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spk04: Good day and welcome to the Allied Properties REIT first quarter 2022 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Michael Emery, President and Chief Executive Officer. Please go ahead, Mr. Emery.
spk09: Thank you, Justin, and good morning, everyone. Welcome to our conference call. Tom, Cecilia, and Hugh are here with me to discuss Allied's results for the first quarter ended March 31, 2022. We may in the course of this conference call make forward looking statements about future events or future performance. These statements by their nature are subject to risks and uncertainties that may cause actual events or results to differ materially, including those risks described under the heading risks and uncertainties in our most recently filed annual information form and in our most recent quarterly report. Material assumptions that underpin any forward-looking statements we make include those assumptions described under forward-looking disclaimer in our most recent quarterly report. Allied's first quarter results met or exceeded expectations with AFFO per unit and average in place net rent per occupied square foot rising to record levels. Cecilia will summarize our financial results. Tom will follow with an overview of leasing and operations. Hugh will provide a development update and I'll finish with our thinking on capital allocation. So now over to Cecilia.
spk00: Good morning. I'll summarize our Q1 results, disclosure enhancements, the balance sheet, and our ESG program. First, our Q1 results. FFO per unit of 61 cents and SAMASA NOI of 2% came in as expected for the quarter. AFFO per unit came above expectations at a record high of 56 cents. Our forecast for 2022 of low to mid percent growth in each of these three metrics remains intact. Our occupied space continues to be increasingly productive. Average in place net rent per occupied square foot is up 4% from a year ago to $25.13. We expect this trend to continue as our occupied space increases over the course of the year. We enhanced our disclosure this quarter. With our most recent acquisition, we reached one million square feet in our Vancouver portfolio, representing early stage critical mass. Accordingly, we are reporting on Vancouver independently of Calgary and Edmonton. We also added disclosure around the timing of NOI contribution from our development completions before the impact of decapitalization, which is included on page 66 of the MD&A. On to our balance sheet. The acquisition from Choice Properties will improve our debt to EBITDA ratio going forward. In terms of liquidity, we currently have access to $475 million on our operating line before exercising the $100 million accordion. We're in a position to meet our commitments well into 2023 with our line. On to ESG. We're currently developing our plan to a net zero carbon pathway. It will be outlined in our third annual ESG report, which will be released in July. To summarize, commitment to our strategy and our balance sheet is unwavering. Execution by our team through our operating framework has been unwavering. In fact, the business has not only exhibited resilience through this time of uncertainty, but it's grown and continued to evolve as we pursue our strategy in ever-expanding ways. I'll now pass it to Tom for a discussion of our operating and leasing results.
spk10: Thank you, Cecilia. Despite the full lockdown in Montreal in January, we had a very good start to the year, completing 94 transactions, totaling 440,000 square feet. Average net rents achieved on renewals or replacements in Q1 were 16.6% higher than average rents in the expiring term. Our leasing teams are motivated. We just had an experienced leasing manager in Vancouver. We have upgraded available space wherever possible to speed up the leasing process. We have completed a show suite at 1001 Robert Bourassa in Montreal. We've made a few adjustments with our listing brokers across the portfolio to ensure that we have the best possible teams on every assignment, and we're determined to move our leased area stats up meaningful. There is currently good action in all markets, which I will describe shortly. Reviewing some information provided by CBRE on the Canadian office market as of March 31st, I note that Allied is doing well relative to the market. We have lower vacancy rates than the downtown markets in every one of the cities in which we operate, except Vancouver. We are higher than the market in Vancouver by only 1.5%, and that's likely to change soon. Before getting to a general update on leasing in our major markets, I thought it might be informative to provide a brief update on the 30 days post-closing of the Choice portfolio. The operations and leasing teams had been fully engaged in the weeks leading up to closing, and we were able to hit the ground running, absorbing these buildings into our system seamlessly. We also onboarded 14 new employees with these acquisitions. Post-closing, we completed a three-year extension to Ontario Health, previously Cancer Care, at 525 University Avenue for 74,000 square feet. We completed a short-term extension with NRC at 1185 West Georgia for 5,900 square feet. We completed a four-year deal for the last remaining office vacancy at 1508 Broadway. We are currently negotiating a short-term deal with a fitness club at 1185 West Georgia for 25,000 square feet and expect to finalize in early May.
spk05: Early days discussions with medical-related use for 60,000 square feet of 175 Bloor.
