The meteoric growth of the portfolio in office and urban data centers, along with sustainable leverage levels, makes Allied Properties an attractive opportunity. Allied Properties REIT (TSE: AP.UN) (APYRF) is a real estate investment trust specializing in urban workspaces in Canada’s major metropolises and network-dense urban data centers in Toronto.
The company has a portfolio of 13.9 million square feet GLA (Gross Leasable Area) worth $8.1 billion. The WALT (Weighted Average Lease Term) is 5.6 years and the occupancy rate is 91.1%. Some of its most notable tenants include Google (GOOGL), Bell, Ubisoft (UBSFY), and others.
Immense Historical Overall Growth
One of the most impressive characteristics of Allied is its growth over the last two decades. At the start of Allied’s IPO, it had $128 million in total assets, and now has roughly $9.7 billion, representing a 26.8% CAGR.
Additional metrics that are important for investors have increased significantly over time, such as NAVPU (Net Asset Value Per Unit) by ~10% CAGR over 18 years and distributions (dividends), even through COVID-19. Although past results are not indicative of the future, historic returns have produced an average annual return of 14.9%. These historic results demonstrate an ability from management to perform well even through many negative financial events (2008 recession and COVID-19 pandemic). See Allied’s stock charts on TipRanks
Growth Strategy
Allied’s strategy in acquisitions for urban office properties is to ensure they are (1) close to the city core, (2) have distinctive properties, and (3) lower occupancy costs. This strategy is quite logical and likely will continue to work as it has in the past.
Even past COVID-19, when lockdowns and restrictions are easing, the city core is still attractive for high talent individuals. Distinctive properties, like 500-522 King West in Toronto or The Landing in Vancouver, provide an advantage as they attract more interest and are “landmark” buildings, compared to regular skyscrapers. Lower occupancy costs lead to better overall operational performance at these buildings. For Q2 of 2021, $61.8 million is allocated towards acquisitions for Allied, and the remaining $68.8 million for development.
Impressive Current Portfolio
Allied has 194 rental properties that are valued at a total of $8.1 billion with a total GLA of 13.9 million square feet. Additionally, there are 10 other properties under development valued at $1.0 billion.
Keeping true to its strategy, the company holds most of their portfolio in the biggest city centers, like Montreal (6.5 million sf) and Toronto (4.8 million sf). The current occupancy rate is at 91.1% and the weighted average lease term of 5.6 years. Net operating income is split by 71.7% for office, 16.8% for data centers, 8.4% for retail, and the rest (3.1%) from parking.
This current portfolio has been impressive in its ability to grow key real estate metrics for the trust: Same asset NOI (Net Operating Income) has increased 6.4% (to $83.5 million), FFO (Funds From Operations) by 8.1%, and AFFO (Adjusted Funds From Operations) by 7.2%.
Toronto / Canada Data Center Industry Attractiveness
According to CBRE, Toronto had the second most active data center leasing in 2020 in North America. Only Northern Virginia was able to best them, albeit by a significant margin.
279 data centers as of March 31, 2021 are available in Canada, and it ranks fifth for data center density globally. Toronto and Montreal are the key markets due to their prime locations and the meteoric growth for cloud computing providers.
Toronto is an attractive market due to its status, size, and multiple large enterprises. Pre-pandemic, the data center market was one of the fastest-growing real estate sectors, and that continued to perform well in 2020, with businesses updating their digital infrastructure to support “work from home” capabilities.
Pat Lynch, a Senior Managing Director for Data Center Solutions at CBRE notes “with data usage growing at an explosive rate, we expect data center demand to increase across both primary and secondary markets in 2021.”
Market inventory over the past year has increased roughly 20% in Toronto. Recently, vacancy has hit an all-time low in the city, at just 10.4% and power costs have been cut for $0.14 per kilowatt to $0.115. For enterprises with ESG concerns, Toronto also satisfies them with ~94% of all energy usage being generated by renewable sources.
The urban data center segment of Allied’s business makes up 16.8% of its NOI. The company has three properties located in Toronto, with the total portfolio fair value at just over $1 billion, with a capitalization rate of 5.31%. This segment has attracted top-tier tenants such as Amazon Web Services (AMZN), Equinix, Bell, and others. The success of this portfolio has been demonstrated by total NOI growing at ~9% CAGR over the past 9 years.
Strong Balance Sheet
In terms of Allied’s leverage levels, it have been able to keep them in check, despite its exponential growth. Total indebtedness is at 31%, with an interest coverage ratio is 3.3x. In addition, the long-term debt that it does have is fixed rate interest, meaning interest rate fluctuations do not pose an additional risk to the trust as they may for other REITs and businesses. This lower level of leverage, with little risk to a change in interest rate to their current debt profile, makes Allied a safer pick.
Bottom Line
Allied Properties REIT offers a good opportunity for investors, given its exceptional growth over the past two decades driven by its strategy, its operation in strong markets, and strong balance sheet. The strategy the REIT uses is to look for properties based in the city core, that are clearly distinctive, and offer low occupancy costs.
The success of this approach is evident by the fact that NAVPU over the past 18 years has increased ~10% CAGR and the average annual return has been 14.9%. The Toronto urban data center segment of their business is also quite attractive, with the explosive growth in the past year and even pre-pandemic and decrease of electricity costs. Finally, even with all of this growth, the trust maintains reasonable leverage levels to reduce risk.
What Analysts are Saying about AP.UN Stock
From Wall Street analysts, AP.UN earns a Strong Buy consensus rating, based on 8 Buy ratings and 1 Hold rating. Additionally, the average AP.UN price target of C$50.36 puts the upside potential at 21.94%.
Disclosure: The author works as a manager at National Bank Financial.
Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.
