Allied Properties REIT Takes $500 Million Loss Amid Writedowns
Allied Properties REIT Takes $500 Million Loss Amid Writedowns
Toronto-Based Office Landlord’s CEO Sees Inflection Point in Office Market
Allied Properties Real Estate Investment Trust recorded an almost $500 million loss in the fourth quarter as the Toronto-based office REIT took writedowns on its assets in Canada’s four largest cities by population.
The firm said operating income from continuing operations was $82 million, up 6% from the same quarter last year. Still, the REIT recorded a $70 million loss in fair value on investment property in Toronto and Montreal and a $425 million loss on rental property valuations in Toronto, Montreal, Calgary and Vancouver, to contribute to a $499 million net loss for the period that ended Dec. 31.
“We believe in Canada’s future, and much of the economic and cultural future is concentrated in our cities. While far from perfect, our cities continue to thrive and demonstrate resiliency. We’re confident they’ll continue to attract a disproportionate share of global talent, which drives economic and cultural growth and evolution,” said Cecilia Williams, CEO of Allied, in a conference call with analysts Thursday.
Allied expressed confidence in the REIT’s portfolio even as reports revealed office vacancies hit an all-time high nationally in the last quarter.
“We’re heading into 2024 with a lower level of economic occupancy than we’ve ever had. While confident that our leasing activity will translate into improved economic occupancy over the course of 2024, the timing is difficult to predict,” said Williams.
Mark Rothschild, an analyst with Canaccord Genuity, said the outlook for the REIT remains challenged, and investors seemed to agree as shares of the REIT traded down $1.74, or 8.91%, to $17.78 on the first day of trading following the results, which were released after the market closed Wednesday.
“While management previously indicated that occupancy should improve in 2023, due to continued soft demand for leasing office space, this was not achieved,” said Rothschild in a report to investors that noted the REIT’s occupancy rate declined to 86.4% at year-end, compared to 86.8% in the third quarter of 2023 and 89.6% in the fourth quarter of 2022.
The analyst lowered his net asset value per unit to $20.25 from $22 after Allied’s earnings were released. Rothschild noted the REIT’s International Financing Reporting Standards dropped net asset value 8.5% to $45.60.
Leasing Momentum Improves
Allied’s CEO maintains leasing is improving and told analysts that the productivity of the portfolio increased for the 18th consecutive quarter, and lease renewals had healthy spreads compared to in-place rents.
“We believe we’re at an inflection point and that leasing momentum, which accelerated in the last quarter of 2023, will continue through the coming year,” said Williams during the REIT’s call with analysts.
Jonathan Kelcher, an analyst with TD Securities, expects continued near-term volatility in Allied’s share price.
“We believe (the change in share price) is currently more sentiment-driven than based on fundamentals,” said Kelcher, who called the drop in the share price an overreaction.
“It was not surprising to us that 2024’s outlook would be more uncertain than in previous years (which our estimates already reflected) with a higher/more volatile interest rate environment extending the decision-making time frame on what are large, multi-year capital commitments by tenants. We were encouraged to hear that activity remains robust with touring activity up yearly.”
Brad Sturges, an analyst with Raymond, wondered in a note about Allied’s development loan exposure to Vancouver-based Westbank Corp. and called it a near-term investment risk.
“Media outlets have recently published that Westbank Corp. faces litigation for unpaid bills for several ongoing projects with various construction and trade groups,” Sturges said in a note that pointed to joint ventures with Westbank for four projects in Vancouver and Toronto with outstanding credit facilities and development loans of about $500 million as of Dec. 31.
Allied has told media outlets it faces no insolvency issues.
Sturges said Allied’s “balance sheet (is) in a good position to fund its ongoing development and upgrade capital commitments.”
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