Q2 2022 Allied Properties Real Estate Investment Trust Earnings Call
Okay.
[music].
Good day.
Welcome to the Allied properties REIT second quarter 2022 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. Please go ahead Mr. Emery.
Thank you Jennifer good morning, everyone and welcome to our conference call.
Cecilia and who are here with me to discuss allied's results for the second quarter ended June 32022.
We may in the course of this conference call today 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 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 may include those assumptions described under forward looking disclaimer.
In our most recent quarterly report.
Allied second quarter operations were strong.
And our financial results were in line with our internal forecast.
Cecilia will summarize our financial results, Tom will follow with an overview of leasing and operations.
<unk> will provide the development update and I'll finish with our current thinking on capital allocation. So now over to Cecilia.
Good morning, I'll summarize the quarter our financial position.
On ESG.
Operationally, we continue to progress with both lease and occupied area of 160 at 120 <unk>.
Great.
The sequential quarter.
We also had another quarter of increasing productivity from oxy.
Right.
We achieved $25 29 average net rent per occupied square foot.
Moving to trends, we've been experiencing for the last 12 quarters.
We're pleased with our financial position as well, we fix the rate on the $400 million term loan, resulting in 93% of our debt now being on a fixed rate basis.
Our liquidity position is strong, allowing us to meet our commitments well into 2023 without the need to access the capital markets.
We've also made progress on ESG, having published our third annual ESG report a few weeks ago, but the significant increase in our 2021 question. Each caller to please now turn our attention to what we want to achieve in the next year.
Identify a path to reach net zero in alignment with the science based targets initiative corporate net zero.
In the next 12 to 18 months.
It also includes piloting physical climate risk adjustments that are building to help us develop a climate risk ratings, where all properties.
The continued implementation of our equity diversity and inclusion roadmap.
Our team at our properties continue to perform well during this time.
Jewelry. This extended time uncertainty, it's all about operations and we've never been stronger on that note I'll pass the call to Tom.
Thank you Cecilia.
We had an exceptionally good second quarter leasing space.
I'm pleased with 160 transactions totaling over 700000 square feet.
Almost doubling the results in Q1.
The average rents achieved on renewals were 10, 1% higher than average rents in the expiring terms.
Reviewing some information provided by CBRE on the current status of the Canadian office market.
Note that allied is doing relatively well.
Compared to the market.
You have a lower vacancy rate in the downtown market in every one of the cities in which we operate we.
We expect to continue to perform and we have good momentum leading into the second half of the year.
Our in house leasing teams have been strengthened.
They're motivated and fully engaged external leasing teams have been reset.
They are also motivated and fully engaged.
Our available space has been upgraded and ready to tour.
Sure volume is up.
Property operations teams are doing an excellent job maintaining our properties, serving our existing tenants very well.
We are also planning significant upgrades to our retail facilities.
There are properties recognizing nearby amenities are essential to our users and their employees.
We're determined to move our leased area stats.
Okay.
I will now provide an update on leasing activities on our recently acquired portfolio of six buildings and provide a general update on activities in Montreal, Toronto, Calgary, and Vancouver, and will conclude with our urban data centers.
With respect to the properties acquired March 31 of this year, we've made good progress on all fronts.
Leased area in that portfolio is up slightly to 92, 5% since acquisition.
Asset plans for all six buildings with short medium and long term strategies have been created.
We have met with every single tenants in the portfolio and we're working with a few of the larger tenants to expand.
We completed a 15000 square foot deal.
85, West, Georgia in Vancouver to reintroduce a fitness facility.
We're negotiating with the restaurants at least the last remaining retail unit at 15 away Broadway also invest more of it.
We have awarded listing agreements at three of the six properties.
Our teams are excited for plays are sent each of these buildings.
Moving to Montreal, our most active market.
<unk> completed 62 transactions totaling 300000 square feet.
Among the highlights in the quarter was a lease with <unk>.
HP, a marketing company for 30000 square feet at the RCA Bill.
Another sizable transaction is currently being negotiated or BRC building, which we hope to complete shortly.
We completed a 30000 square foot lease with even a gaming company at $35 75 still are up with expectations with this tenant to grow.
We also completed a 9000 square foot lease at 400 Atlantic during the quarter.
We are at various stages of negotiation with large users added 1100 per asset.
<unk> hundred 11, Robert Breza.
And at 400 Atlanta.
These potential office tenants totaled 500000 square feet.
In Toronto, we completed 45 deals totaling 260000 square feet in the rental portfolio.
The most noteworthy transaction in this market was a 90000 square foot lease with a tech company at the well currently in our development portfolio.
