Q1 2022 Allied Properties Real Estate Investment Trust Earnings Call
Okay.
[music].
Oh.
Please standby.
Good day and welcome to the Allied properties REIT first quarter 2022 earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference are Mr. Michael Emery, President and Chief Executive Officer. Please go ahead Mr. Emery.
Thank you Justin and good morning, everyone welcome to our conference call, Tom Cecilia and who are here with me to discuss allied's results for the first quarter ended March 31 2022.
We may in the course of this conference call make forward looking statements 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 including those risks.
As 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 including those assumptions described under forward looking disclaimer in our most recent quarterly report.
Allied's first quarter results met or exceeded expectations with a F. F O per unit and average in place net rent per occupied square foot rising to record levels.
Celia will summarize our financial results, Tom will follow with an overview of leasing and operations.
<unk> will provide a development update and I'll finish with our thinking on capital allocation.
So now over to Cecilia.
Good morning, I'll summarize our Q1 result disclosure enhancements the balance sheet and our ESG program.
First our Q1 results.
So per unit of 61 cents and same asset NOI of 2% came in as expected for the quarter.
<unk> per unit came above expectations at a record high of 56.
Our forecast for 2022 of low to mid <unk> percent growth in each of these three metrics remains intact.
Occupied space continues to be increasingly productive.
<unk> in place net rent per occupied square foot is up 4% from a year ago to $25 13.
We expect this trend to continue and are occupied space increases over the course of the year.
We enhanced our disclosure this quarter with our most recent acquisition, we reached 1 million square feet in our Vancouver portfolio, representing early stage critical mass Accordingly, we are reporting on Vancouver independently of Calgary and Edmonton.
We also added disclosure around the timing of NOI contribution from our development completions before the impact of D capitalization, which is included on page 66 of the MD&A.
Onto our balance sheet the acquisition from choice properties will improve our debt to EBITDA ratio going forward in terms of liquidity. We currently have access to $475 million on our operating lines before exercising the $100 million accordion.
We're in a position to meet our commitments well into 2023 with our line.
Onto ESG, we're currently developing our plan to a net zero carbon pathway it'll be outlined in our third annual ESG report, which will be released in July .
To summarize commitment to our strategy and our balance sheet is unwavering execution by our team to our operating framework has been unwavering in fact, the business has not only exhibited resilience through this time of uncertainty, but it's grown and continue to evolve as we pursue our strategy than ever.
Spending ways.
I will now pass it to Tom for a discussion of our operating and leasing results.
Thank you Cecilia.
Despite the full lockdown in Montreal in January we had a very good start to the year, completing 94 transactions totaling 440000 square feet.
Average net rents achieved on renewals and replacements in Q1 for.
Were 16, 6% higher than average rents in the expiring terms.
Our leasing teams are motivated we just haven't experienced leasing manager in Vancouver.
We have a free of available space wherever possible to speed up the leasing process. We have completed a show suite, but 1000 awhile.
Robert for Us in Montreal, we made a few adjustments with our listing brokers across the portfolio to ensure that we have the best possible teams on every assignment.
We are determined to move our leased area that's meaningful.
There is currently good action in all markets, which I will describe shortly.
Reviewing some information provided by CBRE video of the Canadian office market.
At March 31.
I know, it's doing well relative to the market.
We have lower vacancy rate.
The downtown markets in every one of the cities in which we operate except for Hulu.
We are higher than the market in Vancouver by only one 5%.
That's likely to change soon.
Before getting to a general update on leasing in our major markets I thought it might be informative to provide a brief update on the 30 days post closing of the choice portfolio.
The operations and leasing teams have been fully.
It has been fully engaged in the weeks leading up to closing.
And we really hit the ground running.
Absorbing these buildings into our system seamlessly.
We also on boarded for key new employees with these acquisitions.
Post closing, we completed a three year extension to Ontario.
Previously cancer care at $5 25 University Avenue for 74000 square feet.
We completed a short term extension with NRC and eliminating five west, Georgia for 5900 square feet.
We completed a four year deal for the last remaining office vacancy at 15 OE Broadway we.
We are currently negotiating a short term deal was a fitness club at 11 85 less Georgia for.
For 25000 square feet and expect to finalize in early May.
Early days discussions with medical related use for 60000 square feet at 175 in Florida.
We started dialogue on lease renewal rental rates with omni hotels for 20000 square feet of turn thanks for your growth.
We've had many meetings with a major brokerage firms.
Says of awarding listing assignments in four of the six properties.
I will now provide a general update on our leasing activity to Montreal, Toronto, Calgary, and Vancouver, and will conclude with an update on our urban data centers.
Starting in Montreal, the team completed 38 deals at least.
The space leased in the quarter with a very slow start to the year. The momentum is building every month.
We completed two deals for a total of 77000 square feet at 111 lever for us.
And we completed a deal with an existing zone industry tenant for 15000 square feet at 740 seniors.
Just subsequent to the quarter of at least 30000 square feet through a marketing company.
