Allied Properties Real Estate Investment Trust

ahead. Thanks, John. Good morning and welcome to our Q3 conference call. I'll highlight our progress towards 2025 goals and what we're focusing on going forward. Nan will do the same from a financial perspective. JP will outline the positive leasing momentum by urban market. We're then pleased to answer any 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 2024 annual report. Material assumptions underpinning any forward-looking statements we make include those described under forward-looking statements in our most recent quarterly report. We're focused on delivering long-term value through leasing, development completion, and strengthening our balance sheet. Market fundamentals continue to improve, as evidenced by the higher level of leasing activity, including the highest number of square feet of expansions in our portfolio in the last five years, increasing large format space mandates, and improving conversion rates. Our capital structure, specifically the temporarily higher level of debt we took on to complete development projects, put downward pressure on results in the quarter. While our portfolio remains resilient and strategically positioned to benefit from improving market dynamics, it will take us beyond year end to achieve 90% occupied and leased area in our targeted 10 times debt to EBITDA. We remain focused on those as milestones toward continued improvement in our metrics. First, leasing and operational results. Our leased area held in the quarter. We leased 882,000 square feet across the rental and development portfolios. Conversion from tours to signed deals was high at 81%. JP will elaborate on these metrics. These signs of improving operating fundamentals give us confidence that while we're not getting to our ambitious target of 90% occupied and leased area by this year's end, we'll make progress going forward. Second, we advanced on our development and upgrade activities. M4 in Vancouver is now 90% leased, driven by Netflix's expansion in the quarter. Fixturing is underway and rent commences in early 2026. At King Toronto, we're heading towards successful completion by the end of 2026. Securing Whole Foods as the anchor of the commercial component is facilitating the lease up of the remaining space. We're currently in various stages of negotiation with seven retailers. Glazing continues on the fourth level, and glazing for the fifth level will begin to arrive next week. It's truly a distinctive project that will elevate the entire King West Village neighborhood when it's completed next year. All the development and upgrade projects currently underway are on track for completion by the end of 2026. Last, but certainly not least, are balance sheets. While we won't achieve our target of getting to 10 times debt to EBITDA by this year end, we're increasing our steps to get there. We've added Toronto House and Calgary House to our disposition pipeline. Those dispositions, together with the repayment of the 150 West Georgia loan in the first half of 2026, will strengthen our balance sheet as we'll be able to pay off more debt and moderate interest expense, accelerating progress going forward. We're improving liquidity and positioning Ally for the next phase of growth with a stronger foundation. Nan will now elaborate on our financial results and balance sheet management. Thank you, Cecilia. Good morning, everyone. Thank you for joining us today. I'll take a few minutes to highlight our financial performance and the continued efforts we're making to strengthen our balance sheet. Operating fundamentals are improving. Our occupied and leased area didn't increase at the pace we expected in the quarter. Along with elevated interest expense, slower lease finalization put downward pressure on our results. We remain cautiously optimistic as market fundamentals continue to evolve in our favor. Occupancy was impacted by non-renewals, including Entertainment One at 134 Peter Street in Toronto. They consolidated space following their acquisition by Lionsgate, a decision that was made in 2023. More importantly, we offset much of this with new leasing in our portfolio, which drove our leased area from 87.2% to 87.4%. This will translate into earnings as tenants take occupancy. Our same asset NOI was 0.2% up for the quarter, supported by development completions, including 20 bride-ups, 700 center bares, and 1,001 rubber barrasas. Our results included a one-time lease termination fee of $2.1 million related to a space that was on the sub-lease market. The termination was strategically aligned with an expansion of an existing tenant in the building, resulting in no downtime, higher rental rates, and an incremental three-year lease extension, thereby preserving future recurring revenue. Our interest expense was higher due to timing of our dispositions. We expect our interest expense will decrease upon the completion of our disposition program and the receipt of the 150 West Road Term loan receivable. Excluding the sale of our rental residential assets, we expect to generate approximately $500 million from dispositions and the 150 West Georgia loan monetization. This is expected to close between the remainder of 2025 and first half of 2026. All these proceeds will be used to retire debt. Overall, despite pressure from higher interest expense and longer lease-up timelines, we maintain stable operating fundamentals, solid liquidity, and continued progress towards our long-term balance sheet targets. Turning to the balance sheet, liquidity remains strong at $903 million, up $168 million from the prior quarter. About 89% of our portfolio is unencumbered, giving us exceptional flexibility. During the quarter, we completed the extension of our unsecured facility to September 2028 and expanded our syndicate to include six major Canadian financial institutions. This highlights the support we have from our financial partners. We also updated our green financing framework, which was initially released in 2021 to ensure alignment with best practices. Subsequently, we completed the issuance of our Series N debenture for $450 million, which was five times oversubscribed with a six-year term at a rate of 4.6%. This brings our total issuance for the year to $1.3 billion, of which $900 million was issued under the green financing framework, further highlighting the ongoing support that we have from the debt capital markets. Proceeds from this issuance were allocated to the retirement of variable rate construction debt and to pay down a portion of the $250 million term loan due in early 2026. At the same time, we extended the remaining $100 million of the term loan by two years to 2028 and retain the existing interest rate swap on the full $250 million at a favorable rate of 3.5%. In August, DBRS completed their annual review and maintained our credit rating. We remain committed to maintaining our investment rate rating, and our ongoing disposition initiatives will allow us to reduce leverage to our targeted levels over time. We have taken proactive steps to address most of our upcoming maturities for the end of 2026. We'll repay the upcoming 600 million debenture using proceeds from our dispositions and the monetization of 150 West Georgia loan receivable. Overall, this quarter was built on strong leasing momentum, strength and liquidity, and proactive management of upcoming debt maturities. All of this positioned us well for long-term value creation. Thank you. And with that, I'll pass it over to JP to discuss leasing.

