Allied Properties Real Estate Investment (TSX: AP.UN) is the office real estate investment trust (REIT) to own if you’re looking for quality, a stable dividend, and growth potential.
Allied Properties owns, manages, and develops urban office environments, which enrich the experience and enhance the profitability of its business tenants operating in major Canadian cities.
The REIT offers a safe 4.5% yield with a normalized funds from operations payout ratio of about 71%.
The business
Allied Properties has about 155 properties, totaling 11.9 million square feet. Its leasable area is focused in the major cities of Toronto (about 39% of leasable area) and Montreal (roughly 36%).
Then there are the others: Calgary (8.4%), Kitchener (4.5%), Winnipeg (2.9%), and 2.4% or less in each of Edmonton, Vancouver, Quebec, and Ottawa, respectively.
At a higher level, the REIT earns about 60% of its net operating income in the central region of Canada, about 25% in the eastern region, and about 15% in the western region.
Top tenants
In the third quarter, Allied Properties earned 19.2% of its rental revenue from its top 10 tenants, which include a good mix of information technology companies (of which, three out of four are in the data centre industry).
Of the remaining top tenants, it has two financial companies, including Morgan Stanley, two telecoms, including BCE, a Canadian crown corporation, and a media/entertainment company.
They each contribute about 1.3-3% of the REIT’s rental revenue. So, Allied Properties’s rental revenue is very diversified and has little single-tenant risk.
Valuation
At $33.90 per unit, Allied Properties trades essentially at its last reported net asset value (NAV) per unit of $34.09 at the end of September.
The units also trade at its book value. Both the NAV and the book value seem to indicate the units are fairly valued.
However, in the last decade, Allied Properties has tended to trade at above its book value. In five of the 10 years, it traded at a price-to-book ratio (P/B) of 1.1-1.2.
In three of the 10 years, it traded at a P/B of at least 1.6. So, the units could be slightly discounted compared to its historical valuations.
The units trade at a price-to-funds-from-operations ratio (P/FFO) of 15, which indicates, at most, a fair valuation. Allied Properties’s normal P/FFO in the last five years has been 17.2, which indicates the units could be slightly discounted and have room to appreciate about 12% to about $38.80 per unit.
The takeaway
In the best-case scenario, Allied Properties has about 12% of upside potential from current levels. It also offers a safe and potentially growing yield which starts off at 4.5% today.
So, optimistically, the REIT can deliver total returns of 16.5% for a one-year target. For the longer term, the REIT offers a stable dividend and gives exposure to quality urban office properties.
