Ampco-Pittsburgh-Allied Properties: Future Is Still Uncertain

Core Viewpoint - Allied Properties REIT is facing challenges in the office market due to weak demand and an anticipated oversupply in 2024, despite improvements in its balance sheet and rental revenue growth [2][3][14] Company Overview - Allied Properties invests in office properties across major Canadian cities, with a focus on maintaining a sustainable dividend [1] - The company has shown resilience with a 5.0% increase in rental revenue to C $138.5 million in Q3 2023, and a 5.7% increase in same asset net operating income (NOI) to C$ 86.4 million [3][4] Financial Performance - Q3 2023 financial highlights include: - Same asset NOI increased by 5.7% year-over-year - Adjusted funds from operations (AFFO) rose by 3.6% to C $76.2 million - Occupancy rate decreased by 280 basis points to 86.8% [3][4] - The overall office vacancy rate in Canada reached 16.7% in Q4 2024, up 90 basis points from the previous year, indicating a trend of increasing vacancies [5][6] Market Conditions - The Canadian office market is expected to see an influx of 5.7 million square feet of new office space in 2024, significantly higher than the 3.8 million square feet added in the previous year [5][6] - Net absorption of new office supply has been negative since 2020, with a negative absorption of 5.2 million square feet in 2023, suggesting continued challenges for occupancy rates [6] Balance Sheet and Debt Management - Allied Properties' net debt to EBITDA ratio improved to 7.9x at the end of Q3 2023, down from 9.6x in Q2 2022, due to asset disposals [7] - The company faces significant debt maturities in 2025 and 2026, with C$ 893.4 million and C $936.4 million maturing, representing 20.5% and 21.5% of total loans, respectively [7][8] Future Outlook - Management anticipates continued development projects, with 1.8 million square feet of ground-up developments, 81% of which are pre-leased [11][12] - The company is expected to generate an AFFO of about C$ 2 per share, resulting in a price to AFFO ratio of 10.4x, which is low compared to historical trading ranges [13] Investment Considerations - Despite attractive valuation metrics, the ongoing weak demand for office properties and potential economic recession in 2024 suggest that investors may want to remain cautious and consider waiting on the sidelines [14]