Allied Properties Real Estate Investment Trust

TSX:AP.UN

Thank you for standing by. My name is Carly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Allied Properties First Quarter 2025 Conference Call. [Operator Instructions]



I would now like to turn the conference over to Cecilia Williams, President and CEO. You may begin.

Good morning, and welcome to our Q1 conference call. I'll highlight our achievements so far in 2025 and what we're focused on for the balance of the year. Nan will do the same from a financial perspective. J.P. will outline the positive leasing momentum 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 2024 annual report. Material assumptions underpinning any forward-looking statements we make include those described under forward-looking statements in our most recent quarterly report.



We remain focused on what we can control to create long-term value. That includes 3 things. Number one, leasing and operational results. Two, completing development and upgrade projects; and three, strengthening the balance sheet. The quarter-end results reflect the resilience of our portfolio and operating platform, as we've made progress in these 3 areas despite the headwinds.



First, on leasing and operational results. Highlights include positive same-asset NOI, improved retention to 75%, and a stable lease area supported by encouraging levels of tour activity. J.P. will elaborate on that by city. While it's unclear what the short-term impact of the economic uncertainty will be on the demand for urban office space, we're confident in our position to benefit from the long-term positive impact on Canadian cities.



Second, we make progress on our development and upgrade activity. At M4 in Vancouver, users are fixturing their space. At Toronto House, we've successfully launched our in-house rental residential operating platform. At King Toronto, the glazing is progressing, highlighting the distinctiveness of the project. There, we've secured a long-term lease with a global retailer that will enrich the user experience across King West Village. All the development and upgrade projects currently underway will be completed by the end of next year.



Last, but certainly not least, our balance sheet. We're focused on strengthening it, keeping ample liquidity, and improving our debt metrics. We're pleased with our progress so far this year, with $850 million of refinancing resulting in negligible impact on our annual interest expense. Our disposition program of noncore assets is progressing well, as private market valuations remain robust, and our IFRS values continue to be validated.



We closed on one asset yesterday and have 2 more under contract. All proceeds will be allocated to debt reduction as part of our path to get under 10x net debt to EBITDA by the end of the year. We've also improved our debt profile, taking short-term variable rate debt and replacing it with longer-term fixed rate debt.



Nan will now elaborate on our financial results.

Thank you, Cecilia. Good morning, everyone. We're pleased with our performance this quarter. I'll highlight some of the key metrics.



Compared to the first quarter of 2024, our operating income grew by 3.5%, and same asset NOI increased by 1.5%. Average in-place net rent per occupied square foot for the first quarter ended at $25.30, up 5% from the end of the comparable quarter. These metrics highlight the strength and resilience of our portfolio and the continued demand for our urban workspace.



Our retention rate for the quarter increased to our historical level of 75%. Our occupied and leased area remains stable. These metrics reflect an encouraging start to the year, and J.P. will elaborate more on these shortly. We made great progress on our financing initiatives, having issued $850 million in unsecured debentures, bringing our total issuance in the last 6 months to $1.1 billion. Moody's withdrew the unsolicited rating of our debentures after our third issuance.



Consequently, the spreads on our bonds in the secondary market tightened by 10 to 15 basis points. Additionally, we'll see an immediate 25 basis point savings on our unsecured facility. We use these proceeds to proactively address our upcoming maturities. We repaid the construction facility on 19 Duncan, which was maturing in August, the $200 million Series C Debentures, which was maturing in April, and the $400 million term loan, which was coming due in October. These transactions improved our unencumbered properties from 82.7% to 87.7%, and allowed us to take advantage of opportunities in the market to address near-term maturities.



In our view, this is a prudent course of action given the current macroeconomic volatility. Our timing of this issuance could not have been better. Subsequent to the loss issuance, the cost of a floating rate debenture increased by 35 basis points, while a fixed rate debenture increased by 30 basis points. Ultimately, we refinanced approximately 20% of our outstanding debt, and saw only a marginal increase in our annual interest expense of approximately $1 million.



