Allied Properties Real Estate Investment Trust

Hi there and welcome to the Conference Allied Properties third quarter 22 earning conference calls. Please go ahead.

So my apologies to you, A, for the delay, and B, for the fact that we're actually conducting this on a cell phone from our office. Anyway, good morning. Welcome to the conference call. Tom, Cecilia, and Hugh are here with me to discuss allied results for the third quarter ended September 30, 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 AIF 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 third quarter operations were encouraging, especially in the context of growing macroeconomic uncertainty. 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 highlight some operating metrics, our financial position, and progress on ESG. Our operating metrics remain healthy. We had our 12th consecutive quarter of increasing productivity from our space, reaching $25.56 average in-place net rent per occupied square foot. We also continue to see strong rent growth on renewing space, which was 7.3% in the period. We are, however, starting to see the potential impact of recessionary fear in the form of extended time to get to an executed lease deal, despite tour activity remaining strong. We are keeping a close eye on this seemingly contradicting data to better understand changing market dynamics. We're pleased with our financial position. We allocated $108 million of capital in the quarter to revenue enhancing and development activities. which is what we'll continue focusing on for the foreseeable future. With over 91% of our debt now on a fixed rate basis, our exposure to rising interest rates is mitigated. Also, our liquidity position is strong, allowing us to meet our commitment into 2024 without having to access either of the public capital markets. We're pleased with our progress on ESG, Our score rose to 86 in the 2022 Gresby assessment, up from 80 last year. This improvement is the result of huge effort across the Ally team, and we're already working on what we want to achieve in time to report in next year's ESG report. Across the country, we're focused on serving our users and completing upgrade and development work to propel operating capabilities. Our operating platform has never been stronger. With that, I'll pass the call to Tom.

We have a solid third quarter leasing, completing 112 transactions, totaling 424,000 square feet. Average rents achieved on renewals were 16.6% higher than average rents in the expiring term. We ended the quarter at 90.7% lease in the total rental portfolio and 91.4% lease in the stabilized model portfolio. We started 2022 with an aggressive target of achieving 94% occupied area, and we remain focused on achieving that level and higher, but we will not make it by year end. I note that Allied has lower vacancy rate than the downtown markets in every one of the cities in which we operate. We expect to continue to outperform the market and have good momentum leading into year end. In fact, we have 109 transactions in negotiation right now, representing 450,000 square feet of net new leasing, which we are trying to complete before year end. I will now provide an update on leasing activities on our recently acquired portfolio, then provide a general update on activities in Montreal, Toronto, Calgary, and Vancouver, and we'll conclude with our urban data With respect to the properties acquired March 31st of this year, we have made good progress on all fronts. Leased area in that portfolio is up slightly following a lease recently completed for a restaurant space at 1508 West Broadway in Vancouver. We are negotiating a renewal and expansion with our anchor tenant at 1010 Sherbrooke in Montreal and expect to finalize before year end. We have developed asset plans to optimize returns over the short medium, and long-term for each asset. As an update in this regard, we have started dialogue with Moment Factory and Knorr Architects, both of which are allied tenants, asking them to collaborate with us and our partners at OP Trust on a vision to completely reimagine the lobby at 175 Bloor Street East. We are very excited about transforming this prominent building over the next 12 to 24 months at a time when much of Bloor Street will be undergoing transition. In the meantime, we're engaged with three small tenants seeking expansion. Turning to our general market updates, our most active market is Montreal. The team completed 44 transactions totaling 150,000 square feet. Among the highlights in the quarter was a lease for 15,000 square feet at 400 Atlantic, a lease for 15,000 square feet at 111 Robert Barazas. Just subsequent to the quarter, we completed a deal for 16,000 square feet at CCMN. We are now working to finalize a 26,000 square foot deal with a food service tenant at CCMN. When completed, this deal will be an enormous upgrade to the food offering in the complex and the neighborhood. We are at various stages of negotiation with large users at 1001 and 111 Robert Barazas. These potential tenants represent a total of $400,000 25,000 square feet. In Toronto, we completed 26 deals totaling 135,000 square feet in the rental portfolio. The office component at the well is 98% and we're in discussions with a few groups for this last remaining piece. Our buildings at 468 King, 185 Spadina, and 135 Liberty have been upgraded and that work is nearing completion, making new buildings ready for new tenants in 2023. In Calgary, we're maintaining our lease area number at 85.6%, which in the context of that market is quite good. We completed 17 transactions totaling 40,000 square feet during the quarter. Kellogg's Sky is 72% leased, and we have early stage negotiations with one tenant for 20,000 square feet, and if completed, we'll bring that project to 76% leased. In Vancouver, we completed 19 deals totaling 45,000 square feet. we are 94.1% leased with good activity on available space. Finally, to our UDC space in Toronto, we completed a renewal and expansion in the quarter with an existing tenant at $250,000, bringing us now to 99.5% leased in that portfolio. I will now turn the call over to you.