Shopify had an option to lease this space, but elected not to exercise their option in Q1.
Space was introduced to the market and immediately attracted interest.
There were three different companies at the table at some point.
Company that did lease the space did something unusual and very impressive.
After a comprehensive tour of the project being handed us assigned opportunities with terms very close to being acceptable.
Clearly demonstrating a serious desire to secure other space.
Financial terms represented a huge increase from the Shadows Shopify deal negotiated about four years ago.
It took only 30 days from starting discussions to get a firm commitment.
We are making the move from the suburbs to help them compete for talent.
The office component at the World is now 98% leased.
Yes.
In Calgary were maintaining a week's area a number of 86, 1%, which is the context for that market is good.
We completed 21 transactions totaling 82000 square feet during the quarter.
Tell us Scott or 72% leased and we have early stage negotiations with two tenants totaling 60000 square feet.
Calgary market slowly coming back.
In Vancouver, we completed 29 deals totaling 66000 square feet with 93, 8% leased with good activity on all available space.
And finally to our UGC space in Toronto, We completed a small transaction of $2 50 front with an existing tenant in the quarter, bringing us to 97, 9% leased in the portfolio.
I will now turn the call over to Q. Okay. Thanks, Todd this quarter and progress we've made on both current construction projects as well as planning for future projects.
I'll begin by giving an overview of our major projects and then we'll follow that with an update on the work we've done on our development pipeline.
Beginning in Montreal work has commenced on the rehabilitation of $35 75 Boulevard sell this major building renovation will allow us to consolidate large floor plates and the plateau neighborhood that.
<unk> is already used the proposed improvement to land.
Got it.
We are continuing unabated upgrade work at 400 Atlantic.
<unk> and RCA.
In Toronto, while we continue to make progress on all of our active construction projects, we experienced a series of industry wide stripes by various trade in here.
Has been impacted a number of projects. The team has been working with our construction managers on evaluating the impacts of the strikes and determining how we can mitigate the scheduled delays.
Despite the strides the team has been able to reach the 14th floor of our JV project with website ablate had done yet.
<unk> Toronto, we have been able to begin with Walmart above grade.
For our expansion our PRC west the team has been able to push ahead with the first couple quarters of pilot grades.
We are gaining momentum on this project with an anticipated completion of our base building work in the fall of 2023.
Well, having handed over to tower per test to begin their work. We are now focusing on completing the base building work for the retailer and the two small smaller office buildings.
In Western Canada work continues on Boardwalk, Revlon, and our JV project with West Bank.
Ali and Vancouver.
For the JV projects, we are nearing the bottom of excavation and will that enable us to start to climb back up to great.
Obviously, that's a great by the end of the year.
Slightly better.
This quarter the team has been focusing on advancing the design of a number of future interpretation projects, we were able to make the formal submission for the northwest quarter of cadence of the buyback.
At this progress site, we anticipate adding approximately 350000 square feet of net new net zero carbon timber office space.
A number of years ago. This project stands to be an exemplary project of our commitment to enhancing the already vibrant Kingsford IV neighborhood.
Our sustainability framework.
In Vancouver, the team has been focused on advancing the design of our rail Trail project.
Like our brands for payments provider, we're focusing on creating a net zero carbon mass timber building.
We are already in use lessons learned an expertise game to inform our transition of new development and redevelopment projects do net zero carbon and the long term.
Overall, the team has made solid progress across all of our development activity the.
The projects, we have already undertaken coupled with the current and future projects have made us more effective in our collective efforts to serve knowledge based organizations I will now turn the call back to Michael.
Thank you Hugh.
Rising interest rates and inflation have created macroeconomic uncertainty for many businesses.
Thus far the impact on our operations and development completions has been negligible and we don't expect material impact over the remainder of the year.
The impact on acquisition activity on the other hand has been significant.
With the result that we don't expect to pursue new acquisitions of consequence in the near term.
We've suspended discussions in definitely with respect to the possible acquisition of $2 50 from Street West in Toronto, Although our right of first offer remains fully intact.
Fortunately, we completed our largest acquisition ever in the first quarter.
Along with our largest equity issuance ever.
With the equity being issued debt in AEP per unit at that time.
We've already made significant progress integrating the six properties into our rental portfolio, increasing the leased area to 92, 5% at the end of the quarter.
We've developed relationships with all large users and are more confident than ever that we will be able to improve operations and drive value in the near term and over the longer term.
As Cecilia mentioned, we currently have over $365 million available on our revolving credit facility with another $100 million available through the accordion feature this.
This liquidity is more than sufficient to meet our commitments over the remainder of 2022 and well into 2023.
