Q3 2021 Allied Properties Real Estate Investment Trust Earnings Call
Good day and welcome to the Allied properties third quarter 2021 earnings Conference call.
Today's conference is being recorded.
At this time I would like to turn the conference over to Mr. Michael Emery, President and Chief Executive Officer, Sir. Please go ahead.
Thank you so much and good morning, everyone and welcome to our conference call.
Tom Cecelia and who are here with me to discuss allied's results for the third quarter ended September 30, 'twenty 'twenty. One we may in the course of this conference call make forward looking statements about future events or future performance. These statements by their nature.
Sure are subject to risks and uncertainties that may cause actual events or results to differ materially including those risks described under the heading risks and uncertainties in our most recently filed Aif 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 in our most recent quarterly report.
Our positive momentum continued in the third quarter F. F O per unit rose to a record level of 62.4 cents.
F F O per unit came in at 51.9 cents leasing activity exceeded our expectations and we made significant and measurable progress with our ESG program.
Average in place net rent per occupied square foot rose again in the third quarter coming in at $24.62 compared to $24.30 in the second quarter and $23 61 part, yes in the comparable quarter.
Last year.
Our urban work space in U D. C space has become more productive over the past seven quarters and demand for this space has continued to accelerate since the third quarter of last year.
Future so now over to Cecelia.
Good morning, I'll touch on our balance sheet acquisition.
And ESG content.
Our balance sheet with the prepayment of $486 million in mortgages in the third quarter, 94% of our investment properties are now unencumbered.
The prepayment was made possible by the issuance of our second Green Bond in August, which also pushed the weighted average term to maturity of our debt.
Five nine to seven three years.
The weighted average cost of our debt from three 3% to two 9% and got us closer to our target of four times interest coverage.
Acquisition with.
We've continued to act and the favorable acquisition environment, Although we don't expect to see additional opportunities over the remainder of the year our.
Our approach to acquisitions didn't change during the pandemic with our first question continuing to be whether an opportunity makes us a better provider of distinctive urban workspace to knowledge based organization.
The Dominion building is a great example, its location physical attribute and operating history over several decades will allow us to accommodate smaller users who have more flexible workspace neat.
This will help us as we reconfigure our other buildings in the area to accommodate the range of both small to large users.
Our leasing disclosure continues to evolve.
The scale of our rental portfolio upgrade activity is taking place regularly in Toronto, Montreal and Vancouver.
The purpose of the upgrade activity is to better serve our users and in turn augment net rent per occupied square foot.
As such we included the lease area of our rental portfolio split between our stabilized and what we referred to as the transitional rental portfolio.
The transitional portfolio represents properties, where we are intentionally keeping occupancy so to facilitate longer term upgrade activity.
This quarter. It consisted of six properties, representing approximately 773000 square feet of GLA.
The stabilized portfolio has regular turnover vacancy that's an ongoing part of our business, but we're not suppressing occupancy the transitional portfolio will vary depending on when the suppression of occupancy and.
We also added information on the net effective rents achieved on the leasing activity in the period. This adds another level of transparency that we hope you find informative.
Onto ESG.
On October 15th of this year, we issued our second annual environmental social and governance report, we made significant progress on our reporting and disclosure by aligning to the global reporting initiative or G O Ray and the sustainability accounting standards board or SaaS B real estate standard.
Next year's ESG report will also outline our progress in adopting the 11 recommendations put forward by the task force on climate related financial disclosures or T. CFT.
The Tcf D recommendations cover four categories governance.
<unk> risk management and metrics and targets.
We'll be disclosing the board's oversight of climate related risks and opportunities as well as how we identify short medium and long term climate risk for the organization.
Ultimately this means augmenting disclosure that matters to our employees users investors and communities. We welcome feedback as to how we can improve our disclosure on an ongoing basis.
I'll now pass it to Tom for a discussion of our operating and leasing results.
Thank you Sylvia we are continuing our proactive approach to leasing by staying in constant touch with active commercial brokers in each of our markets.
Results have been positive.
Our leasing teams have had hundreds of meetings with brokerage with the brokerage community over the quarter and tour volumes have increased.
We've completed exactly 100 transactions in Q3 totaling 621000 square feet of space.
When comparing average rents on maturing leases to average rents negotiated we achieved a 20% increase in rent on space renewed or replaced in the portfolio.
In general rents are increasing and while a few tenants have elected to lease less space. Most are maintaining the status quo and many are choosing to lease more space to better accommodate employees.
It's worth mentioning the amount of space available for sublease in our portfolio declined considerably over the quarter. We expect this trend will continue as companies realize they need their offices.
I will now provide an update on leasing activity in Montreal, Toronto, Calgary, and Vancouver, and conclude with an update on our urban data center portfolio.
In Montreal, our leasing team was especially busy completing almost half of all the transactions in the portfolio during the quarter.
There were many small deals with new companies at our RCA and Oprah buildings in St. Henry.
This is an encouraging sign for the future as we will be well positioned to handle expansion as many of these small companies will inevitably grow.
The most notable transaction in the quarter was a new lease with Molson Coors for 30000 square feet at 111, Robert Breza.
There are two other transactions of 50030 thousand square feet currently in progress in the same building.
