The Canadian Investor - Is Allied Properties REIT Undervalued or a Value Trap?

Episode Date: December 5, 2022

The Real Estate Sector has been hit hard by higher interest rates with the sector being down more than 25% year to date. In this episode we do a dive into Allied Properties REIT which has seen its price go down by more than 40% since the start of 2022. Allied is traded on the TSX and currently has a dividend that yields more than 6.5%. Tickers of stocks discussed: AP-UN.TO Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Sign up to Stratosphere for free 🚀 our platform for self-directed stock investing research. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. This is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Belanger. The Canadian Investor Podcast. What's up? It is November 30th. Welcome into the show. My name is Brayden Dennis, as always, joined by the legendary Simon Belanger. We are getting into the holidays, my friend. Is your tree up by now or not yet?

It is not, no. Now we're debating whether I want to go cut it with a chainsaw at a nearby kind of tree farm or just go to the local farmer's market where they do trees during the holiday period. Give me like a christmas vacation type movie scenario where you go cut the biggest tree and strap it on to a sedan have an absolute scenario on the highway yeah that's where i'm kind of reluctant is just it's

not the tree cutting because i have a chainsaw and i've used it many times. Because you're a man. Yeah, no, it's an electric chainsaw, so I don't know how much of a man I am. It's actually, it works very well. You're an environmentally friendly manly man. Yeah, yeah, exactly. With the battery and all that stuff. But no, it's the putting on the car and making sure it doesn't fall off that has me a little nervous with, you know, a baby and my wife in the car as well. Yeah, no, I hear you. and my wife in the car as well.

Yeah, no, I hear you. Well, welcome into the show, everyone. So, I've been doing podcasting for what, like six years now? You and I have been doing it for like three years together now. Yeah. So, you know, I consider myself early to the pod game, naturally. And I was hanging out with someone last night who's been podcasting since 2011 consistently every week. And I was like, damn, like I've never even come close to meeting anyone that's podcasted as long as me, let alone 2011. So man, I am very bullish on the podcasting game for, for many reasons. All right. So we have a short ish episode because I'm on the run here in Texas. That makes it sound like I'm on like the run, like from the, from the police or something. No, I'm traveling from the sheriff. I'm on the run from the sheriff. No, I'm traveling for business here.

So I'll do a quick segment and then you're going to do a deep dive. You're going to put me on your back and carry the show today. You're going to do a dive into Allied Property REIT, which is a name we discussed, what, like two weeks ago? Like not in depth, but we talked about the earnings or what was it? Yeah, I had it on my watch list. That's what it was. Our watch list. Yeah, yeah.

So I gave a few kind of highlights. This will be much more in depth. Obviously, you know, if you're interested in investing in it, definitely do your own due diligence. But I think I did a pretty good job by digging into this one. Yeah, and it's one I used to own way back when. No longer do. But, oh man, some of these REITs are

just so cheap. All right. I'm going to start with something called counter-positioning. For those, if you are new to the show, we do one episode a week on earnings releases, news, things going on in the market that comes out on Thursdays and Monday mornings, we come out with things like Simone doing a deep dive into a specific stock. I'll do a deep dive on a specific stock. Today, I'm going to talk about something called counter positioning, which is coming to mind from a book that I've been reading here on the plane. It is called Seven Powers. So I'm going to crush a good majority of the rest of it on the plane tomorrow. And I'll give a full podcast segment within the next two to three weeks on an overview

of the book, because the concept of the book Seven Powers talks about the seven competitive advantages and strategies businesses can use to gain the concept of power. And power in this scenario just means exactly what you would think about it's like gaining power like if you were thinking like a politician gaining power or like a business gaining more power over its competitors it just demands in the way i think about it anecdotally is like it demands a greater gravitational pull not only from customers coming into their ecosystem, but also staying. They can't escape the black hole that has become this powerful business. And so those seven powers in the book are scale economies, network economies, which is what we

call network effects, counter positioning, what I'm going to talk about today, switching costs, counter positioning. What I'm going to talk about today, switching costs, branding, cornered resource, and process power. Those last two, I'm not really sure what they mean. And so I'll let you know all about it. One that I wasn't expecting to read about in terms of a competitive advantage or an important business strategy to gain power was counter positioning. And I know what counter positioning is, but the examples that he uses in the book are like actually really powerful. So the five stages of counter positioning that your competitors will face as the incumbents, and this just means like the traditional entrenched competitors in the landscape are denial. So they're like, first, like, Simon, you come out, I'm Blockbuster,

