Q1 2021 Allied Properties Real Estate Investment Trust Earnings Call
[music].
Good day and welcome to the Allied properties REIT first quarter 2021 earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Mr. Mike and Laurie. Please go ahead Sir.
Thank you very much and good morning, everyone and welcome to our conference call, Tom Cecilia and who are here with me to discuss the ally its results for the first quarter ended March 31, 2021, we may and the course of this conference call may forward.
Eight months about future events or future performance. These statements by their nature are subject to risks and uncertainties that may cause actual events or results to differ materially and.
Including those risks described under the heading risks and uncertainties in our most recently filed annual information form and in our most recent quarterly report.
Material assumptions that underpin any forward looking statements. We make include those assumptions described under forward looking disclaimer and our most recent quarterly report.
Okay.
Despite ongoing shutdowns across Canada, and our operating and leasing momentum continued to accelerate in the first quarter of this year, we collected 97, 6% of our rental revenue.
Of the two 4%, we deferred and we expect to collect nearly 1.5% under the Canada, Canada emergency rent subsidy.
Same asset NOI and <unk> per unit were in line with the comparable pre shutdown quarter last year, while a F. F O per unit was up 3% the.
Quarter once again confirmed that our team our properties and our user base our resilience.
Cecilia will summarize our financial results as well as discuss our balance sheet and our short term outlook, Tom will follow with an overview of leasing and the operations.
Who will provide the development update and I'll finish with our current thinking on the future.
And so now over to Cecilia.
Good morning.
First our financial result, our portfolio and our user base continued to demonstrate resilience to the first part of 2020 one.
The growth and average net rent per occupied square foot of five 3% resulted in our same as the NOI holding despite the drop and our occupancy. We're also confident and the incremental economic contribution as the remaining space of our portfolio is taken up.
Second our balance sheet and then.
Per unit at March 31 was up one point and 1% from the same time last year, our eye of forest value increment and the first quarter was $8 million on incremental capital investment of $85 million, primarily as a result of rent growth and Toronto, partially offset by continuing.
Softness and Calgary and Edmonton.
After finalizing our green financing framework early this year, we issued our inaugural Green bond with a five year term and of one point and 73% coupon for total proceeds of $600 million.
Having been able to take advantage of the favorable interest rate environment puts us in a great position of liquidity today. It will be late in Q3, when we started drawing on our $500 million operating line.
At the end of the first quarter, our net debt to EBITDA was seven nine times and our total debt was 31, 1% of I F for us value and our interest coverage was three three times.
We estimate our developments, which have a 13 year weighted average lease term will increase our annual EBITDA by approximately $79 million not only will this augment our earnings per unit significantly along with anticipated organic growth it will materially reduce our ratio of net debt.
The EBITDA and materially increase our interest coverage ratio our two most important debt metrics.
Our pool of unencumbered assets is $6 $9 billion, representing 79% of our investment and properties.
And we intend to continue prepaying or repaying mortgages as they come due with the goal of having the majority of our asset base unencumbered.
We believe this will give us the strongest and most flexible balance sheet from both the defensive and offensive perspective.
Third our outlook for 2020 one.
Based on accelerating leasing momentum and our major markets. We continue to expect low to mid single digit percentage annual growth and F. F O per unit a F F O per unit and same as the NOI, we expect our portfolio and our users to continue exhibiting resiliency through the balance of.
<unk> 2021 and.
I'll now pass the call to Tom for a discussion of our leasing and operating activities.
Thank you Cecilia.
Within the last 12 months in order to improve our office market coverage and we added six leasing stuff to the team.
Two of Montreal, and Toronto and two in Calgary.
And the beginning exactly one year ago, recognizing the there's never been more important to stay in touch with the market our internal leasing team embarked on a program to strengthen our relationships with the entire brokerage community.
Every active commercial broker and each of our markets receive calls from Alec.
We believe this personal contact on the part of our team has been the biggest reason for our continued leasing success.
We know that if we can get a potential tenant to physically tour of available space. The chances of leasing it are greatly enhanced.
Q1, 2021 was no different with calls of the brokerage community continuing.
Remarkably the team actually completed 30% more physical tours in Q1, 2021 and then Q1 and 2020.
Which was of pre shutdown quarter.
And all there were 201 tours conducted on our portfolio and the first quarter and 78 transactions completed totaling 439000 square feet.
We achieved a five four increase in year, one of net rents on space renewed or replaced.
That's a good number but lower than our usual increases for two reasons.
First there were fewer deals completed and drama this quarter and quite a number of deals completed in Calgary.
And second we were asked by a number of renewing tenants during negotiations to scale rents over the renewable term and not increase the rents early and the term given the pandemic.
For long term tenant relations, we often agreed to delay of an increase and rents to Youtube.
Our leased area of dipped slightly in the quarter to 91, 9%.
There are three reasons that account for this temporary decline in the quarter.
First we had small non renewals and Montreal.
And we settled with the co working company called Breather for seven small leases totaling 35000 square feet rather than deal with the situation and bankruptcy.
And third we made small strategic terminations and Vancouver, we are optimistic of of regaining leased area and the coming quarters. The team recently tally of the amount of space currently under discussion and our portfolio not including renewals at just over 1 million square feet.
Montreal is leading in terms of activity because of the large blocks of the space available.
