Allied Properties Real Estate Investment Trust (TSX: AP. UN) is a closed-end real estate investment trust (REIT), which is engaged in the development, management, and ownership of primarily urban office environments across Canada's major cities. Most of the total square footage in the company's real estate portfolio is in Toronto and Montreal. The company also controls several telecommunications/IT and retail properties within its real estate portfolio.

Key Highlights

• Strengthening financial matrices: Despite the turmoil environment, the company maintained its pace and witnessed spirited performance across its rental revenue, Adjusted EBITDA, Net Income (NI), Same Assets NOI and Funds from Operations (FFO) in Q1 FY 2022 against Q1 FY 2021. The Company is continuously working closely to carry this winning momentum and has witnessed higher scale on the sequential basis, which is appreciable.

• Reliable portfolio growth:The management has proved its creditworthiness with prudent initiatives. They increased its asset base from CAD 128 million in 2002 to CAD 11.4 billion as of March 31, 2022, with rental properties totaling 15.4 million square feet of Gross Leasable Area (GLA) in key Canadian cities. The trust's assets have increased at a noteworthy CAGR of 25.17%.

• Highly diversified portfolio:The trust is maintaining a highly diversified portfolio which helps them in deriving NOI of 3.6% from parking use, 8.6% from retail use, 16.9% from urban-data centers (UDC) use and 70.9% from office use. On the back of this, they reduced its dependency on any single user. In FY 2003, the top ten users contributed 49% while at present this ratio is at 19.9%.

• Active development pipeline:The trust has a strong development pipeline. Almost 65% of the space is preleased, and the firm has earmarked an additional CAD 54.4 million in Q1 2022 to finish active developments over the following four years. Management believes that existing initiatives will improve its annual EBITDA by approximately CAD 82 million following occupancy stability over a three to five-year timeframe, with a weighted average lease term of 12.2 years. This will not only improve its profitability, but it will also considerably cut its net debt to annualized EBITDA ratio and materially enhance its interest coverage ratio.

• Elevated funds from operations: In FY 2021, the REIT’s uplifted its fund from operations to CAD 77.5 million, from CAD 73.7 million in the previous corresponding period. An increase in FFO was primarily driven by the stabilized NOI and higher net income.

• Sequentially improving operating matrix: The REIT is sequentially delivering spirited performance across its operating margin matrix on the back of higher GLA and elevating net rent on renewing leases. The REIT is continuously working closely with its tenants; thus, it improves its occupancy, which is appreciable. We believe the momentum to continue in the foreseeable future, as the Company had an extensive development pipeline to support future growth.

• Consistent dividend distribution: The REIT has a good dividend distribution track record and has grown its payout over the years, demonstrating stability and healthy cash flow creation. Recently it declared a monthly cash distribution of CAD 0.1458 per Unit, for the month of May 2022, representing CAD 1.75 per unit on an annualized basis, payable on June 15, 2022. Furthermore, at the last closing price of CAD 38.85 on May 30, 2022, the company offered a dividend yield of 4.50%, which seemed reasonable given the present macroeconomic and interest rate environment.
  

Financial overview of Q1 2022

• Slight increase in rental revenue: The company’s revenue in Q1 2022 increased by 2.8% to CAD 144.8 million, compared with CAD 140.8 million in pcp. An increase is attributable to the increases in GLA and higher net rent on renewing leases.

• Rise in operating expenses: In the reported period of Q1 2022, the company’s operating sexpenses increased to CAD 61.5 million, against CAD 59.7 million in pcp, mainly due to rise in revenue.

• Increased operating income: Primarily on the back of elevated revenue, the REIT’s net operating income increased to CAD 83.2 million, against CAD 81.1 million in pcp.

• Elevated net income: Due to above discussed rationales and higher fair value adjustment on investment properties, the REIT’s net income swelled to CAD 187.1 million in Q1 2022, against CAD 77.5 million in pcp.

Top-5 Shareholders 

The company’s top 5 shareholders hold around 22.10% of the total shareholding, where RBC Global Asset Management Inc. is the biggest shareholder, who owns 6.92% of total outstanding shares. Additionally, the company's institutional ownership stood at 47.30%. Higher institutional holding boosts the confidence in the mind of retail investors.

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

Risks associated with investment 

The REIT's revenue and operating results depend significantly on the occupancy levels and rent collection; hence, the group is subject to general business risks. These risks include government regulation, fluctuations in occupancy levels and business volumes, competition from other players, and general economic conditions. 

Stock recommendation 

The business reported improvement in same-asset NOI, FFO per unit, and AFFO per unit in Q1 2022 compared to Q1 2021, despite a 2.8 percent subdued growth in rental revenue. Furthermore, the business anticipates a low-to-mid-single-digit percentage improvement in each KPI for 2022. The REIT has a robust development pipeline and has preleased about 65 percent of the available space. According to the management, current developments will improve its annual EBITDA by roughly CAD 82 million. We believe that this would not only raise its profitability but will also significantly reduce its net debt to annualized EBITDA ratio and dramatically increase its interest coverage ratio, both of which would be big positives.

The trust is maintaining a highly diversified portfolio which helps them in deriving healthy NOI and has proved its creditworthiness as it is sequentially delivering spirited performance across its operating margin matrix. We believe the momentum to continue in the foreseeable future, as the Company has an extensive development pipeline to support future growth.

Therefore, based on the above rationales and valuation, we recommend a "Buy" rating on the stock at the last closing price of CAD 38.85 as on May 30, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on May 30, 2022). Source: REFINITIV, Analysis by Kalkine Group

*Recommendation is valid on May 31, 2022, price as well. 

 Technical Analysis Summary

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