and you read Hastings and you come out with Netflix. And I go to the press and I go, or I'm on the analyst call. I'm like the CEO of Blockbuster. And they're like, have you heard about this Simon Belanger guy? He's building this thing called Netflix. I mean, it's going to be all streaming. Like, are you concerned about that? I'm like, nah. I'm like, nah, I'm in just complete denial. Meanwhile, you're building something incredibly powerful. Number two is ridicule, which is like, you know, now I'm just, now I'm dissing you. Now I'm like, your thing will never work. Right. And you're like, okay, sure. Number three is fear. Now I'm like actually causing, you're keeping me up at night knowing that you're

continually growing and challenging the entire space. Number four is anger. Now I'm just angry at you and you're causing me maximum pain to my business. And then number five is capitulation where I just either cave in or try to make some gigantic move. This is basically the story of how you get a 50 times ARR exit on Figma and Adobe. Just maximum fear, anger, maximum pain to capitulation. Any thoughts on that before I talk about how you can use this power? No, I'm just I was kind of thinking about Meta and, you know, our friend Zuckerberg. He's probably stuck at number two.

I don't know if he'll ever get past that. Well, I mean, in terms of their competitors and what everyone thinks about it. I think they're in the denial and ridicule phase, I would say. Yeah, you know what? Zuck is usually pretty self-aware just because he's such a ruthless competitor. So on the earnings calls, I mean, he's talked in the segment, mean he's talked in this the second song i've met but he's talked a lot about how their competitors are are legit and how tiktok is threatening them for real so yeah what he is has been in denial and i think things are changing pretty quickly is their

ridiculous pursuit to the metaverse which is going to be a little bit harder to pull off than he may have thought of when they started spending, what is it, $30 billion? Yeah. I mean, we make fun of him a lot, but to his defense, most of the big bets he's done over the years have worked out quite well. So, we'll see. I guess time will tell and definitely if it doesn't work well, it'll be a kind of historical misallocation of capital. It'll be up there as the tops, probably top of the list in terms of misallocating funds and making big bets that won't work out. But if it does work out, I mean, you'll probably be seen as a visionary.

That's right. Yeah, I think that that's well put, right? It's like the guy is a ruthless competitor and will do anything he can to try to own the hardware ecosystem. How many CEOs are all just banding together now these days and just going, dude, we can't all live in Apple's sandbox anymore. We can't all live in Apple sandbox anymore. Daniel Ake of Spotify, he's been on a, you know, a parade online to just try to bring awareness to the Apple tax. Elon, he's been like doing his thing. Toby, who else? There's been a bunch of, and they're all, they're all commenting on each other's like threads online and retweeting each other's stuff, being like the Apple tax and kind of just being like, hey, regulators, look at this. You guys are shutting me down for antitrust. Meanwhile, Apple and Microsoft don't seem to get any slaps on the wrist.

But anyways. Yeah. Yeah. I mean, I think Elon has to be very careful because Elon could also attract regulators on his platform. So, I think he has to be careful what you wish for because, you know, again, there may be a loss on his platform too, right? Yeah. And it's so funny because you look at Apple and Tim Cook, our boy Tim Apple, he looks like such a nice guy, right? He looks like if you were to sit down, have dinner, have a glass of wine with him, he

looks like a very pleasant man. That guy's got that dog in him, man. I would not want to go up against him. He is ruthless in business. It seems like anyways, from some of the transcripts of like board meetings on decisions on how they're going to just bully people. He is ruthless. You see it sometimes in interviews.

I've referenced that before where an interviewer is saying like, oh yeah, my mom or my grandma, you know, she wants to be part of the group chat, but she doesn't have an iPhone. So we have to, you know, go bypass that, use something like WhatsApp. And it's the only thing we used it for because everyone else has iMessage. And he's like, are you looking to make that available to, you know, Android users? He's like, no, but you know, your grandma, you just buy her an iPhone. And it's just like, you know, just kind of zing over there type of deal. And you kind of see it come out a little bit, but he seems to be,

you know, for good or bad, great in terms of business strategy. No, totally. Totally. One of the best founder-led handoffs of all time, for sure. All right. So, the obvious, I was using the obvious example here in counter-positioning between Netflix and Blockbuster because that's the example he used a lot in the book because the author actually personally knows Reed Hastings and was involved in the stock when it was like a small cap when it IPO'd because Netflix IPO'd before they were the Netflix everyone else knew, knew and loved. Yeah, mail order.

