Allied Properties Real Estate Investment Trust

After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, press star one again. I'd now like to turn the conference over to Cecilia Williams, President and CEO. Please go ahead.

Thanks, Regina, and good morning, everyone. Welcome to our Q1 conference call. I'll discuss highlights briefly. Nan will highlight our strong financial position, and JP will outline our high leasing tour activity and provide a summary by urban market. Then we're pleased to answer questions. 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 2023 annual report and our most recent quarterly report. Material assumptions underpinning any forward-looking statements we make include those described under forward-looking statements in our most recent quarterly report. I'll put our Q1 highlights in the context of leasing and portfolio optimization. First, leasing, strong demand continues. I'm encouraged by the high level of tour activity across our portfolio. I'm also encouraged by the ongoing productivity of our portfolio and that renewals were at healthy spreads to in-place rents. It's worth noting that most of these spreads are on rates established at the height of the market in 2018 and 2019. I believe we're at an inflection point and leasing momentum will continue through 2024. Our high user engagement, which manifests through the critical net promoter score, supports our leasing efforts. On to portfolio optimization, development, upgrade, and capital reallocation. Development and upgrade activity is one way we've optimized the portfolio over the past decade. A quick update on this. At 1001 Robert Barasa, 80% of the transformation of grade is complete and open to the public. It's unique space like no other in the city of Montreal. The work to transform specific floors and fulfill leasing requirements for completed deals is ongoing. The second floor in its entirety and space on the 21st floor will be delivered to two users in June. The interior lobby and exterior of the building will be completed in July and August. At 19 Duncan in Toronto, touring for the rental residential suite has commenced and move-ins are expected later this summer. At King Toronto, the 12th level was completed in April and glazing will begin in June. The 16 level structure will be completed by the end of 2025 when fixturing and residential possession will commence. Two units were sold in April at pricing in line with prior estimates. We're very excited to complete this part of King West Village. At M4 in Vancouver, the concrete structure has been topped off and Animalogic will commence occupancy late this year. Another way we've optimized the portfolio is through capital reallocation. We're effectively trading lower quality assets for higher quality assets. What we've achieved so far this year is a great example of this. We're accessing capital from lower yielding, less strategic assets. Specifically, this quarter, We've identified three assets for disposition in Montreal, totaling $77 million of IFRS value, about one-third of our target $200 million. The expressions of interest have exceeded our expectations over the past few weeks, so we're confident that we can hit our target. We're investing that capital in three higher-caliber, more strategic assets, the first being the rental residential component of Telesky. The second being a majority ownership position in one of the most distinctive assets in the country, 400 West Georgia and Vancouver. And third, an increased ownership position in high-quality rental residential and distinctive workspace in 19 Duncan in Toronto. Through the Telesky and 19 Duncan investments, we've also established scale of our urban rental residential portfolio. This is an important complement to our urban office portfolio. playing a similar role to the retail component of our portfolio. The residential density will not only support the retail and commercial components, but also add to the ecosystem. Our urban centers thrive when the concentration of people have access to everything they need in a tight radius. We have the density potential and the operating capability to create our own mixed-use neighborhoods, to create our own demand. We've now recommenced this activity and we have decades of opportunity ahead of us. Focusing on portfolio optimization doesn't make us indifferent to short-term metrics, but we're intensely focused on the long-term implications of what we do. Portfolio optimization will increase the productivity of our urban portfolio, allowing us to improve our already strong financial position and support our distribution while growing cash flow per unit over the medium term. This is what investors expect and want from commercial real estate. Nan will now outline our position of financial strength, which will enable us to execute our strategy.

