Amid the high interest rate environment, inflation, and broader economic crunch, real estate investing has not been the biggest priority for many Canadians. The last couple of years have seen shares of several real estate investment trusts (REITs) drag behind the broader market.
REITs typically enjoy strong cash flows through recurring income from properties in their portfolios. However, the capital-intensive nature of their business models often requires raising capital through debt to acquire properties.
Expanding portfolios can help REITs generate more returns. Unfortunately, rising interest rates have made borrowing more expensive, eating into profit margins for REITs and leading to lower share prices.
Allied Properties REIT (TSX:AP.UN) is one such trust. As of this writing, it trades for $17.24 per share, down by 71.06% from its all-time high. Due to the significant downturn in its valuation, its dividend yield has gone up to 10.44%.
Paying the high-yielding annualized dividend yield in monthly distributions, Allied Properties REIT looks like an attractive investment for generating passive income through stock market investing. Let’s see whether REIT has the potential to be a good bet to consider for this purpose.
Allied Properties REIT
Allied Properties REIT is a $2.41 billion market capitalization open-ended REIT that specializes in managing and developing urban office environments in Canada.
With its portfolio in major Canadian cities, the trust aims to provide knowledge-based organizations workspaces conducive to productivity and wellness. The trust achieves it by converting light industrial structures into modern office spaces.
Its approach is appealing to professionals across several industries, giving the REIT a reliable business model. Since its properties are primarily located in in-demand areas, the trust has a high occupancy rate to generate strong cash flows.
Between 2003 and 2023, the value of Allied Properties REIT’s portfolio increased from $157 million to $10.6 billion. Boasting a massive 23.7% growth rate, the REIT has fully capitalized on revenue-generating opportunities in the last two decades. Despite the recent downturn in its share prices, Allied Properties still beats the broader market in this period.
Its recent performance
The fourth quarter (Q4) of fiscal 2023 saw Allied Properties REIT report $82 million in operating income, reflecting a 6% hike from the same period in the previous year. Its adjusted funds flow from operations (AFFO) increased from $76 million to $79 million in the same period.
Paying its shareholders $0.15 per unit in dividends annually, its AFFO suggests that its Q4 2023 payout ratio was around 80%. The low payout ratio allows the trust the flexibility it needs to pay down debt and reinvest in more capital projects.
Foolish takeaway
Allied Properties REIT ended 2023 with an 86% occupancy rate, down from 95% in the pre-COVID era. Q4 2023 also saw it report a $499 million net loss mainly due to fair value loss on investment properties. Amid high interest rates, the REIT sold off two data centers in Toronto to raise $1.35 billion to improve its balance sheet.
While there is a risk of underperforming in the near term due to macro headwinds, Allied Properties can be a good investment for monthly income if market conditions improve.