Yeah, exactly. Like they were public Netflix everyone else knew, knew and loved. Yeah, mail order. Yeah, exactly. Like they were public for quite a while. That's why it's one of the like total returns as a public stock, like one of the highest percentages of any public stock. So Blockbuster had those five stages, obviously, right? Denial, ridicule, fear, anger, and then capitulation. and then capitulation. Let's use this example of how I can use it for Stratosphere, my company, on how I could counter position against CapIQ's Faxet and Bloomberg terminals of the world, right? And try to gain power, pointing out that there's so many reasons we can disrupt them. And if you're not hopping on this wagon, Simone, you're just a dinosaur.

them. And if you're not hopping on this wagon, Simone, you're just a dinosaur. We're not limited from their ancient tech stacks, for instance. And it's something that I've found works extremely well in our pitches and in our messaging. And when I talk with people face to face, because so many people are familiar with those legacy platforms. So we have found counter positioning to be really helpful in our messaging. And I'm just wondering, as I read through this book, how that leads to keeping power, but it's certainly one that has helped time and time again of companies gain power over the incumbents. And we're not talking about just like my little example here with my company, but with major hundred plus billion dollar market cap companies. And so it was just interesting one because it's one you hear about in like business school.

But these books are just so great because you get real life examples and not just some textbook, you know, you know what I mean? Yeah, no, no, no. I think it sounds looking forward to hear your deeper dive on that book when you finish it on the airplane. That's what I like from flying. You can just read up on books because, you know, the movie selection is not always the best. And, you know, it's just kind of, I put some classic music on and then just start reading a book. I flew Air Canada in like literally one of the smallest planes I've ever been in. Like I didn't, like I got in the plane. I'm not scared of flying.

Was it a propeller? No, it wasn't. Because I mean, we're going pretty far. Toronto to Austin, Texas. It wasn't a propeller, but which I've done many propeller plane flights coming out of the Billy Bishop airport. But I got on the plane and, you know, it's just one in one in first class. And I was like looking at the flight attendants when you

get on, I'm like, is this thing like, is this thing still up to code? Like the carpets kind of smell, you know, like this is like musty, like this plane this plane like are you sure we can fly this thing and then we're coming in to very windy weather and i have never like literally been like up and down out of my seat i'm not scared of flying at all and i was like actually concerned for the first time in like the 80 flights i've taken in my lifetime i was like like, okay, this is it guys. Like make sure I tell the podcast people I love them and you know, take care everyone. This is it for me. Yeah, no, I know what kind of plane you're talking about and they can be bumpy. It's probably what a Bombardier or Embraer. I think they're the two that made those planes. I couldn't tell you.

I always check. Yeah, I always check in the little booklet. I'm always interested in what kind of airplane I'm riding. I wouldn't be surprised if it was an old Bombardier plane. Yeah, it was small, man. It was really small. Good times though. I'm here. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award winning customer service

team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. So not so long ago, self-directed investors caught wind of the power of low-cost index investing. Once just a secret for the personal finance gurus is now common knowledge for Canadians, and we are better for it. When BMO ETFs reached out to work with the

podcast, I honestly was not prepared for what I was about to see because the lineup of ETFs has everything I was looking for. Low fees, an incredibly robust suite, and truly something for every investor. And here we are with this iconic Canadian brand in the asset management world, while folks online are regularly discussing and buying ETF tickers from asset managers in the US. Let's just look at ZEQT, for example, the BMO All Equity ETF. One single ETF, you get globally diversified equities. So easy way for Canadians to get global stock exposure with one ticker. Keeps it simple yet incredibly low cost and effective. Very impressed with what BMO has built in their ETF business. And if you are an index investor and haven't checked out their

listings, I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, the Canadian bank is delivering these amazing ETF products. Please check out the link in the description of today's episode for full disclaimers and more information. Now we'll move on to, like we alluded to, I'll do a dive into Allied Property REIT. And it's funny because we actually got a request from Eric, who's a listener, and he was asking if we were going to look at that light. And when he wrote in, I said, oh yeah, I've actually been working on that for a couple of weeks. So that was my plan. Just to, you know, it's fun because when you do a dive, I mean, it's kind of a main segment. We usually like to do a

couple segment each for these Mondays episode. and it's a business i was interested in as well so for those not familiar the ticker is ap-un.to market cap a bit more than 3 billion last time i checked when i wrote this was 3.3 billion could be a little bit off because i took that a couple days ago the business allied is primarily a office space REIT. Their NOI, which is a term I'll use quite a bit, so net operating income, comes from four types of real estate, 70% office, 17% urban data centers, 9% retail, 4% parking. Now, for those not familiar with NOI, it's calculated by taking the revenue generated by their real estate properties and subtracting the operating expenses. It's a term

