Q3 2020 Allied Properties Real Estate Investment Trust Earnings Call
Calls keeping space in our portfolio top of mind.
When our leasing team finishes the outreach next week, they will have been in touch with over 600 individually leasing agents.
Since starting these presentations, we've had a corresponding increase in tour activity.
We completed an impressive 385 physical tours.
In our available space from March to September.
What is interesting is that we conducted more tours in September than we did pre coated in January or February.
Tour activity in October is even better than September.
We've seen very few failures as a result of the pandemic and they've been limited to smaller users.
As a result of case by case discussions with our storefront retail users most of which are exceptionally well located in downtown Toronto, We're confident that the vast majority of our retail and restaurant users will survive.
On the office side because of tight supply rents are actually increasing on renewal and replacement tours are happening and there are larger requirements for new space in every market.
It is our job to keep the market fully aware of our portfolio. We must also remain close in close contact with our tenants and maintain our buildings to a high standard.
The Allied leasing team is in the office and ready to go the extra mile on every single deal.
I will now turn the call over to Hugh for an update on our development activities.
Thanks, Tom.
This quarter I've seen a return to a more normal level of productivity for most of our projects.
Despite the second wave of Cove. It we have been able to maintain progress under construction projects I will begin by giving a brief overview of our active construction projects and then I will give a brief overview of other work that we have that have progressed over the past three months.
Construction activity.
Across the country, we have experienced a more consistent level of progress for our major construction projects beginning.
Beginning in Montreal, our team has been focusing on the upgrade of two properties and various Bacon suite upgrades that we believe will enable allied to improve occupancy in the eastern portfolio.
For our 700 DLJ repositioning project, we anticipate construction commencing in the fourth quarter and taking approximately a year to complete the majority of the common area work.
We have started the transformation of the base building on some of the upper floors, which will give the leasing team a template for what we'll be able to offer to the markets.
In Toronto in kitchen sooner our projects have progressed, well working with our construction managers, we have been able to establish levels of productivity that are consistent with the level seen before corbett.
In Western Canada, we have completed the work on Kallis Sky.
We have started the restoration of our boardwalk Revlon building in Edmonton.
The work will transform this building into one of the highest quality brick and beam buildings in the country.
The work on the restoration should be completed by the end of 2021.
In Vancouver, our partners have topped off the steel construction of 400, West, Georgia and are pushing to complete this project by Q3 of next year.
Planning activity.
Our focus this quarter has been to continue to push our development approvals for future projects in Montreal, and Toronto, There's no urgency here, but we need to push harder than normal because of the reduced productivity of municipal planning departments.
This quarter as seen the benefits of the Allied team working in unison to deliver space that serves our workspace users' needs.
Despite the challenges of the second wave of COVID-19, the team understands our strategy and is seamlessly executing upon it.
I will now turn the call back to Michael.
Thank you Hugh as Tom mentioned, our renewal and new leasing activity remains strong and we are beginning to have specific discussions with users of workspace about how they expect their needs for workspace to evolve going forward.
Preliminary indications are that our users across the country intend to return to the office with their entire workforce once the pandemic subsides, though we do need more data before we can make a definitive prediction in this regard.
I also believe that the following should be kept clearly in mind by anyone trying to predict the future demand for urban workspace.
First the fact that urban workspace is not a static reality, but rather that it has been at dynamic reality for decades, now and one that will continue to evolve going forward in response to all relevant influences most of which are human rather than.
Technological.
And second the fact that workspace has evolved recently in response to the needs and aspirations of knowledge workers with respect to human wellness creativity conductivity and diversity, which.
Which interestingly align with the environmental social and governance issues that public entities need to address on an ongoing basis.
Our job at Allied is to continue to anticipate how urban work space will evolve.
Just as we've done for decades.
In light of the factors mentioned above and our experience serving knowledge based organizations I continue to have deep confidence in and commitment to allied strategy of consolidating and and intensifying distinctive urban workspace and network dense you Dcs in Canada is.
Major cities I firmly believe that our strategy is underpinned by the most important secular trends in Canadian and global real estate.
And I firmly believe that we have the properties the financial strength, the people and the platform necessary to execute our strategy.
For the ongoing benefit of our unit holders.
A few words on acquisition and development acquisition activity has never been an end in itself for allied but rather has always been a means to providing knowledge based organizations with distinctive urban workspace more effectively and more profitably.