Thanks, Nan. Over the past number of months, we've observed improving operating fundamentals throughout our portfolio, evidenced by four trends. One, an increase in leasing activity. Two, an increase in large format space requirements. Three, an increase in expansion activity among existing users. and four, an increase in our conversion rate. Our leased area remained stable in the quarter and outperformed each of the urban submarkets in which we operate, except for Vancouver, where we've made good progress in addressing acquired vacancies. In Q3, we completed 882,000 square feet of leasing activity, including 500 and 12,000 square feet of new leasing activity, the most since 2020, of which 426,000 was in our rental portfolio and 86,000 in our development portfolio. This represents an 81% conversion rate, the highest since 2020. The new leasing activity in the quarter included 187,000 square feet of expansions, a 150% increase compared to the previous quarter and the highest since 2020. The impact of our new leasing activity was partially offset by non-renewals, including a large known non-renewal due to M&A activity that occurred in a prior year and not a reflection of current day space requirements. While the number of tours was lower compared to the prior quarter, the average tour size more than doubled, and the number of tours with requirements greater than 25,000 square feet increased 83%, driven by touring activity in the modern segment of our Toronto and Montreal portfolios. Industries represented by touring organizations were technology, financial services, media, professional services, education, and medical uses. We currently have 1.3 million square feet of leasing activity under negotiation or at the prospect stage, of which 970,000 square feet represents new leasing opportunities. Of the new leasing activity underway, 300,000 square feet is under negotiation and 670,000 square feet is at the prospect stage. Included in the leasing activity underway is 170,000 square feet of possible expansion activity, as there are currently 17 existing users considering expansions. I'll now provide a brief overview of each market. In Montreal, we're currently working on 370,000 square feet of new leasing activity, of which 100,000 is under negotiation and 270,000 is at the prospect stage. Most of our vacancy in Montreal is concentrated at La Cité, a portfolio of assets located between Old Montreal and Griffintown, comprising eight buildings totaling more than 1.2 million square feet. We've seen a material increase in leasing activity at La Cité in the second half of the year. In Q3, we completed 100,000 square feet of new leasing and currently have 100,000 at the prospect stage. The upgrade activity, 1001 Robert Brassa continues to attract large and sophisticated users. In Q3, we completed 150,000 square feet of new leasing and currently have 130,000 at the prospect stage. The new leasing completed in Q3 included the expansion of an existing user by 100,000 square feet to accommodate their utilization requirements by backfilling much of the National Bank sublease space. In Toronto and Kitchener, we're currently working on 550,000 square feet of new leasing activity, of which 165,000 is under negotiation and 385,000 is at the prospect stage. In Toronto, there are several large organizations looking to sublease the Shopify space at the well. Shopify is currently finalizing a sublease for a large portion of their premises with a user that will be new to our portfolio. The remaining demand exceeds the balance of space available materially. In Kitchener, Google renewed its lease of 195,000 square feet in the Brighthock Block, a large heritage complex in which we own 50%. Google represented our largest lease maturity in 2026. In Calgary, we're currently working on 30,000 square feet of new leasing activity, of which 20,000 is under negotiation and 10,000 is at the prospect stage. In Vancouver, we're currently working on 20,000 square feet of new leasing activity, of which 15,000 is under negotiation and 5,000 is at the prospect stage. At 400 West Georgia, we finalized a long-term lease of 49,000 square feet with a global educational institution, subject only to routine regulatory approvals expected before the end of November. The asset is now 96% leased. At M4, we finalized the lease expansion of 26,000 square feet with Netflix, bringing Netflix's footprint to 137,000 square feet. The asset is now 90% leased. Our leasing performance in Q3 reflects improving operating fundamentals driven by higher physical utilization and diminishing supply of distinctive urban workspace, resulting in an increase in leasing activity, rising demand for large format space requirements, increased expansion activity among existing users, and improved conversion rates across our portfolio. I will now turn the call back to Cecilia.

