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.

Key highlights

• An Income Play: The group continues with a track record of dividend payment. The company announced a monthly dividend of CAD 0.1417 per unit payable on March 15, 2021, with a record date of February 26, 2021, equating to an annual distribution of CAD 1.70 per Unit. At the last closing price, the stock offers a dividend yield of 4.1%, translating into an essential factor for regular income-seeking investors with a long-term horizon.

• Consistent portfolio growth:The management has proved its creditworthiness with prudent initiatives. They raised their assets base from CAD 128 million at the beginning to CAD 9.4 billion on December 31, 2020, along with rental properties with 14 million square feet of GLA in seven cities across Canada. The trust has grown its assets at a CAGR of 27.9%, which is commendable.

Source: Company

• Active development pipeline:The trust is holding a robust development pipeline. Almost 59% of space is preleased and the company is committed to allocate CAD 451 million to complete its active developments over the next three years. The trust believes that these developments would increase its annual EBITDA by approximately CAD 70 million over the next three years. Not only this would augment its earnings, but it would also materially reduce the leverage ratio and increase interest coverage ratio. 

Financial overview of FY 2020

• For FY2020, the trust reported total revenue of CAD 560.33 million, compared to CAD 496.12 million in the previous corresponding period.
• Operating income stood at CAD 319.05 million compared to CAD 287.36 million in FY 2019; the rise in operating income was primarily due to no condominium cost of sales was incurred.
• Net income reported by the trust in FY2020 stood at CAD 500.72 million, compared to CAD 629.22 million. The decline in net income was primarily due to low fair value gain on investment properties of CAD 280.59 million, against CAD 450.49 million in FY2019. 

Risks associated with investment

The Trust's revenue and operating results depend significantly on the occupancy levels and rent collection; hence, fluctuations in occupancy levels and rent collection would affect the overall performance.

Valuation Methodology (Illustrative): EV to Sales

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

Stock recommendation

In Q4 2020, the company reported growth in same-asset NOI, FFO per unit and AFFO per unit compared to Q4 2019, even though rental revenue was depressed temporarily. Furthermore, the group expects low-to-mid-single-digit percentage growth in each of same-asset NOI, FFO per unit and AFFO per unit for 2021. The company would also allocate a large amount of capital in 2021 with the same strategic coherence and discipline it demonstrated in 2020 and prior years. Moreover, the management believes that its development pipeline would increase the annual EBITDA by approximately CAD 70 million over the next three years, and it would also materially reduce its leverage ratio. Therefore, based on the above rationale and valuation, we recommend a "BUY" rating at the closing price of CAD 41.0 on March 3, 2021. We have considered InterRent REIT, Granite REIT, Canadian Apartment Properties REIT, etc. as the peer group for the comparison.

1 Year Daily Price Chart (As on March 3, 2021) Source: Refinitiv (Thomson Reuters)

Mainstreet Equity Corp.

Mainstreet Equity Corp. (TSX: MEQ), is a Canada-based real estate company, which is focused on the acquisition, redevelopment, repositioning, and management of mid-market rental apartment buildings.

Key highlights

• Consistent asset growth: The Company is generating higher net asset value over the years, indicating constant appraisal in its assets over the year. In Q1 2021, the appraised value stood at CAD 2.19 billion, while the gross book value was CAD 1424.

Source: Company

• Aims to improve liquidity: The company believes that its new growth opportunities would be supported by its strong liquidity position. Recently they acquired 210 units at a total value of CAD 22 million and entered the Winnipeg market. Its current cash balance is approximately CAD100 million, and the management is confident on achieving its target liquidity position of CAD242 million in the fiscal year 2021, which is a promising statement.

• Robust operating matrix:The company reported continued growth over the years, which indicated business resilience. In the recent past due to lower consumer income and a rise in the unemployment rate, most of the real estate companies witnessed decline in their rent collection along with shrinkage in the profitability. However, the group maintained a healthy rent collection of 98% in January 2021.

Source: Company 

Financial overview of Q1 2021

Source: Company

• In Q1 2021, the company posted rental revenue of CAD 38.6 million, increased by 5% against CAD 36.7 million in the previous corresponding period. The rise in revenue was mainly due to the continued growth of the company’s portfolio as the average number of units owned by it increased by 5% over the year.
• Net operating income stood at CAD 23.1 million, against CAD 23.3 million in Q1 2020.
• In the reported quarter the company posted Net loss of CAD 5.3 million, against a net profit of CAD 5.6 million in Q1 2020. The net loss was primarily due to change in fair value. 

Risks associated with investment

Increase in the vacancy rate would lead to lower operating performance. Due to various economic reasons, lower consumer spending, higher unemployment rate, etc., the company might witness a weak rent collection. 

Valuation Methodology (Illustrative): EV to Sales

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

Stock recommendation

Despite extremely challenging operating conditions in Q1 2021, the company managed to maintain funds from operations at the same level as the previous year while achieving a slight improvement in FFO per share and 5% growth in rental revenue. Furthermore, we believe with a gradual revival in the economy, the rental market is expected to recover in the foreseeable future. Moreover, the group aims to improve its liquidity position to CAD 242 million in 2021, which is promising. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 81.17 on March 3, 2021. We have considered InterRent Real Estate Investment Trust, Boardwalk Real Estate Investment Trust, True North Commercial REIT, etc. as the peer group for the comparison.

1 Year Daily Price Chart (As on March 3, 2021) Source: Refinitiv (Thomson Reuters)

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.