spk10: We started dialogue on lease renewal rental rates with Omni Hotels for 20,000 square feet at 1010 Sherbrooke. We've had many meetings with the major brokerage firms during the process of awarding listing assignments in four of the six properties. I will now provide a general update on leasing activities in Montreal, Toronto, Calgary, and Vancouver, and we'll conclude with an update on our urban data centers. Starting in Montreal, the team completed 38 deals and leased about half the space leased in the quarter. With a very slow start to the year, the momentum is building every month. We completed two deals for a total of 77,000 square feet at 111 Robert Barasa. And we completed a deal with an existing film industry tenant for 15,000 square feet at 740 St. Rhys. Just subsequent to the quarter, we released 30,000 square feet to a marketing company in Block D, a freestanding building at our RCA project. We also just agreed to terms with a tech company for 40,000 square feet at 3575 Santa Monica, with potential to grow to 60,000 square feet. As for what is next in Montreal, an existing tenant of Citi Multimedia has just re-engaged in dialogue for 60,000 square feet of expansion at 111 Robert Barassa. We're also working with a life science tenant for 30,000 square feet of RCA, and we're working with two companies for a total of 35,000 square feet at 400 Atlantic. Moving to Toronto, at the well we completed a deal with a tech company for 62,000 square feet and also with a prominent music industry tenant for 26,000 square feet. We reported last call that we were negotiating a deal with an existing tenant currently located at King and Spadina for 55,000 square feet at 185 Spadina. Over the course of those discussions, The tenant decided to concentrate more employees in Toronto and now require 120,000 square feet. And we're in active negotiations with this tenant at the well. We have three other tenants interested in various sizes for the last available space in the project. One way or another, we expect to be 100% leased in the office compartment of the well very soon. In Calgary, we are maintaining an 86% leased area, which in the context of that market is good. We completed 10 transactions in the quarter and have seen good activity at Telesky on the last remaining built-out suite and are working on an existing tenant to expand by 18,000 square feet. If we complete these transactions, we will be at 75% leased in that office component. We've made good progress at vintage towers in the Beltline and are now at 94.5% lease. In Vancouver, we're at 91% lease with good activity on available space. To add further color to the comments on leasing in our workspace portfolio, in addition to the negotiations already noted, we currently have 600,000 square feet of interest in the early stages. And finally, we are 95% leased at our urban data centre portfolio in Toronto. We are currently working on a transaction with an existing tenant to fill all the remaining vacancy at 250 Front and expect to be able to announce a deal on our next call. I will now turn the call over to Hugh.
spk08: Thanks Tom. This quarter has seen the team reach a major milestone on one intensification project, and significant advancements on a number of other current and future development projects. I will begin by giving an overview of our major projects, and then we'll follow that with an update on work we have done on our development pipeline. Construction activity. Beginning in Toronto, the building inspector is signed off on partial occupancy for the office tower at the well. This will permit the tenants to occupy their spaces in the tower once they have achieved their own occupancy. This was a major milestone and the culmination of 10 years of work on this project for a number of team members. The remaining buildings are targeting occupancy over the next couple of quarters. The retail tenants will begin their fit-out work starting in Q2. Work on our other projects in Toronto and Kitchener continues unabated. We have reached grade at King Toronto and the expansion of QRC West, and will now start to see work progressing above grades. At Adelaide and Duncan, the team continues to push towards partial occupancy in Q3. At the Bright Hops, our partners are completing the majority of base building work and will hand the space over to Google to start their fixering in early Q2. In Montreal, work continues on the upgrade work at 400 Atlantic, 1001 Robert Bourassa, and RCA. In order to address the needs of the Montreal market, we've decided to expand the work being done at 400 Atlantic to include turnkey options for tenants. This has resulted in our pushing out of the date for 400 Atlantic being transferred out of the putt. At 1001 Robert Barossa, the team has completed the model suite on the second floor. The work clearly demonstrates what we are capable of achieving with this building and is a useful tool for the leasing team to attract potential tenants. In Western Canada, work continues on Boardwalk Revlon. Like at 400 Atlantic, we have decided to provide turnkey options for tenants. This decision has already resulted in one lease deal being completed and a number of other potential tenants are indicating a preference for our building over other spaces in the market. This quarter has seen a number of significant events for our future intensification projects. To begin with, in Toronto, we have completed the purchase of Great Gulch's half-interest in our King and Grant project. With full control of the project, we are advancing the plan to improve the offering to better suit the knowledge-based users that we intend to serve. This includes adjusting the design to reduce the carbon footprint and potentially achieving net zero carbon certification, exploring the use of hybrid wood and steel construction, and the conversion of the condominium component of the project to rental residentials. We are excited about the potential of this project and intend on bringing it to the market in the fall. In Vancouver, we've entered into a joint venture with West Bank for the fourth phase of their main alley development. This JV consists of a 200,000 square foot office development in the Mount Pleasant neighborhood. The project is already 50% leased to a major tech tenant. We are excited about the potential of this project, aligned with our transition plan for adopting low carbon design, our ability to serve users and life sciences, as well as our expansion in Vancouver. We expect this project to take approximately two and a half years to complete from the beginning of this year. I will keep you updated on the progress of the project going forward. The team has also advanced work on the approval of other future intensification projects in Toronto. While we had hoped to achieve approval for our BASIS assembly by fall, it now looks to be likely given in the new year due to the fall municipal elections. We should also achieve approval on the castle early in the new year. The team has advanced work on the approval of our project at the corner of King and Spadina, with a formal submission having been submitted just subsequent to the end of the quarter. The team is excited about the advancements on the active construction projects, as well as the future intensification opportunities. With the purchase of the Choice Properties portfolio, the team is getting work on establishing plans for a number of those buildings. Our work at 1001.rurasa will be instrumental in understanding the potential that some of these buildings hold and how we can transform the user's experience. I will now return the call back to Michael.