Thanks, JP. Before we turn to questions, I want to reiterate my confidence in our portfolio and our team, especially as market dynamics are improving. We're staying focused on leasing, paying down debt, and completing development projects. Our targets are in sight and are achievable. With our offering of both heritage and modern workspace, our urban portfolio is unique and strategically positioned for the growing demand, and the lack of new supply will highlight this. I say this as Canadian cities are increasingly concentrating into centers of creativity, innovation, and opportunity, and urban workspace plays a critical role in that, making Allied well-positioned to meet the growing demand. Our team is focused patient, and confident that our fundamentals will ultimately be recognized. We'd now be pleased to answer any questions.

Thank you. The floor is now open for questions. And as a reminder to everyone, if you would like to ask a question, please press star followed by the number one on your telephone keypad. And if you would like to withdraw your questions, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking the question. Thank you. Our first question comes from the line of Jonathan Keltcher with TD Cowen. Please go ahead.

Thanks. Good morning. First, just one little clarification. When you talk about, JP, when you talk about a conversion rate, 81% conversion rate, is that off of... leases that are in negotiation or the total for $1.3 million you talked about?

Jonathan, it's in relation to what we would have represented last quarter as new leasing opportunities that we were pursuing at the time.

Okay, so just to be sure, it includes like prospect and stuff under negotiation?

That's correct.

That's correct. Okay. And then I guess a couple of weeks ago, you guys took hitting 90% occupancy off the table for this year and you addressed it a little bit. Based on what you're seeing, and that was a pretty positive sort of update you gave JP, is that a target that you think you get to some point in 26?

Hi, Jonathan. Yes, we do have line of sight to 90% in 2026. Okay.

That's helpful. And then lastly, just looking at where your leverage currently sits versus where you guys want it, the slower pace of the occupants recovery that we're seeing, how is management and the board looking at the distribution level right now?

So we are considering many options, and one of those options is a distribution cut in 2026 so as to strengthen the balance sheet. We haven't made a formal decision yet. We haven't made a formal recommendation, but it is one of the scenarios that is under consideration. Okay.

uh thank you i'll i'll i'll leave it there thanks thanks your next question comes from the light of mario sarik with scotia bank please go ahead hi good morning um i just wanted to focus on the uh disposition pipeline a little bit uh you've added toronto and calgary house to the list at 450 million uh so that increases the total expected dispositions from about 500 million before to call it 675 give or take That would imply that about $275 million of prior assets that were deemed for sale will remain in place going forward. So can you walk through how you think about sizing the disposition pipeline? Is it simply a matter of doing what you need to do to hit target leverage metrics, or do other factors play a role in the decision process, such as being able to get IFRS values for those assets and et cetera?

