance).

Allied stated it will remain fully committed to its distribution program going forward (unclear if this means no distribution cut or historical 2%-3% annual growth).

AP disclosed an expected $65M cash special distribution ($0.47) to u/h’s of record on Dec 31st primarily due to the UDC sale, with the rest = special distribution in units (unclear re: quantum).

Overall, we chose “Mixed” on intact 2023 guidance, but in-place occupancy fell q/q once again; occupancy gains remain an elusive key catalyst to reverse negative sentiment.

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

High-level results. Disclosed AFFOPU was +3.6% y/y (Q2 = -1.3%). Reported Leased occupancy was flat q/q at 87.6% (Q2 = -120bp q/q), but Economic occupancy fell 60bp q/q to 86.8% (Q2 = -80bp) vs. our expectation of a 60bp q/q jump in occupancy. The market with the larger expected occupancy gains (Montreal), saw occupancy fall ~90bp q/q. We est. the PUD in-and-out reclass this quarter was limited as essentially 810 Saint Antoine and the Breithaupt Phase III offset each other. So net-net, a ~60bp occupancy decline vs. an avg. 10bp decline for the broader DT market (Q2 = 35bp decline). SANOI for Urban Office was +0.9% y/y vs. +0.2% in Q2/23. In-place rent growth grew 1.1% q/q to $23.78/sf (4.4% annualized; Q2 = 0.7% q/q), driven in part by PUD re-classification.

IFRS NAVPU fell $0.97 q/q (-2%) to $49.83 (Q2 = +0.8% q/q), well above our $32.00 and ~$31.80 consensus. FV loss of $129M vs. $30M gain q/q, incl. $25M loss on PUD. Overall IFRS cap rate rose a modest 3bp q/q to 4.64% (Q2 = -1bp q/q) vs. our ~5.6% (Toronto/Kitchener was +6bp to 4.43%). Potential incremental density of 10.0Msf fell 0.3Msf q/q (all in Montreal). Looks like 810 Saint Antoine in Montreal was put into PUD (targeting 350,000sf and 30,000sf of Residential and Retail, respectively).

See page 2 for Operational and Liquidity Update

Operational update. AP tenant tours were +5% q/q and 10% y/y to 306 (Q2 = +20% q/q and +13% y/y), leasing 0.4Msf vs. 0.5Msf q/q and 0.4Msf in Q3/22. Tenant retention remained relatively low at 56% vs. 52% q/q, well below historical 70%+. The lease renewal spread was 3.8% on yr.1 (Q2 = 7.6%) and 10% over lease term (Q2 = 13.7%). Disclosed NER on Q3 leasing was $23.25 (incl. ~$4.50 of lease cost) vs. $15.50 q/q (~$6.75). We est. market rent for 2024 expiries were flat q/q (Q2 = ~2.6% higher q/q). Sublet (as a % of portfolio) fell 20bp q/q to 5.6% (Q2 = +10bp q/q). We estimate sub-let space as a % of total vacancy = 30% vs. 31% q/q and ~20% national average.

Leverage falls q/q on UDC sale. Debt/GBV fell 270bp q/q to 34.2% (Q2 = +40bp q/q) and Net Debt/EBITDA fell 2.6x to 7.9x (Q2 = flat q/q). PUD as a % of GBV was +20bp q/q to 11.6%, but AP highlighted a target 4.5% by Q4/25. AP sold a $20M asset in Montreal post-q (was classified as HFS). Target development yields at the midpoint were flat, aside from The Well falling 5bp to 5.05% at the midpoint and 700 Saint Hubert +5bp to 3.65%. The biggest change was The KING Toronto (down 85bp to 5.2%)