Allied Properties Real Estate Investment Trust

and answer session. If you would like to ask a question during that time, press star followed by the number one on your telephone keypad. As a reminder, today's call is being recorded. I will now hand today's call over to Cecilia Williams, President and CEO.

Please go ahead. Thanks, Tamika. Good morning, everyone, and welcome to our conference call. I'll provide an update on our three areas of focus this year. Nan will then highlight our Q2 results and our strong financial position. JP will then outline our solid leasing 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. By their nature, these statements are subject to risks and uncertainties that may cause actual events or results to differ materially. including those 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. Now an update on our priorities for the year. We're focused on running the business for the long term. To us, that means three things in today's environment. Number one, an unwavering commitment to the balance sheet. Number two, leasing up vacant space. And three, completing development and upgrade activity underway. First, the balance sheet. Our unwavering commitment to the balance sheet governs our actions across the business. We're proactively managing our 2025 and 2026 debt maturities to reach our targeted debt to EBITDA in the eight times range and ensure maximum liquidity. This involves selling non-poor assets and proactive debt refinancing. The non-poor asset sales are going well with pricing from unsolicited bids coming in at or above IFRS value. There are currently seven pending sales. All of the properties are smaller and none are part of an existing concentration. The combined proceeds of these seven asset sales and the Telesky transaction will approach the $200 million target established earlier this year and be applied toward debt reduction. Because these proceeds are from the sale of lower yielding assets, paying off higher cost debt is accretive to FFO and AFFO per unit. The success of our disposition program this year has led us to identify another set of non-core properties for disposition at or above IFRS value that would generate another approximate $200 million of proceeds to also be allocated towards debt reduction. Nan will elaborate on this shortly. Second, leasing. Our results this quarter evidence the competitive advantage of our differentiated operating platform. It consistently outperforms the broader market because of the elevated quality of the portfolio and user experience. Our occupancy stabilized this quarter and we're focused on improving it. We've demonstrated that our distinctive urban workspace can accommodate many business needs. The heritage component is the premium brick and beam space we're most known for, restored and updated to meet today's knowledge workers' needs. We have this space across the country. Here, we'll invest in it for a long-term lease. The modern component is workspace that's been developed or redeveloped in the last 10 years. So by definition, it's newer space, concentrated in Toronto, Montreal, and Vancouver. It has all the attributes of brick and beam space that people love, good column spacing, natural light, and high ceilings, but with modern materiality and finishes. Here, we'll also invest in the space for a long-term lease. The flex component is workspace and buildings on underutilized land that will be redeveloped. Because of its short-term nature, we're not investing in the space, but the adjustable lease terms and flexible pricing provide an entry point into certain neighborhoods that were less accessible in the past. We've also strategically invested in suite upgrades, which will drive leasing activity. Defining our space offering in terms relating to the nature of the physical environment and our corresponding appetite to invest capital allows us to have maximum impact through our leasing efforts with the appropriate sensitivity to our balance sheet optimization efforts. On to development and upgrade activity underway. The current projects will be completed by 2026. and will be focusing on onboarding those projects with no plans to start new ones in the near term. Development risk continues to subside. I'll now pass the call to Nan.

