Allied Properties REIT is exploring a $1.3 billion asset sale to ease debt within the wake of rising rates of interest

Michael Emory, CEO of Allied Properties REIT, stands within the foyer of the Adelaide places of work in Toronto.Ashley Hutcheson/The Globe and Mail

Workplace property proprietor Allied Properties REIT AP-UN-T is contemplating promoting its information middle portfolio, a deal that will assist the business landlord pay down debt because it prepares for a brand new period of upper rates of interest and hybrid operations.

Allied, finest identified for its low-rise workplace buildings in downtown cores, presently owns three information middle services in downtown Toronto. In an announcement Thursday, the REIT mentioned it’s “exploring the sale” of those properties, the biggest of which is 151 Entrance St. West, a big telecommunications middle. The corporate values ​​the portfolio at $1.3 billion.

Information facilities, which home servers and telecommunications gear, will not be the core of Alied’s property portfolio – they account for 16 p.c of internet working earnings. However Chief Govt Officer Michael Emory has lengthy been bullish on them, partially as a result of their trade is comparatively steady and all the time in demand.

However the housing market has been rocked by rising rates of interest this yr, and Allied’s models have been among the hardest hit, shedding 40 p.c of their worth since January. Traders beloved Allied earlier than the pandemic, and its models hit a document near $60 in February 2020. Extra just lately, fears of weaker demand for workplace area, together with larger rates of interest, that are driving up mortgage costs, have weighed on the corporate’s models.

Allied Properties models closed up 2.9 p.c at $26.90 on Thursday.

The Allies confronted further obstacles. For one factor, retail traders in Canada was once the principle consumers of REITs as a result of they favored the earnings that comes from month-to-month distributions. at a time when rates of interest have been ultra-low. Nonetheless, REIT distribution yields have hovered round 5-6 p.c per yr – and that stage is now very near what Assured Funding Certificates pay.

Allied additionally developed properties, akin to The Nicely in downtown Toronto, and growth requires some huge cash. For a lot of the previous decade, REITs have been capable of promote new shares to finance such developments, however as their unit costs have fallen, they’re presently unable to take action.

Earlier than the announcement, Allied’s models have been buying and selling at a 40 p.c low cost to the REIT’s internet asset worth, in response to TD Securities. Because of this public traders are skeptical of the reported values ​​of REIT property. (Nonetheless, figuring out truthful worth is a fancy process in such a chaotic market.)

Analysts consider Allied is trying to promote its information middle portfolio as a result of the money it earns can be utilized to pay down debt it accrued whereas financing the event. Promoting property at excessive valuations — a minimum of relative to these in workplace buildings — may additionally assist enhance Allied’s unit worth, as traders are not giving Allied a lot worth for this sort of asset at this level.

The transaction would “crystallize vital worth in Allied’s city information middle portfolio that we consider has not been adequately acknowledged/priced by the general public markets,” BMO Nesbitt Burns fastened earnings analyst Nicholas Kim wrote in a notice to purchasers.

Whereas Allied talked about a potential sale in its announcement, Mr. Emory broadly mentioned the three way partnership thought on the REIT’s quarterly convention name earlier this month, with out going into a lot element. It’s potential that Allied may promote half of the portfolio to a associate after which function the information facilities collectively. Allied declined to remark for this story.

Allied bought 151 Entrance St. Information for $192 million in 2009 and shortly after the REIT revealed a plan to transform one other of its buildings, 905 King St. West, a couple of minutes away, to a different prime information middle. The 2 buildings could be related underground by optical cables.

The centerpiece of 151 Entrance is what’s referred to as a “colocation” area, and tenants have concurrently included Bell, Rogers and Telus. Regardless of fierce competitors between these gamers, their wires should be related in order that anybody sending e-mail from Bell’s community, for instance, can ship their message to somebody utilizing Rogers’ or one other competitor’s message. This takes place in a “assembly room” – no larger than the typical main bedroom, however filled with cables and gear so important to Canadian communications that video cameras monitor each sq. inch.

On the time, Allied noticed one other profit of getting information facilities downtown: plenty of residential and workplace towers have been being constructed, and their proximity would assist telecommunications corporations, as they might supply high-speed Web connectivity by connecting the towers on to the hubs, as an alternative of to make use of peripheral stations for routing within the suburbs that decelerate information transmission.

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