Allied Properties REIT (TSX: AP.UN) and SmartCentres REIT (TSX: SRU.UN) are two prominent players in Canada’s real estate investment trust (REIT) space. Each has its own strengths and challenges. For investors seeking passive income, the question often boils down to which offers the better combination of reliable dividends, financial stability, and future growth prospects. Both real estate investment trusts (REITs) have solid foundations. Yet the approaches and current performance reveal some key differences worth exploring.
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Start with the basics
Allied Properties focuses on urban workspaces, primarily catering to tech, media, and other knowledge-based industries. Its properties, often located in core downtown areas like Toronto and Montreal, emphasize sustainability and modern design, attracting tenants who value vibrant work environments. SmartCentres, by contrast, is best known for its extensive portfolio of retail-focused properties, with many sites anchored by Walmart. In recent years, SmartCentres expanded its focus to include mixed-use developments, adding residential and office spaces alongside its retail centres.
Recent earnings paint an interesting picture. SmartCentres reported strong fourth-quarter results for 2024, including a 9% year-over-year increase in net operating income, reflecting continued demand for its properties. Its occupancy rate hit a five-year high of 98.7%, showing strong leasing momentum across its portfolio. Allied’s fourth-quarter results were more challenging, with the dividend stock reporting a net loss of $342.5 million, largely due to non-cash fair value adjustments on its properties. While Allied’s revenue grew by 13.5% year over year, the earnings per share of negative $2.45 highlight some ongoing financial strain.
Can the dividend be supported?
Dividends are, of course, a central consideration for passive-income investors. Allied currently offers an annualized distribution of $1.80 per unit. This translates to a yield of approximately 10.53% based on its current trading price. SmartCentres, meanwhile, provides an annual distribution of $1.85 per unit, reflecting a yield of around 7.25%. On the surface, Allied’s higher yield seems appealing. Yet the payout ratio tells a more nuanced story. Allied’s payout ratio currently sits at an eye-watering 399%, suggesting the dividend stock is paying out far more than its earnings can sustain. SmartCentres, however, maintains a more reasonable payout ratio of 133%, perhaps indicating a more sustainable dividend structure.
Debt levels further differentiate the two. Both dividend stocks, like many in the sector, carry significant debt. Yet SmartCentres appears to be managing its obligations more effectively. As of the most recent quarter, SmartCentres’s total debt-to-equity ratio stood at 79.83%, slightly higher than Allied’s 79.37%. However, SmartCentres’s operating cash flow of $374 million over the past 12 months suggests it’s in a stronger position to handle debt while maintaining distributions. Allied’s cash flow, by contrast, appears more constrained, with operating cash flow of $147.8 million over the same period, significantly lower than SmartCentres.
Future outlook
Looking ahead, future growth prospects show divergent strategies. SmartCentres continues to expand its mixed-use developments, highlighting its long-term vision. This diversification beyond traditional retail could provide additional revenue streams while enhancing property values. Allied, meanwhile, is doubling down on sustainability initiatives, using proceeds from a recent $450 million green bond offering to fund eco-friendly projects across its portfolio. While this strategy aligns with broader environmental trends, it also increases short-term financial pressures. This could impact future earnings.
Beyond the numbers, there’s also the question of portfolio resilience. SmartCentres’s retail-focused properties, particularly those anchored by essential retailers like Walmart, tend to perform well even during economic downturns. Its expansion into residential and self-storage further diversifies its revenue base. Allied’s urban office spaces, while attractive in a thriving economy, face more uncertainty, especially as hybrid work trends continue to reshape office demand. This difference in portfolio focus could play a significant role in each dividend stock’s long-term performance.
Bottom line
For conservative, income-focused investors, SmartCentres appears to be the safer dividend stock. Its stable earnings, high occupancy rate, and reasonable payout ratio suggest that the dividend is more secure, even if the yield is slightly lower. Allied, with its higher yield and focus on sustainability, might appeal more to investors willing to accept higher risk in exchange for potentially greater rewards. However, the current financial strain on Allied raises questions about how long it can maintain its generous distribution without improving earnings.
