Three Upgrades Allied Properties Real Estate Investment Trust is “performing well” ahead of a full-scale return-to-the office, said CIBC World Markets analyst Scott Fromson.
On Wednesday, the Toronto-based REIT reported funds from operations of 62.4 cents, exceeding the 60-cent estimate of both Mr. Fromson and the Street. Occupancy fell 1 per cent from the previous quarter to 90.6 per cent, missing the analyst’s 91.8-per-cent forecast, but in-place rents rose 4.3 per cent year-over-year, topping his 3.7 per cent projection.
“Allied reported a Q3/21 beat, featuring healthy year-over-year growth in SPNOI (up 6.3 per cent) and strong FFO/unit growth (up 10.1 per cent),” said Mr. Fromson. “Allied continues to move forward in adding and upgrading flexible, well-located and thoughtfully designed workspaces, putting the REIT in a strong position to help its tenants attract workers back to their desks.”
“Two indicators support our belief that a return to office is happening, albeit in a hybrid fashion. As of October 22, 81 per cent of the users in Allied’s portfolio, occupying 73 per cent of GLA, have officially reopened their offices and have begun bringing employees back. Further, management noted in its conference call that it saw a meaningful quarter-over-quarter parking revenue increase in Q3/21.”
Believing valuation upside remains, Mr. Fromson reaffirmed Allied as “top pick in the Canadian office asset class,” raising his target for Allied units to $53 from $50 with an “outperformer” rating. The average is $50.83.
“Allied’s year-to-date performance continues to lag that of the XRE (up 15.4 per cent vs. 28.1 per cent),” he said. “While much of the gap is due to delays in the reopening trade, the beat likely puts a bit of wind back into Allied’s sails; getting over the fully leased finish line at The Well will help further, as will a rebound in occupancy levels. Allied has financial flexibility with 32.9-per-cent debt/GBV (31.0 per cent in Q2/21), supported by $297.7-million of liquidity; the two green bond issues totalling $1.1-billion have lowered Allied’s weighted-average interest rate by 66 bps to 2.94 per cent since year-end 2020.”
Others making target adjustments include:
* RBC’s Pammi Bir to $52 from $51 with an “outperform” rating.
“Post AP’s Q3/21 results that were broadly in line with our call, we see plenty of reasons to remain constructive. Supported by its high quality assets, return to work ramping up, and further strides in economic activity, we expect organic growth to clip along at a healthy pace as occupancy regains traction. As well, a sizeable pipeline of developments teed up for completion should provide some extra juice to growth. While sentiment on office may take time to rebuild, we see an attractive discounted valuation and drivers to shrink the gap,” said Mr. Bir.
* National Bank Financial analyst Matt Kornack to $52 from $50 with an “outperform” rating.