Entercom renewed for 22000 square feet at 1001, Robert process, and we are now negotiating a 50000 square foot renewal with an existing tenant in that same building.
We were delighted last quarter to announce the acquisition of plus plus car Vijay.
This project in Montreal is perfectly positioned to benefit from significant neighborhood evolution supported by a Mega hospital and many residential projects nearby.
We are now finalizing a deal with the Madison group.
Foreign event venue and upscale food market and our wine club totaling about 25000 square feet.
The event venue space and food market will open in summer of 2022, and the one concept in Q4 2022.
Moving to Toronto, we completed a lease with a major U S academic institution for 93000 square feet at <unk> West Phase II.
We leased 27000 square feet to Nick sportswear at 179, John and completed a 32000 square foot deal with favorable sale at 420 Wellington.
We are in the very final stages of negotiation for an extension and expansion with an existing tenant at 111 clean east who is committing to an additional 52000 square feet, bringing their space to 120000 square feet.
We are in the conditional.
Conditional period with one tenant and final negotiations with five more to effectively complete the lease up of the office component at the well.
Four out of six of these tenants are U S base and are household names.
Moving to Calgary and the context of the overall market, we are doing well at 85, 5% leased.
Tour activity is good mostly for small sized users, which we can easily accommodate as many of our buildings have small floor plates, we completed 14 transactions in the quarter.
In Vancouver leased areas holding at 92%, we've recently announced the acquisition of the Dominion building, which is a great addition to our ecosystem in this city <unk>.
Dominion building has approximately 140 small tenants and we look upon this building as an incubator of small new businesses, who can be accommodated elsewhere in our Vancouver portfolio as they grow.
As for our urban data centers, we are 94% leased.
We are in the process of completing two small transactions at $2 50 front, which when completed will bring our leased area to 87% in that building.
The level of activity, particularly in Montreal, and Toronto has been very encouraging and we expect momentum will continue.
Many U S based organizations have had been delaying decisions about expanding into Canada, because it had been impossible to cross the border and physically see the real estate board.
The restrictions were lifted in early August and immediate use of it there was a spike in tour activity from U S based companies.
We expect more activity in the coming months as people are now comfortable with travel.
I will now turn the call over to Hugh.
Thanks, Tom.
This has been a solid car quarter are highlighted in terms of our development activity.
I will begin by giving you an overview of our major projects and then we'll follow that with an update on our planning activity for our development pipeline.
Construction activity.
Beginning in Montreal work on the three main redevelopment projects 400 Atlantic a thousand one Robert Breza and RCA are all progressing well the leasing team is actively marketing the improved spaces with interest being expressed for all three properties.
We should be able to complete the majority of the base building work at 400 Atlantic by the end of the year.
In Central Canada, we have been able to hit a major milestone at the well.
On September 1st the first tenants took possession of their spaces to start their fit out work.
The team has continued to make progress on the other floors in anticipation of the remaining turnover dates.
The retail tenants should start to take possession of their spaces in the beginning of 2022.
Curious U S phase III and King Toronto continue to progress according to our schedule and remain on target for tenants to begin pick screen in Q2, and Q4 2023, respectively.
While we had anticipated achieving their occupancy at our JV project with Rio can on college in Q3. This has been delayed until Q4 of this year.
At 19, Duncan, we anticipate handing over the first floors to Thomson Reuters near the end of the current quarter.
Occupancy for the office component of that project is scheduled for the end of Q2 2022, and the residential to follow in 2023.
In Kitchener, our JV with perimeter remains on track for completing the base building work by the end of Q1 2022.
In Western Canada, we can need to make progress on our boardwalk Revlon building.
West Bakr West Bank is completing the remaining base building work at 400 Atlantic a 400 West Georgia Pardon me currently with attendant fixed rate, we anticipate that project being complete in Q2 2022.
Planning activity.
This quarter has seen progress made on all of our submissions for future intensification projects in Toronto.
The team has turned their attention to advancing the design of the various projects to be able to address the comments of the municipal authorities.
Due to the imminent municipal election in Montreal, we have revised our anticipated completion of the approval of the expansion of Lindner lack until Q1 2022.
This quarter has seen progress made across the board of our development activity. The team has been buoyed by the milestone achieved at the well and is focused on keeping up the momentum I will now turn the call back to Michael.
Thank you Hugh.
Near Universal consensus on vaccine mandates in passports bolstered the success of Canada's vaccination program in the third quarter and beyond this.
This is restoring the confidence necessary for people to return safely to a vibrant form of urban life Canadian business is beginning to play its crucial role in leading the return.
We saw and felt the growing restoration of confidence in our business throughout the third quarter and into the fourth as of last Friday, 81% of the users in our portfolio.
<unk>, 73% of the total GLA in our portfolio have reopened their work space and are bringing employees back we.
We don't have information at the moment on the exact number of employees that these users have brought back to their workspace, but we now know for a fact that the reopening and our portfolio is well underway and widespread.
Another important leading indicator is parking revenue.
It was up $700000 in the third quarter, reflecting clearly the return to a more normal form of urban life.
As you May recall I articulated that thesis in April about the impact of the pandemic on the future of the commercial real estate industry in Canada.
