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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the Allied Properties REIT Fourth Quarter and Year-End Financial Results 2017 Earnings Conference Call. Today's conference is being recorded.At this time, I would like to turn the conference over to Mr. Michael Emory, President and Chief Executive Officer. Please go ahead, Mr. Emory.
Thank you very much, and good morning, everyone. Welcome to our conference call. Tom and Cecilia are here with me to discuss Allied's financial and operating results for the fourth quarter and year ended December 31, 2017. We may, in the course of this conference call, make forward-looking statements about future events or future performance. These statements, by their nature, are subject to risks and uncertainties that may cause actual events or results to differ materially, including those risks described under the heading Risks and Uncertainties in our most recently filed AIF. Material assumptions that underpin any forward-looking statements we make include those assumptions described under forward-looking disclaimer in our most recent annual report.To start, the fourth quarter brought 2017 to a successful conclusion for Allied. Over the course of the year, we achieved strong organic growth in our rental portfolio, completed our upgrade properties in Montréal, reestablished leasing momentum at our cloud-hosting facility in Toronto, completed $123 million in acquisitions, advanced $67 million to Westbank in connection with a Vancouver development, sold 12 noncore properties for $54 million and made significant progress in our development portfolio. Despite the magnitude of our capital investment over the course of the year, we maintained an unwavering commitment to the balance sheet by improving all of our debt metrics and increasing our pool of unencumbered properties to nearly $3 billion.Cecilia will now elaborate on our financial results for 2017, and Tom will follow with an overview of our operating results. I'll finish with our outlook for 2018. So over to Cecilia.
Good morning. In summarizing 2017 from a financial perspective, I'd like to highlight 2 things: one, the strong organic growth in our rental portfolio; and two, our ongoing commitment to the balance sheet. The most important indicator of organic growth is same-asset NOI, which came in as we forecast for 2017. It increased by 6.2% in the fourth quarter and 5.2% for the year as a whole. The growth was driven by occupancy gain and rent growth, primarily in Montréal and Toronto. Tom will elaborate on this further in a moment.Moving to the balance sheet. Our debt metrics remained strong and among the best across Canadian REITs. At year-end, our debt ratio of 33.8% was well within our targeted range. Our interest coverage ratio of 2.8x was at the low end of our targeted range, and we expect it to improve in 2018. Our net debt to EBITDA of 7.5x was within our targeted range, and we also expect it to improve in 2018. The improvement in our debt metrics in 2017 was primarily a result of the $300 million bought deal we completed in August. It allowed us to finish the year with only $25 million drawn on our unsecured line, maximizing our liquidity as we entered 2018. Our pool of unencumbered properties reached $2.9 billion at year-end. This was 27% higher than year-end 2016, with the result that 52% of our properties are now unencumbered. We also expect this to improve in 2018.Looking forward to financial results for 2018, we expect same-asset NOI growth in the rental portfolio to continue. Our internal forecast puts it solidly in the mid-single-digit range. Expected to be in the low-single-digit range, FFO-per-unit growth will be tempered in 2018 by the large full-year vacancies at 425 Viger in Montréal and the Lougheed in Calgary that are necessary as we redevelop these buildings with a view to adding value. It will also be tempered slightly by the sale of our Winnipeg and Québec City portfolios late last year. AFFO-per-unit growth, on the other hand, is expected to be in the high-single-digit range, which will help drive our AFFO payout ratio down from 2017 levels. The added growth in AFFO derived in large part from the fact that straight-line rent in 2018 will decline to approximately half of the 2017 balance, materially reducing the amount that is deducted from FFO to get to AFFO.Despite the rising interest rate environment, we are expecting interest expense levels in 2018 to be consistent with 2017.G&A is expected to be modestly higher than 2017. The occupancy assumption of 95% to 96% by year-end 2018 is driven by Montréal achieving occupancy of 97% and Calgary occupancy of 87%.In terms of quarterly run rates, assuming our capital needs in 2018 are financed with our operating line, FFO per unit in Q1 is expected to be consistent with Q4 2017, with modest growth in each subsequent quarter.I will now pass the call to Tom for a discussion of our leasing and operating activities.