We are intent on growing our business not shrinking.
All with a view to serving knowledge based organizations more comprehensively and profitably over time.
Given the success of our 2022 acquisition program to date.
At the current level of macroeconomic uncertainty, we will focus primarily on operations and development completions for the remainder of the year.
We expect this activity to drive significant growth in <unk> per unit <unk> per.
Per unit.
80 per units in 2023 and beyond.
We continue to focus on enhancing our ESG practices.
<unk> and disclosure.
We published our third annual ESG report in June and we completed our 2020 to assess.
Assessment.
We expect the results of this assessment in October and we will publish them accordingly at that time.
In our view ESG.
Yes, she is more topical and more important than ever to our public real estate enterprise and to all real estate enterprise.
I do hope this has been a useful and comprehensive update for you.
I'm pleased to answer any questions you may have.
Thank you.
I'd like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Again press Star one to ask a question.
And our first question today comes from Scott <unk> with CIBC.
Thanks, Good morning folks.
I'm wondering.
Portion.
The portion of the occupancy increase give a figure for that portion that's.
Related to moving GLA for development portions of the two buildings in the Pud.
Okay.
No.
Okay.
And just kind of run out.
We don't have it at hand.
Okay.
And can you comment on the rental rate growth.
That is attributable to the choice properties and the rest of our portfolio.
I don't know if we if we have.
If we have sorted that way or not.
There are two deals primarily.
Six properties acquired.
March I think.
Both represented some growth over the prior in place, but both spaces Scott had been vacant for some time. So I think we would probably have looked upon them.
New leases.
We certainly don't have at the tip of our tongue, what the rental rates were when the leases expired under the ownership of the prior owner.
Okay.
Helpful I'll turn it over thanks.
And our next question comes from Jonathan <unk> with TD Securities.
Thanks, Good morning.
Okay.
First question Q2, obviously, a very good leasing quarter for you guys.
Just curious.
If that momentum carried over into Q.
Q3, just given the macro uncertainty we've seen in the last couple of months.
Yes.
I'll, let Tom answer that in a granular way, Jonathan but we haven't seen any.
Dimunition in velocity to date.
As a result of the macro uncertainty.
It doesn't appear to be impacted decision makers at all at this point in time, that's not to say it won't.
No evidence of it yet.
I think the momentum carried strongly into Q3.
Jonathan.
And that there is about 500000 square feet of office space under discussion in Montreal.
A few of those potential tenants are new so.
So it's showing us that there is still new entrants to the marketplace.
Or tenants, who are looking to make a move so.
The momentum is maintained.
I would say.
Okay. So you guys are still confident.
Sorry go ahead Calgary.
I'm not sure we've had a quarter like we had in Q2 and Calgary in.
A couple of years.
The activity level was noticeably stronger.
Sure.
So the momentum is good.
They need it's going to stick.
Brian Let's say that.
Okay. So youre still confident in your year end.
Target occupancy.
Yes, we are.
Very good Okay second question just on the.
The acquisition front and you guys are pens down right now and I'm, assuming many others are as well.
What.
The impact do you expect that to have on cap rates I see CBRE yesterday.
To increase their cap rates in Toronto, Montreal, I think for office by by 50, 50 bps or are you seeing any of that in the market.
In our market the markets.
We essentially dominate in my opinion, we're seeing no evidence of that whatsoever.
Okay and is there are there still.
Opportunities out there that you guys are just sort of watching and not.
Not doing anything on or.
<unk> straight up.
Okay.
I would say that.
The intensity of interest on the part of Bend doors to transact now has diminished.
All of the vendors who own assets that could be of interest to alloy are very strong.
They are not under any kind of financial pressure and they are not about to succumb to capitulate to.
The fear that is current ramp and the equity capital markets and the debt capital markets.
They will wait until there is less static in the marketplace.
For the eight.
We can initiate there.
Their efforts to sell their assets as part of the rebalancing their portfolios.
So.
Yes.
To answer the question directly those assets.
Remain accessible to us.
But the vendor is less willing to transact in the context of the current uncertainty as are we.
We don't expect any of those opportunities to disappear.
On us through this period of uncertainty.
And we know that the owners of those assets.
We are extremely strong and we will transact on terms acceptable to them.
At the appropriate point in time.
We will look at small infill acquisitions as we did through the pandemic.
Where I think we we were fortunate to acquire around 200 billion worth of acquisitions over the two year period.
Covering I think 19 acquisitions. If my memory is correct. We continue to see a few of those very small.
We're certainly interested Esa augmented existing concentration we happen to have.
