Allied Properties Real Estate Investment Trust (REIT) (AP.UN) demonstrated a strategic focus on improving its financial position and leasing activities in the third quarter of 2024. President and CEO Cecilia Williams emphasized efforts to strengthen the balance sheet, enhance leasing, and progress in development projects. The company's financial health showed signs of improvement with a 4.2% increase in Q3 operating income and a slight improvement in net debt to EBITDA ratio. Allied Properties REIT (TSX:AP_u) is optimistic about its leasing momentum and asset dispositions, aiming to refine its portfolio quality and profitability while effectively managing debt.
Key Takeaways
- Strategic priorities include strengthening the balance sheet, increasing leasing activities, and completing development projects.
- Successful property sales and non-core asset disposals are expected to generate significant funds for debt reduction.
- Leasing activity increased significantly, with total leasing up 39% from Q2 and nearly doubling year-over-year.
- Operating income rose by 4.2% in Q3, and the company issued a CAD250 million senior unsecured debenture to refinance higher-cost debt.
- Montreal is experiencing a surge in demand for larger spaces, with transformation projects completed and new tenants in negotiation.
- Allied announced greenhouse gas emission reduction targets and reported high user satisfaction with a Net Promoter Score 250% above industry peers.
- No plans for residential conversions are in place, with an average yield of 3.5% on assets held for sale.
Company Outlook
- Allied Properties REIT targets a net debt to EBITDA ratio in the mid-8x range by end of 2026.
- Ongoing asset dispositions and leasing activities are expected to enhance portfolio quality and profitability.
- The company remains confident in its leasing momentum, particularly in Montreal and Vancouver.
Bearish Highlights
- Increases in project costs, notably CAD 35-36 million for King Toronto, due to higher construction costs and delays.
- Sublease space uptick in Montreal as a result of National Bank's consolidation.
- Flat sequential portfolio performance in Q3, with declines in Montreal and Vancouver offsetting increases in Toronto.
Bullish Highlights
- Allied's diverse offerings are tailored to meet various user needs, contributing to strong leasing activity.
- The company's commitment to sustainability with greenhouse gas emission reduction targets set to be validated by SBTi in early 2025.
- High user satisfaction indicated by a Net Promoter Score significantly higher than industry peers.
Misses
- Despite overall leasing activity growth, a specific Flex (NASDAQ:FLEX) building lease resulted in lower-than-expected spreads due to strategic concessions.
Q&A Highlights
- Three mortgage commitments are set to close in Q4 2023, with CMHC financing for 19 Duncan expected in Q1 2025.
- Financing commitments are not rate-locked, but the company is vigilant about securing rates at the right time.
- Allied anticipates a contribution to EBITDA from development completions, growing substantially in the next two years.
- Lease-up at 19 Duncan is progressing, with stabilization expected in the latter half of 2025.
- Incremental NOI is expected to increase significantly in 2025 and 2026, not yet reflected in upcoming maturities.
- Average leasing costs remained consistent with past metrics at $4.70 per square foot.
Allied Properties REIT's third-quarter results show a company strategically navigating the real estate market with a clear focus on financial stability and growth in leasing activities. While facing some market fluctuations and increased project costs, the company's optimistic outlook and commitment to sustainability and tenant satisfaction position it for future progress.
Full transcript - None (APYRF) Q3 2024:
Operator: Ladies and gentlemen, thank you for standing by. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to the Allied Properties REIT Third Quarter 2024 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Cecilia Williams, President and CEO of Allied Properties REIT.