widely used if you're in the real estate industry, even if you're just like Dan and Nick, our real estate show, if you're just investing in kind of smaller properties for renting out, that's a term they'll be using quite a bit. Now, just to note, some news came out a few days ago for the Urban Data Center, so UDC. So Allied issued a press release saying that it was exploring the sale of their UDC portfolio. They haven't provided much more information than that. So it's something just to keep an eye on. much more information than that. So it's something just to keep an eye on. But from the looks of it, they're trying to capitalize on the fairly high value of these type of real estate right now and reinvest that money in what is their core kind of segment, which is office real estate in

large cities in Canada. So they're like, the majority of our business is heavily undervalued in our opinion. We think we can get a decent multiple on this premium on data centers with our assets. Let's roll those into our under... They're basically trying to double down on what they think is their bread and butter and undervalued segment of the portfolio. I do think though, like having almost 20% of the revs in the data centers has kind of been what makes Allied attractive too as well. So... Yeah, I can definitely see that argument for someone who has pretty good exposure to data centers. I would be more than happy with them divesting of that

and using the proceeds to buy some more office real estate if I were to start a position. You own Equinix. Exactly. So, I would own that specifically. That's it, to get exposure to that office real estate. So, for me, I think it's a good thing, but I can definitely understand people who don't own an Equinix, for example, they may really like to have that part of the portfolio. Now, it's not a huge read, obviously, as people may have guessed with the $3 billion market cap or so, but they currently have 15 million square feet of gross leaseable area, GLA, which is a term that I will use a bit here. It's spread out between six major Canadian cities

but you know the vast majority here I'm talking 80% is between Montreal and Toronto so in terms of the percent of their GLA 43% has been Montreal Toronto 36% Calgary 8.6%, Vancouver 6.7%, Kitchener 3.7%, and Ottawa 1.5%. The overall occupancy is currently, well, the latest numbers were 89%, but for context here, the occupancy was 95% in 2019. So they do have some work to get back to those levels, but they're hoping to get close to 94% by the of this year and the occupancy varies pretty widely i mean you see the numbers here i did a little table pretty widely depending on the location so ottawa is pretty much fully occupied i know the buildings i looked at where they were at they're basically downtown ottawa they're historical

buildings i suspect it's mostly government that's leasing them just where they're located. So it's not surprising it's 99% leased. And then the lowest occupancy is Calgary, which is their third largest market. But again, it's still relatively small compared to Montreal and Toronto, which represent the bulk over here. They only have 2.5% of their real estate leases maturing this year, with that going up to 11% next year, close to 7% 2024, and close to 10% in 2025 and 2026. So it is something to keep an eye on. However, they have been able to increase the leases for the ones that are coming up. So it's looking good from that perspective. And the average remaining lease has a 5.6 year term on it. Anything you want to

add before I go on? No, my only thing is I know you brought this up like two weeks ago that the percentage of their portfolio is actually a little bit higher in Montreal than in Toronto, which was frame-breaking for me because I thought it was almost like a pure play on downtown Toronto, which is embarrassing because I owned it for a hot second. Unless that's changed, I'm not sure. It's changed a bit over the years, but Montreal and Toronto were always their two biggest markets.

I thought Toronto being one, Montreal being two, but they're pretty close. Anyways, I want to look at those properties because if you are in Toronto and you take a walk down King Street or Adelaide or Richmond, like the main downtown East West streets, like the main most valuable properties in the whole city. And now on front, like Allied has their nameplate on almost every single one of them. And they own, anecdotally, my favorite office space in the entire city. And so from that perspective, I do think they own really good office assets that are not like old sleepy ones that people don't want to rent. We're talking

about the sleek, appealing to tech, modern, beautiful office space that is unique. The uncovered brick, the restored older buildings. It's the stuff that people actually like in 2022. So just anecdotally looking at the portfolio firsthand with my own eyes, this is not office space that people are looking to like move out of because it's not, you know, the new hot thing for their employees. This is the new hot thing. Yeah. And that is interesting because the sector they have the most exposure to is actually the tech sector. So they are focusing on that. And, you know, it could change in the upcoming years because they do have quite a few projects coming online. They have 1.7 million of square feet in development that will come online between the end of this year and 2025.

