REIT spurs growth with development after acquisitions

This REIT has used strategic acquisitions in urban markets to boost its revenue and cash flow—and its monthly distributions. It will now spend $1.2 billion to further develop some of its key properties in those markets.

ALLIED PROPERTIES REAL ESTATE INVESTMENT TRUST (Toronto symbol AP.UN; owns 147 office buildings, mainly in major Canadian cities. Most of those are classified as Class I buildings. Together, they comprise over 10.9 million square feet of leasable area. The REIT’s occupancy rate is 94.9%.

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Class I refers to 19th- and early-20th-century industrial buildings that are now used as office space. They often have exposed beams and brick walls, and hardwood floors.

Allied has grown steadily by acquisition. In 2016, it spent $376.7 million on seven properties in major Canadian cities, including Calgary and Toronto. In 2017, it spent $122.7 million on six properties. So far in 2018, it has spent $17.2 million on five more properties.

Altogether, new buildings helped raise the trust’s revenue by 3.7% for the quarter ended June 30, 2018, to $107.0 million from $103.1 million a year earlier. Cash flow per unit rose 15.4%, to $0.45 from $0.39.

Dividend stocks: A New Focus on Urban Property Development

While acquisitions have been a big part of Allied’s past growth, the REIT will now focus on developing some of its urban properties. Allied aims to expand by enhancing new properties and intensifying existing ones.

For example, in 2017 the trust paid $60 million for 56 The Esplanade in Toronto. The property abuts a large block of buildings, or land assembly, that includes Allied’s nearby 35-49 Front Street. The REIT has no immediate plans for a major development, but expanding the land assembly adds value.

The REIT plans to spend roughly $1.2 billion over the next five years, including $300 million a year for 2018, 2019 and 2020. The plan includes eight urban development projects totalling 2.3 million square feet, with 175,000 in Vancouver, 316,000 in Calgary, 300,000 in Montreal and the balance of 1.5 million square feet in Toronto.

With the January 2018 payment, Allied raised its monthly distribution 2.0%. The trust’s annualized distribution of $1.56 per unit yields 3.8%. Allied Properties REIT trades at 22.5 times its forecast 2018 cash flow of $1.90 a unit.

Recommendation in Canadian Wealth Advisor: Allied Properties REIT is a buy.

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