Scotia comments Swap AP-U for BN — Covered by Scotiabank analyst Mario Saric. We think the replacement that likely makes most sense is Brookfield Corporation (BN) for replacing Allied Properties (AP) rather than Dream Office (D) given its cheaper implied office valuation and positive performance YTD (contrary to D which is also a candidate for tax-loss harvesting). Despite Office Real Estate representing only ~10% of our NAV, we think investors are focused on the implied value of the Real Estate in the stock and that discount on Real Estate ($7B implied value vs. our $17B) is greater than the trading discount on either Allied Properties (AP) or Dream Office (D), which are 14% and 28%, respectively. As such, if the Office Market sentiment improves (which is AP’s key catalyst in our view), BN will respond to that more than the ~10% reflected on our NAV without as much downside risk. Having said that, D’s exposure is more tied to idiosyncratic risks that is less relevant to AP, such as its ability to recycle capital and pay down debt, as well as selling pressure from large unitholders.
Despite having a Sector Outperform rating on BN, we still think AP is an attractive investment opportunity that should play out in 2025, therefore the position should be switched back after the 30-day period. We think AP remains a “show-me” story and occupancy marching towards 90% to support the $1.80/un distribution (likely to be renewed in December) remains the main driver of unit price performance. We think justified confidence in the distribution supporting a distribution yield of ~7.5% (currently 10%) could drive a 30%+ unit price upside and the market underestimates the private demand for AP’s portfolio.