Allied Properties Real Estate Investment Trust T.AP.UN

Scotia update

[incomedreamer11]

Up Could Have Been Down; Flat is Likely Better

OUR TAKE: Slight Positive. AP confirmed its annual $1.80/un distribution for December and expects to maintain it in 2024. AP notably outperformed post Q3 results (+7% that day and +25% since vs. +11% for sector; see our Q3 note) as AP committed to the distribution we’re not expecting a big unit price move. That said, keeping the distribution vs. the contemplated customary 2%-3% growth (1st time in 11 years that AP has not boosted the distribution; CAGR = 2.4% since 2003) is likely what the market wanted given Allied already boasts the 3rd highest distribution yield at ~10% (Exhibit 1) which = a spread to 10YGoC that is much wider than historical average (Exhibit 3).

A top “soft landing” pick, with near-term catalysts in tow. Our positive thesis is intact, with near-term catalysts below. Assuming NO multiple expansion (P/AFFO of 9.1x is still ~50% of historical 17.2x avg.), investors are getting an ~10% yield, which combined with our 2023E-2025E AFFOPU CAGR of 2% = attractive 12% total return CAGR, with a free call option on AP significant residential land value (see our note; values probably down 30%-40% though) that we think can be monetized in 2025 and beyond. For taxable investors, we’re OK with waiting until January to buy.

KEY POINTS

Near-term catalysts = Q4/23 results in late January. First, AP guidance implies ~$0.67 of FFOPU vs. our $0.62 and $0.61 consensus. We don’t know how AP gets there on a recurring basis, but odds of a “miss” appear low and we think a “low-quality” beat still moves the unit price higher. Our 2024E y/y FFOPU = 3% vs. 1% consensus (i.e., low-to-mid-single digit guidance would likely suffice). Second, AP retained some hope of hitting its 2023 year-end target occupancy of ~91% (+300bp vs. Q3/23A). Again, we don’t see how AP gets there (i.e., we’re at +80bp q/q to 87.6%), but any gain (not driven by PUD re-classes) would likely be viewed positively at the current unit price. Third, while lending appetite for Office appears very soft (see our recent report), we think completion of private market transactions would likely help market perception on AP valuation (implied $296/sf and 8%+ implied cap). As shown in Exhibit 2, AP is one of only 3 REITs (that we’ve covered since 2012) trading at an above-historical-avg. AFFO and implied cap rate spread to 10YR GoC.

Nothing new on expected non-cash special distribution. We’re surprised it wasn’t included as part of the press release, but nonetheless, expect something in the next couple of weeks. As a reminder, we have estimated a combined capital gains tax of $1.50-$2.00 on a hypothetical $200M UDC tax value (see link).