Allied Properties Real Estate Investment Trust

Good day, and welcome to the Allied Properties REIT second 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.

Thank you, Jennifer. Good morning, everyone, and welcome to our conference call. Tom, Cecilia, and Hugh are here with me to discuss Allied's results for the second quarter ended June 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 may include those assumptions described under forward-looking disclaimer in our most recent quarterly report. Allied second quarter operations were strong. and our financial results were in line with our internal forecast. 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 current thinking on capital allocation. So now over to Cecilia.

Good morning. I'll summarize the quarter, our financial position, and next steps on ESG. Operationally, we continue to progress with both leased and occupied area of 160 and 120 base points on the sequential quarter. We also had another quarter of increasing productivity from our occupied space, reaching $25.29 average net rent per occupied square foot. continuing the trend we've been experiencing for the last 12 quarters. We're pleased with our financial position as well. We fixed the rate on the $400 million term loan, resulting in 93% of our debt now being on a fixed rate basis. Our liquidity position is strong, allowing us to meet our commitments well into 2023 without the need to access either of the capital markets. We've also made progress on ESG. Having published our third annual ESG report a few weeks ago with a significant increase in our 2021 graduate score to 80, we've now turned our attention to what we want to achieve in the next year. That includes identifying a path to reach net zero in alignment with the science-based target initiative's corporate net zero standard in the next 12 to 18 months. It also includes piloting physical climate risk assessments at our buildings to help us develop the climate risk rating for all properties and the continued implementation of our equity, diversity, and inclusion roadmaps. Our team and our properties continue to perform well during this extended time of uncertainty. It's all about operations, and we've never been stronger. On that note, I'll pass the call to Tom.

Thank you, Cecilia. We had an exceptionally good second quarter leasing space. We completed 160 transactions totaling over 700,000 square feet, almost doubling the results in Q1. Average rents achieved on renewals were 10.1% higher than average rents in the expiring term. Reviewing some information provided by CBRE on the current status of the Canadian office market, I note that Allied's doing relatively well compared to the market. We have a lower vacancy rate than the downtown markets in every one of the cities in which we operate. We expect to continue to perform, and we have good momentum leading into the second half of the year. Our in-house leasing teams have been strengthened. They're motivated and fully engaged. Our external leasing teams have been reset. They are also motivated and fully engaged. Our available space has been upgraded and ready to tour. Our tour volume is up. Our property operation teams are doing an excellent job maintaining our properties, serving our existing tenants very well. We are also planning significant upgrades to our retail facilities in a number of properties, recognizing nearby amenities are essential to our users and their employees. We are determined to move our leased areas fast up meaningfully. I will now provide an update on leasing activities on our recently acquired portfolio of six buildings, then provide a general update on activities in Montreal, Toronto, Calgary, and Vancouver, and we'll conclude with our urban data centers. With respect to the properties acquired March 31st of this year, we've made good progress on all fronts. Leased area in that portfolio is up slightly to 92.5% since acquisition. Asset plans for all six buildings with short, medium, and long-term strategies have been created. We have met with every single tenant in the portfolio, and we're working with a few of the larger tenants to expand. We completed a 15,000 square foot deal at 1185 West Georgia in Vancouver to reintroduce a fitness facility. We're negotiating with the restaurant to lease the last remaining retail unit at 1508 Broadway, also in Vancouver. We have awarded listing agreements at three of the six properties. Our teams are excited to place our stamp on each of these buildings. Moving to Montreal, our most active market, the team completed 62 transactions, totaling 300,000 square feet. Among the highlights in the quarter was a lease with YHP, a marketing company, for 30,000 square feet at the RCA building. Another sizable transaction is currently being negotiated at the RCA building, which we hope to complete shortly. We completed a 30,000 square foot lease with Haven, a gaming company at 3575 Saint Laurent, with expectations for this tenant to grow. Also completed a 9,000 square foot lease at 400 Atlantic during the quarter. We're at various stages of negotiation with large users out of 1001 Robert Barasa, 111 Robert Barasa, and at 400 Atlantic. These potential office tasks total 500,000 square feet. In Toronto, we completed 45 deals, totaling 260,000 square feet in the rental portfolio. The most noteworthy transaction in this market was a 90,000 square foot lease with a tech company at The Well, currently in our development portfolio. Shopify had an option to lease this space, but elected not to exercise their option in Q1. The space was then introduced to the market and immediately attracted interest. There were three different companies at the table at one point. The company that did lease the space did something unusual and very impressive. After a comprehensive tour of the project, they handed us a signed offer to lease with terms very close to being acceptable. clearly demonstrating their serious desire to secure the space. The financial terms represented a huge increase from the Shopify deal negotiated about four years ago. It took only 30 days from starting discussions to get a firm commitment. They are making the move from the suburbs to help them compete for talent. The office component at the well is now 98% vacant. In Calgary, we're maintaining a leased area number of 86.1%, which in the context of that market is good. We completed 21 transactions totaling 82,000 square feet during the quarter. Telus Sky is 72% leased and we have early states negotiations with two tenants totaling 60,000 square feet. Calgary market is slowly coming back. In Vancouver, we completed 29 deals totaling 66,000 square feet with 93.8% lease with good activity on all available space. And finally, to our UDC space in Toronto, we completed a small transaction 250 front with an existing tenant in the corridor, bringing us to 97.9% lease in the portfolio. I will now turn the call over to you. Thanks, Tom.

