Office Property Owner Allied Properties REIT AP-UN-T is looking to sell its data center portfolio. The deal will help commercial landlords pay off their debt as they reorganize for a new era of high interest rates and hybrid working.
Best known for its low-rise office buildings in the downtown core, Allied currently owns three data center properties in downtown Toronto. In a statement Thursday, the REIT said it was “considering the sale” of these properties, the largest of which is a major communications hub, He 151 Front St. West. The company values its portfolio at $1.3 billion.
Data centers, which house servers and telecommunications equipment, are not the core of Allied’s real estate portfolio and account for 16% of net operating income. But CEO Michael Emory has long been bullish on them, partly because their industry is a relatively stable industry with constant demand.
But the property market has been rocked by rising interest rates this year, with Allied units being the hardest hit, losing 40% of their value since January. Allied was an investor favorite even before the pandemic, and in February 2020 he hit an all-time high near $60. unit.
Allied Properties unit rose 2.9% to close at $26.90 on Thursday.
Allies face additional headwinds. For one thing, Canadian retail investors were the primary buyers of REITs because they loved the income they got from their monthly distributions. era of ultra-low interest rates. However, REIT distribution yields tend to hover around 5-6% per annum, which is now very close to what guaranteed investment certificates pay.
Allied is also developing real estate such as The Well in downtown Toronto, which requires a lot of cash to develop. For most of the last decade, REITs could sell new shares to finance such developments, but at the moment many prices have fallen so they can’t do that.
Prior to the announcement, Allied units were trading at a 40% discount to the REIT’s net asset value, according to TD Securities. This means that public investors are skeptical of his REIT’s stated asset value. (But determining fair value is a complex task in such chaotic markets.)
Analysts believe Allied is pursuing a sale of its data center portfolio. This is because the cash earned can be used to pay off the debt accumulated while financing the development. Investors don’t appear to be giving Allied much value for this type of property at this point, so selling properties at strong valuations, at least compared to office buildings, also doesn’t help drive Allied’s unit price. It might help you push up.
In a note to clients, Nicholas Kim, a fixed income analyst at BMO’s Nesbit Barnes, said the deal “doesn’t appear to be properly recognized and priced in the public market. It will bring great value to the portfolio.”
Allied mentioned the potential sale in a statement, but Emory broadly discussed the joint venture idea during the REIT’s quarterly conference call earlier this month, but didn’t go into detail. It is also possible to sell half of the data center to a partner and co-manage the data center. Allied declined to comment for this article.
Allied purchased 151 Front St. West for $192 million in 2009, shortly after the REIT announced plans to transform another building, 905 King St. West, in another prestigious data center a few minutes away. The two buildings will be connected underground with fiber optic cables.
151 Front’s hub is a so-called “colocation” space, with tenants including Bell, Rogers and Telus simultaneously. Despite the fierce competition among these players, anyone sending email from Bell’s network, for example, could use Rogers’ or another competitor’s network to deliver the message, so that the wire could be used. Must be connected. This takes place in the “Meet Me Room”. This room, while not the size of your average master bedroom, is chock-full of cables and equipment essential to Canadian communications, with video cameras watching every square inch of him.
At the time, Allied recognized another advantage of having a downtown data center. A number of condominiums and office towers have been built, and their proximity has been beneficial to carriers. Suburban perimeter routing stations that slow down data transfers.