But we're not seeing many of them and we're not about to reach for any info, but if.
If we can transact on an appropriate basis and augmenting existing concentration.
We may well do that but I am certain as we sit here today.
That will represent a material allocation of capital over the remainder of 2022 or into 2023.
It will be.
Purely incidental and mature we de minimis in relation to the size of our business and the amount of capital we typically allocate.
Okay. Okay.
That's helpful and just you are still committed to close the Montreal acquisition this quarter correct.
Absolutely I don't know if its this quarter it depends on completion I know it is on time and their September October .
Okay. So it is on schedule and we are.
Firmly committed to closing on schedule.
Okay. Thanks, I'll turn it back.
Yes.
And as a reminder, if you'd like to ask a question you may signal by pressing star one.
I find your question has been answered you may remove yourself from the queue by pressing star two.
And we will hear next from Brad Sturges with Raymond James.
Hi, good morning.
Just to follow on Jonathan's question, there that'd be the same for 400 West, Georgia would that be still on track to close this.
This quarter.
That will also potentially.
Charlie you're right there'll be December January .
Got it.
Okay, and then just to go back to the occupancy question would there be any other buildings looking to be added to the transitional portfolio or is it just down to the three in and that we're kind of gets completed by year end.
I think the principle.
Transfers worthy Montreal properties.
With 1001 repair for us of being fully as expected.
And the most active.
<unk> par I don't think we expect any other material transfers.
Be well.
The remainder of the year.
Okay.
So.
Okay.
Okay.
Yes.
<unk> completed that sorry.
Yes, Okay. That's helpful.
Just last question you highlighted.
Phil.
Making progress on <unk>.
Diana there through the <unk>.
Pre planning process I guess, how should we think about.
The pursuit of that development projects in terms of timeline and then.
If you are commencing a new development like you would.
Your return hurdles have changed at all given where.
Cost of capital has moved in recent months.
I think the best way to answer that question is to say that we have pursue intensification approvals.
Without interruption through the pandemic and into 2022, and we expect to do that going forward. It is highly unlikely that.
That we will in the near term initiate.
The other new developments.
Anywhere in the country.
And if we do it will be very small.
Barry.
Discrete.
In a given market, where we think it's timely to do so but that particular project, which I think will be a spectacular intensification in due course.
Imagine initiating it.
For the next three to five years.
And have no interest in initiating in the next three to five years, we've got enough work to do.
Enough space to deliver.
And as we said pre pandemic.
We weren't prepared to initiate any new large scale developments in the city of Toronto given.
Supply and demand dynamic that we're all very well apprised.
Watch the new supply that's being introduced to the market get absorbed.
It will be absorbed very successfully but we're not going to initiate another large new development in Toronto until we observe how all of this current supply wave works through the system.
That makes sense I'll turn it back thanks a lot.
No problem.
And our next question comes from <unk>, <unk> with RBC capital markets.
Thanks, Good morning, just.
In terms of need the properties that were transferred to the redevelopment portfolio. This quarter can you just describe the magnitude of work involved there and how long before these projects may take.
Okay.
Hey, Dan.
Very.
Sorry, not something I'm famous score.
The biggest project is 1001.
However, offset formerly 700 to negotiate chair.
There are two components of it there is a significant office component, where we are bringing.
<unk>.
If you will inherit.
Spatial framework back to base building, which I think cash we've explained in certain publications is truly spectacular that is not an inconsequential drop.
It involves removing that hideous dropped ceilings.
Figuring the air delivery system stripping.
<unk>.
Beautiful.
Columns from dry wall and painting, the carloads with SMS and pain that is a lot of work.
The base building that is achieved by an effect restoring to what was originally constructed.
Eliminating both Oracle accretions.
To the area.
Formed by the original and subsequent users.
Yields exactly the kind of space, we know our customers sure.
So that's probably six to 12 month process minimum.
Meanwhile, Tom and the team.
Are well underway and negotiating those areas with real life prospects in the city of Montreal. The other big element is the massive transformation that we're going to execute and are underway in executing at the ground.
Floor, which is something like 36000 feet, if I remember correctly and then the area below it which historically was one of the most horrifying food courts.
Montreal, and which we are literally going to transform.
Into amenity rich.
Area within within the complex that will.
Ground floor were hoping you will be complete.
In the summer of 2023.
And we are extraordinarily enthusiastic about that transformation and the impact that will have the ability I think the area below grade will take another year at least.
Its a big transformation.
But it's one that we didn't expect to be able to effect.
As rapidly.
As we are going to be able to effective.
Because there was a lot of existing leasehold commitments in place, but because of the pandemic and the habit.