While we will not complete all of the potential deals. We are very encouraged for future results on the levels of activity today.
I will now provide leasing updates on Montreal, Toronto, Calgary, and Vancouver, and conclude with an update on our urban data center portfolio.
Noteworthy transactions and Montreal during the quarter, where the extension and expansion of moment factory to 80000 square feet.
And of 21000 square foot renewal with and independent Jim of the RCA building.
And of interest.
Is the recent increase in activity from the various companies serving the film industry, we have a number of tenants and Montreal, providing postproduction services through the large film studio studios in Hollywood and <unk>.
Hollywood has reopened for business some of our tenants are arranging for more space to handle this spike and workflows and.
This will no doubt result, and an increase and our leased area in the coming months.
And in Toronto, we maintained our leased area at 95, 8%, we completed a new lease for 25000 square feet of the well and also completed the second expansion of Rose rock of 37 from East out.
The 8000 square feet.
And in the Calgary market small spaces continue to lease the team completed a very impressive 81 tours and Q1 and lease more space and completed more deals than we didn't trust.
We also managed to increase of at least area the 85%.
In Vancouver, we continued to day leased two properties as we reposition the buildings for the long term.
Subsequent to the quarter, we completed the 17000 square foot renewal of the lending with good uptick in Netherlands.
There were no leasing deals finalized at the urban data center portfolio in the quarter.
But just subsequent to the quarter, we completed three deals at $2 50 front for a total of 22005 hundred square feet Rep.
Revenue will be phased commencing Q2. This year. These deals bring our leased area of $2 50 from 286% and our UTC portfolio to 94%. We are currently working with the transit on the transaction of $1 51 front, which if completed will bring it to 100% leased.
We remain unconcerned and by the amount of space available for sublease, and our portfolio and can reported decline and the amount of space currently being offered we express and expect this trend will continue as tenants withdraw their space from the market in favor of reoccupied.
And as the year progresses, we will maintain our efforts to stay connected to the market.
In recent weeks, we awarded for listings and Montreal to assist us with exposing for large blocks of space.
And our cold, calling will continue and we expect results will be positive.
Now I'll turn the call over to Hugh.
Thanks, Tom.
This quarter, we have been able to make progress on all of our major construction projects. While COVID-19 has had an impact on manpower and supply chains, we have not seen any material impact on our projects overall schedules.
All of our major projects have been exempt from any government mandated shutdown.
I will begin by giving an overview of our major projects and then we'll follow that with an update on planning activity for development pipeline.
Beginning of the Montreal the team has been able to make solid advancements at our work at 400 Atlantic and 700 D. L. G.
Our first phase of vacant suite upgrades is complete and the team is focusing on leasing up the improved spaces.
And Toronto and Kitchener, Despite the government restrictions on construction activity, we have been able to make solid progress on all of our large scale development projects.
At the end of the quarter, we had reached the top floor of the main office tower at the well we have completed the transfer of three of the six are right sales to our residential partners and will complete the remaining over the next four months.
And the team has turned their attention to ensuring that the site is ready for tenants to start their fit out work. The first tenant begins their work in September.
And at Abilene, and Duncan our partners have reached the fourth floor and continue to climb up the tower.
Real can is nearing completion at our JV project at College Street and should start the lease up for this rental residential project in the late summer.
On King Street, we have been able to excavate the majority of the site and have started the form work to the lowest levels of the below grade, we anticipate reaching grade by the end of 2021.
And Kingston, our partners parameter of continue to make good progress on our bright Hot Phase III project. We have reached the fourth floor and anticipate construction to be completed by Q1 and 2022.
And in Western Canada, we are nearing completion of the restoration of the law of hate building and Calgary and 400, West, Georgia, and Vancouver work at the Boardwalk Revlon building and Edmonton continues unabated.
Planning activity.
We have been able to make and being able to progress work on a number of future intensification projects and Montreal and Toronto of this quarter.
This includes the formal submission for the first expansion of law and order to lack and the preparatory work for the two intensification of projects in Toronto.
The latter two submissions should be made and the following couple of weeks.
The team has started the initial plane and work for the intensification of the northwest corner of King and spin Diana.
Despite the challenges of COVID-19 on our Workforces and supply chains. This quarter has seen solid progress made on all fronts of our development activity. Our team remains upbeat and well prepared to ensure that we continue to push through the challenges I will now turn the call back to Michael.
Thanks, you as I mentioned in my letter to unit holders. We continue the small strategic infill acquisitions, principally in downtown Toronto. These of Ford respectable yields and augments existing concentrations with future intensification.
Potential.
We allocated 100 million to acquisitions like these and 2020 and another $30 million in the first quarter of 2021, we.
We expect to continue allocating relatively small amounts of capital in this way over the remainder of 2021.
Cecilia and you have discussed we continue to allocate large amounts of capital to development activity with our completion and return estimates remaining intact.
We estimate that current developments will increase our annual EBITDA by approximately $79 million and have a weighted average lease term of approximately 13 years.
As we look to the future I believe we should base, our decisions and our expectations on what people actually do not on what they say they might do more.
Most of the behavior I observed in 2020, and thus far in 2021 suggests that Canadians remain committed to the city as the principal venue for living working and playing.
Demand for urban accommodation has not declined but rather accelerated putting upward pressure on prices demand for urban office space has not collapsed, but rather remains strong and putting continued upward pressure on rental rates and Montreal and Toronto and <unk>.