Thank you, Cecilia. I agree that organic growth in our rental portfolio was one of the principal highlights for 2017. It was driven by successful leasing activity that boosted both occupancy and net rent levels over the course of the year. Our leasing team completed transactions totaling 586,000 square feet in Q4 and 2.3 million square feet for the year as a whole. We completed 364 separate leasing transactions in 2017, which essentially means we completed a deal a day.We saw steady gains to our leased and occupied areas in each of the first 3 quarters of 2017, and Q4 was no different. Demand for Allied work space in each of our 3 operating regions strengthened in 2017, and we were able to move the needle nicely. At the end of 2017, our leased area was 95.2%, up 3.3% over the year, and our occupied area was 93.5%, up 4.8% over the course of the year.Also encouraging was the continued increase on net rents on space renewed or replaced in 2017. Largely due to significant increases in rents achieved in the Toronto market, we achieved a 17.8% increase in rental rates for the affected space. Reviewing our lease expiry schedule for 2018, we expect healthy increases will continue, as approximately 60% of lease maturities for the year are in our central region, where the rent increases are most significant.Moving from east to west, I will provide a brief leasing update on the 4 major markets in which we operate and conclude with an update on our mission-critical facilities. Montréal remained very active in Q4 in our leased area, ending at 94.5%, up 3.3% from the beginning of the year. Interestingly, our large upgrade projects, which have been the focus of our attention in recent years, are all now substantially leased. De Gaspe, Cite Multimedia and Le Nordelec are each 96% leased, and 6300 Parc is 91% leased.Our leasing success can be partly attributed to our ability to accommodate large users. Our large floor plates and relatively modest gross rents have great appeal in the Montréal market. This trend continues into '18 with 5 large deals under negotiation in the Montréal portfolio as I speak. Three are with new tenants and 2 are for lease extensions and expansions. The unique ground-floor space at Nordelec is particularly active, with some of the units seeing multiple offers. The retail offering in Nordelec is also beginning to take shape, with a bank branch and a new fitness center planned, along with various restaurants.Construction is about to start on the redevelopment of 425 Viger. This building has large floor plates, high ceilings, and will be redeveloped to a high standard. On completion, the building will be approximately 300,000 square feet and will afford great branding opportunities for large users needing space in mid-2019. Good interest has been expressed so far, and we believe that our timing is excellent as we introduce this opportunity at a time with the urban Montréal market is clearly demonstrating strength.Moving to Toronto. Demand is strong. We're 98% leased in this market. We were very successful in 2017, fully preleasing our development with Westbank at 19 Duncan to Thomson Reuters, and fully preleasing our development with RioCan at King Portland Centre to Shopify and Indigo. The Well is our top leasing priority now, and we remain focused on securing a major tenant in 2018.In Calgary, we continued to lease small units and maintain leased area of just over 85%, with which we're pleased. We see the market slowly beginning to improve, with an increase in the number of tours in Q4. There's a sense that the market is stabilizing. After a few years of negative absorption, organizations seem now ready to make commitments for urban work space.This gradual market turn is happening at a time when we will soon be ready for tenant fit-up at TELUS Sky. Turnover is expected in Q4 this year. Accordingly, we have stepped up our marketing efforts and have just completed a series of presentations to senior brokers in Montréal, Toronto and Vancouver. The idea is to expose the project to a much wider audience. We are working with 3 separate tenants at the moment, for a total of 95,000 square feet, and remain confident that our unique architecture, relatively small floor plates and sustainability features will distinguish this building.We also intend to create model suites for the building for smaller users. Creating model suites is working well in Calgary, even in the commoditized downtown towers. Essentially, the model suites provide an opportunity for smaller tenants to move in without delay. We expect to see some progress at TELUS Sky in the coming months as well as improved leased area and occupancy numbers in our Calgary portfolio over the course of 2018.In Vancouver, we have little vacancy in our existing portfolio, and the market is solid. Together with our partner, Westbank, we have commenced preleasing 400 West Georgia and have interest in much of the building at this early stage. We have finalized an offer for 122,000 square feet and are working on the lease. We expect to be able to report additional preleasing success throughout the year on this unique project, which is scheduled for completion in 2020.Finally, turning to mission-critical facilities. We continue to work with 2 new potential tenants and 1 existing tenant for more space at our cloud-hosting facility at 250 Front in Toronto. Our ancillary rental revenue is billing, and we understand from our AWS Direct Connect partners that they are beginning to get traction as a result of ramping up sales efforts. This bodes well for a boost in cross-connect activity and increased ancillary rental revenue to Allied. We had suggested that this revenue would build over a 24-month period, and we appear to be on track. More on this revenue as we get deeper into 2018.I will now turn the call back to Mike.