Don the tenants in that food court, we have been able to get access to the space sooner and we'll be able to transform it more or less concurrently with the ground level, obviously there'll be a one year gap, which is not inconsequential.
<unk>, but but in terms of real estate timing is pretty concurrent.
So that's kind of the timeframe.
Sure.
Our views as to our ability to transform that conventional office tower.
Into work space.
And if entity environments that serve the kind of tenants we want to serve effectively is only heightened by the experience we've had to date with both the construction and the.
Leasing interest the minute people could get into the second floor, which Hugh and his team restored to its original base building splendor.
The interest on the part of the leasing community went through the roof and it will translate there is no doubt in our mind now that it will translate.
Long winded answer, but hopefully helpful.
No no that was great color. Thank you for that and just maybe just sticking to that Robert.
Was that contemplated with the transfer to the development bucket contemplated at the start of the year as part of your.
94% occupancy target by yearend.
Yes, it was contemplated from the beginning.
And then it relates to the first known return of space, what we liked about this building from the beginning.
Was that it had a very temperate lease maturity schedule.
And we could in a way anticipated.
The timing of return of significant portions of the building two lots for redevelopment. So it was fully contemplated at the beginning of <unk>.
2022, and indeed, it was really contemplated once we've finalized our asset plant portability.
Got it and just maybe coming back to the to evaluate evaluation discussion in the comments you've made so far we have seen some of your peers take some some charges.
Through Q2 early I guess, it's still early in the reporting season, so with that context.
Dissipating, perhaps any changes.
In terms of how you look at the portfolio from an asset value standpoint, maybe over the next couple of quarters.
Whether it's through adjustments to maybe any of the cash flow assumptions or discount rates.
Et cetera.
We are not anticipating any changes Amit.
But we obviously are watching.
<unk>.
Activity in the market in place carefully.
Revaluations that might have occurred to date with others Mike.
<unk> related to the nature of those assets. What we are looking at always as you know is.
Very central relocated hyper urban.
Real estate that not only generates improvement levels of revenue set not only has become a more productive with the passage of time.
<unk> mentioned the last four quarters, we've seen our average in place net rent per square foot go up.
But actually hasnt enormous intensification potential.
We do not expect assets, having those attributes to be revalued in relation to what's going on that said we may be wrong.
And obviously as the management team is responsible ultimately for that judgment.
We need to be very observant.
And thoughtful about what we do in each quarter.
We have no doubt that there were no reasons for adjustments in Q2 other than with two or three properties across the portfolio, where we did see fit.
For one reason or another to increase either the cap rate or change the discount rate.
We don't expect there to be transactions in our markets.
That would.
Signal the need to change.
The cap rates applicable to our properties, but again that is a projection that is a forward looking statement and each quarter, it's incumbent upon us.
To make the ultimate judgments informed by an independent appraiser always in that regard.
There are no trades of concern to us in our marketplace at this point in time.
Okay.
Thank you just one last one you still managed to get some leasing done with certainly with the tech sector I guess.
Yes.
Well, that's one of the notable ones, but maybe more broadly speaking can.
Can you just shed some light on perhaps the type of tenants that might be giving up space.
Or as those that are still leasing.
Are there any notable trends by user groups that youre seeing.
There are trends and they are positive most of the demand we're serving before negotiating with is emanating from the tech sector, both nationally and internationally.
We are not seeing a single tenants in the tech sector asking to give back space.
Sub lease space or asking to contract.
Space again that doesn't mean, it won't happen, but we have not had any experience in that regard.
To date, and we frankly don't expect it but what is most encouraging to me is contrary to what I might call.
Speculation in the marketplace.
Most of the incremental demand we are seeing is emanating from the tech sector, which is the largest sector we serve.
Thanks, very much I'll turn it back.
One last little point, because Tom reminds me one of the most interesting things about Calgary.
Is the demand were seeing there is emanating from the tech sector.
There is no energy tenants, taking up space at Allied buildings in Calgary.
All emanating from knowledge based enterprise, which is very interesting and I think bodes well for the future of Calvert.
Yes.
Thank you our next question comes from.
Our next question comes from Jenny MA with BMO capital markets.
Thank you and good morning.
Just continuing on the discussion about the tech sector I'm, just wondering if you could comment on whether or not there's any concerns about some of the tech layoffs. We've seen I know a lot of them are concentrated in the U S. But is that something that allied tracks within your portfolio.
Okay.
We certainly keep track of what is discussed in the press.
And nothing discussed in the press in relation to users of Allied space causes us concern at all at the moment.
Yeah.
