Allied Properties REIT explores $1.3-billion asset sale to ease debt woes as rates of interest rise

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

Workplace property proprietor Allied Properties REIT AP-UN-T is contemplating the sale of its data-center portfolio, a deal that might assist the business landlord pay down debt because it retools for a brand new period of upper rates of interest and hybrid operations.

Allied, greatest recognized for its low-rise workplace buildings in downtown cores, presently owns three data-centre properties in downtown Toronto. In a press release Thursday, the REIT stated it’s “exploring the sale” of those properties, the most important of which is 151 Entrance St. West, a significant telecom hub. The corporate values ​​the portfolio at $1.3-billion.

Knowledge facilities, which embrace servers and telecommunications tools, are usually not the main target of Allied’s property portfolio — they comprise 16 % of web working revenue. However CEO Michael Emory has lengthy been bullish on them, partially as a result of their business is comparatively secure and at all times in demand.

Nonetheless, the true property market has been rocked by rising rates of interest this yr, and Allied’s models have been hit hardest, dropping 40 % of their worth since January. Buyers cherished Allied earlier than the pandemic, with its models hitting document highs close to $60 in February 2020. Just lately, fears of weak office-space demand and better rates of interest, which might make mortgages costlier, have hammered the corporate. models.

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

Ally faces further headwinds. For one, retail traders in Canada was main patrons of REITs as a result of they cherished the revenue supplied by month-to-month distributions. At a time when rates of interest had been extraordinarily low. But REIT distribution yields tended to hover round 5-to-6 % yearly — and that degree is now a lot nearer to what assured funding certificates pay.

Allied can also be creating properties in downtown Toronto, corresponding to The Properly, and the event wants lots of money. For many of the previous decade, REITs had been capable of promote new shares to finance such development, however now they’re unable to as a result of a lot of their unit costs have fallen.

Previous to the announcement, Allied’s models had been buying and selling at a 40-percent low cost to the REIT’s web asset worth, in accordance with TD Securities. Which means public traders are skeptical of REITs’ acknowledged asset values. (Nonetheless, figuring out the proper value in such a chaotic market is a posh activity.)

Analysts imagine Allied is pursuing a sale of its data-center portfolio as a result of the money earned may very well be used to pay down debt it accrued whereas financing the event. Promoting belongings at robust valuations – at the least relative to workplace buildings – may additionally assist enhance Allied’s worth, as traders do not appear to worth Allied a lot for this sort of asset proper now.

The transaction “will crystallize vital worth in Allied’s city data-center portfolio that we imagine has not been appropriately acknowledged/valued by the general public markets,” BMO Nesbitt Burns fixed-income analyst Nicholas Kim wrote in a word to shoppers.

Whereas Allied talked about the potential sale in its assertion, Mr. Emory broadly mentioned the thought of ​​a three way partnership within the REIT’s quarterly convention name earlier this month, with out going into too many particulars. It is attainable that Allied may promote half of the portfolio to a associate, after which co-manage the information facilities collectively. Allied declined to remark for this story.

Allied purchased 151 Entrance St. in 2009. West was bought for $192-million and the REIT bought one other of its buildings, 905 King St. West, minutes away after unveiling plans to show it into one other state-of-the-art information middle. The 2 buildings can be linked underground with a fiber optic cable.

The Hub at 151 Entrance is named a “co-location” area, and tenants embrace Bell, Rogers and Telus. Regardless of the fierce competitors between these gamers, their wires have to be linked in order that anybody sending an e-mail by means of Bell’s community, for instance, can ship their message to somebody utilizing Rogers or one other competitor. It takes place within the “meet-me room” — which isn’t any greater than the common main bedroom, however is so filled with cables and tools important to Canadian communications that video cameras monitor each sq. inch.

On the time, Allied noticed one other benefit in proudly owning information facilities downtown: Many condominium and workplace towers had been being constructed and their proximity would assist telcos, as a result of they may supply sooner Web connections by connecting the towers on to hubs as an alternative of utilizing them. Peripheral routing stations within the suburbs that gradual information transmission.

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