Thanks, Tom. This quarter has seen progress made on both current construction projects as well as our 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 work we have done on our development pipelines. Construction and activities. Beginning in Montreal, the team continues to advance work on the rehabilitation of 3575 Boulevard Saint-Laurent and the RCA building, the transformation of 1001 Robert Rousseau, and the tourism fit-out work at 400 Landon. These four large-scale and multi-year redevelopment projects continue to remain on track to remit the teams to position the properties as a premier workspace for knowledge-based organizations that we serve. In Toronto, we have made progress on all of our active construction projects. At the Well, the team continues to complete spaces for both the office and retail users to commence their bid-out work. For the expansion of Curacy West, we have reached a third floor. While we had hoped to have a building topped out by the end of October, Industry-wide, labour shortages have pushed that date out to early December. We continue to make progress on our joint venture projects with West Bank in both Toronto and Vancouver. In Toronto, at King Toronto, we are climbing above grade, with some parts of the project trying to reach the third floor. At 19 Duncan, the team continues to push to achieve occupancy late in October or early November to allow Thompson Reuters to occupy their space. We hope to top off the building by the end of the year. In Western Canada, work continues on Boardwalk Revlon and our JV project with West Bank at Main Alley in Vancouver. At Main Alley, the team has begun the foundation work that will permit us to begin climbing up to grade by the end of the year. Base building work for this project is anticipated to be completed in late summer. Planning and activities. The team has been primarily focused on the execution of active development and redevelopment projects this quarter. In Montreal, the team has commenced preliminary discussions with the city on the potential of creating space that would accommodate life sciences uses at the east block of Gare du Gé. These initial discussions have been positive, and we plan on beginning assembling a team to determine the full potential of the site. Overall, the team has made solid progress across all of our development activities. The team has taken advantage of the work done in previous quarters on our new development approvals to focus on advancing work on the vacancy upgrades, redevelopment projects, and major development projects. I will now turn the call back to you.

Ben, are we live now on the line? Okay, we're live.

Okay, we're live. I'm almost at a loss for words, and I don't think I've ever been at a loss for words in my adult life. Anyway, let me continue. Capital allocation is always important, but never more so than in times of macroeconomic uncertainty. As mentioned last quarter, we're focusing on completing the developments in our pipeline, which we expect will add approximately $82 million to our annual EBITDA over the next few years. This alone will improve our relatively strong debt metrics in an organic manner. I hope this has been a somewhat useful and comprehensive update for you. Lord knows it hasn't been a continuous one. We'd now be pleased to answer any questions you may have. I can't vouch for the success of the connection, but we will do our very best to answer any and all questions you're able to put to us. Ben, if we could turn this over to questions now, that would be very helpful.

Sure. If you'd like to ask a question, please press star 1 now on your telephone keypad. If you would like to redraw that question, please press star 2. The first question comes from the line of Jonathan Klescher calling from TD Securities. Please go ahead.

Hey, Jonathan. Good morning. That was a lot of fun. First question, just maybe give a little bit more color on the longer sales cycle you guys are seeing for leasing. Is that all types of tenants, all geographies? Maybe just a little bit more color on that.