The same is true of our development redevelopment and upgrade activity.
Thus far in Twentytwenty, we've allocated 570 million to acquiring distinct of urban workspace in Montreal, Toronto and Vancouver.
We remain intent on augmenting our urban workspace portfolio on an ongoing basis and are you DC portfolio within a three to five year timeframe.
Urban workspace in Canada is beginning to trade following a hiatus during the shutdown and the early stages of the reopening with the most notable trade having occurred in downtown Vancouver at a very low capitalization rate.
While I don't expect opportunities to emerge for us over the remainder of 2020 I do think they will begin to emerge in 2021.
For the kind of workspace, we want the cap rates will be largely consistent with those that prevailed before the shutdown.
Any thought that there will be this distressed properties of the store we want on the market will prove to be misguided.
Weve committed to allocate $500 million to completing our active development. So for the next four years. We recently arranged conventional construction financing on very favorable terms for $250 million of this amount and funded $150 million the balance through a private placement of EPS.
Equity, which facility amendment.
We expect to fund the final $100 million in Twentytwenty two.
The global pandemic and consequent economic disruption have not impaired our return expectations, nor have they delayed completion of construction by other than a few months.
And we estimate the developments will increase our annual EBITDA by approximately 70 million over the next four years.
Not only will this augment our earnings per unit significantly along with anticipated organic organic growth it will materially reduce our ratio of net debt to annualized EBITDA and materially increase our interest coverage ratio two of our most important debt metrics Tom.
Turning finally to ESG.
Environmental social and governance issues have become a more conscious and explicit part of business life, especially for public entities like Allied.
This is encouraging and it's incumbent upon allied to submit to scrutiny. In this regard just as weve submitted to extensive financial and operational scrutiny since going public.
Allied made a commitment a year and a half us or so ago to submit formally to independent scrutiny in regard to EPS G by Twentytwenty.
The most important single step in this regard was to obtain a G.R.E. EPS fee assessment and to provide an annual EPS GE report.
We are on schedule to do just that.
The GRC SB assessment will be finalized on November 16, and our first annual EPS GE report will be published before year end.
I have no doubt that these reports will identify some strengths.
And also opportunities for improvement at Allied.
What's most important is they'll assist the board and management in establishing rational priorities going forward and will provide benchmarks for measuring improvement.
Allieds Board and management are committed to making our inherent approach to SG more manifest deliberate and measurable we've always believed that submitting to inform scrutiny will make us a better business.
And formally submitting to DSG scrutiny is no exception in this regard.
We look forward to your feedback as we progress in this area of our business.
I hope this has been a useful and comprehensive update for you. We'd now be pleased to answer any questions you may have.
Thank you.
I'd like to ask a question. Please press star one on your telephone keypad.
If you are using a speakerphone. Please make sure your mute function is turned off to allow your.
Signal to reach our equipment.
Again press Star one to ask a question.
We'll take our first question from Fred Blondo with <unk> Securities.
Thank you and good morning.
Hi, Good morning, I was just going to just following up on your comments on the sub leasing and just one quick question for me could you give us a color on the trends you're currently seeing in the GP in terms of the overall sub leasing space and what are your views at this.
Stage going forward, both in terms of the deal girls subleasing space as well as you as the subleasing space space It within your portfolio.
Theres been a lot as you can see Fred there's been a lot of sublease space added to the market in Q3.
And Allied has been no different.
Most of the space being offered is from Tami type tenants.
Tech advertising media and information and.
We have we look at subleasing as an opportunity to benefit from replacing the tenancy with no downtime the existing tenant ends up.
Subsidizing the replacement tenant and we benefit from it and we often get upticks in rent right off the bat, what we haven't seen yet is the downtown core financial services tenants come forward with subleasing, and we expect that's going to happen in the coming months.
Yeah.
Oh, that's great then maybe a quick one for Michael or I guess your your base I understand you don't want to speculate here on demand, but is it fair to say that your base scenario on demand as on change all that much since since April I guess.
That's correct Fred It has not changed at all and Fortunately for Allied at we're back in the office across the country dealing with our tenants on an ongoing basis and our tenants are making it quite clear to us that they intend to return to the off.
Office with their entire workforce once the pandemic is over the.