Thank you, Tom. Looking forward, our outlook for 2018 is positive. We expect our operating, development and acquisition environments to be generally favorable over the course of the year. As Tom has just mentioned, we expect the urban leasing markets in Montréal, Toronto and Vancouver to be particularly strong.As Cecilia mentioned, our internal forecast contemplates solid mid-single-digit percentage growth in same-asset NOI, low-single-digit percentage growth in FFO per unit and high-single-digit percentage growth in AFFO per unit. We also expect continued growth in NAV per unit in 2018, with significant contribution from development completions, ongoing rent escalation and ongoing cap rate strength in Canada's major urban centers.There's an important element of our internal forecast that I've alluded to in past conference calls and want to reiterate explicitly in this one. While we fully expect to sustain the leasing momentum at our cloud-hosting facility in Toronto, we have, for the purposes of our internal forecast, assumed no additional lease-up in 2018. This is solely because of the significant positive impact that can flow from what is essentially a temporal estimate. We very much want to avoid creating inflating expectations at the beginning of the year based on such a temporal estimate. We'd very much prefer to revise our expectations following finalization of specific lease transactions, and that's what we'll do as appropriate.Our activity thus far in 2018 certainly supports our positive outlook. We continue to have deep confidence in and commitment to our strategy of consolidating and intensifying distinctive urban office space in Canada's major cities. We firmly believe that our strategy continues to be underpinned by the most important secular trends in Canadian real estate. We also firmly believe that we have the properties, the people and the platform necessary to execute our strategy for the ongoing benefit of unitholders.I hope this has been a useful and comprehensive update for you. We'd now be pleased to answer any questions that you may have.
Thank you.[Operator Instructions]We'll take the first question from the line of Mark Rothschild with Canaccord Genuity.
In reading your comments, Michael, it seems like you're saying, and I just want to make sure I understand, that even if there's some increase -- a further increase, possibly -- in interest rates, you expect cap rates for your types of properties to remain low and at current levels. Is that an accurate reading of what you're saying, and maybe if you'd expand on what your thoughts are on the types of properties you own with the demand for properties now?
I do, and I think you summarized it perfectly, Mark. Notwithstanding the rise in interest rates that has and will occur over the course of 2018, I expect cap rates to remain low in the urban core of Toronto, Montréal and Vancouver. In fact, they are probably under some downward pressure in the city of Montréal because they have been higher in the past 24 months than the cap rates in Toronto and Vancouver. There was a transaction late last year with respect to an asset that falls squarely within our investment and operating focus that would suggest the cap rates have moved down considerably there. So I do expect the cap rates to remain low in the markets I've mentioned. I wouldn't be prepared to suggest that they will compress further, but I do think they will hold because the demand for well-located urban real estate in those 3 cities in particular exceeds the supply by a country mile.
Okay, great, thanks. And then that leads me into my other question. In regards to Montréal, clearly, you've had some good rent growth and same-property NOI growth in Toronto. There's been more and more talk about improving fundamentals in Montréal. Do you expect to see strong rent growth in Montréal over the coming years?
I probably wouldn't be that emphatic. I think in the last few conference calls, we've suggested that most of the rent growth would come from Toronto and relatively little rent growth in Montréal, but that we would see good absorption in Montréal. I would modify that a little bit today and say we continue to expect to see good absorption in Montréal and perhaps modest rent growth, but I wouldn't expect, and we're not expecting or forecasting, material rent growth in the city of Montréal at this point in time, although we're very confident about lease-up in Montréal. But we're not expecting material rent growth. Certainly nothing comparable to what we're seeing in the city of Toronto.
We'll now take our next question from the line of Fred Blondeau with Echelon Wealth Partners.
Maybe -- first, maybe a quick question for Cecilia. The January expense came in above our estimates, and I was wondering if you could give us more details on this, and what would be a good run rate. I remember last quarter you mentioned that the -- Mike, you mentioned the volatility of the G&A. Maybe you could explain the dynamic there.
Yes. In Q4, we had the final bonus pay-outs, which came in higher than what was accrued. That's what spiked it. So you'll see the G&A will be a bit less in Q1, but we expect in the year as a whole for it to be roughly in line with 2017.
Okay. Okay, fair enough. And Michael, maybe, as you mentioned, your core GTA market remains extremely tight, and new supply is picking up a bit, and now it's between -- call it between 6 and 7 million square feet. And is there a level where you would feel risk is increasing significantly, or you feel like demand's so strong that you don't see an emerging risk for at least -- call it the next 24 months?