We continue to proactively address our remaining maturities and have completed the refinancing of the construction facility at 20 Bright Rock with our partner. We are currently reviewing our options for the construction facility on M4 in Vancouver, which matured in December of this year. Our liquidity position remains strong, with over $700 million available on our unsecured facility.



Our disposition program continues as expected, and we will utilize the proceeds to repay debt. We have 3 assets currently under contract for $50 million, and expect these to close over the course of the second quarter.



Strengthening our balance sheet and deleveraging is an important objective for us, and we are fully committed to achieving this.



As iterated during our fourth quarter conference call, we anticipated a temporary increase in our net debt to EBITDA in Q1. However, we are targeting to bring our leverage ratio to below the 10x range by the end of 2025. We will achieve this through organic growth in the rental portfolio from leasing activity, rent commencement in our development portfolio, stabilization of our 2024 acquisition, and retiring debt with proceeds from the sale of non-core assets. We are mindful of the current macroeconomic uncertainties. However, we remain confident that, we will achieve these targets. Thank you, everyone.



Over to you, J.P.

Thanks, Nan. In Q1, we continue to observe strong conversion rates, robust expansion activity, and a shift towards larger space requirements among prospective users despite the ongoing disruption in global trade.



Our occupied and leased area remains stable and outperformed each of the urban submarkets in which we operate, except for Vancouver, where we are working to address vacancy that was acquired last year. We remain extremely encouraged by the number of existing users in our portfolio that continue to require more space.



In Q1, 50,000 square feet of new leasing activity represented expansion in line with the previous quarter. We are also encouraged by our improving retention rate, which was back in line with our historical level of 75%.



In Q1, the average rental rate was stable when comparing the ending to starting base rent, and up 6.3% when comparing average to average. The observed moderation in rental rate growth upon renewal is in line with our expectations and reflects the anticipated impact of increased supply, a message we have been communicating for several years.



Tour activity continues to be strong. Tour activity in our rental portfolio was up 10% from 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 933,000 square feet of leasing activity under negotiation, or at the prospect stage, including 570,000 square feet of new leasing activity.



In Q1, we completed 507,000 square feet of leasing activity, including 246,000 square feet of new leasing, resulting in a 43% conversion rate. As of today, we have 1.3 million square feet of leasing activity under negotiation, or at the prospect stage split evenly between new leasing and renewals, representing a 39% increase in activity compared to the end of last quarter.



I will now provide a brief overview of each market. In Montreal, we continue to observe strong demand from users with larger mandates. There are currently 7 prospective groups, with mandates greater than 50,000 square feet considering space in our portfolio.



Technology and professional services firms are the 2 most active sectors, and we're seeing an increase in demand from technology users headquartered in France as evidenced through recent leasing activity.



Most of our vacancy in Montreal is located at La Cité, a portfolio of assets located between Old Montreal and Griffintown, comprising eight buildings totaling more than 1.1 million square feet. La Cité offers 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.



There are currently 8 prospective groups with mandates between 20,000 and 150,000 square feet considering lease options at La Cité. These prospects represent the technology, professional services and medical sectors.



In Toronto and Kitchener, we continue to see an increase in demand from prospective users with larger space requirements. There are presently 31 users with mandates in excess of 10,000 square feet touring our portfolio and we are currently in discussions with 7 existing users looking to expand, representing 50,000 square feet of new leasing opportunity.



In Q1, we experienced an increase in demand from AI-based technology users and life science users. In Calgary, we are seeing an increase in the size of mandates in the market as there are currently 11 prospective organizations with requirements in excess of 10,000 square feet evaluating options in our portfolio.



We are also engaged in discussions with 12 existing users looking to expand, representing 40,000 square feet of new leasing opportunity. Lastly, we continue to observe an increase in near-term demand from users in buildings slated for conversion.



