Allied Properties Real Estate Investment Trust (TSX: AP.UN) is a leading owner, manager, and developer of (i) distinctive urban workspace in Canada’s major cities and (ii) network-dense urban data centres in Toronto that form Canada’s hub for global connectivity. Allied’s business is providing knowledge-based organizations with distinctive urban environments for creativity and connectivity.

Investment Rationale

• A High Yielding Income Play: Shares of AP.UN are yielding higher on the stock exchange, with a 4.03% yield amid a lower interest rate environment. Further, the company has a track record of consistent dividend payment over the past decade regardless of the economic cycles. The stock’s dividend yield of 4.03% is approximately 1.34x of the TSX Composite Index dividend yield of 3.0%.  

10-Year Dividend Payment History of AP.UN. Source: Refinitiv (Thomson Reuters)

• Bullish Technical Indicators: AP.UN shares are hovering in a bullish zone, with shares traded well above the crucial short-term as well as long-term support levels of 50-day and 200-day SMAs. This implies a long term bullish trend in the stock. Further, the 14-day RSI is hovering in the neutral zone at 62.20, which supports a bullish bias in the stock. Moreover, the leading momentum indicator, Moving Average Convergence Divergence (MACD), is rising with the difference between 12-day and 26-day EMA is positive, which is a bullish indicator. Further, the MACD is hovering above the 9-day SMA signal line that is another bullish indicator and shows that the stock is in upward momentum, and further upside can be witnesses in coming trading sessions.

Technical Price Chart (as on April 12, 2021). Source: Refinitiv (Thomson Reuters)

• Improved Portfolio Base in FY20: In the year ended December 31, 2020, the company’s total number of properties has increased from 192 at the end of 2019 to 202 at the end of 2020, implies a growth of 5% growth. Over the past two years, the total number of properties has improved by ~15%, from 175 in FY18 to 202 in FY20. Further, total rental gross leasable area (GLA) has also improved to 13.9 million square fit at the end of 2020 from 12.9 million square fit reported at the end of FY19, implies an improvement of ~8% on a YoY basis. Leased rental GLA has also improved by 5.1% on a YoY basis to 12.9 million square feet. Though, the occupied area declined slightly to 92.1% in FY20 against 94.4% in FY19.
• Decent Financial Performance in FY20: Despite a challenging financial year in 2020, the company reported decent financial performance, with revenue surged by 13.2% to CAD 562.79 million from CAD 497.25 million reported in the previous financial year. Adjusted EBITDA improved by 12.5% to CAD 349.02 million, with adjusted EBITDA as a multiple of interest expenses improved from 5.1x at the end of FY19 to 4.8x at the end of FY20. Further, urban workspace across the country continued to strengthen in the fourth quarter. Also, the company’s fourth quarter of 2020 was stronger than third, with same-asset NOI, FFO per unit and AFFO per unit up from the comparable quarter last year.
• Stellar Portfolio Growth Since IPO: The company reported strong portfolio growth since its IPO in 2002. The portfolio has surged from CAD 120 million in 2002 to CAD 9,410 million by the end of 2020, implies a compounded average growth rate (CAGR) of 27.9% in the last 18-years. Moreover, at the end of the FY20, the group’s total portfolio stood at CAD 9.4 billion as compared to CAD 8.3 billion at the end of the FY19, implies growth of 13.2% on a YoY basis.

Source: Company Presentation

• Presence of Globally Renowned Institutional Investors: Looking at the company’s shareholding pattern, we find that the major globally recognized big institution are having significant stake in the company. Presence of major institutional investors also provide a lot of confidence to retail investors.

Source: Refinitiv (Thomson Reuters)

• Risk Associated to Investment: There are certain risk factors inherent in the investment and ownership of real estate. Real estate investments are capital intensive, and success from real estate investments depends upon maintaining occupancy levels and rental income flows to generate acceptable returns. These success factors are dependent on general economic conditions and local real estate markets, demand for leased premises and competition from other available properties.

Financial Highlights: FY20

Source: Company Filing

• In the FY20, the groups reported adjusted EBITDA improved by 12.5% to CAD 349.02 million.
• Net income excluding fair value adjustments improved by 14.9% to CAD 242.43 million. However, net income before any adjustments deteriorated by 20.4% to CAD 400.7 million against CAD 629.2 million reported at the end of FY19.
• Allied allocated CAD 325 million to strategic acquisitions and another CAD 252 million to development and value-add activity in 2020. In the face of continuing robust capital allocation, Allied maintained strong balance-sheet metrics by raising a significant amount of capital (CAD 700 million in unsecured debentures and CAD 153 million in equity) on favourable terms.
• For the year ended December 31, 2020, FFO per Unit excluding condominium related items and prepayment costs totalled CAD 2.295. This is a decrease of CAD 0.005 or 0.2% over the comparable period in the prior year. The decrease was primarily due to rent abatements provided under the CECRA program and higher interest expense partially offset by an increase in NOI and higher interest income.
• However, to ensure sufficient cash is retained to meet capital improvement and leasing objectives, Allied strives to maintain an appropriate FFO pay-out ratio excluding condominium related items and prepayment costs, which is the ratio of actual distributions to FFO excluding condominium related items and prepayment costs in a given period. For the three months and year ended December 31, 2020, the FFO payout ratio excluding condominium related items and prepayment costs was 70.0% and 71.9%, respectively.
• For the year ended December 31, 2020, AFFO per Unit, excluding condominium related items and prepayment costs, totalled CAD 1.991. This represents an increase of CAD 0.041 or 2.1% over the comparable period in the prior year. AFFO excluding condominium related items and prepayment costs increased primarily due to the changes in FFO excluding condominium related items and prepayment costs discussed above and lower regular leasing expenditures partially offset by higher amortization of straight-line rent and higher regular and recoverable maintenance capital expenditures.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 25.19% of the total shareholding. RBC Global Asset Management Inc. and BMO Asset Management Inc. holds the maximum interests in the company at 4.23% and 4.17%, respectively. The institutional ownership in the stock stood at 43.7%, and ownership of the strategic entities stood at 1.41%.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to EBITDA based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation:

The management’s internal forecast for 2021 calls for low-to-mid-single-digit percentage growth in each of same-asset NOI, FFO per unit and AFFO per unit. While the trust does not forecast NAV per unit growth, it does expect to propel further growth in 2021. Allied also expects to allocate a large amount of capital in 2021 with the same strategic coherence and discipline it demonstrated in 2020 and prior years. The trust continues to have deep confidence in and commitment to its strategy of consolidating and intensifying distinctive urban workspace and network dense UDCs in Canada’s major cities. We believe that its strategy is underpinned by the most important secular trends in Canadian and global real estate. We also firmly believe that it has the properties, the financial strength, the people and the platform necessary to execute its strategy for the ongoing benefit of its unitholders.

Further, despite a recent price rally in the stock over the past six months, its shares are still well placed for further upside. Moreover, the stock is offering a decent dividend yield of 4.04%, which is relatively higher given the lower interest rate environment.

Also, from the technical standpoint, its shares are hovering in bullish territory and traded above the long-term as well as short-term support levels of 200-day and 50-day SMAs.

Therefore, based on the above rationale and valuation, we suggest a “Buy” recommendation at the closing price of CAD 42.15 on April 12, 2021. 

1-Year Price Chart (as on April 12, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at April 13, 2021 price as well.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.