And Cooper.
Despite the fact that urban retail users have four and the economic brunt of the pandemic.
Many are committing to the few strong urban locations that come available effectively looking right through the pandemic two a strong rebound.
People are betting on and committing to the city more than ever.
Far from reversing and urban intensification of the pandemic seems more likely to have the long term effect of accelerating it.
It follows that we continue to have deep confidence and our strategy of operating distinctive urban workspace and Udc's in Canada's major cities. We continue to expect our operating and development environment to be generally favorable in 2021 and finally, we.
To have confidence in our internal forecast for 2021.
I do hope this has been a useful and comprehensive update for you and we'd now be pleased to answer any questions that you may have.
Operator.
Okay.
And if you would like to ask a question. Please take note that pressing star one on your today from key pads ease and I'll take all of the first question is from Jonathan.
Jonathan cash Sharon TD Securities. Your line is open.
Thank you good morning.
Good morning.
First question.
Congrats on the leasing.
Two five Q front, what kind of tenant was that.
There were three cash Jonathan.
Actually two tenants and three leases.
So the bid with us for a while and now theyre looking for more space.
Okay.
The expansion and you say the lease the rent commenced in Q2 and then.
How do they build and beyond that.
So the <unk>.
All of the three spaces starts actually June <unk> 2021.
And the other two spaces will begin contributing in Q1 of 2022 and the phase over 12 months.
Okay and.
And what are your prospects for the remainder of the space.
Okay.
We continue to work on it I think we may see some expansions and the future.
We're also looking to complete the leasing of 151 front.
The leasing cycle for these projects is a long one but.
Constantly working on it.
Okay.
That is helpful. Thanks, and then just switching.
On the.
The development side, you guys signed leases of Boardwalk and 400 of Atlantic This quarter.
Do you know of any.
I guess at both say theyre going to be transferred and Q1 of next year.
Do you have estimates on the total cost and the expected yields for those two projects.
And we Havent done any deals as Hugh here, we haven't done any deals at 400, and boardwalk Revlon and the leases that were described and the table on our existing leases because the building was partially leased and partially the least.
And so that's those what are what we're referring to and those tables and we haven't disclosed the yes, it's to be determined we haven't disclosed the.
On the costs, yet, we're still tendering and that out.
Okay.
Still think there'll be done those by.
Q1 next year.
Yes.
Okay. Thanks, all the I'll turn it back.
Thank you.
Our next question is from Caitlin Burrows from Goldman Sachs. Your line is open.
Oh, hi, good morning.
You mentioned planning for the long term around what companies are actually doing versus what they say, they're going to do which I think makes sense.
Wondering if you could talk about how on the off the utilization of Repopulation is going so far and then we'd have to based on conversations so based on the conversations that youre, having what is your latest thoughts on more significant repopulation and timing.
I'm going to have Tom elaborate on it but generally.
Our tenants across the country are beginning to establish firm timeframes for re occupying their space, which is encouraging.
And there has been virtually no need expressed on the part of our tenants to transform or modify their existing spaces across our portfolio. There's one exception to that a user of that needs to in a way the densify.
The utilization of their space and when I say D. Densify I mean, they have to remove partitions, which actually create multiple pinch points within their space. That's the exception that proves the rule in our case.
And that nobody feels the need at this juncture.
And to modify.
And there is space for the purposes of returning to the office, but Tom has been conducting those discussions with our tenants on an ongoing basis and can probably elaborate usefully yes.
Kansas 15, large size users and the portfolio in various parts of the country and.
And the media companies Tech companies financial services professional services.
So a wide range.
And they are planning on re occupying their space in September October timeframe predominantly.
And theyre going to be phasing in.
Their population.
Usually starting around 25% with expect to reach full levels.
And again that depends on vaccine rollout and public health, but they expect to re occupy two 100%.
And by the end of the year early next.
Got it okay.
And then just on the topic of sublease space, that's something that it looked like it peaked in the recent past it takes first and at the year end and now it's down to five 3% with noticeable declines and Toronto and Montreal. So I was wondering if you could go through any details of this decline whether it was due to some of the.
Net space being.
And actually sub leased whether that was directly with you of the original tenant taking it back.
And then your expectation for the sublease space going forward.
Very little of our space has been actually sublease and it's been tenants, taking the space back off the market recognizing that theyre going to need it.
There were a lot of small tenants that decided we're working from home, let's throw our space on the sublease market and see what happens there not getting any takers and they realize they need it. So it is slowly coming off we think that trend is going to continue for the balance of the year.
Got it Okay, and then maybe the last one I think of as touched on in the prepared remarks, just on the leasing spread number that you've reported and the first quarter.
Still up but lower than in the past when we look at the mark to market.
Kind of potential that you guys show and the supplement it does look like it's could increase later in the year. So just wondering if you could give some color on that and so.
And the extent, you're confident in that increasing or debt there could be some other risk.
Yes, I think it will increase later in the year as confidence builds of the reopening there is momentum that takes place and the marketplace and.
And and tenants are of.
A little bit more flexible we did give some tenants a little bit of of break by by scaling up their rent in renewal periods.
But I think as confidence builds will be able to see bigger.
Bigger increases right off the bat throughout the year, yes.
Yes, the the other thing I'd add Caitlin is as the space.