<unk> be a freestanding building at our RCA project.
We also just agreed to terms with a tech company for 40000 square feet or 35, 75 stand alone with potential to grow over 60000 square feet.
As for what is next in Montreal and existing tenant at city multimedia is just re engaged in dialogue for 60000 square feet of expansion at 111 Robert for Us.
We're also working with a life science tenant for 30000 square feet.
And we're working with two companies for a total of 35000 square feet at a four year 400 Atlanta.
Moving to Toronto.
Well, we completed a deal with a tech company for 62000 square feet.
And also with a prominent music industry tenant for 26000 square feet.
We reported last call that we were negotiating a deal with an existing tenant currently located opinions with Diana for 55000 square feet at 180 <unk> for that.
Over the course of those discussions the tenant decided to concentrate more employees in Toronto and now require 120000 square feet.
And we're in active negotiations with this tenant upper well we.
We have three other tenants interested in various sizes for the last available space in the project.
One way or another and we expect to be 100% leased in the office component of the well very soon.
In Calgary, we are maintaining an 86% leased area, which in the context of that market is good.
We completed 10 transactions in the quarter and have seen good activity at Telus Sky on the last remaining builder suite.
Working on an existing tenant to expand by 18000 square feet.
As we complete these transactions, we will be at 75% leased in that.
Office component.
We've made good progress at vintage towers in the Bell brand and are now at 94, 5% leased.
In Vancouver, we're at 91% leased with good activity on the renewable space.
To add further color to the comments on leasing in our workspace portfolio.
In addition to the negotiations already noted we currently.
We have 600000 square feet of interest in the early stages.
And finally.
We are 95% leased at our urban data center portfolio, which model.
We are currently working on a transaction with an existing tenant to fill all the remaining vacancy at $2 50 front and expect to be able to announce a deal on our next call.
I will now turn the call over to Judy.
Thanks, Tom.
This quarter it seem that <unk> reached a major milestone on one hand classification projects and significant advancements on a number of other current and future development projects I will begin by giving you an overview of our major projects and then we'll follow that with an update on work we have done on our development pipeline.
Construction activity <unk>.
Beginning in Toronto.
Building Inspector has signed off on partial I don't see for the office tower at the well this will permit the tenants to occupy their space in the tower once they have achieved their own occupancy.
This was a major milestone and the culmination of 10 years of work on this project for a number of number of team members.
The remaining buildings are targeting occupancy over the next couple of quarters. The retail tenants will begin their fit out work starting in Q2.
Work on our other projects in Toronto in Kitchener continues unabated, we have reached greatly that king Toronto and the expansion of curious to see what I will now start with the work progressing above grade.
Abilene and Duncan team continues to push towards partial equity in Q3 at.
The bright spot our partners are completing the majority of base building work and will and the space over to Google to start with fixed rate in early Q2.
In Montreal work continues on the upgrade work at 400 Atlantic.
One Robert Curacao and RCA.
In order to address the needs of the Montreal market, we've decided to expand the work being done at 400 Atlantic to include Turkey options for tenants. This is a result of it in or pushing out the date for for romantic being transferred out of.
At 1001, Robert Burrows.
Team has completed the malls suite on the second floor.
Work clearly demonstrates what we are capable of achieving with this building and is a useful tool for the leasing team to attract potential tenants.
In Western Canada work continues on Boardwalk Revlon.
At 400 Atlantic, we have decided to provide turnkey options for tenants.
Decision has already resulted in <unk> being completed and number of other potential tenants are indicating a preference for our building over other spaces in the market.
Planning metric this.
This quarter has seen a number of significant events for future transportation projects.
Then with the <unk> trial, we have completed the purchase of breath golfs have interest in our Canadian Grant project with full control of the project. We are advancing our plans to improve the offering to better suit the knowledge base to users that we intended to serve.
This includes adjustments designed to reduce the carbon footprint and potentially achieving net zero carbon certification.
Exploring the use of hybrid wouldn't steel construction and the conversion of the condominium component of the project to rental residential.
We're excited about the potential of this project and intend on bringing it to the market in the fall.
In Vancouver, we have entered into a joint venture with Westpac for the fourth phase of their main Ali development.
This JV consists of about 200000 square foot office development in the Mount Pleasant neighborhood.
<unk> is already 50% lease to a major tech tenant.
We are excited about the potential of this project alignment with our transition plan for adopting low carbon design, our ability to serve users and life sciences as well as our expansion in Vancouver, we.
We expect this project will take approximately two five years to complete from the beginning of this year I will keep you updated on our progress of the project going forward.
The team has also advanced work on the approval of other future in its application projects in Toronto.
While we had hoped to achieve approval for a bath with a 70 by fall and now looks to be likely given in the new year due to the fall of municipal elections.
We should also achieve approval on the castle early in the new year.
The team has advanced work on the approval of our project at the corner of King's Medina with a formal submission having been submitted just subsequent to the end of the quarter.