This corridor has seen progress made on both current construction projects as well as planning for future projects. I will begin by giving an overview of our major projects, and then we'll follow that with an update on the work we have done on our development pipeline. Beginning in Montreal, work has commenced on the rehabilitation of 3575 Boulevard Saint Laurent. This major building renovation will allow us to consolidate large floor plates in the Plateau neighborhood. The team has already used the proposed improvement to land a large tech tent. Work continues unabated on upgrade work at 400 Atlantic, 1,000 Limebrow, Curacao, and RCA. In Toronto, while we continue to make progress on all of our active construction projects, we experienced a series of industry-wide strikes by various trade unions. This has impacted a number of projects. The team has been working with our construction managers on evaluating the impacts of the strikes and determining how we can mitigate the schedule delay. Despite the strikes, the team has been able to reach the 40th floor of our JD project with West Bank at Adelaide and Duncan. At King Toronto, we've been able to begin the formwork above grade. For our expansion of QRC West, the team has been able to push ahead with the first couple floors above grade. We are gaining momentum on this project with an anticipated completion of our phase building work in the fall of 2023. At the well, Having handed over the tower for tenants to be in their fit-out work, we are now focusing on completing the base building work for the retail and the two smaller office buildings. In Western Canada, work continues on War Rock Grand Line and our JV project with West Bank at Main Alley in Vancouver. For the JV project, we are nearing the bottom of excavation and will then be able to start the climb back up to grade. We hope to be back up to grade by the end of the year. This quarter, the team has been focusing on advancing the design of a number of future intensification projects. We were able to make the formal submission for the northwest corner of King and Stavina. At this prominent site, we anticipate adding approximately 350,000 square feet of net new, net zero carbon mass timber office space. While a number of years out, This project stands to be an exemplary project for our commitment to enhancing the already vibrant Kingsford Island neighbourhood, guided by our sustainability framework. In Vancouver, the team has been focused on advancing the design of our rail town project. Like our plans for Kingsford Island, we are focusing on creating a net zero carbon mass timber building. We have already used lessons learned and expertise gained to inform our transition of new development and redevelopment projects to net zero carbon in the long term. Overall, the team has made solid progress across all of our development activities. The projects we have already undertaken, coupled with the current and future projects, have made us more effective in our collective efforts to serve knowledge-based organizations. I will now turn the call back to Michael.