Renewed and Toronto goes up in terms of the total so too will the average rent increases the ability to achieve very significant rent increases in Toronto over our in place rents has not eroded one bit as a result of the pen.
Debit.
So as Tom mentioned, the lower number in Q1 was really a function of the fact that very little of the space renewed in Q1 was in Toronto.
So it does vary for us from market to market in terms of the level of increase we can expect and Toronto was easily the highest.
Those numbers can can approach, 50% over prior and place.
And we haven't seen any pullback in the Toronto market at all and frankly, Calgary is seeing more leasing activity than we expected the rents arent heroic to put it mildly.
But we can get deals done and they do tend to represent some erosion in relation to prior in place.
Levels of ramp as we expected.
Got it okay. Thanks.
Thank you.
Our next question is from Mike <unk> from dish and her team.
Please go ahead.
Alright, Thank you and good morning to everybody.
Just just focusing back on the.
The 5% average lease spread this quarter just noticing within the mix.
And <unk>.
Understand your.
Explanation with regard to geography, but there was a flat rent of $40 or maybe multiple leases and average of 40, which disproportionately true off that.
And that mix as well and I suspect that might be due to a scale up over the course of the renewal of term as you expected, but I'm. Just wondering if you can give us a little bit more color on that particular space just given the high rent per square foot.
I would say you've hit the nail on the head Mike in terms of just giving the tenants the benefit of the debt early in the term.
Okay and would that have been specific the Toronto or just trying to get some color on where that's great for us.
Pretty well everywhere.
And.
We.
And Calgary.
Coming off of a 10 year lease terms total rent is going to be lower in Toronto.
<unk>.
We gave some tenants are break and early years, and I would say Sam and Montreal.
Okay, great. Thank you.
Just in terms of your leasing efforts you guys of pad.
Conjugates and pointed comments with respect to the increased activity on the leasing side in terms of extra resources, but also.
Extra efforts to be visible and and reaching out to the brokerage community in.
In terms of.
Tenants are looking for is there anything that youre seeing in terms of the cause of UV to evolve your offering.
Hey, Jack up rates and stuff like that and risk once the pandemic sort of becoming topical or is it business as usual on that front.
You were breaking up there Mike for part of it but what was your question do we need to modify our offering and all in the future yes.
Yes, I was just curious I mean, Michael I made the comment that nobody is looking to change.
Change the way.
The existing footprints and I'm just wondering on the new leasing side. If there is anything that tenants are looking for now that is different and what you may have seen in the past and.
Specifically, just thinking about things like.
And the in the context of the pandemic HVAC upgrades or touchless water process, all of that kind of stuff that seem to be coming.
Becoming more topical.
Newbuild.
Not really I don't think people are as concerned about their physical office environment as we are about getting to the ops.
So we haven't had many.
Issues with respect of People's concerns with the office environment itself.
Okay, great. Thanks last one from me before I turn it back just on the $79 million of.
EBITDA that you expect on completion of the existing pipeline do you of any thoughts on.
Based on your leasing expectations and the mix.
Space and that development pipeline, how long it will take you in terms of once you complete the developments to actually achieve the $79 million.
The ramp.
The the larger projects are 100% leased are very close to a 100% leased so I'm thinking of Adelaide and Dunkin is a 100% leased of Thomson Reuters right hop three of the 100% leased of Google The wells, 85% leased on the office component and so you know I would say that the.
Bulk of that is baked in and you can go off the timing that we disclosed in the MD&A.
In terms of you know one of the will actually hit our EBITDA.
Okay, great. Thanks, very much and I'll turn it back.
Okay.
We take our next question, Jamie <unk> from BMO capital markets. Your line is open.
Thanks, and good morning, everyone.
Congratulations on the strong leasing quarter.
I'm wondering if you could share what the average term in terms of timeframe and cars and is there a range that you can provide and has that really changed from leasing activity you've seen in the payback kind of at times.
Not much change in terms of the lease terms I would say there has been a few occasions, where we've elected to have shorter terms, where we've had the compromise in Calgary.
Four of shorter term.
Waiting for the market to improve where we can get a bigger rent going forward. So.
But generally no change and the lease terms requested by tenants.
Okay.
Are you able to share what the average lease term for the leasing and Q1 was roughly.
Yeah.
I don't know it offhand.
And.
Consistent with our in place.
And it didn't change and it did not alter the in place and any material way so by by implication.
Five six years or something like that.
Okay, Great. That's helpful and I wanted to dig a little bit deeper in terms of that Toronto Calgary differential in the leasing activity.
First of all with Calgary can you give us some more color on what kind of lease the kind of tenants are looking for new space right. Now does it have to do with a bit more confidence in and higher oil prices or are they sort of non oil and gas users.
And.
Do you see the Calgary and leasing.
And the impact for the rest of the year or is it really contained to just sort of the Q1 events either because of market conditions of just the timing of the leases.
I think its effort I think Calgary wasn't as locked down the same way that we were in Australia and I think the the.
The marketplace was more amenable to physical tours and the team turned on the task of full blast in terms of connecting with the brokers.
The the kind of tenants, we are seeing our tech tenants.
Professional services tenants.
Not oil and gas tenants.
In particular as you know Calgary is trying to make as a proof of on attracting tech and I think they are beginning to see some traction.
Certainly we are.
But I think the.
