Should You Buy Allied Properties Stock for its 9.5% Yield?

Allied Properties is a REIT that offers you a tasty dividend yield while trading at a compelling valuation.

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Rising interest rates in the past two years have dragged shares of companies part of capital-intensive sectors such as real estate and utilities significantly lower. One such real estate investment trust (REIT) is Allied Properties (TSX:AP.UN), which currently trades 69% below all-time highs.

However, the drawdown in share prices also increases the yields of dividend-paying companies as the two are inversely related. Right now, Allied Properties offers you a tasty dividend yield of 9.5%, making it attractive to income-seeking investors. So, let’s see if you should buy Allied Properties stock for its elevated dividend yield right now.

An overview of Allied Properties

Valued at $2.4 billion by market cap, Allied Properties owns, manages, and develops urban workspaces in major Canadian cities. It is one of the fastest-growing REITs in Canada, increasing its total assets from $157 million in 2003 to $11.3 billion in the third quarter (Q3) of 2023, indicating a compound annual growth rate of 24.4%.

A widening base of cash-generating properties has allowed the REIT to increase its distributions from $1.14 per share in 2004 to $1.80 per share in Q3 of 2023. Despite the massive pullback in share prices, the REIT has outpaced the TSX decade in the past two decades, delivering annual returns of close to 9% in this period.

With a portfolio of 200 rental properties valued at $8.6 billion and spanning 14.8 million square feet, Allied Properties has a major presence in cities such as Toronto, Montreal, Calgary, and Vancouver.

Some of its tenants include tech giants such as Ubisoft, Alphabet’s Google, and Shopify. The top 10 tenants now account for 18.7% of rental revenue for Allied Properties, much lower than the 49% in 2003.

How did Allied Properties perform in Q3 of 2023?

Allied Properties reported funds from operations of $0.598 per unit, up from $0.588 per unit in the year-ago quarter. Its adjusted funds from operations also rose from $0.536 per unit to $0.545 per unit in this period. Given a quarterly dividend of $0.45 per unit, the payout ratio stands at 82.6%, which is not too high, as it provides the REIT with the flexibility to repay the balance sheet and boost its liquidity position.

Allied Properties emphasized its average in-place rent per occupied square foot continued to rise in Q3, reaching $23.78. It increased rents on renewals between 3.8% and 10%, showcasing the company’s pricing power.

Allied Properties also closed the sales of its Urban Data Center portfolio for $1.35 billion in Q3 of 2023. It used $755 million to repay amounts drawn on its unsecured credit facility and has allocated $200 million to repay a secured promissory note by the end of 2023.

It will use roughly $50 million to repay its remaining first mortgages on fully owned properties in 2024, and the balance will be used to fund the development and upgradation of properties in the near term.

Priced at nine times forward earnings, Allied Properties is not too expensive, given its high dividend yield and sustainable payout ratio. Analysts remain bullish and expect shares to surge over 10% in the next 12 months.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Shopify. The Motley Fool recommends Alphabet. The Motley Fool has a disclosure policy.

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