Allied Properties Real Estate Investment Trust T.AP.UN

Scotia update

[incomedreamer11]

OUR TAKE: Neutral. CBRE Q4/24 Office update resembled Q3. National DT Office was up another 30bp q/q to 20% (Class A +40bp to ~17%) vs. +20bp expected on new supply, while Suburban vacancy was flattish q/q (~17%). We est. ~15bp of the 30bp = 0.6M of new supply delivered in DT Toronto (Crosstown Place; impacted Toronto vacancy by 50bp). Quoted Class A DT asking rent was +1% q/q to $29.41/sf, incl. +2% in Toronto (new supply reflected). Consistent with our Q3 remarks (see link), Q4 supports the notion that the worst may be behind Office (assuming no tariff-driven domestic recession) but transitioning from "no longer getting worse" to "getting better" may take another quarter or so as anecdotal discussion points (i.e., larger tenants revisiting magnitude of space given up) convert toactual data. Shorter-term, we think the data aligns with the view that any imminent Allied occupancy gains will come from Allied success rather than broader market. That said, on the margin, this print could slightly lower odds of AP Q4 occupancy gains (critical unit price catalyst). We still think CAD Office REITs can do well in 2025 should Canada deliver solid (i.e., 2%+) Real GDP growth. AP remains SO, with D at SP.

KEY POINTS

Allied Properties: Our Q4/24E q/q occupancy of +40bp (Q3/24E was +30bp) compares to our est. 40bp decline in AP markets (Q3 = -50bp), on an 80bp jump in Toronto, partially offset by a 40bp decline in Montreal (Exhibit 9), with the latter a big source of in-place AP vacancy. As at Q3, AP had 0.3Msf of GLA expiring in 2024 (200bp of portfolio GLA), of which 40% was in Montreal/Ottawa and 35% in Toronto/Kitchener. AP noted an expected inflection point (i.e. occupancy growth) in 2H/24 on was intact on its Q2 call, which it updated on the Q3 call by noting Q3 occupancy was expected to be a trough. With AP reaffirming its $1.80/yr distribution in December (see link), we still see AP as fairly binary, with 200-300bp+ occupancy growth driving 15%+ unit price upside on higher distribution confidence. Lastly, we think AP could provide added disclosure on multi-year thoughts with Q4 results (set for Feb 4), which could = the road-map to distribution sustainability. All-in-all, we think the market is (rightfully) taking a wait-and-see approach with AP occupancy gains, despite management continually citing strong touring activity (or perhaps because of it) and higher confidence in leasing execution (size of tenant space requirements is increasing, as is expansion activity). Our AP Q4/24E and Q4/25E = 86.0% (-100bp vs. pre-Q3) and 89.4% (-180bp), respectively (Q3/24A = 85.6%), with every 1% = ~1% AFFOPU.