Thank you, Hugh. rising interest rates and inflation have created macroeconomic uncertainty for many businesses. Thus far, the impact on our operations and development completions has been negligible, and we don't expect material impact over the remainder of the year. The impact on acquisition activity, on the other hand, has been significant, with the result that we don't expect to new acquisitions of consequence in the near term. We've suspended discussions indefinitely with respect to the possible acquisition of 250 Front Street West in Toronto, although our right to first offer remains fully intact. Fortunately, we completed our largest acquisition ever in the first quarter, along with our largest equity issuance ever, with the equity being issued at NAV per unit at that time. We've already made significant progress integrating the six properties into our rental portfolio, increasing the lease area to 92.5% at the end of the quarter. We've developed relationships with all large and are more confident than ever that we'll be able to improve operations and drive value in the near term and over the longer term. As Cecilia mentioned, we currently have over $365 million available on our revolving credits facility, with another $100 million available through the accordion feature. This liquidity is more than sufficient to meet our commitments over the remainder of 2022 and well into 2023. We are intent on growing our business, not shrinking it, all with a view to serving knowledge-based organizations more comprehensively and profitably over time. Given the success of our 2022 acquisition program to date, and the current level of macroeconomic uncertainty will focus primarily on operations and development completions for the remainder of the year. We expect this activity to drive significant growth in FFO per unit, AFFO per unit, and NAV per unit in 2023 and beyond. We continue to focus on enhancing our ESG practices, targets, and disclosure. We published our third annual ESG report in June and we've completed our 2022 RES assessment. We expect the results of this assessment in October and we'll publish them accordingly at that time. In our view, ESG is more topical and more important than ever to a public real estate enterprise and to all enterprises. I do hope this has been a useful and comprehensive update for you. We now be pleased to answer any questions you may have.

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. And our first question today comes from Scott Frommsen with CIBC.

Thanks. Good morning, folks. Just wondering on the portion of the occupancy increase, do you have a figure for that portion that's related to moving GLA for development portions of the two buildings into PUDD?

Okay. And just on the rental... We don't have it at hand.

Okay. And can you comment on the rental rate growth that is attributable to the choice properties in the rest of the portfolio?

I don't know if we have sorted it that way or not. there are two deals primarily in the six properties acquired in March. I think both represented some broke over prior in place, but both spaces, Scott, had been vacant for some time. So I think we would probably have looked upon them as new leases.

And we certainly don't have at the tip of our tongue what the rental rates were when the leases expired under the ownership of the prior owner.

Okay, that's helpful. I'll turn it over. Thanks.

And our next question comes from Jonathan Kelcher with TD Securities.

Thanks. Good morning. First question, Q2, obviously a very good leasing quarter for you guys. Just curious, if that momentum carried over into Q3, just given the macro uncertainty we've seen the last couple of months?

I'll let Tom answer that in a granular way, Jonathan, but we haven't seen any diminution in velocity to date as a result of the macro uncertainty. It doesn't appear to have impacted decision makers at all at this point in time. That's not to say it won't, but there's no evidence of it yet. And indeed, I think the momentum carried strongly into Q3.

Jonathan, I mentioned that there's about 500,000 square feet of office space under discussion in Montreal. A few of those potential tenants are new. So it's showing us that there's still due entrance to the marketplace. or tenants who are looking to make a move. So the momentum has maintained, I would say.

Okay, so you guys are still confident. Sorry, go ahead.

Calgary is, I'm not sure we've had a quarter like we had in Q2 in Calgary in a couple of years. The activity level is noticeably stronger.

So the momentum is good. We're Thinking it's going to stick right on the same path.

Okay. So you're still confident in your end target occupancy?

Yes, we are.

Very good. Okay. Second question, just on the acquisition front, and you guys are pens down right now, and I'm assuming many others are as well. impact do you expect that to have on cap rates? I see CBRE yesterday increased their cap rates in Toronto, Montreal, I think, for office by 50 beeps. Are you seeing any of that in the market?

In our market, the markets that we essentially dominate, in my opinion, we're seeing no evidence of that whatsoever. Okay.

And are there still opportunities out there that you guys are just sort of watching and not doing anything on, or have volumes dried up?

I would say that the intensity of interest on the part of vendors to transact now has diminished. All the vendors who own assets that could be of interest to Ally are very strong. They are not under any kind of financial pressure and they are not about to succumb to or capitulate to the fear that is currently rampant in the equity capital markets and the debt capital markets. They will wait until there is less static in the marketplace before they reinitiate their efforts to sell their assets as part of the rebalancing of their portfolios. So if I was to answer the question directly, those assets remain accessible to us, but the vendor is less willing to transact in the context of the current uncertainty as are we. We don't expect any of those opportunities to disappear on us through this period of uncertainty. And we know that the owners of those assets are extremely strong and will transact on terms acceptable to them at the appropriate point in time. We will look at small infill acquisitions as we did through the pandemic, where I think we were fortunate to acquire around $200 million worth of acquisitions over the two-year period, covering, I think, 19 acquisitions, if my memory is correct. We continue to see a few of those, very small acquisitions, We're certainly interested if they augment an existing concentration we happen to have, but we're not seeing many of them and we're not about to reach for any of them. But if we can transact on an appropriate basis and augment an existing concentration, we may well do that. But I am certain as we sit here today allocation of capital over the remainder of 2022 or into 2023. It will be purely incidental and purely de minimis in relation to the size of our business and the amount of capital we typically allocate.