Cecilia Williams: Thanks Mark. Good morning, everyone, and welcome to our conference call. I’ll provide an update on our three areas of focus for the year. Nan will highlight our Q3 results and our strengthening financial position. JP will outline our solid leasing activity and provide a summary by urban market. Then we’re pleased to answer questions. We may in the course of this conference call make forward-looking statements about future events or future performance. By their nature, these statements are subject to risks and uncertainties that may cause actual events or results to differ materially, including those described under the heading Risks and Uncertainties in our 2023 annual report and our most recent quarterly report. Material assumptions underpinning any forward-looking statements we make include those described under forward-looking statements in our most recent quarterly report. Now on an update of our priorities for the year, which are as follows: one, strengthen our balance sheet; two, lease up vacant space; and three, complete development and upgrade activity underway. All of this will drive operating results and supports our ongoing commitment to our distribution. First, the balance sheet. Our commitment to the balance sheet governs our actions across the business. We’re proactively managing our 2025 and 2026 debt maturities to reach our targeted debt-to-EBITDA in the mid-8x range and ensure maximum liquidity. As we explained last quarter, this involves selling non-core assets and proactive debt refinancings. The non-core asset sales are going well with pricing from unsolicited bids coming in at or above IFRS value. In the third quarter, we closed on 3 properties and we currently have another 5 pending sale, all expected to close by December 31. We haven’t historically been sellers of our assets, but it’s an opportune time given today’s economic environment. The property that we’re disposing of are non-core assets and that they’re smaller, low-yielding and not part of an existing concentration. The combined proceeds of these 8 asset sales by the end of 2024 will be CAD193 million, in line with the target established earlier this year. All proceeds will be applied toward debt reduction. Because these proceeds are from the sale of lower-yielding assets, paying off higher cost debt is accretive to FFO and AFFO per unit. As we mentioned on our Q2 call, the success of our disposition program on the first CAD200 million of assets led us to identify another set of non-core properties for disposition that will generate an incremental CAD200 million of proceeds to also be allocated towards debt reduction. Most of these assets are now categorized as assets held for sale in our financial statements. Proactive debt refinancings have also gone well. We issued a CAD250 million bond with proceeds used to pay off variable rate debt. We also received commitments for secured financing at lower than in-place variable rate debt. Nan will elaborate on this shortly. Second, leasing. Our results this quarter evidenced the competitive advantage of our differentiated operating platform. It consistently outperforms the broader market because of the elevated quality of the portfolio and the user experience. The elevated user experience is evident from the results of the annual user engagement survey that is run by Kingsley. J.P. will elaborate on that shortly. Our annual GRESB score, reflecting our progress on ESG initiatives and our commitment to set near and long-term greenhouse gas emission reduction targets are also important to our current and prospective users. JP will elaborate on that [Technical Difficulty]. Our leased and occupied area held steady this quarter and the entire team is focused on improving it. We’ve been meeting with brokers across the country over the last few months. And they understand that while we may not be able to fulfill all of their clients’ needs, we can meet many of them through our multiple offerings of Allied Heritage, Allied Modern and Allied Flex. Allied Heritage is a format created through the adaptive reuse of light industrial structures for office use above grade and retail use at grade. Nordelec in Montreal, 500-522 King West in Toronto, the Telephone Building in Calgary and Sun Tower in Vancouver are perfect examples of this. Allied Modern is a format created specifically for office use. These buildings tend to be mid-to-high-rise, clustered in the urban core and are distinctive in their design, integration with heritage structure and integration with the different elements of amenity-rich urban neighborhoods. 1001 Boulevard Robert-Bourassa in Montreal, 134 Peter in Toronto and 400 West Georgia in Vancouver are great examples of this. Allied Flex is a limited format for buildings that we will redevelop completely within 10 years. Because of that near-term transformation, we can make that format available on more flexible terms. El Pro in Montreal and 420 Wellington in Toronto are examples of this. We’ve also strategically invested in suite upgrades, which will drive leasing activity. Defining our space offering in terms relating to the nature of the physical environment and our corresponding appetite to invest capital allows us to have maximum impact through our leasing efforts with the appropriate sensitivity to our balance sheet. On to development and upgrade activity underway. We transferred more GLA from the development portfolio to the rental portfolio this quarter and this will continue until the projects are complete by mid-2026. Over the next 18 months, we’ll focus on onboarding those into the rental portfolio with no plans to start new ones in the near-term. Our development risk continues to decline. I’ll now pass the call to Nan.
Nanthini Mahalingam: Thank you, Cecilia. Good morning, everyone. I’ll speak briefly about our financial results, our ongoing commitment to deleveraging and provide an update on our proactive financing. The third quarter was encouraging. Our operating income increased by 4.2% compared to Q2 2023. Our average in-place net rent per occupied square foot increased to an all-time high of CAD25.30. This reflects a 6.4% increase from CAD23.78 in the comparable quarter. Both metrics reflect the increasing productivity of our urban workspace portfolio and the resiliency of our business. As we continue to complete development projects and meet our lease-up objectives on the organic portfolio, we expect that these metrics will continue to grow. Last quarter, we completed the acquisition of a 90% interest in 400 West Georgia and an incremental 45% interest in 19 Duncan. While these transactions improved the quality of our portfolio, they resulted in temporary short-term pressure on our debt metrics. Our net debt to EBITDA went from 10.9x in Q2 to 10.7x for the 3 months ended September 30, 2024. This modest decrease in debt-to-EBITDA was a result of increased EBITDA from the development completions, mainly rent commencement from Northeastern University at QRC West Phase 2. Our net debt was also tempered by disposition of 3 non-core assets in Montreal during the quarter. Gross proceeds from these assets was CAD51 million. We are targeting to get to the mid-8x range by the end of 2026. We continue the progression towards completing our ongoing development projects. Compared to the same period last year, these have generated incremental EBITDA of CAD19 million for the 9 months ended September 30, 2024. The incremental FFO from these projects is approximately CAD9.4 million. This is consistent with our expectation that approximately 50% of incremental EBITDA converts to FFO due to decapitalization. We are also progressing well with our objective of selling non-core assets over the remainder of 2024 and into 2025. These are anticipated to generate approximately CAD342 million at or above IFRS value. Lastly, our proactive financing initiatives have advanced significantly well. During the quarter, we issued a CAD250 million senior unsecured debenture, which reflects the first time that we have utilized the debt capital markets since August 2021. We achieved a rate of 5.534% and used the proceeds to pay down higher variable rate debt. This offering was 5x oversubscribed and illustrates our ability to access the unsecured debenture market on an accretive basis. In addition, we’re working on putting in place permanent financing for QRC West Phase 2, 425 Viger, 400 West Georgia, TELUS (TSX:TIXT) Sky Residential and CMHC financing for 19 Duncan. These transactions are expected to materially reduce interest expense on higher variable rate debt and extend our overall debt maturity schedule. We have also started working on permanent financing for 20 Breithaupt in Kitchener, which will replace the existing construction facility upon its maturity in early 2025. Overall, we are pleased with these results for the quarter. We’ll continue to advance our development completions, our non-core asset dispositions and our proactive financing. I’ll now pass the call to JP, who will talk about our leasing momentum.
