Some dividend stocks are easy to own, while others test your patience before the investment story fully unfolds. Allied Properties Real Estate Investment Trust (TSX: AP.UN) clearly falls into the second group. Its shares are down about 55% from their 52-week high as declining cash flow and a stretched balance sheet seem to be taking a toll on investor sentiment.
Although those concerns should not be brushed aside, we shouldn’t forget that Allied still owns a large portfolio of distinctive urban workspaces across major Canadian cities. More importantly, it’s making progress on leasing, asset sales, and debt reduction. With this stock trading well below its reported net asset value and offering a 10.7% annualized dividend yield, the risk may already be reflected in its price, in my opinion.
In this article, I’ll explain why I would still consider Allied a long-term hold.
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Why I’d still back Allied stock
If you don’t know it already, Allied is a Toronto-based real estate investment trust (REIT) that owns and operates urban workspace properties across Toronto, Montréal, Vancouver, Calgary, Edmonton, and Kitchener. Its portfolio includes heritage buildings converted into offices, purpose-built modern workspaces, and redevelopment properties.
The REIT currently trades at $10.10 per unit with a market cap of about $1.9 billion. Besides its attractive monthly distribution that translates into a 10.7% annualized dividend yield, the stock has been under heavy pressure lately. It has declined 45% over the last year and remains well below its previous highs as investors continue to worry about office market weakness and leverage.
What are the key concerns today?
Some key concerns were clearly visible in its latest quarterly results. Allied posted a 4.5% year-over-year (YoY) decline in its first-quarter rental revenue to $143.9 million, while its operating income fell 14.3% from a year ago to $69.6 million. The company attributed this drop mainly to lease non-renewals, property dispositions, and lower capitalization of operating costs as space was prepared for future use.
As a result, its funds from operations (FFO) dropped 36.1% YoY to $45.5 million, while adjusted funds from operations (AFFO) fell 48.1% to $33.7 million. At the same time, its interest expense also climbed 28.5% because less interest was capitalized following the completion of development projects and property upgrades.
The company also recorded a $44 million expected credit loss and $48 million impairment on its KING Toronto project because higher construction costs and delays made the project more expensive to complete.
Why I’m still optimistic
Even so, Allied is showing encouraging signs that could support its long-term recovery, I believe.
The first positive is its leasing activity. During the first quarter, Allied completed more than 323,000 square feet of new leasing activity in its rental portfolio. Even better, its total leasing pipeline grew 20% since the beginning of the year, while its new leasing pipeline jumped 36%. That suggests demand is gradually improving despite ongoing challenges in the office market.
The REIT is also making meaningful progress on reducing debt. Allied completed $46 million of property sales in the first quarter and later entered firm agreements to sell another nine properties for expected proceeds of about $201 million. The company continues to target roughly $500 million in total dispositions to strengthen its balance sheet.
That strategy is already producing results as its net debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) improved to 12.3 times from 12.9 times in the previous quarter. Now, it is targeting the mid-11 times range by the end of 2026.
Is this dividend stock for everybody?
I agree Allied remains a higher-risk investment at the moment, and its turnaround may take time. However, stronger leasing momentum, ongoing asset sales, and a disciplined focus on deleveraging make me believe its current share price already reflects much of the bad news.
That’s why, for patient income investors willing to ride out some short-term volatility, I think Allied still deserves consideration as a long-term hold.