I made it clear then and I reiterate now that I can't prove the thesis.
Only human behavior over time, we will do that or not.
What I can say now however.
Is that human behavior as allied has experienced it over the past seven months.
Is consistent with and supportive of the thesis.
I find this encouraging and I look forward to learning more as this continues to play out over the remainder of the year and into next.
I hope this has been a useful and comprehensive update for you. We'd now be pleased to answer any questions you may have.
Yes, Sir yes.
At this time, we will open the line for questions.
May signal for questions by pressing star one on your telephone keypad.
People are using a speakerphone. Please make sure that your mute function is turned off to allow your signal to reach our equipment.
Again that is star one to ask a question.
And our first question comes from Caitlin Burrows with Goldman Sachs.
Hi, good morning, everyone.
Thanks for the detail on the stabilized versus transitional rental portfolio occupancy I guess given that this is new disclosure. We don't know what the trend has been so as of September 30th it looks like the stabilized rental portfolio was 92% leased wondering if you can give us a sense for the stabilized portfolio occupancy level, how much it's down from 2009.
And then your outlook for that portion in particular from here.
Caitlin I would have to.
Do a bit of guesswork, because I'm not aware of analysis in that regard, though I think we should do it and we will.
But I would say during the pandemic our stabilized portfolio is down about 100 basis points or so.
Most of it actually is not pandemic related in the sense that people have either contracted in the face of the pandemic or moved out completely in the face of the pandemic. Most of it is known non renewals.
That we faced almost pre pandemic and that actually actualized or materialized in the pandemic and most of that would be at Citi multi media.
Which Tom referred to as 111 will bear Bourassa, which is the largest single phase of city multi media, where the bulk of the expiry has occurred in the third quarter and I think a bit more will occur in the fourth quarter.
So guesswork, probably educated guesswork would would get us to about 100 basis points in the stabilized portfolio.
And the vast bulk of the decline in the pandemic certainly is in the transformational or transitional portfolio, but we will we will follow up on that in the next quarter.
And do a more precise calculation.
Okay, Great and then maybe just thinking about all of the developments that you guys have going on.
I know you talked about it last quarter that they would contribute about $80 million to EBITDA. It looks like that's still the expectation, which is good I guess with the well being the most significant piece of that and are getting transferred to the rental portfolio. Q1can you give any further details on how you expect EBITDA in 2022 to be impacted.
By development.
I think the most useful estimate I can provide is that we will begin to see the impact on our statement in 2022, but the really.
Significant and material impact will be felt more in 2023.
Got it and will that pace, mostly just be impacted by the timing of projects being completed at the timing of companies moving in or what's driving that.
<unk> piece of it again, because what we see is just that like the well in particular is transferred NYU.
Yes.
When occupancy commences, we can begin in most instances to recognize straight line rent.
But the actual rent if you will the cash rent.
Won't commence until the tenant has actually occupied and is using the space and that's going to occur over the course of 2022 by 2023 I don't think all of this space will be rent producing but a significant amount of it will be from.
Jan one 2023 onward.
It really is the transitioning in of the actual users at.
At the world and the payment the actual payment of rent commencing at the world over.
Really over the course of 2022.
And 2023 will be the first year, where we we have the bulk of it if you will hitting our statement from Jan one onward, and that's when we anticipate the most significant.
<unk> movement in <unk> per unit and <unk> per unit, because we wont, we wont be pulling straight line rent.
Out of <unk> to get to <unk> by that point it will all be.
Primarily be.
<unk> as well as <unk> per unit Caitlin you might find it helpful. If you look at page 61 in the MD&A. It shows the rent commencement timing by quarter and the corresponding square feet. So I think that'll give you a bit of a sense in terms of.
The contribution.
And that page 61 that you see on the <unk> basis or a F.
It just gives the rent commencement by user and the amount of square footage. So you can use an average NOI per square foot from what's on page 16, and you look back into something that's pretty reasonable.
Sorry for the follow ups here, but that would be on an <unk> basis or a F.
Those date times, there and it's actually cash NOI cash rent so okay. Yeah.
Okay. Thanks, a lot.
No problem.
Yeah.
Our next question comes from Jonathan Culture with TD Securities.
Thanks.
Morning.
Good morning.
You guys.
We have some assets for sale, which is not something that's historically been the norm for you can you give us a little bit of color on what type of assets what markets.
Yes, the only assets we have for sale are the ones that we've designated I believe for accounting purposes as held for sale.
They are three and number one is eight plastic commerce in Montreal.
It was acquired probably six years ago as part of a four property portfolio. It was the one property in the portfolio that we didn't particularly want or have much interest in.
But we very much wanted the other three and in order to make that transaction easy and efficient we acquired the fourth.
It is on <unk> Island.
And.
It has benefited from a <unk>.
<unk> led change to the zoning.
With the result, it's become much more valuable today.
Then it was when we acquired it it remains non core for us because of the density is probably best.
Brought into existence in the form of residential space and Thats not something we have any interest in doing independently of a big mixed use project like 19, Duncan or the world.
So we.
We have put it on the market through CBRE. The process is just about complete and.
We will be going through the process of getting that.
Closed in the first half of 2022 that.
Two assets in Toronto again, our noncore there on the north.
