The Canadian real estate market recovered partially. While retail REITs recovered completely, housing and commercial REITs have been struggling to recover. The overall recovery in the real estate sector is still lagging amid economic uncertainty. Amid this uncertainty, Allied Properties REIT (TSX:AP.UN) unit price fell to its July 2009 level and hasn’t recovered since then.
Why so?
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Why is this REIT trading at its lowest valuation?
Allied Properties has 186 rental properties, of which 82% are office space, 12% retail, and 6% parking. The pandemic was disruptive for most commercial REITs as offices were closed. The work-from-home trend shrunk office space for many companies even after the pandemic.
Many commercial REITs stopped giving distributions as the occupancy rate fell drastically. The accelerated hike in interest rates in 2022 forced many commercial REITs to even pause distributions so they could pay interest on loans. True North Commercial REIT even started selling properties to use the proceeds to repay debt.
While Allied Properties faced similar issues of lower occupancy and rising debt, it continued to pay distributions. The REIT has identified 15 assets as held for sale. It aims to sell them for around $300 million and use the proceeds to reduce debt.
Like all commercial REITs, Allied has a high indebtedness ratio of 42.9%, way above its target of less than 20%. The REIT has 12 properties, which are 53% vacant. It has been selling non-core assets and acquiring core assets to enhance its property portfolio.
The reduction in fair market value (FMV) of its invested properties has been pulling down the net asset value (NAV) per unit. Its NAV fell 10.8% year-over-year to $39.99 in the first quarter of 2025. This has reduced its unit price by 67% to $15, at a price-to-book value of 0.39 times.
The 12% yield: Is it sustainable?
The falling unit price has inflated the distribution yield as the REIT continued to pay distributions. At a time when other commercial REITs paused distributions, Allied Properties maintained its distributions, which shows its stability amidst the crisis.
However, rising interest expense on the debt it took for 2024 acquisitions has reduced its adjusted funds from operations and increased its payout ratio to 96.4% in the first quarter of 2025. This ratio could be reduced if the REIT sells the $300 million worth of assets and reduces debt.
So far, the 12% yield seems sustainable. However, there is a risk of delay in the sale of properties as a disruption of global trade is slowing decision-making for long-term leases. So, I won’t rule out the possibility of a distribution cut if the debt doesn’t reduce.
Who should buy this 12% yielding REIT?
Allied Properties REIT is trading at its lowest valuation in a decade, but there is a good reason for it. The economic slowdown from the trade disruption could delay recovery in commercial real estate. The REIT could withstand the slowdown till then.
The unit price has already slipped to its lowest, reducing its downside. The REIT has never slashed dividends since its incorporation, which gives some assurance around the possibility of locking in a 12% yield. It is a high-risk stock but has the potential to give high returns.
If the economy recovers and commercial real estate prices revive, the REIT could give you capital appreciation plus a 12% yield and a distribution that grows with inflation. However, the investor has to take the risk of a possible dividend cut and a lower unit price for two to three years.
