Allied Properties Real Estate Investment Trust

Hello, everyone. Thank you for joining us and welcome to Allied Properties REIT Third Quarter 2026 Earnings Conference Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Cecilia Williams, President and CEO. Please go ahead.

Thanks, Pascal, and good morning, everyone. Welcome to our Q3 conference call. Please note that certain statements we make during the course of this conference call that are not statements of historical facts may constitute forward-looking information and forward-looking statements about future events or future performance. These statements are based on management's current expectations and are subject to risks, uncertainties, and other factors that may cause actual events or results to differ materially from historical results and or from our forecast, including those described under the heading Risks and Uncertainties in our 2025 Annual Report. Material assumptions underpinning any forward-looking statements we make include those described under the heading Forward-Looking Statements in our 2025 Annual Report. In addition, certain non-IFRS financial measures may be discussed on this call. References to non-IFRS financial measures are only provided to assist you in understanding our results and performance trends and may not be appropriate for any other purpose. For further discussion on these matters, please refer to our 2025 Annual Report under the heading Non-GAAP Measures. Turning to our prepared remarks before we take questions. Before discussing our quarterly results, I want to address our decision to reduce the distribution and expand our disposition program. These actions will retain more cash in the business and accelerate debt reduction. We recognize that Allied's performance has been disappointing for our union holders and that this distribution reduction adds to that disappointment. We understand the importance of both the income you receive and the value of your investment. We're accountable for improving Allied's financial position, and these decisions are both difficult and necessary steps toward that goal. Our priorities are clear. Reduce leverage, streamline the portfolio, and convert our leasing progress into recurring cash flow. Moving to the quarter, we're seeing encouraging momentum in our operating business. Leasing activity continues to strengthen. Occupancy is ahead of our expectations and our leasing pipeline continues to grow. These are important indicators that demand for our workspace is improving and that the underlying fundamentals of our portfolio are moving in the right direction. JEP will elaborate on that shortly. The improvement in leasing has not yet translated into stronger financial results. There's a lag between signing leases and tenant taking occupancy and paying rent. At the same time, the later timing of dispositions has kept interest expense elevated for longer, while lower interest income and reduced expense capitalization are also weighing on earnings. Together, these factors are driving the lower earnings outlook. Our leverage remains too high. We need to reduce it while the cash flow benefit of our leasing activity builds. That is why we're retaining more cash and accelerating dispositions. The distribution reduction will retain $126 million annually within Ally. This additional cash will support debt reduction while preserving our capacity to meet the leasing and capital requirements of the portfolio. We're on track to exceed our 2026 disposition target of $500 million. Between executed sales and firm agreements, we estimate year-end proceeds of approximately $660 million. With all proceeds directed at debt repayment, we remain on track to meet our year-end debt to EBITDA target of mid-11 times. To continue reducing debt beyond 2026, we've increased our multi-year disposition program by between $750 million to $1.5 billion. As we select properties for sale, we'll balance near-term deleveraging objectives with strategic importance and long-term return potential. Our objective is to reduce debt and concentrate our capital in the properties we believe offer the strongest future returns. We're increasingly confident in the earning potential of the portfolio. Our priority is to unlock that potential by putting Ally on a stronger financial footing. There are two other updates I'll address. At 150 West Georgia, our priority is to maximize recovery of Ally's outstanding loan. Construction delays and ongoing discussions with an established operator have moved the expected resolution into 2027. We're pursuing alternatives with our advisors and have retained Finnegan Marshall to monitor construction progress and costs. As construction advances towards completion, our objective is to provide greater clarity on the path to recovering our loan. Next, King Toronto. We remain on track for completion in the second half of 2027 as previously disclosed. We continue to work with advisors to ensure the project progresses as expected. I'll now turn the call to Craig for more detail on our financial results, outlook, and financing plan.