Thank you, Cecilia. Good morning, everyone. A few highlights before I provide more detail on our commitment to the balance sheet. Our financial performance in the quarter was in line with our expectations. With operating income of $82 million, a 5.5% increase from the comparable quarter. Total portfolio same-asset NOI grew by 1.7% for the quarter. The average in-place net rent per occupied square foot continued its upward trend, reaching $25.08. Additionally, we successfully closed on the 400 West Georgia and 19 Duncan transactions. which although exerted short-term pressure on our earnings and debt metrics, are expected to yield significant strategic benefits. These transactions will enhance our urban workspace portfolio and expand our urban rental residential platform. As a testament to our unwavering commitment to maintaining a healthy balance sheet, we're actively implementing our plan to mitigate the short-term impact of these recent transactions. and return to our targeted debt metrics. There are three ways that we're doing this. Firstly, we have made rapid and material progress in selling low yielding non-co properties at or above IFRS value and will utilize the proceeds to retire higher cost debt. The total proceeds from asset sales of up to 400 million over 2024 and 2025 are expected. The $234 million assets held for sale on our balance sheet is on an equity-accounted basis. Including TelSky, the total assets held for sale is $286 million. This represents a portion of the $400 million proceeds we're targeting by the end of 2025. Under IFRS, we can only include what we expect to close within the next 12 months. So you'll see assets being transferred into this category over the balance of the year. Secondly, we have considerable optionality to refinance our 2025 and 2026 debt maturities, including utilizing the proceeds of secured financing on the residential component of Telesky, which we currently do not have financing on. Secured financing on select unencumbered properties while ensuring that our percentage of unencumbered properties remains high, accessing the bond market to refinance upcoming debentures based on single solicited rating from Morningstar DBRS. Additionally, we're currently in constructive negotiations to extend the $400 million unsecured term loan, which is due in late 2025. Our $250 million term loan currently matures in 2026 is subject to five one-year extension options. We anticipate exercising these options to extend the maturity to 2031 to align with the existing fixed rate swap which we have in place. This will maintain the existing underlying interest rate until 2031. We're addressing three of our variable rate construction loans with the intention of converting them into fixed-rate mortgages, including a lower-cost CMHC mortgage on 19 Dunkin'. As I've outlined, we have significant optionality in addressing our upcoming maturities and maintaining liquidity is a priority. Finally, we'll progress towards achieving our targeted debt metrics through organic growth by leasing space across our portfolio. We value the strength of our balance sheet and we are on a path to our targeted debt to EBITDA ratio in the eight times range within the next 24 months. The continued contribution of our development completions, which are expected to contribute over $85 million in annual EBITDA by 2026, will support the growth of our organic portfolio. JP will now speak about our leasing momentum that we're seeing. Thanks, Nan.

We remain encouraged by the level of utilization and leasing activity across our portfolio. In Q2, occupied and leased area held steady for the first time in six quarters, which gives us confidence that we are nearing an inflection point. This quarter, the number of total leasing transactions was in line with Q1 and up 25% compared to the prior year. Year to date, total leasing transactions were up 29% compared to the prior year, and new leasing transactions were up 45%. We continue to be encouraged by the number of existing users in our portfolio requiring more space. 18% of new leasing activity in the quarter represented expansions. Year to date, the amount of expansion space leased is up more than 300% compared to the prior year. Our improving retention rate, which was nearly 60% in Q2, is a positive sign and closer to our historical level of 75%. Even more encouraging are the rents achieved on renewal in the quarter. The average rental rate saw a healthy increase up 10% when comparing the ending to starting base rent and up 16% when comparing average to average. This demonstrates our ability to secure favorable deals surpassing those completed five years ago at the height of the market. Our strong tour activity continues to be a positive indicator. Tours in Q2 were in line with our quarterly average and tours are up 5% year to date compared to the prior year. Industries represented by touring organizations continue to be technology, professional services, education, and medical uses. Last quarter, we reported 1.05 million square feet of leasing activity under negotiation or at the prospect stage. In Q2, we completed more than 400,000 square feet of leasing activity. As of today, we have 900,000 square feet of leasing activity under negotiation or at the prospect stage, of which 40% represents new leasing requirements and 60% represents renewals. The strong demand observed across our portfolio is supported by higher utilization rates among our existing users in each city as more organizations revert to an office-centric model. This trend is evident in our portfolio and confirmed in numerous third-party reports. I'll now provide a brief overview of each market. In Montreal, we continue to see increased demand from technology users and greater diversification among industries represented by touring organizations. as more employers recognize the importance of offering great workplace experiences to attract, motivate, and retain top talent. Tour activity in Q2 was in line with our quarterly average. We continue progressing with the transformation of 1001 Boulevard Robert Barasa, attracting a diverse user base. 90% of the transformation at-grade was recently completed and open to the public. The balance of the interior lobby and exterior work will be completed this summer. We also recently unveiled a new vision for Cité de Multimédia, a portfolio of assets between Old Montreal and Griffintown, comprising eight buildings totaling more than 1.1 million square feet. Cité de Multimédia has been rebranded La Cité and will offer allied modern and allied heritage workspace solutions, as well as an enhanced amenity experience for users and an improved necessity-based retail and service component consistent with amenity-rich urban neighbourhoods. Most of our vacancy in Montreal is concentrated within La Cité, and this new vision will drive leasing activity. 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 Q2 was in line with our quarterly average. We recently unveiled an enhanced vision for our concentration of assets within the King and Spadina neighborhood, now known as King West Village. King West Village is an amenity-rich urban neighborhood unrivaled by any other. It offers Allied Modern, Allied Heritage, and Allied Flex workspace solutions across 57 buildings totaling more than 2.6 million square feet at our interest. And it includes a new amenity offering exclusive to Allied users at 460 King branded Block by Allied. This enhanced vision for King West Village will drive leasing activities. In Calgary, there is renewed activity from the oil and gas industry and education sector. In Q2, we leased the entire Odd Fellows building to Cornerstone College, totaling 33,000 square feet. This transaction illustrates an increasing trend across the country of post-secondary institutions establishing operations in Canadian cities. Tour activity in Q2 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. Vancouver remains the strongest leasing market in Canada, and tour activity in Q2 was in line with our quarterly average. To support our leasing efforts, we continue to actively engage our partners in the brokerage community. In Q2, we held broker assemblies in Montreal and Toronto, where we shared Allied's vision for the future of Canadian cities and introduced the three formats that make up our urban workspace portfolio, Allied Heritage, Allied Modern, and Allied Flex. We look forward to engaging with the brokerage community in Vancouver and Calgary this fall. In closing, the increase in office utilization and demand across our portfolio, coupled with the strength of our operating platform and team, as validated by 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 Canada. I will now turn the call back to Cecilia.