Yes, I see the potential for risk developing if the market begins to create supply meaningfully in excess of the demand. Right now, however, I believe the potential supply and the demand are in good balance, so my expectation is, over the next 24 to 36 months, we will see the industry supply a wave of demand that clearly exceeds the current level of supply. I think there is reason to be cautiously optimistic that the market won't oversupply the demand because of the nature of the ownership in the downtown core. It tends to be very accountable entities, either public entities like Allied or pension funds like Cadillac Fairview and Oxford, who are creating the new supply, and I don't believe they will build any material amount of space on spec. So it would be, really, the increase in spec building that would be a signal we should all be concerned about. And other than 16 York in Toronto, there isn't, to my knowledge, a single spec building underway. And given Cadillac's expertise and tenant relationships, I don't think 16 York will be a spec building for very long at all. So I don't see anything to be concerned about yet, but I think the #1 signal would be a material increase in spec construction. Then I think we'd all have cause for concern.
We'll now take our next question from the line of Jonathan Kelcher with TD Securities.
First question is just on the same-property NOI assumptions. Could you maybe walk through what some of those assumptions were to get to the mid-single digit?
I will -- I'm now hearing an echo in my phone system, guys, so apologies, but I will try to answer that question helpfully. We know our same-asset NOI will be soft in Calgary. We know it will be very strong in Montréal, primarily because of occupancy gain, and we know it will be relatively strong in Toronto, primarily because of rent growth. So Toronto and Montréal will more than offset any softness that we experience in the city of Calgary, and I think Vancouver's probably fine. It's probably net positive. So we are quite confident in our ability to deliver solid mid-single-digit percentage growth in same-asset NOI in 2018, and I suppose the biggest achievement necessary to deliver that would be continued lease-up in Montréal, about which we're very confident.
Okay. I guess you're assuming the 19% lift on market rents versus expiring rents? That would go into the same-asset NOI?
It will -- it did contribute to it in 2017, and it -- we expect it to continue to contribute in 2018.
Okay. And then just turning -- good to hear that Nordelec's 96% full. That asset's also on your development page. Does that -- is development there something you're starting to look at?
It's a good question. There's a component of the larger complex, Jonathan, as you mentioned, that is in the development portfolio. It's actually 255,000 square feet of residential density, if I remember correctly, and we're carrying it as a PUD rather than as part of the rental portfolio for obvious reasons. And the answer to your question is yes[Audio Gap]very strong leasing momentum we've been able to achieve at Nordelec. We are now much more actively considering how best to utilize or take advantage of that opportunity. There have been a number of suggested opportunities to us by third parties, some wanting to create condominium space, some wanting to create rental residential space and some even wanting to create hotel space. We haven't looked at those opportunities seriously before now because we wanted to get the core rental portfolio substantially leased, but now that we're clearly there or on the verge of being there, we're going to actively explore taking advantage of that development opportunity. And I would have to say that we're leaning in favor of doing it ourselves rather than having a partner do it with us because of the level of confidence we have in the asset and in our Montréal team.
Your next question will come from the line of Mark -- or Mike Markidis with Desjardins.
Cecilia, do you happen to have the NOI contribution in 4Q for the Québec City and Winnipeg assets at your fingertips?
It's about $1.5 million for -- yeah.
For the full quarter? Okay. Moving on to your announcement…
Oh, sorry, Mike. Mike, sorry. That's a full year number.
That's a full year 2017 contribution?
Yes. So just -- I mean, they were disposed of in the last couple of weeks of December, so Q4 I would literally just take a quarter of it, and that'll be close enough.
Okay, fair enough, thank you. Just with respect to the announcement with respect to The Well and the Enwave deep water cooling system, does that add any -- can you just walk us through that agreement in more detail? Does that add any, I guess, CapEx in your plans, first of all, and then second of all, aside from the efficiency, lower op cost, potentially, for your tenants, is there any other financial benefit to Allied down the road from that arrangement?
Yes, good question, Mike. The answer to the first part of the question is there's no additional capital outlay on the part of the partners in The Well, Allied and RioCan. There is a very material financial benefit to Allied and RioCan, however, inasmuch as we're effectively leasing space in the underground structure to Enwave for a term of 30 years at a reasonable level of rent that escalates, I think, by 2% a year in each year of the term. So it will represent rental revenue to The Well on an ongoing basis in addition to enabling The Well to avail itself of the more sustainable energy available through Enwave. So it effectively is a lease transaction between Allied/RioCan as co-owners of The Well and Enwave as the utility.
Okay. And I didn't have a chance to look at the sequential change, but that extra lease income, has that increased your expected yield on the development, or?
It is certainly additive to what we expected prior to the transaction with The Well, yes.