Thank you, Cecilia, and good morning, everyone. As this is my first earnings call as CFO of Allied, I want to start by saying how pleased I am to be taking on the role. Over the past quarter, I've had the opportunity to work closely with our team, and I look forward to engaging more directly with our investors and analysts. I'm stepping into the role at an important point for Allied. While operating fundamentals are improving, our financial position requires focus and decisive action. My priorities are clear. Strengthen the balance sheet, reduce leverage, and improve the sustainability of our cash flow. With that in mind, I'll focus my comments today on our third quarter financial results, our revised 2026 outlook, and the actions underway to strengthen the balance sheet. Starting with the quarter, our results reflect continued pressure on earnings, even as the operating fundamentals begin to improve. FFO was $38 million or 0.194 per unit compared to $65.7 million or 0.470 per unit in the same quarter last year. The year-over-year decline had three principal drivers. First, operating income was approximately $12 million lower reflecting non-renewals, dispositions, and the lower capitalization of operating costs. Interest income declined by approximately $9 million as no new interest income was recorded on the West Bank-related loans in the quarter, as we had previously disclosed and had anticipated. And third, interest expense increased because the amount of interest being capitalized declined materially as development and upgrade projects were completed. Before capitalized interest, Gross interest expense actually decreased by approximately $4 million, or 9%, reflecting the reduction in our overall debt balance compared to the prior year. Turning to ASFO, the decline was more pronounced. ASFO was $21.6 million, or 0.110 per unit, compared to $61.2 million, or 0.438 per unit, in Q3 last year. The decline reflects a higher volume of leasing costs associated with the increased activity in our portfolio. Regular leasing expenditures were $10.5 million in Q3 compared to $1.7 million in the same quarter last year. While these leasing costs weigh on ASFO today, they drive higher occupancy in future cash flow as rents commence. We expect a partial cash flow contribution from the leasing activity in 2027, with the full benefit reflected in 2028. In short, leasing and occupancy are improving, but that improvement has not yet fully translated into earnings. Before turning to the outlook, I'll briefly touch on our investment property valuations. During quarter, we recorded a fair value loss of approximately $39 million across investment properties and properties held for sale. Within the Investment Property Portfolio, valuation changes reflected updated leasing activity, additional capital requirements, and selective adjustments to cap rates based on market evidence and recent transaction activity. Overall, valuation parameters were relatively stable during the quarter. Turning to our outlook, we are updating our 2026 earnings expectations. Starting with NOI, we now expect $300 to $305 million for 20.6 compared with our previous outlook of $310 to $320 million. Relative to our previous outlook, the reduction approximately reflects a $4 million impact from the timing and increased volume of dispositions, a $2 million impact from the decapitalization of operating costs, and a $2.6 million impact from non-recoverable air rate taxes that we had previously disclosed. Turning to FFO, we now expect $170 to $175 million for the year, compared with our previous outlook of $185 to $200 million. In addition to the lower NOI I just described, the revision approximately reflects $3.5 million in higher interest expense, primarily due to disposition timing and lower interest capitalization, and $3 million of lower interest income, primarily related to the West Bank loans. A meaningful part of the reduction in near-term earnings reflects the actions we are taking to reposition the balance sheet, including a larger disposition program. This distinction matters because our priorities are clear. Reducing leverage and strengthening the balance sheet remain our highest financial priority. That brings me to the balance sheet. At September 30th, net debt to EBITDA was 12.5 times on a nine-month annualized basis. The increase from Q2 was primarily the result of lower EBITDA, as no interest income was recorded on the West Bank-related loans, while overall debt remained relatively stable during the quarter. This leverage level is far too high, and reducing it is our absolute financial priority. Alongside the cut to the distribution Cecilia outlined, We are materially expanding our disposition program as a key tool to reduce debt. We have completed $321 million dispositions and have firm agreements for approximately $340 million of additional sales expected to close in the fourth quarter, including Toronto House and 19 Duncan. Together, completed and firm transactions represent approximately $650 million of gross proceeds significantly exceeding our original 2026 target of 511. With additional dispositions expected to close before year end and the proceeds directed towards debt repayment, we remain on track to reduce leverage to our mid-11 times target. Getting there will be an important step, but it will not complete the work. We need to continue to be aggressive and bring down leverage. With that, we are extending and expanding the disposition program into 2027 and beyond, targeting an additional $750 to $1.5 billion of asset sales as part of a multi-year approach to further reduce leverage and optimize portfolio. From a liquidity perspective, we remain well supported by multiple sources of capital. Our recently extended credit facility provides significant capacity, while our substantial portfolio of unencumbered assets provides additional financing flexibility. These sources are complemented by our disposition program. Together, this provides us with ample liquidity as we continue to deliver and address our upcoming maturities. Our most significant upcoming maturity is $700 million of unsecured ventures in April 2027. We currently expect to repay at least $350 million of those equal maturities with disposition proceeds. Importantly, $350 million is not intended to be a ceiling. As we continue to expand the disposition program, our objective is to use additional proceeds to further reduce the amount we need to refinance. We expect to refinance the remaining amount with either secured or unsecured debt. for the focus on the source of capital that provides us the most attractive pricing in terms available to us at that time. As I close, let me reiterate our overarching financial priority, strengthening the balance sheet. Our objective is to bring down leverage meaningfully and quickly, preserve our investment grade credit rating, and address our upcoming maturities in a disciplined and proactive way. That is why we are accelerating dispositions, and it is why we are cutting the distribution. allowing us to preserve capital and retain additional cash to fund the business and accelerate deleveraging. We have a clear objective and we are taking necessary steps to achieve it. This will remain at the center of our capital allocation decisions as we move through 2027. With that, I'll turn it to JP.