JP Mackay: Thanks, Nan. We continue to observe improved utilization across our portfolio as more and more organizations revert to an office-centric model, resulting in increased demand for our urban workspace. This was particularly evident in the amount of expansion space leased to existing users in the quarter. As a result, leased area in Q3 held steady for the second consecutive quarter. In Q3, total leasing activity was up 39% compared to the previous quarter and almost 100% compared to the prior year. Year-to-date, total leasing activity is up 23% compared to the prior year and new leasing activity is up 60%. We remain extremely encouraged by the number of existing users in our portfolio requiring more space. Q3 was our strongest quarter for expansion activity in 2024. 94,000 square feet of new leasing activity in the quarter represented expansions, including Shopify’s expansion for a full floor at King Portland Centre. We continue to observe expansion activity in all markets across all sectors. We are also encouraged by our improving retention rate, which was 60% in Q3, closer to our normal level of 70% to 75%. Excluding a short-term renewal at an Allied Flex property in Toronto, the average rental rate was up 0.5% when comparing the ending to starting base rent and up 10.3% when comparing average to average. In addition, we completed 343,000 square feet of renewals on space that is maturing in the future, which is more than the aggregate amount of renewal activity achieved in Q1 and Q2 for future maturing space. Tour activity continues to be strong. Total tour activity in Q3, including our PUD portfolio and assets held for sale was in line with our quarterly average and up 5% compared to the prior quarter. Industries represented by touring organizations continue to be technology, media, professional services, education and medical uses. At the end of last quarter, we reported we had 900,000 square feet of leasing activity under negotiation or at the prospect stage. In Q3, we completed 618,000 square feet of leasing activity. As of today, we have 960,000 square feet of leasing activity under negotiation or at the prospect stage, of which 44% represents new leasing requirements and 56% represents renewals. I’ll now provide a brief overview of each market. In Montreal, we’re seeing an increase in demand from prospective users, including tech users for larger space requirements that are greater than 50,000 square feet. We continue to make great progress with the transformation of 1001 Boulevard Robert-Bourassa. The transformation at grade is now complete and open to the public. We continue to pursue the transformation of the workspace above grade as it becomes available and the lower level retail offering. The property continues to attract diverse industries and we are in discussions with respective groups with mandates up to 100,000 square feet. We also recently unveiled a new vision for Cite du Multimedia, a portfolio of assets located between Old Montreal and Griffintown, comprising 8 buildings totaling more than 1.1 million square feet. Cite du Multimedia has been rebranded La Cite and will offer Allied Modern and Allied Heritage workspace solutions as well as an enhanced amenity experience for users and an improved necessity-based retail and service component, consistent with amenity-rich urban neighborhoods. We are extremely pleased with the progress of the transformation of the retail offering as we have completed or are finalizing leases for the entirety of the retail space at 111 Boulevard Robert-Bourassa, totaling 21,000 square feet. Most of our vacancy in Montreal is concentrated within La Cite, and we believe this new vision will help attract knowledge-based organizations. In Toronto and Kitchener, we continue to see an increase in demand from prospective users with larger space requirements that are greater than 10,000 square feet. We recently unveiled an enhanced vision for our concentration of assets within the King & Spadina neighborhood, now known as King West Village. King West Village is an amenity-rich urban neighborhood unrivaled by any other and offers Allied Modern, Allied Heritage and Allied Flex workspace solutions across 57 buildings totaling more than 2.6 million square feet as well as a new amenity offering exclusive to Allied users at 460 King that will be branded Block by Allied. Most of our vacancy in Toronto is concentrated within King West Village, in part due to users that relocated to The Well. In Q3, we leased more than 40,000 square feet in King West Village. At 19 Duncan, we have leased 69 residential suites, representing 16%. We anticipate we will achieve stabilized lease-up in the second half of 2025. In Calgary, Phase 2 of the Downtown Development Incentive Program was introduced to support office conversions and the eligible catchment area was expanded to include the belt line. While we have no intention of pursuing residential conversions, we expect to see an increase in near-term demand from users and buildings slated for conversion. We also recently unveiled a new vision for our heritage on 6th Avenue portfolio comprising the Lougheed Building, Telephone Building and Odd Fellows Building. This new vision incorporates enhanced amenity offerings and leverages our ecosystem of premium heritage assets located in the heart of Calgary’s Central Business District. As reported last quarter, we leased the entirety of Odd Fellows to an educational user, Cornerstone College and believe this new vision will drive leasing activity in the balance of the heritage on 6th Avenue portfolio. In Vancouver, there has been an influx of new entrants to the market and increased demand for urban workspace among organizations currently located in suburban environments. In addition, we are starting to see an increase in demand from prospective users with larger space requirements that are greater than 10,000 square feet. Vancouver remains the strongest leasing market in Canada. 