Q1 2023 Allied Properties Real Estate Investment Trust Earnings Call
Michael Emery President and CEO you May begin your conference.
Yeah.
Thank you Rob and good morning, everyone. Welcome to our conference call comments Celia are here with me to discuss allied's results for the first quarter ended March 31, 2023, naphthalene Bellingham, our incoming CFO is also with us today.
We may in the course of this conference call will 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 described under the heading risks and uncertainties in our most recently filed Aif and in our most recent quarterly report.
Material assumptions that underpin any forward looking statements. We make include those assumptions described under forward looking disclaimer in our most recent quarterly report.
Despite ongoing macroeconomic uncertainty.
Allied business is larger.
Stronger.
And better managed than ever before.
Our operating income was up 14, 5% in the first quarter.
An all time high being possible buying development completions and contribution from last year's portfolio acquisition.
Our interest cost was also up in the quarter.
Entirely due to variable rate debt incurred to fund developments that will continue to propel a operating income in the coming years.
We plan to retire the variable rate debt fully and.
And increase our liquidity materially.
The proceeds from the sale of our UGC portfolio.
While the sale process is not complete.
It is definitely nearing completion.
The first quarter of 2023 was positive.
From an operating perspective and supportive of our outlook.
<unk>, who will summarize our financial results, Tom will follow with an overview of leasing and operations.
Ill finish with our current thinking about the future.
Particularly the future of the Allied team.
Now over to Cecilia.
Good morning, I'll highlight key operating metrics, our financial condition progress on development and upgrade activity and priority spending yet.
Operating metrics continue to be strong.
Operating income was up 14, 5% comparable period due to a fault.
Quarter, the contribution of the choice portfolio as well as development completion.
Average took place net rent for occupied square foot was also up $23.
This is higher from year end.
Five 1% and higher from a year ago by three 6%.
Also continued strong rent growth on renewing based in the Florida. Please with 11, 4% on an ending disclosure basis and 18, 2% on an average to average basis.
Tom will provide more detail on our leasing activity.
But pleased with our financial condition, we expanded our operating margin by $100 million.
$700 million, while keeping the <unk> hundred million for income tax.
On closing of the portfolio sale, we intend to use the majority of the proceeds to pay off debt, including our operations line, which we expect to pay off in.
Increasing our liquidity and pushing our debt metrics back within our targeted ranges.
Our debt metrics will continue to improve thereafter.
Development completions continue to be increasingly economically productive.
<unk> does not intend to allocate any capital to discretionary activities, including acquisition in the coming year.
We allocated $85 million of capital in the quarter to Robin given commencing activity and development completions, we can well continue focusing on for the foreseeable future.
Our development and upgrade activity is progressing well.
In Toronto at 19, Dunkin' Thomson Reuters has taken physical occupancy and <unk> west expansion northeastern University has finalized its bit of design.
In Montreal at tour Vijay Novartis has taken physical occupancy and the remaining space is under negotiation with other interested users.
Our priorities for 2023 continues to be leasing.
Government and upgrade completion, and completing that UPC sale to strengthen our balance sheet and reaffirm our commitment to urban workspace.
The goal continues to be to propel our operating capabilities.
Our outlook for 2023 remains unchanged at low to mid single digit growth in each of <unk> and an assortment of unit and same asset in Nevada. We also expect to continue increasing our distributions at our historical rate of 2% to 3% per year.
Our team and our operating platforms has never been stronger.
With that I'll pass the call to Tom.
Thank you Cecilia.
We had a solid Q1, completing 102 transactions totaling 425000 square feet.
Average net rents on renewal quarter for in a healthy 18, 2% higher average net rents in the expiring terms.
Average in place rents in the portfolio have increased every quarter for 14 consecutive quarters.
Our original portfolio at March 31 was 88, 8%.
We have good momentum heading into Q2 bolstered by a very aggressive approach by our leasing team.