Okay, and then Michael you mentioned that Youre not seeing the large tech users can give back space in your house you had some pretty good leasing activity.
Is this lease activity coming from maybe some smaller users or is it still fairly broad based from the tech sector in general.
It tends to be very broad based and it tends to be concentrated amongst the larger players in the tech sector for the most part are Great example is Google as you know we're about to complete roughly 300000 square feet in Kitchener for Google I think build start building networks later this year and again.
<unk> can see early in 2023.
Not only is that not sufficient.
We are actually discussing with them yet further expansion. So so what we're seeking.
From the users in our portfolio.
Tends to be more expansion.
And certainly been contraction.
We are aware of that wealth simple and.
Shopify has.
Ladies.
A portion of their workforce.
We do not believe that will impact their need for allied space at all.
Shopify has completed thoroughly extensive reconfiguration of its space at Q4 2007.
And is finalizing a fairly complex reconfiguration of this space at the well.
With the intention of initiating construction either late this year or early next so we have no reason as we sit here today, we would expect any impact on our space as a result of these layoffs.
And we also don't regard these layoffs as surprising they were inevitable.
And they are inevitability.
<unk> has been apparent for.
Anywhere from six to 12 months in my view.
And it's part of the correction that we all knew had to occur and its now occur.
Okay great.
Just shifting back to the change in the acquisition outlook, just a bit more clarity would you say that acquisitions are pas full stop or would you consider doing deals.
Certain leavers could be pulled to make the transaction accretive just finding creative ways to make it happen or is it really a broader macro call.
I think it's a broader macro call journey there.
<unk> paused foresaw.
Okay. So what are you watching to see if that deal with change I mean aside from from Allys cost of capital is there anything in the broader market that youre, keeping an eye on to see if there is high and so it would be.
Safe to get back into the water acquisition.
I think in the simplest terms it would be a resolution of the extreme uncertainty that exists today.
I think it's fair to say that Allied please.
We anticipate the level of macro uncertainty that we experienced starting I think late in the first quarter and throughout all of the second.
Don't think a number of people anticipated that.
Indeed, if I have to be candid I expected, maybe the opposite sort of augmenting stability as well.
We want to see if the pandemic abates.
But.
We are faced with what is fairly severe.
Macroeconomic uncertainty, we are certainly going into some form of cyclical slowdown or cyclical correction I don't know sitting here today, how extreme it will be and what form it will take until there's more clarity there I see absolutely no.
Reason to engage in acquisitions of consequence.
We've got <unk>.
Great amount of value to create through our development pipeline.
And that's what we should focus on we've got a great amount of value to create through our expanding improved operations. That's what we should focus on the timing for new external growth is not know.
At that time, we will return I have no doubt.
I think the biggest.
Pre condition.
That four hour.
We will be greater certainty as to what kind of economic slowdown we are facing.
And there may be smarter people than me, who already have that figured out but we don't.
And we see no reason to pursue that.
That kind of external growth under these macroeconomic.
Economic circumstances.
Great that's really helpful. Thanks.
You very much I'll turn it back.
Okay.
Once again its star one to ask a question.
We will hear next from Matt <unk> with National Bank financial.
Good morning, guys.
I guess a follow a follow up to Jenny's points. There. Just you also mentioned that there is no interest in shrinking the portfolio either.
Yes.
Would you anticipate though maybe looking at joint ventures at this point to leverage the platform. If there is a party that's looking to get access to the type of assets that you owned maybe with longer leases or is that off the table as well.
Okay.
I don't want to be misinterpreted and what I'm about to say, but we are always considering a wide range of options in that regard and we're fortunate to have a number of people who want to have discussions with us in that regard, but again just as I do.
Don't see.
Okay.
Cheating.
External growth through acquisitions under these circumstances I don't see much motivation to pursue.
The disposition of bond management interest under these macroeconomic circumstances either.
Very liquid our balance sheet is very strong.
And there's really no incentive to dispose of assets other than the incidental non core assets that we already identified we're going to dispose of.
Non core nature of those assets and because we committed to do that when we bought plant start up a U shape.
2021.
We have.
There has been a bit of a delay, but we have done exactly what we said we were going to do and that was to fund the equity component of it.
Original portion of the acquisition with dispositions and we will do just that.
<unk>.
With a bit of delay.
Dissipated at the time, so Matt I don't see any reason to contemplate the transactions of that sort at this point in time in this sort of uncertain macroeconomic environment either.
Okay fair enough, but the option exists it sounds like should should you want or need to in the future.
And we haven't sort of.
We haven't stopped talking.
But we're also nowhere near that point in time, where we would even bring opportunities to the board let alone.