spk09: Thank you, Hugh. At the end of the first quarter, as others have alluded to, Allied completed its largest acquisition ever, along with its largest equity issuance ever. with the equity being issued at $50.30 per unit, our NAV per unit at the end of 2021. We published our preliminary vision for integrating these six properties into our large, focused, and distinctive rental portfolio. The vision document is available on our website, and I'd urge those of you who haven't looked at it to spend a few minutes to go through it. In my opinion, an important industry theme this year will be the large-scale rebalancing of diversified portfolios in Canada between strong and experienced real estate entities. Allied's acquisition at the end of the first quarter was an excellent example of just that. It represented an important and compelling strategic refinement for choice properties, and a significant and well conceived expansion of operating capability for Allied. Allied intends to remain within two capital allocation guide rails this year. The first is not to increase our ratio of net debt to annualized EBITDA in funding discretionary acquisitions. The acquisition from choice properties, as Cecilia noted, actually improves this ratio. The second is not to issue large amounts of equity significantly below NAV per unit in funding such acquisitions. Again, we paid approximately 75% of the purchase price to Choice Properties by issuing equity at our NAV per unit as at year end 2021. Clearly, we can make large discretionary acquisitions within the articulated guide rails. Allied did not utilize its ATM program in the first quarter of 2022. We currently have over $475 million available on our revolving credit facility with another $100 million available through the accordion feature. This liquidity is more than sufficient to meet all of our current commitments over the remainder of 2022 and well into 2023. Allied is intent on growing its business, not shrinking it, all with a view to serving knowledge-based organizations more comprehensively and more profitably over time. Given our proven strategy and ability to execute, We will continue to allocate capital with a view to consolidating the ownership and operation of distinctive urban office and storefront retail space, which we aggregate into the term urban workspace in Canada's major cities. We believe that our strategy is underpinned by the most important secular trends in Canadian and global real estate. We also believe that we have the properties the financial strength, the people, and the platform necessary to execute our strategy for the ongoing benefit of our unit holders and our many other constituents. I hope this has been a useful and comprehensive update for you. We'd now be more than pleased to answer any questions you may have. Thank you.
spk04: If you would like to signal with questions, please press star 1. on your touch tone telephone. If you're joining us today using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that will be star one. If you would like to signal, please, star one for questions. Our first question today will come from Scott Bromson with CIBC.
spk13: Hi, good morning, folks. You gave a pretty comprehensive overview, so I have just some very minor questions. Just wondering how TIs have been trending. Is there any changes with leases currently under negotiation? And how does it compare with comparable periods, say, you know, early in the pandemic and pre-pandemic?
spk10: I would say that TIs have maintained their level throughout. The only difference is, in some cases, as alluded to in the speaking notes, we've elected to provide some built-out suites, which actually comes along with a corresponding rent increase for us.
spk06: But generally, TIs have been more or less the same. Okay, thanks.
spk13: Of the leases maturing in 2022 and into 2023, is any of the GLA earmarked for the transitional portfolio?
spk09: That is a good question, Scott. I don't think any of us can answer that.
spk08: The cannery in Kitchener, we might be doing that. There's a large space that's coming back. We have to whether or not that needs to be upgraded.
spk00: I don't think there's anything material coming, maturing.
spk09: Certainly nothing occurs to me, although it's something we should look at carefully so we can answer the question more confidently.
spk13: Okay, and a final quick question. Have any of the users at the well, or future users at the well, put any committed space up for a sublease?
spk06: I don't believe so.
spk10: I think that there was talk of one doing it at one stage, but I don't believe there are any.
spk09: Yeah, I think the architects were thinking about it, putting one floor on, but it's not clear yet whether they in fact are prepared to put that on the market. And that's a relatively small tenant and a good one, but I know they were thinking about putting half of their space on the market. And I don't know whether they've done that yet or not. We certainly haven't had to compete against it. That I know for sure.
spk06: That's great. Thanks very much. We'll turn it over.
spk03: And our next question will come from Jonathan Kelcher with TD Securities.
spk11: Thanks. Good morning. First question, just to clarify, Tom, in your remarks, did you say you're in discussions with 600,000 companies square feet of space right now?
spk10: Yeah. The comment was at the end of the urban workspace comment, and it was just to suggest that there are lots and lots of conversations taking place, and the total is about 600,000-odd square feet across the portfolio at the very early stages. There's a lot of interest at the moment.
spk11: Okay. I just wanted to clarify that. On the well, obviously good leasing action there for you guys, and I guess you'll get the space that Shopify gave back, leased up pretty soon. Can you maybe give us a sense of what the difference on rate that you expect to get on that space versus what Shopify had under contract?