Thanks. Hi, Mario. So we've outlined $270 million on page two of the press release. On top of that, it's the proceeds from 150 West Georgia, and that's about 240 million, roughly. And then on top of that, it would be the proceeds from the disposition from Toronto House and Calgary House, which we're not quantifying, but it would more than double the proceeds that we get from our sales, which would all be applied towards debt reduction.

Okay. But it seems like there were maybe some assets that you would think that you were considering selling previously that you're no longer considering selling. Is that a fair comment? And then I guess if so, what are some of the factors that kind of drive those decisions?

It's based on what we were able to sell sooner rather than later, and the update, you know, it's opportunistic-based to some extent. We have our non-core assets identified, and as we get IFRS value or higher, we sell them, and the update is as we've outlined it in the press release, but there weren't material changes.

Okay. And then just... On the $239 million West Bank loan receivable underpinned by 150 West Georgia, how would you characterize your confidence level today in terms of collecting on that receivable relative to three months ago, and what factors would you highlight that kind of underpin that confidence?

We remain very confident in collecting that, Mario, and it's based on the zoning that's in place and the parties that are interested in the opportunity.

Okay, thank you.

Your next question comes from the line of Roger Lafontaine with Nugget Capital Partners. Please go ahead.

Hello, thank you for taking my question. I had a question whether you're seeing in full transaction liquidity within the office market, and that's really just my question, whether it pertains to smaller buildings or larger buildings. if you could touch base on that. Thank you.

Sorry, are you asking about, I couldn't hear the first part of your question, sales volume?

Yeah, if you're seeing improved transaction liquidity as you seek to dispose of any assets or offices, whether you're seeing more buyers on the market.

Thank you. Yes, for the assets that we are looking to dispose of, our smaller non-sector assets, we certainly are. I think it's buyers are seeing this as an opportunity to get access to buying these types of assets, which isn't normally an opportunity for them. So, yes, we are absolutely seeing higher levels of interest.

Thank you very much.

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

Thanks. Good morning. Just on King Toronto, you know, I think going back, the closings were initially set for, I think, 4 to 25 and it's kind of been pushed back. I was just wondering if you could give us some colors to what's really been driving those delays. Like, is there issues with purchasers that are in default on their agreements or what's really happening there?

No, it's nothing to do with any defaults. We haven't had any to date. It's really the pace of construction activity, which was recently impacted by some rain, and it prevented us from getting some of the glazing up. But for the most part, things are progressing as expected.

Okay, okay. And then I might have missed this, so apologies if I did, but do you guys have a kind of a target yield on Toronto House and Calgary House based on the unsolicited imbalance you've gotten?

Not that we're disclosing, Lawrence,

Fair enough. Okay. Thank you very much.

No problem. Thank you.

Your next question comes from the line of Matt Cornick with National Bank Financial. Please go ahead. Hey, guys.

Good morning. Just back on King Toronto, you revised the expected proceeds a bit lower there. Is that a function of what you think you'll get on the sale price, or is that a thought around maybe some

condos that closed not collecting on them or just what was behind that assumption at the end of the day it's just to reflect Market value on the remaining eight percent of units that have to be sold so as you know we're 92 sold so that pricing is locked in um and we need to just we needed to just adjust on the remaining eight percent okay makes sense um and then

There was, I think, I'm not sure if it was in your same property NOI number or not, but it sounds like you collected a prior bad debt provision of around $1.3 million on an asset in Calgary. Would that have been in same property NOI and was there an offsetting negative or should we view that as kind of one time in nature?

Hi, Matt. It's Meg. That was a reversal in Calgary, but There was the normal course back debt that's in our results as usual, which offsets that. So that should not be something that should be backed out, because if you're backing out the reversal, you've got to back out the provisions. If you look at Note 10, it's very clear the provisions actually in the quarter were higher than the reversal.