400 West Georgia is currently 82% leased. There are 4 floors totaling 64,000 square feet that remain available. There are presently 3 prospective organizations with requirements ranging from 1 to 2 floors currently touring the asset. As discussed on our Q2 call, we anticipate the remaining vacancy will be leased with users in possession in the second half of 2025. We continue to be very active in engaging our partners in the brokerage community. In Q2, we held broker assemblies in Montreal and Toronto where we shared Allied’s vision for the future of Canadian cities and introduced the 3 urban formats that make-up our portfolio; Allied Heritage, Allied Modern and Allied Flex. In Q3, we engaged in similar outreach with each of the major brokerages in Vancouver and Calgary. Allied’s commitment to sustainability and user experience remain foundational pillars of our operating platform. In Q3, we announced our commitment to set near and long-term greenhouse gas emission reduction targets in line with the science-based targets initiative and a 1.5 degree Celsius decarbonization pathway. We will submit our targets for validation by the SBTi in the first half of 2025, and we’ll disclose them once they have been validated. We also announced our 2024 GRESB scores based on the 2023 reporting year. We achieved a score of 84 for standing investments and 86 for developments. We remain at or above the GRESB average for both scores, 5 points above the peer average for standing investments and 2 points below the peer average for developments. Our ability to sustain long – strong performance highlights our commitment to achieve long-term sustainability. We are currently completing our 2024 user experience assessment survey in partnership with Grace Hill Kingsley Surveys. The results will be shared on our Q4 conference call. In 2023, our Net Promoter Score was 250% higher than our peers. And the interim results of this year’s survey are reflective of continued outperformance relative to our peers. I will now turn the call back to Cecilia.
Cecilia Williams: Thanks, J.P. Before we turn to questions, I want to reiterate my confidence that our portfolio will not only hold up well in this economic environment, as it has during past downturns, but will ultimately emerge in a stronger position for the following reasons. Number one, our differentiated operating platform. This is the combination of our one-of-a-kind concentration of urban properties we own and the strong team that operates them and two, the intensification potential inherent in our portfolio, which represents decades of continued growth. And this is all in the context of our thriving cities, which continue to attract global talent. Last week, Montreal, Toronto, Calgary and Vancouver were ranked in the top 4 of livable cities in North America. Globally, 3 of them were ranked in the top 12 of livable cities. These rankings are based on an assessment of stability, healthcare, culture and environment, education and infrastructure. While many of us may not appreciate the livability of our cities as we have to live through the growing pains that come with their increasing popularity, the fact is that our cities continue to grow. And all this growth leads to demand that we’re well positioned to satisfy and serve. We’d now be pleased to answer any questions.
Operator: [Operator Instructions] And our first question comes from the line of Jonathan Kelcher with TD (TSX:TD) Cowen. Jonathan, your line is now open.
Jonathan Kelcher: Thank. Good morning. First question, just on the press release, if I look at Q3’s press release versus Q2, you guys seem a lot more confident in terms of near-term leasing activity. I’m just curious as to what gives you that increased confidence?
JP Mackay: Jonathan, I think there are three things. First, the increasing utilization that we are seeing across our portfolio, coupled with greater clarity with respect to the macroeconomic environment, which is leading organizations to make real estate decisions, decisions that have been deferred over the past 24 months. And we’re seeing that in our conversion rate. Of the new leasing activity that we reported last quarter, we completed 68% of that compared to our average over the past 12 months of 42% and a median of 38%. The second is the increasing expansion activity that we are observing. As noted, Q3 represented the most expansion activity that we achieved, and its representative of all sectors and across all markets and then lastly, the increasing size of mandates that we’re seeing from prospective users across the country, which is now translating into deal activity. Last quarter, we completed 8 transactions in excess of 10,000 square feet. This quarter, we completed 12, including 5 greater than 25,000 square feet and one greater than 50,000 square feet.