spk10: I'm so glad, Jonathan, you asked that question. We should see a $15 per square foot uptick in rent on the 90,000 square feet that Shopify didn't take up.
spk11: Okay, and what sort of percentage increases that?
spk05: That's almost 50%.
spk09: Almost 50%, okay. It'd be like 15 on 35, right, roughly, so 40%. And Jonathan, just to clarify what Tom said in regard to the well, there is roughly 120,000 square foot feet remaining to lease, including the 90 that Shopify did not exercise their option on. And we're in the very fortuitous position of having a single tenant seriously considering the 120,000 square feet at roughly $15 above what Shopify was obligated to pay. And then, in addition, there are three tenants with an aggregate of 120,000 square feet in the same position, if I understand. Where we've achieved the same... Where we've achieved the same... So we're... Just so you know, this is why we're speaking with extreme confidence. A, that... the remainder of the well is for all practical purposes leased, and B, that we will get a $15 uptick in relation to what Shopify was obligated to pay under its lease.
spk11: Okay, that sounds very good. And then just lastly, turning to the balance sheet, you guys do have a fair amount of floating rate debt. Maybe what's your thought process on
spk09: hitting the unsecured market and what sort of term would you be looking at right now if if you were to do it well the only the only floating rate that we have Jonathan would be the facility we recently put in place to pay down the line and the reason it's floating is because it gives us complete optionality going forward it has a three and a half year term if I remember correctly and We can always fix the rate if we consider it advisable to do so, but we're going to let it float because that gives us the option of prepaying without any cost. And if the bond market was to improve, we might consider repaying with the proceeds from an issuance in the bond market. Similarly, if our cost of equity was to improve, we might consider repaying it by issuing equity. So what I like about the floating rate in this particular instance is it gives us real optionality over the next six to 12 months as to how we permanently finance, if you will, that $300 or $400 million facility. And we wouldn't normally be interested in variable rate, as you know, and as you rightly point out. But in this instance, we were very interested in the variable rate, primarily because it gave us complete optionality going forward in terms of either fixing the rate on the existing facility or repaying it with debt raised in the bond market or equity raised in the equity capital markets. And of course, now we don't know which of those three alternatives we might elect, but having the ability to elect them in light of ongoing changes in the environment is really valuable to us.
spk11: Okay. That's helpful. I'll turn it back. Thanks.
spk03: And our next question will come from Mario Sark with Scotia Bank.
spk12: Thank you, and good morning. Morning. Out of curiosity, what happened during the quarter that led to higher than expected AFL internally?
spk09: I suppose it would be two things. Number one, the NOI growth was solid and as expected. Our parking improved. Our parking revenue improved. Not quite to pre-COVID levels, but close. And then finally, our regular leasing capex was probably lighter in the quarter because most of our leasing costs, actually in 2022 and onward, will be related to income enhancing rather than regular leasing expenses. So we will have significant leasing expenses in 2022 but a very significant component of them will relate to improving the revenue-producing potential of the properties actively being upgraded, particularly those in Montreal. And just for the record, the three in Montreal that I'm alluding to in that regard would be RCA, L-Pro, and 1001, Robert Barasa.
spk06: Okay.
spk12: And then maybe switching gears to the kind of market rents and occupancy, just on the occupancy side, I can appreciate the expectation for a meaningful uptake, as Tom was noting in the commentary. In the shorter term, do you think internally that Q1 leased and economic occupancy represents a trough?
spk09: Do I think it has troughed in Q1 of 2022? Is that the question? The answer is yes, with one possible exception, and that is at 1001, we will be taking space back on the upper floors, again, as part of our repositioning program. I don't know how we will characterize that, Mario. We haven't really had the time to determine that but that could that only could have a negative impact on our occupancy over the remainder of 2022 nothing else that I'm aware of can and will and certainly we're becoming more confident with each passing week or month of our ability to achieve our leasing objectives for 2022 and But we are going to be taking back four or five floors at 1001 Robert Barasa. But I don't look upon that as, if you will, vacancy. That's really part of a repositioning program. And it's one that will take the form that we've described at some length at 1001 Robert Barasa, where the floors transform magnificently from chopped up, ugly, light entrapped space into open, very well illuminated, very spacious, cubically and otherwise. And we've got to make that transformation before we can release the space on the terms we know we can now achieve in the market. So that would be the only thing that might hit numerically in 2022. But as I say, that's part of a long-awaited repositioning program that we're now fortunately in a position to execute very, very successfully. And we know the demand is there. But we've got to make the transition first before we can lease the space.
spk12: Got it. And just on those four or five floors, is there a target return on capital? that you're looking at, or is that a difficult question to answer insofar as it's part of the overall bigger redevelopment at the property? How should we think about the return associated with repositioning the space?