Okay. And maybe just following on that point, I know The Well is obviously a big priority for you guys in 2018. Perhaps you could just give us a sense of the traffic that you've experienced lately, and maybe it's a little too early to tell, but has this announcement with Enwave resulted in any increased activity?
Enwave hasn't really produced any extra activity. We've been very busy touring potential tenants through our presentation center on The Well. We've had probably 30 visits last year. We've got more planned in the coming weeks and months. Some of the visits have been repeat visits. There are a few tenants that we're getting very close to. So we're very buoyant about what's happening at The Well and our prospects for landing a large tenant over the course of 2018.
Okay. Last one here from me before I turn it back. Cecilia, I think around $270 million of total CapEx all-in last year; what ballpark should we thinking about for 2018?
In 2018, in terms of development activity, I mean, I think the way that we look at it is we plan to spend about $1 billion in the next 5 years on development. Roughly half of that will be on The Well. And then it's primarily in the next 3 years, with the last 2 years being the lesser spending on development. So I think you can use an average based on that, but I think in 2018 we're looking at about between $200 million and $250 million of spend on development.
$200 million to $250 million on development. Okay. And just with respect to the -- there was a fairly significant amount in the rental pool as well in 2017. Are you expecting that run rate to normalize somewhat or come down in 2018, just given the fact that de Gaspé is now finished with the ongoing upgrade?
Yes, we do expect that -- sorry, Mike. Yes, we do expect that to come down a bit in 2018 from 2017 levels.
We'll now take our next question from the line of Mario Saric with Scotiabank.
Maybe give you more of a granular question, I suppose. Looking at your mark to market on Page 22 of the annual report where you highlight your in-place versus the estimated market rent. I think Jonathan alluded to the spread earlier in the call; it's about 19% this quarter. In Q4, it was roughly about 6% for 2018 expiries. The square footage expiry [ equaled ] a bit less. So presumably, it reflects the assets that were sold in Québec City and in Winnipeg that may have had a smaller mark to market. But in terms of just trying to get an understanding on an apples-to-apples basis what your thoughts were in terms of the market rent growth in your markets in Q4 and how that contributed to the pretty substantial increase in that 2018 expected mark to market.
Intuitively, Mario, it would almost certainly be our estimation with respect to the leases that expire in our Toronto portfolio in 2018. And I think it's probably reflected in the regional breakdown. You can take Central Canada as a very good proxy, obviously, for Toronto, and there you see rents going from in-place $20.58 to estimated market $28.64. That's a really significant increase. And we are -- that is, of course, our best estimate, but I think we're very confident in our ability to achieve that level of increase on expiring leases in the Toronto portfolio.
Okay. And then the guidance presumably reflects the $28.64, i.e., you're not reflecting additional market rent growth expected over the course of 2018, which could be a plausible scenario given how tight the market is today.
That is correct. I mean, the $28.64 is an estimate, if you will, late last year or early this year as to what the market is now, and it is possible the market could move positively from that estimate over the course of 2018 itself. And as Tom pointed out, we're 98% leased. There's not a lot of frictional vacancy there. And so that is a possibility. Because you're right, the estimates are all current estimates, even the ones that are further forward in time. They're simply what we estimate the rate to be for the applicable piece of space today. So yes, there could be both upside and downside, I suppose, in those estimates.
Understood. Okay. And then just on 250 Front, the disclosed normalized LQA NOI was up about $1.5 million quarter-over-quarter this quarter. Does any of that increase relate to the cloud connection fees? Or are you still not recording much revenue on that front?
A virtually nominal amount, Mario, would be reflected in that number. So that is only going to start to grow materially over the course of 2018. So it is something that could alter, if you will, our LQA as 2018 unfolds, or improve it, maybe put differently. But there's very little baked into the Q4 LQA.
Understood. Okay. My last question just comes to your IFRS NAV. It was up about 80 basis points quarter-over-quarter on a per-unit basis. The cap rate came down a pretty healthy 14 basis points quarter-over-quarter, which, all else equal, would suggest maybe a slightly bigger increase in your IFRS NAV per unit. So I was just wondering if you can maybe give us some color in terms of some of the moving parts on a quarter-over-quarter basis that drove the modest increase in the NAV.
Yes, that was driven by our assets in Montréal and Toronto, Mario. When Cushman -- as you know, Cushman does a full appraisal every quarter, and they were aligning the properties in our portfolio within those 2 cities with what they were seeing in the market. So...