Yeah. I think it's a good question, and it's an interesting experience we're having. I think we would say – that the high volume of tour activity is constant across our major markets, Montreal, Toronto, Calgary, and Vancouver. And I would say the beginning of the stretching out of negotiating timeframes is more or less constant as well. As Cecilia mentioned, there is an inherent contradiction in what we're seeing because typically we would see tours decline concurrently with negotiating timeframes stretching out. What we're seeing now is somewhat contradictory, but I don't think we can ignore the stretching out of negotiating timeframes. The fourth quarter is going to be extremely important to us in this regard. As Tom mentioned, I think we have 109 transactions in the works. Now, we never get every transaction done, no matter how buoyant the environment. But if negotiating timeframes continue to stretch out and people put decisions off until next year, that will tell us one thing. If, on the other hand, we get our normal level of transactions across the finish line in the fourth quarter, that'll tell us something else. I can't tell you or predict now which of those two realities will present themselves. The one thing I can assure you is we will know soon and we will include what we learn in our projection or internal forecast for 2023. I don't know if that's terribly helpful, Jonathan.

Yes, that is. Sorry. Are you still seeing tour activity sort of maintain itself into Q4?

Yes.

Okay. Yes. Okay, that's helpful. And then secondly for participants, I guess 2023 renewals, you don't have a ton, I think only 11% total. But, like, how are those conversations going? Do you think you'll get your same sort of normal annual renewal rate?

I think we will, Jonathan. I think a lot of our conversations have been taking place for a while, and I think we'll get our share as usual.

Okay, so there's no big known vacancies coming?

We know that all. We're aware of everything that is going to happen with respect to – we're not going to be surprised by anything. I think it's maybe the best answer. We're aware of all the non-renewals for 2023, and we're appreciating everybody else.

Okay. And then just lastly, just to clarify it in case I missed this or whatever on your remarks, Tom, but I think you said you had about 450,000 square feet under negotiation right now, and then when you were talking about Montreal, you said there was 425 square feet under negotiation. Is that correct?

Yes, but it's a different category of tenants. Those are larger transactions that probably will take a few more months to advance them, but there's 450,000 square feet of negotiations taking place right now that we hope to complete before year-end. The 425,000 square feet for Montreal includes a few big ones that is going to take a little bit of time to sort through.

Okay, so those are sort of separate numbers then.

Yes.

Okay, thanks. I'll turn it back.

The next question comes from the line of Jenny Ma calling from BMO. Please go ahead.

Thanks. Good morning. I wanted to get a better sense of the trend for capitalized interest as some of your projects finish off. I think this quarter it's sitting at $14.6 million. So I'm just wondering if that's nearing sort of a max value and if you can give us some guidance in terms of how that kind of comes off in the next couple of years.

Yeah, I think you can assume that the Q3 level is – is what will come through the next couple of quarters. And I'll give more specific guidance on that on our Feb 1 call as it relates to our 2023 forecast.

Okay. So could I presume that it's going to be fairly lumpy then between, let's say, the second half of 23 and into 24?

Yes, because as our development completions transfer into the rental portfolio in tranches, you'll see it, you will see it kind of lumpier. So it'll be more of an average for the year that I can give for next year on the FedOne call.

Okay. So just a bit further on that. So if we take the well, for example, it would be on a, I guess, a phase-by-phase or a specific building-by-building basis. Is that sort of the trigger for capitalized interest to come in for the property?

Correct. So you can use the timing that we include in the staffing chart in the MD&A page 74 where we have rent commencement. That should give you a pretty good approximation of the timing of decapitalization.

Okay. That's really helpful. Thank you. And then switching to the 94% occupancy target that you guys are pushing out, I'm just wondering if you'd be willing to venture perhaps a timeframe for when you think Allied could get to that point.

We would not.

Okay. Always got to ask. And then lastly, just wondering in terms of capital allocation, these are small numbers, but wondering what your thoughts are on the distribution. Allied's got a pretty good track record of an increase. on an annual basis and given the EBITDA that you're expecting to come in from development, is that something that gives you comfort in perhaps maintaining that track record that you've built?

That's a good question and a fair question. As you know, it is a board decision. What I can say as part of management is that we see no reason why our pattern will not be maintained late in 2022.

Perfect. Thank you very much. I'll turn the call back.