Thank you, Cecilia. Good morning, everyone. The first quarter of 2024 was in line with our expectations. Our funds from operations per unit for the quarter was $0.578, which was 0.3% lower than the comparable quarter. Adjusted funds from operations per unit for the quarter was 53.7 cents, which was 0.8% higher than the comparable quarter. Same asset NOI of the total portfolio increased by 2.9% over the comparable quarter, while the same asset NOI of the rental portfolio decreased by 2%. On April 1, we closed on the acquisition of 400 West Georgia in Vancouver and increased our ownership interest in 19 Duncan in Toronto. In doing so, we traded non-cash interest income for cash operating income from high-quality assets, which is exactly what we want as owner-operators. While these acquisitions will put temporary upward pressure on our debt metrics in the near term, proceeds from our disposition activity will offset this pressure as they will be allocated to paying down debt. Our planned disposition activity is progressing well, with targeted proceeds of up to $200 million of IFRS value to be realized. At the end of the first quarter, we have more than $730 million in available liquidity. And we are fully committed to maintaining a strong balance sheet and retaining our investment credit rating. I'll now pass the call to JP. Thank you.

Thanks, Nan. We remain encouraged by the level of leasing activity across our portfolio, even with longer leasing timelines. In Q1, we completed more leasing transactions than any quarter in 2023. and the number of leasing transactions was up 32% compared to the prior year. We are also encouraged by the number of existing users in our portfolio requiring more space. 18% of new leasing activity in the quarter represented expansions, and the amount of expansion space leased in the quarter was greater than the total amount of expansion space leased in all of 2023. Tour activity continues to be strong and exceeded our expectations for Q1. We observed a 10% increase in tours in the quarter compared to Q4 last year and a 23% increase compared to Q1 last year. Industries represented by touring organizations continue to be technology, professional services, education, and medical uses. The increase in tour activity is particularly encouraging Considering over the past few years, we introduced the ability for prospective users to tour our space virtually. As a result, by the time an organization conducts a physical tour of our portfolio, they are already familiar with the space, resulting in enhanced quality of tour activity compared to what we observed previously. As of today, we have more than 1.05 million square feet of leasing activity under negotiation or at the prospect stage. I'll now provide a brief overview of each market. In Montreal, we're seeing an increase in demand from technology users and greater diversification among industries represented by touring organizations as more and more employers recognize the importance of offering great workplace experiences to attract, motivate, and retain top talent. Tour activity in Q1 was in line with our quarterly average. In Toronto and Kitchener, we are seeing an increase in demand from prospective users with larger space requirements that are greater than 10,000 square feet. Tour activity in the quarter was 21% higher than our quarterly average. In Calgary, there is renewed activity from the oil and gas industry, and we're seeing an increase in demand from professional firms that serve the sector. Tour activity in Q1 was in line with our quarterly average. In Vancouver, there has been an influx of new entrants to the market, particularly among technology users and professional services. This is resulting in increased tour activity, which was 71% higher in Q1 than our quarterly average. In summary, the composition of our portfolio, concentrated in amenity-rich urban neighborhoods, coupled with the strength of our operating platform and team, as validated, by our users through our Net Promoter Score, which in 2023 was 250% higher than our peers, gives us tremendous confidence in the continued demand for Allied's distinctive workspace across the country. I'll now turn the call back to Cecilia.

Thanks, JP. Before we open to questions, I want to reiterate my confidence that our portfolio will not only hold up well in this economic environment, as it has during past downturns, but ultimately emerge in a stronger position for the following reasons. One, the one of a kind concentration of urban properties we own and operate. Two, the intensification potential inherent in our portfolio, which represents continued growth. And three, our team across the country is stronger and better integrated than it's ever been. I know that my fellow allied team members are energized and focused on executing our strategy, And I thank each of them for their hard work, creativity and dedication day in and day out. These two things are one of a kind concentration of properties and our strong team represent our unbeatable operating platform. This is all in the context of our thriving cities, which continue to attract global talent. Our cities are in demand and continue to grow. This growth will lead to demand that we can satisfy and serve. It's time to invest in the future of our cities by investing in allies, and we'd now be pleased to answer any questions.