By mid February our leasing team completed presentations to the brokerage community Montreal, Toronto, Calgary and Vancouver.
Steam coal at the broker roadshow.
30 separate presentations took place through all major brokerage houses.
Disciplined leasing opportunities in each city.
They reached 550 individual lesions following these presentations.
Over 200000 square feet of new transactions underpinning that we may not have had otherwise with 100000 square feet now of the offer stage.
We also experienced a large uptick in our tour activity in the month of March because of this program.
I will now provide an update on our leasing activity for Montreal, Toronto, Kitchener, Calgary and Vancouver.
Montreal continues to be active with the team completed 24 transactions in Q1.
Our focus in 2023 continues to be increasing at 111 Robert Breza.
And one of them for us as well as BJ Mds schedules.
I'm pleased to report we have action on all four buildings, specifically when the final stages of negotiation for 60000 square feet in the past.
Hey kit.
The global conglomerate.
We are working through a LOI with an educational use for 40000 square feet in the same building.
We have approximately 70000 square feet of space under negotiation of RCA.
For tenants and a full floor 35000 square feet with a tech company.
111 months for us.
In Toronto, we completed 38 transactions in the quarter. Most notable transaction was an early renewal and extension with sick Kids Hospital for 110000 square feet at five <unk>.
Five University.
Upgrade work at 185 Super Diamond and 468 King.
<unk> and renegotiating offers with single users of both buildings.
In picture, we are in advanced negotiations with a tech tenant for up to 160000 square feet and if successful we will be 99% leased in that market.
Moving to Calgary team has done a good job maintaining leased area of 83, 4%, which relative to the market is good.
<unk> has been finalized to reposition to ILUVIEN.
And we're working with an educational use for a large portion of that building.
We're also active on three build to suites at Telus Scott.
In Vancouver, the team completed 33 transactions that we maintain a 94% leased areas for us.
Generally speaking we are very encouraged with the pipeline of deals for the balance of 2023.
<unk>.
The following reasons.
We track leasing activity very closely.
April 17.
820000 square feet of new deals were expansions at the upper stage, we're in advanced discussions.
When you have action of seven large blocks of space totaling 450000 square feet we'd.
We'd have action on amenity uses totaling 70000 square feet in our large projects in Montreal, we have.
Currently in discussion with six educational users for new deals were expansions, we have been aggressive ready suite program.
Which is focused on upgrading and vacant space between two and 10 thousands.
Square feet.
Adheres to provide space and move in condition to shrink negotiation timeframes.
Most of our leasing is done in this size range.
We are very close to completing three significantly detailed Nielsen King west.
And we maintain a very high degree of interaction with the brokerage community and all of our markets to maintain maximum coverage we.
Have hand pick the best agents in each market to list of available spaces.
In addition to our 15th in House leasing staff 52 agents working RV.
While we will not complete all of the deals in the pipeline in 2020, we do expect to complete most of them, which will move the needle meaningfully on a really serious about.
We look forward to providing an update on our progress next quarter.
I'll now turn the call back to Michael.
Thank you Tom.
As you May know <unk> Clarke left Allied recently to joining a private equity firm.
We have divided his responsibilities by modeling two exceptional young leaders at Allied.
Both of whom will report directly to Cecilia when she takes on the role of CEO on may 2nd.
John Lindsay our BP development.
He will oversee development and construction activity in projects, where users don't take occupancy until completion.
So well in Toronto.
A great example of such projects Hershey over to Europe , Our BP construction and technical services will oversee construction activity and projects where users occupy a significant portion of the leasable area on a continuous basis through the construction.
That's.
1001, <unk> and the RCA building in Montreal are great. Examples of these type of projects.
Egypt, John and Hershey was trained as an engineer.
Each has made a significant contribution to our business and is an integral part of our lives next generation of leadership.
Yes.
Other integral parts of the Allied leadership team will report directly to Cecilia when she takes on the role of CEO .