East corner of Bathurst and King.
They are quite shallow.
And we are entering into a transaction with the province of Ontario.
To have those become part of the Ontario line system.
And we are getting credit for the residential density on the site as well as the.
The income producing potential that we have benefited from historically.
And again the aggregate consideration for those three assets. There are three separate properties, although we think of the Toronto properties as one.
We will exceed the equity component of the first phase of <unk>, which is exactly what we set out to fund by putting these noncore assets on the market or negotiating the sale of these noncore assets as the case may be.
What we have no other properties on the market for sale.
Okay. So do you have other properties that you would.
Sort of your bottom tier of properties that you might consider non core or is this just sort of a one off.
Fitbit builder by Montreal assets, Yes, I would characterize this more as a one off.
As as an opportunity to provide the most efficient form of equity for an acquisition that we believed.
Was very strategic and indeed, possibly even transformational for allied.
We are fortunate not to have many non core assets and indeed to elaborate on that a little bit Jonathan even though it wasn't exactly the question you asked.
We have long suggested that we would sell the boardwalk Revlon building in Edmonton.
Simply because we didn't see the opportunity to grow there.
In a way that was meaningful in the context of our business now that Hugh and his team.
Are well underway and indeed.
Nearing completion for an exhaust of.
Redevelopment of that complex.
We we have reversed our decision or I have reversed my Inc.
Inclination to dispose of that property it will be one of the best brick and beam buildings in the country.
And accordingly, something that allied should own and operate.
Going forward so.
I really don't see.
Much opportunity to sell non core assets.
In allied's portfolio anywhere in the country today.
Okay. Thanks that was helpful I'll turn it back.
Okay. Thank you.
Our next question will come from Scott Thompson with CIBC.
Hi, good morning folks.
A question on the.
Large amount of inventory coming on board in Toronto over the next few years, how do you what are your what are your current thoughts on how it's going to affect two particularly the backfill.
Well.
Comment, one where a big part of that inventory.
I think roughly $1 5 million of 8 million square feet and obviously in Toronto.
We're all but fully leased in relation to that office component.
So.
We don't see it having any impact on our development portfolio.
Portfolio.
The backfill space.
Has been fairly carefully quantified over the years, both pre during and.
Certainly post pandemic.
It's known it's well understood it will be backfill space owned and operated by very strong well funded.
Owner operators and that backfill space will be upgraded.
It will not be allowed to deteriorate it will be upgraded it will remain competitive.
The best guess that we've seen and again. This this work was done pre pandemic during the pandemic and we will certainly be updated on an ongoing basis by the advisory community, but the best information we've seen suggest that if the absorption.
Say this year and in the next three years is half of the absorption.
In the prior four year period.
And then we end up at around 9%, 10%.
Vacancy in the urban market.
So we don't see it having any material impact on our existing rental portfolio either.
People will not be running out of $505 22, King West in order to go into Commerce Court.
To backfill whatever backfill vacancy might be there.
It has never happened in any supply cycle and it won't happen now.
Tenants will move there will be competition.
I don't think there will be material downward pressure on rental rates, but there will certainly see a plateauing of the rent growth that we've been seeing quite significantly in 2018, 2019, and indeed, even last year and this year.
Even that mid teens.
Average rent growth over prior in place that's not sustainable.
In a in a market that's an equilibrium.
That significant today, because the demand continues to exceed the supply by the time the supply is delivered in full.
It will easily have caught up with the excess demand and I would expect to see rental rates plateau at that point in time and rent growth revert. The best case scenario is rent growth reverts to something more normalized 2% to 3%.
Over prior in place rather than.
Mid teens or even even as high as 20%, which we have seen in the past.
So that's what I'm expecting.
To flow from the completion of the supply underway.
No significant new projects have been initiated nor do I expect there will be.
We're on the record pre pandemic and we stand by this whole heartedly of not being prepared to initiate a large scale development.
Until we get through this supply wave that we're in the midst of and a significant part of so we don't see the backfill as a big risk to the market.
But it will certainly it will certainly.
Mitigate the rather unusual rent growth that we've seen in the last five years.
Okay.
Thank you Michael that's a very comprehensive and useful answer I'll turn it back over thanks.
Thank you.
Our next question will come from Jimmy <unk> with BMO capital markets.
Thanks, and good morning.
Good morning, great to see some strong leasing activity, particularly at a at the Wawa and <unk> west too it looks like the expected yield has improved now that you've got some visibility on.
<unk> income can you talk to us about.
A bit of background about how that came to be and any commentary on what large block users that might be out there. There's a lot of them looking for space.
Well, there's a number of large block users looking for space in the current circumstances in particular or specifically with respect to how the deals came to be for us at <unk> phase two.
We've been working on the transaction that took place for the better part of a year.
We actually came close to a few other transactions for the entire building as well.
The nature of the architecture and the position of the building is quite attractive.
You can comment on the actual returns that we're going to achieve there but.
They are quite good we're very happy with the deal that was done.
Academic.
Institution that we referred to is also taking the ground floor of the building and there'll be animating the ground floor, and we think adding a lot of life to Queen Street West when it needs. It. So we're really happy about that transaction as for the deals at the well.
We have been working for five years continually.