The surge in activity and Calgary is attributable to the.
And the efforts we've made on personal connections with the brokers.
Okay, great. So when I look at the the rent roll for 2021, I guess, it's the Calgary Edmonton and Vancouver, all rolled up is there much more or less and in Calgary that might be.
And that might provide some downside because it looks like the average size of spread is pretty much flat. So is it because calories rolled off because of the Q1 leasing or is there more in there or its offset by.
The Vancouver.
Okay.
I don't think we're going to see any.
More pressure on Calgary.
I think it will maintain the same momentum.
Sure.
Alright, great.
Just switching gears to acquisition, Michael last quarter, you had talked about some potential for larger opportunities and the market.
Particularly in Vancouver that you guys would be interested and could you give us on update on what youre seeing and the market and if you expect more products to be coming online as you had indicated a couple of months ago.
Yes.
Yes, just to clarify.
What I foresaw and what I anticipated and what I adverse it too in.
In the Q4 conference call was the Recommencement of trading of larger high quality urban office assets and that has occurred and it has occurred at price levels.
Identical to or even better than pre pandemic as I expected it.
It's even started and Montreal, which doesn't surprise me.
Actually I'm most happy to see.
Because Montreal was in many respects.
The latest to really trade at and aggressive level pre pandemic and to see if reestablish itself at that level. So quickly.
Call. It so quickly following some kind of re normalization of trading is really encouraging to me.
Whether that recommencement of trading will bring large opportunities to allied or not I don't know.
I have no wish.
And no sense of urgency with respect to large acquisitions on allied part in 2021, what I am thrilled about.
Is the fact that we're seeing small infill acquisitions that enable us to augment the existing concentrations of real significance.
And our Toronto market and.
And they don't represent large allocations of capital.
But they are generating respectable returns and.
The amount we were able to allocate and 2020 was not immaterial, but not large at 100 million.
Likewise, the amount we allocated in the first quarter was not large but the longer term implications of the acquisitions are significant and those are the acquisitions I want to focus on in 2021 of the fascinating thing about them and this has become more apparent to us as we worked.
Of our way through this unusual environment.
Is these are assets that would not have been available to us pre pandemic.
Not because they're owned by weak owners. They are not owned by weak owners, but they're owned by owners, who arent large established real estate organizations and what those owners did pre pandemic was entirely intelligent and correct. They ran with their games.
And they have enormous gains accumulated and those smaller properties. The pandemic impressed upon them that there is indeed risk associated with owning commercial real estate in major urban centers in Canada.
And suggested to them that the wise investment conduct might be to realize that large gain and passed the assets on to larger organizations better able.
To cope with the risk that is inherent in real estate ownership and operation.
So.
All of the acquisitions, we've made and the first quarter of this year are properties that simply would not have been available to us pre pandemic.
And that's where we see the opportunity arising for us out of the pandemic not some court and some sort of.
The large acquisition and Vancouver.
And I'm, not saying one won't presents itself, but frankly I'm less interested in that than I am and taking advantage of the opportunities that wouldn't have come our way had the pandemic not occurred.
So trading has recommenced.
The trading has occurred at cap rates.
Entirely consonant with the cap rates that prevailed pre pandemic.
And interestingly and this isn't something we anticipated initially small acquisitions that would never have come our way and our pre pandemic environment are coming our way and Thats, where were focusing our energies and attention in terms of capital allocation of the bulk of it is going.
To be toward development over the next two years, but if we can allocate relatively smaller amounts to these really.
Potentially significant small acquisitions, and that's where we want to go.
Great. That's fantastic color that actually leads to my next question on the the acquisitions you completed in Q1 of the one in Toronto and Calgary I just wanted to be clear with the four three to Wellington assets is that income producing because I believe the tenant is not operating at this point.
Like what kind of leases in place for that property.
Well that the.
That is a very interesting situation.
It's a building on Wellington across from the well one building.
West of our four 'twenty, Wellington, which is the building we've owned since the REIT went public in 2003 it was run.
As the lease less select bistro and it is a very popular restaurants in the neighborhood at large and has a long history and Toronto, the operator happened to own the real estate as well the sided.
And to retire.
Most of the value and the business was reposed and the real estate.
And.
Offered it to us.
We agreed to by both the real estate.
And the restaurant business now let me assure you of Allied is not getting into the restaurant business, but we thought having the restaurant assets.
Make it more attractive to a new operator that we would attract to the property and.
And interestingly it worked out exactly that way.
A major operator in this country is going to the operating the property as the select.
With the rent commencing on July one.
At levels of net rent that are extremely encouraging and represent a very good return to us. The deal is structured so that we can regain access to the property. After five years, although it has a 10 year deal.
Should we want to redevelop it at that point in time.
My guess is we will see that operation run for the full 10 year term of the lease and we will redevelop that complex of property on Wellington 10 years out.
Occasionally things do progress more rapidly than we expect and if they do we will have the ability to get that back.
Five years from July one of 2021, so it's a perfect example of the.
Kind of opportunity that wouldn't have come our way and wouldn't had been accessible.
Had the pandemic not occurred.
And it is also a transaction that validates and the fullest possible terms the kind of retail net rents that we can achieve the kenyans Medina and they are every bit as high as they were pre pandemic if not somewhat higher.
Okay, Great. That's that's really interesting and I for one and I'm pleased to hear that in the select will be coming back and some farm.