<unk> of course, we will do so as our CFO .
Individuals who currently reports to Tom will also do so specifically, Tim low our SVP of leasing at J P. Mackay RSVP national operations.
This will allow ally to evolve in the optimal manner going forward.
As you would expect so failure will conduct our next conference call as CEO .
Anthony JP, Tim John and Hershey will contribute to the call going forward.
Also on the call, but I promise Cecilia and the team that I'll talk much less.
And against all odds I assure you.
I will keep my comments.
I hope this has been a useful and comprehensive update for you.
Now being pleased to answer any questions you may have.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad. Your first question comes from the line of Lauren Calmar from <unk>. Your line is open.
Thanks, Good morning, everyone.
Yeah.
Just one quick one on the UDC and then I promise I'll leave it you guys are obviously pretty far down the road.
The final bids due in roughly what is closing expected.
We've said all we're going to say on the process.
Can't blame a guy for trying.
And then looking at developments the idling Dunkin' costs were up quite a bit quarter over quarter could you maybe give some color on what drove that.
Yes, I'm happy to do that about roughly half of the increase in the costs related to capitalized interest from the.
Later.
And the rest is just.
Higher costs related to the delayed completion.
Okay Fair enough and then it sounds like you guys have a lot of good leasing momentum across the portfolio, obviously occupancy took a bit of a dip this quarter.
Any expectations for where you expect it to shake out at the end of the year.
Okay.
Well, we're certainly projecting an increase between now and the end of the year and it will be.
It's very difficult to predict exactly but will be in the low 90 <unk> for short.
Great.
Okay, that's great.
Then last one for me it kind of in the same vein any other known non renewals coming down the pipe.
Okay.
I'm, sorry, I didn't hear that.
I apologize any any other known non non renewals expected.
There are two that come to mind, one in Calgary or about 70000 square feet and one in Toronto.
45000 square feet.
And we're working on those right.
Okay Fantastic that's all for me.
Yeah.
Your next question comes from the line of Jonathan <unk> from TD Cowen Your line is open.
Thanks. Good morning, just just following up on.
Florida last question there the two nonrenewals.
Fourth quarter would they come off.
Q2, Jonathan.
So for all of us so they're empty now or do they come up for.
Q3.
They come up for Q3.
Okay.
And then on the sublease space.
It did jump up quite a bit in the quarter was that was that something that happened post the banking issues in the U S or was it sort of just a steady climb throughout the throughout the quarter.
No the bulk of it with Shopify Shopify space came on the market in Q1.
Okay and on that is there any update that you guys can give on that.
No.
Okay, and then last one for me.
Just on the leasing sounds like you're you're obviously very active this year has there been any change in the Ti requirements.
Yeah.
The tenant or tenants are looking for.
But no change in the last.
Six months or a year.
Okay. Thanks, I'll turn it back.
Yes.
Your next question comes from the line of Munis Garg from Laurentian Bank Securities. Your line is open.
Yeah.
Hi, Good morning, guys, just a follow up on the Subleasing question. So I was wondering if you could share your views on.
What are you currently seeing so far into Q2 on the ground in terms of sublet space in downtown Toronto, and what are your scenarios for 2023 for both the market and as well as our light.
Uh huh.
I think the best way to answer that question is we are not seeing any new <unk>.
Sublease space of consequence in our portfolio following the shopify announcements.
Which I believe was either late.
Last year.
Get our numbers if you will in the first quarter were not see anything.
We do have a consequence in.
Our portfolio to date.
I think there have been sublease.
Spaces come on the market.
In downtown Toronto, especially in the south quarter, if I'm not mistaken.
<unk>.
It is relevant.
Okay.
It is not particularly consequential to us.
We don't compete directly with that space.
In any way shape or form.
And because of that well is for all practical purposes output can be easily.
Okay, great. Thanks, a lot.
Butler.
Okay.