spk09: It's a little difficult to articulate in isolation, but what I can say that is useful is that we do expect to achieve on that project the kind of spread we would achieve on a development. And as you know, Mario, from long conversation with us and others, we won't do anything if we don't think we can achieve at least a 150 basis points spread to the cap rate. And I'm very confident, actually, of our ability to achieve at least that in relation to 1001. it's going to be most likely achievable at the end. I don't know whether any segment of four or five floors will get there, but what we're targeting, we're basically looking upon that to perform like a development for us, that our total cost will get us to the point where there's at least a 150 to 200 basis point spread between the unlevered yield and the actual cap rate that we could sell the building at in the market. And we're encouraged certainly by the cap rate end of that equation in the Montreal market. It has traded more strongly, more rapidly than I would have expected in Montreal. Vancouver has traded rapidly and strongly, but that was no surprise at all. And I think Toronto's not gonna be a surprise either. But I was amazed to see how rapidly the demand to buy urban office space reasserted itself in the city of Montreal, and it's far from over. It's just starting.
spk12: Okay. Just two more quick ones, just first on market rent, and then the last one, just on a comment in the letter to you, the words that you made. So on market rent, some of the brokerages out there, like CBRE, put quarterly data stats and actually showed market rent coming up a little bit in Toronto, but that could be impacted by changing composition in terms of new supply coming on board and so on and so forth. It looks like your estimated market rents came down a little bit versus Q4, but it seems like most of that is related to Calgary. So if we just step back and say, if three to six months ago you were You had space in the market, let's say 25 net in your core portfolio in Toronto. What are you asking for today on that space?
spk06: Has it changed materially or significantly in either direction?
spk10: To understand the question, Mario, you're asking whether or not we're confident that we'll continue to see rental uplift in the Toronto market?
spk12: No, no, no. Not so much the positive re-spreads, but rather the actual underlying market rent for your assets or for your portfolio. Is that changing in either direction quarter to quarter over the past six months?
spk06: I would say not. I think that they held on very, very well.
spk10: There's a limited supply in a lot of the products that we have.
spk09: My sense is, and Tom, you're more active on a daily basis certainly than I am, but my sense is the level of rent our core Toronto portfolio commands has not eroded one bit and really has continued to grow through the pandemic. Maybe somewhat more modestly than it would have in a different environment, but it appears to me to have continued to grow. We're just not letting anything go at a low rate. We just aren't doing it. And it's not because we're so tough or so smart. We just don't have to. There's always someone there to take the space. And we will always wait for the level of rent that we believe our portfolio can command. This is why I think our average in-place net rent per square foot keeps going up quarter after quarter after quarter because basically there's not a huge gap between what we expect for our space and what the market's prepared to pay.
spk10: Nobody's lowballing us. We don't see tenants coming to us with really lowball offers at all.
spk09: One of the things to appreciate about our leasing world, and it's very interesting, and we've all lived it now for probably five or six years, price is never what we negotiate. And again, it's not because we're tough. It's because the market is pretty well understood by the intermediaries. So the real issue for us is always whether our space meets the requirements and aspirations of the employer. If it does, the market's pretty efficient at determining what our space is worth. And we just don't lose business over price. And in fact... I can think of an example, which I don't mind sharing. There was a major marketing firm located on Bloor Street who looked at the well for a reasonably big requirement, maybe 200,000 square feet, maybe more. And it was clear that deal was being run out of New York by people who didn't know anything about the market. And the only thing they cared about was price. So we basically sent them down to the innovation center on the waterfront where they could get good, cheap space. I'm kidding, we didn't send them there, but that's where they went. But that's what they were looking for. They didn't care about anything else but price, and we had no wish to have them in the well, and we didn't need to. So our rental rates have not eroded. If anything, they continue to grow, and as we've said, at the well, they continue to surprise us on the upside.
spk10: The big conversation, Mary, was about an ability to expand. These are largely tech companies and they're interested in how they can grow. And the advantage we have is we can expand these tenants within our portfolio. Maybe not the building that they're in, but certainly elsewhere in their portfolio. And a perfect example is the one I cited where we've got a tenant in 25,000 square feet of King Spadina, wanted to grow, thought they needed 55,000, were interested in 185 Spadina, very keen, super interested. All of a sudden they decided that's not going to be big enough for us. We need more space. Okay, we've now got this space that Shopify are taking. Let's talk about that. And we're getting close to a deal. So it's really, a tenant is interested more on the Billy Earl than they are about the venture campaign.