My last question. My last question is about the deferred rent and the the stairs component of that one 5% out of that two 4% I'm just wondering given the different structure of <unk> versus T crop, but one of the 5% is that and estimation on your part of the tenants you Billy.
<unk> were eligible eligible where I indicated to you that the eligible or is there some sort of an agreement in place that the allied hasnt, writing with the tenants in terms of accessing the service of match assistance.
The ladder.
Okay. So we have worked with the tenants we have helped them process their applications.
Through the program.
And we know the applications have been accepted and we have a commitment from the tenants to provide those funds to us on account of their rent on receipt.
Okay. So, let's just get the of flow through the Allied as the payment is received by the tenants the.
Exactly.
Perfect. Thank you very much.
Thank you.
We take our next question from Mario <unk> from Scotia Bank. Your line is now open.
Hi, good morning.
Hi, good morning, I wanted to.
And for the first question and I wanted to just come back of the lease renewal spread.
Of the $5 four just maybe help us kind of better quantify the impact of scaling back the rent increases as your term debt.
And do you ever strength of what the slide four would look like either on a year of two basis or on the weighted average rent over the term of the new lease.
From an area of weakness.
Yes, we don't we should add.
Actually and we will we will provide that but we did not make that calculation and.
In light of your question and in retrospect, we should have we can make that calculation, we will and I think it is an important bit of additional disclosure. So we will provide that.
Okay.
Alright, and then maybe shifting over to the guidance, which was in terms of.
And I believe.
The call of the started the year was caring for relatively flat occupancy.
Over the course of the U K and.
60, and 70 basis points, but based on your commentary it does sound like you expect it to pick back up again as well.
And that a fair comment to say about the expectations for the.
The economic argument could it be pretty consistent.
Q4, 'twenty kind of the year.
We do expect occupancy to increase over the remainder of 2021 principally in Montreal.
That's not guaranteed.
But given the level of activity.
Given the depth of our team in Montreal, and given the relationships with the brokerage community, which Tom at vs. Two in his prepared remarks.
And we do expect to.
To increase occupancy in our overall portfolio over the remainder of 2021, and we do expect the bulk of that increase to come from.
<unk>.
Understood. Okay, and then just on that point.
And in Montreal, and 90000 square feet roughly of increase to be can see quarter over quarter.
How much of that would you say, what's the what the street, but I like versus the kind of a broader general decline and lease renewals.
I think and I'm going by memory and Tom can correct me I think of big chunk of that.
Would be part of building transformation, we will see some non renewals in Q3 of.
2021 in Montreal, which we at vs. Two.
When we discussed our internal forecast for 2021, so we do expect well we do know those are coming and we're making a lot of progress on them now, but I believe the bulk of.
If you will the increase in vacancy and Montreal in the first quarter was largely.
Transformative work at L Pro and and the RCA building and 400.
Atlantic So I think the bulk of it Mario was if you will transformational rather than non renewal or erosion.
Got it okay and.
And then.
Just sticking to the guidance of one last question alright, and the proceeds.
250 front.
And as Tom mentioned, the smaller the smaller of the three leases will commence rent and and.
In June of this year.
Is that now reflected in your in terms of.
Guidance or do you continue to exclude from your original guidance.
It's a good question you're right that we did not in our internal forecast.
Contemplate any.
Rent increase as a result of lease up at $2 50 fronts.
So I suppose it would be modestly incremental.
Two our guidance, but we don't expect it to have impact in 2021 or to have material impact on 2021, but it will certainly have material positive impact in 2022 and beyond.
I think thats, probably right I would say, that's great and context, I said the smallest of the three leases Mario and the smallest of these.
And is about 10 or 11% of <unk>.
Okay. So.
It's a small portion of the 22500 square feet.
Got it.
One of them on this.
Just trying to understand is that the.
Regarding to the target and I was just curious about how.
How you feel about the crude and office portfolio today relative to three months ago.
I guess in relation to the guidance.
Some of it is pretty consistent.
Yes, we're entirely comfortable with the internal forecast as it relates to our urban workspace portfolio. There has been nothing that has occurred to reduce our confidence or to cause us to be more cautious.
And indeed, the success at $2 50 front is incremental to our internal forecast, but as Tom points out it it's not going to be materially incremental in 2021 if.
If we are successful and increasing occupancy and Montreal in the face of the renewed non renewals that I had version two and Q3 that too would be incremental but it would be late in the year.
So.
Even if we're fortunate enough to get there.
And would not likely have much impact on 2021, it would clearly have impact on our run rate for 2022.
Alright, okay.
I wanted to shift gears to $2 50 front sort of.
The leasing it was nice to see you on the on the two and 22000 square feet that was leased.
How much capital on Euro and would be required to prepare that speaks for the leases and you at all.
There was some capital but less than normal the first tranche was basically no capital required.
And the other two.
Modest amounts of let's say.
Okay, and then I think.
Michael and the parents, you've talked about of longer term plan to commit capital.
The Q2 dollars 50 in terms of increasing the capacity of productivity.
Capability here.
Uh huh.
Are you at a point now and where you can quantify how much capital youre thinking about all of it.
And it can be spent and how it.
Part of the productivity of 250 funds going forward and the types of returns.
No it <unk>.