The team is excited about the advancements on the active construction projects as well as the future intensification opportunities with the purchase of the choice properties portfolio. The team has gained work on establishing plans for a number of those buildings are worked out 1001 that will be instrumental.
Your mental understanding the potential that some of these buildings hold and how we can transform the user experience.
I will now turn the call back to Michael.
Thank you Hugh.
At the end of the first quarter.
As others have alluded to.
Two allied completed its largest acquisition ever along with its largest equity issuance ever with the equity being issued at $50 and <unk> 30 per unit.
Our <unk> per unit at the end of 2021.
We published our preliminary vision for integrating these six properties into our large focus and distinctive rental portfolio Division document is available on our website and I urge to those.
Haven't looked at it to spend a few minutes to go through it in.
In my opinion.
An important industry theme this year will be the large scale rebalancing of diversified portfolios in Canada between strong and experienced real estate entities allies acquisition at the end of the first quarter was an excellent example of just that.
It represented an important and compelling strategic refinement for choice properties, and a significant and well conceived expansion of operating capability for allied.
Allied intends to remain within two capital allocation guide rails this year.
The first is not to increase our ratio of net debt to annualized EBITDA in funding discretionary acquisitions.
The acquisition from choice properties as Phacelia noted actually improved this ratio.
The second is not to issue large amounts of equity significantly below NAV per unit.
Funding such acquisitions again, we paid approximately 75% of the purchase price to choice properties by issuing equity at our <unk> per unit as at year end 2021.
Clearly, we can make large discretionary acquisitions within the articulated guide for Hill's.
Allied did not utilize its ATM program in the first quarter of 2022.
We currently have over $475 million available on our revolving credit facility with another 100 million available through the accordion feature.
This liquidity is more than sufficient to meet all of our current commitments over the remainder of 2022.
And well into 2023.
Allied is intent on growing its business not shrinking at.
All with a view to serving knowledge based organizations more comprehensively and more profitably over time.
Given our proven strategy and ability to execute we will continue to allocate capital with a view to consolidating the ownership and operation of distinctive urban office and storefront retail space, which we aggregate into the term urban workspace.
In Canada's major cities, we believe that our strategy is underpinned by the most important secular trends in Canadian and global real estate. We also believe that we have the properties the financial strength the people and the platform necessary to execute our strategy for the ongoing <unk>.
The fit of our unit holders and our many other constituents.
I hope this has been a useful and comprehensive update for you we'd now be more than pleased to answer any questions. You may have.
Thank you.
We'd like to signal with questions. Please press star one on your Touchtone telephone.
Joining us today, he's a speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment.
Again that will be star one if you would like to signal. Please star one for questions.
Our first question today will come from Scott.
<unk> with CIBC.
Hi, good morning folks.
Good morning gave a pretty comprehensive overview.
Some very minor questions I'm, just wondering how <unk> been trending is there any change with leases currently under negotiation.
How does that compare with comparable periods.
Okay.
Early in the pandemic and pre pandemic.
I would say the tis have maintained their level through.
The only difference is in some cases as alluded to in the speaking notes we've elected to provide some build to suites, which actually comes along with a corresponding rent increase for us, but generally <unk> been more or less the same.
Okay. Thanks.
Of the leases maturing in 2022, and then into 2023 is there any of the GLA earmarked transitional portfolio.
That is a good question Scott I don't think any of us can answer that.
The cannery and kick or we might be doing that there is a large basis going back we have to.
Yeah, whether or not that needs to be upgraded I don't think theres anything material coming maturing debt certainly nothing occurs to me, although it's it's something we should.
Look at carefully so we can answer the question more confidently.
Okay and the final quick question of any of the users.
Well, our future users as well put any committee committed space for sublease.
Okay.
I don't believe so I think that there was talk of one doing it at one stage, but I don't believe there are.
Yes, I think the architects who are thinking about it.
One floor on but it's not clear yet whether they in fact are prepared to put that on the market.
And then okay, that's a relatively small tenants.
Good one.
I know they were thinking about putting half of their space on the market.
And I don't know, whether they've done that yet or not.
We certainly haven't had to compete against that I know for sure.
That's great. Thanks, very much I'll turn it over.
And our next question will come from Jonathan culture with TD Securities.
Thanks, Good morning.
First question just to clarify Todd in your remarks did you say you're in discussions with 600000 square feet of space right now.
Yes.
The comment was at the end of the Earth.
Workspace comments and it was just to suggest that there are lots and lots of conversations taking place.
The total is about 600000 odd square feet across the portfolio at the very early stages.
There's a lot of interest at the moment.
Okay.
Wanted to clarify that on the on the well obviously.
Good leasing option there for you guys.
And I guess youll get the space at Shopify.
Gave back leased up pretty soon could you maybe give us a sense of what the difference on rate that you expect to get on on that space versus what shopify.
<unk> had under contract.
I'm, so glad Jonathan you asked it.
Yes.
Yeah.
We should see $15 per square foot.
Uptick in Rins.