Vancouver remains the strongest leasing market in Canada. There are presently 10 users with mandates between 10,000 and 50,000 square feet evaluating space in our portfolio. We are also engaged in discussions with four existing users looking to expand, representing 30,000 square feet of leasing activity.



While the ongoing disruption in global trade may impact leasing activity in the near-term, we remain confident in our ability to outperform the market in each city due to our concentration of distinctive urban workspace in amenity-rich urban environments and the strength of our operating platform, as validated by our Net Promoter Score, which increased 30% year-over-year and is 150% higher than our peer average.



I will now turn the call back to Cecilia.

Thanks, J.P.



Before we turn to questions, I want to reiterate my confidence in our ability to weather the current economic uncertainty and create long-term value. First, we own and operate an irreplaceable distinctive urban portfolio. Second, we have a strong integrated team running that portfolio. Third, we're successfully selling non-core assets, which sharpens our operating focus, strengthens our balance sheet, and enhances portfolio quality.



This is all in the context of strong Canadian cities. They matter more than ever as hubs of education, innovation, culture, and opportunity. And urban workspace matters more than ever as knowledge-based organizations increasingly value the attraction and retention of talent and the importance of having their team physically together in environments that facilitate collaboration and culture.



For all of these reasons, our team is focused, patient, and confident that in time, our fundamentals will be recognized. We'd now be pleased to answer any questions.

[Operator Instructions] Your first question comes from Jonathan Kelcher with TD Cohen.

First question, just on the touring, and I get Q1 was a pretty good quarter. I'm assuming that slowed down the first week of April. How has it trended the last couple of weeks, and how does it look going forward into May?

Jonathan, it hasn't slowed. In fact, April tour activity was in line with March and on trend to outpace Q1.

Okay, and I guess that's the same going forward into May?

Well, May 1, so we expect it to hold, yes.

Okay. And then secondly, just on the outlook, you did maintain the 4% decline in FFO, which is so about $2.09 a share. You also noted a slowdown in decision making. How much of a risk does that slowdown pose to you guys making that number? Do you have enough of a buffer built in there?

The slowdown in decision making, we've only observed that in very limited instances, Jonathan, so it's hard to tell now, you know, balancing the visibility that we have in terms of what we have in the leasing pipeline, which is up, I think, almost 40% from what J.P. said. We have 1.4 million square feet.



With balancing that, with really the uncertainty on the short-term impact on demand for urban office space, we didn't feel that we needed to change our outlook. We're still targeting all of the metrics that we stated a few months ago for the end of the year.

Okay. And I guess, you're a little bit ahead on interest costs, just given the rates you guys got on your financing?

We're very happy with the rates we achieved on the financing.

Okay. And then just lastly, on the renewal rate, 75%, obviously a very good start to the year, but you do have at least one decent-sized non-renewal in, I think, Q2, maybe Q3, but how does the balance of the year look like? Do you think you're going to hit the 75% historical number?

Our objective is to achieve a retention rate in line with our historical level, Jonathan.

Yes.

Your next question comes from Lorne Kalmar with Desjardins.

Maybe just going back to the kind of, I guess, maybe a caveat around the outlook for the targets, what, in your view, has to happen to kind of give you full confidence that you guys can meet these 2025 targets?

Well, Lorne, it's not really a caveat. We wanted to acknowledge the environment that we're operating in. We're still targeting to hit what we set out to achieve earlier this year by the end of the year. So, we're not changing what we expect to achieve by the end of the year. We just wanted to recognize the economic environment we're operating in.

Is there anything that you think, you know, realistically, as we sit here today, that, you know, that keeps you up at night, that really concerns you wouldn't be able to get to your targets?

No. We're focusing on what we can control. The things out of our control, we can't do much about. So, we're not expending energy on that.

I actually like that approach. Okay. And then, maybe just one quick question on the leasing activity this quarter. It looked like on the renewal side, the vault was fairly short, about 2.5 years. Could you guys maybe provide some color on that?