Thanks, JP. Before we turn 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 will ultimately emerge in a stronger position for the following reasons. The first being our differentiated operating platform. This is the combination of our one-of-a-kind concentration of urban properties we own and the strong team that operates it. And two, the intensification potential inherent in our portfolio, which represents decades of continued growth. And I say all this in the context of our thriving cities, which continue to attract global talent. Montreal, Toronto, Calgary, and Vancouver continue to rank high as cities with top tech talent in North America, with Montreal, Toronto, and Vancouver ranking in the top 12. Montreal, Toronto, Calgary, and Vancouver are also in demand and continue to grow. They each had population growth and net new jobs in 2023 and have forecasted real GDP growth through 2028. They also all have growth in public transit commuting and investments in public transit infrastructure, which happen to be in close proximity to our city portfolios. All this growth leads to demand that we're well positioned to satisfy and to serve. We'd now be pleased to answer any questions.

At this time, if you would like to ask a question, press star one on your telephone keypad. If your question has been answered and you would like to remove yourself from the queue, press star one. Your first question is from the line of Jonathan Kilcher with TD Cowan.

Thanks, good morning. Morning, morning. First question, just on the leverage, it was up quite a bit in Q2 over Q1. Was that in line with your expectations?

Yes, it was, Jonathan. With the acquisition of 400 West Georgia and 19 Duncan, we anticipated the leverage to go up.

Okay, but like from 9.4 to 10.9?

It's a temporary downward pressure on our debt metrics due to the stabilization of 19 Duncan in particular with the rental residential lease up. That is what will bring the EBITDA in later this year in early 2025. So we always knew there would be that temporary downward pressure on our debt metrics.

We do expect the debt metrics to improve over the balance of the year though, Jonathan.

So Q2 should be the top in terms of debt to EBITDA.

Yes, correct.

Okay. Then I guess just switching gears to leasing, for the balance of this year and into next, can you talk about any larger blocks that you know that you'll be getting back and where you stand in terms of activity on those?

Yeah, in terms of maturities, JP can talk to the top two or three that we have coming back.

Yeah. So, Jonathan, in Montreal, we have, later this year, some space at 1010 Sherbrooke that is maturing that we expect to renew. We have some space at 1001 coming back that we look to upgrade. but no blocks of space that are material in size, the largest being roughly approximately 30,000 square feet.

Okay. And then what about next year? I think you have some space at 134, Peter.

Yes. So next year, you're referring to the space currently occupied by E1, which totals approximately 90,000 square feet, of which approximately 20,000 will be retained. the balance of which E1 is currently evaluating their real estate strategy following the acquisition of their business by Lionsgate.

Okay. I will leave it there. Thanks.

Your next question is from the line of Lorne Calmer with Des Jardins.

Thanks. Good morning, everybody. Good morning. Maybe I'll... Good morning. Maybe on the disposition front, great to see the progress that you've made there already. I was wondering if you could give us a rough idea of the cap rates or even the target cap rates that you're looking to achieve on these dispositions.

