Call takeaways. AX noted 12 properties totalling ~$450M of dispositions is under contract/approaching and reiterated confidence in dealing with $261M of debt maturities in 2024 (Exhibit 3), with 17% under term sheet, 50% expected to be extended and no concern over the remaining 33% (we note mortgages for assets held for sale = $135M). The 2024 debt maturities are all in the U.S. and AX clarified all assets in the portfolio with mortgages are recourse in nature. AX floating rate exposure remains extremely high at 63% (Exhibit 3 above), which should fall with dispositions but AX is also strategically anticipating Fed/BoC rate cuts (i.e., making a call that rates are falling). We note 300 Main in Winnipeg (a ~$200M residential development) was reclassified into IPP in Q4 but the FFOPU impact was not known. Stabilized NOI = $10M/yr (i.e., 5% yield) but stabilized FFO impact was again unclear. AX is still accruing 18% on the initial $100M CUF Iris preferred investoment (was 23% in Q4) in kind (not cash). The interest income = a material 34% of AX 2024E FFO and is expected to remain PIK in the near-term (i.e., balance now = $144M). Lastly, on AX equity securities, it confirmed it remains only D and FCR and AX actually purchased ~$2M in Q1.
Q4/23 Highlights & Developments
OUR TAKE: Slight negative. Reported FFOPU was $0.25. Ex. $0.5M of lease termination fees and $0.7M of other non-recurring items, we estimate recurring FFOPU was $0.253 vs. $0.265 q/q and $0.300 y/y, below our $0.266 and $0.264 consensus (range = $0.25-$0.27); The print = 16% y/y erosion (Q3/23A = 24% y/y erosion).
Limited completed dispositions in Q4, but large uptick in disclosed assets held for sale. It appears that only $24M (1 office, 1 industrial) of the $110M that was previously cited as closed/unconditional transacted in Q4/23. That said, assets HFS were +$303M q/q to $572M and = 19% of IPP (Q3 = +$126M q/q to $269M).
Special Committee update: Limited. A sale of the REIT was pursued but didn’t yield bids in proximity to IFRS NAVPU (Q4/23A = $13.96, down 9% q/q). Office assets appear to be the stumbling block given disclosed healthy private market demand for Industrial and Retail. We didn’t expect “status quo” to be the outcome of the Strategic Review, and the Board remains committed to pursuing near-term strategic alternatives, but its a bit more unclear what those may be. No disclosed change to the distribution (for now, in our view).
Capital recycling update. AX renewed its NCIB on December 19th, but did not repurchase units in Q4/23. AX FV investment in equity securities were +$18M q/q to $152M (all FV gains; Q3 = fell $35M q/q). Post-Q, AX sold equity securities for $27M of net proceeds and purchased $2M.
IFRS NAVPU fell $1.30 (-9%) q/q to $13.96 vs. our $12.50 (Q3 = -$1.02 q/q to $15.26), incl. a $120M FV loss ($1.10/un; Q3 = $88M FV loss). The $120M FV loss = 4% of IPP (Q3 = 3%) was driven primarily by a $92M FV loss in Office (Q3 = -$80M). Portfolio IFRS cap rate was +17bp q/q to 6.89% (vs. our 7.21%; Q3 = +12bp q/q), driven by Industrial +13bp (Q3 = +17bp), Office +29bp (Q3 = +18bp) and Retail +9bp (Q3 = +7bp). Residential was flat q/q at 4.50% (Q3 = flat).
Occupancy improves slightly q/q. In-place occupancy was +20bp q/q to 90.1% (Q3 = -40bp q/q to 89.9%), while committed occupancy fell 20bp q/q to 90.9% (Q3 = -80bp q/q to 91.1%). In-place CAD was +50bp q/q to 89.8% (Q3 = -40bp q/q), while U.S. fell 10bp q/q to 90.3% (Q3 = -30bp q/q). Avg. total portfolio rent on lease renewal was +5.8% (Q3 = +3.5%). In-place rent was +0.4% q/q to $15.15/sf (Q3 = +2.4% q/q) and is 1.7% above AX-est. market (Q3 = 1.0% above). SPNOI was +9.2% in CAD and 9.0% in local currency (Q3 = +6.0%/+3.8%). By asset class, y/y SPNOI in CAD was: Industrial (+17.6%; Q3 = +21.3%), Office 4.3%; Q3 = -5.3%), Retail (+12.4%; Q3 = -2.6%)
Liquidity and D/EBITDA improves, while floating-rate debt exposure decreases. Q4 liquidity was +$17M q/q to $164M (Q3 = -$304M q/q to $147M), incl. $29M in cash and $135M in available revolving credit; = 0.63x 2024 mortgage debt maturities (Q3 = 0.45x 2023-2024). Total debt/GBV was +150bp q/q to 50.9% (Q3 = +220bp q/q to 49.4%) on large FV loss; Again, AX does not disclose proportionate, which in both cases is likely notably higher than disclosed total metrics. Disclosed debt/EBITDA fell 0.3x q/q to 7.7x (Q3 = +0.2x q/q to 8.0x). Unhedged variable-rate debt as a % of total debt fell 10.2% q/q to 62.8%. Unencumbered assets to unsecured debt fell 0.05x q/q to 1.62x (Q3 = -0.1x q/q to 1.67x).