The question really revolves around when the pandemic is over and what exactly over means a lot, but acknowledging those questions or is that uncertainty. It is clear to us that the vast majority of our tenants want to return to the office.
With their entire workforce, both because there are people want to be back and because the employer wants their people back now again as I mentioned in an effort not to be dogmatic and not to ignore reality.
We don't have enough data yet to make definitive assessments, but I would say in answer to your question My outlook.
For continued demand for distinctive urban workspace of the sword. We provide is as positive today as it was perhaps in March.
Fortunately, though it's based on more data today than it was in March because in March we were all operating in a surreal world, where nothing was happening and where speculation and conjecture was kind of out of control now we are operating on data and that of course is.
Always the best basis from which to make predictions.
No that's great. Thank you I'll leave it there.
Well take our next question from Mark Rothschild with Canaccord.
Thanks, and good morning good.
Good morning.
You probably put a focus on having a strong balance sheet and you issued equity to fund development, even with the unit price clearly below where you think the value is you have expanded a little bit on.
What extent you would continue to do that if the unit price to remain where it is or.
At what point do you think the balance sheet is strong enough that you would maybe use some of that strength, maybe possibly repurchase units, even though I know that's not something you've generally done and how you think about the unit price now.
Mark I would say in all sincerity the balance sheet is exactly where we want it to be now Oh, we don't need to access capital from the capital markets.
Or another 12 to 18 months or longer if we need to add so I don't see us issuing equity or raising debt.
In the next 12 to 18 months with respect to our unit price clearly our cost of capital has deteriorated from where it was in 2019. Fortunately in 2019, we took extraordinary advantage of the exceptional cost of capital we had for the benefit of the balance sheet and for the benefit of the business.
[noise] I clearly consider.
Our current unit price to be severely disconnected from the underlying value of our asset base, but I also know from long experience. There's absolutely nothing we as a management team can do about that we cannot control the capital markets, We certainly can't control the.
With the capital markets. What we can do is continue to run our business and to focus on operations and leasing as Tom described and I can honestly say to you without wanting to sound too promotional Allied is in a league of its own when it comes to leasing space.
Both pre pandemic and certainly during the pandemic and so our confidence going forward is really based on experience we've had since returning to the office.
As early as May 18, and and most recently on July six so our unit price is massively disconnected from the underlying value of our business.
I think that relates more to the equity capital markets than it does to our business.
And our job is to work through that the other thing I think very strongly is we should not do anything.
Today or in the near term that is predicated.
On our unit price reconnecting.
With the underlying value of our asset base that will happen I have no doubt.
But I don't know when it will happen and I don't know what the catalyst for it happening will be.
But it will happen as I say I won't even try to predict when and I won't allow any decision that the allied management team and board makes to be predicated.
On that cost of equity recovery.
Because that would be a foolish thing to do in my opinion.
That's a little bit of a rambling answer mark, but but those are my thought.
Okay, great. Thanks, and then maybe for Tom for the 2021 did I read that are in Western Canada, you just break down what because I know, it's listed as no Calgary Vancouver, what what market specifically it is in and if there's any sizable leases that we should be aware of or focused on.
Yeah.
The bulk of them I would say would be in Calgary and they're made up a very small tenants. So there isn't a very large tenants.
Tenant sales.
And to be expiring in 2021.
Okay, great. Thank you.
We'll take our next question from Caitlin Burrows with Goldman Sachs.
Hi, good morning, everyone and I know that our occupancy is hard to predict but I guess on the occupancy side on the occupancy and lease rate declined in the quarter and you talked about how some of that was expected.
Declines in each.
As Ed mentioned, which I think might have been driven by de leasing ahead of development, but also Calgary nacelle in Toronto. So I guess I was wondering if you could just give any color on how you expect occupancy to evolve, especially in the larger markets like challenger.
Sure I know and I when.
When we could reach a bottom and how much lower that could be.
Well, we did lose a little bit of ground in the quarter, but occupancy actually is on the rise for us we've completed the number of transactions, which hopefully will.
Demonstrate that in the next quarter and beyond.
The deals that we lost weve known for quite some time <unk>.
And they were you know predicting that we're working on replacing them some of them we've already replaced.
So we're looking at our occupancy numbers improving over the coming quarters.
Okay, that's encouraging on and then on the leasing spread side it looks like you.
