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Good day, and welcome to the Allied Properties REIT First Quarter 2018 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. Emery.
Thank you, Ron. Good morning, everyone, and welcome to our conference call. Tom and Cecilia are here with me to discuss Allied's financial and operating results for the first quarter ended March 31, 2018. 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 Annual Information Form. Material assumptions that underpin any forward-looking statements we make include those assumptions described under Forward-Looking Disclaimer in our most recent quarterly report.Our operating, acquisition and development environments have been supportive this year and our team took advantage of the favorable conditions to deliver solid first quarter results.In the quarter, we achieved strong organic growth in our rental portfolio, completed $16 million in acquisitions, advanced $3.2 million to West Bank in connection with the development of 400 West Georgia in Vancouver and made significant progress in our development portfolio.Cecilia will now elaborate on our financial results for the quarter, Tom will follow with an overview of our operating results and I'll finish with a discussion of our outlook for 2018.So, over to Cecilia.
Good morning. I will address our financial results and balance sheet. First financial results: Driven by occupancy gain and rent growth in Toronto and Montreal, our same-asset NOI in the first quarter was up 11% from the comparable quarter last year, driving 10% growth in our AFFO per unit. Same-asset NOI at 250 Front West was up 119% in the first quarter as full rent had commenced on all of the occupied space by the beginning of the year. Even excluding 250 Front West, our same-asset NOI was up 8%, which is encouraging and essentially, consistent with our internal forecast.Driven largely by the recent completion of upgrade properties in Montreal, our NAV per unit at the end of the quarter was up 7% from the end of the comparable quarter last year. The IFRS value adjustment in the quarter totaled $42 million excluding incremental capital investment of $42 million. At $260 million our annualized EBITDA was up 8% from the same quarter last year. This growth is also consistent with our internal forecast.Moving to the balance sheet, our debt metrics remained strong. At quarter end, our debt ratio was within our targeted range at 34%. Our interest coverage ratio was in the low end of our targeted range at 2.9x and net debt to EBITDA was in the high end of our targeted range at 7.7x. At quarter end, we had $95 million drawn on our operating line, leaving us with $155 million undrawn.In January of 2018, we amended the facility to extend the maturity date to January 2021 at a more favorable interest rate. Provided we maintained certain debt metrics, which are well within our targeted ranges, the facility will now bear interest as though our debt rating was BBB mid, favorable to the BBB low rating by 25 basis points.In 2018, we intend to pay off mortgages coming to totaling $63 million at maturity. This will continue the growth in our pool of unencumbered properties. At quarter end, the pool totals $3 billion, representing 53% of the IFRS value of our properties. This was up 26% from the same time last year.I will now pass the call to Tom for a discussion of our leasing and operating activities.
Thank you, Cecilia. The leasing momentum in 2017 continues in 2018 with 407,500 square feet of space leased in Q1. Our occupied area increased by 1/4 percent to 94.77% and our leased area basically remained flat sitting at 95%. What is interesting to us and very encouraging is that despite some short-term transitional slippage in leased area in Central Canada, we maintained our leased area because of leasing success in Calgary, more on that shortly.Also encouraging was the healthy lift in net rents on space renewed or replaced in the quarter. We achieved a 27.4% increase on the affected space. We expect renewal and replacement rents will continue to show very positive increases over the balance of the year as 50% of our expiring leases in 2018 are in Central Canada.Moving from East to West, I'll provide a brief leasing update on the 4 major markets in which we operate, and conclude with an update on our mission-critical facilities. Montreal remains very active with multiple large transactions in play. Our typical offering price point of $30 per square foot all in, combined with our ability to provide large floor plates and high ceilings has great appeal to office tenants in this market. All of our properties are seeing good traffic.With Cite Multimedia, De Gaspe and 6300 Park being substantially leased. We have 3 main objectives in Montreal this year. Our first objective is to lease the ground floor at the Le Nordelec, which is comprised of 150,000 square feet that we've repositioned from light industrial to office. We are currently negotiating leases for 90% of the space.Our second objective is to lease a redevelopment project at 425 Viger. Construction has recently started on the expansion and retrofit and activity is excellent with a number of prospects, ranging from 50,000 square feet to 200,000 square feet having expressed interest. Delivery of the space for tenant work is planned for Q3, 2019.Our third objective is to lease a number of the smaller spaces in our Montreal portfolio. We've developed a plan to tackle this initiative and expect to see good progress over the course of the year.Moving to Toronto, demand remains strong and we remain highly leased. Our primary focus in Toronto was pre-leasing the office component of The Well, our joint venture with RioCan. We are in the process of finalizing lease transactions with 3 tenants for an aggregate of 475,000 square feet of GLA, representing 41% of the office component of the project. We will report more specifically as these transactions are finalized.As mentioned earlier, we made excellent progress in Q1 in Calgary. We finalized a number of smaller transactions and moved the needle nicely, improving our leased area by 440 basis points. We currently sit at a very respectable 90% leased in this market. Our strategy of creating and leasing model suites on a turnkey basis is working very well. Vancouver remains a very solid office market and our existing inventory is highly leased. To illustrate the strength of this market, pre-leasing is going exceptionally well at 400 West Georgia, our West Bank project that we're financing. West Bank is in the process of finalizing transactions with 3 tenants for an aggregate of 312,000 square feet, representing 88% of the total GLA. Completion of this project is scheduled for late 2020.To provide additional color on our office leasing activities, we currently have 11 large lease deals in various stages of negotiation, totaling 1.2 million square feet of space. 5 of the deals are for space in our existing portfolio and 6 are for pre-leasing at new developments. While we may not complete them all, we expect to complete most of these deals before the end of this year.Turning to Mission Critical: We are 60% leased at 250 Front West. We're working towards finalizing a lease transaction for 10,000 square feet with a new tenant and continue to work with 2 prospects for an aggregate of 25,000 square feet. Ancillary revenue is slowly building.I'll now turn the call back to Mike.