I would just say, Lauren, that they're lower yielding assets and they're not all necessarily cap rate driven and we'll be using the proceeds to pay off higher cost debt, so it'll be overall accretive.

Are there assets in there where you're going to get credit from the buyers for development density?

In some, yes.

Okay. And then, Nan, I believe you said you wanted to get down to about eight times leverage by mid-2026, if I heard correctly? Correct. That is correct. Could you maybe walk us through some of the key assumptions to getting there?

Absolutely. So we have the contributions from our development pipeline, which if you look at the incremental contribution year over year and building up to that $85 million by mid-2026, that's one piece. And the $85 million comes from our ground-up development. We also have our upgrade category, which is the redevelopment category, which is not part of that $85 million, and that will also contribute to that growth. Obviously, organic growth, as JP alluded earlier, that leasing momentum is picking up. So organic portfolio will contribute. And some of the refinancing that we're currently working on. So lowering our interest expense, including lowering our overall debt through the disposal strategy that we have ongoing. Those are some of the ways that we're targeting to get to that eight times range. So we're targeting by mid-2026.

Okay, perfect. And then maybe just last one from me. Would you be able to give us an idea of the utilization rates in the portfolio currently and maybe how they kind of compare year over year?

Yeah, we are seeing ever-increasing utilization rates across our portfolio observed through a number of data points and supported by third-party reports reflective of utilization rates more broadly. The Western Canadian cities, most notably Vancouver and Calgary, continue to lead Eastern Canadian cities. In Vancouver and Calgary, we're seeing utilization rates near what we would consider stabilized in line with pre-pandemic levels. In Montreal and Toronto, our utilization rates are about 10% off what we would consider stabilized pre-pandemic utilization rates. But more and more organizations are reverting to an office-centric model and increasing their utilization rates as a result, which gives us confidence coupled with the strong leasing activity this quarter that we're nearing an inflection point as we described earlier.

I'm guessing getting the Gardner construction done in Toronto will also help things too.

That would certainly help.

All right, thank you very much. I'll turn it back.

Thanks. Your next question is from the line of Brad Serge with Raymond James.

Hey, good morning. Morning. As part of the debt refinancing plan, obviously you suggested to look to be active in the secured mortgage market. I'm just curious if you can provide a little bit of color in terms of you know, the debt availability and the appetite by lenders to provide new mortgages in the market today and what the indications of credit spreads would be in the secured market at the moment?

Yeah, absolutely. So currently, if you're borrowing against the law, our cost of borrowing is like 6.7% all in. On secured financing, we have term sheets that range from 5.2% to 5.5%. So, you know, you're looking anywhere from 100 to 150 BIPs based on the asset, the quality of the asset, the tenancies. You know, if you have a great tenant with a great covenant with great wealth, you know, you're looking at LTV of 65% on loan to value. And we've had quite a few assets that we've identified. Obviously, we still want to keep our unencumbered properties in the, you know, up to the 80% range. But we'll definitely use that source of funding right now because the secured is definitely a lot cheaper than using our lock. And we have the flexibility because right now we sit with 87% of our assets unencumbered.

Great. And I guess part of that... Go ahead, sorry.

Sorry, I also wanted to mention the CMHC financing. So CMHC financing on 19 Duncan, if you take the Canada mortgage bond today, and add in the spread, it's 3.8% compared to the current construction loan, which is at an open variable loan rate. So that's where we're going to see that refinancing on interest expense. It's going to add to our results in the second half of 2024.

When would you be in the market for the CMHC financing? Would that be after the lease-up? And can you quantify the proceeds on that?

Sorry. I'm jumping ahead of the questions. We've already actually applied for the CMHC. The deadline for the MLI Select Program was June 18, so we got the application in before that. Our application has been accepted. So now we're in the process of finalizing things.

And do you have an idea of what the rough proceeds would be in terms of that specific opportunity set on the CMUC side?

Anywhere from $320 to $340 million.

And just maybe more generally with Adelaide and Duncan, can you comment or give an update in terms of how the lease up of the residential is going and how rents are coming in versus your pro forma expectations?

We've just started our leasing program. We're really pleased thus far with the take up of the product, recognizing that the amenities are still to be delivered, which will help propel our leasing activity when they're delivered later this year. Thus far, the rents we're achieving are in line with our pro forma model.

Okay. I'll turn it back. Thank you.