He witnessed a strong leasing spreads in the third quarter, which isn't surprising given historical results, but then if we look at the current expectations for the future your mark to market and they have been revised.
Good.
Now there maybe just tell me hi, but could you give some color on market expectations for rents on and how the three key trends remained robust, but the future your mark to market I estimate <unk> come in a little bit.
Yeah, we temper, we tempered the market rents, we checked them every quarter.
And they did come down a touch but we're seeing really good positive increases I should also point out that the 19.3% increase.
This year one of the renewal.
That's not the average rent on the renewal that's he just year one.
So were.
Bullish about our future our spaces are unique and they are in demand.
Okay.
Well take our next question from Jonathan Culture with TD Securities.
Thanks, Good morning.
Good morning, going back to <unk>, just going back to the capital or is that.
Mark was asking about guys consider selling at least a partial interest in some existing assets to to raise that equity and I guess related to that would and I know you've looked at it in the past or would you consider that going forward because it would certainly help demonstrate portfolio value.
We have considered that Jonathan and we have had opportunities to do it.
And we have declined to do it Oh, we are very confident.
In the cap rates applied to our asset base and we don't think anything would be accomplished by selling a an undivided half interest in anything.
Because we never sell everything in order to validate that fact Ah, we know where the market is going to start trading at and it's going to start trading at a level that will validate the underlying value of our asset base again without being dogmatic we're certain of that.
And I see absolutely no value.
In engaging in a trade just to try to demonstrate to the market that the underlying value of our assets is as we represent it to be a in our IRS values.
So we we have declined to do that we are aware of the U.S. office issuer, having done that on a rather large scale with Blackstone and it was a if you will.
I won't say, a dud, but it accomplished nothing and it did nothing to address the concern that some people may have about cap rates are going forward. So it would be one of those actions in my opinion that would be designed to.
If you will cater to.
The equity capital markets and it wouldn't achieve the desired objectives number one and it it wouldn't in my opinion be a good decision for the business.
Okay.
Fair enough just secondly.
Turning to the beauty seed portfolio another strong quarter, there were there any onetime items.
In the in the NOI this quarter.
I think and and Cecilia can correct me on this.
I think the 800 plus thousand dollars that we adverse it to in the press release I think 68% of that is recurring so I think by implication the balance would be a more one time items. So we are trying.
Trying to identify the unexpected growth there that is recurring and then the unexpected growth that is one time. So what we gave was an aggregate number for for the second and third quarter and as I say, if I remember correctly Cecilia 68% was was.
Recurring and will recur if you will indefinitely and the balance is nonrecurring or onetime so it's or it's it's a fairly good ratio, we'd obviously like a 100%, but but we'll take the nonrecurring any day of the week.
Okay and the nonrecurring is is I guess.
Is that something you expect sort of quarter to quarter, just different nonrecurring revenue.
We have had.
Sequential quarters of nonrecurring revenue, but I don't think we would be wise to assume that that is going to continue indefinitely. They are if you will exceptional circumstances, where we're certainly getting what we earned or what we do.
Deserve a boat, but it would be unwise for us to look upon that is recurring.
Yes, we don't yet know Mike candidate, it's a little frustrating, but we don't yet know the eligibility criteria for the new program.
We could assume that it will be the same as sacra, but we just don't know I'm, hoping.
That it will expand somewhat in terms of eligibility because if you think about the 50000 dollar limitation that applied under sacra.
I understand the need for a a bright line but.
But $50000 in downtown Toronto.
Is very different than $50000 in berry or some other place.
So I'm hopeful that sales strive to expand the eligibility.
So as to include tenants that we have had to take care of in our deferral program, but we just don't know yet.
How that's going to shake out my sense is the.
The government is trying.
Sincerely to support small and medium sized enterprise and I think that's very sound economic policy because in aggregate small and medium sized enterprises is vital to our economy and to our wellbeing. So but I just don't know the answer to that yet.
What I do know, which is very encouraging to us about Q4 earnings our Q4 rental revenue to be precise.
Is that as we sit here today, 70% of our users or is it 75.
70, 70% of our users who qualified under secretary have paid their rent to us in October.
And that's a very encouraging sign to us about the ability of those tenants to support themselves without subsidy or the other three things that encourage us about rental revenue in Q4 is the very visible recovery.
Our variable parking revenue.
The absence of the need to abate rent at all.