Okay, that's fair. And then I guess on 1001, Robert Burrus says, The lease termination income, I know it's $2.1 million, but was there anything that we should net against that in terms of the new lease that's going to be signed relative to the old? What would be the net impact if we wanted to get to a normalized number in the quarter or for future quarters on a run rate?

Matt, it's $3 per square foot higher than the current lease.

Okay. Okay. And then lastly, for me, I appreciate the disclosure in terms of the incremental NOI coming from the ground-up development. I think it was $1 million in Q4 and $10 million in 2026. Does that include anything from the redevelopment portfolio, or would that be incremental on top of those figures?

Matt, there's a little bit from 1001, Robert Barasa, and RCA in those numbers.

in those numbers. Okay. So that's, that's the total expected kind of incremental to just general same property in the portfolio.

Your next question comes from the line of Del Wooley with CIBC capital markets. Please go ahead.

Hi, good morning. Just on King condos. So how much capital do you expect to be getting back in 2026? Because it seems like the closings may bleed into 2027 as well.

So from the condo sale?

Yes.

Yeah, it's in the notes. It's about $240 million at our share.

Okay. And that's in 26? Or that's total?

That's the total. So occupancy will be in place. The closing is based on city permits in place. So right now we're expecting late 2026 to early 2027. So cash proceeds.

Okay. Got it. Just on leasing in general, I guess I feel like maybe I or the market are getting a little surprised with just trying to reconcile the commentary you guys have around leasing with what's getting rendered in the quarters. And so, you know, if you're seeing increasing leasing, increasing large format tenant demand, you know, improved existing user demand and the conversion rate, you know, like I wouldn't necessarily, those sound like all good things and yet occupancy is down quarter over quarter and, you know, your revised outlook doesn't really have much of an occupancy list baked in next quarter either. And so when are the wheels going to start to turn positively for occupancy despite all the sort of, you know, sort of green shoots, I'll call it, commentary that we're getting?

Yeah, there's a few quarters of a delay between getting the leasing locked down and then having occupancy and then having rent commencement. So it unfortunately doesn't happen immediately. There is a lag effect. And so We are seeing that. We are seeing the leasing momentum, the TAMI sector. You know, the bank mandates are kind of the latest, but we started seeing things starting to pick up before the bank mandates. And unfortunately, it takes a few quarters for it to start being reflected in our numbers and then for the cash rent commencement to start hitting our statements. So there is a bit of a lag that has to be taken into account.

Okay, so like middle of 2026, you would feel comfortable that occupancy should be above where it is right now.

I would expect 2026 to be improved over 2025, but I'm not going to start speaking to 2026 on this call, Tal, although I appreciate that you are asking from a good place. We'll be operating on what we expect for 2026. as we always do on our year-end call. But we certainly, as we sit here today, we have line of sight to improve metrics in 2026. Okay.

And then just lastly, on 150 West Georgia, do you have a data center partner prospected or in place already? Or are you just saying basically you have a powered land site that could be used for that, and that that person will still need to go get site plan approval and all that stuff?

No, we have entitlements, and there are prospective parties at advanced stages of their due diligence.

Okay, and then your goal here is just 100% monetize that loan and be out of this site forever?

Absolutely, yes.

Okay, got it.

All right, thanks very much.

Thanks, Tom.

Your next question comes from the line of Tammy Beer with RBC Capital Markets. Please go ahead.

Thanks. Good morning. Just with respect to dispositions, the $270 million that you mentioned, plus, I guess, Toronto and Calgary House, would this collectively sort of mark the end of the disposition program for, I guess, if you think about 2026, or would you consider just continuing to perhaps upsize that program?

No, as we sit here today, we see that as being the end of the disposition program, Tommy.

And then I guess tied to that with the, I guess, anticipated repayment of the West Bank loan, would that get you to effectively that 10 times debt diva target? Is that enough?

We have line of sight to being in the 10 times range by the end of 2026.

Okay. Maybe just switching gears, coming back to the comments around the distribution. I don't think this was asked, but if it was, I apologize. But what are some of the parameters or goalposts that you're focused on, on whether to cut, you know, is it leverage, occupancy, the payout ratio, et cetera, or just maybe some color around how you're approaching it at this point?