At this time, I'd like to remind everyone, in order to ask a question, press star followed by the number one on your telephone keypad. Our first question will come from the line of Jonathan Kelcher with TD Cowan. Please go ahead.

Thanks. Good morning. Good morning. First question. First question, Cecilia, I guess just on the, you guys highlighting your rental portfolio and I know you talked a little bit about it, but does that change anything in terms of future projects or what you're doing with the excess density?

No, I mean, we've been involved in rental residential development for the last 10 years. Jonathan, starting with Telesky, I think that was in 2015. and then followed very quickly with 19 Duncan, both of which of course now are either completed or at completion. So it's really about just identifying the residential density, the intensification potential that we have inherent in our portfolio, and that we see that as a compliment similar to the retail component of our portfolio. We're not You know, saying that we're going to be changing our focus away from from office, but we really do see it as a compliment and, you know, basically creating our own mixed use neighborhoods in the past. We've had to joint venture with partners that had rental residential expertise and now we wouldn't need to do that going forward. We have that expertise ourselves.

Okay. That's helpful. And then just switching gears on the leasing front, sounds like you guys have been very active. At what point does that start to translate into occupancy gains?

It's very hard to predict in this environment, and so I think the outlook that we've given in the press release is a responsible way to address our expectations in this environment. We've gotten great feedback from our constituents in terms of how we're laying that out, and there's nothing that I have to add to that at this point.

Okay. And then I'll just slide one more in here then. There was no real change to your outlook, I don't think, in the press release. And your beginning of the year outlook, did that contemplate the West Bank transactions?

It did not contemplate any reorganizations in that regard, but I think we gave ourselves enough space that we'll see how things play out, but we're not changing our outlook.

Okay, thanks. I'll turn it back.

Your next question will come from the line of Mario Saric with Scotiabank. Please go ahead.

Hi, good morning, and thank you for taking the question. Cecilia, just coming back to occupancy and a comment that you made that you felt that you were at some deflection point and momentum is expected to continue in 24. Was that pertaining to occupancy or maybe if you could just provide the more color on what you meant on .

We're sticking with the outlook that we gave in our year-end press release. dated January 30th, and we have no change to our outlook. We provided color in terms of our expectation of occupancy over the course of 2024. That has not changed.

Okay. So, in the comment on an inflection point, was that related to something outside of occupancy?

No. No, it's just a reflection of how we're feeling about the level of tour activity and leasing that we have in the pipeline.

Got it.

Okay. It's really hard to predict timing, Mario. So it's hard for me to say, you know, what's going to land by June 30th versus what's going to land by September 30th, given that we report on a quarterly basis.

Okay. How did the 50 basis point quarter over quarter decline in economic occupancy in Q1 and 69% tenant retention during Q1 compared to internal expectations at the start of the year?

They were as we expected. Got it.

Okay. And then I think, JP, you mentioned that there's a 1.05 million square foot leasing pipeline, which is fairly similar to what was noted in Q4. How much of the 1.05 million square feet relates to the 800,000 square feet that is remaining to expire this year?

About 50%, Mario.

Okay. Just on the assets held for sale, the disclosed same asset NOI in Q1 was $1.3 million. Would all of the $130 million of recorded assets held for sale be same property assets?

Yes, they would, Mario.

Okay. And then the $1.3 million for Q1, is it reasonable to just annualize that $1.3 for a full year NOI?

Yeah, that's approximately correct.

Okay. My last one, the reported debt to EBITDA came up a little bit quarter to quarter. I think, Nan, you mentioned it may come up a little bit more on the back of the West Bank transaction that closed on April 1st. Do you have a target debt to EBITDA in mind? And if so, what kind of timeframe should we think about?

Nothing. We're not disclosing how we expect that to evolve over the next few quarters. We have said that there will be temporary modest upward pressure on those metrics, but they will come down over the course of the next 18 months. So, we expect to ultimately remain within our targeted ranges.