Your next question comes from the line of Hummingbird RBC capital markets. Your line is open.
Thanks. Good morning, just maybe on the occupancy can you talk about the interest that you have received to date on the space.
I believe the cannery and <unk>.
Potential timing of re leasing there and then same question on the <unk> building in terms of the timing of a lease on that site.
Okay.
The tablet and negotiations with them for them to enter.
<unk>.
Yes.
Successful.
Rent will commence in early 2024.
Sure.
Just for them.
With respect to the <unk> building.
Early to say.
Okay, and then just on that tenant that you're in talks with at the January would be.
Bearable or.
That compare to.
The prior tenant.
It's actually higher.
Okay.
And then just on the renewal leasing spreads they did come in better than I think we've seen in a bit.
Can you just provide some context on the drivers there and what is that.
Regional related or tenant specifics or any color you can share.
Okay.
But one of the deals were done in Toronto in that quarter, so that would be.
That makes a difference.
Yeah.
Okay.
And then just in terms of the tour Vijay with some of the leasing thats in the work.
What point do you expect that property to to reach stabilized NOI.
Uh huh.
Okay.
Well.
So I hope we expect to complete.
Leasing of the building.
This year.
Rent commencing.
For the deals that we're doing.
July of next year.
Got it.
Okay last one from me just where are you seeing some of the strongest sources of demand it sounds like from an educational user standpoint, there seems to be some good activity there.
And just any other sort of indication that you can provide and then just lastly the.
The tour activity I'm, just curious if that picked up in April so far on a year over year basis.
I haven't seen the statistics for April yet, but I mentioned mature activity remained very very good.
Oh.
With respect to the types of uses instead of a mix, but educational uses of our capital topping the list.
At this game.
There's still a lot of tech.
Interest we've got some financial services interest, we're working with <unk> retail.
Retailers for their office space.
It's a mix.
Thanks, very much I'll turn it back.
Your next question comes from the line of Matt <unk> from National Bank Financial Your line is open.
Hey, guys.
Just a quick one with regards to tenant retention.
We've spoken about the potential.
Taken space and it seems like it's fairly material, but can you speak to kind of the trend on tenant retention.
Yeah.
Yeah.
Well, it's definitely lower in the first quarter than our normal level of retention and maybe even lower than the new normal.
Normal for US is 75%, we certainly didn't achieve that in 2022, and we don't expect to achieve that in 2023, I think our internal forecast for 2023 calls for somewhere around 65% to 70% retention.
Sure.
And that with.
That forecast if you will.
Assumes the non renewal that had the greatest impact on Q1, which was the non renewable and the cannery in Kitchener.
So I.
I think this quarter is 58% or so retention, that's lower than we expect for the year.
And thats driven by an unusually large on retention.
So it sounds like outside of that and then the two mentioned previously on the call.
Your expectation is that most tenants are going to keep their existing space.
Maybe beyond that are you still seeing tenants expanding to new space within the portfolio.
Yeah.
All of that that continue who is certainly.
Especially in Montreal.
Yeah.
Okay that makes sense and then just with regards to the Telus Sky is on the residential component getting towards closer to a stabilized level.
And then you've got Adelaide and Duncan when Youll be delivering and I think some of those numbers were taken off.
I should say in terms of the NOI contribution I presume that's related to the expectation on the residential.
But can you give us a sense financing wise.
Point, you'd potentially look at putting CMA insured debt on those assets or if that is something that you are considering in the future.
Okay.
I don't know whether either of those assets.
Wouldn't qualify for CMA cheap financing in this environment.
Certainly.
We have not assumed in our thinking.
Eligible for that kind of financing and we have rather considerable flexible ability in terms of how we can finance those assets going forward.
I think our current plan as allied.
Is to fund them.
With our own resources as opposed to placing first mortgages on them.
Our private partner.
In both instances they.
We need to use conventional first mortgage financing and there are of course mechanisms, which will allow us to do that but our current plan is to use our own resources.