Jonathan Kelcher: Okay. That’s helpful. I’m guessing you’re not giving targets on where you think occupancy can get to. But you’ve had – I guess, you’ve had a couple of quarters in a row where you’ve been relatively flat or up a tiny little bit. Based on what you know over the next 4 or 5 quarters, do you expect any dips in the occupancy level as the trend sort of improves?
Cecilia Williams: No, Jonathan, we don’t.
Jonathan Kelcher: Okay. And then secondly, just on the assets held for sale and you guys identified them as lower-yielding. What should we sort of think of as an average cap rate or an average yield on cost there on those?
Nanthini Mahalingam: Jonathan, I would say, on average, 3.5% yielding.
Cecilia Williams: Yes. And the cap rate isn’t totally indicative of much because some of the assets we’re selling and the sale price is based on intensification potential. And they’re lower-yielding because we’ve also been vacating them, because in some instances, they actually have more value being vacant. So the cap rate isn’t really an applicable metric.
Jonathan Kelcher: For sure. Just trying to get an idea of how much NOI to take out.
Nanthini Mahalingam: Hey, Jonathan. It’s Nanthini.
Jonathan Kelcher: Sorry, go ahead.
Nanthini Mahalingam: Yeah. That’s the point I made. It’s low-yielding. On average, the yield is like 3.5%. And if you look at where we are in terms of interest rates, it’s accretive.
Jonathan Kelcher: Well, for sure. Thanks, Nanthini. I’ll turn it back.
Operator: Our next question comes from the line of Brad Sturges with Raymond James. Brad, your line is now open.
Brad Sturges: Hey, good morning. You made a lot of progress on the financing side of things, lots of mortgage commitments that you’ve highlighted in your disclosures. Just I want to get a sense on timing. Would that – would some of that close in Q4? Is that more into early ‘25?
Nanthini Mahalingam: So, three will close in Q4. The CMHC financing will close in Q1 of 2025.
Brad Sturges: Okay. That’s the 19 Duncan one that you’re referring to?
Nanthini Mahalingam: Yes, 19 Duncan.
Brad Sturges: And everything is rate-locked right now, so you wouldn’t expect any changes in the rates provided?
Nanthini Mahalingam: No, it’s not rate-locked. We’re waiting for the most opportunate time to rate-lock. The spread is obviously locked, but the rate isn’t. We are tracking to when we want to rate-lock. The GOC is not on the grade right now. So we’ll keep an eye on that. And that’s part of the reason why we haven’t closed yet.
Brad Sturges: Okay. [Technical Difficulty] I saw the changes in the project cost quarter-over-quarter and that obviously has a negative impact on yields. Just want to understand what’s driving the change in [Technical Difficulty].
Cecilia Williams: Yes. So a couple of things. We had 3 units that’s sold in Q3. On average, we achieved close to pro forma rate. So there was the cost increases of the supply chain issues that we had mentioned previously. And the impairment was due to the cost increases, the carrying cost and then the remaining net proceeds or the proceeds on the revenue. I’m assuming you’re referring to the impairment.
Brad Sturges: Well, I mean, just quarter-over-quarter, just looking at King Toronto, the cost in the table that you disclosed, I think it was up like CAD35 million, CAD36 million quarter-over-quarter. So I’m just – is that related to the additional credit facility that you’re funding to Westbank or is that – is there something else driving that?
Nanthini Mahalingam: Basically, there’s a combination of higher construction costs, a little bit of delay, which also means a little bit more capitalized interest. So all of that is going into the higher construction costs.
Brad Sturges: Okay. Thanks. I’ll turn it back.
Operator: Our next question comes from the line of Pammi Bir with RBC (TSX:RY) Capital Markets. Pammi, you line is now open.
Pammi Bir: Yes. Thanks. Can you maybe just clarify, Nan, I think you said that it’s – one of those mortgages is not rate-locked. Sorry, does that apply to all of the financings that you flagged in the release or just the CMHC financing at Duncan?
Nanthini Mahalingam: No, none of those are rate-locked yet. So we have the commitments in place and we have up to 30 days to rate-lock.
Pammi Bir: Okay. And so if the spreads are locked, just sort of – what’s sort of the – if you were to lock them around today, just roughly what would that all-in financing come in at?
Nanthini Mahalingam: They’re compared to the rates that we disclosed about 10 bps to 20 bps difference.
Cecilia Williams: Yes, it’s what’s in the press release, Pammi.