Lorne, it's just a function of a higher percentage of renewals in our Flex portfolio, where we will offer shorter terms.

Fair enough. Okay.

[Operator Instructions] Your next question comes from Mario Saric with Scotiabank.

Just coming back to kind of the observation of limited or very limited tenant discussions being extended, can you maybe just help us kind of quantify how, like, limited that is? Like, is it, like, one out of every 5 leases or discussions, 1 out of every 10? And are there any specific geographies or tenant types that are comprising that limited delay decision?

In Q1, we had 1, maybe 2, Mario, of the, I don't know, several dozen leases that we nailed down. So, it is limited, extremely limited at this stage.

Okay. And then, for the remainder of the year, in terms of known tenant vacancies, can you just remind us of what the total square footage maybe that was or wasn't included in your 90% plus target occupancy by the end of the year?

I think it's in our -- sorry, we have it in the MD&A. In the maturity -- the maturity table would capture what we have coming up.

It's about a million square feet for the remainder of the year, Mario.

But specifically in terms of known tenant vacancies, like, the tenants that you know are leaving this year?

Well, you can apply our historical renewal rate. So, we still expect to achieve, you know, in the mid-70%. So, you can apply that to the 1 million square feet that remain. That's what we're targeting to get to by the end of the year. So, I mean, it might be chunky quarter-over-quarter, but that would be a full year estimate.

Got it. Okay. And that tenant renewal ratio, was it similar in the non-FLEX portfolio versus the FLEX portfolio during Q1?

Sorry, can you repeat the question? We're having trouble. Sorry, it sounds kind of mumbly. We can't tell what you're asking exactly.

Okay. I'll try again. The 75% renewal ratio in the quarter, was it similar in the FLEX portfolio versus the non-FLEX portfolio?

Yes.

Okay. My last question, just in terms of the disposition, the $300 million for the year, you expressed confidence in hitting that. Are there any factors that could come into play where you would look to perhaps exceed the $300 million?

We're targeting $300 million, Mario, and we expect to hit that by the end of the year. That's all that we're going to be commenting on at this point.

And presumably, the $300 million would exclude monetization of 150 Georgia receivable?

Absolutely, yes.

Your next question comes from Matt Kornack with National Bank Financial.

Good morning, guys. Just quickly, with regards to some of the upgrade assets, particularly in Montreal, do you expect to make some progress on leasing at 1001 Robert-Bourassa or maybe 3575 St-Laurent? Or how should we think about, again, the view to getting to 90% by the end of the year on committed occupancy? Will that come from the upgrade portfolio or from filling vacancy in the existing properties?

So, we absolutely will be making progress on renting out 1001 and 3575. That won't impact our lease area, as the lease up there is taking place in spaces that are currently in the PUD portfolio. So, we'll make progress on those 2 assets, but we will be making progress with the 90% in the rental portfolio separately from 3575 and 1001.

Okay. And then with regards to the NOI contribution from development versus capitalized interest, has anything changed on that front in terms of the cadence or how should we think about, define the 2025 earnings impact, but I think there is more material impact in 2026 on some of those items.

Nothing has changed on that, Matt. We're progressing as expected and leasing away.

Your next question comes from Brad Sturges with Raymond James.

Appreciate all the commentary around leasing. I guess, given you're seeing an uptick in activity and sort of limited impact, I guess, based on the macro environment, would you expect any changes in the type of lease term that you're seeing your tenants pursue? Are you seeing more of a preference for shorter-term deals, or is it just really user-specific?



And then secondly, would you be pursuing early renewal with any of your larger tenants if you're looking towards 2026?

Brad, we're seeing requests for longer-terms amongst our new leasing pipeline. The average term for new leasing in the quarter was 6.3 years. When you remove new deals in our Flex portfolio, it was 7.9 years. That's a trend we expect to continue and we are pleased by the ongoing discussions we're having with tenants that mature in 2026.