Pushing this project and it's just a lot of years of hard work coming to fruition right. Now the project is taking place you can see it on the skyline, we're really delighted with how it looks in the marketplaces responding accordingly, I think the amenity package that we've got at the well.
It is very attractive.
User outstanding and.
It's just something that the marketplace wants.
Our leasing team.
Aren't taking any chances there in constant.
Constant touch with every active commercial broker in Toronto.
No.
Proofs in the pudding, we will see in the coming weeks or months that we can finalize these deals that are on the table now I think we can.
And we're going to enjoy a fully leased office components come the end of the year.
And one of the things I would add which which you can quantify in general journey is that the net effective rental rates at the well as we move up the building and remember that it was leased at the bottom first.
And we've moved progressively upward the net effective rental rates, we've been able to attract have gone up very significantly and.
Most of the deals that Tom.
As described today are in the top third of the building so the smallest floor plates and when you can get a relatively small floor plate.
In a very high caliber building that happens to be in the higher levels of the building you will pay for it and Fortunately the very significant users that Tom and the team have been.
Dealing with are more than prepared to pay for it and the net effect is are actually higher than we anticipated and that too is encouraging so whatever change you've seen in our.
Forecasted unlevered yield for the well would be driven in part by those rents and I'm sure. If there has been a change of <unk> phase III <unk> it would be driven by the actual ramp rather than the projected rent that's right.
That's great to hear.
That kind of leads into my next question I see that the ifr at cap rate on the on the pod portfolio went down quite a bit.
<unk> three is that largely being driven by the well yeah.
Yes that would be driven by the well.
And is the catalyst for that the the visibility towards leasing or market indications about what what drives it.
Correct, so as as the leasing continues as well as as the construction continues and there is I guess less of a question mark around the cost to complete.
And.
The cap rate comes down essentially.
Okay and was that being driven by the office lease that to me was a component of retail in there as well.
It would be both okay.
With that that brings the risk of the overall project down and and as you know we have it appraised and we have our entire portfolio of appraised every quarter by cushman. So as the risk comes down they now flipped it into a DCF from from.
From a cost to cost to complete basis. So it does bring down the risk and accordingly, the cap rate.
Great.
And then my last question is with regards to G&A and it looks like it was.
Fairly low this quarter, but it kind of had a $1 million range on a quarterly basis can you give us any guidance on how to think about that for the next year or two and if there's any inflation related impacts that as well.
Yeah. So Q2 had a few well had $1 2 million or a one time item that we called out.
So I think if you use Q3 less that amount so roughly $5 million a quarter, you know very rough you'd be pretty close to what our.
A trend of quarterly run rate would be there are some chunky items in there, but overall if you use that for a year, you'll you won't be far.
Okay, great. Thank you very much I'll turn it back.
Thank you.
Our next question will come from Mario <unk> with Scotiabank.
Hi, good morning, So I'm not sure you can hear me okay.
Hear you loud and clear.
Perfect. Okay. So I wanted to focus on occupancy a little bit with respect to the questions.
I would echo the appreciation for the new disclosure on the transitional portfolio. So my question kind of pertains to be expected pace.
Lease up on those transitional six assets.
How much will combine current capex is.
Prior to fully upgrade those six assets to where you envision it to be.
Mary will probably the biggest of the six is the RCA building in Montreal.
It is a spectacular complex in St. Henry.
It had an enormous number of small users in it when we bought it.
A number of those have moved either over to our <unk> pro building or elsewhere.
To facilitate the build out there is a very significant build out there.
That is nearing completion now and there is also a very significant user.
Looking at that space so.
To answer the question directly where we can have the greatest impact on the transformative or transformational portion of the portfolio is at RCA.
And a significant anchor leasing.
Objective is is not complete but it is very advanced toward completion could be completed in the fourth quarter. Although we we can be.
Be assured at this point in time that it will be.
But we're basically at the point in most of the transitional or transformational buildings to actually begin the re leasing process.
Now again at RCA for example, the re leasing is going to be phased we won't do I forget the size, but its about 250000 feet or so.
We're not going to release that all at once there is no way.
But we probably will release at around 50000 feet at a time.
And that I think is achievable and.
And the preliminary response, we've had to the modified space has been very encouraging.
Any any color Tom in that regard, we're replacing the windows in that building and it's changing the look of the building from the outside but even more importantly, it's really enhancing the look at the building from the inside I was actually in the building in a tenant space last week.
The changes that we're making.
Really going to make a huge difference and there will always be a lot of small tenants in this building because of the configuration of the building.
It's a great location and it's.
We're going to be leased up as soon as that in fact, most of the building is covered with scaffolding today and it's <unk>.
Holding us back a little bit Mario in terms of.
Some leases but.
When it is completed and it will be completed over the next few months.
We're negotiating with the tenant now for that space.
Fingers crossed we can get that deal done.
Perfect.
Comment that most of it.
Ready to begin <unk> seen now would imply that most of the capital.
Wired.
<unk> has already been deployed.
Over the next few quarters will be deploying the capital there.
We can we can do some of the work while the tenants start fixed dream. So it's some of it is consolidated space relocating small smaller tenants to our pro for example to facilitate these larger blocks.