The next question comes from the line of Matt Cornack, calling from National Financial. Please go ahead.

Hi, guys. I appreciate the incremental disclosure on your top tenets. Can you kind of give us a sense as to what will happen with the cloud space? It seems like the maturity is pretty imminent on that. Should we expect that this tenant will continue on, or if not, what are the prospects?

Yeah, no, I think it's a good question, and I do think that disclosure was helpful. Not the cloud infrastructure activity, but the hyperscaling activity, which is the largest component of the three, is not the highest and best use of network and interconnection space. And happily, we will be getting that space back at the end of this year, and we will be releasing it as network and interconnection space probably at a 20% to 25% premium to what we're obtaining now. The reality is hyperscalers don't need the capacity of high quality network and interconnection space and aren't prepared to pay for it long term. We in turn don't want to accommodate not because it isn't a great use, but it's not the highest and best use of the UDC portfolio we have. So we will be working that, and indeed have been working it very successfully for some time now. We're very close to releasing a third of that space, and I'm extremely confident that we'll release the entire space at a very significant increment. The timing that the hyperscale use afforded us was really, really helpful to us. It sort of bridged a five-year gap. We got the facility fully leased, and now we can upgrade that last component. So I don't see us ever accommodating hyperscalers again, not because they're not good users, but they're simply not prepared to pay the levels of rent. that we can command in network and in a connection space of the sort we have.

Okay, fair enough. And I saw that I think generally you brought up your mark-to-market potential on the UDC portfolio. But just from a modeling standpoint, I guess we can assume that that component of the near-term maturity comes off and then kind of is built back up over the course of next year, or should we assume it takes a little bit longer than that?

No, the course of next year I think is correct, and you're quite right. The rent chart, which is an important part of our disclosure, was altered to reflect exactly what you and I have just been discussing.

Okay. Fair enough. And then on 400 West Georgia and the new development component of the Chateau Vijay, can you give us a sense, like I think I had them modeled for this quarter and next, but what would the timing be on when those are brought in or purchased and brought into IPP?

Yes. Plascar Vijay this quarter. Indeed, it's expected to close at the end of this week or tomorrow, in fact, which is great. It's a spectacular building, and we're extremely pleased with it. And we're working extensively with a tremendous roster of biotech and life science users, as we had hoped, to complete that space. The 400 West Georgia is also going extraordinarily well. There is expansion occurring within the building and within the tenant base in the building that should get the final three floors leased before the end of the year, and I believe that will transition at some point in 2023. Do we know when? Around the middle. So mid-2023, mid-year next year.

Okay, that's very helpful. And then on the G&A for this quarter, Cecilia, was there anything one time in nature it was lower than I guess what we were forecasting? But I don't know if we – there's some seasonality. I think obviously Q4 is a bit higher, but how should we think of this figure in the context of looking forward?

I think Q3 is a good basis to assume going forward. There is seasonality because of when the restricted units are amortized earlier in the year, and then, you know, like you mentioned, Q4 based on final compensation payouts, but otherwise Q3 didn't have any unusual one-time items in either direction.

Okay, perfect. And then I have one here on straight-line rent, but I think that was development deliveries probably, and it converts to cash rent over a period of time in the next quarter or two, or will it stay elevated just because you're developing more? Sorry, I... Sorry, I think honestly it doesn't matter. I'm not going to model it in that much detail, so I'll leave it at that. I'll ask one last one, though, just a bit of a more general commentary. I mean, we've always looked at Allied as kind of a place that you'll have the flight to quality given the assets that you own and the type. but we're trying to kind of weigh this against what's happening with technology companies just from a valuation standpoint, and obviously there's been a bit of a shift in the market. How should we gauge kind of or reflect between these two kind of opposites, flights of quality in a tougher office market, but also technology companies facing some financial pressures? Do you think it impacts the leasing going forward for your portfolio?