The it would be irresponsible I think to even try our focus of course is to complete the lease up of $2 50 front, which happily we have finally made decent progress on.
On April of this year, but we're not at a point, where we would begin to play.
Plan for taking additional amounts of space from the landlord in that complex the CBC.
And so we're really not in a position to and a way anticipate or forecast or predict.
The growth at $2 50 front over and beyond what we have even though as we've discussed we have tremendous power.
Allocated there along with power at $1 51 front, so the potential.
To increase the economic productivity of those two facilities is material, but I don't think its fair to suggest we've made any progress in that regard thus farm Mario so it isn't something that's likely to have any impact on 2021.
And I.
I'd be surprised if it has a material impact on 2022 to be honest, but it is a capability that exists.
And it is the capabilities that I think we will ultimately deploy or exploit and there is a cost of capital.
Associated with that exploitation, but.
And not imminent and I don't think given the experience we've had and the last 12 months.
Got it Okay and my last question just more of a housekeeping item.
On the parking revenue and Q4 was down one and a half million year over year do you ever since of worked out and the group was down from Q1 because here.
Same number of Mario one and a half million dollars.
Perfect. Okay. Thanks, everyone.
Thank you.
We take now our next question from <unk> <unk> RBC capital.
Mark Your line is open.
Hi, everyone. Thanks, good morning.
And maybe coming just.
And just coming back to the on the rents and leasing spreads.
Have you had to perhaps step up at all in terms of whether it's inducements or incentives.
And any comments on on how you see perhaps net effective rents trending.
Over the balance of the year.
There really hasnt been any change and the kinds of inducements, we've been providing the tenants on these renewals.
So it will be consistent with the <unk> going forward.
And have you have there been any instances, where there are perhaps and any free rent periods.
That might be out of the ordinary or longer real.
And that's a good day.
It's a good question, but we're almost of allergic to free rent periods.
So no no no.
No change there.
Got it.
Just maybe switching gears just thinking about the development.
And we've been hearing a lot about rising costs again or maybe this is just a continuation for quite some time, but it seems the pressures seem to be heating up.
If you look at the development portfolios the yields as you mentioned and we can see youre holding and pretty steady can.
Can you talk about maybe what you're seeing from a cost perspective and and weather.
Do you see the potential pressure on those yields going forward.
Sure I'll take this I don't see any pressure on any of our yields for any of our projects, mostly just due to where we are and tendering. So I think that we're reevaluating for future projects, taking into account cost escalations, but for all of our existing <unk>.
<unk>, just given where we are and what we've tendered and what we've locked in I don't see any impact on our of our yields.
Got it thanks, very much I will turn it back.
Thank you.
We take our next question Ms Koenig from National Bank Financial Please go ahead.
Hi, guys.
And most of my good morning, most of my specific questions have been answered, but maybe a more general one and looking at the third party brokerage reports the little counterintuitive I guess to our intuition.
And in terms of where the vacancy has been the highest and it seems to be and king west and east due to the sublet move.
But just generally wondering how you think this all plays out and the downtown core and what the knock on effects of that maybe I know I've been going into the office since July and it seems the only reason to be at King and New York has to be and the office. So your thoughts generally on those dynamics and how it may impact your business going forward.
I think I can summarize that Matt pretty usefully I think if we look at downtown East and downtown and West where allied has its portfolio concentrations.
Think it has a slight advantage.
In the context of the ongoing pandemic and in the early stages of the reopening pri.
Primarily because there are mixed use neighborhoods with established residential populations there too in a way provide demand to the storefront retail users and the buildings are lower rise. So it's a little easier for people to repopulate if they can get to the buildings and a manner that they.
Feel it's safe, but I think that advantage as temporary only I think once the vaccination rollout achieves its.
The level of if you will distribution that is necessary for public health purposes, I think the core will repopulate.
And be every bit as viable as it was pre pandemic and the retailers the leaf the tower complexes hu.
Who have suffered so intensely.
During the pandemic because of the towers are empty.
And we'll again achieved the kind of.
Sales volumes that they were accustomed to so I don't see any systemic erosion.
In the conventional central business district.
At the end of this pandemic I think our properties may have a slight advantage.
In the early stages of the pandemic, but I think once we are back to normal and I am convinced we are returning to normal now, although we're certainly not there.
Think the towers will repopulate and operate just as they have.
Historically, and I think the building's east and west of the core will repopulate and operate just as they have previously so I don't think theres any systemic weakness in the office towers in.
In the core of Toronto, or frankly, and Montreal or Vancouver, either.
And on Montreal, and Vancouver, and I mean, it seems at least at this point and everybody's feeling similar circumstances of low Quebec seems to have done a little bit better and the third wave.
It seems like Montreal has been more active is that something cultural as their new businesses that are being formed there are going to Montreal at the moment and I'm just interested in and some of the divergence and leasing trends amongst the Canadian markets.
Well in our case, it's been considerably more active primarily because we have more space to lease.
In Toronto I think are our occupancy is around 90, 798%, it's quite high and Theres not a lot of occupancy gain that we can achieve and Toronto and Montreal I think it's around 92% force. So theres a great deal of occupancy gain that we can achieve.
And there.
So part of the activity differential is simply the fact that we have more space to lease and that market. The other part of it I believe is is related to what Tom alluded to in his prepared remarks and that is the post production.
Entities in the city.