Pammi Bir: Okay. Just coming back to the sublease space in Montreal, can you maybe just comment on what drove – there was a sizable uptick in that particular market. What did that relate to? Like was it one property or multiple locations? And then secondly, do you expect any of that to turn into direct vacancy?
JP Mackay: Yeah. Pammi, it was National Bank at 1001 Boulevard Robert-Bourassa, space that hasn’t been formally listed on the sublease market, but available for some time now as National Bank consolidates its operation in 800 [ St. Charles ]. The space represents approximately 200,000 square feet. It is dated and certainly won’t compete with the upgraded product that we’re bringing to market. In Q3, 100,000 square feet came off the sublease market in our portfolio. And the number of suites listed for availability through sublease is currently 46 compared to 63 at the outset of this year. And to answer your question with respect to the term remaining, the weighted average lease term of our sublease space across our National portfolio is 5.7 years.
Pammi Bir: Okay. That’s helpful. And then just in terms of coming back to the leasing question and the confidence around some of the factors that you highlighted that should drive stronger activity. Anything large coming up for renewal either Q4 or into 2025 that you think may not get renewed?
JP Mackay: We don’t have any material known non-renewals in the near-term. The largest in 2024 represents approximately 30,000 square feet at our Nordelec property in Montreal where we have a stand-alone building on land that represents opportunity for intensification. This particular structure caters to industrial-like users and the user currently located will be leaving at the end of November and moving off island to a larger industrial site. Looking to next year, we have space here at 134 Peter that will be coming back from Entertainment One. And we have space in Calgary that is currently on the sublease market at Vintage Towers that we know will be coming back to us, which was a result of M&A activity a few years ago. Looking to 2026, we have two users at 840 Cambie, that will be one relocating to a newer development of ours in Vancouver, another relocating to a development we don’t own, but they will be vacating around the same time, which presents an opportunity for us to re-evaluate the strategy associated with that asset, which represents opportunities to improve the existing space and/or intensify the site. So, we view that as opportunistic. So, to answer your question in short, no material, large no renewals over the next 3 years.
Pammi Bir: Great. Just at 150 West Georgia, the Westbank loan there, any update on what’s happening at that site and thoughts on repayment timing?
JP Mackay: Pammi, the site has been zoned for data center development and through the presence of the Creative Energy plant. The Creative Energy plant coupled with a partnership with BC Hydro, there is an opportunity to bring an abundance of power to the site, offering very high densities, which is unique for an urban data center location. As such, Westbank, with our support and with support of the property – investment brokerage team that supported the sale of the UDC portfolio, will be bringing that data center development opportunity to market in the New Year.
Pammi Bir: Got it. Last one for me just on the distribution side. You mentioned at the outset the confidence in sustaining it. I am just – I know you typically decide I think in the next month or so as far as the outlook for the year ahead, I am just curious any color you can share in terms of how management is thinking about the distribution at this point?
Cecilia Williams: We are thinking of keeping it certainly at the level that it’s currently at.
Pammi Bir: Thanks so much. I will turn it back.
Operator: Our next question will come from the line of [Technical Difficulty]. Your line is now open.
Unidentified Analyst: Thanks. Good morning everybody. Maybe just quickly going back to the sublease space, JP, do you have an idea what the term on the remaining space would be ex the Shopify (NYSE:SHOP) space at The Well?
JP Mackay: Yes, 3.9 years.
Unidentified Analyst: Okay, perfect. And then I know you said you don’t have a ton of non-renewals, but obviously, the non-renewals have kind of impacted same-property NOI over the balance – or over the course of this year. When you are seeing non-renewals outside of relocations, where are tenants generally going or is it just downsizing? Like what’s kind of the trend there?
JP Mackay: Lorne [ph], it does vary, but I can tell you that we are seeing a decline in the number of tenants that are not renewing because they are downsizing. So, year-over-year, we have seen a decline in the number of tenants not renewing because they are downsizing. And Lorne, just for further clarity, over the past 2 years, that region has represented less than half of the regions for non-renewals.
Unidentified Analyst: Okay. Are you seeing instances of folks, obviously, in Toronto, you have got the node sort of outside of the core. Are you seeing folks looking to move into the core or not as much?
JP Mackay: I think we are. We are certainly seeing more and more of that in Vancouver. But I think organizations as they evaluate their workplace strategy and endeavor to offer great workplace experiences to attract, motivate and retain exceptional talent, recognize that they need to be located in the many rich urban environments, and there is no greater place to do that than Canadian cities.
Unidentified Analyst: Fair enough. And then on KING Toronto, I mean obviously, there is – you guys have had to do some deals with Westbank and there was another deal done by one of your retail peers. Is there any concern that you might have to take in a portion of their interest on the project or bring in another partner?
