Canadian office real estate is showing signs of recovery. During the first quarter of 2025, downtown vacancy rates finally dropped for the first time since the first quarter of 2020, according to CBRE’s latest market report. With vacancy rates at 18.7%, average rents climbing to $26.25 per square foot, and corporations gradually bringing employees back to offices, one beaten-down office real estate investment trust (REIT) has caught my attention.
Allied Properties Real Estate Investment Trust (TSX:AP.UN) has fallen a staggering 68% from its March 2022 highs. This massive drop in the office REIT’s market value might represent an extraordinary investment opportunity for Tax-Free Savings Account (TFSA) investors seeking passive income in 2025.
Why Allied Properties REIT is worth considering
Allied Properties REIT owns 186 rental properties spanning 14.3 million square feet across Canada, with a significant presence in Montreal (six million square feet) and Toronto (5.2 million square feet).
What makes this REIT particularly compelling right now?
First, Allied Properties trades at a jaw-dropping 61.7% discount to its most recent net asset value (NAV) of $41.25 (as of December 31, 2024). To put this in perspective, you’re essentially buying high-quality Canadian office real estate at less than 40 cents on the dollar.
Second, the REIT’s monthly distribution currently yields an impressive 11.4% annually. With a 92.2% payout rate on adjusted funds from operations (AFFO) over the past year, this juicy yield appears sustainable. According to the Rule of 72, such a yield could theoretically double your investment in under 6.5 years through distribution reinvestment alone.
Recovery signs emerging
Allied Properties REIT’s portfolio occupancy rate stood at 87.2% entering 2025, and management aims to boost this to 90% by year-end. The target could be achievable given that two large properties with nearly one million square feet combined will join the rental portfolio this quarter (Q2 2025), and they’re already essentially fully leased with 98-100% pre-occupancy rates.
The REIT’s average in-place rent of $25.41 per square foot compares favorably to the national downtown office average of $26.25, management has room to implement rental increases on new leases and renewals.
Allied Properties REIT’s smart capital allocation
Management plans to sell $300 million of non-core assets in 2025 at or above book values, using proceeds to reduce debt. Given the massive discount to NAV, these sales are highly accretive to shareholders, more so if some proceeds go toward repurchasing discounted units.
Last year, Allied acquired over $670 million of highly occupied properties with long lease terms (up to 11 years) at prices below replacement costs. This strategic move locked in value that could be realized as the Canadian office market normalizes.
While management expects same-property net operating income (NOI) to shrink by 2% and AFFO to contract by roughly 4% year over year in 2025 due to slightly higher interest costs post-2024 acquisitions, the distribution should remain fully covered by recurring distributable cash flow with a projected AFFO payout rate around 97.9%.
Why I’d add Allied Properties REIT to my TFSA in 2025
REIT distributions are generally taxed as ordinary income, making them perfect candidates for Tax-Free Savings Accounts. With $7,000 in TFSA contribution room available to Canadians in 2025, allocating some of that to Allied could generate tax-free monthly income for years to come.
With a conservative debt ratio of 41.7%, Allied Properties maintains financial flexibility to redevelop properties into premium assets as occupancy rates improve.
Yes, office real estate faces headwinds from hybrid work models. However, the extreme discount to NAV provides a meaningful margin of safety. If occupancy rates remain steady or start climbing, and the narrative around office space shifts even slightly, significant capital appreciation could follow while you collect that 11.4% yield every year.
Is Allied Properties REIT a guaranteed winner? Of course not. However, for TFSA investors with appropriate risk tolerance seeking potentially outsized returns, this beaten-down dividend stock offers an intriguing risk-reward proposition that I find hard to ignore.
