Allied Properties Real Estate Investment Trust APYRF

Raymond James view on Allied today

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Allied Properties REIT  (AP.UN-TSX) 

Real Estate | Office/Diversified

3Q24 Results: Looking for More Treats in the Cdn Office Goody Bag

Recommendation

Allied Properties REIT (Allied) reported 3Q24 FFO as expected at ~$0.54/unit (excluding ~$0.23/unit in residential inventory impairment charges), and down ~11% YoY from ~$0.60/unit in 3Q23.

Still Waiting for Canadian Office Leasing Velocity to Reach an Inflection Point and for Average Occupancy Rates to Stabilize: At Sept-30, Allied’s average occupancy rate was ~85.6%, down ~20 bps QoQ and ~120 bps YoY from ~86.8% in 3Q23. Allied’s 3Q24 SP-NOI excluding its development portfolio fell ~3.1% YoY, mainly due to non-lease renewals in Toronto, Kitchener, Calgary, and Vancouver. In 3Q24, Allied executed ~393k sf of lease renewals (tenant retention rate: ~60%), at ~6% average lower rents psf (or +0.5% excluding a short-term lease renewal in Toronto).

Increasing Financing Activity to Address Near-term Maturities and Reduce Higher Cost, Floating Rate Debt: Allied’s debt to EBITDA ratio was ~10.7x at Sept-30 (vs. ~10.9x at June 30), and above its mid ~8x target by the end of 2026. In 3Q24, Allied issued $250 mln in new, 5-year Series J senior unsecured debentures (average interest rate: ~5.53%). As part of its 3Q24 release, Allied noted its additional debt financing initiatives to address upcoming debt maturities and reduce higher cost, floating interest rate exposure, including: 1) obtaining secured mortgages (term: 4-5 years) totaling ~$343 mln (interest rates: 4.70-4.90%); 2) finalizing a 10-year CMHC-insured mortgage (expected interest rate: ~3.5%) secured by 19 Duncan; and 3) obtaining a 2-yr interest rate swap totaling ~$175 mln (fixed interest rate: ~4.93%). Allied expects to repay ~$200 mln in Series C unsecured debentures due in April 2025, funded by planned non-core asset sales.

Westbank Development Loan Exposure is a Near-term Investment Risk: At Sept-30, Allied had JV partnerships with Westbank for 3 projects in Vancouver and Toronto: 150 West Georgia; 19 Duncan; and KING Toronto. Allied had outstanding credit facilities and development loans at Sept-30 that totaled ~$393 mln (or ~$2.80/unit). In 3Q24, Allied amended its loan agreement with Westbank for its KING Toronto JV, by adding another $35 mln credit facility (rate: prime + 8% or +13.95% currently). We note that a portion of Allied’s loans generate non-cash, payment-in-kind (PIK) interest income, thereby accumulating a growing loan and/or facility balance until repayment upon maturity or project completion. In 3Q24, Allied’s reported interest income was ~$10 mln, of which ~$6 mln (or ~8% of its 3Q24 FFO/unit) appears to be non-cash interest income.

Key Takeaway

We seek improvements in a few key areas before we become more constructive on Allied’s near-term total return prospects, like: 1) a clear recovery in underlying Canadian office leasing demand and supply fundamentals; 2) greater sustainability in its monthly distribution rate; 3) improving balance sheet strength with a reduction in financial leverage metrics towards target levels; and 4) minimizing dilution and/or impairment of Westbank-related development projects and loans.

Valuation

Allied trades at 9.7x 2025E AFFO, ~12% below our $21.00 NAV estimate (6.50% cap rate), and yields 9.7% (2025E AFFO payout ratio: ~94%). Allied also trades at an implied ~6.9% cap rate and ~$373 psf. Our new $20.00 target price for Allied is based on ~10.5x of 2025E AFFO (prior: ~11.0x), above its Cdn office peers of ~6.0x due to its higher unit liquidity, and underlying urban land value.