spk09: And the Toronto market is efficient. It's really efficient. Like, nobody steals space from anybody, and nobody grossly overcharges for space. The The established, sophisticated users are very well advised, and the intermediaries in Toronto are very, very good. It's an efficient market. There are very, very few price skews in high-quality urban office space. Retail can be a little more subjective, but office... if you will, the buyers are very well advised and the sellers know exactly what they're doing and exactly what needs to be done. Historically for us, it used to be whether our mixed-use, amenity-rich urban neighborhood was more important to the tenant than access to the underground path. And there are very rational reasons for preferring both. It was never about cost. The environment suited the users of the building better. If it did, the tenants were coming to us. If it didn't, they were going to the conventional towers. And again, that's very rational. It depends on what the user needs and wants for its people. And we even lost Apple, I think. They came out of Mississauga. We thought for sure they would come to our portfolio. We have a relationship with them in Vancouver. And they went to the South Core because connection to the past system, which I consider to be rather imperfect in the South Core, but nonetheless it exists, was more important to Apple than being in a mixed-use, amenity-rich urban neighborhood, which is where we have our concentration and strength. So that tends to be more determinative of where people end up than pricing. Nobody, as I say, I shouldn't say this, very few projects succeed by being cheaper. It just doesn't work that way anymore. They succeed by being better able to serve the needs of the user. And the user will pay the price because it's an efficient market. That's probably more of an answer than a glass for Mario, but it is an interesting question. It is an interesting, and you see, we're living this. And I just know our rents are not eroding. They're actually increasing. And Toronto is where, well, Vancouver, they're increasing at a crazy level as well. But Toronto is super strong. Montreal, the increases are much more temperate. It's a different market. The demand velocity is different. But fortunately also, there's no new supply being created in any meaningful sense. So it's different in that respect too.
spk12: Yeah, the conviction and enthusiasm is coming out loud and clear, so I appreciate that. Just my last question, I just want to come to, Michael, your comment on the large-scale rebalancing of diversified portfolios in Canada being a key theme this year. You've done the choice deal. Is that kind of suggesting that there could be other larger scale opportunities to build the portfolio in your markets on the horizon?
spk09: Well, and I want to be careful not to create anxiety in the listeners, but I know that in 2022 and probably 2023, a lot of rebalancing happens. going to occur. And there's sort of two basic categories of rebalancing as I see the market. There are the weak aggregators who have had to disaggregate and to rationalize themselves back to something sustainable going forward. I don't see that affording any opportunity for allies at all. Nothing of interest there. But I think it's going to be a significant part of the trading volume in 2022. And I think that real estate is going to find its way into stronger hands or maybe put differently, more appropriate hands. And I think that's good for the market generally. And it's also good for trading volumes. And it also reflects, I think, the reality of ongoing demand on the part of different investors for different assets. I think the pension fund interests are also going to be rebalancing from a position of very considerable strength, not from a position of weakness, because they probably consider themselves overweight Canada. That is definitely going to elicit opportunity for buyers. Whether it elicits opportunity for allied remains to be seen. I'm inclined to think it will, but as I say, it remains to be seen. Choice is a similar transaction in my mind, and it is one of the reasons I expected to see what I alluded to in the first quarter conference call. But What I don't know is whether the opportunities that will come forward will fit allies' focus or not. If they do fit allies' focus, we'll certainly look at them and determine whether it's appropriate for us to allocate capital to them at that point in time under those circumstances. I can imagine that it will be, but I can imagine equally that it won't be. And as I've said to investors for some time over the course of 2022, investors are very aware of what we did in terms of acquisitions. Investors are completely ignorant of what we haven't done or what opportunities we haven't pursued over the last 20 years. And believe you me, if an opportunity isn't right for us at the point in time that it presents itself to us, we will pass without blinking an eye. We have a lot to do as it is. And we are dedicated to and excited about doing it. So we're not gonna make acquisitions just for the sake of making acquisitions, ever. We never have, and I think that's one of the reasons we have one of the most coherent portfolios in all of public real estate in Canada. and we intend to see that continue. But if something will make us a better provider of distinctive urban workspace in Canada's major cities, we will look at it. If it's opportune for us to allocate capital to it, we'll do it. If it isn't opportune for us to allocate capital to it, we will pass, knowing that another deal will come two, three, four months later, as interesting or more interesting. So our goal is to consolidate and to continue to consolidate. Our goal is not to shrink, as I said. Shrinking is of no interest to me. But we will only consolidate if it represents appropriate capital allocation for Allied, given its history as a pretty good allocator of capital, in my opinion. Again, a little more than you asked for, Mario, but what the heck? I thought I'd give you an answer.
spk12: Again, the enthusiasm and conviction is coming out loud and clear, so I appreciate the detail on all the questions. Thank you.
spk03: And our next question will come from Gaurav Mathur with IA Capital Markets.
spk14: Thank you, and good morning, everyone. So given the demand velocity for... class higher brick and beam space in the MTV cities and the inherent flight to quality, in your opinion, is there any potential upside in the current environment to the targeted occupancy of 94%?
spk09: Are you asking, Gaurav, whether we hope to achieve more than 94% occupancy on a stabilized basis? Yes. I want to answer that carefully because I get myself all the time by over promising and I really want to avoid that. I do think on a fully stabilized basis, it's not unreasonable for us to expect our portfolio to be above 94% occupancy, but I do not think there's any realistic possibility of our getting above 95% occupancy in 2022. I wish there was, but I think that alone is, it's not a stretch goal, but it's not a low bar either. That is an ambitious goal that we have established for ourselves and are committed to, But we can't blithely have that happen. We're going to have to work very hard and have some good outcomes in order to get there.