Okay, that's helpful. And you are still committed to close the Montreal acquisition this quarter, correct?

Absolutely. I don't know if it's this quarter. It depends on completion. I know it is on time.

Either September or October. It might just straddle the quarter.

Okay. So it is on schedule, and we are firmly committed to closing on schedule.

Okay. Thanks. I'll turn it back.

And as a reminder, if you'd like to ask a question, you may signal by pressing star 1. If you find your question has been answered, you may remove yourself from the queue by pressing star 2. And we'll hear next from Brad Sturgis with Raymond James.

Hi, good morning. Just to follow on Jonathan's question there, that would be the same for 400 West Georgia. Would that be still on track to close this quarter?

That will also potentially straddle your run. It'll be December, January.

Got it. Okay, and then just to go back to the occupancy questions, would there be any other buildings looking to be added to the transitional portfolio, or is it just down to the three and that work kind of gets completed by year-end?

I think the principal transfers were the Montreal properties, with 1001 Rivera-Barraza being fully as expected. and the most material by far. I don't think we expect any other material transfers into PUD .

Okay.

That process is completed now. Sorry.

Yeah. Okay. That's helpful. Just last question, you highlighted the, you know, still making progress on King and Spadina there through the pre-planning process. I guess, how should we think about the pursuit of that development project in terms of timeline? And then, you know, if you're commencing a new development, like, would, you know, your return hurdles have changed at all given where cost of capital has moved in recent months?

I think the best way to answer that question is to say that we have pursued intensification approvals without interruption through the pandemic and into 2022, and we expect to do that going forward. It is highly unlikely that we will in the near term initiate another new development anywhere in the country. And if we do, it will be very small and very discreet in a given market where we think it's timely to do so. But that particular project, which I think will be a spectacular intensification in due course, we don't imagine initiating it for the next three to five years and have no enough work to do, enough space to deliver. And as we said pre-pandemic, we weren't prepared to initiate any new large-scale developments in the City of Toronto given the supply-demand dynamic that we're all very well And it will be absorbed very successfully. But we're not going to initiate another large new development in Toronto until we observe how this current supply wave works through the system.

That makes sense. I'll turn it back. Thanks a lot. No problem.

And our next question comes from Pammy Burr with RBC Capital Markets.

Thanks. Good morning. Just in terms of the properties that were transferred to the redevelopment portfolio this quarter, can you just describe the magnitude of work involved there and how long these projects may take?

Again, to be very brief, not something I'm famous for, the biggest project is 1,001 Romero Barasa, formerly 700, the negotiator. There are two components of it. There is a significant office component where we are bringing the, if you will, inherited spatial framework back to base building, which I think, as we've explained in certain publications, is truly spectacular. That is not an inconsequential job. It involves removing the hideous straw ceilings, reconfiguring the air delivery system, stripping the beautiful steel columns from drywall, and painting the columns with etch-a-mess and paint. That is a lot of work. But the base building that is achieved by, in effect, restoring to what was originally constructed and eliminating the horrible accretions to the area performed by the original and subsequent users yields exactly the kind of space we know our customers cherish. So that's probably a six to 12 month process minimum. Meanwhile, Tom and the team are well underway in negotiating those areas with real live prospects in the city of Montreal. The other big element is the massive transformation that we're going to execute and are underway in executing at the ground floor, which is something like 36,000 feet, if I remember correctly. And then the area below it, which historically was one of the most horrifying food courts in downtown Montreal and which we're literally going to transform into amenity-rich area within the complex. The ground floor we're hoping you will be completing in the summer of 2023. And we are extraordinarily enthusiastic about that transformation and the impact it will have on the building. I think the area below grade will take another year at least. It's a big transformation, but it's one that we didn't expect to be able to affect as rapidly as we're going to be able to affect it because there was a lot of existing leasehold commitments in place. But because of the pandemic and the havoc it wreaked on the tenants, in that food court, we've been able to get access to the space sooner and we'll be able to transform it more or less concurrently with the ground level. Obviously there will be a one year gap, which is not inconsequential chronologically, but in terms of real estate timing is pretty concurrent. So that's kind of the timeframe. Our views as to our ability to transform that conventional office tower into workspace and amenity environments that serve the kind of tenants we want to serve effectively is only heightened by the experience we've had to date with both the construction and the leasing interest. The minute people could get into the second floor, which Hugh and his team restored to its original base building splendor, the interest on the part of the leasing community went through the roof. And it will translate. There is no doubt in our mind now that it will translate. Long-winded answer, but hopefully helpful.