On the 90000 square feet to Shopify.
Hey, John .
Okay, and what sort of percentage increases that.
That's almost 50%.
Almost 50% okay.
It'd be like $15 35, roughly so 40% and Jonathan just to clarify.
What Tom said in regard to the well.
There is roughly 120000 square foot.
<unk> remaining to lease, including the 90 that.
Shopify did not exercise their option on.
And we're in a very fortuitous position of having a single tenant.
Seriously considered.
120000 square feet.
At roughly $15 above.
What shopify was obligated to pay and then in addition, there are three tenants with an aggregate of 120000 square feet.
In the same position if I understood with achieved the same the way we received.
So we are at just so you know this is why we're speaking with extreme confidence a that the remainder of the world is for all practical purposes leased and B that we will get a $15.
Uptick in relation to what shopify was obligated to pay.
Yeah.
Under its lease.
Okay that sounds it sounds very good and then just lastly, turning to the balance sheet you guys do have a fair amount of floating rate debt.
Maybe what's your thought process on on hitting the unsecured market and what sort of term would you be looking at right now.
If you were to do it.
Well the only the only floating rate debt, we have Jonathan would be the facility. We recently put in place.
To pay down the line and the reason it's floating is because it gives us complete optionality.
Going forward it has a three and a half year term if I remember correctly.
We can always fixed the rate if we consider it advisable to do so.
But we're going to let it flow because that gives us the option of prepaying.
Without any cost and if the bond market was to improve.
We might consider repaying with the proceeds from an issuance in the bond market. Similarly, if our cost of equity was to improve we might consider repaying it by issuing equity so what I like about the floating rate in this particular instance is it gives us.
Real optionality over the next six to 12 months.
As to how we permanently finance, if you will that three or $400 million facility.
And we wouldn't normally be interested in variable rate as you know and as you rightly point out but in this instance, we were very interested in the variable rate primarily because it gave us complete optionality going forward in terms of either fixing the rate on the existing facility or repay.
With that.
Debt raised in the bond market or equity raised in the equity capital markets and of course, now we don't know which.
Of those three alternatives.
We might elect.
But having the ability to elect them in light of.
Ongoing changes in the environment is really valuable to us.
Okay.
That's helpful I'll turn it back thanks.
And our next question will come from Mario <unk> with Scotia Bank.
Thank you and good morning.
Good morning.
I had a curiosity.
What happened during the quarter that led to higher than expected due.
Germany.
Yeah.
I suppose it would be two things number one.
The NOI growth was was solid and as expected our parking improved our parking revenue improved.
Not quite to pre COVID-19 levels, but close.
And then finally.
R R.
A regular leasing capex was probably lighter in the quarter because most of our leasing costs.
Actually in 2022 and onward will be related to income enhancing.
Rather than regular.
Leasing expenses. So we will have significant leasing these expenses in 2022, but a very significant component of them will relate to improving.
The revenue producing potential of the properties.
Actively being upgraded particularly those in Montreal.
And just for the record that.
The three in Montreal that I'm alluding to in that regard with the RCA <unk> pro and the <unk> thousand one repair process.
Okay.
And then maybe switching gears to the.
Kind of market rents and occupancy just from New York.
I can appreciate your expectation for a meaningful uptick Palmer.
Noting the commentary.
In the shorter term view do you think internally.
Q1, we used an economical.
Control.
Okay.
Do I think it has trough in Q1 of 2022 is that the question.
Yes.
Okay.
The answer is yes, with one possible exception and that is at a 1001.
We will be taking space back.
On the upper floors again as part of our.
Repositioning program I don't know, how we will characterize that Mario we haven't really had the time to do.
A turbine that but that could that only could have a negative impact on our occupancy over the remainder of 2022 nothing else that I'm aware of can and will and certainly we are.
Becoming more confident with each passing.
Week or month of our ability to achieve our leasing objectives for 2022, but we are going to be taking back four or five floors.
At 1001, <unk>, but I don't look upon that as if you will they can see that's really part of our repositioning program.
And it's one that will take the form.
That we described at some length.
At 1001, <unk>, so where the floors transform magnificently.
From chopped up ugly.
Light and trapped space.
To open.
Very well illuminated very spacious cubic Lee and otherwise and that we've got to make that transformation before we can re lease the space on the terms. We know we can now achieve.
In the market so that would be the only the only thing that might.
Hit numerically in 2022.
As I say, that's part of our long awaited repositioning program that we're now.
Fortunately in a position to execute very very successfully and we know the demand is there, but we've got to make the transition.
First before we can lease the space.
Got it.
Just on the on the scorecard floors.
Is there a target return on capital.
Looking at or is that a difficult question to answer and so forth.
It's part of the overall bigger redevelopment a couple of.
Property, how should we think about the return.
Okay.
That's great.
It's a little difficult to.
To articulate in isolation, but what I can say that is useful.
Is that we do expect to achieve on that project that kind of spread.
Would achieve on a development and as you know <unk> from from long.
Conversation with us and others.
