We’ve got a few things to go over in this e-mail, including a new addition to the Dividend Bull List and updates to our growth model portfolios.
First, let’s go over the Dividend Bull List addition.
We added Allied Properties REIT (AP.UN) to the Dividend Bull List
There is no question that REITs are facing a complex macro environment. The rapid pace of rate hikes and inflation not only make it more expensive for REITs to grow, but they cannot raise rents fast enough to keep pace.
It is why the entire sector has underperformed over the past year. While REITs have had a great start to the year, we do not expect the difficult environment to change any time soon. Rate hikes are still coming, and the threat of a recession looms large.
Since the pandemic began, we have also been hesitant to invest in office REITs. We know that “work at home” has now become permanent among several employers and the demand for office space isn’t what it was pre-pandemic.
So why add a REIT today and an office REIT at that?
For starters, we always take the long-term view. So while the macro environment may not favour REITs today, that will eventually change and accumulating strong companies in times of weakness is a tried and true strategy.
So why Allied Properties over the others? The answer is straightforward. For starters, the company has one of the best balance sheets among all TSX-listed office REITs. While debt has been creeping up, it still has some of the best coverage ratios in the space.
Secondly, the company’s core portfolio is made up of low-cost urban workspaces. This just so happens to be the fastest-growing sub-segment of the office industry. Yes, it is a growing segment and one that is expected to expand as employers look for smaller, more efficient workspaces.
Thirdly, Allied has an attractive distribution which currently yields ~6%. Allied has put together an 11-year distribution growth streak, which is tied for the second-longest among all TSX-listed REITs. We expect that growth streak to be extended as it has a respectable FFO payout ratio of 72%.
Finally, Allied is looking to undergo a strategic shift. In January, the company announced it plans to dispose of its urban data centers (UDC) portfolio. With an IFRS value of ~$1.3B, proceeds from the sale are expected to be used to pay down debt, fuel growth in its core segment and potentially buy back shares. The expectation is that the interest saved on the sale will offset the potential earnings loss.
In our opinion, this is a positive catalyst for the company. Even if the sale doesn’t materialize, Allied is still attractively priced as it is trading at a 42% discount to Net Asset Value. Considering its financial position relative to others in the industry and its strong distribution, we believe it provides an attractive risk-to-reward ratio.
As always, if you want to learn more, click the link below to read our full report. If you have any questions, feel free to utilize the Q&A on the website.
Click here to read our full report on Allied Properties
Our Growth Model Portfolios
With the markets recovering, most of the growth model portfolios are producing strong returns over the last 1, 3, and 6-month timeframes, outperforming their benchmarks as well.
All 3 of the models had relatively poor years in 2022, but if the markets can rebound and go risk-on, we expect them to start outperforming once again.
We’ve simplified the approach of updating our portfolios overall. They are now available on our website, both income and growth, via a single page.
On that page, you’ll be able to view our portfolio commentary and the changes made in the portfolio, and you’ll be able to download either an in-depth report or a single-page tear sheet of the results of the portfolio.
We plan to update and provide commentary on our model portfolios more than we have historically, as we feel they are a relatively underutilized feature here at Premium that does provide a lot of value.
Moving forward, the overviews and tearsheets for all 6 of our model portfolios will be updated every month and available for members to download from the website.
Let’s dig into some highlights from each individual growth portfolio.
Keep in mind we have full writeups on the portfolios on the website. You can click here to access them and read more details about why we made the moves we did.
Early-Stage Growth
Quick highlights:
– We sold off our fixed income portion of the portfolio and invested the 5% proceeds into XUU.
– We trimmed profits in Alamos Gold (AGI) and Boyd Group Services (BYD).
– We took a 2.5% position in Canadian Natural Resources (CNQ) with the profits from BYD and AGI.
Mid-Stage Growth
Quick highlights:
– We trimmed positions in TFI International and Endeavour Mining.
– We took a position in CNQ with the room created from the trimmed positions above.
Late-Stage Growth
Quick highlights:
– We sold our position in Bank of Nova Scotia.
– We sold our position in Manulife Financial.
– We trimmed fixed income exposure to 30%.
– With the proceeds of the sales, we added a position in Royal Bank, Intact Financial, and Canadian National Railway. We also added to our XUU position to increase US exposure.