spk14: Okay, thank you for that, Michael. And my final question, and I'm going to change gears here. Now, the choice properties deal comes off as a win-win for both sides. And given your comment on rebalancing in the Canadian reed landscape, are you thinking of using the LP units mechanism a lot more for future acquisitions just so you can stay within your capital allocation guardrails?
spk09: It's a good question and a fair question. And until we did the choice transaction, we had never conceived of that mechanism as something we could avail ourselves of on a large scale. But I think what the choice is, transaction has taught us is we can actually execute that kind of transaction on a large scale. And it does have real value to a seller in terms of deferring significant amounts of capital gains and recapture tax, as long as you believe in Allied's units and Allied's business. So I don't want to suggest we're going to see an avalanche of transactions like this, but it's a possibility that we recognize more fully. And if by an owner of assets that fit our investment and operating focus that was prepared to trade on this basis, we would now look upon it with more favor and more confidence and and be better able to exploit that opportunity. And frankly, there are elements of that kind of transaction that I really like in terms of allocating capital and building allies' operating capability. So I'm not sort of signaling to the world, please come talk to us, but it wouldn't surprise me, nobody has yet, just to be clear, but if people did approach us over the remainder of the year and into next year on that basis, or perhaps even we approach others on that basis, that wouldn't surprise me either. So once a possibility becomes apparent, it simply becomes part of how you view the opportunity set you have as a business. And for sure, we see this as a very good model for transacting between sophisticated parties who can understand the implications and derive the benefits from this kind of, if you will, utilization of units as currency.
spk14: Thank you, Michael. I'll turn it back to the operator. Thank you.
spk03: And our next question will come from Jenny Ma with BMO Capital Markets.
spk01: Thank you, and good morning. Good morning. I appreciate the discussion on the guide rails for capital allocation, and I'm wondering, in terms of the ATM, how should we think about it under this new context? You know, is it something that falls outside of the guardrails, just given that it's fairly small in quantum, or is it something you put aside, given that the choice portfolio transaction allows you to, I guess, you know, juice up your equity and therefore the ATM is not necessarily a tool you need to use for now?
spk09: It's a good question and a fair question. And we've consistently responded to it by saying it does not fall outside the guide rails. It is not an exception. We will have to raise very considerable and very substantial amounts of equity through our ATM. But we won't do it at prices significantly below NAB per unit. So it does not fall outside the guide rails, it falls squarely within it. The dry run in the fourth quarter, I could argue, fell outside those guide rails because we just wanted to see how that system worked. And we were very encouraged with the results. But we didn't even consider using the ATM in the first quarter because certainly pre-announcement of the choice transaction, we were nowhere near NAV per unit. And even as we began to rise toward NAV per unit subsequent to announcing the choice transaction, then the whole market got distracted, understandably, with all kinds of uncertainties and anxieties, which I fully understand. So just to be clear, it does not, fall outside the guide rails.
spk01: Okay, great. That's very helpful. Turning to the IFRS cap rates, and particularly the UDC portfolio, the cap rate on that had been pretty flat for almost two years now, and we saw a gap down by over 40 basis points this quarter. I just wanted to give some color on what drove that. Was it some other transactions that it was being marked against, or is it a bit of a catch-up as it hadn't moved in a while? Anything would be helpful there.
spk00: Sure. There was a transaction involving QTS that was announced late last year and closed earlier this year, and so that provided the appraisers with another data point. They always look at 1 Wiltshire and 60 Hudson as the comparable properties to our UDC assets, even though they're not directly comparable, but they're just as unique, let's say, as our UDC asset. So with that transaction, it did make them and us more comfortable in bringing down the cap rates across the board.
spk01: Okay, so that was the key driver of the move?
spk00: Yes.
spk01: Okay, great. And then lastly, at the last call, you talked about the potential for the CBC building to transact Do you have any update on that front, particularly as it pertains to Allied and your option?
spk09: No, we really have no update at all. But I'll say three things in an effort to be helpful. One, we have not reached agreement with CBC on the acquisition of 250 Front, and I do not know whether we will or not. Number two... If we do, a transaction won't occur until late 2022 or early 2023. And number three, if we do, we have multiple options in terms of how we fund such an acquisition and we will not go outside the guide rails to do that deal. But there is no new information, Jenny, on that transaction. And frankly, I'm quite happy that the public process that CBC and CBRE felt the need to go through is over. And whether it will result in Allied doing a deal on that building or not, I truly do not know.
spk01: Okay. Actually, one more question on that front. If you end up doing something, is bringing on a partner something you would consider?
spk06: Yes. Great.
spk01: Thank you very much.
spk09: Just to be clear, it's something we have considered. So yes, absolutely. And that's not the only alternative we have.
spk06: Great. Thank you. I'll turn it back.