And finally, the scaling down of our deferral program, which is real.
Which Tom has.
Done an extraordinary job of leading.
And there's really not a tenant who circumstances were not fully conversant with and who is the ability to survive.
We have confidence in so those are the sort of for reasons that we anticipate more normal levels of rental revenue in Q4, but as to the new rent relief program. We are anxiously awaiting the details as our retail users across the country.
Sure sure and all that so that's very helpful. So so I guess just taking that on the different programming, it's going down I think you guys. A 5.9 million in the second quarter and 5.4 in the third so you would expect that that would trend down at a similar pace or we're going to start to see a more rapid tapering in pork you and when do you.
Well. This is obviously risky territory for me, but my expectation is it will scale down at a more rapid rate in Q4 than it did between Q3 and Q2.
Okay. Thank you just on you know the increased tour activity that you guys have seen it's obviously a positive sign or Tom I'm wondering if you could just give a couple of additional compares with respect to where you see that demand coming from I mean, it would seem that at least in the short term there's been a contraction in demand in the market. So I.
Those would be an increase in people that are not looking for growth space that maybe just to upgrade their existing premise.
And then the second question is how your conversion rate would compare today versus the peak over those.
Like our conversion rate is still very good its it's I'd say comparing favorably with respect to.
Growth its actually a lot of it is coming from our existing tenant base needing more space.
There's a lot of deals that were done in Q3 that came from our existing tenant base wanting to grow.
A couple of the deals that I mentioned that happened post quarter end in Toronto.
Two of them were tenants that were in our existing portfolio, who need it a whole lot more space.
One of them went from 6000 to 26000.
The other one from about 18 or 20002.
37000, so so it's our existing tenant base continues to be a supporting us.
Okay, Great last one for me before I turn it back it just wondering if.
You could perhaps just remind us of the the mechanics on 400.
George I believe that.
Come it'll be complete I think you said in the third quarter of 2021.
I'm just trying to think about the timing of your obligation to purchase a 50% interest in how we should think about.
The capital that Youve got extended with the loan receivable and how the recap might affect.
Sources and uses going forward.
Yeah, we we fully expect Mike that the the transaction will occur in the third quarter of a 2021 and the transaction will be of course, the repayment to us of of the advance we've made and then the purchase by us.
An undivided 50% interest in the property at a 5% cap.
Cap rate I believe and we expect that to occur in Q3, and we expect the flow to be a more or less concurrent and it. It will also coincide with placement of a conventional first mortgage on the property al.
Slide wouldn't normally.
Use first mortgage financing as you know, but in this instance, when we have a private partner we are prepared to use conventional first mortgage financing just as we will with our partner perimeter in kitchen or when we complete the Google building.
So I would I would see that occurring Mike in the third quarter of 2021, and I think the probability of that is is extremely high now given the state of construction.
And given the fact that the building is essentially fully leased to extraordinary tenants.
Okay, and then just on that point, so the repayment of the loan and putting construct I'm sorry, not construction, but take a permanent financing would that mean that you guys would actually get some cash proceeds back once that closes.
Correct, that's right yeah, we paid our loan.
And then the construction financing in place.
Okay. Thank you for clarifying open it back.
Thank you.
Our next question from Mario.
Sure Bank.
Hi, good morning.
Good morning.
And just in terms of cash.
Well do some in 2021, it gets really external growth.
Michael you know what is the expectation for.
Acquisition opportunities in 2021, with really no change in pricing relative to pretty cold levels, Oh implied cap rate, depending on your estimates probably up 160 basis points plus.
During the credit crisis, resulting in a large and 34% discount to your eye for us and bounced.
Balance sheet kind of where you want it and it doesn't sound like asset sales or something that in the near term are.
We're going to be material. So how you know how do you how do you think about growing the size of the company in the portfolio, while treating it or a bigger discount to NAV something that's been built we were overall interest rate.
It's a good question and it's one we've been asked a lot and it's one we have been thinking about a great deal and I think the best way I can answer that is as follows.
With respect to development.
The interesting difference is we're committed now to it.
There's no discretion.
We have made those commitments, we need to complete those construction projects and that's why we took if I can put it.
The lightly.
The conservative or careful approach to funding our obligations in that regard and I think because the private placement. We did was very much putting discretion ahead of valor in an effort to be certain.
