Ampco-Pittsburgh-Allied Properties: Bet On Office Recovery And Collect A 10.5% Yield

Core Viewpoint - Allied Properties REIT is positioned as a low-risk investment in the Canadian office recovery, supported by a strong balance sheet, high-quality assets, and effective management [1]. Company Overview - Founded in 2002 by Michael Emory, Allied Properties REIT went public on the Toronto Stock Exchange in 2003 [2]. - Initially focused on Class I workspace, the company has expanded its asset types to include mixed-use developments and previously owned urban data centers [3][4]. Asset Composition - Allied owns 201 properties across six major Canadian markets, totaling nearly 15 million square feet, with a valuation of $8.5 billion [4]. - Over 40% of its space is located in Montreal, with Toronto being the second-largest market [5]. Historical Performance - The company experienced significant growth, with total assets increasing from$ 128 million at IPO to $9.4 billion by the end of 2020, reflecting a compound annual growth rate of over 20% [6]. - Despite a decline of more than 70% from early 2020 highs, Allied has consistently outperformed the S&P TSX Total Returns Index since its IPO [6]. Recent Developments - Allied has been active in M&A, acquiring six office towers for$ 794 million in 2021 and consolidating ownership in various projects with Westbank [8]. - The company sold its data center portfolio for $1.35 billion, significantly improving its balance sheet and reducing its debt-to-assets ratio to 34.7% by the end of 2023 [9]. Current Market Position - As of the end of 2023, Allied's occupancy rate was 87.3%, down from the 90% range in 2021 and 2022 [11]. - The company faces upcoming lease renewals, with 7.1% of its space due in 2024 and 9.9% in 2025, which could impact rental spreads [11]. Financial Outlook - Analysts project flat earnings over the next couple of years, with a consensus estimate for funds from operations (FFO) of$ 2.26 per share in 2024, slightly increasing to $2.27 in 2025 [15]. - The current distribution yield is 10.5%, with a payout ratio of approximately 80%, indicating that while the distribution is currently sustainable, there are risks associated with future leasing and debt obligations [16][17]. Valuation and Investment Thesis - Allied is trading at a low valuation of 7.5 times the expected FFO for 2024, providing a margin of safety for investors [18]. - The company's strong balance sheet and focus on Class I office space in downtown areas are seen as positive factors for long-term recovery in the office sector [19].