Okay. And so, can you just remind me what that target range is, 18 months or so?

in the eight times range as it relates to debt to EBITDA. Perfect.

Okay. That's it for me. Thank you.

Thanks.

Your next question comes from the line of Lorne Calmar with Desjardins. Please go ahead.

Thanks. Good morning, everybody. I noticed – actually, sorry, let me restart. You mentioned a strong interest for – the assets you're looking to dispose of. Is there a scenario where you look to go beyond the $200 million of dispositions?

Not this year.

But maybe just to follow on that, getting back to that eight times range, would you look to pursue additional dispositions if you're finding it a little more difficult to do organically?

I mean, we'll consider Offers that come our way, the unsolicited offers and expressions of interest that we received have actually been quite intelligent. And so we're open to considering everything. We're targeting 200 million this year. If we are able to do more than that, we're open to that. Not committing to more than that at this stage, but certainly open to it.

That's fair. And then maybe can you just give a little bit of color on the types of buyers that are coming forward?

It's a mix of foreign buyers and local buyers, but all private.

All private, okay. And then I noticed this quarter you guys, I think, removed the net effective rent disclosure. Can you maybe give us a little color as to the decision or the reasoning behind that decision and maybe what the NERs look like on Q1 leasing?

So I'll answer the first part of your question. We found that the disclosure isn't helpful in terms of our leasing negotiations. And I think we're also the only office issuer in Canada that might be disclosing them. So not helpful to us in leasing, but JP can provide an update in terms of the net effective rents realized in Q1. Yeah.

NERs in Q1 were in line with NERs achieved last year.

Okay, so that's very helpful. Thank you, JP. And then maybe one last quick one for Nan. With the acquisition of the additional 45% of 19 Dunkin', what do you expect to be the incremental increase in capitalized interest? Should we sort of think of it as the incremental amount on the construction lines with the additional interest in the properties?

Lauren, we'll be reporting on that in Q2 and each quarter going forward as just our normal course of reporting. We're not going to be providing any sort of forecast on those line items.

Okay, fair enough. Thank you so much for taking my questions. I'll turn it back.

Thanks.

Your next question will come from the line of Matt Kornack with National Bank Financial. Please go ahead.

Hey, guys. Just quickly on the dispositions. If you look just quarter over quarter at the property list, it looks like two of them would have been in Old Port, Montreal. But also, we noticed that 810 St. Antoine is no longer in the property list. Are you selling some land that would have been kind of suited for more condo development? Is that how we should read into that? And maybe taking that forward into Toronto, is that something we'd expect to kind of between call it Spadina and Church on Adelaide or some of the other residential density that may not be rental appropriate?

I hope I remember your multi-part question. On the three assets that we've identified in Montreal, and I believe we've listed them with the individual addresses. Is that right, Nan? Yeah. So it does include 810, and really we're focusing on the lower-yielding assets. That site in particular was already zoned for rental res, but it is a lower yielding asset, so it was something that we were open to considering. We're not looking to dispose of all sites that have rental res potential, but that one was an obvious one for us.

Okay, fair enough. And then on just aggregate capex as a kind of as opposed to kind of the IPP capex. How should we think about that number? It's been around kind of $100 million to $120 million. It was a little higher in Q4, kind of stable this quarter, but the IPP component was lower than last quarter. Can you give us a sense as to kind of, I'd assume that the aggregate spend should come down as you finish the development assets, or should we expect that given the focus on upgrading the portfolio broadly, that maybe more assets fall into the redevelopment bucket going forward?

No, I think the table in the MD&A talks about the remaining costs to complete, so those will be done mostly by the end of 2025. And then upgrade capital going forward would be less than what has been our annual investment over the last few years. It would be a lower level, but we still will be completing upgrade activity.

Okay. Accounting-wise, just sequentially, quarter over quarter, there was an increase in the amortization of PIs and leasing costs. Is that just because you're bringing more of the development assets in? Or was there anything one time in nature? I'm just thinking whether we should straight line that number.

