Shares of Allied Properties Real Estate Investment (TSX: AP.UN) have been underperforming the broader market lately. After losing nearly 42% of its value last year, Allied Properties REIT (real estate investment trust) stock has extended its losses by about 37% in 2023 so far to currently trade at $16.25 per share, cutting its market cap to $2.1 billion. By comparison, the main TSX index now trades with 1.4% year-to-date losses.
While this selloff in Allied Properties REIT stock has made investors worried about their investments, the recent declines have made its annualized dividend yield of about 11% look impressive. But does this high dividend yield alone make its stock worth buying on the dip? Before discussing that, let’s take a closer look at the main factors that were responsible for driving its share prices lower in the last few quarters.
Allied Properties REIT stock
If you don’t know it already, Allied Properties REIT is based in Toronto and owns and operates a high-quality portfolio of distinctive urban workspace in several major cities in Canada. At the end of June 2023, Ubisoft Divertissements, Google Canada, and Shopify were three of the top names in its tenants list based on the percentage of its total rental revenue and gross leasable area.
In 2022, the REIT’s adjusted rental revenue of the continuing operations rose about 10% YoY (year over year) to $519.5 million. Still, its net income for the year fell sharply, which could be one of the key reasons why its share prices underperformed the broader market by a wide margin in 2022.
Overall, growing macroeconomic challenges amid rapidly rising interest rates and high inflationary pressures have dimmed the growth outlook of most tech firms in the last year. This factor also worried Allied’s investors as some large tech companies are among its tenant base, further intensifying the selloff in its share prices.
Does its 11% dividend yield make Allied stock look attractive?
While Allied’s 11% annualized dividend yield at the current market price might look very attractive at first glance, investors shouldn’t make final investment decisions solely by looking at a stock’s dividend yield. This is because a high dividend yield usually doesn’t tell you anything about the sustainability or safety of a stock’s dividend payments.
It’s important to note that Allied Properties REIT recently completed the sale of its UDC (urban data centre) portfolio in Downtown Toronto in a deal worth $1.35 billion. Besides improving its balance sheet by reducing debt, Allied plans to use the proceeds from this sale of its UDC portfolio to fund its development and upgrade activities in the next year.
Although prolonged macroeconomic weakness might continue to affect Allied Properties REIT’s short-term growth outlook and keep its share prices volatile in the coming months, its long-term fundamental outlook could improve with its increasing focus on its urban workspace portfolio after the recent sale of its UDC portfolio, which can help its share prices recover fast in the coming years.
Given Allied’s proactive financial management, as apparent from its recent actions of repaying debts and allocating funds for future development and upgrades, Allied stock, besides a high dividend yield, also offers potential for long-term capital appreciation.
Interestingly, Allied distributes its dividend payouts every month, making its stock look even more attractive for income investors seeking to earn reliable monthly passive income. Notably, Allied will announce its latest quarterly results later this week on October 25, which could temporarily increase the volatility in its stock.