Capex, we're probably spending 100 bucks a square foot, but seen 6% to $7 gain on net rent. So it really it makes sense to make this kind of investment.
Perfect. Okay, more broadly speaking on occupancy economic targets 200 basis points.
North of 90%.
I'll use the word city multimedia.
Vacancies, but it looks like based on your disclosure you recover the vast majority of about.
Post Q3.
90% to near historical trough in terms of occupancy.
How should we think about the broader occupancy outlook for our coming through 2022.
95%.
Traditional base case kind of our consumable.
So achievable.
In a post COVID-19 environment.
Absolutely it is achievable.
It is as achievable in a post COVID-19 environment as it was pre COVID-19.
Don't expect to see any material improvement in occupancy over the remainder of 2021.
But I do expect to see it begin to improve in 2022, I don't think we'll get back to 95% in 2022, I'd love to but I think realistically.
That won't happen, but.
But I would expect to get back to the 95% level in 2023 and as we do this the one really encouraging thing for our business is our same asset NOI.
We'll get a tremendous twofold boost.
First of all get a boost simply by virtue of the increase in occupancy.
And we love in a way being in this position because this is this is a position where the growth is actually the net.
So whatever we get in gross rent actually falls to the NOI line completely but the second driver will come from the fact that it will propel our average in place net rent per occupied square foot, because we're going to be taking rents up from.
What would be better than industrial rent levels, but would be quite modest levels of rent for good office space to levels of Brent for good office space that will be quite high. So so we'll see the same asset NOI growth come out of.
Of the.
The increase in occupancy over the course of the next let's call. It 18 to 24 months, but I don't think we can get back to 95% in 2022, but I do think we'll be back to 95% in 2023 unless we.
<unk>.
Unless we propel other large scale upgrades, but I don't see any at the moment that we're going to be initiating I think I think we've initiated most of the upgrades that we want to initiate.
And the only exception to that might be the Dominion building, which we're going to close.
In about two or three weeks.
Might we might indeed depressed the occupancy there.
Temporarily, but we don't envisage going in there and blowing the existing tenant base out at all in fact, we're going to work with the.
The existing tenant base, but that could precipitate some early stage turnover, but other than that I'm not aware Tom of any sort.
Large scale upgrade that we're likely oh, okay Hugh points out we may indeed.
Do some work on $35 75, solera in Montreal, It's a great building that I think was the second building we acquired.
In the city, probably around 2006, it's really well located close to the University.
But I think there is an opportunity there too to depress the occupancy boost.
Boost the NOI through upgrade overtime. So so that would be the one exception to what I said.
But as I say most of it is really in the St. Henry node, It's RCA and El Pro and then a bit in Vancouver. The landing we have suppressed the occupancy and the landing in order to rationalize the utilization and we've been very successful there as you know we got Microsoft.
To extend on two floors for about 44000 square feet, which is terrific.
But we do have more vacancy there then that will be sustained.
Once we upgrade the building to the level that we think is appropriate for that building.
But $35 $75 is a good use of capital.
Going forward.
I think that timeframe is reasonable merial I'd love to get back in 2022, but I don't think thats going to happen, but I do think we will be back.
In 2023 to the sort of mid <unk> level that we consider normalized or stabilized.
Got it.
The commentary in terms of mill expect an improvement in occupancy over the course of 'twenty, one, presumably that's referring to the economic arguments here as opposed to the leased occupancy.
Which again given some of the.
Leases that have been.
Q3.
We've been moving up.
Yes.
That's correct because there is still some non renewal at 111.
Roberto Bourassa that actually occurs in the fourth quarter. So we will offset some of that but I don't think we will probably offset it but we want more than offset it.
Alright, Okay, and then just looking at the 22 are there any kind of known kind of vacancies and of course, it looks like a 50000 square feet.
That may impact the fluidity of those occupancy gains overtime.
Yeah.
There is a lease in Kitchener.
That is expiring that will need to be paying attention to that is sizable.
It's in spectacular space.
I think we will handle it pretty quickly, but thats the only one that comes to mind.
Mario.
Okay, and then just maybe on the.
As we embark city multimedia.
The market rents can you give us a sense of.
The change in the market on a net effective basis.
80000 square feet or so that hasn't been done or isn't close kind of negotiations low because of the expiring rent.
Was there a material change.
I would say there is a modest increase in <unk>.
Rents in the building with the new leases.
Some of the leases came off some pretty high rents.
They were induced heavily.
We're achieving.
The same or better in most cases.
Okay, Okay, perfect and then just lastly on liquidity pool.
Total liquidity and disclosures and I think we're just shy of $300 million.
The 86 million of assets held for sale arguably offsets the acquisition of the Dominion building in Vancouver, and the remaining 50% interest in the Guangzhou ascend.
Assembly in Calgary that you noted as a subsequent event.
Do you feel about the $300 million of liquidity kind of going into 2022, and how would you rank the available options to bolster that liquidity.
We're very comfortable with our liquidity position Mario one of the things that we embarked on a few years ago. Once we received the Moody's credit rating was to start incremental lighting, our way to a larger line that was.
More appropriate for the size of our business. So every couple of years, we've been adding $100 million to our line. So we'll be expanding our line from 500 to 600 million on Jan one 2022. So we're we're very well covered for our commitments in 2022.