Cecilia Williams: Not – we are not talking of bringing on another partner and taking on more interest in the project would concern to us, but it’s not something that we are contemplating at this time.
Unidentified Analyst: Okay. That’s all for me. Thank you very much.
Cecilia Williams: Thank you.
Operator: And our final question comes from the line of Sumayya Syed with CIBC (TSX:CM). Sumayya, your line is now open.
Sumayya Syed: Thanks. Good morning. I wanted to ask about leasing spreads, and I noticed some volatility from the Flex leases, excluding which it looks like it was flat, whereas previously, you have kind of gotten mid-single digit or better. Can you just provide some more color on the spreads you got in the quarter?
JP Mackay: No problem, Sumayya. So, first, as you referenced, we renewed a user in a Flex building in Toronto that was looking to rationalize their space. They were in space that we could not demise and we did not have an option to relocate them elsewhere. So, in the spirit of continuing the relationship with this particular user whom we value, we decided to offer economic terms that were appropriate for their current circumstances, but did not invest any meaningful capital. So, the net effective rent was consistent with the market despite the lower in-place rent. Secondly, we had a higher volume of renewals in Calgary. And when you account for those, coupled with the Flex renewal that you make reference to, the increase in rates from beginning to ending was 5.3% and the average was 15.7% in line with prior quarters.
Sumayya Syed: Okay. So, when you do leasing on the Flex assets, that’s typically at positive spreads and this quarter was more of a one-off?
JP Mackay: Correct. And it was circumstantial to a unique user and we made a strategic decision to retain them in our portfolio.
Sumayya Syed: Okay. Great. And then maybe a question for Nan, so on your deck, you have a deleveraging waterfall on how to get to mid-8x leverage. Can you walk through a similar build-up for NOI or EBITDA for the next 2 years and just touch on, I guess the major building blocks of that $85 million in EBITDA that you expect?
Nanthini Mahalingam: Yes. So, the – currently, in 2024, we have $63 million contribution from our development completions. We anticipate in 2025 – I am talking annual numbers, not incremental. In 2025, it will be $80 million and then it builds up to the – what’s disclosed in our PUD tables to the remaining $100 million over 2026, end of 2026.
Sumayya Syed: Okay. Got it. And just lastly, can we get an update on lease-up at 19 Duncan?
JP Mackay: We have leased up 69 residential suites, representing 16%. And we expect to achieve stabilized lease-up in the second half of 2025.
Sumayya Syed: Thanks. That’s all for me. Thank you.
Cecilia Williams: Thanks.
Operator: And we have a question from Matt Kornack with National Bank Financial. Matt, your line is now open.
Matt Kornack: Hey guys. Just a quick follow-up, Nan, on your NOI commentary there, so is the net incremental like the $63 million current, $80 million next year and then $100 million, so it’s, call it, $37 million of incremental NOI that you would add over like from an annual standpoint in ‘26?
Nanthini Mahalingam: In 2025 or in 2026, Matt?
Matt Kornack: For 2026 or maybe if you could give [Technical Difficulty] contribution for ‘25 and for ‘26?
Nanthini Mahalingam: $17 million, so you are getting from the $63 million to the $80 million in ‘25.
Matt Kornack: Okay. And then $20 million additional in…?
Nanthini Mahalingam: It’s in ‘26.
Matt Kornack: Okay. Thanks for that. And then on the mark-to-market potential, particularly for the remaining 2024 maturities, A, can you clarify as to whether the space is already leased, but it looks particularly high. Like Montreal, it’s 41%, on 106,000 square feet. And Calgary, it’s a small amount of space, I think 36,000 square feet at 143% renewal spread. Are those locked in or is that still prospective leasing that you hope to do?
Nanthini Mahalingam: Are you talking about what we disclosed in the MD&A on Page 55, Matt? Are you talking about the upcoming maturities in it?
Matt Kornack: You gave the square footage and then you gave kind of in-place rents versus market rents. And those ones stood out just as being high. I mean the rent in Calgary is really low. It’s like $5 a square foot or something like that. But yes, have you leased those already?
Nanthini Mahalingam: No. What we disclosed on Page 55 are the upcoming maturities. It doesn’t reflect the maturities in future years that we already leased. That’s been removed. This is what still needs to be renewed.
Matt Kornack: And are there prospects or why – I think the Montreal, it sounds like it may be that Nordelec space that JP mentioned would be bringing down kind of the in-place rent. But yes, given the big mark-to-market, what’s kind of the delay in renting them?
Nanthini Mahalingam: I mean we start speaking with users 18 months in advance of when their lease matures. So, we would certainly be in negotiation with all of those users. It’s just the deals aren’t done yet.
JP Mackay: And the average in-place rents would reflect firms that have agreed to 5 years, 10-plus years ago. And as the market has grown, naturally, there is a wider spread on our near-term maturities to market.