No, that was a great caller. Thank you for that. And maybe just sticking to the Robert Barossa question, Was that contemplated, was the transfer to the development bucket contemplated at the start of the year as part of your 94% occupancy target by your end?

Yeah, it was contemplated from the beginning. And it relates to the first known return of space. What we liked about this building from the beginning was that it had a very temperate lease maturity schedule. And we could, in a way, anticipate the timing of return of significant portions of the building to us for redevelopment. So it was fully contemplated at the beginning of 2022. And indeed, it was really contemplated once we finalized our asset plan affordability.

Got it. And just Maybe coming back to the evaluation discussion and the comments you've made so far, we've seen some of your peers take some charges through Q2 early. I guess it's still early in the reporting season. So with that context, are you anticipating perhaps any changes in terms of how you look at the portfolio from an asset value standpoint, maybe over the next couple of quarters? whether it's through adjustments to maybe any of the cash flow assumptions or discount rates, et cetera?

We are not anticipating any changes on it, but we obviously are watching the activity in the marketplace carefully. Revaluations that might have occurred to date with others might relate to the nature of those assets. What we are looking at always, as you know, is very centrally located, hyper-urban real estate that not only generates proven levels of revenue, that not only is becoming more productive with the passage of time, and persuade would go up, but actually has enormous intensification potential. So we do not expect assets having those attributes to be revalued in relation to what's going on. That said, we may be wrong. And obviously, as the management team is responsible ultimately for the judgment made, we need to be very observant and thoughtful about what we do in each quarter. We have no doubt that there were no reasons for adjustment in Q2 other than with two or three properties across the portfolio where we did see fit for one reason or another to increase either the cap rate or change the discount rate. We don't expect there to be transactions in our market that would signal the need to change the cap rates applicable to our properties. But again, that is a projection, that is a forward-looking statement, and each quarter is incumbent upon us to make the ultimate judgments informed by an independent appraiser always in that regard. But there are no trades of concern to us in our marketplace at this point in time.

Thank you. Just one last one. You still managed to get some leasing done, certainly with the tax sector. I guess the lease at the well was one of the notable ones. But maybe more broadly speaking, can you just shed some light on perhaps the type of tenants that might be giving up space and those that are still leasing. Are there any notable trends by user groups that you're seeing?

There are trends and they are positive. Most of the demand we're serving or negotiating with is emanating from the tech sector, both nationally and internationally. We are not seeing a single tenant in the tech sector asking to give back space, subleasing space, or asking to contract space. Again, that doesn't mean it won't happen, but we have not had any experience in that regard to date. And we frankly don't expect it. But what is most encouraging to me is contrary to what I might call speculation in the marketplace, most of the incremental demand we're seeing is emanating from the tech sector, which is the largest sector we serve.

Thanks very much. I'll turn it back.

One last little point, because Tom reminds me, one of the most interesting things about Calgary is the demand we're seeing there is emanating from the tech sector. There's no energy tenants taking up space in Allied's buildings in Calgary. It's all emanating from knowledge-based enterprise, which is very interesting and I think bodes well for the future of Calgary.

Our next question comes from Jenny Ma with BMO Capital Markets.

Thank you. Good morning. Just continuing on the discussion about the tech sector, I'm just wondering if you could comment on whether or not there's any concerns about some of the tech layoffs we've seen. I know a lot of them are concentrated in the U.S., but is that something that Ally tracks within your portfolio?

We certainly keep track of what is discussed in the press, and nothing discussed in the press in relation to users of allied space causes us concern at all at the moment.