Okay. Thank you.
Our next question comes from Howard Leung with Veritas investment research.
Thanks, Good morning.
Good morning, there was some.
Pretty helpful.
Sat around the users returning back.
Michael I think you mentioned 73% of GLA.
I know you mentioned that as well that those workers youre not sure how many are going back yet but when.
When you look at your.
Your category.
Users by sector business services.
Are there any categories in particular that are coming back or not coming back any of that you want to call out and anything you've heard so far from them about how many days.
They're they're letting their users come back or they or their employees come back.
Yes, so we would not have that information, we do have that information sake made segmented pardon me by city and we do have it segmented by.
If you will.
Basic.
Type. So for example, UDC they never left period full stop.
Retail is well above 90% reopened if you will.
Office ranges from.
I guess it would be.
Yes around 60%.
In Calgary too.
Hi of 87% of total area in Vancouver, and that that's not surprising at all Toronto is about.
Interestingly about 77% and Montreal is about 71.
Again, they are slower and have historically been slower than than Vancouver, We just don't have the data.
Nor is it really possible for us to acquire the data in a short period of time.
As to how many people any given organization is bringing back at any given point in time, we can use our own.
Our own experience as a little bit of a proxy we've been running at about 50% re population for over a year now.
Now again, we are in the somewhat unique position of being an essential service because of the physical nature of.
The work we execute.
And we're now.
Trying to understand what the requirements are with respect to office space in Toronto and in Ontario, because.
We we were probably accommodating anywhere from 80% to 95% of our employees today, but they are cycling in and out in a way that keeps the number at any one point in time at 50%. So that's our experience, we're probably more advanced than most of our tenants.
Some of our tenants are like us essential services and they've never really.
They've never really shut down in the way some organizations have.
But we don't have that data.
It's hard to assemble and frankly, it's very clear that almost every tenant is in a transitional phase now.
But what we what we do know.
Is is that the doors are open the offices are.
Working and people are coming in and out of them on a continuous basis, but I wish I could glean.
Leanne repopulation numbers from that but but we can't and indeed gathering that I don't know I don't know how cooperative tenants would be in providing that information.
Number one and number two it would be a massive data gathering.
Exercise. So so we put these numbers forward as indicative, but they're up big time over the past.
Eight weeks that's for sure.
People clearly are returning.
And.
And that return is accelerating and if we look at the retail.
Users, especially.
In the King's benign area and the St. Lawrence market area. They are fully back and they are doing all of the business that they can do.
There is still some difficulty getting workers, which is why not everybody is open for lunch yet.
But the demand is there they simply.
Aren't at a point, where they can serve the demand and the margin for dinner as is much much higher and it's getting us frenetic.
In those urban neighborhoods as it was pre pandemic.
I Unfortunately don't have any.
Supplemental information I know that.
Roughly 73% of our space is reopened and populated but I don't know how the population compares to pre pandemic levels.
But that's still that's still helpful and good color.
A question a question about leasing.
And in that leasing spread chart in the MD&A just noticed that the starting base rent for the manure and placements.
Pretty similar to the average base rent on the on the renewal and replacement leases.
Does that mean that I guess for those leases signed in Q3 that.
There's no step up in.
Within the term beliefs.
Hi, Howard Cecelia D average the average is.
Include the any fixed during period, so it would be over.
A longer period of time, then the obviously the ending to starting so it does get a little bit distorted because of that but there absolutely are step ups in the leases on renewal and replacement.
Oh right right, because the picturing period right.
Exactly.
Okay. Okay.
And then maybe just one more for you some silly on the.
Transitional space disclosure, that's pretty helpful that youre starting to call that out.
That does that transitional versus stabilized would that affect any calculation on the same asset and why or is it not not related.
No. We included everything is part of the rental portfolio, including the transitional properties. So it would be part of the six 3% increase that we had in the quarter.
Okay got it. Thanks, thanks, so much for the color I'll turn it back.
Alright, thank you.
Our next question will come from Matt <unk> with National Bank financial.
Guys I'll try to keep it quick on the well and this maybe is more of a comment than a question but.
Would it be.
It's possible to get maybe with Q4 kind of a sense as to how the <unk> and capitalized interest would trend as that comes online I know I think shopify enters fixed during or as in fixed during now so presumably they would be in SFO and Q4, but.
Any sense on that and maybe the retail versus office split on NOI I don't know if you can make comment on that now.
Well I can certainly speak to the first part of your question I think that could be something that we provide as part of our.
Outlook for 2022 on our February call.
So in terms of guidance.
The ranges that's affiliate fulfill et cetera, okay that makes sense.
And then on Tuesday multimedia is the Molson space is that the top floor that was leased to SAP <unk> and then I guess, if there is new space Thats coming off.
Post quarter are you in discussion on that.
You've noted the 50000 square feet.
In discussions, but where else are you in terms of.
Potential leasing at that building.
So, yes, <unk> will be taking the top floor of the building you're right on the money.
And.
The 50000 square foot and the 30000 square foot tenants. The 50000 square footer is an existing tenant looking for expansion.
And we're getting very close to that.
30000 square footer.