Well to do anything if we don't think we can achieve at least a 150 basis points spread to.
To the cap rates and I'm very confident.
Actually of our ability to achieve at least that.
In relation to 1001.
It's going to be most likely achievable at the end I don't know whether any segment.
Up four five floors will get there, but what we're targeting we're basically looking upon that to perform like a development for us that.
Our total cost.
We will get us to the point, where theres at least a 150 to 200 basis points spread between the Unlevered yield.
And the actual cap rates that we could sell the building out in the market.
And we're encouraged certainly by the cap rate end of that equation in the Montreal market. It is traded more strongly more rapidly than I would've expected.
In Montreal, Vancouver has traded rapidly in strongly but that that was no surprise at all and I think Toronto is not going to be a surprise either but I was amazed to see how rapidly that demand to buy urban office space.
Reasserted itself and the city of Montreal, and it's it's far from over.
It's just starting.
Okay.
Just two more quick ones.
First of all the market rents and then.
The last one just on the comment in the letter to unitholders that you made.
So on market rents.
Some of the brokerage look like CBRE put quarterly data starts production showed market rents coming up a little bit.
In Toronto, but that could be impacted by change in composition in terms of new supply coming on board and so on and so forth. It looks like your estimate of market rents came down a little bit versus Q4, but it seems like most of that is related to Calgary. So if we just step back and say no.
Through six months ago.
Based on the market, let's say 25.
In our core portfolio in trauma.
What are you asking for today on that space.
And materially or significantly in either direction.
If I understand the question Mario.
Youre, asking whether or not we're confident that we'll continue to see rental uplifts in the charter market.
Because there's nothing.
Yes, not so much the positive lease spread but rather the actual kind of underlying market, but for your assets. So for your portfolio.
Is that does that change in either direction.
For over quarter over the past six months.
Let's say not I think I think that they held on very very well.
So there's a limited supply and a lot of productivity.
Oh.
My sense is and Tom you're more active on a daily basis, certainly than I am but my sense is.
The <unk>.
Level of rent are core Toronto portfolio commands has not eroded one bit and really has continued to grow through the pandemic may.
Maybe somewhat.
More modestly than it would have in a different environment, but it appears to me to have continued to grow and we're just not letting anything go.
At a low rate, we just are doing it and it's not because we're so tougher so smart we just don't have to.
There is always someone there to take the space and we will always wait for the level of Brent that we believe our portfolio can command. This is why I think our average in place net rent per square foot keeps going up quarter after quarter after quarter.
Because.
Basically there is not a huge gap between what we expect for our space and what the market's prepared to pay.
Nobody is global I guess, we don't see tenants coming to us with really lowball offers at all.
One of the things to appreciate about our leasing.
World and it's very interesting and we've all lived it now for probably five or six years.
<unk> is never.
Okay.
What we negotiate and again, it's not because we're topics because the market is pretty well understood by the intermediaries. So the real issue for US is always weather our space needs.
The requirements and aspirations of the employer if it does.
The market's pretty efficient at determining what our space is worth and we just don't lose business.
Over price and in fact.
Think of an example, which I don't mind sharing there was a major marketing firm.
Located on Bloor Street, who looked at the well.
FERC.
Reasonably big requirement, maybe 200000 square feet maybe more.
And it was clear that deal was being run out of New York by people didn't know anything about the market and the only thing they cared about was with price. So we basically sent them down to the innovation center on the waterfront, where they could get good cheap space.
I'm kidding, we didnt send them, there, but that's where they work, but that's what they were looking for they didn't care about anything else, but price and we have no wish to have them in the well and we didn't need to so.
Our rental rates have not eroded if anything they continue to grow and as we've said that at the well they continue to surprise us on the upside.
The big conversation, Eric wisdom and ability to expand.
These are largely tech companies and they're interested in how they can grow and the advantage we have as we can.
Expand these tenants within our portfolio, maybe not building the brands, but certainly elsewhere in the portfolio and a perfect example is the one I cited where we've got a tenant only 25000 square for use case, but I wanted to grow phosphate needed 55000, we're interested in $185 per day and that very keen super interested.
All of us that may decide that that's not going to be big enough for us.
Need more okay. We've now got this space of Shopify are taking let's talk about that and we're getting close to that.
So it's really a.
Tenant is interested more on an affiliate.
Okay.
And the Toronto markets.
It's really efficient light.
Nobody's nobody steel space from anybody and nobody grossly overcharges for space that.
<unk> established sophisticated users are very well advised.
And the intermediaries in Toronto are very very good it's an efficient market. There are very very few price skus.
In high quality urban office space.
Just retail can be a little more subjective but office.
The if you will the buyers are very well advised and the sellers note.
Exactly what theyre doing and exactly what it.
It needs to be done historically for us it used to be weather or mixed use amenity rich urban neighborhood was more important to the tenant then access to the underground paths that and there are very rational reasons for preferring boat was never about cost it was weather the environment.