And another 1 million in redevelopment. So it could be that Toronto and Montreal come a bit closer. I know there's some major one. The well. Including the well. I know there's some major one. The well. Including the well. Exactly. That's coming online. They did speak about the whole Shopify thing that had an option to rent.

And I don't know if they just ended up renting less, but they definitely did not rent the whole thing that they were expected to. And they were able to release that to another company at a higher price than what was previously agreed with Shopify. So there is some good news there because they mentioned that in their latest earnings call, which I wanted to listen to because you do get a lot of good tidbits when you're researching a company. And we've hammered that quite a bit. Like listen to at least a couple of calls if you're going to start a position. I totally geeked out when they started doing the well project, which is on Front Street in Toronto. I was totally geeking out because I went to school for environmental engineering and I did a lot of work on energy reduction and trying to be efficient with energy.

And what they do with the well, the reason it's called the well is there is a gigantic, it the well the reason it's called the well is there is a gigantic gigantic literal concrete well that sits underneath the development way way down in the earth that is pumping water deep from the lake like deep lake bed cooling and then that runs the cooling through the whole building in the summer is actually using the energy like like using that really cold water. Yes. It's a geothermal system. And that's why it's called the well, because it's literally a well of huge well of water from Lake Ontario that they're using the deep lake bed cooling. So totally one of the coolest projects from an engineering perspective. And I think it's five towers as well. So I would expect that that that skew from to Toronto as soon as that, you know,

they do the ribbon cutting ceremony there becomes the largest percentage of the portfolio again. Yeah. And I think, I don't exactly remember, but I'm pretty sure it's a joint venture between them. Rio Can. Rio Can. Yeah, that's right. Okay. So, I read that correctly. So, essentially, Yeah, that's right. Okay. So I read that correctly. So essentially the projects that will be coming online REIT, revenues are important, but you're really looking to get higher FFO and AFFO. So FFO is funds from operations. So as a high level explanation, you add in depreciation and amortization to the net income. and amortization to the net income. And you also remove the impact of any gains or losses on property sales because it will skew right what you have in terms of profits. And AFFO is similar

to that, but it also includes things like leasing expenditures and maintenance capital expenditures, which tend to be regular. So it gives you an even better idea of what the actual kind of income in air quotes is for that real estate investment trust. If you're looking at REITs, AFFO is like financial nirvana for these companies. You got to get familiar with it. It helps adjust for rent increases and stuff. All the things that you'd want if you actually ran a real estate business. So, good call out. Yeah, I definitely just simplified it there. But AFFO, as you guys will see, is when you look at payout ratios, the payout ratios are

usually higher when you look at AFFO because it includes a lot more things. So that's why I tend to focus a bit more on that one. But AFFO is also a good indicator. But I mean, obviously, if you use one, you'll use the other two. Now, looking at the results, here's how AFFO per unit has trended in the last couple of years. I'll use since the start of 2020, since that's a better indicator than pre-pandemic, in my opinion. So in 2020, it was $1.99 per unit. 2021, $2.09. And 2022, if the trends continue, it'll be a bit higher. So $2.10, maybe a bit more than that. And some

key takeaways I took from, like I just referenced listening to their most recent call, it was really interesting, especially in the Q&A. So the Q&A is, I don't know about you, generally the Q&A, sometimes like I find analysts ask really stupid questions, but sometimes actually they will ask some very, very good question. And their call was actually like the vast majority was Q&A. So they had like 15 minutes maybe of explaining, you know, the results and so on. And then like 45, 50 minutes of Q&A. Yeah, the Q&A is where all the good stuff is found, really.

Well, yeah, I mean, again, it depends, I think, on the type of businesses. But this one, I think it was a good one. that although there are macro headwinds such as inflation, higher interest rates, and potential recession, they don't anticipate that this will have any material impact on their business this year and well into 2023. They said that the main impact will most likely be that their acquisitions will slow down because of higher interest rates, for example, in the next few years, and the type of properties they're actually eyeing. The owners of those properties tend to be well capitalized so they have mentioned that they are in continuous discussion with potential acquisition but right now is looking like it's not the best time in terms of making

those acquisition which is fine right i don't want a management team to overpay for a property they are seeing the strongest demand in Calgary that they have seen over the last two years. Like I mentioned, Calgary is their third biggest market. Of course, it's only about 9%, so it's not used. But what was interesting, the demand is primarily tech-related, not oil and gas. So something very interesting, and they were really bullish on that because they find that that's more sustainable than oil and gas, which tends to be more cyclical. So that's understandable. And although they are looking to grow their portfolio, they have a very prudent approach

