Allied Properties Real Estate Investment Trust T.AP.UN

Scotia Q4 preview

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Q4 Preview: Lots to Talk About

OUR TAKE: Neutral. We think the Q4 release on Tuesday night (our Q4/22E FFOPU is +0.7% vs. consensus) and subsequent c/c should be very topical, including: (1) December leasing update, (2) 2023 guidance (incl. occupancy), (3) UDC portfolio sale progress (see our note), (4) Development leasing update, incl. The Well post-Shopify news.

Despite being up 16% YTD (vs. +9% for sector and +8% for U.S. Office REITs), AP trading multiple is still 42% below pre-COVID level (Exhibit 1) and well below avg. (Exhibit 2). Hence, we believe FFOPU/AFFOPU growth = higher unit price and we continue to think AP can deliver a material 2-3 year return given expected growth and private portfolio value.

KEY POINTS

December leasing update. AP had pushed its target Q4/22E 94% economic occupancy into 2023 (Q3/22A = 89.6% = +10bp q/q). Based on Q4/22 market data, we estimate AP market occupancy fell 85bp q/q to 88.8% (Exhibit 3). In pushing back stabilized occupancy, AP noted November/December leasing would be telling re: market strength. Our Q4/23E and Q4/24E economic occupancy are 90.6% and 91.6% (Exhibit 4 shows LTA), which implies Allied outperformance vs. broader market; Exhibit 5.

Annual guidance has been consistent during COVID. Exhibit 6 = historical annual guidance, which has been low- to mid-single-digit per unit growth. That said, with last year’s guidance (February 2022), AP also provided “soft” guidance for 2023E FFOPU in the mid- to high-single-digit range. Our in-place 2023E SSNOI and FFOPU growth of 3.8% and 4.8%, respectively compares consensus FFOPU growth of 1.2%. A big contributor to our 3.7% 2022E-2024E FFOPU CAGR = development completions (mostly leased); Exhibit 7.

UDC thoughts will be front-and-centre. Recall, on Nov 24, AP announced the possible sale of its UDC portfolio (Q3/22A IFRS value = $1.3B vs. $1.4B in our NAV; upside value = $1.5B+; Exhibit 8). On Jan 16, it noted pursuing a 100% stake disposition and no expected earnings dilution, which has surfaced many client queries given debt maturities (and credit facilities) through 2024 amount to $676.4M at an avg. 5.0%. (ex. assumed debt pre-payments). We note AP est. development pipeline yield = 5.2% and its implied cap = 6.3% (to the extent units are re-purchased). One bridge could be acquisitions (at cap rates > UDC) but we sense “trading UDCs for urban office assets” would raise mixed market feelings. Lastly, we were surprised with the proposed 100% sale given our assumed material special distribution on a cash deal (tax basis must be fairly low), so some clarity will be sought.

Our Q4/22E FFOPU = +1.0% q/q and +2.4% y/y. AP reports on Tues, Jan 31 (typically ~5:00 p.m.) with a c/c on Wed, Feb 1 at 10:00 a.m. ET (#1-800 599-2055). AP has met or exceeded quarterly consensus FFOPU 73% of the time since Q2/15