Okay. And then within the IFRS NAV as of Q4, were there any meaningful NOI forecast adjustments on a quarter-over-quarter basis?
No, no.
We'll now take our next question from the line of Chris Couprie with CIBC.
I had a quick question on The Well. You're currently expecting to transfer to the rental portfolio in the third quarter of 2021. In terms of getting a prelease commitment, how does that -- the timing of that affect your delivery date?
The way to think about it, Chris, I think, is this: There are 18 months that will elapse before we get back to grade, that is to say, before the underground structure that we're currently excavating for and will be building gets back to grade. We want to have an appropriate level of preleasing achieved by that point in time. In theory, if we were unsuccessful in preleasing at that -- within that 18-month period, we could temporarily cap the office tower on the corner and keep going with everything else. I think that's a theoretical possibility only. We are very confident that within the next 18 months we will secure sufficient preleasing to warrant commitment to the construction of the tower on the corner. So the only thing, I think, that can really delay the transition from PUD to the rental portfolio would be construction delay. And we are in the riskiest part of construction now, which is always the below-grade construction. It's going well, and there have not been any rude surprises to date. So we're pretty confident about that estimate in terms of when The Well will transition from PUD to the rental portfolio. And I think if we were unsuccessful in achieving preleasing over the next 15 months, that would be the only thing that could delay it. But as I say, our sincere view at this point in time, given the level of demand in the marketplace and the amount of activity that we've been addressing already, that we will, indeed, be preleased sufficiently within that period. I would even go further. Tom and I and the leasing team are determined to achieve a level of preleasing sufficient to commit to the project this year. There's...
Got it. This one is maybe for Cecilia. The jump in nonrecurring NOI in the quarter, can you comment on what that was?
That was primarily lease termination fees, and it didn't -- it only affected the quarter. Yes.
Okay. And maybe another one for you. Financing. What type of rates are you seeing on this financing?
In terms of mortgages or...
Yes, yes.
We actually haven't done any mortgages, to be honest with you, in recent years.
Any -- okay, so any feel for what the market would be for you today in terms of a rate?
I think the last quote I got on a mortgage, which would have been about a month ago, a 10-year mortgage on a fully leased-up asset in Toronto, I believe I was quoted in the high 3s, low 4s. So let's say 4% for a 10-year mortgage.
Okay. And is that generally the intention is to go much longer on renewals?
No. Well, we plan to pay off all the mortgages that come due in 2018.
Oh, and everything go unencumbered?
For 2018, certainly. And then we'll reevaluate for 2019 going forward.
Okay, great. And maybe just on the acquisitions. I know you did a few tuck-ins year-to-date. And any commentary on the just overall acquisition outlook from your perspective?
As I mentioned, it is positive. We're seeing opportunities that fit our investments and operating focus. We're seeing opportunities that are generally stabilized as opposed to low-yielding value-add opportunities. And of course, what we're targeting, what we're striving for, are stabilized assets with accretive yields that fit our investment and operating focus, and we're fortunate that our cost of capital is such that we can compete in the market. And I think we have better-than-normal access to opportunities because probably 70% of what we buy, we buy off market. So we're pleased with the level of opportunity we've been seeing. And unlike last year and the year before where we started the year thinking the acquisition environment was unfavorable, I would say we're starting this year believing that the acquisition environment is favorable. And part of that, of course, is informed by the success we enjoyed in acquisitions in '17 and '16. We exceeded our own expectations very materially there. But we are seeing appropriate opportunities for Allied in our target markets, which could make it a favorable acquisition environment for us.
And your FFO growth outlook obviously doesn't contemplate any acquisitions. Correct?
It does not.
[Operator Instructions] We'll now take the next question from the line of Heather Kirk with BMO Capital Markets.
Given the strength in the market that you've seen on the rental front and the progress you've made with lease-up of various projects, is there any thought given to actually accelerating some of the things that you have in the pipeline, either by bringing in a partner or just moving things forward more quickly?
I'm trying to think of the right way to answer that because it's a good question. The answer is yes. We have so many outstanding opportunities, both in Downtown East and Downtown West Toronto, that we are thinking systematically about accelerating some of the opportunities that are ready for exploitation as we speak or ready for production, if you will, as we speak. Most of them, interestingly enough, are opportunities that are solely owned by Allied. And I don't think we would need or want a partner in order to expedite those particular opportunities. All that being said, Heather, we are determined to achieve the preleasing we need to achieve at The Well as a top priority. So frankly, we'll be reluctant in the early part of 2018 to advance another project until we get a respectable level of preleasing achieved at The Well. We know from experience that once the preleasing is achieved, the follow-on leasing will be very rapid. We'll be able to accommodate smaller requirements and we'll be able to, in a way, reduce the leasing risk with that relatively large development materially. So I guess the answer is a qualified yes. There are a couple of projects in Downtown West that I would love to initiate, and we're quietly doing the preparation necessary for that, but we're not going to pull a trigger until we've achieved material preleasing at The Well. I think we owe that to ourselves, we owe that to our partner, and we don't want to get ahead of ourselves.