We pursue it and as I say the incentive to do that for US now does not exist.
Okay makes sense.
On the leasing side, particularly in Montreal.
With regards to 111, Robert Burrows versus 1001, Robert Burrows side, I would expect a fairly similar type tenants would be looking at both of those spaces and my understanding is 111 is pretty much ready to go so if anybody needs a near term lease that would probably be where you'd be pushing them towards but just <unk>.
The rest of it and the interplay between those two properties and leasing the space that you have available.
Yes, I think.
<unk> hundred 11 is available more or less now.
<unk>.
If we can if there is a group looking at both we will certainly be trying to get them to go to 111.
But there is a difference between the properties in terms of geography, one of them is a lot closer to the downtown core in the downtown core in the otherwise is not and I think the tenants.
Make a decision to be in the core or not.
Youre right will have large floor plates, but.
Some tenants.
Prefer to be outside of the downtown Portland.
Theres, a new tenant in the building.
Moved from the core interestingly.
Therefore, a year.
And they love it and it was a comment that was made to me in an elevator ride by this particular tenant saying if we didn't know what it was like to live in this environment, we would've been here sooner.
I was really delighted to hear that.
Yes.
Tenants.
Pick up the difference.
Okay.
And having had the benefit of recently touring 111.
Youre leasing team there was pretty eager and bullish about the prospects for leasing.
Is that.
Is that your view that you would expect some of the vacancy I know we've talked about in the past, but some of the vacancy to be leased by year end or at least early 2023.
Absolutely absolutely.
Absolutely the level of interest.
Building on our portfolio of Montreal is really good.
Really really good and we do have a really excellent group of people.
In our leasing team Montreal, Theyre motivated and we've got the right listing brokers on each of our buildings.
We're going to move the needle that much at all.
Okay Fair enough and then last minor technical one for.
Phacelia.
On the approach to capitalized interest should.
Should we expect that to increase with short term rates moving higher or do you do you peg it on some sort of fixed rate view just interested how we should expect that the development time.
Got it.
The weighted average cost of debt.
It is largely fixed 93% of our debt based on foreign exchange basis, So I wouldn't expect.
Right, which would be capitalized at this time.
Materially.
So its the in place weighted average cost of debt is not the current cost of debt in the market.
Correct exactly.
Okay fair enough thanks, guys.
Okay.
And our next question comes from Mark Rothschild with Canaccord.
Thanks, Good morning, guys.
Maybe this question would be for Tom I'm not sure if just get a little more color on the data center portfolio in the branch and if youre seeing any changes in.
The trend in how rents are moving if it's moderating at all.
Hello.
No. They are still very good demand market in the big data centers and rents are actually.
The improving.
The most recent deals we've done.
Showing significant increases.
Okay.
Okay.
So then should we expect internal growth to maybe pick up from that portfolio of hope the remainder of the year.
Okay.
Yes.
Whenever we have an opportunity to do a renewal we're going to see an increase in rent.
Our new tenants were building the rents are increasing so yes. It will we expect some growth for sure.
Yes, I think that.
Hurdle growth will be consistent or meet the organic growth will be consistent with our internal forecast. So so I think were I don't think were exceeding our internal forecast, but our internal forecast concentrated.
Growth and that growth is being achieved.
Okay.
Okay, great Thanks and.
Maybe to back into <unk>.
Capital recycling and the way you think of buying properties, which I know you've answered a few times already.
Firstly, when you think about a higher price values. The way you guys calculate perhaps would that be based on only trades that happen or would it be based on baby appraisers expectations of trades.
Do you have any interest in what appraisers think is going to happen because they don't have a clue.
We are only interested in what has happened.
And we only attributes.
Significance to actual transactions.
Okay Fair enough Thats clear helpful and then.
Just looking out as you get a number of projects developed projects on the go and this is going to clear up over the next couple of years or so.
The units have.
But you've never really been a fan of correct me, if I'm wrong in saying it and buying back units, but I don't recall the units that we're trading at such a discount to your estimate of value. So.
Is this a scenario where you might shift your view or taking a long term approach you still would stay the course with how you backed it in the past with regards to equity.
Equity.
I think we've been.
<unk> consistent and Mark we are allocating a significant amount of capital to our development pipeline, which is getting very close to completion and which is going to make a very significant contribution to our EBITDA in 2023.
If we were committed to that capital allocation.
We might consider.
Using available capital to buying our units back under the circumstances.
But fortunately for US we are committed to allocating capital in that way and we remain committed to our balance sheet.
As we always have been and so given those facts.
