Allied Properties Reit Optimistic About Office Sector
Allied Properties Reit Optimistic About Office Sector
Allied Properties Real Estate Investment Trust, one of Canada’s largest office REITs, said it is increasingly optimistic about demand for space in its buildings, even as it is being urged to cut its distribution to shore up its balance sheet.
“I want to reiterate my confidence that our portfolio will continue to hold up well in this economic environment,” Allied President and CEO Cecilia Williams told investors last week during its fourth-quarter earnings call. “Yes, we are aware of the headwinds, but we see more upside and are optimistic because of the strength of our operating platform.”
Still, Pammi Bir, managing director of real estate and REITs at RBC Capital Markets, asked Allied executives for their rationale for holding the shareholder distribution at current levels instead of lowering them. Bir said that “a cut could certainly help concerning achieving some of your debt reduction targets.”
Williams quickly shot down the idea of a distribution reduction.
“Our distribution is a commitment that we have made with our investors, and we take it very seriously,” Williams said on the call. “And we have a path to be able to strengthen the balance sheet without having to cut the distribution, which is why we are not cutting it.”
Allied announced its earnings for the quarter that ended Dec. 31 in a challenging environment for the country’s office market. The headwinds affected the REIT’s, funds from operation, during the quarter. FFO is a significant indicator of financial performance for real estate investment trusts.
Key indicator drops
In the quarter, Allied’s funds from operations totalled nearly $72.4 million down 15.3% from a year earlier. On a per-unit basis, FFO was 51.8 cents in the fourth quarter versus 61.1 cents a year earlier. The REIT’s FFO payout ratio jumped to 86% from 73.6% during the period.
Analysts with Canaccord Genuity said the drop in FFO is putting additional focus on the REIT’s “elevated” payout ratio. The payout ratio represents the amount of a company’s FFO that is paid out as distributions.
“Allied Properties REIT’s financial results highlight a continued challenging operating environment for office landlords. Results were below expectations, and while management expressed confidence that occupancy will improve in 2025, market fundamentals are not expected to improve materially in the next year,” Canaccord analysts said in their report.
As for its 14.5 million square feet portfolio, Allied said its occupied and leased area was 85.9% and 87.2%, respectively in the fourth quarter. Allied also said it renewed 69% of leases maturing in the quarter, close to its historical average of 70% to 75%.
Allied’s goal for year-end 2025 is to have 90% of space occupied and leased.
TD Cowen analysts said the expectation of a 4% drop in FFO was unsurprising given the REIT’s issues and said 2025 will be the tough for Allied earnings.
“We are encouraged by the optimism management has in the current leasing environment, the TD Cowen analysts said in a report. “We believe the cadence of 2025 occupancy gains towards the 90% target, more weighted to the second half (of 2025), will be the key driver of near-term stock performance.”
Source CoStar. Click here for the full story.
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