That we could meet those commitments with respect to which we have no discretion.
When it comes to acquisitions.
It's a much more interesting dying.
Dynamic for us as a management team.
Because it's an entirely discretionary act on our part we can choose to do it or not to do it depending on what we think is best for our business and as I mentioned, if we think it will make us a better provider of distinctive urban workspace in major Canadian sit.
These were going to want to do it.
But because it's discretionary that may be a circumstance, where we'll use our balance sheet strength.
To fund the acquisition at least initially.
And it would be rational and appropriate for us to do that even.
Even if or especially if our cost of capital hasn't returned to a level that we consider appropriate.
So I have said and our team has discussed the possibility.
Using that untapped balance sheet strength.
To fund acquisitions.
If our cost of equity isn't attractive to us in that regard.
I'm, not saying, we'll do that I'm, not saying, we'll do it.
To an extraordinary degree, but I am saying, we would be predisposed to doing that.
On a discretionary basis, if we're convinced that doing so would make us a better provider of distinctive urban workspace in this country or in the major cities of this country. So.
Certainly our cost of equity is currently.
An impediment.
Two.
Making significant acquisitions, it's no impediment to making small infill acquisitions, which we continue to make.
But in aggregate they don't represent a large amount of capital up but in terms of larger acquisitions. Our cost of equity is currently an impediment bought.
Our cost of debt happens to be extraordinarily attractive.
And we may in the right circumstances choose to use our balance sheet and to deploy our balance sheet, we're not prepared to deploy our balance sheet to meet fixed obligations overtime.
That would be perilous.
But we might be prepared.
Because of course fixed obligations for for development.
Actually bring significant deferred returns to us, but they bring no current returns that's the difference.
Acquisitions, if were going to make them will bring a current return in addition to making us a better provider of distinctive urban workspace. So that's how we would approach it Mario I cant say definitively what we would do if a marvelous acquisition came along in the first quarter of 2021.
That was large but frankly, we would.
Make every effort to find an appropriate.
And successful way to achieve that acquisition and we might in that instance use more debt than equity.
We might even sell something.
Because our ability to do that is.
It's clear beyond that we keep sending people away frankly, who say you know please sell us half of this so you know you can you can demonstrate a nice price to the market and your unit price will recover it won't recover it'll be.
A resounding nothing.
But if it was to facilitate a great acquisition, that's a whole different ball game, and we might very well entertain that opportunity at that time.
I again, a bit rambling, but hopefully helpful.
No no I appreciate the color there.
Have you thought about what type of balance sheet capacity.
In terms of maybe funding transactions or acquisitions in 2021.
I resisted the temptation.
To do that but it is not in consequential.
I mean, we can maintain a a very prudent balance sheet.
And stay close to our targets.
And fund the significant amount of acquisition with that.
But I I've almost deliberately tried not to quantify that because I'll get in trouble with my colleagues.
Fair enough and then gets you in trouble if you're going to push on completion. Please I'm I'm barely staying above the water line as it is [laughter].
The next question is really through its public space and actually the commentary dark very preliminary discussions later I mean, what kind of projects you will come back.
With full workforce.
Oh it was interesting.
But the sublet space in your portfolio is also coming up at the same time from 2.2% of the portfolio to 4.7%.
So can you maybe just reconcile those two comments one being that.
Executional because Americans support for them to start can you see any tenants.
But some of their space on the subject matter within your portfolio.
Mario the honest reconciliation there in my opinion is that the tami tenants, who are putting their space on the market for sublease are under some pressure on the top line they need to reduce expenses and it's interesting to us it's not really tech tenants.
That are doing this in our portfolio I don't know about others. Its 10, it's it's advertising and media and I think their toplines are under a bit of pressure and I think they want to reduce their I think they want to reduce their ongoing costs and they're probably well enough advised to know.
That they have something that's very marketable.
I mean, if you have 25000 square feet.
Of Allied space at let's say 18 net.
You're going to get off that.
Very successfully and and with minimal cost and indeed, what often happens [noise].
Is the tenant will come to us and say we need your approval.
A and B the sub tenant would like to have longer term will you enter into direct.
Lease arrangement with our sub tenant what we usually do then is say we have a good opportunity for you will it will we'll actually enter into the direct lease from day. One we'll let you get off the hook provided the sub tenant is appropriately strong and we'll deal with a sub tenant and that's where we are.
