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Michael Emory is president of Allied Properties.Tibor Kolley/The Globe and Mail

Allied Properties Real Estate Investment Trust

Tuesday's close: $34, down 2 cents, or 0.05 per cent

52-week trading range: $27.10 to $35.45 a unit

Annual distribution: $1.36 a unit for a yield of 4 per cent

Analysts' ratings: There were 8 buys, 2 holds and no sells, according to Bloomberg data. Target prices ranged from $34.25 a share as estimated by GMP Securities analyst Jimmy Khing Shan to $37.50 a share by Raymond James analyst Ken Avalos.

Recent history: Shares of the Toronto-based office REIT that focuses on urban brick and beam buildings have gained 28 per cent (including distributions) over the past year. The price of the REIT is still off its 52-week high in February when its units came under some pressure because of an equity offering to help fund the purchase of a $110-million office property in Calgary. Allied Properties has a big chunk of its portfolio in Toronto, but it has been making acquisitions elsewhere that can add to cash flow per unit. One exception has been a joint-venture deal negotiated last year to buy a 6.5-acre downtown Toronto site on which The Globe and Mail headquarters is located. RioCan Real Estate Investment Trust and Allied Properties each hold about a 40-per-cent stake in this property that will be used to create a mixed-use retail, office and residential development. Last week, Allied Properties reported first-quarter results with funds from operations (FFO) - a key financial measure in the real estate industry - rising 2.3 per cent to 45 cents a unit from a year earlier.

Manager insight: The recent pullback in the price of Allied Properties units provides a good entry point for investors seeking a combination of growth and income, says Derek Warren, a portfolio manager with Morguard Financial Corp.

"I would expect in the second half of this year that you will see the distribution rise again," said Mr. Warren, who has been buying more units in the REIT since last fall for his portfolios. "The payout ratio right now is about 70 per cent."

This office REIT can generate cash flow growth by doing everything from increasing rents to finding better uses for its properties through renovations and additions or developing new properties, he said. "It has been able to not only increase the cash flow coming from their existing properties, but also reduce its overall debt at the same time."

Allied Properties has been able to cut its debt partly by issuing equity like it did in February when it raised about $126-million, he said. "That put the REIT under pressure but it solidified its balance sheet...Their debt-to-total capitalization is 35 per cent versus mostly 50 per cent for its peers."

The REIT now trades at a slight premium to the consensus net asset value (NAV) estimate of $31 a unit, but it deserves at least a 15-per-cent premium, he suggested. His own 12-month target is $38 a unit.

Allied Properties should trade at a "significant premium to the value of its properties as management has consistently found ways to increase their value through strategic leasing as well as redevelopment opportunities," Mr. Warren said. "We also like the growth opportunities as they are acquiring properties in Calgary. We feel they will be able to do in Calgary what they have already done in Montreal and Toronto."

This office REIT has a lower dividend yield than some income-oriented investors would like, but the total return potential, which includes capital gains, can be "much greater" with lower volatility than other investments, Mr. Warren noted.

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