Here's how we're thinking about it. to date, Matt, and you articulate it well. It is becoming clearer and clearer to us that Ally does represent a flight to quality in all our major markets, whether it's Montreal, Toronto, Calgary, or Vancouver, and that is encouraging. We are not seeing any diminution in the demand on the part of tech users for space in our major markets. And indeed, we continue to see more demand emanating from tech users in the city of Calgary than is historically the case. Now, admittedly, the historical case is almost negligible. But nonetheless, we are seeing more demand on the part of tech users in the city of Calgary. In Montreal, Toronto, and Vancouver, it remains the vast bulk of the demand we are seeing. I don't know, Tom, whether the 109 deals you're looking at can be categorized in terms of tech and non-tech, but my guess is it's probably pretty tech-heavy.

Tech would be the biggest chunk. Yeah. I'm guessing a third. I'm actually just looking at the list now. Okay.

Yeah, and then knowledge base would get us much higher. And that's the interesting thing. Tech, it depends what one means by tech, and I'm not trying to be glib or cute in saying that. But in Montreal, for example, it's much more multimedia post-production content type of knowledge-based organizations in vancouver it's pure tech it's what any of us would define as tech and then in toronto it's probably a combination so at the moment matt we're not seeing impact on tech demand for our space that doesn't mean we won't over the remainder of 2022 and into 2023 but we're not seeing it yet but again We think more in terms of knowledge-based than tech, and I think that is a broader cross-section. I mean, post-production and multimedia is on fire. You know, Hollywood is busy trying to make up for the fact that we consumed, I don't know, five years of content in a year and a half of the pandemic. So that we're seeing more. real depth in, I don't know whether it comes within the rubric of tech or not. Same with gaming. Yeah. Gaming is still hot. Is that tech? Yeah. Biotech and life science, the demand, we're seeing it most pronounced in Montreal. Is that tech or is it not? I don't know. But we're absolutely seeing the demand there, and it is beginning to translate into deals.

Okay, that's fair commentary.

I don't know if that's helpful, but that's kind of how we see it now, and we're obviously going to be monitoring this super carefully.

That makes sense. And if I could, just one quick follow-up. On the VJ, the site, I think it's to the east, I think at a time you were considering an RFP for something in the vaccine production type area. Is that what you're discussing with the city, or has it evolved into something broader biotech-wise?

I think what Hugh described in his presentation is the piece adjacent that has an old entirely replaceable building on it. we're working with Hugh and his team are working with the city now to get it approved for biotech and life science. So we don't have a specific tenant earmarked for that site, but we are making real progress and clearly have the support of the city in rezoning it for biotech and life sciences. And we also, and Tom is leading this charge, We also are developing extensive relationships with existing and potential biotech and life science users because there's no doubt that they want to concentrate in that part of Montreal near the shrimp. I mean, there's absolutely no doubt whatsoever. And so we want to make that particular opportunity available to satisfy that use because we won't be able to meet all of the demand in the building that we're closing on tomorrow. We will meet some of it, which is great, but we certainly won't be able to meet all of it, and we'd like to be able to meet more of it going forward. But that's sort of a medium-term kind of reality. Working with the City of Montreal is a long process, and then actually leasing and building is also a long process. That is not imminent, but I do think it's a very real avenue of growth for allied in the city of Montreal.

Okay. That makes sense. That area of the city has come a long way with this issue. It's amazing, the transformation there. Okay. Thank you very much for the call, guys.

Thank you.

The next question comes from the line of Gaurav Mathur calling from IA Capital Markets. Please go ahead.

Thank you, and good morning, everyone. Two very quick questions from me. Now, firstly, just focusing on the decline in living velocity, and when you're speaking with tenants, can you comment on how much of this decline can be attributed to the work-from-home debate versus being in a recessionary cycle?

It's a great question, and here's how we think about it. The fact that tour velocity continues to accelerate is to me fairly definitive in terms of those users having made the determination that Workspace is a major component of how they get their work done. And as such, a very good signal. Interpretation of the stretching out of the negotiating framework, that's entirely based on what I would call uncertainty in the face of an anticipated recession. People are just saying, should we wait six months before we make a 5, 10, 15-year commitment? And I believe that has everything to do with recessionary fear, and nothing to do with organizations having made the determination that they want to work from home.