in the future. They want to be sure that whenever they go ahead with a project or an acquisition, they know there will be strong rental demand. So, they're kind of still just figuring out where the market is at in terms of demand because they are admitting that it's not the same as pre-pandemic. It is picking back up, but they want to make sure they have evidence that if they put a project online, they will be able to get really high occupancy for it. You know what? That's really funny because with the occupancy in Calgary you're mentioning and the inflows actually coming from the tech sector, not like oil and gas as you'd expect. And again, that's the kind of companies their properties attract is the more techie types,

just from a design perspective. And that's funny because I was literally at dinner last night with a bunch of founders and I was sitting at our like round table there and three of the like seven were from Calgary and they didn't know each other prior. And we're talking with them and they're like, yeah, I feel like, you know, the startup scene in Calgary, it's like not that good. I feel like it's kind of lacking in Canada, all this stuff. Like, I don't know any founders in Calgary, like no one's working on anything. And I'm like, what do you mean? Like we're here in the Southern States of the US and more than half of you guys are tech entrepreneurs from Calgary. Like Clearly stuff is happening. And I think that

that's true in a lot of cities in Canada, but I think it's also very true in Calgary, just from the network that I've been developing over the past couple of months of small tech entrepreneurs. So I think that there's probably a lot of people that are in that same scenario. I'm like, guys, look around. Things are happening here in Calgary and more than half of them are sitting at this table. So maybe you guys should hang out. I mean, Ally clearly agrees with you on that. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online

broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense, and with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money.

Visit questrade.com for details. That is questrade.com. So not so long ago, self-directed investors caught wind of the power of low-cost index investing. Once just a secret for the personal finance gurus is now common knowledge for Canadians. And we are better for it. When BMO ETFs reached out to work with the podcast, I honestly was not prepared for what I was about to see. Because the lineup of ETFs has everything I was looking for. Low fees, an incredibly robust suite, and truly something for every investor. And here we are with this iconic Canadian brand in the asset management world, while folks online are regularly discussing and buying ETF tickers from asset managers in the US. Let's just look at ZEQT, for example, the BMO All Equity ETF. One single ETF,

you get globally diversified equities. So easy way for Canadians to get global stock exposure with one ticker. Keeps it simple yet incredibly low cost and effective. Very impressed with what BMO has built in their ETF business. And if you are an index investor and haven't checked out their listings, I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, the Canadian bank, is delivering these amazing ETF products. Please check out the link in the description of today's episode for full disclaimers and more information. Now, obviously, one thing you have to look at when you're looking at a REIT is their debt,

because that's the reality REITs will have high amounts of leverage some less than others and what you really want to look at in my opinion is you want to make sure it's investment grade because that will give them an advantage over any competitor in terms of getting financing at lower rates than a non-investment grade real estate investment drugs so they're rated at triple B from Moody's and this allows them to get cheaper financing, right? So that's the important, it's really important given how much Reliance Reits will be on debt. And speaking of that, 93% of their debt is on fixed terms. They have $300 million maturing next year, $600 million in 2025, and another $600 million in 2026.

The rest is due between 2027 and 2032. I think that's about like half of it. If I remember, I don't have the exact numbers, but roughly just looking at the charts when I looked at it, half of it is due in 2027 or later. Now, they have a pretty low indebtedness ratio, which is simply their debt divided by the value of their asset currently sits at 34%, which has gone up slightly in the last few years, but much below their target level. Their interest coverage ratio, something else that's really important is that it's actually 3.4 times last year compared to 2.9 times. So that's compared.

They calculated by taking adjusted EBITDA by their interest expense. And I don't think it's really alarming, but something to keep an eye on since actually I messed that up. So it's 2.9% times right now compared to 3.4 times last year. So like I said, it's not extremely alarming, but something to keep an eye because it's lower than it was in recent years. It was usually around 3.3 times. So something to keep an eye on. You don't want it to drop too low, but so far it doesn't seem like interest will be an issue anytime soon for them. Now, what people probably are interested in

here, if they're looking at Allied, is their dividend or distribution. Their dividend currently sits at 6.4%. So it's a pretty high yield, even for a REIT. But I wouldn't say it necessarily raises alarm bells here because it's on the higher side, but I think it's probably mostly just with the current sentiment for office real estate. I would just attribute that to the yield being so high because I know when you owned it, it was around 3%, right? Or 2%, 2.5%, 3%? Yeah. It's always been historically the low yielder, really high quality of assets in the REIT game. And I'm looking at a 6.5% yield today, and it's like, holy smokes. Also, I just was looking at the stock price of the units, and I was like, holy smokes, thank God I sold it. I didn't know it's gotten this bad.