Your next question is from Mario Saric with Scotiabank.

Hi. Thank you, and good morning. Just coming back to 19 Dunkin' and the 400 West Georgia transactions, I appreciate the disclosure that you provided indicating that it impacted SFO by about $0.04 this quarter with kind of a the puts and takes in terms of the CMC financing at 19 Duncan and repayment of the construction facilities going forward. How should we think about an improvement in that 4 cent dilution on a quarterly basis over the next 12 months? Is it something that becomes 3 cents next quarter, 2 cents the following quarter? Maybe just talk about the pace of improvements anticipated.

Mario, so you'll see that gradually come down. So a couple of things. 19 Duncan Residential in particular We kicked off the leasing on that, like JP just talked to. That asset should start seeing a lot of EBITDA coming in in Q3, building up into Q4, and stabilizing by Q1 2025. That's how we're modeling that particular asset. 400 West Georgia, the remaining space that needs to be leased, I would model that into Q3, Q4 of 2025, lease up time. But the The interest expense, you should see the interest expense on 19 Dunkin' come down by 6, from the 6.7 currently to, I would say, modeled at 3.8% coming down in Q4, so full quarter of Q4.

Okay, and then just shifting to the occupancy inflection point that's been discussed, maybe for JP, how would you characterize the timing of that inflection point in relation to expectations at the start of the year? Have there been any delays based on the recent discussion that you've had, and what are some of the factors that have transpired that may differ?

Hi, Mario. Yeah, I'm going to take that. We're still expecting... today what we were expecting earlier this year. So we were always thinking that the first half of the year would be softer with improvements in the second half of the year, and we are still confident that that's how things will play out.

Okay. On the disposition, the $400 million that you've highlighted into 25, what are some factors that may have you considering doing a more meaningful amount above and beyond that?

More than $400 million? Yeah. We'll work through the $400 million and then we'll take stock during that process and we'll provide an update on our thoughts around that on the next call.

Okay. Maybe if I phrased the question differently, when I look at the types of assets that you're going to sell, some of which have residential density that you mentioned, not part of larger continuous blocks as well. When you look at your overall portfolio today, how would you characterize the percentage of the portfolio those types of assets represent?

I would say that it could be more than 400, but it wouldn't be as high as, let's say, a billion to use an upper end. We're not launching a billion-dollar disposition program, but we do have the ability to access more than 400 million assets through dispositions if we wanted to. Perfect. Okay.

And then just at the rebranding of La Cité in Montreal, can you talk about the potential CAPEX requirement and target returns on that CAPEX?

Mario, there's minimal CAPEX required. Most of the upgrades to the common elements and the amenities have been completed. The balance of the work would be associated with the reimagination of the retail component, and those costs would be attributed to specific leasing transactions.

Perfect. Okay. And then the last one for me, for JP, you mentioned or you highlighted a 10% increase on expiring versus year one rent. What would that look like on that effective basis?

Net effective basis, as we reported earlier in the year, our net effective rents in 2023 were up 13%, I should say, Mario, compared to 2022. And thus far, we're seeing net effective rents hold relative to last year, both for new leasing activity as well for renewals.

Okay, that's it for me. Thank you.

Your next question is from the line of Matt Cornick with National Bank Financial.

Hi, everyone. Most of my questions have been answered at this point. But just going back to the disposition program, you mentioned it likely wouldn't be in excess of a billion-dollar disposition program. There's been a bit of change in terms of the size and quantum, the types of assets. Do you Like, how will you address that over a period of time? Let's say if operations don't turn around as quickly as you hope to do, would you look to maybe dispose more assets than the $402 billion?

If we had to, Matt, I mean, at this stage, it'll be something that we're just regularly assessing as things progress. And we'll always keep you updated on that.

And then if I look at kind of I see this disposition program as the way you kind of get some accretive growth and it could get you on side from a distribution payout standpoint because it seems like you really don't want to cut the distribution. So how should we think of just the sustainability of the distribution as well going forward? Under kind of the current scenario, it sounds like you get to a point where you're pretty confident on paying that amount.

We're very confident in our distribution. It's sustainable. And so it's not something that we're discussing in terms of changing it. It'll be supported by our growing and improving operating metrics. And it's something that we intend on maintaining.