Suited the users of the building better if it did the tenants will come in to US if it didn't they were going to the conventional towers and again, that's very rational.
It depends on what the user needs and wants for its people.
And we even lost Apple Inc.
Because.
Connection to the past system, which I consider to be rather than perfect in the south core, but nonetheless it exists.
It was more important to Apple then.
Being in the mixed use amenity rich urban neighborhood.
Which is where we have our concentration and strength so that tends to be more determinative of where people end up then pricing nobody as I say.
<unk> seen very few projects.
Succeed by being cheaper.
It doesn't work that way anymore.
They succeed by being better able to serve the needs of the user.
And the user will take the price because it's an efficient market.
That's probably more of an answer that last for.
But but it is an interesting it is an interesting and you see we're living this and I just know our rents are not eroding, they're actually increasing and Toronto.
Is where well terrific Vancouver, they are increasing at a crazy level as well.
So some but Toronto is super strong Montreal, the increases are much more temperate.
It's a different market the demand velocity is different but Fortunately also there is no new supply being created in any meaningful sense. So so.
Different in that perspective.
The conviction and enthusiasm coming out loud and clear so I appreciate it I appreciate that.
Alright, My just my last question I'm, just going to come through like with your comments on the large scale rebalancing.
A diversified portfolio in Canada being a key theme this year.
And you've done the Tories deal.
Kind of projecting that there could be other larger scale opportunities to build the portfolio and your go to market.
Alright.
Well and I want to be careful not to create anxiety in the listeners, but I know.
That in 2022, and probably 2023 a lot of rebalancing.
<unk> is going to occur and there's sort of two basic categories of rebalancing as I see the market. There are the weak aggregators, who have had to disaggregate.
And and to rationalize themselves back to something sustainable going forward.
I don't see that affording any opportunity for allied.
At all.
Nothing of interest there, but I think it is going to be a significant part of the trading volume in 2022, and I think that real estate is going to find its way into stronger hands or maybe put differently more appropriate hands.
And and I think thats good for the market generally and it's also good for trading volumes.
And it also reflects I think the reality of ongoing demand on the part of different investors for different assets.
I think the pension fund.
Risks are.
We're also going to be rebalancing from a position of very considerable strength not from a position of weakness.
Because they probably consider themselves overweight Canada.
That is definitely going to.
Elicit opportunity for buyers, whether it elicits opportunity.
For Allied remains to be seen I'm inclined to think it will.
But as I say it remains to be seen choice is a similar transaction in my mind.
And it is one of the reasons I expected to see.
What I alluded to in the first quarter conference call.
But what I don't know is whether the opportunities that will come forward will fit allied's focus or not if they do fit our lights focus.
We'll certainly look at them and determined whether it's appropriate for us to allocate capital to them at that point in time under those circumstances I can imagine that it will be but I can imagine equally that it won't be and as Ive said to investors for some time over the course of <unk>.
'twenty two.
Sure.
Investors are very aware of what we did in terms of acquisitions investors are completely ignorant.
Of what we havent done or what opportunities we haven't pursued over the last 20 years and believe you me.
If an opportunity isn't right for us at the point in time that it presents itself to US we will pass without blinking an eye, we have a lot to do as it is.
And we are dedicated to and excited about doing it.
So we're not going to make acquisitions just for the sake of making acquisitions ever we never have and I think that's one of the reasons. We have one of the most coherent with portfolios in all of public real estate in Canada.
And we intend to see that continue.
But if something will make us a better provider of distinctive urban workspace in Canada's major cities, we will look at it.
If it's opportune for us to allocate capital to it we will do it if it isn't opportune for us to allocate capital to it we will pass nowhere.
That another deal will come.
234 months later.
As interesting or more interesting. So our goal is to consolidate and to continue to consolidate our goal is not to shrink because I said shrinking is of no interest to me.
But we will only consolidate if it represents appropriate capital allocation for allied given its history.
As a pretty good allocator of capital in my opinion.
Again, a little more than you asked for Mario but what the heck I thought I'd give you an answer.
But again, the enthusiasm and conviction coming out loud and clear so I appreciate the detail on all the questions. Thank you.
And our next question will come from Rob Mathur with.
<unk> capital markets.
Thank you and good morning, everyone.
Good morning, and demand velocity for clarifying our brick and beam space and the MTV cities and the inherent flight to quality.
In your opinion is there any potential upside in the current environment to the positive occupancy of 94%.
Okay.
Our use asking gaurav, whether we hope to achieve more than 95% occupancy on a 94% occupancy on a stabilized basis.
Yes.
I want to answer that carefully because I get myself all the time by.
Over promising.
And I really want to avoid that I do think.
On a fully stabilized basis, it's not unreasonable for us to expect our portfolio to be above.
94% occupancy.
But I do not think.
There's any realistic possibility.
Our getting above 95% occupancy in 2022.
Okay.
I wish I wish there was but.
I think that alone is it's not a stretch goal, but it's it's not a low bar either.
That is an ambitious.