Okay, great. And just to stay on that line of thinking, you know, when you're thinking about net trends across your portfolio and even the broader market, given that we're going to be in a tough macro tape, you know, how are you thinking about demand and net trends going forward? Especially since you just mentioned that, you know, tech demand may slow down slightly for the rest of 2022 and into 2023 as well.

I didn't quite get the question, Gaurav. Are you asking what our thoughts are with respect to demand in the near term?

What are your thoughts on net rents in the near term, you know, as you go through a tough micro-tape?

Yeah.

Thoughts on net rents?

Sorry, net rents? Oh, net rents. Sorry. I apologize.

This damn cell phone. Anyway, all good. Look, yeah, our belief is, and again, we, you know, I want to express this with appropriate caution. And caution isn't exactly my strong suit, but I think it's appropriate here. In Toronto, We expect to continue to see upward pressure on rental rates on renewal. That's for sure. We continue to believe there will be some upward pressure on rental rates with respect to our developments. Now, they're just about leased, which I'm very happy about. But I think we expect to see upward pressure there. In Montreal, which is much more an upgrade market, we certainly expect to see upward pressure on rental rates in the buildings that we have redeveloped. And 400 Atlantic is a great example of that, which is leasing up now because the redevelopment is complete. And then in Vancouver, to the extent we have vacancy, I do expect the upward pressure on rental rates to continue. But in the Montreal market, with respect to completed stays, I don't envisage much upward pressure on rental rates in 2023 and 2024. but I do expect to see it in the upgraded properties, big time. Toronto, in terms of our space, generally, I think we will continue to see some level of upward pressure. I've always expected that to plateau once the new developments inventory is completed. And certainly by 2024, I would expect rental rates in Toronto to start to plateau. But not before then. And now again, that's an expectation. It's imperfect. But what we're seeing on the ground suggests that that's the case. But that could deteriorate if the recessionary fears start to take hold in a big way, then that clearly could put downward pressure on rental rates. The interesting thing is the recessionary fears, which are real, have had more impact on the capital markets than they have at the moment on our operations. But that doesn't mean they won't have impact over the remainder of 2022 and into 2023. We've always done well in the downturn, always. And we know we will again, whatever the downturn brings. So I really do want to express a caveat with respect to what we're seeing, because it could change. The environment within which we are operating could deteriorate. especially if we go into a deep recessionary environment.

Okay. Thank you for the call, Michael. I'll turn it back to the operator. Okay. Thank you.

The next question comes from the line of Tommy Beer calling from RBC Capital Markets. Please go ahead.

Thanks. Good morning. Maybe just coming back to the occupancy comments, maybe stitching together everything that you said today, Michael, you know, with respect to leasing, the pipeline, the developments coming online, but there's obviously some recessionary concerns that certainly escalated. Do you think there's enough momentum to drive occupancy higher over the next few quarters, or do you see it kind of just holding steady, or any call you can share on that front?

Well, you're trying to ask me the same question Jenny asked me, albeit more indirectly in your case. Look, I really want to avoid trying to predict anything between now and when we actually provide our 2023 outlook. Of course I expect occupancy to increase over the remainder of the year and into next. But there is a level of uncertainty that I think would make it almost imprudent for me to prematurely make that prediction. So I think the right thing for us to do is to experience Q4, One thing to remember, leasing isn't that cyclical. It tends to slow down a little in August because everybody's working from home socially or working from their cottage or just at the cottage. But it picks up very rapidly in September. And the one thing we know from long experience is December 31st is a massive deadline for leasing. We were actually finalizing deals. on December 31, 2021. I remember. I wasn't here, but a big part of the team was, and they were literally signing deals that day. So it's a big, big deadline in the leasing cycle that we have experienced over a very long period of time now. And, frankly, before I make any bold pronouncements, I really want to see how the fourth quarter plays out.

No, that's helpful. I did have a question. On the 2023, your estimated development contribution, I think there's a schedule on page 70 something of the MD&A. There was a drop in the estimated NOI contribution in 2023 relative to what I think you had last quarter. Now, this does, you know, these numbers make, you know, I think overall $80 million, but, you know, they can swing around, I guess, on a quarterly basis in terms of your disclosure. But was there anything in particular that drove that rather sizable drop from the disclosure in Q2? And this is, again, the 2023 NOI contribution from the developers.

