CIBC comments after conferenceOur Conclusion
Q4 results will likely take a backseat to the announcement of a 50% distribution cut, which acknowledges the heightened and prolonged uncertainty in the office market, and follows similar actions taken by other office peers that have either reduced or suspended distributions. Pre-cut, units were yielding ~11% at a payout ratio of ~100%, and we estimate a 56% payout post. Owing to the concurrent unit consolidation plan, we expect the true impact on units could take some time to play out.
We lower our price target to $8.50 (prior $10.00), on applying a larger ~25% discount to our NAV estimate (all on a pre-consolidation basis).
Key Points
Unit Consolidation And Distribution Reduction: Concurrent with the quarter, the REIT announced it has decided to implement a consolidation of all the issued and outstanding units on the basis of one post-consolidation unit for every two pre-consolidation units. This will be effective on or around February 22 and post-consolidation units will start trading February 27. The monthly distribution will not be proportionately increased, and the REIT will maintain its current distribution of $1.00 per post-consolidation unit. As such, post-consolidation, the total distribution amount will decrease ~50%, from $37.9MM to $18.9MM. The $18.9MM in annual savings will be used to reinvest in improving occupancy.
Liquidity Update: The REIT had ~$187MM of liquidity and ~$17MM of unencumbered assets. Of the $187MM, ~$100MM comprises facilities to be used solely for retrofits and a construction allowance requirement on a negotiated lease. Debt obligations due within a year total $87MM. Q4/23 Results: FFO/unit was $0.38 vs. our $0.36 estimate, and included $0.02 of non-recurring income. SP-NOI was flat Y/Y. In-place occupancy was 82%, up 100 bps Y/Y, propelled by positive absorption in Toronto downtown of 2.7%, partially offset by negative absorption in other markets of 1.9%.
Outlook For 2024: While management does concede that it is still difficult to predict occupancy and NOI for 2024, there was an outlook provided with the quarter. Occupancy is expected in the mid- to high eighties (one large expiry could offer upside). SP-NOI growth is expected to be flat or in the low-single digits, with an FFO/unit range between $1.40 and $1.45.
Rental Rate Growth: Average in-place and committed net rent of $26.35/sq. ft. represented an increase of ~6% Y/Y, driven by a ~7% increase Y/Y in Toronto (to $31.23). However, TI’s and leasing costs were elevated at $8.34/sq. ft. for the year.
Price Target (Base Case): C$8.50 Our $8.50 price target reflects a ~25% discount to our $11.50 NAV estimate and equates to 6.0x 2024E FFO.
Upside Scenario: C$11.00 Our upside scenario of $11.00 reflects a ~10% discount to our $14.25 NAV estimate with NOI 2.5% above our forecast on higher occupancy and rent growth.
Downside Scenario: C$5.00 Our downside scenario of $5.00 assumes a stagflationary environment and reflects a ~20% discount to our NAV estimate with NOI 5.0% below our forecast on lower occupancy and rent growth and a 50 bp blended cap rate expansion.