Goal that we have established for ourselves and are committed to.
But we can fly fleet.
Have that happen, we're going to have to work very hard and have some good outcomes in order to get there.
Okay.
Okay. Thank you for that Michael and my final question and I'm Gonna change gears now.
Now the choice properties be it comes off as a win win for both sides.
And given your comment on rebalancing in the Canadian REIT landscape.
Are you thinking of fusing the LP units mechanism a lot more future acquisitions. Just so you can stay within your capital allocation guardrails.
It's a good question and a fair question and until we did the choice transaction, we had never conceived of that mechanism.
As something we could avail ourselves on a large scale.
But I think what the choice transaction has taught US is we can actually execute.
That kind of transaction on a large scale and it does have real value to a seller.
In terms of deferring significant amounts of capital gains.
And recap recapture tax.
As long as you believe and allies.
Units.
And allied business.
So I don't want to suggest we're going to see an avalanche of transactions like this but it's a possibility that we recognize more fully.
And if.
Approach.
Bye.
And owner of assets that fit our investment and operating focus that was prepared to trade on this basis, we would now look upon it with more favor and more confidence.
And be better able to exploit that opportunity so.
And frankly, there are elements of that kind of transaction that I really like in terms of allocating capital and building allies operating capability. So.
I'm not sort of signaling to the world. Please come talk to us but.
It wouldn't surprise me nobody has yet just to be clear, but if people did approach us over the remainder of the year and into next year on that basis.
Or perhaps even we approach others on that basis.
That that Wouldnt surprise me either.
Once a possibility.
Becomes apparent.
Simply becomes part of how you view.
The opportunity set you have as a business and and for sure.
We see this as.
As a very good model.
For transacting between sophisticated parties.
Who can understand the implications and derive the benefits from this kind of.
If you will utilization of units as currency.
Thank you Michael I'll turn it back to the operator.
Thank you.
And our next question will come from Jamie.
BMO capital markets.
Thank you and good morning.
Good morning.
I appreciate the discussion on the <unk> for our capital allocation and I'm wondering in terms of.
How should we think about it under this new contract.
Is it something that you know.
That falls outside of the guard rails, just given idle.
Small and quantum or is it something you you put aside given that that the choice portfolio transaction allows either I guess.
It seems that the equity under the ATM, but not necessarily yeah, I totally get it.
It's a good question and a fair question and we've consistently responded to it by saying it does not fall outside the guide rails. It is not an exception.
We would we will.
To raise very considerable and very substantial amounts of equity through our ATM.
But we won't do it at.
At prices.
Significantly below NAV per unit. So it does not fall outside the guide rails. It falls squarely within it the dry run in the fourth quarter I could argue fell outside those guide rails, because we just wanted to see how that system works and we were very encouraged with the results, but we did.
And even consider using the ATM in the first quarter.
Because it.
Certainly pre announcement of the choice transaction, we were nowhere near.
NAV per unit and even as we began to rise toward NAV per unit subsequent to announcing the choice transaction then the whole market got distracted understandably with all kinds of uncertainties and anxieties.
Which I fully understand so it just to be clear it does not fall outside the guide rails.
Okay, Great that's very helpful.
Turning to the ifr at cap rates that in particular like the Utica.
<unk> portfolio the cap rate on that had been pretty flat for almost two years now we saw a gap down by over 40 basis points. This quarter I'm. Just wondering can you give us some color on what drove that was it.
Other transactions that it went to market against or is it a bit of a catch up I haven't moved in awhile anything would be helpful. There.
Sure there was a transaction involving QTS that was announced late last year and closed earlier this year and so that provided the appraisers with another data point.
They always look at one Wilshire and 60 Hudson as the comparable properties to argue D. C assets, even though theyre not directly comparable but theyre. Just this unique let's say at our new D C assets with that transaction.
It did make them and us more comfortable bringing down the cap rate across.
Across the board.
Okay. So that was the key driver of that move.
Yes.
Okay, Great and then lastly at the last call you talked about.
The potential for the CBP building to transact do you have any update on that front, particularly as it pertains to allied and your option.
No we really have no update at all but I'll say three things in an effort to be helpful. One we.
We have not reached agreement with CBC on the acquisition of $2 50 front and I do not know, whether we will or not.
Number two if we do a transaction wont occur until late 2022 or early 2023.
And number three.
If we do we have multiple options in terms of how we fund such an acquisition and we will not go outside the guide rails to do that.
That deal.
But there is no new information Jenny.
On that.
Transaction, and frankly, I'm quite happy that the public process.
CBC and CBRE felt the need to go through.
Is over.
And whether it will result in allied doing a deal on that building or not I truly do not know.
Okay I'll ask one more question on that side.
End up doing something.
Bringing on a partner or something you would consider.
Yes.
Great. Thank.
Thank you very much.
Just to be clear, it's something we have considered.
So, yes, absolutely and thats not the only alternative that we have.
Okay.
Great. Thank.
Thank you I'll turn it back.