spk03: And our next question will come from Mark Rothschild with Canaccord.
spk06: Thanks, Sam. Good morning, everyone. Good morning.
spk07: Micah, you spoke about why you liked this deal of choice where you were able to issue equity. To what extent in the future would you care about someone's intention on owning the units for a long-term or a short-term when you're doing a transaction like this and maybe being even more direct, to what extent has choice indicated to you how long-term they would plan to own the units?
spk09: It's a fair question, Mark, but I'm really loathe to speak for choice or for the corporate group of which it is an integral part. I do think that group assigns real value to the units over and above the fact that they facilitate deferral of taxation. But I don't feel competent or entitled to articulate views on behalf of either choice or the corporate group of which it's a part. Is it relevant to allied? Yes. So to answer that part of the question, if I thought they were going to flog the units at the earliest possible moment in the most expeditious possible way, I would be less inclined to do such a transaction. But can anyone give me assurance ahead of time that they won't do that? No. But can I rely on on the perceived integrity of the counterparty, yes. Am I prepared to in this circumstance? Clearly yes. In other circumstances as well. But I have to acknowledge on behalf of Allied, there is no assurance that the holder of those units is gonna do anything beyond the contractual hold period other than seldom. I think that's probably the fairest and most useful answer I can provide. Is it relevant to us? For sure. Did we think about it a lot? For sure. Did we take advice from Goldman and Scotia on the matter? Sure. We also know that no holder of roughly $600 million of Allied's equity is going to paint itself into a corner. It's just not going to happen, and I wouldn't do it either.
spk07: I appreciate that. Thanks. Maybe just one more question. You clearly are positive on the fundamentals in your core markets for understandable reasons, and that's is part of what gives you confidence to do such a large acquisition. To what extent do you look at the impact of rising interest rates on potential value as you look at acquisitions now? Or do you believe that there's enough capital out there looking for properties and fundamentals will improve enough that you don't necessarily feel concerned about that?
spk09: I'm not expecting the rise in interest rates to have any material impact on capitalization rates for high quality urban office assets. I may be wrong, but I don't see that happening. I think the demand in relation to the supply is such that transitory changes in interest rates aren't going to affect the value people assign to those kind of almost irreplaceable assets. I may be wrong, but that's my expectation. We're a long-term buyer. It has virtually no impact on how we look at value because, A, we use a relatively modest amount of leverage. What really is important to us is cost of equity, of course, and that's the biggest driver in terms of our willingness to pay, and again, we're willing to pay because we're an operator, not because we're trading assets. And I think most of the people buying the kind of assets we look at are not really conducting any kind of financial arbitrage. They're acquiring assets to operate them to add value, in some cases to trade based on the added value, in Allied's case, to own forever and to serve users ever better. I don't think that's going to happen, Mark, but again, this could take on a dimension. We see in the papers almost daily suggestions that it might take on a bigger dimension. Rates may go up faster in an effort to cool everything down. At some point, that has an impact, but again, Most real estate buyers are not conducting any kind of arbitrage to debt. In the old days, that's exactly what we all did. But we're not really arbitraging to debt costs anymore.
spk06: It's a whole different ballgame. Understood. Okay, thanks. That was helpful.
spk03: And our next question will come from Irina Prokopiva with Prisima.
spk02: Yes, hello, do you hear me?
spk06: Yes, hear you loud and clear.
spk02: Thank you for taking my question, and I apologize if you addressed it earlier. I wanted to know what's your outlook with the Daxi Calgary market, given how strong a performance you want and what kind of tenants are expressing interest in leaving space and maybe evolve your expectations for the rest of the year?
spk06: Again, I didn't hear that clearly.
spk10: Your question relates to the Calgary market and our perception as to what's happening there and will we continue to see that market improve? And we actually are physically seeing the changes now in Calgary. I'm not sure if you've been downtown there lately, but there are people back on the streets. There's people on the plus 15s. There's a rush hour again in Calgary in the morning and the evening. Calgary is coming back to life, and we're seeing a corresponding increase in traffic through our buildings. So, you know, we are confident that Calgary is going to come back. And, you know, we're seeing some really good activity in that marketplace.
spk06: I'm hoping that answers your question.
spk02: Yeah, but that's really an activity. What kind of tenants do you see most interest from?
spk10: Increasingly, we're seeing tech tenants show up in Calgary. It's an area where the city of Calgary has been pushing really hard to attract tech to the city, and the city has great appeal as an environment for young families, and I think tech will continue to see growth in that market, and certainly we're seeing our share of it.
spk02: Okay, thank you.
spk04: And that does conclude the question and answer session. I'll now turn the conference back over to you for any additional or closing remarks.
spk09: Thanks again, Justin, and thank you all for participating in our conference call. These were great questions, and hopefully we were able to provide helpful answers. We look forward to keeping you apprised of our progress going forward. Until we next speak... Be well, and thank you again for showing up today.
spk04: Well, thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.
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