Allied Properties Real Estate Investment Trust

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 located in Toronto and Montreal.

Key highlights

• An Income Play: The group has a decent track record of dividend payment. The company announced a monthly dividend of CAD 0.1375 per unit payable on 15th January 2021, with a record date of 31st December 2020, which equates to an annual distribution of CAD 1.65 per Unit. At the last closing price, the stock offers a dividend yield of 4.33%, which translates in an essential factor for regular income-seeking investors with a long-term horizon.

• Increase in dividend distribution: The group approved an increase in monthly cash distributions for 2021 to CA 0.1417 per unit, which is encouraging from an income investor’s standpoint. 

• Consistent portfolio growth:The management has proved its creditworthiness with prudent initiatives. They raised the assets base from CAD120 million to CAD 9.3 billion on September 30, 2020, along with rental properties with 13.9 million square feet of GLA in seven cities across Canada. The trust has grown its assets at a CAGR of 28.3%, which is commendable.

Source: Company

• Active development pipeline:The trust is holding a robust development pipeline. Almost 64% of the space is preleased. The group is committed to allocating CAD 500 million to completing the active developments over the next four years. The trust believes that these developments will increase its annual EBITDA by approximately CAD 70 million over the next four years. Not only this augment its earnings, but it would also materially reduce its ratio of net debt to annualized EBITDA and materially increase interest coverage ratio. 

Highly diversified portfolio: The trust is maintaining a highly diversified portfolio which helps in deriving NOI of 4% from parking use, 7.2% from retail use, 16.4% from urban-data-centre (UDC) use and 72.4% from office use. On the back of this, the group reduced its dependency on any single user. In FY 2003, the top ten users contributed 49% while at present in Q3 2020 this ratio is at 19.3%. 

Source: Company

Financial overview of Q3 2020

Source: Company

• In Q3 2020, the trust reported total revenue of CAD 139.7 million, compared to CAD 142.6 million in the previous corresponding period.
• Operating income stood at CAD 79 million compared to CAD 74 million in Q3 2019; the rise in operating income was primarily due to no condominium cost of sales was incurred.
• Net income reported by the trust in the reported quarter stood at CAD 69 million, compared to CAD 121.1 million. The decline in net income was primarily due to low fair value gain on investment properties.

Risks associated with investment

The Trust's revenue and operating results depend significantly on the occupancy levels and rent collection. Any fluctuation would in these would affect the group’s performance.

Valuation Methodology (Illustrative): Price to Earnings

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

Stock recommendation

The group's results in Q3 2020, were robust compared to its sequential quarter with rent collection at 95.2%, up from 94.5% in the previous quarter. Same-asset NOI from the rental portfolio in the third quarter was CAD 72.2 million, up 2.9% from CAD 70.2 million in the second quarter. The management expects even stronger results in Q4 2020 with rental revenue returning to normal levels. We expect an improvement in the rent collection and a decline in provisions, which would further support its overall performance. Therefore, based on the above rationale and valuation done using the above methodology, we have given a "BUY" rating at the closing price of CAD 38.15 on January 7, 2021, with a lower double-digit (Percentage Term) upside potential. We have considered InterRent Real Estate Investment Trust, Killam Apartment REIT, Crombie Real Estate Investment Trust, etc. as the comparison's peer group.

Source: Refinitiv (Thomson Reuters)

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