When interest rates are rising, it’s usually not the time to buy dividend stocks that are sensitive to rates. In Canada, real estate investment trusts (REITs) and utilities have been under pressure since the Bank of Canada started hiking the borrowing cost.
But that pullback has created some opportunities for long-term investors who are waiting for their favourite stocks to hit the bottom. In the REIT space, I particularly like the most widely held names: Allied Properties Real Estate Investment (TSX: AP.UN) and RioCan Real Estate Investment Trust (TSX: REI.UN).
Today, let’s take a deeper look at Allied Properties to see if it offers a good bargain at the current price level.
Allied Properties
Allied focuses on the office space in Canada’s biggest cities. It transforms light industrial structures into modern office facilities, featuring high ceilings, natural light, brick, and hardwood floors. Office spaces in Toronto and Montreal account for more than half of its portfolio.
Its clients include some of the top business brands, such as BCE, Goodlife Fitness, and Shopify Inc. Allied is well positioned to take advantage of the booming demand for leasing the office space in Canada’s largest markets.
In a latest interview with Bloomberg News, Allied CEO Michael Emory disclosed that Allied is planning a development worth $1-billion that will include the office space to meet the growing demand from the city’s technology companies.
In this development plan, spanning over the next five years, Allied will commit a large chunk of that capital to The Well and 1.6 million square feet of office and retail space in Toronto, targeted for completion in 2021. RioCan, Canada’s largest retail REIT, is a partner with Allied on this venture.
Focusing on the Greater Toronto Area is a strategy that is certainly going to pay off. The downtown vacancy rate in Toronto was just 2.5% for the first quarter of 2018 — a historic low for the area, according to Avison Young.
Allied’s focus on the office space is helping its stock to buck the general weakness in rate-sensitive stocks. Trading at $40.71, its stock is still up ~11% in the past 12 months when compared with a 1% decline in the iShares S&P/TSX Capped REIT Index ETF.
And if you look over the longer horizon, Allied stock continues to outperform its peers, rising ~19% in the past five years, when RioCan, for example, fell 8%. With an annual dividend yield of about 3.77%, Allied pays a monthly distribution of $0.13 a share.
The bottom line
Allied Properties is a good dividend stock if you plan to add a top real estate name to your portfolio of equities and bonds. This REIT will probably the first to rebound when the rate cycle turns due to its strong portfolio and strategy.