With respect to repayments of the construction loans on those assets.
Well actually more precisely on $19 that there is no construction loan.
Allies on Telesat.
Okay.
That's a fair point and then I guess with regards to.
Capital allocation and the balance sheet, obviously the deal we're not speaking to on the call. We will have a big impact but is there anything else that we should think of in terms of potential disposition activity.
Or just the changes in the capital stack and access to financing.
<unk> been a big theme south of the border, but it doesn't seem to be as big of an issue.
Here.
Yes, there will be nothing material.
Yeah.
We may sell a small asset in Montreal all of it is very much non core.
We may sell a small asset in Toronto that is.
Less non core but that isn't part of any existing concentration.
But that is literally incidental and inconsequential.
From a capital.
Recycling perspective.
Okay fair enough thanks, guys.
Your next question comes from the line of Gaurav Mehta from IAA capital markets. Your line is open.
Yeah.
Thank you and good morning, everyone.
In terms of leasing trends can you discuss if there's any noticeable change in leasing conversion times and if tenants are any closer to pulling the trigger on the space requirements as compared to the previous quarters.
Yeah.
When you say, leaving strength.
Leasing target leasing strength, yes.
Yes.
Yeah.
I'm just wondering if there's a change in tenant sort of pulling the trigger as far as Oh. The space requirements are concerned that conversion time has now decreased or if its increased in any manner.
Yeah.
Well they are certainly taking more time to make a final decision.
Then they were perhaps up until the third quarter of 2022.
But the good news from our perspective is these entities are ultimately making decisions.
They are ultimately taking down space.
Our preference of course is that they pay it down with Allied and we are as always getting way more than our fair share.
Of the demand and the concluded transactions in our key markets.
But it's definitely taking people are longer and I think there are two very good reasons for that.
Our probably a wider array of options open to them now.
And there has been historically.
And second there is continuing anxiety about where the economy is going.
Which is causing decision makers to be more careful more thoughtful.
About the decisions they make going right up to the board level.
So to summarize there is no question. It is taking users longer to conclude transactions, but theres also no question that they are ultimately concluded transactions.
And I attribute it not at all.
So whole working from home thing, but.
But rather.
Two the fact that people are concerned and uncertain as to why this is going to transpire in our economy in the coming 12 to 18 months.
And.
And I don't think Theres any other explanation for it and it's entirely logical and it is what we have always seen in an environment such as this one where there is concern about a possible downturn in the economy.
Okay, great. Thank you for the color on that and just as a segue into my next question.
Given the macroeconomic environment.
Are there any read throughs from the collapse of the Silicon Valley Bank on the Tech and life Sciences tenant base in your portfolio.
Yes, very good question and there is absolutely none.
Okay, Great and just lastly.
Thinking about fair value adjustments, what seems to be the toughest spot for you to estimate in the current environment.
Yeah.
Yes.
I think the.
The most difficult part of it.
A discounted cash flow.
Dallas.
Is the time required to address turnover vacancy and the rental rates.
And those are the the very very large variables is a discounted cash flow analysis. So those are the hardest for us.
I'm very glad we do it on a quarterly basis.
Do think to the extent, there's variation in our ifr's values, whether positive or negative.
Which was the case this quarter it will revolve around our estimate of rental rates.
The relevant market and our estimate of the time.
That will be required to fill vacancies.
Or put differently does duration of turnover vacancy.
Okay, great. Thank you for the color Michael I'll turn it back to the operator.
Thank you.
Your next question comes from the line of Dean Wilkinson from CIBC. Your line is open.
Thanks, Good morning, everyone.
Okay.
Michael the proposed change over from closed antitrust to an open ended trust serve to ameliorate any potential tax implications from asset sales.
Okay.
Okay.
No it will not have any impact positive or negative on the tax implications from the sale of the UTC portfolio.
Okay. So its just lining up with basically everyone else's structures out there.