Benefited on almost every sales sublease that any of our tenants have done but the reconciliation I think.
Comes with the fact that to the best of my knowledge Tom.
Every one of our significant sublease tenants and again that were talking 20000 foot type spaces.
They want to manage their expenses going forward because their topline is under some pressure the ad.
World as you know the conventional ad agencies.
There, there's still viable businesses, but their top lines have been under pressure for several years, now and and they're they're all looking to manage costs and and I believe the motivation for the sub leasing of space within our portfolio is almost exclusively.
To manage cost not because.
They don't want to bring their employees back to work. They just I think probably have fewer employees period.
And need less space period, so they're trying to manage the cost.
Okay.
Two more really quick ones on my end one for Tom.
The the 125 [noise].
Our latest whose Q3 the three leases.
Her with the Merck to merger.
Sure to the 90% to deliver during Q3.
It would be about 20.
20% ish Mary I haven't done the exact calculation for those three deals.
But also another interesting tidbit for those transactions.
The <unk> the allowance that we provided was tiny.
In all three cases.
And we got to still we've got to rent uptick.
Okay, that's great and my last one the ocular in Hawaii due for before it came down a bit quarter over quarter. If it was 1.6 million or so with the 12.4.
Yes. It was discussed earlier was flattish quarter over quarter can you provide some color in terms of what drove that downtick.
Yeah pay marry out there like that I recovery cap that affected us in Q3, but it was limited to Q3 and it you won't see it again, so like you know 400000 that got annualized but it won't it won't happen after October one onwards.
No. It does I'm you know sequel onwards, it'll be up front for me.
Absolutely.
Okay. Thank you.
Well take our next question from Howard Liang with Veritas investment research.
Thanks, Good morning.
Good morning, I wanted.
I want to return to the question about the you know the pandemic being over and your discussion with that these tenants you've mentioned that they've all said that there so far and that they will return to their entire workforce has there been any discussions about you know they all employees, which are due to the workforce but.
Turning to hybrid workdays, so where they would be in the office only part of the time.
Hi, Tom has had most of those discussions so I'll let him.
I've taken upon myself to call pretty well all of our large users in the portfolio to just find out what they're thinking about returning to work and what's going to happen in the in the future with respect to flexibility with the employees.
And all of them would say they need their offices they can't wait to be back they probably will be providing some kind of flexibility to the work week for the employees, but it's it hasn't been defined or established.
Anyone as far as I'm aware.
Right. So it would be too early to make it work task [laughter] lower demand because of that I guess going forward correct.
Correct.
And then I guess more specifically on the vacancies that popped up I guess quarter over quarter in Q3, Yeah, I think the comment from from view with that.
<unk> the rate what kind of expecting those.
But just to clarify what were you expecting them I guess prior to the pandemic like those.
Most of those vacancies were known brand or was it George.
During the pandemic that like I said, there was found out.
I would say all of them were known pre pandemic.
We're in touch with the tenants on a regular basis way in advance of their expiry and we were aware that this was happening.
There were no surprise.
Yeah and to take that one step further Tom if I'm not mistaken in every instance, the reason the tenant didn't renew and they they are without exception really great tenants. The reason they didn't renew is because they needed more space and we couldn't afford it to them and we hate losing tenants for that.
So we just hated Ah, but it had nothing to do with the pandemic.
Right, that's true I think I.
That makes sense a lot of your vacancy I think in your in your table. It's really just they're mostly under 10000 square feet. So they wanted to larger space I guess.
I guess my other question about the leasing activity at the table that in the reports I guess this quarter does any of that relate to the sub lease the leasing to be done in a sub leases. So for example, the you highlighted the 80 to 82, but I know trends at.
Action that included into leasing activity table or is that separate a transaction that.
That was post that was post quarter and it wasn't a sublease.
Okay, Okay got it.
And then just one more for me on the.
The development activity I guess that tell it's guy I think I see in that table. It it's.
When it's transferring to rental properties pushed to Q4 can you remind me of the criteria to where Oh property is transferred to the rental portfolio again.
Hi, Howard it's when we have all of the necessary occupancy permit which you expect to have in Q4.
Okay. Okay all.
All right. Thanks, that's it for me I'll turn it back.
Thank you and as a reminder, if you would like to ask a question. Please signal by pressing star one well take our next question from Matt corner with National Bank financial.
