Allied Properties REIT (AP.UN-T)

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.

Lots of "brick and beam" properties, very beautiful. Redevelopment of those heritage buildings is much more difficult. Smaller square footage actually hurt them more from Covid, as many decided they didn't even need an office. Rental dynamics have changed since Covid.

Office has suffered since the pandemic, supply/demand are out of balance everywhere. Occupancy has slipped to lowest level in 2 years. Leverage is quite high, while net operating income is down this quarter. An execution story. Some wonder if distribution can be sustained.

They rank among the top REITs in Canada and the U.S. They have a history of buying and spending well and adding a lot of value. They were a darling until Covid hammered the office market. Now, AP.UN faces a tough office market. Toronto remains a major city that hasn't returned to the office, so vacancy rates remain high. He doesn't know if this huge wave will return. But AP's dividend is sustainable, though it should be cut to do things like buyback stock and paying down debt.

Starting to see strength in REIT's with lower interest rates. Would wait for trend to head up before investing. Breakout would be above $20/share. 

Deep value, turnaround story. Gentrifies warehouse and industrial corridors in Toronto. Also in Montreal, Calgary, Vancouver and Kitchener. Getting some love and accolades for The Well, multi-use residential & commercial & office. Former darling, compounding at 17% annual pace from 2003-2019. Trading at less than half book value. Yield is 9%, which he feels is sustainable.

People returning to office. Debt refinancing, construction financing. Macro tailwinds with interest rates falling. In its new first inning.

Likes real estate in general, sector will benefit from lower interest rates. In particular, likes those that are building their businesses; not the ones that are just collecting rents, paying dividends, and going sideways. A good business run by good people. Yield is 10%, sustainable, won't get cut.

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. 
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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.