Allied Properties Real Estate Investment Trust (TSX: AP.UN) is a leading owner, manager, and developer of distinctive urban workspace in Canada’s major cities and 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

• An Income Play: Amid a lower interest rate environment where there is so much liquidity coming from central banks, finding a yield on fixed income securities has just dropped down. Allied Properties is a good income bet, especially for income seeking investors. Allied shares are offering a dividend yield of ~4.5%, which is approximately 1.36x of the TSX Composite dividend yield of 3.35% and approximately 5.35 times of the Canada 10-Year Government Bond Yield of 0.84%, respectively. Moreover, the group has a decent track record of dividend distributions over the years, which reflects the operational resilience and stable cash flow generating capacity of the group.

Dividend History. Source: Refinitiv (Thomson Reuters)

• Insiders Remain Net Buyers in the last one year: Looking at the insiders’ activity in Allied Properties shares, it seems that many of them have utilized a free fall in the Allied Properties stock price led by COVID-19 outbreak as an opportunity to accumulate shares at a dirt-cheap price and valuation. Insiders turned net buyers in the last one year. Also, insiders buying increases confidence in retail investors. Also, a strong insider buying shows that the insiders are quite bullish on the future performance of the company and stock price as well.

Insiders Activity. Source: Refinitiv (Thomson Reuters)

• Return on Equity Better than Peer Group: LTM ROE of the company stood at 12.1%, which is significantly higher than the peer’s average ROE of 7.43%. When a company has a higher RoE, it implies that the company has used the capital invested by shareholders efficiently. It reflects that the company is in a position to provide investors with better returns.

Source: Refinitiv (Thomson Reuters)

• Healthy Dividend Coverage Ratio: Allied Properties TTM Dividend Coverage ratio stood at ~3.31 times. A higher dividend coverage ratio indicates that the earnings generated by the company are enough to serve shareholders with their dividends. As a rule of thumb, a coverage ratio of more than two is considered as decent.

• Higher Free Cash Flow Yield Compared to Peers: The company is offering a higher free cash flow yield of 6.7%, as compared to its peers’ average free cash flow yield of 3.6%. This indicates that the company is generating higher free cash flow for its investors as compared to the industry rivals. Free cash flow is important to investors because it shows how much actual cash a company has at its disposal. This may sound like a simple point, but it is one parameter, which should rank extremely high on an investor’s ‘need to know’ list.

• Risk associated with the 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: Q3FY20

Source: Company Filing

• Gross monthly rent due in the third quarter was CAD 168 million. 1.2% of the total amount due comes from parking use, 7.1% from retail use, 15.2% from urban-data-centre (UDC) use and 76.5% from office use.
• Allied collected 95.2% of the total amount due in the quarter, abated CAD 2.8 million (1.7% of the total amount due) as part of the Canada Emergency Commercial Rent Assistance (CECRA) program and afforded deferrals aggregating CAD 5.4 million (3.2% of the total amount due), primarily to storefront retail users.
• In the leasing segment, the occupied area of Allied’s rental portfolio at the end of the third quarter was 92.9%, with leased area at 93.3%, down slightly from the end of the second quarter as a result of expected non-renewals. Allied renewed or replaced leases for 74.6% of the space that matured in the quarter. This resulted in an overall increase of 19.3% in net rent per square foot from the affected space and a weighted-average lease term of 5.7 years for the entire rental portfolio.
• In the third quarter, Allied achieved an 8.6% increase in NAV per unit over the comparable quarter last year.
• Allied also completed a private placement of units for net proceeds of CAD 153 million in September. The net proceeds would be used to fund a significant component of Allied’s remaining development activity, enabling it to maintain the balance sheet and debt-metrics squarely within targeted ranges.
• Allied’s results in the third quarter were stronger than the second quarter. With Gross monthly rent due in the quarter was CAD 168 million, up 2.4% from CAD 164 million in the second quarter, with rent collection at 95.2%, up from 94.5% in the second quarter. Same-asset NOI from the rental portfolio in the third quarter was CAD 72.2 million, up 2.9% from 70.2 million in the second quarter.
• Further, the management expects even stronger results in the fourth quarter with rental revenue returning to more normal levels.

Outlook

The company’s original internal forecast for 2020 called for mid-single-digit percentage growth in each of same-asset NOI, FFO per unit and AFFO per unit. In light of Allied’s second and third quarter results, recent private placement of units and outlook for the fourth quarter, Allied has revised its internal forecast for 2020 to flat-to-low-single-digit percentage growth in each of same-asset NOI, FFO per unit and AFFO per unit. While Allied does not forecast NAV per unit growth, it continues to expect growth over the course of 2020. Also, Allied 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. Allied firmly believes that its strategy is underpinned by the most important secular trends in Canadian and global real estate.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 24.23% of the total shareholding. BMO Asset Management Inc. and CI Investments Inc.  holds the maximum interests in the company at 4.08% and 3.86%, respectively. The institutional ownership in the stock stood at 43.7%, and ownership of the strategic entities stood at 1.41%, respectively.

Source: Refinitiv (Thomson Reuters)

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

Note: All forecasted figures and peers have been taken from Thomson Reuters

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Stock Recommendation: Real Estate sector was among those badly jolted because of COVID-19 pandemic. However, with a gradual recovery in the broader economy, the sector is also reviving from a downturn. The company’s revenue recovered approximately 2.3% on a sequential-quarter basis to 139.7 million. Gross profit improved by 2.2% and operating income increased by 3.7% in the same period.

Moreover, Allied’s results in the third quarter were stronger than the second quarter. Gross monthly rent due in the quarter was CAD 168 million, up 2.4% from CAD 164 million in the second quarter, with rent collection at 95.2%, up from 94.5% in the second quarter. Same-asset NOI from the rental portfolio in the third quarter was CAD 72.2 million, up 2.9% from 70.2 million in the second quarter. Also, the company’s total asset has surged with a CAGR of 28.9% since IPO to September 31, 2020. In the third quarter, the company's total assets improved to CAD 9.3 billion against CAD 9.15 billion in the second quarter of 2020. Further, the management expects even stronger results in the fourth quarter with rental revenue returning to more normal levels.

Moreover, the group has a decent track record of dividend distribution and offering a lucrative dividend yield amid a low-interest rate environment.

Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 37.73 on January 25, 2021.

Technical Price Chart (as on January 25^th, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at January 26, 2021 price as well.

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