Introduction:
In this report I am working for Allied Properties REIT, and will be looking into a future investment in a commercial property.
The purpose of this report is to investigate a local commercial property on behalf of the investment group to determine whether or not it would a good property to invest in and keep in the company’s portfolio and if it would give a proper return. Sections of this report include: information about the firm, information about the property, the recommendation for the investment company about the property, and an appendix. This report includes details about the company and what types of properties they invest in as well as an analysis on why or why not the firm should invest.
The Firm:
Allied Properties REIT is a real estate investment trust that is publically traded on the Toronto Stock Exchange (AP.UN) and has been a leading firm in real estate investment since the early 1990’s. Allied Properties REIT has built their reputation by continuously being at the forefront of urban intensification and modernization. They operate out of Canada’s major cities, with their head office being located in downtown Toronto. Other cities they operate out of include: Montreal, Calgary, Ottawa, and Vancouver. Investing in commercial real estate is Allied’s main business activity, resulting in the management and ownership of just under 4 million square feet in Toronto alone. As of 2018, their compound annual growth rate on total assets is 29%, there is a present value of 16.7% average annual total return, and total assets as of the second quarter in 2018 is 6.1B. Currently the company owns 146 distinctive urban properties across Canada, comprising of almost 11 million square feet in Canada (Investors, Allied Properties REIT, n.d).
Allied believes in a strong modern investment strategy that has helped them acquire various properties throughout the year. “Allied’s focus has been on creating workspaces that facilitate creativity and innovation, and are a vital part of the urban fabric, and contribute meaningfully to a sense of community” (Investors, Allied Properties REIT, n.d). Allied prefers to delve into the rising urban real estate market, primarily dealing with properties that can be turned into modern office spaces for various companies. The company also meets the wants and needs of leading business professionals, who are now moving towards urban cities as the focal point of their business, by providing them with these modern offices that help their businesses proper. Through various years in this industry, Allied has concluded what the newest era of business professionals are looking for in a property, allowing them to be a more successful REIT. Professionals are now looking for buildings that allow businesses to apply TAMI characteristics: Tech, Advertising, Media, and Info (Investors, Allied Properties REIT, n.d). They also prefer buildings that are made with exposed brick and beam, and an abundance of natural light and fresh air.
Although the company’s main focus is on office space, their portfolio indicates investments in other commercial real estate properties. The break down as of October 2018 includes: 70.3% office space, 8.2% retail, 16.6% urban data centres, and 4.9% parking (Company, Allied Properties REIT, n.d).
Allied has also begun investing in urban data centres, creating a large market for tech companies. These data centres are offices and warehouses that house computing facilities like servers, routers, and houses supporting components for these companies (Company, Allied Properties REIT, n.d). These are properties that are rented and sold to big data companies such as Rogers and Bell Media. Placing these data centres in the core of downtown cities have allowed for Canada to become a central core for global connectivity. These data centres allow Allied to become a leading figure in this market allowing these companies to create an environment where they can foster creativity and connectivity.
The three main criteria Allied uses for investment are: easy access, spirit of community, and areas of attraction (Investors, Allied Properties REIT, n.d).
Allied prides itself on being a real estate investment firm whose main goal continues to be placing modern spaces in urban cities. Thus, having an ease of access to downtown cores and to areas close to downtown of major cities is a vital part of the company. As stated before, many young business professionals are leaving their rural and semi-modern areas to transfer to the big city. However, these modern cities are mainly centered in downtown areas that can only be accessed through transports such as public transit and bicycle routes. This adds to the idea of Allied being a modern investment company; with the additional influx of professionals into major cities, many prefer public transit and environmentally friendly options of transit. Therefore, having an ease of access to these properties is a key value Allied believes it’s properties should have.
The presence of a strong community can help make or break the atmosphere of a property. If there are no surrounding businesses, parks, restaurants, etc businesses can feel trapped and isolated. Therefore, making a property look unappealing. Thus, Allied believes a strong community presence can help not only the business thrive but the property as well. “Our community foster and contribute to the vibrancy of urban neighbourhoods and offer unique goods and services to our workplace occupiers” (Company, Allied Investment REIT, n.d).