And in terms of also getting back to sort of the market strengths, what are your thoughts about where yields are trending? And does some of this strength in terms of the widening spread between your in-place rents and market? How does that change your view about the yields you might be able to achieve? And do you think there's any room for those to come up?
It's a really good question. We have not inflated our yield expectations on any projects currently underway. I think what it does do for us, though, is give us a great deal more confidence in our yield expectations with respect to developments that we've committed to. And I believe, in the case of The Well, we're going to be establishing our yield expectation in conjunction with our first quarter results. We haven't done that yet, Heather, as you know. But it certainly does, if you will, bolster our confidence in the net effect of rent levels we expect it to achieve. But we have not boosted any of our yield expectations yet based on the rent growth that is very, very evident in the Toronto marketplace.
We will now take our next question from the line of Howard Leung with Veritas Investment Research.
Just wanted to touch back on The Well again and just ask about the flavor of tenant that you're looking for, for the preleasing. Has that changed over the past year? Is it still the same type? Would it be more tech-focused? Just want to get a sense of that there.
Well, I'll have Tom comment, because he's much more directly involved than I am, but I'm sensing that the tech, advertising, media and information tenants are the ones that are most likely to land at The Well. I think financial service tenants, Tom, have been looking at it, but I think they tend to revert to opportunities on the PATH. Would you agree?
Yes. We've had a real mix of tenants looking at The Well: financial services, insurance, professional services. But I'd say that most of the interest is from the TAMI tenants. The few tenants that we're working closely with now happen to be in the technology business. It's not a surprise.
Yes, no, that makes...
Yes. And I think that the reason for that, Howard, is interesting: Technology tenants are much more interested in finding an amenity-rich area for their employees, which favors The Well. Financial services tenants -- and these are generalizations, of course -- are much more motivated by connectivity to the PATH. And if we look at QRC West as an example, if we look at King Portland Centre as an example, they have ultimately attracted Allied's conventional TAMI tenant base. And the reason for that is they've provided not only highly differentiated office space but in amenity-rich neighborhoods that the employee base of these kind of organizations favor. So I expect that to play out the same way at The Well, and I'll be very happy when it does. I think also at The Well we'll be able to achieve a really good tenant composition. We won't have any one tenant that utterly dominates the development the way CIBC would, for example, at the Ivanhoe Cambridge development on Bay Street. Not that that's a bad thing, but we will have a better tenant composition at The Well, which in the long run is a good thing.
We're likely to have many, many tenants in the office component of The Well.
Exactly.
The floor plates taper to a very small size, so we'll likely see many office tenants in the project.
Okay. No, that makes sense. And is the other factor kind of the proximity to, I guess, Union Station, given there's a lot of tenants that look for a faster or a quicker way to get there because of their commuters?
It's certainly relevant for all tenants, is the proximity to Union Station, or the PATH, or the connectivity to the intermodal transportation system. So it's a relevant factor and always will be. And the kind of tenants that locate in Allied properties are tenants who put more emphasis on amenity-rich neighborhoods than that particular connectivity, and the kind that are attracted, say, to the South Core are those who obviously put much more emphasis on connectivity to the intermodal transportation system.
Okay, makes sense. Just wanted to touch on, also, the sublease disclosure that you have in the MD&A: Just noticed that Montréal just ticked up a bit quarter-over-quarter. Is there anything there, or just kind of regular sublease activity?
Yes, the Montréal sublease activity, it's still a modest portion of our total size in that marketplace. And it's comprised of a number of smaller tenants. It's not one large tenant. Calgary, the sublease area increased dramatically, but it's really 1 tenant that dominated that. So in Toronto, we also spiked a little, but that's a fact of our tenants who would like to stay with us have no space in our portfolio to grow, so they've had to put their space on the market for sublease. So we're not concerned at all about the amount of sublease space we have in any market.
Your next question will come from the line of Mario Saric with Scotiabank.