What we're not prepared to do is borrow money to buy our units back even though you are radically it might be a good trade.
We're not in the business of trading in our units.
As I say if conditions were different.
If we weren't committed to allocating capital to very productive.
<unk>.
We might take the suspension.
External growth through acquisitions.
Use whatever capital we have available on our balance sheet and.
And by units back, but I don't see our future unfolding that way, we're going to complete the developments over the course of 2023 in early 2024, and we're going to allocate capital, which is always a scarce resource to that.
Lots of buying our units back although I agree entirely with the premise that our units are trading.
At a level materially below.
The actual value per unit of our portfolio.
But again.
We are intent on growing.
Not irrationally at not irresponsibly, but we've committed to do this and something like $2 million to $300 million a year thats allocated to this completion process that Fortunately for us it's going to end.
Around late 2023 early 2024, then we have latitude or more latitude than we have today, but at this point in time when this.
Value gap exists.
We have a use for all of our capital.
That is consistent with building our business and that will generate very meaningful.
Meaningful return to our unitholders.
It's really not an option that's available to us even though the conditions or buybacks are very very favorable. It's just not an option available given the commitments we've made over the past.
Eight to 10 years with respect to development.
That's helpful. I appreciate that and yes, you have been consistent.
Thanks, Mike.
Okay.
And your next question comes from Scott Thompson with CIBC.
Hi, just a quick follow up.
Yes.
Outlook on you're talking about the outlook for the leasing of the retail portion of the well.
I think last how Blake.
Reported.
Press release, we issued Scott indicated that the well.
The leaf the retail component of the world was around two thirds leased.
I believe we have.
Transactions.
At various stages of negotiation that will get us higher than that.
We will leave it to real can to report on that specifically in conjunction with their Q3 results, which I'm sure are imminent.
As they are.
At the forefront of that particular leasing initiative.
But they have achieved very good results.
And I know that.
The last press release, we issued.
Recited the actual results very precisely I know there has been progress from that point forward, but I'm not in a position to quantify it as authoritatively is Rio can Canada undoubtedly will when they report.
Thanks, and then just a quick follow up question on sustainability, you get a bit of color on how users views on sustainability of changed in terms of choosing space and how they are thinking about relative rental rates maybe in other words is the balance between users needs needs.
It needs for sustainable workplace.
And in paying higher rents continuing to shift.
In February <unk>.
Right.
There is really it's a really good question and there is significant anecdotal data that suggests that users are demanding sustainability attributes and are prepared to pay for them.
In relation to environments.
That are lacking in that regard number one and I think there is also emerging empirical data.
Mostly from the U S. If I'm not mistaken that supports the anecdotal.
So and certainly if you're asking for my educated guess there is no question.
The vast majority of the users we serve.
Including users and more conventional.
Categories are prepared to pay more.
Or an environment that is sustainable.
And in an environment that is conducive to the wellness.
The men and women working.
In that environment.
And indeed I would go further and say if you're owning and operating urban office environments that don't have those attributes and don't progress in that regard you will fall behind those who do.
And did that tone of conversation on potential users at the world does that change over the course of.
The development and leasing process.
Yes.
It's hard to answer that because we were building to a LEED platinum standard.
And because the specification cycle, we're so well articulated and end up such interest to the users I don't think I don't think that changed the attitude.
I think we were delivering our product.
That was very appropriate to the environment, we're talking about and I think the success. We've enjoyed there is attributable in part to that the other.
Element of success that was critical there.
While it is.
The desirability.
Being located squarely within.
Mixed use of entity richer environment. There is no question that drove many of the decisions made to locate in the office component of the well and indeed now in the retail component.
Well.
What I think did change over the course.
The development in our favor was the ongoing strengthening of the trauma market.
And the proximity to completion.
The deal that Tom talked about with respect to 90000 square feet.
One of the major reasons, we were able to secure that deal is that completion.
And they could predict with great certainty when they could start moving their most valuable resources into that building that weighed heavily so that certainly helped us as we progress.
What I think.
I think the sustainability.
<unk>.
Aspects and wellness aspects of a complex.
Were recognized at the beginning and we're a big part of the success, we had for sure and yes people were prepared to pay more to be in the well.
For those reasons and the other reasons I mentioned.
That's very helpful. Thanks very much.
Thank you.
Okay.
And we have no further questions at this time I'd like to turn the conference back to Mr. Emery for any additional or closing remarks.
Well, thank you Jennifer and thank you all for participating in our conference call. We will keep you apprised of our progress going forward in the meantime, I wish you all the best have a good day.
And this concludes today's conference. Thank you all for your participation you may now disconnect.
[music].