And our next question will come from Mark Rothschild with Canaccord.
Thanks, and good morning, everyone.
Good morning, Mike you.
You spoke about Paul why you like that there's still a choice where you were able to why you were able to issue equity.
To what extent in the future would you.
Care about.
Someone's intention on owning the units for a long term or short term when you're doing a transaction like this and maybe being even more direct to what extent test choice indicated to you how long term deadwood plant on the units.
Yeah.
It's a fair question Mark but.
Im really loath to speak for choice or for the corporate group of which it is an integral part.
I do think.
That group assigns real value to the units over and above the fact that.
They facilitate deferral of taxation.
But I.
I don't feel.
Competent ore or entitled to articulate.
Views on behalf of either choice or the corporate group of which it's apart.
Is it relevant to allied yes, so to answer that part of the question.
If I thought they were going to flog the units at the earliest possible moment in the most.
Expeditious possible way.
I would be less inclined to do such a transaction, but can anyone give me assurance ahead of time that they won't do that no but can I rely on on the perceived integrity.
Of the counterparty, yes am I prepared to in this circumstance clearly yes.
Other circumstances as well.
But but I have to acknowledge on behalf of Allied there is no assurance.
That the holder of those units is going to do anything.
Beyond.
The contractual hold period.
Other than other than sell them.
But I understood okay.
I think that's probably the fairest and most useful answer I can provide is it relevant to us for sure did we think about it a lot for sure did we take advice from Goldman.
And Scotia on the matter sure.
But.
But we also know that no holder of roughly $600 million.
<unk> equity is going to paint itself into a corner, it's just not going to happen and I wouldn't do it either.
Yeah.
No I appreciate that maybe just one more question.
You're clearly a positive.
On the mental team in your core markets for understandable reasons.
And that is part of what gives you confidence to do such a large acquisition.
What extent do you look at the.
The impact of.
Rising interest rates on potential value as you look at acquisitions now or do you believe that there's enough capital out there looking for property fundamentals will improve enough that you don't necessarily feel concerned about that.
I'm not expecting.
The rise in interest rates to have Andy.
Material impact on capitalization rates for high quality urban office assets.
I may be wrong.
But I.
I don't see that happening I think the demand in relation to the supply is such.
That.
Transitory changes in interest rates arent going to affect the value people assigned to those kind of almost irreplaceable assets may be wrong, but that's my expectation it doesn't.
We are a long term buyer it has virtually no.
Impact.
On how we look at value because a we use a relatively modest amount of leverage.
What really is important to us its cost of equity of course, and that's the biggest driver in terms of.
Our willingness to pay and again, we're willing to pay because we are an operator, not because we're trading assets.
And I think most of the people buying the kind of assets. We look at are not really conducting any kind of financial arbitrage.
They are acquiring assets to operate them to add value in some cases to trade based on the added value in allied's case to own forever and to serve users ever better. So I don't think thats going to happen Mark but again.
This could take on a dimension.
And we see in the papers almost daily suggestions that it might take on a bigger dimension rates may go up faster.
In an effort to cruel everything down.
You know at some point.
That has an impact but again.
Most real estate buyers are not conducting any kind of arbitrage to that in the old days, that's exactly what we all did.
But.
We're not really arbitrageur to debt cost anymore.
It's a whole different ballgame.
Understood. Okay. Thanks, that's helpful.
Okay.
And our next question will come from Irina.
Please proceed.
Oh, yes.
Yes hear you loud and clear.
Oh, Thank you for taking my question and I apologize.
Yeah.
I wanted to know what's your outlook.
Kevin.
Turning to Q1, and what kind of tenants expressed an interest.
Okay.
Yeah.
Okay.
Again, I didn't hear that clearly your question relates to the Calgary market.
Our perception as to what's happening there.
We continue to see that market improve.
And we actually are physically seeing the changes now in Calgary I'm not sure if you've been downtown there lately, but there are people back on the streets. The Stifel unpleasant disease. There is a rush hour again in coffee in the morning, and evening Calgary is coming back to life and we're seeing a corresponding increase in traffic through our buildings.
So.
We're confident that Calgary is going to come back.
And.
We're seeing some really good activity in that marketplace I'm, hoping that answers your question.
Yes, that's the leasing activity was kind of panel.
Kumar from.
Increasingly we're seeing tech tenants show up in Calgary.
It's an area where the city of Calgary has.
Has it been pushing really hard to attract to the city and the city has greater appeal as an environment for young families and I think we'll continue to see growth in that market and certainly we're seeing our share of it.
Okay.
Okay. Thank you.
Okay.
Sure.
And that does conclude the question and answer session I will now turn the conference back over to you for any additional or closing remarks.
Thanks, again, Justin and thank you all for participating in our conference call. These were great questions and hopefully.
We were able to provide helpful answers, we look forward to keeping you apprised of our progress.
Going forward until we next speak B well and.
Thank you again for showing up today.
Well. Thank you that does conclude today's conference we do thank you for your participation.
Okay.
Okay.