That's correct. It's actually the developments that are coming online with straight line rent in place and amortization of TIs as well. Okay.

And then just lastly, on the distribution, you guys have been firm in your commitment to it. But can you give us a sense as to how you balance kind of retaining that capital to invest in the portfolio versus paying it out to investors and maybe What is your thought on kind of a minimum payout ratio or is there a payout ratio in mind? And I know you're looking longer term, but just your views on the distribution and why sustain it in the context of how high your yield is at this point?

Yeah, so we are absolutely committed to our current level of distribution. I'm an investor. Everyone in the room here with me is an investor, so we understand how important that is. Ultimately, like over the medium to longer term, you know, we would want that payout ratio to come down to, let's call it the 70% range as a way, you know, to your point of retaining more of our lower cost capital, which of course is the capital that we generate internally. And that will just come over time with organic growth. And yeah, that's something that, you know, maybe in the medium to longer term would be what we're targeting.

Fair enough. I appreciate the call, guys. Thanks.

Thanks. Your next question comes from the line to Brad Sturgis with Raymond James. Please go ahead.

Hey, good morning. Just to go back to the comment around lease negotiations still taking a long time and then trying to, I guess, marry that to the inflection point comment. Is there been any green shoots on whether those timelines are starting to shorten up a bit? Or how should we think about that inflection point in terms of the confidence going forward in terms of perhaps other green shoots that you're seeing to make that statement?

Yeah, the level of tour activity is really the leading indicator for us, Brad. So having those at above average levels quarterly levels is what gives us the confidence and just the continuing dialogue with prospective users and existing users, frankly. JP referred to some of the expansion activity within our portfolio. We'll see how the time to execute a deal changes for the next couple of quarters. That will be quite telling, but it's really the level of tour activity that gives us the confidence that we're at an inflection point.

Okay, that's helpful. And just on the development pipeline in terms of what's left to complete, maybe I missed it, so I'll pause it if I did, but just what's the analyzed EBITDA contribution still left to come online?

I think we press released that a couple of quarters ago, and it's still in line with that.

Okay.

Yeah, we refer to the incremental in the last press release.

Okay, sounds good. Thanks a lot. I'll turn it back.

Thanks, Brad. Your next question comes from the line of Pammy Beer with RBC Capital Markets. Please go ahead.

Thanks. Good morning. Interesting comments on the tenant expansions from a leasing standpoint. Can you maybe just provide more color on what's driving that? Are these unique to those assets or those tenants? Or is this maybe a bit of a trend that you've seen as maybe return to office picks up?

I think, Pammy, it's a function of both growth for the organizations in question, but also the need to expand their footprint to accommodate their employee base as they revert back to an office-centric model, as you refer to.

And was that... noticeable in any particular region or is it across the portfolio?

It was a diversified representation both type of user as well as geography.

Okay. Maybe just coming to 400 West Georgia, can you talk about the tenant interest that you've seen there thus far and maybe any sense of timing to get the balance of that space leased up?

We have three prospective users looking at taking up the remainder of the space there. And we're very confident in our ability to meet their needs. So that is ongoing and we'll provide, you know, we can provide an update as part of our Q2 conference call.

Okay. And sorry, Cecilia, do you expect maybe to get these deals done this year?

That would be my desire. Certainly. And that's what we're targeting.

Okay. Last one for me, just on the residential leasing at 19 Duncan. Can you just comment on maybe what the rents look like there and leasing interest? You did mention that there has been some leasing interest to date. I'm curious if you have any sense of maybe the percentage of units that might be committed at this stage and when do you expect to get that stabilized?

We've just started our leasing program, so we're encouraged by the amount of interest and activity, although it's likely premature given we've just started to give you any meaningful direction. But we are optimistic with respect to the lease up over the course of this year. And rents would be representative of the high-water mark within the market and comparable to what you would expect for a similar product across the city.

