Canadian Real Estate Investment Trusts (REITs) like Allied Properties (AP-UN.TO), RioCan (REI-UN.TO), and Granite REIT (GRT-UN.TO) offer diverse portfolios across different property types, each with its own set of challenges and opportunities. As of November 6, 2024, these REITs show varying price-to-AFFO (P/AFFO) multiples, standing at 9.8X for Allied, 13.1X for RioCan, and 15.6X for Granite. While these valuations might reflect each REIT's specific risks and returns, they also invite a closer look at how each is positioned within today’s economic landscape.
Allied Properties: Navigating the Office Sector Challenges
Allied Properties has had its share of challenges as the shift toward remote work continues to reshape the office sector. With leasing activity in office spaces slowing, Allied’s occupancy rates have seen a downward trend, though the last two quarters suggest a possible stabilization. This quarter, occupancy held relatively steady, with a slight increase in the leased area. Allied’s management is optimistic, expecting leasing activity to accelerate over the remainder of the year and into 2025 (https://alliedreit.com/wp-content/uploads/2024/10/Q3_PressRelease_Oct30_EN.pdf), as demand in major Canadian cities continue to rise.
Interestingly, Allied’s occupancy trends are consistent with recent insights from CBRE, which also notes signs of flattening vacancy rates in the office sector. While Allied may face a tougher road compared to other REITs focused on different property types, the early signs of stabilization could be a positive indicator for those considering its long-term prospects.
RioCan and Granite: Stability in Retail and Industrial Sectors
Unlike Allied’s office-focused portfolio, RioCan and Granite are less affected by remote work trends, with their focus on retail and industrial properties, respectively. Both REITs have maintained strong occupancy rates, hovering around 96% for RioCan and 95% for Granite. These steady occupancy levels translate to reliable streams of adjusted funds from operations (AFFO) and funds from operations (FFO), showcasing resilience amidst broader economic fluctuations.
RioCan has delivered consistent FFO in the 0.43-0.45 range per quarter, while Granite has shown a modest, yet steady increase from approximately 1.25 to 1.35 over the past seven quarters. For investors, this consistency suggests that RioCan and Granite offer a stable income profile, less impacted by the volatility faced by office-based REITs like Allied.
Debt and Financial Health
Debt metrics offer additional insight into the financial health of these REITs. Allied’s debt-to-EBITDA ratio is at 10.7X with an interest coverage ratio of 2.3X—an elevated level that may raise some concerns. During recent earnings calls, Allied’s management expressed a commitment to reduce its debt-to-EBITDA to around 8.0X over the next two years, primarily by selling off non-core assets to repay debt. This plan could make Allied a more appealing option if it successfully manages this transition.
In comparison, RioCan and Granite are on firmer ground. RioCan’s debt-to-EBITDA ratio stands at 9.06X, and Granite’s at 7.3X, both of which suggest a more manageable debt load. These stable debt metrics, coupled with solid interest coverage ratios, make RioCan and Granite attractive for investors seeking lower-risk, income-generating REIT options.
Dividend Sustainability and Payout Ratios
Dividend stability is often a priority for income-focused investors, and it’s worth examining how these REITs handle their AFFO payout ratios. Allied has historically maintained a 70-80% payout ratio, supporting its reputation as a dividend aristocrat. However, recent pressures have caused this ratio to creep up, reaching around 96% over the past seven quarters. This increase is largely due to contractions in FFO and AFFO, sparking questions about the sustainability of Allied’s dividend. Despite these concerns, Allied’s management has consistently reiterated its intention to maintain the current dividend level.
By contrast, both RioCan and Granite have managed to keep their payout ratios stable at approximately 70%, signaling a more secure dividend structure. This difference may be crucial for investors evaluating the long-term income reliability of these REITs.
Overall Thoughts: Risks, Rewards, and the Path Forward
Given Allied’s challenges with debt metrics and rising payout ratios, the stock’s lower multiples may be justified, reflecting the current risks. However, another interpretation is that Canadian REITs as a whole may be somewhat undervalued, presenting a potential buying opportunity for long-term investors.
For Allied to regain valuation levels comparable to RioCan or Granite, it would need to demonstrate growth in FFO, effectively reduce debt, and lower its payout ratio. Achieving these goals could allow Allied to transition from today’s uncertainties to a stronger, more sustainable position. Whether Allied can successfully navigate the evolving office sector and fulfill these ambitious targets is something only time will reveal.