Hi, guys. So I'll try to keep this quick good good morning, with regard to the sublet space can you comment as to whether any of it is currently part of your deferral program and then you gave some goalposts on rent spreads, but and any sense on the weighted average rent spread and term to maturity on those leases.
Yes first.
First of all none of them are part of the deferral program.
All of them are very credible tenants.
And there are significant upticks available to us.
From the in place rents to market.
Okay and then.
Three and a half years, that's like a weighted average term of three and a half years.
And I think you've mentioned this in the past year leases don't allow for them to profit on a sublet to if they were to get above market rent enough to share that with you correct. That's.
That's correct.
On on a 425 VJ and tell this guy is for 25 VJ now fully in cash rent and is tell us sky in straight line rent at all at this point.
Tell us sky isn't straight line rent.
And 425, D.J. isn't not yet fully in cash rent.
The Sealy or do you know any proportion of which it would be in at this point or.
Well.
Okay. My question my portion not quite 25 in cash rent the bulk of it. It begins in Q1 of next year, Okay. Perfect and then the last one for me in terms of a market rent changes. It seems like most of them were in Toronto in 2022 and beyond I assume.
That's the confluence of new supply coming online as well as some expectation of financial institutions, giving back space, but you didn't make any fair value adjustments to the portfolio. So were you running different rent numbers in your projections or how should we think about that maybe you brought coverage them on some.
Of those rents assumptions so.
So just to clarify on the market rents that we close on the maturing stage we're.
We're not trying to guess what the future might get rental d.. So we're not adjusting for any supply that we're expecting to come on line and 2022 in today's market rents.
On this specific space that matures. So every quarter, we assess along with the brokerage community what the market rate is today, but all of the base that is maturing over the next five years to the adjustments were made based on the nature of the space.
Okay, that's interesting, but when you do your Dcs I guess, you would assume a market rent at the time when it comes to that fair.
Right. So on the D.C., Yes, and I think your question was.
Around the uptick overall in the portfolio or whether you would have made any changes to your rent assumptions going forward I guess, so that the appraiser witches cushman. They would've made a change in the assumption we had an an uptake in our I ask price value in the quarter, primarily because of lower.
Deals that materialize at higher than what we modeled in by the appraisers. So whatever they model that we ended up getting a bit better than that in the quarter.
Okay, perfect. Thanks, guys and it looks like a pretty stable quarter all things considered.
Thank you.
Well take our next question from Mike Smith.
Smith this shortens.
It's from regardless your line is live.
I'm, sorry, I was on mute.
[laughter].
Thanks, I seem to do that a lot these days, but anyway and tell this guy I just wanted to follow up I think on the last call. You had actually mentioned that you had your occupancy permits and that the first residents had moved in in August. So I'm, just trying to get a better picture of you know it is being transferred or in Q, but is that going to be a full tranche.
Right you will there will be a full the capitalization in.
In the fourth quarter and balling on that perhaps if you could give us an update on where the residential leasing is until its done it would be helpful.
Sure. So at the end of Q2, we had occupancy permits up to a certain point of the residential floors.
We've just been able to achieve at the beginning of Q4, the remainder of the R&D parent. So now we have the full building that can be transferred into pod.
Our <unk> are the deals that are being done on the residential floors are consistent with our pro forma so it should we're seeing good traction there and west Bank is working to lease up the rest of the building.
Okay, and just you know not the not the.
[noise] push it all but where with the leased rate.
Yeah on a per square foot basis, well not the rents not the rents the occupancy rates are.
Oh, it's consistent with our projections on the lease up.
Oh for the residential force.
Okay very early on yeah.
Yeah, and so then maybe just what was your if its consistent with your your assumptions than what was the assumption in terms of time to lease revenue.
Oh, it's about a year to 12 months.
Well once okay.
Okay, and with the pro Formas that you're achieving is that.
Including the impact of any potential incentives or is there any there's they're not incentive activity.
That is inclusive of the incentive program.
That was taken into account in our pro forma and assumed as part of the cost of the project and the lease up.
Okay. That's the area that's very good just like it.
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[noise]. Thank you operator, thank you all for participating the call hopefully our answers and presentation were helpful to you. We look forward to keeping you apprised of our progress in the meantime, the well and be safe.
And have a good day. Thank you.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.
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