Very simply, Pami, it's just timing of completion and commencement of reps. Okay. So the aggregate number isn't impaired in any way. Right. If the timing of rent in 2023 is going to be a little later than we initially forecast.

And would most of that be tied to the well? It looks like a few of the leases were pushed back by a quarter or two or something like that.

Yes. And, Tommy, the connection we have with you is not good. So if you could just speak a little louder, it would be helpful.

Okay. Hopefully this is better. Maybe just switching gears with respect to, you know, capital recycling. You've done a little bit in terms of dispositions this year, and I think there's still one property that's held for sale. As you think ahead and you kind of balance your leverage targets as well, can you maybe just provide some color on how you're thinking about capital recycling over the next probably year or so? Yes.

And thank you for that telephonic clarity. That was really helpful. I heard the whole question. We have for several years now been – if you will, representing to you and our constituents that we have considerable optionality in terms of monetizing non-managing interests in our rather large national portfolios. And we've also represented that we have been working on developing those relationships quietly and systematically, even through the pandemic, in an effort to gauge how much optionality we have, how significant it could be, how efficiently we could execute transactions of that sort. So I think the best answer that I can give to you is that we are very confident of our ability to monetize non-managing interests in various aspects of our portfolio on financial terms that would be very attractive to us. And the proceeds of which we would dedicate almost certainly to proactively improving our debt metrics. They're going to improve organically for the reason we discussed on completion of the development pipeline. But we are well prepared to take a more proactive approach to doing that. I'm not projecting that we will or won't, but I am saying in response to your question that we're very well prepared in terms of relationships and in terms of forethought to execute on that kind of transaction if we consider it to be in the best interest of allied and its constituents. That I think is helpful as I can be. So even though we haven't talked about this a lot over the past two or three years, we have been both thinking and working towards establishing our capability in that regard.

That's very helpful. I'll turn it back. Thanks.

The next question comes from the line of Dean Wilkinson calling from CIBC. Please go ahead.

Thank you and good morning, everyone. Hey, Dean. I'm like a boomerang. I keep coming back.

Yeah, we thought we got rid of you.

You know how many times I've heard that. Just a question on the King Toronto. The asset impairment there, was that just straight up on the front end, uncontracted costs coming in higher just because of inflation, or was there something else going on there?

There was a cost increase, but also the delays in the construction as well as the higher cost of equity. Okay.

Got it. And then, you know, I guess natural extension of that on the $300 and change million that you've got left on the cost to complete under the PUD, is there any element of that that would be, let's call it uncontracted risk given inflation and sort of, you know, the increased costs associated with that? Or do you have a big enough buffer baked into those construction budgets to be able to absorb that?

The intention is to have that built in as a contingency into that number. So we have a large contingency set aside to deal with those kinds of cost increases.

Perfect. And we know contingencies always get used. So that's all I had. Thanks, everyone.

Thank you.

We currently have no question coming through. As a final reminder, if you would like to ask a question, press star 1 now. We have a question from Mario Saric calling from Deutsche Bank. Please go ahead.

Hi. Thank you and sorry for prolonging this event with a couple of questions, but we're almost there. The first question for Tom is a clarification on the of net new leasing, would that be above and beyond the 400,000 square feet required?

Mario, sorry, the connection is bad. And I don't think any of us quite got, I know if you're talking about 450,000 square feet of net new leasing, but I couldn't get the question.

Okay, is this better? A little.

So the question was Tom talked about 450,000 square feet of net new leasing discussions. That's fairly comparable to the amount that's expiring in Q4 of this year, so I just wanted to get a better understanding of whether the 450,000 is kind of above and beyond what is expiring.

It's above and beyond. Generally, Mario, a big chunk of this 150,000 square feet are absolutely brand-new deals for us, new tenants. There's some tenants that are really expanding. That's also a factor in the 450,000 square feet. But a big chunk of it is brand-new tenants. Is that answering the question?

