Investors looking to boost the passive income generation potential of their investment portfolios should enjoy some rich pickings. Canadian dividend stocks remain attractive long-term investments while bloated distribution yields on Canadian Real Estate Investment Trusts (REITs) look so inviting going into 2024. One intriguing opportunity that seems ripe is Allied Properties Real Estate Investment Trust (TSX:AP.UN), which pays a well-covered monthly distribution that should yield 9% for the next year.
Allied Properties REIT’s units are selling cheap right now. Down 22% so far this year, and trading 59% off recent three-year highs recorded just before the rate hikes of 2022. The trust’s beaten-down units carry an intrinsic value double what investors pay to get them today. Office real estate is simply and generally out of the market’s favour going into 2024 – even as the top monthly dividend stock pays out a special distribution for December, and maintains a healthy regular monthly distribution rate.
For what it’s worth, unlike True North Commercial Real Estate Investment Trust, which unfortunately cut its distribution (just as this writer feared back in January), Allied Properties REIT looks vastly different from its office REIT peers. Let’s take a closer look at why one may buy the 9% yield for monthly passive income in 2024.
Allied Properties REIT to pay a juicy distribution yield in 2024
Allied Properties REIT holds an $11.3 billion portfolio of top-quality urban office properties comprising more than 14.8 million square feet of gross leasable area across Canadian cities. In response to declining office space demand post COVID-19, the trust adopted a mission to serve technology firms’ workspace requirements and unlock value through mixed-use intensification. The strategy could work, and the REIT’s high 9% distribution yield looks intact.
The REIT reported 3.6% growth in adjusted funds from operations (AFFO) for the third quarter of 2023 and a 90 basis-points rise in same property net operating income (NOI). The average in-place net rent per occupied square foot reportedly continued to rise this year to $23.78 by September 30, 2023.
Management revealed strong confidence in leasing activity during the past quarter after signing new leases at rates 10% above base rents for the third quarter of 2023. The portfolio could have 7.4% of leases expire in 2024, and another 9.7% of leases need renegotiation in 2025. The REIT’s fortunes could turn favourable if recent leasing activity sustains into the new year.
Further, the trust’s $1.2 billion portfolio of properties under development is already more than 81% pre-leased to help sustain the trust’s distributions in the future.
Speaking of distribution safety, Allied Properties REIT paid out 82.6% of its recurring AFFO during the first three quarters of 2023. The distribution is much safer going into the new year, and could have room for more growth – if trustees see stability in occupancy rates.
Allied Properties is a Canadian dividend aristocrat that has raised distributions for 11 consecutive years.
Should you buy units for passive income?
Investors could buy Allied Properties REIT units at a 60% discount to their most recent net asset value (intrinsic value) of $49.83 and lock in a lucrative 9% distribution yield for 2024. Three factors support a buy thesis: The trust’s sustainable payout rates, a total debt ratio of 34.2% going into the fourth quarter that implies manageable leverage, and ample portfolio liquidity that could see the trust through planned intensification projects without much hustle.
That said, there are two risks to consider right now.
Firstly, the trust’s portfolio occupancy rates have been declining sequentially for five years now – as tabulated below.
Declining occupancy levels may mean lower revenues and cash flow in the future. Investors should keenly watch occupancy rates going forward as 17.1% of portfolio leases expire within the next two years. Given the impressive leasing momentum seen lately, who knows? The tide could have turned in the trust’s favour.
Secondly, there was this risk of a debt downgrade – which could have been “averted”.
Although the REIT maintained an investment-grade credit rating since 2014, including a current BBB rating with Stable outlook from DBRS Morningstar, Moody’s confirmed a Baa3 rating on the trust’s debt in August, with a negative outlook. Moody’s Baa3 is the lowest rating on its investment grade scale – any downgrade could have thrown the trust’s credit offerings into speculative territory, substantially increasing its borrowing costs.
Intriguingly, Moody’s is no longer engaged with the REIT for credit rating services – since November 2023. A red flag?