Opinions
Stockchase Insights
Allied Properties REIT
AP.UN-T
PARTIAL BUY
Jun 24, 2024
Stock price when the opinion was issued
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Dark horse candidate. Former market darling. Trades at 0.4x book value. Office and retail in Toronto. 6M square feet of space in Montreal; 3M across Vancouver, Calgary, Ottawa and Kitchener. 17% compound growth rate total return since IPO, until their Covid fall. Yield is 10%, very sustainable.
(Analysts’ price target is $20.03)In his dividend growers mandate. Very high dividend yield, over 10%, and is sustainable (though may not grow in near term). Debt to capital ratio ~40%, selling non-core properties. Closing deals will add cash this year. Vacancy rates should stabilize. Private market value is significantly higher. Needs patience.
Thinks rates are heading higher, so REITs are going to come under pressure. If the S&P 500 real estate sector is down 2%, perhaps the Canadian sector won't be hit as hard, but it'll still head lower. If his call is correct about a bigger correction later on, it'll be a better opportunity.
Look to energy names instead for a strong dividend yield.
Continues to like it here. About 80-85% is office, rest is retail and parking. Occupancy around 85%, versus 96-97% pre-Covid. In his dividend growers mandate, though it may not for the foreseeable future. Shedding non-core assets. Trades ~40 cents on the dollar of book value, should attract a re-rating.
Recent results reflect a challenged operating environment. Q4 earnings below expectations. FFO was down 13% YOY. Interest rate headwinds, negative internal growth, earnings headwind. Goal of 90% occupancy by year's end is ambitious, especially with new supply in the key market of Toronto.
Payout ratio hovering around 100%; but when you adjust for non-cash revenues, distribution is not covered. Company's adamant in not cutting dividend, willing to borrow to cover it. That's not a formula for success. So don't buy it for the yield.
Really likes. Only part of the office space that's any good is luxury. For example, high end in New York is booming. Allied owns buildings that are top level and edgy. Huge conglomerate, giving tenants lots of choice. Unique position. Wonderful development opportunities.
Good business, solid financials, great properties, stock's cheap. Dividend's not hugely well covered, but it is covered; doesn't think it will be cut.
The main concerns here are debt, office vacancies and the payout ratio. Office vacancies remain high, and this limits the ability to raise rents. Debt is high, as is typical with most REITs. Payout ratio (12 months) is 99%, so there is no room for an increase, certainly. Interest expenses were $108M in the last 12 months, vs $294M operating cash flow. As rates decline, some of the pressure will be alleviated. AP.UN last raised its distribution in January 2023. But with a yield of 11.73% and units down 24% this year, investors are clearly concerned. Much here will depend on occupancy levels going forward. We would certainly not consider the distribution 'safe' in the sense of the word. The company can likely keep paying the current rate for some time, if it were to choose to. But something has to improve here for any long term sustainability at the current level. That being said, the very low valution (6X cash flow) likely reflects a lot of this risk already.
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