Okay. And then, Michael, you mentioned that you're not seeing the large tech users give back space and you have some pretty good leasing activity. Is this leasing activity coming from maybe some smaller users or is it still fairly broad-based from the tech sector in general?

It tends to be very broad-based and it tends to be concentrated amongst the larger players in the tech sector for the most part. A great example is Google. As you know, we're about to complete roughly 300,000 square feet in Kitchener for Google. I think they'll start building out later this year and begin occupancy early in 2023. Not only is that not sufficient for Google, but we're actually discussing with them yet a further expansion. So what we're seeing from the users in our portfolio tends to be more expansion than certainly than contraction. We are aware that Wealthsymbol and Shopify have laid off a portion of their workforce. We do not believe that will impact their need or allied space at all. Shopify has completed fairly extensive reconfiguration of its space at King Portland Center and is finalizing a fairly complex reconfiguration of its space at The Well with the intention of initiating construction either late this year or early next. So we have no reason as we sit here today to expect any impact on our space as a result of these layoffs. And we also don't regard these layoffs as surprising. They were inevitable. And their inevitability, I think, has been apparent for anywhere from six to 12 months, in my view. And it's part of a correction that we all knew had to occur and it's now occurring.

Okay, great. Just shifting back to the change in the acquisition outlook, just a bit more clarity. Would you say that acquisitions are paused full stop, or would you consider doing deals if certain levers could be pulled to make the transaction accretive, just finding creative ways to make it happen, or is it really a broader macro call?

I think it's a broader macro call, Jenny. They're paused full stop.

Okay, so what are you watching to see if that view would change? I mean, aside from allies' cost of capital, is there anything in the broader market that you're keeping an eye on to see if there's signs it would be safe to get back into the water on acquisition?

I think in the simplest terms, it would be a resolution of the extreme uncertainty that exists today. I think it's fair to say that allied, at least, I believe didn't anticipate the level of macro uncertainty that we experienced starting, I think, late in the first quarter and throughout all of the second. I don't think a number of people anticipated that. Indeed, if I have to be candid, I expected maybe the opposite, sort of augmenting stability as the lunacy of the pandemic evaded. But We are faced with what is fairly severe macroeconomic uncertainty. We are certainly going into some form of cyclical slowdown or cyclical correction. I don't know, sitting here today, how extreme it will be and what form it will take. And until there's more clarity there, I see absolutely engage in acquisitions of consequence. We've got a great amount of value to create through our development pipeline, and that's what we should focus on. We've got a great amount of value to create through our expanding improved operations. That's what we should focus on. The time for new external growth is not now. That time will return, I have no doubt. But I think the biggest precondition for that, for Alan, will be greater certainty as to what kind of economic slowdown we're facing. And there may be smarter people than me who already have that figured out, but we don't. And we see no reason to pursue that kind of external growth under these

macroeconomic circumstances.

Great. That's really helpful. Thank you very much. I'll turn it back.

Once again, it's Star 1 to ask a question, and we'll hear next from Matt Cornick with National Bank Financial.

Good morning, guys. I guess a follow-up to Jenny's points there. You also mentioned that there's no interest in shrinking the portfolio either. Would you anticipate, though, maybe looking at joint ventures at this point to leverage the platform if there's a party that's looking to get access to the type of assets that you own, maybe with longer leases, or is that off the table as well?

I don't want to be misinterpreted in what I'm about to say, but we are always considering a wide range of options in that regard, and we're fortunate to have a number of people who want to have discussions with us in that regard. But I, again, just as I don't see achieving external growth through acquisitions under these circumstances, I don't see much motivation to pursue the disposition of non-managing interests under these macroeconomic circumstances either. We're very liquid. Our balance sheet is very strong. And there's really no incentive to dispose of assets other than the incidental non-core assets that we've already identified we're going to dispose of because of the non-core nature of those assets. And because we committed to do that when we bought Plaskar DG in 2021. what we said there we were going to do, and that was to fund the equity component of the original portion of the acquisition with dispositions. And we will do just that with a bit of delay as we anticipated at the time. So, Matt, I don't see any reason to contemplate of uncertain macroeconomic environment either.

Okay, fair enough. But the option exists, it sounds like, should you want or need to in the future.