Got it. Thanks very much, JP. I will turn it back.

Again, for any questions, press star 1, and your next question will come from the line of Mark Rothschild with Canaccord Genuity. Please go ahead.

Thanks. Thanks. Good morning. Good morning. Maybe following up on your comment regarding the distribution of the confidence in that, I'm looking at the numbers and trying to reconcile and understand your comment. Obviously, organic growth is extremely hard here, especially when you consider leasing costs. There is about $1.5 billion of debt maturing between 2025 and 2026. The 2026 maturities are at very low rates. Obviously, we don't know where interest rates are going to be then. How are we to expect the payout ratio to come down considerably or any amount materially over the next few years considering the difficulty in refinancing debt in general at office properties? If you have good properties, you'll be able to access debt, but the rate's likely to go up. It's hard to have organic growth. It's not clear how much the accretion is from the development completion. How do we get there within the next two, three years?

Oh, well, I don't expect to achieve a 70% payout ratio in the next two or three years, certainly. That would be our long-term aspiration. You know, we'll look at selling other lower-yielding, less strategic assets if we need to. We have a lot of ways that we can address our maturing debt, our next tranche of debt. Our next bond is April of next year for $200 million. not something that we're incredibly concerned about given the amount of liquidity that we have and the options that we have at our disposal to address that. So it's not, I didn't mean to imply that we were targeting a 70% payout ratio in the next two or three years. That is a longer term aspiration.

Okay. And then to your comments on asset sales, do you believe that if you wanted to sell considerably more at IFRS NAV, that's, the market would be there to do that.

Yes, I do believe so.

Okay, great.

And the unsolicited expressions of interest support my belief.

But to be clear, that's not something you're pursuing right now?

We're open to, we're considering everything that comes our way and we're not saying no to anything preemptively. We'll consider all of our options.

Okay, great. Maybe just the last one. This is a small one, but there was a fee paid consulting to a trustee. Is that, was that a one-time thing, or is that going to be just a recurring cost? Is this someone who is helping out the REIT?

It's an annual agreement.

Okay, great. Thank you so much.

Your next question will come from the line of Sumali Saeed with CIBC. Please go ahead.

Thanks. Good morning. Just to revisit the leasing conversation. So it does sound like tour activity is fairly healthy. So just wondering of the portion of tour that aren't converting yet to from releases, I guess, what's the reason you're hearing why tenants don't pursue it? Is it pushback on rent or is it more so timing? And then if it is timing, what are you hearing that they need to see before they firm up their decisions to lock it down?

It really varies, Samaya, and it does depend on just they need to make decisions based on the needs of their business. It certainly isn't based on what we're able to offer them. It's really on a business by, on case-by-case basis based on their own business situation.

Okay. And there was good color on, I guess, expansion trends in your assets. Are you seeing much downsizing activity? And then if so, is there a certain type of user that would be more downsizing oriented?

Not any more or less than we've seen in the past. And so, there wasn't anything to highlight there. Okay.

And Samaya, I'll just add, we survey our users every year. and uh you may recall that last year there were more users in our portfolio that identified a need to expand than contract so that that in addition to what cecilia just outlined is another another data point that gives us confidence that the trend around contraction is um is diminishing across our portfolio and more and more users are looking to grow okay that's good color

And lastly, just to go back to your comments around your urban rental residential strategy, and you talked about expertise you have already in-house. Do you plan to build it out further? And just, I guess, if you could offer more color around that operating platform, that would be helpful.

I don't think we need to build it out further. So the answer would be no.

Okay. That's all I have. Thank you, guys.

Thanks, Maya. And we have no further questions at this time. I will turn the call back to management for any closing remarks. Thanks, Regina.

And thank you, everyone, for joining our Q1 conference call. We'll keep you updated on our progress going forward.

Ladies and gentlemen, that will conclude today's meeting. Thank you all for joining. You may now disconnect.