It's really looking at getting the balance sheet where we feel it needs to be at and accelerating the progress towards that goal. And certainly payout ratios and set to EBITDA and those kinds of metrics, but it's about strengthening the balance sheet.

I guess the other way to think about it is why not just cut now? I mean, how much could... I know there's a lot happening, a lot of stuff in the works with all this capital that you expect to repatriate, but why not just do it now and just drive on and the rest sort of strengthens the balance sheet further?

Yeah, we have a process that has worked for us since we went public in 2003, and it's a decision that the board makes annually for the following year at the end of every calendar year, and we don't see the need – to go off process. And so we will be meeting with our board at the end of November and making our decision within the usual timeline.

OK. And then just lastly, the, you know, to clarify the comment that you made on, you know, getting to 90% occupancy next year, is that in place or is that committed?

I was speaking to Leitharia and, you know, we will also stick with our usual process, Pommy, of talking about 2026 on our year-end call. My reference to having line of sight to lease area of 90% by the end of 2026 is based on the improving market fundamentals that we have in front of us today, and it's something that we'll reaffirm on our year-end call.

Okay. Okay, then just lastly here, okay, without commenting on 2026 growth, Do you see 2025 as the low watermark on FFO in this cycle for Allied?

I think that's something that I'll have to leave for part of our year-end call, Tommy. We're focused on the metrics and we want to provide a comprehensive update in terms of our outlook for next year. So I just, I'm not trying to put you off. I just, I don't want to start giving piecemeal information on next year. All I can say is that with the improving fundamentals, we absolutely expect an improving set of operating metrics in 2026. Okay.

Thanks very much. I'll turn it back to Cecilia.

Thanks. Thank you.

The next question comes from Delano . Please go ahead.

Hi, thank you and good morning. I was just wondering, there's an expectation of maintaining the occupancy rate flat over Q3 and Q4. And I see you have net lease maturities of 390,000 with some offset by fixed income instruments. So where is this roughly 100 basis points or 90 basis points of occupancy going to come from? Is it new leasing or is it renewals for whatever is maturing in this quarter?

It comes from term commencement as a result of contractual leasing activity achieved year-to-date. That will commence in Q4.

And then anything on renewables out of that 391,000 square foot?

Of the 391,000 square feet, we expect approximately half will mature for circumstances specific to each organization and exit the portfolio.

Okay, thanks. And the other question I have, and I think Nan, you touched on it. Of the $600 million maturity up in Feb 2026, be expected to fully repay through asset sales, or is there going to be some refinancing through unsecured debt?

It's expected to be fully repaid.

OK, those are my questions. I'll turn it back in. Thank you.

Thank you.

The next question comes from the line of bread searches with Raymond James. Please go ahead.

Hey there, just a couple of quick questions for me. Just going back to King Toronto. I think you talked about total proceeds of 240 million. What kind of default rate would you assume as a base case scenario for?

condo closings as those progress over the balance of 26. we understand that a regular default rate is between seven to ten percent brad so i wouldn't expect it to be higher on that project if anything it might be modestly lower okay that's helpful um second question just on the

the remaining assets held to complete, can you just talk about maybe an average yield or expected exit cap rate on a blended basis of what that potentially could look like for remaining transactions?

We're not going to be doing that at this time. We'll disclose, as we always do, as the dispositions are completed. All I can say is that we've had our IFRS values being validated through the disposition program to date.

Okay. Thank you.

Thank you, and it seems that we have no further questions at this time. I will now turn the call back over to Cecilia Williams for closing remarks.

Thanks, John, and thanks, everyone, for attending our conference call. My final message is this. Market dynamics are shifting in our favor, and with the team staying focused on what we can control, we're successfully operating our way through the improving environment and remain on the path to our goals, releasing up space, executing a plan to reduce debt, and completing developments that will strengthen our ability to serve knowledge-based organizations for years to come. Our portfolio is unique. It's deeply urban and deeply connected to the cities that are driving Canada's economic and creative future. As these cities get stronger, so does Allied. We'll keep you updated on our progress going forward. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines. We thank you for your participation. Have a great day.