Desperately need more space in order to meet the demand that all of the sudden has re presented itself from Hollywood and elsewhere.
In terms of the creation of new content, one of the interesting things about the pandemic and I was reading about this and certainly no expert in this area.
During the pandemic, we consumed like five years of content.
And one year and and all of the content providers or out of content and desperately need to create new content. So I think thats part of what we're seeing and Montreal, Montreal has always been driven and our.
And time, there by the Tami tenants complex and a big part of that and Montreal Interestingly is animation game development and post production and Thats been augmented by artificial intelligence.
And more recently interestingly by the by the the major Tech complex the so-called Fang companies, which has got to be one of the ugliest acronyms ever but in any event Montreal has a lot of natural demand velocity because its such a successful city for knowledge based.
Organization. So that's the other three.
Driver in my estimation, but in our situation specifically, it's really because we got more space and lease there.
Okay fair enough and I appreciate the color.
Okay.
Our net.
Our next question and the second last four day moment is from Howard Leung from Veritas investment Research. Your line is open.
Thanks, Good morning realize it's past the hour already.
Good morning.
I wanted to.
Such a base of asked about the sublease space.
The table that you showed in the quarter shows the dropped just and that's encouraging and Toronto and Montreal.
Wanted to know.
I guess two things the first and last.
And last quarter, you talked about the.
The composition of it you know I think you mentioned, 75% of it was under 10000 square feet and that's still the case with.
Dispatch space and the other one that I wanted to ask is the delta between Q4 and Q1, if you have those figures.
How much space was added and how much space was taken on to make that debt dropped.
Thanks.
Yes.
There wasn't much space added.
To the sublease market and the space that was taken off.
And.
There was a couple of 30000 footers.
Only.
The rest of our small.
The three five to 7000 square footers.
And we think we will see.
And unless.
Alright, so it sounds like it's still okay.
Sorry go ahead.
One of the things we've learned is that in major urban markets that are more advanced in the reopening.
The same thing has occurred on a larger scale.
Most of the.
Sublease space that came on the market during the pandemic is actually removed by the very tenants, who put it on the market as they plan to re utilize it or re populated so in London and for example, the.
The trend that Tom articulated.
Is much further advanced apparently than it is here in Toronto.
So based on that too.
We are anticipating as we.
Progress toward reopening that will see more and more of that space at least and our portfolio and I expect and the general market as well come off the market and be pulled by the tenants off as opposed to leased by the tenants to sub tenants.
Right, yes, so it sounds like the same story at the last quarter, where tenants searches.
They are just trying to look and and as things reopen they should pick it up.
I guess, it's still we're still in early in 2021, but I wanted to look at the next year given that we hope for and.
A rebound and <unk>.
And 22 looking at the lease bladder it looks like there was kind of a bigger proportion of leases coming up for renewal on especially in Toronto.
Is it fair to say I guess.
If we have if we're going to get it.
Rebound that.
The growth rate might be higher than that.
At higher than this year on in terms of same office, NOI and <unk> and <unk> per unit.
Well I'm just looking at the table on page 38 of our quarterly report and if I look.
And make sure I'm reading it correctly, we've got about 750000 square feet Rolling in Toronto.
In 2022 and the in place rent is $21 47, and the estimated market rent is $26 63.
So that would suggest the very significant amount of growth is achievable in 2022, if our market.
Estimates are correct and.
And as you know we review of those every quarter with the brokerage community on a space by space basis. So that that is a reasonable inference from if you will that schedule and that chart, especially if you drill into Toronto, and Kitchener, which are grouped.
But kitchener doesn't have much.
Overall impact on that number it's primarily Toronto and and there is a fairly respectable GAAP between in place and our current estimate of market rents.
Right right and and.
Speaking to the the year one year two renewal of that you talked about you go and anticipate at this at this time to have to do that with the Toronto tenants that are expiring next year right. I guess this is more of a Q1 'twenty one strategy.
Yes, I would say, it's something we do expect to do and 2021 and as Tom mentioned.
And the tenants, except the rent increases, but have asked us if we would ease them into it rather than have it occur if you will overnight and in the interest of longer term tenant relations.
And for tenants, who have been long term occupants of our space. We're prepared to do that it's not a function of weakness is actually a function of strength and it is appreciated and it gives the tentative.
Tough year, if you will during which they won't be utilizing the space.
And to not have to withstand the rent increase but I think I would hope by 2022.
We will not be doing that because of the tenants will indeed be using their space and and have to bear the full brunt of the increase from day one.
So I think it's a very good move on the part of our operations and leasing teams to have done what we did and 2021 because most of the tenants who have agreed to these renewals aren't even using the space.
Or at least not using it in any material way. So I think it was a very good thing to do but it wasn't a function of weakness at all it was simply and effort too.
Recognize the circumstance with users who have been part of our portfolio for a long period of time, and with whom we have a very constructive.
And generally longer term relationship.
Right right, Yeah, I am sure. They also appreciate the breathing room as well.
That's it from me thanks, everybody.
And it appears there are no further questions at this time and I'd like to turn the conference back to you for any additional or closing remarks.
Okay, well. Thank you all for participating in our conference call. We will certainly keep you apprised of progress as we move forward.
Be safe be well and we will be talking soon thanks, so much.
Yes.
Okay.
This concludes today's call. Thank you for your participation you may now disconnect.
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