This “Strong Buy” REIT Can Gain 90% Before Reaching Its Asset Value

Allied Properties REIT (TSE:AP.UN) is a real estate investment trust that mostly makes its net operating income (69.6%) from leasing out urban office buildings in major Canadian cities. Additionally, 16.6% of its net operating income comes from urban data centers, 9.5% from urban retail workspace, and 4.3% from urban parking workspace. The stock currently yields 6.5% and is trading at a large discount to its net asset value per unit (NAV/unit), presenting an interesting opportunity. In fact, it can gain about 90% before reaching its NAV/unit — more on that below. Also, the stock is a “Strong Buy,” according to analyst ratings. Therefore, it’s worth checking out.

Office REITs Can Still Survive

While many investors may not like office REITs because of the increasing number of people working from home (lowering the demand for offices), offices are still useful. In a previous article of ours about Slate Office REIT (TSE: SOT.UN), we wrote, “Offices will probably never completely disappear, as they allow employees to communicate better, and some people like working in an office setting.

Also, it’s possible for companies to continue growing despite being in a tough industry — just ask tobacco products retailer Altria (NYSE: MO), whose free cash flow and revenues are near record levels. Therefore, as long as the company knows how to optimize its operations, it should be fine.” As we’ll talk about below, AP.UN has a solid track record of creating value for shareholders. Therefore, we’re confident that its management team would know how to deal with future challenges and changes regarding office use.

Allied Properties REIT Creates Value for Investors

When it comes to REITs, there’s another important thing to consider besides dividends – net asset value per unit. Looking at Allied Properties’ historical NAV/unit trend can help investors determine if the company is creating value for shareholders or not. Luckily for investors, its NAV/unit has been consistently trending higher over the past decade, going from C$27.74 in Fiscal 2012 to C$51.10 as of the most recent report. In addition, for the past five years, its NAV/unit CAGR is 6%.

Is Allied Properties REIT’s Dividend Worth It?

As mentioned earlier, AP.UN has a ~6.5% dividend yield, which is pretty good in our eyes. Its five-year dividend CAGR comes in at 2.7%, so don’t expect much growth. However, when combined with its consistent NAV/unit growth, the stock can provide solid returns for investors if it keeps up its growth trajectory.

Also, its dividend is covered, as the company’s adjusted funds from operations (AFFO, a cash-flow metric used by REITs) payout ratio was 83.2% in Q3 2022, meaning that not all of its cash flow is being paid out as dividends.

Allied Properties Stock is Undervalued

AP.UN stock’s current price is C$26.95/unit. Meanwhile, its NAV/unit is C$51.10. This means that you can buy the stock at a large discount to its fair value, which has been growing every year. Objectively, this makes the stock undervalued unless you think that rising rates will severely impact the value of AP.UN’s properties, causing a massive drop in NAV/unit. We think that any drop in NAV will be temporary in nature, making its valuation compelling.

Analysts Rate AP.UN Stock a Strong Buy

According to analysts, Allied Properties REIT stock earns a Strong Buy consensus rating based on five unanimous Buy ratings assigned in the past three months. The average AP.UN stock price target of C$36.55 implies 35.6% upside potential. Analyst price targets range from a high of C$39.50 to a low of C$33.75. 

The Takeaway: Consider Buying AP.UN Stock

Allied Properties REIT may be looked down upon since it makes most of its money from offices. However, it has proven that it can grow its dividend and NAV/unit over the years, and its valuation is very cheap. The 6.5% dividend yield is the icing on the cake, and it makes sense that analysts are unanimously bullish.

Disclosure