No, exactly. And I mean, they have a history as well as raising their dividends on average. They raised it just shy of 3% over the past four years. And Allied currently pays out 71% of their FFO, which is very reasonable. It's actually similar to Granite, another real estate investment trend that I own. Granite obviously is a different line of business for real estate. It's industrial real estate, so definitely different here than office real estate. Their AFFO payout ratio sits at 81%, which is the same as it was last year during the first nine months of the year. So definitely what you want to see. These are two very respectable numbers for a real estate business. Now, I'll just finish here with the risk and my overall take there are some risks to be aware of so the first one is macro risk so management has said that although rents are increasing year over year for the total rental space at a good pace around four percent they are seeing negotiation take longer for new prospective tenants right now on latest call, that's what they were seeing. There's still interest, but the negotiations are taking longer because of uncertain economic conditions. And clearly, you know, potential tenants are a bit reluctant of committing too

much. So that makes complete sense. The future of work. So because of the pandemic, there's still a lot of companies that are fully working remotely. Some are using a hybrid model. Like I mentioned with their occupancy rates, they are clearly lower than they were pre-pandemic. Shopify is a good example because they decided not to pick up their option to rent at the well. Like I said, fortunately, they were able to rent it at a higher rate to another business. Now, if macro risk future of work end up taking a turn for the worse from an allied views perspective, it could severely impact their revenue

since there would be less demand and they would most likely have to accept lower rents. Interest rates is an obvious risk as well. They said in the short term, like I mentioned, shouldn't be too much of an issue, but could definitely impact their growth going forward. Geographical risk.

Let's be honest. They have 80% plus of their portfolio in Toronto and Montreal, and all of their portfolio is in Canada. So something to be aware of because you have to be comfortable with that. And there's also sector risk because tech sector is their largest sector exposure in terms of tenants. Now, my overall take is I think it's a pretty interesting play from a contrarian perspective. You only have to remember what Brookfield did with its real estate business a few years ago, and that was primarily office real estate and retail.

So two sectors that were really down at the time it was during the pandemic and they saw a lot of value. And you can definitely kind of extrapolate that to allied property REIT here where the office real estate space, it's still not loved. It's very unloved by the market. The market's still kind of thinking of the worst here. And there will be some movement on rates, right? Yeah, exactly. The movement on rates is definitely kind of weighed down on most REITs, not just, you know, office real estate, but office real estate is probably like the most unloved because of that. And of course, rising interest rates, like you

said, the future of work, potential macroeconomic downturns. I think it's going to be a rough year or two, not like rough, but probably not much growth from an allied perspective, probably occupancy rates, you know, not as high as they have been historically pre pandemic. But if those things end up being even slightly positive, Allied will be really well placed to benefits from that. And the current 6.4% dividend yield could look like a really absolute steal a few years down the line. So it's not without its risk, but it's definitely on my radar personally. And I would not be surprised that five years down the line, people look back and say, oh man, I could have gotten allied at 6.4% dividend yield if I bought it when the market was really down on real estate,

but especially office real estate. It's one of those things where if you were to purchase it, you'd look at the chart and go, oh my God, the term, like momentum wise, I might get deleted on this. Like this could be really painful, but at least you're getting paid so handsomely to wait. That's it. That's what you, it's like the one thing you can really draw on is you're getting paid extremely handsomely to wait. I like the assets. I like the business. I like historically their model also, which is you touched on this earlier. You said, okay, 2025, their 1.7 million square feet in developments are coming online. We mentioned the well, so that's probably a good chunk of that with those five towers. Okay. That's going to come online. That's a needle moving type project. And then 1 million in redevelopments. Now the redevelopment segment is what I think they're really good at, because they take, you know, older space, you know, and what they do is like, so you have like a bunch of exposed brick, like old like factory, like like Liberty Village or like on King Street in the

city. And you got it, but you keep the charm of the exterior of the building in those redevelopments. And this is the type of space that people really like working in. It's airy, it's bright, but it's also rustic. And so I'm no interior designer. I don't know what I'm talking about right now. But you know what I mean. This is the trendy and they're attracting the people they want to attract with how they do those buildings. Go on their website, on Allied's website, and you'll see their properties. They show their portfolio.