Is a brand new tenants to the marketplace and we're getting close to that one and there is probably three or four others that were in conversation with.
Okay perfect.
That sounds good.
So.
I'm blanking here Im sorry.
I'm looking forward to see what you guys have proposed for 357, and so I'd say and it's over 11, so I'll leave it there.
Okay.
$35 75.
I went to Mcgill I own property not far from it.
I thought I thought we had the property I didn't know about.
[laughter].
Thank you awesome. Thanks, so much.
Alright.
Our next question will come from Jimmy <unk> with RBC capital markets.
Thanks, I will try to keep this quick just given the time, but just and I do apologize. If this was answered earlier, but in terms of the additional leasing at the well relative to the update that was provided a couple of weeks ago.
Just on some of the new leasing I guess, it's roughly 300 basis points can you talk about maybe just the types of tenants on those new leases and.
Are those tenants relocating to the well or is that incremental new space for them.
So there's a mix there is immediate tenant there is one.
Two.
Tech tenants Theres, a pharmaceutical tenant.
Financial tent.
And most of them are relocations to the well I would say four out of the six relocations and two are new to the market.
Thanks, very much I'll turn it back.
Alright, thank you.
And we do have one more question on the Q Mario <unk> from Scotiabank.
Sorry, just.
One more on my end, but potentially the wall as well given how important it is.
Going forward the <unk>.
Government yields with what they.
Five one to five nine in terms of the range.
This quarter versus last quarter.
Yeah.
The leasing risk or the visibility improves.
What is what is your confidence level like in terms of like the lower end of that range or potentially the higher end of that range.
So our confidence level to be in the middle of that range. I think there is still a little bit of visibility on the retail rents that we need to achieve.
The office is we've basically got.
Two thirds of the NOI the property figure it out.
So it's really in that the last retail deals that we're working on now with real Ken.
And then you've done a fantastic job of leasing up the office space and there's various reasons for that.
How would you characterize.
The retail division.
About the property to essentially getting to 100% opportunity also sounds like where does it rank in terms of.
Importance.
I think the retail vision is critical to both the actual lease up and then the ultimate success.
The complex as a whole and the retail component as well I think Rio can and allied have together.
Done a very good job of developing the right vision for the retail component.
And executing the right kind of leasing to get the outcome we need it.
It has meant that the retail leasing has to follow the office leasing.
Primarily because we will get the best results when we can show the physical environment or at least the.
The general outline our parameters of the physical environment to prospective users and we're at that point now.
So I believe the vision for the retail component of the well is critical to the completion of the mixed use project.
In a way that will see it complement that.
King <unk> in our neighborhood and.
And actually.
Meaningfully integrate with.
King and spit Ina neighborhood and become an extension of it.
I think we have the right vision the <unk>.
Market is the core to that vision that was an idea Tom had many years ago.
It's an excellent idea, it's very hard to execute it's easy to say, it's very hard to do.
I know Rio can has talked to something like 400 local.
Food and foodservice.
Interest in the city.
In an effort to populate or cure rate.
The market in the right way it would be very easy to let someone else do that.
But we wouldn't get the quality of outcome that we want and so allied in Rio can are adamant.
That this will be curated by the owners and we will not surrender control.
To any one would be operator of the market or the food complex within.
Within the well and I am very confident in the outcome.
<unk> always expected it would occur much closer to completion than the office leasing our experience in the inner city has always been.
The office leasing can get done way ahead of.
Construction completion retail leasing just doesn't happen that way in the inner city.
So there is nothing.
Toward or discouraging about the fact that the retail leasing is following the office leasing in fact, that's exactly what we expected and we're very happy to be at a point in time, where we can now show.
Two retail users the incredible environments, we're creating there and we can also tell them that the office component is approaching 99, 5% lease up and that the residential.
Components are sold out if theyre condominium.
And under our under very very good stewardship, if theyre rental stewardship, which will be partially represented by Rio can itself.
In a way I kind of regret that we didn't participate in the residential component, but not really because.
It's not an essential part of what we do whereas I believe it is becoming an essential part of what <unk> is.
And I think it made a great deal of sense for <unk> to be part of that component of the world going forward.
It isn't as crucial or central to allied's core mission, but I do believe it is central to Rio <unk> core mission. So we.
We love the retail we know its going to complement our enormous amount of retail on King Street, it's not going to diminish it its going to complement it and.
That's good for everybody.
So that's kind of that's kind of my perspective, Meera I don't know if that was your question exactly but if I could add one thing sure Mario.
Every single office tenant.
Ask about the retail.
Everyone and everyone, we're really comfortable and impressed by the vision.
So it was a very important element of our.
Leasing success.
I'd like to say it was entirely because of the leasing team.
Working hard that was only part of it but the vision.
It was a huge part of our success.
The retail version.
Perfect. Okay. Thanks, everyone.
Alright, Thank you and.
And speakers at this time, we have no further questions in the queue.
Okay, well. Thank you all I hope this has been a useful and comprehensive update for you.
We will certainly keep you apprised of our progress going forward. Thanks, again and have a great day.
Yeah.
Thank you ladies and gentlemen. This concludes today's teleconference and you may now disconnect. Please enjoy the rest of your day.
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