Dividend investors take positions in real estate investment trusts (REITs) because of high dividends and monthly payouts. However, some subsectors, especially office spaces, have higher downside risks.
A dividend titan in the real estate sector is Allied Properties (TSX: AP.UN). The current challenge, though, is the REIT owns and operates urban office properties. At $17.04 per share, the year-to-date loss is 12.7%, while the dividend yield is an ultra-high 10.6%. Should yield-hungry investors avoid this REIT and pass up on the monthly cash payments?
An optimistic view
Michael Emory, founder and executive chairman at Allied Properties, recently told BNN Bloomberg that demand for office space is slow but not collapsed. He added that the $2.2 billion REIT maintains optimism and anticipates a sector recovery in 2026.
Emory said 2019 was a high point for REITs before the global pandemic. However, since 2020, the public and capital markets have lost interest in commercial real estate. When asked about the high dividend yield and potential distribution cut, Emory responded, “We don’t need to, and we won’t cut our dividend.”
The market is pricing the REIT with a dividend cut in mind. Nonetheless, he said Allied Properties can maintain it despite falling occupancy rates and rising debt because the level of cash flow per unit has been sustained and has not eroded. Also, the 80% payout ratio is healthy. The cash flow level in 2024 would be the same as in 2019.
Financial improvement
In Q1 2024, rental revenue and operating income increased 3% and 1.7% to $143.5 million and $78.5 million, respectively, compared to Q1 2023. The net loss dwindled 40.8% year over year to $18.8 million. As of March 31, 2024, Allied Properties had 198 rental properties. The leased and occupied areas are 87% and 85.9%, respectively, while the weighted average remaining lease term is 5.7 years.
Allied Properties has classified distinctive urban workspaces into three categories: Class I Workspace (Allied Heritage); Workspace developed or redeveloped in the last decade (Allied Modern); and Workspace in buildings on underutilized land to be redeveloped in the next decade (Allied Flex).
According to management, there was a strong and quantifiable demand for all categories of office space during the quarter. It should fully support the REIT’s current distribution commitment.
Potential monthly income
Allied Properties pays monthly dividends and is an eligible investment in a Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP). A $17,057.04 investment today (1,001 shares) will transform into a $150.10 monthly passive income. You can hold the REIT in a tax-advantaged or tax-sheltered investment account for tax-free income or money growth.
The plan
Emory said Allied Properties is intensely focused on the longer-term aspects of its commercial real estate business and is excited for the future. The REIT strongly believes that urban intensification will push forward. It will sell fewer strategic assets to finance the debt reduction strategy.
Lastly, Allied Properties’ competitive advantage is the largest and most concentrated portfolio of economically productive, underutilized urban land in Canada. The portfolio has extraordinary mixed-use intensification potential in major cities. Emory sees a stabilized occupancy rate of 95% in 2026.