Due to branding themselves as a modern and urban company, it is important that the properties that Allied represents are placed and built in urban and modern areas as well. Thus, Allied focuses on investing in properties that are located in major cities and are surrounded by the presence of booming commerce, entertainment, and business (Investors, Allied Properties REIT, n.d). This helps the property reflect the aspects of modernization and intensification while attracting leading business professionals in the area.
The leading factor that makes Allied Properties REIT a competitor in the real estate investment market is their acknowledgement of the importance if experience-focused service. The company believes that providing the needs and wants to their occupiers will allow for their occupiers to enjoy their property and allows for better operation business wise. “We have always made it our mission to contribute to the vitality of Canada’s dynamic neighbourhoods through thoughtful design, customer centred property management, and a focus on high-quality workspace” (Investors, Allied Properties REIT, n.d).
The Property:
The property that I have chosen to be part of Allied Properties’ investment portfolio is a three storey commercial building located on Bathurst and Dundas St W, in the Trinity Bellwoods Community. The property is six years old, making it a relatively new property to be invested in. The building is currently listed at $2,995,000 with approximately 3091 square feet. The zoning code for the property is CR2.5(c1.0;r2.0). Thus, meaning the actual zoning is a Commercial Residential Property, with a max commercial FSI of 1.0 and a max residential FSI of 2.0. The cap rate of this property is approximately 4.6% (using data from the TREB commercial realty watch, quarter 2 2018). This is considered a good cap rate for a commercial piece of property, due to the fact that in Toronto the average cap rate for multi-unit properties averages between 3-5%.
The area is very close to many public services, including transportation, other businesses, restaurants, parks, etc. There are various streetcars that run along this neighbourhood, including the 505 Dundas streetcar which provides a 15 min ride to the core of downtown Toronto. There are various streetcar stops located near the building, creating easy access for the inhabitants of the building. The closest streetcar stop being a one minute walk from the building. Various night busses also run throughout the neighbourhood allowing for those who work late into the night to still have an option to get home. Although, the location is more accessible through TTC and public transit, it is not as accessible by car. There is still access to the Don Valley Parkway and the Gardiner Expressway through Lakeshore, however it is more of a hassle for the inhabitants of the building. The area is covered in almost 15+ bike friendly roads, many of them running through Trinity Bellwoods Park which concludes to an approximate two min bike ride to the building. The infamous Trinity Bellwoods Park is in very close proximity to the building, being only 0.34 km away. The building is also in close proximity to the famous Kensington Market, a very popular tourist attraction, becoming a booming area for young businesses to set up shop.
These are all important factors for the company to consider when investing because it shows that the area is appealing to those whose preferred method of travel includes the use of public transit and bike routes. Having an office space that is in close proximity to restaurants, parks, and malls also gives the property a certain appeal. It shows potential buyers that this property is multi-functional allowing business people the access they need to these services.
The property is split into a three storey building. Currently, the main floor and the basement of the property is being leased as a flagship store to an international retailer, an OVO flagship store. The other two storeys include open space concept area, a green roof, a secure carport off lane, parking spaces, and high ceilings.
The Recommendation:
Based on the investment strategy and the preexisting properties the firm is already invested in, I recommend the firm should invest in this property.
Although Allied Properties have invested in many buildings throughout Toronto, they have failed to invest in a building within this area. The closest Allied owned building to this area is on Richmond St E and Bathurst, which is a office building. Therefore, if Allied were to invest in this property they would be expanding their portfolio in untouched areas. This can be considered a risk to most companies, but Allied can play this to their advantage by implementing some of the more recent goals they have acquired to this property. Allied projects that in five years their investment strategy will change and will now include: the purchase of under utilized land, additional rental area with low land cost, and high return. If they were to buy this property and implement these new investment goals they can decide whether or not these goals will be sufficient enough to help the company in the next few years.
The most important aspect as to why the company should invest in the property is because this property matches most of the investment strategies outlined by Allied Properties REIT. As stated before, easy access to the property is a key factor to deciding whether or not the firm is willing to invest. The building is situated in an area surrounded by various transit and cycling options, making it an attractive asset to have within the firm. The location of the building provides a quick 15 min bus ride to the downtown core of Toronto, a very important aspect for the firm to consider.