Okay, makes sense. And then maybe lastly, Nan, you mentioned... the NOI contribution from the development side as well as redevelopment. If you look at the table, it looks like a big component of that would be the well, but I think most of that's already in your numbers at this point. How should we think about, is there something outside of that bucket in addition to what's disclosed in terms of the NOI upside there?

I think the big one is QRC Phase 2. which will start contributing in Q3 on. That's the big one, aside from the well. You also have 19 Duncan Residential. Those are the big ones I would say in the ground up that is going to start contributing in the near term. And then you've got M4, which, sorry, Jonathan, I'm sorry.

Sorry, I was just gonna, QRC, you've removed from your development because I guess it's been transferred. from PUD into IPP, but you didn't have any NOI contribution from it. Exactly. Okay, so that one plus 19 Dunkin' on the lease up, and then the redevelopment portfolio, I mean, we're just kind of taking a stab at how that comes in, but does it come in kind of equally over a number of quarters, or is it weighted to a certain year time frame, Sarah?

It's weighted as well, so it would contribute from 11 to 20 million over the next years, so 2024 on to 2026. It builds up to 20 million in additional EBITDA from that category, the redevelopment.

Okay, that's very helpful. Thank you.

Your next question is from the line of Tammy Bear with RBC Capital Markets.

Thanks. Good morning. Just coming back to the dispositions, can you just maybe expand on the types of buyers that you're actually getting interest from on an unsolicited basis? And then is there any anticipation of providing any VTB financing?

Sure. So the types of buyers are there's private, smaller family buyers, North American, European, It's funny, there's a lot of capital from outside of Canada looking to invest in Canada. And in terms of our appetite to provide VTB, it's zero. There will be no VTBs.

Okay. And then just on that, coming back to Nan, that eight times debt to EBITDA target, I'm not sure if this was answered previously, but, you know, what are you assuming, I think you said by mid-2026, but what are you assuming in terms of dispositions in that to get there?

Currently, just the $400 million that we have targeted.

Okay. Okay. At 400 West Georgia, what can you share in terms of the interest that you've received on the remaining space to lease up there? And then just on 19 Duncan, what's the rent that you're targeting per square foot?

So, Pammy, at 400 West Georgia, as you know, there are four floors totaling 60,000 square feet. There is interest on all of the floors. among eight prospective users, of which one is an existing tenant looking to expand. Some are looking at the entirety of the space, and some are looking at a portion of the space. And with respect to your question relating to 19 Duncan, the residential rates that we're targeting average in the mid fives on a per square foot basis, mid to high fives.

Okay, I'm sorry, on 400 West Georgia. Correct me if I'm wrong, but I think you said you expect that to get to, expect the balance to get at least up by Q3, Q4 of next year, 25?

Yeah, middle of 2025, Tommy, would be the outside date.

And income producing at that point, like cash flow producing?

That would be what we would want, yes.

Yeah, okay. And then just lastly, at King Toronto, the condos there, have you had any buyers on the 90% or 91% that have been sold to date? Has there been anyone reaching out to get out of any of these transactions? Or what can you share in terms of maybe even or even just selling the remaining 9%?

Surprisingly, Pami, no one has indicated that they're walking away from the projects. The deposits are in good standing. You know, the percentage of foreign buyers is really low, surprisingly less than 7%. So, you know, so far, I mean, most of these purchases are all high net worth individuals and we have not had any indication of anyone actually walking away.

Okay. So not necessarily, these would be end users as opposed to investors for the most part, given the pricing on these.

Yes.

Okay. Okay. Thanks very much. I'll turn it back.

Your next question is from the line of Mark Rothschild with Canaccord.

Thanks. Good morning. You commented that you want to keep the unencumbered pools as large as possible, which I understand, yet the cost of debt on secured properties is a decent amount lower. How are you thinking about that going forward in regards to your interest expense? Would you be willing to lever up on a bunch of properties to take advantage of the strength that you have with those unencumbered assets in regards to your interest expense?

We'll always want to remain at least at 80%. So right now we're sitting at 87% unencumbered assets and we'll still want to remain at at least 80%. We would not have we'll always have a component of unsecured financing in place. We'll go back to the bond market. We can still go back to the bond market. So we'll access unsecured and secured. We'll balance, and interest rates are on a downward trend, and we'll do what's necessary. But right now, there's certain construction loans that are on a variable rate at 6.7%, and we want to tackle those high interest rate debt right now. And a lot of these are debt for debt where the asset's already secured. But we'll look at putting on some incremental secured financing just to take advantage of that rate reduction today.

