Allied Properties Real Estate Investment Trust T.AP.UN

Alternate Symbol(s): APYRF

Allied Properties Real Estate Investment Trust (Allied) is a Canada-based open-end real estate investment trust (REIT). Allied is an owner-operator of distinctive urban workspace in Canada's cities. Its business is providing knowledge-based organizations with workspace that is sustainable and conducive to human wellness, creativity, connectivity and diversity. Allied operates in seven urban markets in Canada, which includes Montreal, Ottawa, Toronto, Kitchener, Calgary, Edmonton and Vancouver. Its urban office properties are managed by geographic location consisting of approximately four groups of cities. Its subsidiaries include Allied Properties Management Trust, Allied Properties Management Limited Partnership, and Allied Properties Management GP Limited.

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Post by incomedreamer11on Jul 31, 2024 8:49am

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Post# 36155863

Scotia comments

Q2 Glance: Higher Interest Expense Bites; Is "No Longer Falling" Good Enough... Probably Not

OUR TAKE: Mixed. Recurring FFOPU of $0.526 (vs. $0.578 q/q and $0.588 y/y) was below our $0.55 and $0.56 consensus (range = $0.53-$0.58). The miss vs. us was entirely on higher interest expenses (+$0.035); see Exhibit 1. For context, the acquisition of 19 Duncan and 400 West Georgia (link) impacted Q2 FFOPU by $0.041 per AP.

Specific mention of FFOPU/AFFOPU/SSNOI was removed from the “2024 Outlook” in Q1, replaced by an expectation that “operating results in 2024 will fully support AP current distribution commitment”. AP reiterated that commitment.

Economic and Leased occupancy were flat q/q (1st time in 6 quarters), consistent with broader market (see our note) with AP expecting a “positive inflection point” by year-end (our Q3/24E and Q4/24E q/q are +53bp and +122bp). Overall, we feel occupancy gains may take longer than envisioned. We still believe higher unit price requires increasing occupancy (ultimately providing confidence in the distribution).

In yesterday’s Q2 Preview (link), we opined flat q/q occupancy felt neutral to the unit price (Q3 is likely the main event), but we chose “mixed” due to the Q2 miss (carry forward of higher interest expense).

Full update post c/c tomorrow at 10 am ET (1-800-715-9871; #1813464).

High-level results. Disclosed AFFOPU fell 11% y/y (Q1 = +0.8%). Leased occupancy was +10bp q/q to 87.1% (Q1 = -30bp q/q), while Economic occupancy fell 10bp q/q to 85.9% (Q1 = -50bp q/q). We est. 19 Duncan and 400 West Georgia had a +6bp and -9bp impact, respectively. We estimate PUD reclasses/asset sales had a ~+10bp q/q impact on quoted occupancy (sale of Telus Sky improved quoted occupancy by ~20bp). Rental SANOI fell 2.3% y/y vs. -2.0% in Q1/24, with all regions ex. Montreal&Ottawa negative. In-place rent was +4% q/q at $25.08/sf (Q1= flat q/q).

Capital Recycling. AP will complete the previously announced reorg of Telus Sky, receiving $32M of net proceeds in Q3, and has the pending sale of 5 assets in Montreal (2 in Toronto) at/above IFRS in 2H/24 for ~$200M; AP is receiving intensfication value on 3 of the assets (other 4 = cap rate acquistions). Aggregate dispo cap rate not disclosed, but AP noted recycling into debt reduction = AFFOPU positive (we don’t have dispositions in our forecast). AP is targeting another $200M of sales heading into 2025.

IFRS NAVPU fell $0.41 q/q (-0.9%) to $44.43 (Q1 = -1.7% q/q), still well above our $26.50 and ~$22.83 consensus. FV loss of $45M vs. $119M loss q/q, incl. $48M loss on PUD (Q1 = $31M). Overall IFRS cap rate fell 2bp q/q to 4.82% (Q1 = +1bp q/q) vs. our 6.2%, with Toronto -4bp q/q and Calgary +1bp q/q. We est. +1bp cap rate change in our Q2 CBRE Cap Rate Survey report (see Exhibit 3 in the report). Potential incremental density of 9.9Msf fell 0.1Msf q/q (Q1 = flat).

See page 2 for Operational and Liquidity Update and our Q2 Variance Analysis

Operations. AP tenant tours fell 13% q/q to 262 (-10% y/y, Q1 = 300), leasing 0.47Msf vs. 0.54Msf q/q and 0.7Msf y/y. Tenant retention fell to 60% vs. 69% q/q, below the historical 70%+. The lease renewal spread was 9.7% on yr.1 (Q1 = 4.7%) and 16% over lease term (Q1 = 10%). We est. market rent for 2024 expiries was +0.7% q/q (Q1 = +4% q/q), with AP est. MTM of 17% on a gross basis (Q1/24 = 12%). Sublet (as a % of portfolio) was -30bp q/q to 5.0% (Q1 = +20bp q/q). We estimate sub-let space as a % of total vacancy = 26% vs. 27% q/q and ~16% national average.

Leverage moves higher (as expected) on Westbank acquisitions. Debt/GBV was +320bp q/q to 39.1% (Q1 = +120bp q/q) and Net Debt/EBITDA was +1.5x to 10.9x (Q1 = +1.2x q/q). PUD as a % of GBV was flat q/q at 11.4% (Q1 = -0.5% q/q) and above AP target of ~5% by Q4/25 (disclosure stopped in Q1). Q2/24A assets held for sale = $286M (vs. $130M as at Q1/24). AP cited expected repayment of the 2 debt expiries in 2025 ($200M debenture + $400M unsecured term loan) via sale of non-core assets (up to $400M), and possible CMHC financing at 19 Duncan ($50M). Discussions to extend the $400M are also underway.