Exactly.
And another change that you've put in there and maybe I'm reading a little too much into it is the ability to do stuff down in the U S.
Should we or could we read that as a reflection that you might be looking south of the border seeing some massive price dislocations and office properties down there and you see some attractive opportunities or is there something else in that amendment.
Well I think my answer to your question would be potentially yes, but let me be very clear.
It would not be yes in the near term.
It would be to quick allied in a position where it could consider expanding.
Geography.
With at least the optimal structure to facilitate such an expansion, but I want to say unequivocally now we have no intention to expand into the United States.
I do hope in the fullness of time ally can evolve in a way.
That would make it worthwhile to consider expanding into major cities in the United States of America, and potentially even elsewhere, but we're a long way from that point in time and as I've said before.
Years now we have so much opportunity in Canada.
That looking further afield would almost be a misallocation of capital today.
But I sincerely hope there and I hope I'm still involved with that wide at that point in time that we can rationally.
Allocating capital to expansion beyond <unk>.
Canadian cities, but we're nowhere near that point in time as we sit here today, but having a structure that facilitates that is only in our interest. So we don't have to rush back to our unitholders on a transactional basis and seek modification.
No that makes perfect sense and it sounds like <unk> is going to rack up a lot of frequent flyer miles.
That's it for me I'll hand, it back thanks.
Your next question.
Your next question comes from the line of Mario <unk> from Scotiabank. Your line is open.
Good morning.
Just a couple of quick ones on my end the first one for Tom.
Comment on <unk>.
Occupancy I guess by the end of the year in the low 90% range for sure just want to clarify whether you're referring to economic or at least.
Lisa.
Yeah.
Okay and then.
Every every quarter. So there's some puts and takes in terms of assets going into pud coming out of Pud.
So in the context of the comment or just generally speaking.
Going forward.
Is there a range or a number of.
Property GLA that you expect may come into Pud over the course of the year.
Based on planned value add initiatives.
Mario I can't think of anything off the top of my head that will move from rental to Pud in 2023.
I really can't I think to the extent that this done it was done appropriately and it was done in either 2022 or perhaps to some limited extent that 2021 and I suspect the vast majority of it is in Montreal.
I can't think of a single instance, where that will occur over the remainder of 2023.
Got it okay.
One technical question on the UDC.
Specifically on <unk>, but just from an accounting perspective.
The <unk> fair value was flattish quarter over quarter again from a technical perspective would that value with us.
Closed incorporate the first round of bidding that transpired on March 24th liquidity.
Data into consideration.
Okay.
It incorporates everything relevant levels.
Two making a sound and responsible judgments about.
Our EPC port loading.
Okay.
[laughter].
Okay.
One one last maybe quick one on my end.
You mentioned that the S. Four per unit for the quarter was below internal forecast can you kind of highlighted.
Capitalized interest and so on and so forth, but <unk> per unit was above internal forecast.
Can you reconcile the two for us in terms of what benefited a full per unit.
The per unit this quarter.
Yeah.
Okay.
No yeah happy to answer that is really the timing of capital.
Whatever effects into Amazon.
That would be it.
Okay.
That's it for me thank you.
Yeah.
And we have a follow up question from the lineup hummingbird from RBC capital markets. Your line is open.
Thanks, Yeah, just a quick follow up on the data centers.
Drop in the NOI from Q1 versus Q4 was that was that entirely or predominantly driven by the vacancy that you indicated back with your Q3 results last November that was expected I think that took hold in November just wanted to clarify that.
Yes.
Great. Thanks very much.
And I will now turn the call over to Mr. Michael Emery for some final closing remarks.
Thanks, again, Rob I Hope this has been a useful and comprehensive update for all of you.
Thank you for taking the time to participate in this call.
We look forward to the next one where I repeat I will be largely silo.
Thanks, very much all of it.
This concludes today's conference call. Thank you for your participation you may now disconnect.