Okay, great. And then maybe in regards just to the asset sales, are you looking at any specific markets that you'd maybe want to reduce exposure to, or is it really just assets that you can get really good prices for that are just non-core to the overall main parts of what you would call the allied portfolio.

The assets that we've identified tend to be in Montreal and Toronto, and obviously those are the largest parts of our portfolio, less so in Calgary and Vancouver.

Okay, and then maybe just lastly for me, would you consider residential assets that's still something that would be core that you'd want to have exposure to, or is that an area that you might look at as an area to reduce exposure to as part of this position program?

No, some of the residential sites are sites that we want to keep within our portfolio, and then some we consider non-core.

Okay, great. Thank you so much.

No problem. Your next question is from the line of Shalab Grob with Virtus Investment Research. Shalab, your line is open. Please take your line and make sure that you're not muted.

Hello. Hi, good morning. So just a quick question on the King Toronto project. You took an impairment charge of around $6 million this quarter, so can you provide some color on that? And do you expect or do you foresee further delays regarding this project?

Yeah, so the impairment this quarter was because of some cost overruns. and mainly related to supply chain management related issues.

And then on the closing, it's being delayed by a couple of quarters. Do you foresee any further delays?

No, we don't. We expect to close by mid-2026.

And that would be the tail end of the condo closings. The condo closings will begin in late 25, early 26, but they'll take about

two quarters to complete. Okay, that's helpful. The rest of my questions were answered previously.

Okay, awesome.

As a reminder, to ask a question, press star one on your telephone keypad. Your next question is from the line of Sameh Saeed with CIBC.

Thanks, good morning.

Morning.

Firstly, on the leasing side of things, if I just kind of look at the average term you're getting on your renewals, it's around three years, I guess a bit below the typical five-year term. How do we interpret that? Is that kind of fair to say that that's just tenants seeking more flexibility, or what are you hearing from that side?

Samaya, I would suggest looking in isolation. It probably doesn't represent a meaningful sample or provide sufficient visibility to tenant intentions broadly across our portfolio. Our WALT in Q2 was 5.8 years. Interestingly, there's no change in our WALT compared to Q2 2020. So the average term length across our portfolio remains unchanged over the past number of years. And then new leasing activity. in the quarter with six and a half years. So generally speaking, we haven't seen, observed any discernible trend over an extended period, which would suggest that tenants are looking for shorter term durations than historically.

Okay. And JP also referenced seeing expansion at several assets. Is that a specific user type or one after any product trends that you can point to there?

No, I think that the one overarching trend is the fact that more and more organizations are increasing their utilization across our portfolio as they revert to an office centric model. And that is requiring them to reevaluate their real estate needs. And consequently, a number of them are looking to expand in our portfolio. The expansion activity year to date is not representative of one tenant or a small subset of tenants, nor a particular industry. It's broad-based, multi-user type, multi-geography, and gives us confidence among the other data points that we're nearing an inflection point.

Okay. It looks like there was a small non-renewal at 82 Peter, and I see that that's an asset that also has resorting in place. But I guess, would your intent still be to lease it up? I did not expect it to commence construction anytime soon.

82 Peter, Samaya, that was the asset you were referring to?

Yeah.

Yeah, that asset is part of our allied flex program, which is where we have identified opportunities for future intensification. We're not, as a result, investing meaningful capital in the interim, and therefore we're able to offer users more flexible terms without compromising on our rates. in a manner that we otherwise wouldn't have historically. So that represents the nature of that transaction. And that type of transaction would be consistent with what you might see across our allied flex portfolio nationally.

Okay. And lastly from me, looking at the capitalized interest, it increased sequentially by about 1.6 million. Is that okay to use as a run rate for the balance of the year?

Samaya, good to use for the next two quarters, but as the development pipeline keeps coming down, typically we say half of the EBITDA contribution is impacted by decapitalization. So you should keep that in mind as EBITDA comes on board. You're going to see some of that come down.

Okay, perfect. Thank you.

At this time, there are no further questions. I will now hand today's call back over to presenters for any closing remarks.

Thanks, Tamika, and thanks, everyone, for joining our conference call. We'll keep you updated on our progress going forward.

This concludes today's call. Thank you for joining. You may now disconnect your lines.