It does exist, and we haven't stopped talking, but we're also nowhere near the point in time where we would even bring an opportunity to the board, let alone

As I say, the incentive to do that for us now does not exist.

On the leasing side, particularly in Montreal, with regards to 111 Robert Bourassa versus 1001 Robert Bourassa, I'd expect a fairly similar type tenant would be looking at both of those spaces. And my understanding is 111 is pretty much ready to go. So if anybody needs a near-term lease, that would probably be where you'd be pushing them towards. But just interested in the interplay between those two properties and leasing the space that you have available.

Yeah, I think 111 is available more or less now. And if there's a group looking at both, we'll certainly be trying to get them to go to 111. But there is a difference between the properties in terms of geography. One of them is a lot closer to the downtown core and in the downtown core, and the other one is not. And I think that tenants make a decision to be in the core or not. You're right, both have large floor plates, but some tenants prefer to be outside the downtown core. There's a new tenant in the building. They moved from the core, interestingly. They've been there for a year and they love it. And it was a comment that was made to me in an elevator ride by this particular tenant saying, if we'd have known what it was like to live in this environment, we would have been here sooner. I was really delighted to hear that, but tenants, Pick up the differences.

Yeah. Having had the benefit of recently touring 111, your leasing team there was pretty eager and bullish about the prospects for leasing. Is that your view that you'd expect some of the vacancy? I know we've talked about it in the past, but some of the vacancy to be leased kind of by year end or at least early 2023?

Absolutely. Absolutely. The level of interest in the building in our portfolio in Montreal is really good. Really, really good. And we do have a really excellent group of people in our leasing team in Montreal. They're motivated. And we've got great listing brokers on each of our buildings. We're going to move the needle in Montreal.

Okay. Fair enough. And a last minor technical one for Cecilia. On the approach to capitalized interest, should we expect that to increase with short-term rates moving higher, or do you peg it on some sort of fixed rate view? I'm just interested how we should expect that to develop in time.

Yeah, it is based on the weighted average cost of our debt, which is largely fixed. 93% of our debt is on a fixed rate basis. So I wouldn't expect the rate on which we capitalize interest on to change materially.

Okay, so it's the in-place weighted average cost of debt. It's not the current cost of debt in the market.

Correct, exactly.

Okay, fair enough. Thanks, guys.

And our next question comes from Mark Rothschild with Canaccord.

Thanks, Anne. Good morning, guys. Maybe this question will be for Tom. I'm not sure. Just get a little more color on the data center portfolio and the rents and if you're seeing any changes in the trend and how rents are moving, if it's moderating at all.

Well, there's still very good demand, Mark, in the data centers, and rents are actually improving. The most recent deals we've done have shown significant increases in rent.

Should we expect the internal growth to maybe pick up from that portfolio over the remainder of the year?

Whenever we have an opportunity to do a renewal, we're going to see an increase in rent. The new tenants will bring the building, the rents are increasing.

So yeah, we expect some growth for sure.

Yeah, and I think the internal growth will be consistent, pardon me, the organic growth will be consistent with our internal forecast. So I don't think we're exceeding our internal forecast, but our internal forecast contemplated growth and that growth is being achieved.

Okay, great, thanks. And maybe just back into capital recycling and the way you think of buying properties, which I know you've answered a few times already. Firstly, when you think about IFRS values, the way you guys calculate IFRS, would that be based on only trades that happen, or would it be based on maybe appraisers' expectations of trades?

We don't have any interest in what appraisers think is going to happen because they don't have a clue. We're only interested in what has happened, and we only attribute significance to actual transactions.

Okay, fair enough. That's clear, helpful. And then maybe just looking out as you have a number of projects, development projects on the go, and this is going to clear up over the next couple of years or so, The units have, Michael, you've never really been a fan, correct me if I'm wrong, in buying back units, but I don't recall the units ever trading at such a discount to your estimate of value. So is this a scenario where you might shift your view or taking a long-term approach, you still would stay the course with how you backed it in the past in regards to equity?

