Allied Properties Real Estate Investment (TSX:AP.UN) is trading at levels last seen at the start of 2014. The office real estate investment trust (REIT) is priced close to its 52-week low. At about $32.2 per unit, it yields 4.5%.
The yield might not look as impressive as other office REITs, but Allied Properties has generally been a stellar performer in overall returns.
If you had bought the shares 10 years ago, you would have earned a rate of return of 10.6% per year. From its 52-week high of $41, Allied Properties has retreated 22% to the $32 level.
Should you buy the REIT? First, let’s check out its business fundamentals.
Dividend safety
From 2003 to the present, Allied Properties has never cut its distribution. In fact, its annual payout increased every year except between 2009 and 2012, when it froze its distribution. However, that’s understandable because that was around the time of the financial crisis.
From 2014 to 2015, Allied Properties grew its distribution by 3.5%. With a payout ratio of about 70%, there’s a margin of safety for its annual distribution of $1.46 per unit.
Assets
At the end of the second quarter of 2015, Allied Properties had close to $4.3 billion of assets. Its assets are diversified across 146 properties in Canada.
Its net operating income distribution is diversified with 60% from the central region, 22% from the eastern region, and 18% from the western region.
Diversified tenant base
Its top 10 tenants contribute about 20% of its rental revenue. That exposure has declined from 49% in 2003. Its top tenants include DesJardins, SAP, International Business Machines Corp., and BCE Inc. No tenant contributes more than 3.2% of rental revenue.
How cheap is Allied Properties?
Let’s look at Allied Properties using multiple valuation metrics. The REIT’s book value is $32.8 per unit. The recent share price is $32.2, which implies the shares are priced around book value and are fairly valued.
The consensus net asset value (NAV) for Allied Properties is $34.3 per share. According to this NAV, the shares are discounted by about 6%.
In the past decade, Allied Properties has normally traded at a price-to-funds-from-operations ratio (P/FFO) of 14.5. It’s priced around a P/FFO of 15 right now. That said, during the financial crisis, it hit a multiple under eight.
So, it looks like Allied Properties is fairly valued at today’s price of about $32.
In summary
Historically, Allied Properties has outperformed the iShares S&P TSX Capped REIT Index Fund and S&P/TSX Composite index, and the REIT has only underperformed compared to those indices in the past year.
Now that Allied Properties is close to fair value, there is an opportunity to buy its units for outperforming returns with a starting yield of 4.5%.
REITs pay out distributions that are unlike dividends. If you wish to avoid the tax-reporting hassle, you should buy REITs in a TFSA or a RRSP.
