Allied Properties vs SmartCentres: Which REIT Wins?

In the dynamic landscape of Canadian Real Estate Investment Trusts (REITs), two firms – Allied Properties vs SmartCentres – have drawn significant investor attention.

Allied Properties, known for its distinctive urban workspaces and “brick and beam” buildings, contrasts with SmartCentres, which boasts a substantial retail portfolio across Canada, often anchored by Walmart stores. Both REITs offer compelling investment opportunities but differ significantly in their approaches.

This post will compare Allied Properties and SmartCentres to determine which may be a better investment.

Valuation and future growth potential are key factors in this comparison. Currently, Allied Properties appears more favorably valued with lower leverage, payout ratios, and a higher yield. However, negative sentiment around office space affects this assessment.

Redevelopment potential also plays a crucial role. SmartCentres benefits from its vast land holdings and the ability to repurpose properties for higher-density uses. Meanwhile, Allied Properties’ strategic urban locations provide their own advantages.

Interest rates are another vital consideration. Since REITs generally carry debt, fluctuations in interest rates can impact borrowing costs and overall value.

Both REITs face challenges: Allied Properties is affected by the shift towards remote work, while SmartCentres contends with the rise of e-commerce. Ultimately, the choice between Allied Properties and SmartCentres depends on individual investment goals, risk tolerance, and views on the future of office and retail spaces.

Join us as we explore these factors further, providing insights to navigate the complex REIT landscape.

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Allied Properties Real Estate Investment Trust

Allied Properties holds a leading portfolio of unique urban workspaces in major Canadian cities. The company offers unique office environments including many in historic “brick and beam” buildings. Allied’s office portfolio is focused on the highest-grade urban core offices.

SmartCentres Real Estate Investment Trust

SmartCentres holds a diverse retail portfolio that spans Canada including over 180 properties sitting on more than 3,500 acres of land. Many of SmartCentres properties are anchored by a Walmart. The company is actively diversifying its portfolio to include more work-live spaces including residential developments.

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Financial Comparison

	Allied Properties	SmartCentres
Leverage Ratio*	55%	73%
AFFO Yield	9.93%	7.74%
AFFO Payout Ratio	84%	98%
Distribution Yield	8.36%	7.75%

*Leverage Ratio was calculated by dividing the market cap of the REIT by the debt outstanding. In this way, a higher value means a lower level of leverage and more capital compared to debt outstanding.

The table above shows that the valuation of Allied Properties is currently more favourable compared to SmartCentres. This is evidenced by a lower payout ratio, and a higher yield. However, the market cap of Allied is currently quite low compared to its assets and debt outstanding. These valuations incorporate sentiment about the future, which is currently quite bearish on office buildings as will be explained further.

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Redevelopment Potential

A REIT’s ability to re-develop their property portfolio is a key factor to determining their ability to grow over time. Especially as times change, real estate trusts need to adapt to new trends.

SmartCentres has the edge compared to Allied Properties when it comes to re-development potential. One benefit for SmartCentres is their large land footprint. Many of their current shopping centres are suburban and include vacant land and large parking lots. These properties can be more easily converted to higher density uses including residential. In fact, investors in the GTA may have noticed towers spouting up at highway 7 and the 400 in Vaughan where SmartCentres is in a multi-year process of redeveloping land surrounding the Vaughan TTC subway extension.

Allied Properties on the other hand does not has as much redevelopment potential. The land Allied owns is smaller in size but located in downtown cores. This makes re-development tougher from a regulatory perspective. But, when Allied Properties can re-develop, their properties are situated on more valuable locations that will likely have higher density.

Expertise is another factor to consider about a REIT’s ability to re-develop their portfolio. SmartCentres is building a greater expertise in residential development. However, Allied Properties lacks the same capacity internally when it comes to residential developments.

Outlook for Interest Rates

The outlook for interest rates plays a critical role when conducting financial analysis of a Real Estate Investment Trust (REIT) for several reasons. Many REITs carry some debt. So, as interest rates rise or fall, it will impact the cost of this debt. Also, real estate is valued based on capitalization rates. When interest rates rise, the value of many REITs will fall as investors adjust to alternatives. This dynamic is similar to how bond values fall as interest rates rise.

In summer 2023, investors expect interest rates to rise further. This is one reason why REIT values have been falling. The REITs with the highest debt levels are the most exposed to higher interest rates. Since Allied Properties carries less debt relative to assets & equity compared to SmartCentres, this will make SmartCentres more vulnerable to higher interest rates.

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Allied Properties vs SmartCentres: Existential Threats

Both Allied Properties and SmartCentres face existential threats to their business. For Allied Properties it’s the trend towards working from home (“WFH”). A greater portion of office workers are spending a greater share of their workday away from their office. This trend accelerated during the covid pandemic and looks like it will continue. The result is less demand for office space as vacancy rates for office has risen.

SmartCentres is also under threat from online shopping and e-commerce. This means that more shoppers will buy from retailers like Amazon who do not offer a “brick and mortar” shopping experience. The trend in retail is that online shopping continues to grow. This may mean less demand for retail shopping space in the future.

Allied Properties vs SmartCentres: Which is a Better Investment?

To decide whether Allied Properties or SmartCentre is the better investment, start by considering your investment goals and risk tolerance. Both companies offer high yields and stable cash flows, but they face distinct challenges. SmartCentre has higher financial leverage but a lower yield, which might make Allied Properties seem more attractive. However, the market sentiment towards office buildings is currently negative, leading to the undervaluation of Allied Properties.

While the trend towards remote work is likely to continue, it doesn’t necessarily spell the end for office work. Many businesses and employees still value the benefits of working in physical office spaces, such as the nature of the work and social interactions.

Despite this, remote work has made it harder for employers to motivate and assess employees, making physical office presence more valuable. Eventually, the office market will stabilize when supply and demand are better aligned. Currently, however, tenants have the upper hand, with around 25% of office buildings in Toronto vacant, which contributes to Allied Properties’ low valuation.

For investors willing to take on more risk or who believe the decline in office work is overstated, Allied Properties might be a worthwhile consideration. Conversely, if you seek higher yields with more stability, SmartCentre could be the better option.

Allied Properties vs SmartCentres: Key Takeaways

In conclusion, the choice between Allied Properties and SmartCentres as a potential investment depends on a multifaceted consideration of the current market dynamics, personal risk tolerance, and individual investment goals. The decision is not simply a matter of comparing numbers; it also includes reading into broader economic and social trends, from interest rates to shifting work patterns.

Allied Properties’ strong urban portfolio presents a unique value proposition, particularly for those who believe that the current bearish sentiment around office spaces is temporary. Their higher yield, lower debt, and prime locations make them a potentially lucrative option for those with a higher risk appetite or a long-term outlook.

SmartCentres, on the other hand, offers stability with its diverse retail portfolio, strong ties with retail giant Walmart, and a clear roadmap for expansion and redevelopment. Investors seeking steadier returns and less risk may find SmartCentres more appealing, despite the challenges posed by the rise of e-commerce. Navigating the ever-evolving landscape of REITs involves a delicate balance of careful financial analysis, keen market intuition, and understanding the socio-economic trends shaping our world. Both Allied Properties and SmartCentres offer intriguing prospects and their own sets of challenges. Ultimately, the superior investment will hinge on individual perspectives on the future of office work and retail spaces, as well as the ability to weather the uncertainties that lie ahead. Whatever your decision, the journey of investing in REITs promises to be as dynamic and fascinating as the market itself.

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