Okay. My other question, just you saw the uptick in occupancy at Toronto House as you're leasing out that asset. Just curious, I guess, would that be more like short-term rentals and how should we think about the NOI, or the rental rate contribution from short-term lease -- short-term rental lease versus, I guess, at some point you'll be focused more on the long-term rental pool there?

Brad, it does not represent short-term leasing opportunities. They are all long-term lease transactions consistent with what you'd expect for the market. We're very pleased with the rental rates we're achieving. They're in line with our performance and we expect our performance to continue in that way.

But there will be like a short-term rental pool. I guess, when would that program really start to commence?

There is not a short-term rental pool, Brad. There are third-party providers that offer that service that have entered into long-term contracts with Allied to offer that type of duration of stay.

Got it. Okay. And it would be typically like a 1-year lease term for those type of providers?

Those are typically longer than 1 year.

Okay. Great. I'll turn it back.

Your next question comes from Pammi Bir with RBC Capital Markets.

Just coming back to the disposition target, I guess we should see some pickup in Q2. Just any discussion -- anything you can share in terms of color on discussions maybe beyond the $50 million? I'm curious if you're seeing any stronger interest in any particular markets or from various types of buyers?

Yes. It's consistent with what we disclosed in the press release, Pammi, and it's all based on unsolicited inbounds for our assets and private equities, the valuations remain robust and we're pleased that our IFRS values are being validated.

Okay. So, these aren't necessarily assets that are going through sort of a listed process with a broker?

Absolutely not.

Okay. And just coming back to 150 West Georgia, any update there in terms of the process? What kind of interest maybe has been seen on that site?

Yes, we will be going live with that process later this month and we're very pleased with the opportunity that we'll be able to explore there.

I guess in terms of it's going live, I guess this month or soon, is there the possibility that a deal could be transacted within the second half of the year and ultimately, I guess, repayment by closing and repayment for the loan?

Yes, we're targeting by the end of 2025. That's right.

Your next question comes from Fred Blondeau with Green Street.

Sorry, I missed that. Just one question for me. When are the lease term -- on lease being discussed with your prospective tenants at the moment? You mentioned the 2.5 years. I was wondering how is that expected to trend from here?

For new leasing, the average term achieved in the quarter was 6.3 years. When removing transactions in our Flex portfolio, it was 7.9 years and we continue to feel more and more increase from prospective users looking for longer-term durations than shorter-term durations.

[Operator Instructions] Your final question comes from Sumayya Syed with CIBC.

Just to revisit the outlook briefly. So, I think your lease up targets and the 90% goal were weighted to the end of the year anyway. So, if things do meaningfully slow down, how do we think about that? Would that simply be that the 90% goal is deferred or in-place occupancy goes down from where it is currently?

No, you know, I mean, if things slow down, then we'll address them when they do. But right now, we're sticking with our target of 90%, at least 90% by the end of the year.

Okay, and then, J.P., in your commentary, you mentioned about a 43% conversion rate on new leases. So, of the ones that don't convert, what are some of the main or recurring reasons that you hear and how does that 40% conversion compare with historical rates?

Sumayya, 43% is in line with what we would have achieved in the first half of 2024. In many cases, transactions that we haven't yet converted are ongoing. And as we've addressed in our remarks, we've seen a 39% increase in prospective leasing activity in our deal pipeline, which is really encouraging.



So, our leasing team is very busy across the country and we are very pleased with the amount of inbound increase that we're fielding across all markets and sectors.

Okay, great. And just lastly, I think in the fair value discussion, there was some comment around there being cost increases in the development portfolio. Is any more color there if it's market or project specific?

No, that was just on the redev category and that's the category where there was the movement this quarter where there was 6,000 square feet that was transferred in. It was just related to that.

That concludes our Q&A session. I will now turn the conference back over to Cecilia Williams for closing remarks.

Thanks, everyone, for joining our conference call. We'll keep you updated on our progress going forward.

This concludes today's conference call. You may now disconnect.