The fact that the building is so close to downtown Toronto, also plays into the idea that Allied prefers properties with attractive areas. Being close to downtown allows inhabitants of the building to remain close, but also secluded from the noise and craziness that comes with being downtown. The area is also close to many small businesses and neighbouring parks as well, allowing it to be a space where employees can enjoy the day to day of their job without feeling too isolated. The community of the area is also one home to many small businesses becoming increasingly popular giving the area an aura of attraction.
The dimensions and the characteristics of the building also make it one worth investing in. The open spaces and green roof will prove to be an attractive aspect to future occupiers. The upstairs areas have functional bathrooms and a kitchen space which are factors that many occupants find redeeming.
Although I believe this property to be one the firm should invest in, there are some deficiencies to the property. However, I do believe these deficiencies to be minor, and they can be easily fixed by Allied Properties REIT.
One of the deficiencies to the property is that the main floor and basement of the property is currently being leased out as a flagship store. Although there is no concrete information as to when that lease is up, when it is, Allied Properties REIT can create a new lease agreement with this company. This would provide additional benefit and revenue for the company, since the flagship store is very popular in Toronto. This may cause problems with the store and the occupants of the current two storey space that is available. However, I do believe that if certain rules are met and kept this should not be a problem. If Allied decides not to renew the lease with the flag ship this can also prove beneficial to them as they can use this space and rent it out the full building to any potential occupants. This would be the better option in my opinion, due to the fact most businesses would prefer the entire building to themselves.
Another deficiency to their property is that it is currently classified as a retail property. Allied Properties REIT mainly invests in modernized office space, due to their interest in creating a modern space for the young business professional. 70.3% of the firm’s investment is in office space while only 8.2% is in retail (Investors, Allied Properties REIT, n.d). Therefore, there is not a large interest for them to invest into this property. However, I believe it is still a good investment for the firm. If they are insistent in keeping a large portion of this investment in office space, they can rent out the other storey’s available as office space. The floor layout and the atmosphere created within these two storey’s allows for the space to be adapted and created into one that can provide with a modern twist to a regular office space. This would be the more favourable option due to the structure of the building; exposed brick and beam and abundance of natural light and fresh air are all aspects of this property, characteristics of most Allied office spaces.
Although Allied can take this space and convert it into an office workspace, I believe they should leave it as retail area and instead lease the two storey’s out to another store. Although Allied doesn’t invest in retail as much, they still do have retail properties within their portfolio. They are not creating a balance in their portfolio between retail and office spaces, therefore investing in this property provides them with some benefit. Not only will this create diversity throughout their portfolio, but it will show investors that the company is willing to take risks in the land they invest in. Due to the nature of the community and the surrounding businesses, I believe the company should retain the building as retail space and lease it out to smaller businesses such as; a tattoo parlor, a game cafe, or a salon. These would all be viable options for this space and would increase the popularity of the community. With the flagship already a prominent space for business, this would draw consumers to the other businesses that are in the building as well.
Another factor to consider that is attractive to Allied is the firm’s cap rate. The cap rate of the firm is currently at 4.6%. The average cap rate for the top ten urban workspaces that Allied has current investments in are 5.6%, with two of those properties being located in Toronto, both with cap rates of 4.25% and 4.75% (Investors, Allied Properties REIT, n.d). Therefore, this property falls within the average range for the current cap rates the firm has already invested in, revealing that the property would not be too much of a risk financially for the firm to have. This cap rate is considered to be a low cap rate, meaning that this would prove to be a low risk investment for the firm. Given the current deficiencies that I have outlined above, the fact that this would be a low risk despite these deficiencies prove that the firm should invest in the company.
In conclusion, I personally feel that this property would be a successful investment for Allied Properties REIT to consider. The main reasons for the company to invest in this property include: the fact that it covers the main strategic goals the company has outlined for all it’s investments, proves to be beneficial for the company in the future, and it allows the firm to expand its portfolio. These attributes outweigh the unfavourable characteristics of the property the company may find within this property, allowing for them to see the investment opportunity created. Overall, Allied Properties REIT invests in properties with similar attributes, making it a successful investment for the company.