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OUR TAKE: Neutral. AP reports Q3 on Wed, Oct 30. Our intact $0.53 = flat q/q and 12% y/y erosion (vs. +4% y/y for REIT sector) and = consensus. Our 2025E FFOPU falls 1% to $2.22 (on presumed sale of 150 West Georgia), but still a modest +1.5% vs. Street. Our new 2026E reflect 2% y/y erosion on higher debt cost and lower mezz income, despite a 220bp occupancy jump to 92%. Perhaps most relevant for now, our forecast = $1.80 distribution through 2026 (i.e. intact) at an ~100% AFFO payout ratio (at a blended ~$30/sf lease cost & 70%-75% tenant renewal rate). Rather than a focus on Q3 FFOPU, q/q change in occupancy (in-place and leased) remains by far the most watched operating metric in our view. We left our +30bp forecast (to 86.1% economic) but our confidence is low (on Q3 occupancy growth) given market Q3 declines in Montreal and Vancouver (100-120bp; see link to our report).
Bottom-line, the bar is obviously higher at $20 than $16 and Q3 feels void of catalysts. That said, given our view of a still-discounted valuation (implied $400/sf, 11x 2025E AFFO, 40%-50% probability of a distribution cut; Ex. 6-11), we believe 100-200bp+ of occupancy in the next 6 months (helped by a soft-or-no landing) = a stock closer to $25 than $20.
KEY POINTS
Q3 Focus Areas. We think it is highly likely AP confirms its $1.80 annual distribution in December, even though we est. the market is pricing-in a 40%-50% probability of a 50% distribution cut (Exhibit 6). Outside of occupancy and leasing trends, we’re hoping AP provides FFOPU thoughts on development completions, as opposed to just EBITDA (we have ~2% FFOPU dilution upon completion), in addition to some semblance of expected interest and G&A capitalization (see below). Lastly, AP has guided to ~$400M of asset sales through 2025 at low cap rates; additions to the disposition pool (unlikely) would likely be welcomed by investors.
Capitalization remains a wildcard. Investors have paid particular focus on AP interest and G&A capitalization policy given a relatively high capitalization rate and uncertain trend going forward upon PUD completion. As shown in Exhibit 3, AP capitalized interest and G&A (as a % of total reported interest and G&A) is well above REIT peers pursuing development today. We think some of that can be explained by higher development intensity (PUD = 9.6% of GBV vs. 4.1% peer avg.), particularly as it relates to G&A, but less so on interest expense. Our new 2026E (see page 2) reflect capitalized interest and G&A as a % of forecast of 18%-19%. As shown in Exhibit 4, adjusting those outputs to match current peer avg. (also adjusting for development intensity) would reduce our 2026E FFOPU/AFFOPU by ~3%, all else equal.
See Page 2 for our new 2026E FFOPU and AFFOPU breakdown ($2.19 and $1.80)
New 2026 estimates: What Occupancy giveth, debt costs taketh away. Exhibit 5 = our key operating assumptions. Before we get to 2026, our 2025E FFOPU falls 1% ($0.02) as we now assume the sale of 150 West Georgia by Q2/25 along with an ~200bp decline in the mezz loan receivable return to 5.0%-5.5% (i.e., debt repayment). Our avg. 2026E occupancy of 91.9% = +220bp y/y, with modest 1% in net asking rents (driving a 5% blended lease spread vs. +3% y/y). Our ~$30/sf blended lease cost = 20%-25% of expiring ~$24 net rent/sf. Every $5/sf leasing cost = 3% of AFFOPU. AP has 10% of portfolio GLA expiring vs. 2025E of 11%. Despite healthy forecast occupancy gains, our new 2026E FFOPU and AFFOPU of $2.19 and $1.80 = 2% y/y erosion, primarily due to higher debt costs; $870M = 26% of total debt expiring at 2.28% (incl. $600M green bond at 1.73%) = $0.15 of FFOPU erosion (7% of 2024E FFOPU). Furthermore, assumed reclass of PUD into IPP = $0.04 impact. Our 2026E FFOPU/AFFOPU are 1% above and 4% below consensus, respectively.
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