Matt Kornack: No, that makes sense. Last one, just I think something like 40% of your earnings right now is better capitalized interest, capitalized G&A or kind of paid-in-kind interest income. Can you give us a sense, I think, Nan, somewhat of it gets answered in that conversion to NOI, but how should we think about that proportion of your earnings that’s non-cash coming down over maybe through 2026?
Nanthini Mahalingam: I think that’s something that we will give more color on as part of our year-end call where we outline our expectations for 2025, Matt. We will make sure to address that.
Matt Kornack: Appreciate it. Thanks very much.
Operator: Our next question comes from the line of Mario Saric with Scotiabank (TSX:BNS). Mario, your line is now open.
Mario Saric: Just coming back and I guess more of a bigger picture, if we step back at the start of the year, and I am asking about occupancy. At the start of the year, the expectation was for occupancy to accelerate in the second half of this year, and you are sounding a bit more confident that it will. How would the Q3 numbers, both leased and economic compare to what your expectation was at the start of the year? And if it’s any different, what do you think has been the driver behind the variance?
Nanthini Mahalingam: Yes. We didn’t have a lot of visibility at the start of the year, Mario, which is why we were shy about providing specific numerical internal expectations on leased and occupied area. I would say that today, our optimism is a lot higher than it was in January and we feel we have more visibility today as well versus in January. So, we are pleased that our leased area has been holding the last two quarters. Of course, I would have preferred for it to have been materially up. But I will take a steady – so, I think someone said to me that holding flat is the new up, and we certainly are feeling that way today. But we are also feeling like it’s – we are at that turning point and I would expect us to start seeing slow, but steady increase in our leased and occupied area over the next few quarters. So, that’s [Technical Difficulty] and with prospective users that are touring our space all validates that feeling that we have.
Mario Saric: Got it. Okay. And like in the flat sequential for the entire portfolio, it kind of masks a couple of varying trends, like Toronto was up 150 basis points sequentially, a really good increase. And when you look at the sub-nodes within Toronto, virtually all the sub-nodes saw higher economic and leased occupancy in Q3 than in Q2, and that was completely offset by erosion in Montreal and Vancouver, which isn’t dissimilar to the broader market. I think JP mentioned that Vancouver, we still see pretty strong demand there. So, I guess the question is, how would you rate your level of confidence in higher occupancy in Montreal and in Vancouver relative to your confidence in increasing occupancy in Toronto going forward?
JP Mackay: We remain confident across all markets, Mario. In Montreal, we are confident in part because of the new vision that we recently unveiled for La Cité and then the new amenity and necessity-based service-oriented retail program that we are introducing, which we have had tremendous success leasing. And so we believe that, that concentration of assets representing 1.1 million square feet will attract knowledge-based organizations and is more and more representative of an amenity-rich urban environment characteristic of our portfolio nationally, coupled with the improving investment in that area more broadly. Secondly, in Vancouver our leased area is slightly lower than the market because of the introduction of the vacancy at 400 West Georgia, coupled with suppressed occupancy at 1185 West Georgia, while we complete upgrade activity.
Mario Saric: Okay. And then maybe last one, more of an accounting question for Nan perhaps. The $22 million of improvement allowances and leasing commissions disclosed during Q3, I just wanted to verify that, that is applicable to the 617,000 square feet of leasing that was completed during the quarter that equates to roughly $35 a square foot or does some of it apply to prior leasing that pertains to leases that commenced during the quarter?
Nanthini Mahalingam: Yes. Mario, it’s based on lease commencement. So, it’s dependent. There could be part of the 600 that took occupancy within the quarter that’s reflected in there. But there is a bulk of what we did in the previous quarters that took occupancy or lease commencement this quarter. So, we would have reflected that this quarter.
Mario Saric: Okay. So, with that would it be notably different than like the $35 a square foot that I calculated just based on leasing this quarter and the $22 million?
Nanthini Mahalingam: Are you talking about the average leasing cost per square foot?
Mario Saric: Right.
Nanthini Mahalingam: No, that is consistent with our MERs that we have reflected in the past at$4.70 per square foot.
JP Mackay: Yes, correct, Mario. Our net effective rents are now back in line with 2020 levels. And our leasing costs – the average leasing costs for our rental portfolio over the past year has remained constant. And as Nan said, is $4.70 a foot.
Mario Saric: Okay. That’s it for me. Thank you.
Nanthini Mahalingam: Thanks.
Operator: There is no further question at this time. I will now turn the call over to Cecilia for closing remarks. Cecilia?
Cecilia Williams: Thanks Mark and thanks everyone for joining our Q3 conference call. We will keep you updated on our progress going forward.
Operator: That concludes today’s call. Thank you all for joining. You may now disconnect.
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