They show a gallery. It's beautiful real estate. It really is. Their assets are high quality, top tier, well-designed. People want to work there. And so I'm less worried about the future of work with these types of assets versus the old stinky line of cubicles type office buildings. I don't think those are the same moving forward in the next 10 years in terms of demand and having trouble filling those with the companies of tomorrow, not the companies of yesterday that are going to be working out of these major cities in Canada. So that's my only thought. And it's a mostly, mostly positive one. But of course,

as you said, this does not come without risks and everything that they're dealing with. But I think that those have largely been reflected in the price. I mean, this thing is very unloved. It went from like the highest multiple REIT you can find in Canada to like one of the lowest within two years. So, that just shows you what the market can do. Yeah. And management's saying the right things, right? I think they're being, you know, cautiously optimistic. They're not trying to, you know, they're being prudent. And I think that's an opportunistic if opportunities do come up. And that's, I think, what you want to see, especially when these higher rates and where there is uncertainty ahead. But they're,

you know, their financials look pretty solid and there's a lot of things to like. But again, if there weren't the risks I mentioned, you probably would not be getting it at that attractive of a price. So that's something, you know, when you want to go against the market, there's usually going to be a lot of stuff that are not, you know, there's going to be some stuff, whether it's one big overhanging things or multiple small things that the market doesn't like. I mean, we talked about TSMC and Warren Buffett, right? Starting a stake. There's a reason why he probably started a stake because it was good value in his eyes, but there's still that geopolitical risk that's pretty overhanging and pretty huge over TSMC. So, you know, if you want really good valuations,

that's usually what's going to happen. You just have to do the work to make sure that, you know, you understand whether it's a risk you're willing to live with. And also, if it's a risk that could be a death knell into the company or it's more of a short-term risk. And I personally think it will be more of a short-term risk. And I personally think it will be more of a short-term risk here for or short-term risks here for Allied. I like it. It's been a while since

we've done a segment on a truly like contrarian unloved biz. I feel like, you know, we talk about all kinds of stuff, but this feels like one of the most unloved names that we've done a semi-dive into. Because, I mean, you've got to zig one other zag. You just talked about it. Like TSMC, it's like, who's going to step up to the plate and buy this thing? Because it's one of the most important businesses in the world. And trading like it's left for dead. People hate it. It's disgusting. It's hard to own. You walk up to your portfolio manager, you're the analyst at some

investment bank or some small hedge fund, and you get laughed out of the room for suggesting it. That's the kind of stuff that gets me excited. Like, you what now? You want to buy the most unloved thing in the market? Like, laughed out of the room. Those are typically when you find maximum pain and eventually find a bottom. For these good businesses, I'm not talking about something that's, you know, on its last breath. I have never been convinced that's a good way to go to buy undervalued, unloved businesses that are in terminal and secular decline. The ones that we've mentioned today, I don't think that that's the case. No, I definitely agree with that. So, I know it was fun doing the research. It definitely took a bit more time than my normal notes, but I'll

usually do the research for companies that I'm actually interested in because it makes it more fun and interesting for me, right? If you have an actually, you know, vested interest in that, I'll disclosure I have not started a position. I am thinking about it and, you know, I'll mention it here and on Join TCI if I do start a position in Allied. Very cool. Thanks for listening to the pod today. Simone, this week was a grind, but the show must go on as it always does here,

Mondays and Thursdays. If you haven't checked out our Patreon to support the show, go to join TCI.com. It is the turn of the month, Simone, so we got to get our portfolio updates and we post those on the Patreon at join TCI.com. It is the turn of the month, Simone, so we got to get our portfolio updates. And we post those on the Patreon at join tci.com for everyone to see, provide additional disclosures.

And then you can see, you know, in a spreadsheet what we own and we keep it up to date every single month in terms of our actual portfolios. You'll also find there Simone's model portfolio for an income portfolio, as well as ability to download the spreadsheet that we use internally ourselves to keep track of our portfolios as well. And it's a very useful spreadsheet. It's quite good. It works well. It uses something called modified diets to properly calculate your returns with cash flows in and out. Because man, if you have multiple brokerage accounts, you're not going to know how you're doing unless you're centralizing it in one place or using some portfolio management tool. And the good old spreadsheet that's available on join tci.com. We hope you'll come support the show. Thank you so much for listening. We'll see you in a few days. Take care. Bye-bye. The Canadian Investor Podcast should not be taken as investment or financial

advice. Brayden and Simone may own securities or assets mentioned on this podcast. Always make sure to do your own research and due diligence before making investment or financial decisions.