Hi, sorry. One more follow-up question on just the cap rate environment in Montréal. And Michael, you alluded to 1 transaction that perhaps indicates cap rates have come down or could come down further. To the extent that you can, how comparable was that transacted asset to your broader portfolio in Montréal, and was it a value-add opportunity, or was it stabilized, and was it going in the cap rate, the way to think about the transaction, and what rate...
Yes. I don't know if it has been announced publically, Mario. I don't know if it's closed or if it's been announced, so I certainly don't want to toot anybody else's horn, but I do know this: It is, for all practical purposes, a fully stabilized opportunity. There is a value-add component, but it would be something I would characterize as being very much down the road as opposed to imminent, and relatively inconsequential given the total value of the asset. So I look upon it as a very good example of what a stabilized asset will trade for in Montréal. It was well-tenanted, good lease maturity schedule, and the cap rate is very low, and I think it is a direct comparable for Allied's portfolio in the city of Montréal, especially the assets in Mile End. So I would expect it to have some impact on our IFRS values once the transaction closes and becomes part of the public record.
We'll now take the next question from the line of Matt Kornack with National Bank Financial.
Just a quick, broad question. I was wondering if you've seen any change in the way entities are looking at development, given what's gone on or what is anticipated to go on at the OMB. Is that impacting sort of the density you guys are going for, and what is your view on the King West neighborhood, whether or not it will become less favorable to develop there, or you'll need better sort of relations with the neighborhood itself?
Here's what I think, Matt, and you've always got to discount what I say because I see the world optimistically and not otherwise, but in my view, what the changes are going to precipitate is a decline in the poor condominium development that has afflicted Downtown East and Downtown West for some time now. So the more marginal developers, if I can characterize them that way, are going to be much less successful in creating density and securing rapid approvals than they have been in the past by simply running straight to the OMB. I actually think that's a good thing. I don't believe it will impede a respected developer like Allied in any way whatsoever. We have always worked with the city. We have always worked with the surrounding communities. We have only once gone to the OMB, and that was almost on a consent basis with the city to address a technicality. So I don't expect it to harm the high-caliber developers who are building for their own account, who are building, if you will, to own the asset on an ongoing basis. I do think it's going to put a real brake on the ability of merchant developers to do what they've done in the past, and I think that's a great thing. And I want to say one more thing just in that regard: There are some excellent condominium developers in Downtown East and Downtown West who have done really good work and who have done it collaboratively with the community and the city. There are some who are terrible, in my opinion, and they're the ones who are going to be hamstrung by the regulatory changes that are taking effect in many different ways downtown.
A fair point, and I hear you. I think there's been some destruction of streetscapes in some cases, but some additions in others, so agree there. And then just quickly on the Viger asset: interesting renderings. It looks like a neat addition you're making to that. Any progress on leasing above and beyond sort of the soft indications I think you had at one point?
Nothing to report. We're just getting going with our marketing materials on that project right now, and hopefully we'll have some more to report later this year, but there's been lots of people asking about it, a lot of brokers are calling about it, tenants are interested in it, but we don't have anything to report just yet.
And in your view, would it be a similar-type tenancy that you've been attracting to Nordelec, or -- and remind me if I'm wrong here, but is the tenant base in Cite Multimedia similar to Nordelec, or are they different? And which type do you think makes the most sense for Viger?
There is crossover between the types of tenants at Nordelec and at Cite Multimedia, and Viger, though, I think could attract any kind of tenant. It -- the location could attract financial services, professional services, as well as tech tenants. It has large floor plates, which the market likes, and it's a great spot for a large organization to brand themselves.
Makes sense. And Cecilia, I may have missed this in the public disclosure, but you mentioned that there's an impact as a result of the property being out of the NOI pool, but is it not being reclassified as a development at this point, or because it's more of an intensification, is it staying in the IPP?
It'll be moved out of the rental portfolio on January 1, 2018. The last day that Desjardins had it under legal agreement was December 31, 2017. So it'll be fully out of the rental portfolio starting January 1 and for the full year 2018.
Okay. So you'll yield -- get a little bit of cash up on capitalized interest, but otherwise, you'll lose the top line revenues subscribed with it.
Correct, correct. Exactly.
And Mr. Emory, there are no further questions at this time. I'd like to turn the conference back to you for any additional or closing remarks.
Thanks. Thanks, everybody, for participating in our conference call. We'll certainly keep you apprised of our progress going forward through the year, and we look forward to speaking again in May when we report our Q1 results. Thank you and have a good day.
Ladies and gentlemen, this concludes today's call. Thank you for your participation and you may now disconnect your lines.