A historic building in Toronto retrofitted by Allied Properties REIT, which expects its year-end occupancy to come in around 84 per cent.Thomas Bollmann/Thomas Bollmann
Allied Properties Real Estate Investment Trust AP-UN-T slashed its monthly distribution by 60 per cent to focus on debt repayment, marking a major reversal for management after telling investors in August they were “very comfortable” with the monthly payout.
Allied, one of Canada’s largest publicly traded office-building owners, is cutting its distribution to 6 cents a unit monthly, down from 15 cents. Management said in a news release Monday that the decision was made “with a view to reducing indebtedness and associated interest expense going forward.”
The cut begins in December and will last throughout 2026 – but no guarantee was given that a higher payout will be restored in 2027.
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, its monthly payouts totalled 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.
Yet in late October Allied’s management suggested it was starting to change its mind, and comments made about weighing a distribution cut during the REIT’s third-quarter conference call sent its units tumbling 17 per cent in one day. The units kept falling from there, and in late November they crashed to around $12.60, the same price they traded for in the thick of the global financial crisis in late 2008 and early 2009.
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Allied units rose 2.7 per cent in early Monday trading to $13.32 apiece.
The leasing environment appears to have prompted management’s 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.
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.
Allied also said in October 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 continuing debt repayment has not come as quickly as hoped since.
After Allied’s management said it was considering lowering its distribution, a number of analysts expected a 50-per-cent cut. Allied ultimately went for something bigger, but in a note to clients, Bank of Nova Scotia analyst Mario Saric wrote that it is hard to know if this was “due to worse fundamentals or desire for greater margin of error, given unit price weakness.”
“We think Allied is near a bottom, but the lack of additional detail in press release is disappointing,” he added, noting that the announcement “is a missed opportunity to outline how the distribution savings will be reallocated, along with a broader organizational outlook as Allied enters this new era.”
Allied isn’t alone when it comes to cutting its distribution. In February, 2024, Dream Office REIT D-UN-T, which used to be the envy of many commercial landlords for its quality skyscrapers in major cities such as Toronto and Calgary, cut its own distribution in half because the return to office was much slower than originally envisioned.