I think we've been partly consistent, Mark. we are allocating a significant amount of capital to our development pipeline, which is getting very close to completion and which is going to make a very significant contribution to our EBITDA in 2023 and beyond. If we weren't committed to that capital allocation, we might consider using available capital capital in that way. And we remain committed to our balance sheet, as we always have been. And so given those facts, what we're not prepared to do is borrow money to buy our units back, even though theoretically it might be a good trade. We're not in the business of trading in our units. As I say, if conditions were different, if we weren't committed to allocating capital to very productive development activity. We might then take the suspension of external growth through acquisitions, use whatever capital we had available on our balance sheet and buy units back. But I don't see our future unfolding that way. We're going to complete the developments over the course of 2023 and early 2024 and we're going to allocate capital, which is always a scarce resource, to that, not to buy our units back. Although I agree entirely with the premise that our units are trading at a level materially below the actual value per unit of our portfolio. But again, we're intent on growing not irrationally and not irresponsibly, but we've committed to do this. And, you know, something like 200 to 300 million a year gets allocated to this completion process. That, fortunately for us, is going to end around late 2023, early 2024. Then we have latitude or more latitude than we have today. But at this point in time when this value gap exists, we have a use for all of our capital that is consistent with holding our business and that will generate a very meaningful return to our influence. So it's really not an option that's available to us, even though the conditions for buybacks are very, very favorable. It's just not an option available

given the commitments we've made over the past 8 to 10 years with respect to development. That's helpful. I appreciate that. And, yes, you have been consistent. Thanks, Mark. Thank you. And our next question comes from Scott Frumson with CIBC.

Hi. Just a quick follow-up. Can you give me an idea outlook on, you talk about the outlook for the leasing of the retail portion of the well?

I think the last public report or press release we issued, Scott, indicated that the well was, the retail component of the well was around two-thirds leased.

I believe we have transactions at various stages of negotiation that will get us higher than that. I think we will leave it to RioCan to report on that specifically in conjunction with their Q3 results, which I'm sure are imminent as they are at the forefront of that particular leasing initiative. But they have achieved very good results And I know the last press release we issued recited the actual results very precisely. I know there has been progress from that point forward, but I'm not in a position to quantify it as authoritatively as RioCAN can and undoubtedly will when they report.

Thanks. And just a quick follow-up question on sustainability. Can you give a bit of color on how users' views on sustainability have changed in terms of choosing space and how they're thinking about relative rental rates? Maybe in other words, is the balance between users' needs for a sustainable workplace and paying higher rents continuing to shift in favor of your portfolio?

That's a really good question. And there's significant anecdotal data that suggests that users are demanding sustainability attributes and are prepared to pay for them in relation to environments that are lacking in that regard, number one. And I think there is also emerging empirical data now, mostly from the U.S., if I'm not mistaken, that supports the anecdotal data. And certainly, if you're asking for my educated guess, there is no question that the vast majority of the users we serve, including users in more conventional categories, are prepared to pay more for an environment that is sustainable, and an environment that is conducive to the wellness of the men and women working in that environment. And indeed, I would go further and say if you're owning and operating urban office environments that don't have those attributes and don't progress in that regard, you will fall behind those who do.

And did that tone of conversation on potential users at the well, did that change over the course of the development and leasing process?

It's hard to answer that because we were building to a LEED platinum standard and because the so well articulated and of such interest to the users. I don't think that changed the attitude. I think we were delivering a product that was very appropriate to the environment we're talking about. And I think the success we've enjoyed there is attributable in part to that. The other element of success that was critical there was the desirability of being located squarely within a mixed-use, amenity-rich urban environment. There is no question that drove many of the decisions made to locate in the office component of the well and indeed now in the retail component of the well. What I think did change over the course of the development in our favor was the ongoing strengthening of the Toronto market and the proximity to completion. The deal that Tom talked about with respect to 90,000 square feet, one of the major reasons we were able to secure that deal is that completion is imminent and they could predict with great certainty when they could start moving their most valuable resources into that building. So that certainly helped us as we progressed. But I think the sustainability aspects and wellness aspects of the complex were recognized at the beginning and were a big part of the success we had for sure. And yes, people were prepared to pay more to be in the well for those reasons and the other reasons I mentioned.

That's very helpful. Thanks very much. Thank you.

And we have no further questions at this time. I'd like to turn the conference back to Mr. Emery for any additional or closing remarks.

Well, thank you, Jennifer, and thank you all for participating in our conference call. We will keep you apprised of our progress going forward. In the meantime, I wish you all the best. Have a good day.

This concludes today's conference. Thank you all for your participation. You may now disconnect.