Workplace actual property proprietor Allied Properties REIT AP-UN-T is contemplating a sale of its knowledge heart portfolio, a deal that might assist the industrial landlord pay down debt because it prepares for a brand new period of upper rates of interest and hybrids.
Finest recognized for its low-rise downtown workplace buildings, Allied now owns three knowledge facilities in downtown Toronto. In an announcement Thursday, the REIT stated it’s “exploring the sale” of these properties, the biggest of which is 151 Entrance St. West, a big telecommunications heart. The corporate values the portfolio at $1.3 billion.
Information facilities, which home servers and telecommunications tools, usually are not the core of Allied’s portfolio – they account for 16 p.c of internet working revenue. However the chief govt, Michael Emory, has lengthy been sort to them, partially as a result of their trade is comparatively secure and at all times in demand.
Nonetheless, the property market has been battered this yr by rising rates of interest and Allied models have been among the many worst hit, dropping round 40 per cent of their worth since January. Allied was adored by buyers earlier than the pandemic, however its models hit a report excessive close to $60 in February 2020. Extra just lately, fears of weaker demand for workplace house, mixed with greater rates of interest, which make mortgages dearer, have hammered the corporate’s models.
Allied Properties shares rose 2.9 p.c to $26.90 on Thursday.
Allied has confronted rising headwinds. For one factor, retail buyers in Canada was large patrons of REITs as a result of they beloved the revenue that month-to-month payouts supplied at a time when rates of interest had been tremendous low. Nonetheless, returns on REIT distributions tended to hover round 5 to six p.c yearly — and that stage is now very near what assured funding trusts pay.
Allied has additionally been growing properties, similar to The Properly in downtown Toronto, and growth requires some huge cash. For a lot of the final decade, REITs had been in a position to promote new shares to fund such developments, however with so lots of their unit costs down, they cannot in the meanwhile.
Previous to the announcement, Allied’s models had been buying and selling at a 40 p.c low cost to the REIT’s internet asset worth, in keeping with TD Securities. Meaning public buyers are skeptical of REITs’ said property values. (Figuring out honest worth, nonetheless, is a posh job in such a chaotic market.)
Analysts imagine Allied is pursuing the sale of its knowledge heart portfolio as a result of the cash raised can be utilized to pay down debt accrued whereas financing the event. Promoting the properties at sturdy valuations – at the least relative to workplace buildings – may additionally assist enhance Allied’s unit worth, as buyers presently do not appear to worth Allied a lot for such a property.
A transaction “would crystallize vital worth in Allied’s city knowledge heart portfolio that we imagine is just not being acknowledged/priced appropriately within the mainstream markets,” BMO Nesbitt Burns analyst Nicholas Kim wrote in a word to purchasers.
Whereas Allied talked about a potential sale in its assertion, Emory mentioned the three way partnership thought throughout the REIT’s quarterly convention name earlier this month, with out going into element. It’s potential that Allied may promote half of the portfolio to a accomplice after which handle the info facilities collectively. Allied declined to remark for this story.
Allied bought 151 Entrance St. West for $192 million in 2009, and shortly after the REIT unveiled a plan to transform its different constructing, 905 King St. West, minutes away, to a different top-notch knowledge heart. The 2 buildings can be interconnected underground by optical fiber.
The middle at 151 Entrance is what’s often known as a “co-location” house, and tenants have concurrently included Bell, Rogers and Telus. Regardless of fierce competitors between these gamers, their wires should join in order that anybody sending e mail from Bell’s community can have their message despatched to somebody utilizing Rogers or one other competitor. This takes place within the “meet-me room” – which isn’t any greater than the typical double bed room, however full of cables and tools so important to Canadian communications that video cameras monitor each sq. inch.
On the time, Allied noticed one other profit to having knowledge facilities downtown: Various residential and workplace towers had been being constructed, and their proximity would assist carriers, as a result of they might supply quick Web connections by connecting the towers on to the hubs, slightly however utilizing peripheral routers within the suburbs that decelerate knowledge switch.