Imagine earning a 10.7% yield in monthly passive income streams on an investment that may potentially double over time. Canadian income investors could buy shares in a beaten-down real estate sector stock trading at a 62% discount to its most recent fair value and, consequently, earn high-yield monthly distributions for a lifetime.
For the first time since 2020, the Canadian office real estate sector posted back-to-back quarters of net space absorption during the second quarter of 2024 – the CBRE Group reported in July. There’s hope for a recovery for office property investors, and speculative buys on beaten-down office Real Estate Investment Trusts (REITs) could pay handsomely if the emerging trend holds into 2025.
One of the best-in-class office REITs to play the office recovery is Allied Properties Real Estate Investment Trust (TSX: AP.UN), which owns a portfolio of 192 Class 1 office rental properties worth about $8.8 billion and boasts a strong $1 billion development pipeline.
Why invest in Allied Properties REIT in August
Allied Properties REIT is a best-in-class office real estate owner that has been resilient during a tumultuous time. The Canadian dividend aristocrat stands to richly reward its loyal long-term-oriented investors as Canadian businesses embrace offices again.
The REIT boasts a strong in-place portfolio occupancy rate of 85.8%, which has remained stable while peers struggled to retain tenants since the COVID-19 pandemic gave businesses a taste of work-from-home productivity.
Encouragingly, the trust recently leased office space at higher than expiring rates, and average in-place rent per square foot improved 6.7% year-over-year to $25.08. The trust achieved rent increases on lease renewals of 9.7% and up to 16.2% during the second quarter, and existing tenants renewed about 60% of expiring leases during the past quarter. The renewal rate is inching closer to the REIT’s historical average renewal rates of 70% to 75%. The trust’s office leasing fundamentals are slowly falling back into place.
Quarterly operating income rose by 5% year-over-year. Management claims the REIT’s office portfolio continued to outperform the Canadian urban office market, except in Vancouver. The worst could be over for Canadian office REITs, which have seen occupancy rates plummet since COVID-19 pandemic gave companies an addictive taste of how productivity can remain optimum or even improve as employees work from home.
A well-covered distribution
Allied Properties REIT’s high-yield distribution remains well covered in 2024. The distribution payout rate on Adjusted Funds From Operations (AFFO), a key measure of payout sustainability, was 81.5% for the first half of the year.
That said, AFFO payout rates may decline in the near term as the trust executes portfolio optimization transactions. The REIT plans to use proceeds from strategic asset sales to pay down debt and free up distributable cash flow as interest payments fall. Management is upbeat that the payout will remain secure.
The high-yield TSX REIT is a speculative play on a beaten-down office REIT sector that may continue to recover in 2025 and beyond.
How to earn $100/month in passive income
Passive-income seekers could snatch Allied Properties REIT units at under $17 today (a massive 62% discount to their most recent net asset value per unit of $44.43 in June). Buying 667 units could earn you an easy $100 in monthly distributions.
| Stock to Buy | Recent Price | Number of Shares | Total Investment | Distribution Rate | Total Distribution | Frequency | Total Annual Payout |
| Allied Properties REIT (TSX: AP.UN) | $16.86 | 667 | $11,245.62 | $0.15 | $100 | Monthly | $1,200 |
Take note that REIT distributions are taxed as ordinary income in Canada. Investors may locate REIT investments in tax-advantaged accounts, including the Tax-Free Savings Account (TFSA) to enhance tax efficiency.
