Allied Properties Real Estate Investment Trust AP-UN-T, one of Canada’s largest publicly traded office building owners, disappointed investors with weak leasing figures and the possibility of a distribution cut, sending its unit price tumbling 17 per cent.
Allied, best known for its low-rise office buildings in downtown cores, has been asked about its monthly distribution for months because the REIT continues to struggle with a heavy debt burden, and office leasing activity has remained muted relative to levels prior to the pandemic. Each year, the monthly payouts total around $250-million.
Despite the woes, Allied has long stressed that its payout, which hovers around 100 per cent of available cash, was sustainable. After reporting second-quarter earnings in August, management said they were “very comfortable” with the monthly payout.
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That stance changed on Thursday when Allied reported third-quarter earnings. Asked about the distribution, which was yielding 9.8 per cent before markets opened, chief executive officer Cecilia Williams said the company is “considering many options, and one of those options is a distribution cut in 2026 so as to strengthen the balance sheet.”
The leasing environment appears to have prompted the change of heart. Allied had been telling investors it would achieve 90-per-cent occupancy across its portfolio by year-end, but recently pushed the target date back. Lower occupancy means the company will earn less from leases, which limits how much cash it has available to pay the distribution.
Allied’s unit price tumbled Thursday, falling 17 per cent to $15.26 apiece, down 75 per cent from February, 2020. Before the COVID-19 pandemic, Allied was adored by investors and its low-rise buildings were in heavy demand from businesses in the creative and innovation sectors.
Under Allied’s new leasing outlook, the REIT expects its year-end occupancy to come in around 84 per cent. Missing the 90-per-cent target is a double whammy for investors because beyond Allied’s stated optimism, there had been hope that return-to-office mandates from large institutions, such as Canada’s banks, would drive more leasing activity.
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At the end of the third quarter, downtown class A office buildings – those in prime locations with high-quality finishes and upgraded amenities – had a national vacancy rate of 16.1 per cent, according to real estate consultancy CBRE. Expectations of better leasing demand sent Allied’s unit price soaring 30 per cent from early August to early October.
The REIT has since given back all those gains.
Allied also said Thursday that it will not hit its debt-level target of 10 times earnings before interest, taxes, depreciation and amortization by year-end. The company’s debt burden has weighed on its units for years, and in 2023 Allied tried to defuse the issue by selling data centres in downtown Toronto for $1.35-billion. The deal generated much-needed cash to pay down debt and fund its development portfolio, but ongoing continuing debt repayment has not come as quickly as hoped since.