I think so. Yep. And my second question just dovetails kind of on the capital recycling comments earlier. So it seems like the ability to execute on potential dispositions through these JVs that you're referring to seems really high in terms. I'm just curious in terms of that. I don't know if you can answer the question, but in terms of the willingness, How do we think about the catalysts going forward, whether it's microeconomic uncertainty, whether it's, you know, further increase in private market cap rates, not for the types of assets that you own, but for other class A assets? What are some of the factors that you're thinking about in terms of the willingness of executing on that potential strategy?

Okay. I think I got the question. And there are three things that we're evaluating in thinking about this. One is while it's not the goal or the purpose, we'll only execute a good trade. Period. Full stop. The goal isn't to execute a good trade. That as a goal is insufficiently motivating for us. But it's sort of a necessary condition but not a sufficient condition. It has to be a good trait, number one. More importantly, getting to goals, there are two goals that are motivating to us and would take necessary to sufficient. Number one, we may want to proactively improve our debt metrics and not wait for the organic improvement to occur. That's number one. Number two, we always want to establish relationships where complementary expertise becomes part of what we achieved through the transaction. And since 2011, we have been establishing joint venture relationships with organizations, not so much because they brought capital to the activity, but because they brought complementary expertise. our relationship with Perimeter is a great example. They have real development expertise along the perimeter of the greater Toronto area. We don't. And so the relationship we established with Perimeter way back in 2012, I think it was, involved not really bringing us capital at all. We brought the capital to the to the program, but bringing us expertise in developing in Kitchener that we simply didn't have, and how successful that partnership has been. West Bank, likewise. RioCan, likewise. In each case, the partner brought complementary expertise. And in each case, the relationship has made us stronger. and made us more successful in whatever we happened to have been focusing on collectively. So to sort of summarize this, because it is a good question, and we have been thinking about it for a very long time. Number one, necessary that we do a good trade, but not sufficient. Two and three, it has to help us address our debt metrics in a meaningful way. and it has to bring complementary capability. I wouldn't call it necessarily expertise, but complementary capability to allies. And we've been saying for two or three years now, and I'm frustrated that we haven't been able to deliver on this, although in fairness to me and us, a pandemic has intervened and we seem to be moving out of a pandemic into a recession. So I don't feel terrible about not having achieved this broader goal to date. But we want to lever our platform. Our history primarily is levering our access to the capital markets. And now and for some time we've wanted to lever our platform. So if we do a deal of the sort I described or alluded to, it will be something that levers our platform or brings complementary expertise to our business or whatever. Long-winded answer, but hopefully a helpful one, Mario. But I want to repeat one thing emphatically. We're not just going to go out there and do a trade so that we can establish a data point that's going to make everybody feel warm and positive. We will not do that for two reasons. One, it's kind of an idiotic undertaking. And two, it won't make anyone feel warmer and busier in this environment. So that is not the rationale that will support what we do if we do anything in this regard. Thank you.

But I made just one last one, and maybe for Cecilia. Just in terms of the IFRS cap rates, we were pretty flat this quarter, aside from the uptick in Calgary. CBRE came out yesterday with a kind of cap rate survey, again, not actual transactions, but on a survey basis, kind of noting cap rates for downtown office A, B, kind of up across the board, 25, 30 basis points in terms of all the major markets. In terms of your thought process on the cap rates, is it simply a function of just no trades within allied specific type properties or notwithstanding that, is the confidence level high that cap rates indeed have not changed for your properties?

So we do adjust our cap rates, but it's based on actual transactions completed as opposed to different research reports. So there was a trade in Calgary in Q3, which justified us bringing up the cap rates in some of our Calgary assets. And we will continue looking at other transactions that take place and assets that might be comparable to our asset base, and then we'll revisit accordingly.

Great. Thank you.

No problem.

There are no further questions, so I will hand you back to your host to conclude this conference.

Okay. Well, thank you, Ben, and thanks to all of you for enduring this most adventurous conference call with us. I think at the end we did manage to share a lot of information with you, and I hope you found it helpful. And I hope all the conference calls that you participate in going forward are technologically better than this catastrophe was. So thank you again. And if there are follow-up questions, don't hesitate to call any of us.

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