Allied Properties Real Estate Investment Trust T.AP.UN

Scotia comment after conference

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Delivering Resilient Growth @ Roughly Half the Cost

OUR TAKE: Neutral. We maintain our SO rating along with most key estimates (Exhibit 1) post in-line quarter and reasonable 2023 guidance (Exhibit 6). We felt there was a “lot to talk about” heading into the Q and it certainly didn’t disappoint, including announced internal CEO succession plans (see below). Operationally, Q4 was “OK” as SS occupancy was +35bp q/q (Montreal gains offset by Toronto/Vancouver losses; Exhibit 8-9) and 6% lease renewal spread (Exhibit 10). 2023 Guidance was also “OK” and importantly, reflects continued per unit growth, contrary to the 44% multiple erosion (half the cost) during COVID (Exhibit 2). Regarding capital allocation, AP pointed to an expected slow 2023 acquisition year (a positive, in our view), while UDC portfolio sale process starts today (we think domestic and foreign private equity, international operators and domestic pension funds could be interested). We continue to believe FFOPU/AFFOPU growth = higher unit price and we still think AP can deliver a material 2-3 year return should office and/or investment market sentiment improve. AP remains a top value (Exhibits 3-4, 16-17; implied $414/sf) and yield pick (Exhibit 5).

KEY POINTS

Update on our key focus areas heading into results. Regarding the UDCs, we were pleased to hear that redeployment of any significant disposition proceeds wouldn’t be put towards acquisitions (given market concerns over broad-based higher CAD CRE cap rates and our previously communicated thoughts on market sentiment on a “switch trade” from UDCs to Urban Office). We were pleased to see that Q4 occupancy inched up 35bp q/q (Exhibit 8), which in the current climate, is a decent result, despite the 50bp q/q decline in Toronto/Vancouver. 2023 FFOPU guidance was mostly as expected, coming in between our prior $2.53 (now $2.52) and consensus $2.46 at the midpoint (~$2.51).

What has changed since we last wrote? For starters, a lot of the executive team roles! We detailed the changes in our Initial Glance. While succession plans tend to “sneak up” on the market, Allied has discussed the plans for several years (since 2019) with a desired path for internal succession. We don’t expect a significant shift in strategy/vision given Mr. Emory’s full-time Executive Board Chairperson role (we expect Mr. Emory will remain actively involved), nor do we think it changes overall private portfolio valuation. Otherwise, our Current NAVPU falls $1.00 (50% on 6bp higher cap rate; other 50% mostly on lower development value given modest decline in target yields; Exhibit 14). Our 23E and 24E occupancy falls 70bp to 89.9% and 90.6% (was 90.6% and 91.3%). We included the UDC portfolio sale in our estimates at $1.5B and a 4.25% cap rate, split equally between a 2H/23 and 1H/24 close. For now, we are reflecting full redeployment into debt repayment at a comparable return (i.e., no dilution).

Call Highlights. AP was -2.5% vs. CAD REIT sector and -1.3% vs. U.S. Office REITs pre-call, but recovered 1.2% vs. each during the call. Leasing was dominant, with AP noting a 60,000sf lease completion at Place Gare Viger (~40bp of total portfolio occupancy), in addition to another possible 40,000sf lease. While management “wouldn’t go there” in terms of discussing embedded target occupancy in 2023 guidance, it is hopeful that Q3/22A occupancy = trough (Q4/22A was +35bp if we back out the UDC reclass vs. quoted flat q/q). The low avg. lease term on deals during Q4 (3 yr. avg.) was done with future repositioning in mind. AP was very clear that it is not buying assets in 2023 and a majority of any UDC sales proceeds will go towards debt repayment (we est. ~$900M due through 2024 + $650M of unsecured term loans that may be re-paid). The UDC sales process started yesterday and is expected to last 3-4 months. Seems like redeploying anything into the NCIB will be dependent upon unit price at time of completion (our base case = limited use). AP is pleased with Retail leasing progress at The Well and believes Shopify’s below-market rent should help with re-leasing the sub-let space (348,000sf) to a direct tenancy with AP.