Canadian REIT Has an “Irreplaceable” Footprint

Analyst cites balance sheet, unique locations as reasons for recommending Canadian REIT Allied Properties REIT (TSX:AP.UN)

Capital Ideas Media | June 12, 2020 | SmallCapPower: Capital Ideas Media Publisher Mark Bunting wrote: Real estate investment trusts (REITs) have been hard hit during the pandemic as commercial buildings sit mostly empty and rents are deferred or not paid at all.

(Originally published on Capital Ideas Media on May 5, 2020)

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That’s leading to concern about net operating incomes and net asset values declining.

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But they’re not making any more land, to use the old axiom, and, no matter what the circumstance, there are some REITs better positioned than others to withstand any changes in the commercial property landscape.

One such REIT, according to Canaccord Genuity, is Allied Properties REIT (TSX:AP.UN), whose portfolio mainly consists of urban, brick-and-beam type properties often occupied by trend-setting technology and new media companies.

Allied reported Q1 funds from operations of 58 cents per unit, up four per cent year-over-year and above the 57-cent consensus on Bay Street.

Canaccord Genuity analyst Mark Rothschild has upgraded Allied to “buy” and boosted the price target to $51.50 from $50, which gives the units nearly 20% upside, and is slightly below the average analyst target of $52.64.

He also raised his funds from operations projections for Allied for this year and next.

Here are some excerpts from Rothschild’s report:

“Allied is well positioned to manage through an uncertain environment.

However, following Q1/2020 results, and including the benefit of management’s commentary, we believe that the ‘risk’ to Allied’s cash flow is likely less severe than we may have assumed.

Management disclosed that, for April, Allied collected 90 per cent of total rent due, and agreed to deferrals amounting to eight per cent of total rent.

A significant portion of deferred rent was for the REIT’s storefront retail tenants, which represent seven per cent of the REIT’s gross monthly rent.

While it is reasonable to expect rent collection rates to be lower in the next few months, we believe that:

Allied’s portfolio should remain highly occupied due to the strong location of its portfolio, the unique characteristics of many of its buildings, and the current low vacancy rates in both the downtown Toronto and Montreal office markets.

With rental rates having risen steadily in Allied’s core markets of Toronto, Montreal and Vancouver over the past few years, the REIT’s in-place rental rates are generally well below current market rent.

This is leading to solid leasing spreads and, in Q1/2020, Allied signed leases totalling 111,880 square feet at rental rates, on average, 24.2 per cent higher than expiring rents.

This compares to 17.1 per cent in Q4/2019 and 19.6 per cent in Q1/2019.

Renewing leases at market rental rates should continue to be a driver of cash flow growth, albeit at somewhat more modest growth rates than we had previously assumed.

Allied has long been one of Canada’s most successful REITs, and benefits from a strong balance sheet, high-quality management team and a well located and unique portfolio.”

Meanwhile, Industrial Alliance Securities analyst Brad Sturges lowered his target on Allied to $55 from $60.50, and kept a “buy” rating.

Among Sturges’ comments he said:

“Allied has assembled an irreplaceable urban Canadian office real estate footprint. Although construction activity recently has been disrupted and activity has slowed, long-term development, intensification, and value creation strategies may further unlock Allied’s underlying urban land value.”

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