Allied Properties REIT (AP.UN-T)

Incredibly tied to a lot of the big issues going on. Lots of exposure to office throughout Canada, especially to The Well in Toronto. Return-to-office has been slower to pick up. REITs tend to really suffer with higher interest rates. 

The worst might be priced in, could be time to sharpen your pencil and take a look. Good operator, great assets. If you feel that interest rates have peaked and fear around office is waning, will benefit as those sentiments start to reverse.

He's not an expert in the payout ratio for REITs and whether dividend can be maintained.

Is not buying into REIT sector yet. Waiting for interest rates to fall. Vacancy rates still high with "work from home" trend. Not cheap enough to buy. Would rather growth sector (A.I., data centers, healthcare, energy). 

A lot of REIT's haven't recovered after the 2020 crash. People want 6 to 10% yields. This one has 11 1/2%. It's price has been steady at $17 this year but is now breaking below that creating new lows for the stock. It is technically breaking down. Be selective when buying REIT's.

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. 
Unlock Premium - Try 5i Free

Quite challenged on supply/demand. At 17.2% for Q1, downtown Toronto vacancy rate is higher than in suburbs, the biggest change in vacancy in 3 decades. Muted earnings growth, limited organic growth, higher debt load than before. Distribution may not be fully covered. Better opportunities elsewhere.

Valuations for REIT sector in general are exceptionally low. Part is interest rates, but the biggest overhang is the office space. That will take longer to play out, and remote work is becoming more acceptable by companies. Toronto estimates vacancy in the core is around 25-30%, gives him pause. Steer clear. Yield is 10.5%.

He's become more negative on the REIT model. With such a high payout, difficult to consolidate value in a down market, unless they have a sponsor behind them willing to supply capital. This plays into the hands of private equity.

Not everyone's back in the office, headwind for office demand. Negative headlines are pretty much behind the sector, now a show-me story. Can space be leased to same extent today as before, and at what cost? Sold data centre portfolio, gave it breathing room on yield and debt. Recently took on extra debt, further pressure on yield. 

Strong portfolio, but he's not ready to bet today. Lots of market headwinds. Have to consider, asset by asset, how their portfolio has changed over time.

Unique, charming, well-maintained buildings with smaller floor spaces. Well run. Development of "The Well" not smooth. Not expensive, opportunity to buy. Interest rates have hurt, but real estate should do well with lower rates.

Some tenants have pulled out of its big Toronto project, The Well. Its smaller spaces have hurt them, as people can work from home just as easily. Interest rates hurt real estate. Good company, lots of really interesting, character-rich properties. Owning something like this should do well for you in a better interest rate environment.

80% of asset value is in Toronto and Montreal. Good operators in a difficult market. Discount to NAV. Committed to distribution of 10%, sustainable if they can continue executing into 2024. Sold data centres, giving breathing room.

Bankruptcy is extreme. And he bought it just a week ago. He's not bullish on office or retail, but it gets to the point where it's been hit so hard, you have to put in 1 of 3 real estate chips on a name like this. Premier asset, trading at a 30% discount. There will be a recovery, but it will take a while. Its smaller floor plans are appealing. 

Yields almost 11%, but he thinks it's sustainable. Sold data centres earlier this year, so that helped their leverage.

AP.UN reported EPS of ($0.1842) and revenues of $138.455M, slightly beating estimates of $138.4M. FFO per unit was $0.598, a slight increase from its prior quarter, and AFFO per unit increased to $0.545. Management noted high demand for workspace in urban areas of major cities. Its dividend has risen to 11% and the stock remains cheap. Sales of its UDC portfolio have helped bolster its balance sheet and liquidity. We think a drop in rates can help this name, but we would like to see more catalysts here to get more interested in the name. For now, its small size and office exposure is not overly compelling, and we feel these are getting reflected in the company's valuation.
Unlock Premium - Try 5i Free

80% of portfolio in Toronto and Montreal. Availability rates are over 16%, yet new builds continue. Sold data centres. Good position on cashflow. Valuation now more compelling. Enticing 9% yield if you're willing to take the risk. Difficult asset class going forward, perhaps better value elsewhere. Many of these stocks look oversold, though he's not willing to place bets today.

Thinks office use will continue despite remote work.
Interest rates tough on business (debt levels & alternative bond yields).
Well run business with solid management team.
Pressure on stock lately - unsure on future of the business.
Difficult to ascertain future of office REIT sector. 

Interest rates not only factor negatively impacting company.
Work from home, and overall economy also impacting share price.
Looking into company - has met with management. 
Good long term assets - waiting to see how economy performs in the fall.
Major change in how people work balanced with low share price buying opportunity.