Thank you, Tom. Looking forward, our outlook for 2018 remains positive. 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.Our results in the first quarter were entirely consistent with our internal forecast. We completed 4 small infill acquisitions in the quarter, 2 in Toronto and 2 in Calgary. They augmented existing concentrations and I expect them to be modestly accretive to our AFFO per unit going forward. Most notable among the Toronto acquisitions was 464 King Street West, a small parking lot between 460 and 468 King Street West. With that acquisition, we now have uninterrupted ownership on the north side of King West between Spadina and Brant. The 2 acquisitions in Calgary were made jointly with First Capital and augment the GM Glenbow joint venture established early in 2016.I expect our acquisition environment to be generally favorable this year, in large part because of relationships and opportunities we've nurtured over the years. Our primary focus will be on stabilized, and infill assets in Toronto and Vancouver, though we won't ignore appropriate stabilized opportunities in Montreal and Calgary, should they arise.As Tom mentioned, we've made significant progress on the pre-leasing at our development projects. I expect our development environment to be favorable for the remainder of the year and beyond. We've initiated the expansion and retrofitting a 425 Viger in Montreal and the timing appears to be opportune, especially given the strength of the urban office market in Montreal and the desirable location and physical attributes of the property; completion of 425 Viger is scheduled for 2020.We also expect to initiate the development of 489 to 539 King Street West with West Bank, and 540 to 544 King Street West with Great Gulf in the latter half of this year. I expect both projects to be completed by 2020.To summarize, 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 our 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.
And we'll take the first question from the line of Michael Markidis with Desjardins. Please go ahead.We'll move on to the next question from the line of Mark Rothschild with Canaccord. Please go ahead.
Maybe starting -- just on West, with Calgary occupancy, there was some improvement. Can you just talk about -- are you seeing some improvement or is that more just you sold some vacancies -- some assets with some vacancy and bought some assets with occupancy and are you seeing any more traction in that market?
We are seeing more traction in the market, there is a lot more activity, lot more tours. We actually leased space; we didn't make any trades that made a difference. We actually leased space and we were encouraged about what we're seeing so far in this quarter as well, but the market has certainly bottomed out and there is traction in the market all of a sudden.
Okay, great and then in regards to the leasing at The Well, which sounds like this quite a bit, that's closed. Can you talk about maybe the types of tenants you're seeing for the space and how the tenants are looking at it versus what we call the core -- are these tenants that are looking for different types of locations and maybe also -- I don't expect to get too specific, but the types of rents versus maybe what you pro formed?
Mark, the type of tenants we are dealing with in connection with The Well are exactly as you'd expect for the most part. They are TAMI tenants, tech advertising media and information tenants. Interestingly, however, one of the 3 we alluded to is a financial services tenant. And I think what we're seeing is the willingness on the part of businesses with large requirements to look favorably upon the amenity-rich environment that exists, that came in Spadina in relation to the amenity, I won't say impoverished, but the amenity barren environment in what we call the conventional downtown core. So the access to the path remains an important factor for certain users. However, what we are seeing and what we have seen in our development program in the last 36 or 48 months is more and more users are attributing importance to amenity-rich neighborhoods with good proximity to the conventional core. And these are the tenants that are attracted to The Well. And we are very confident, Mark, of our ability to achieve the net effective rates we sort in connection with the office component of The Well.
We'll now take our next question from the line of Jonathan Kelcher with TD Securities. Please go ahead.
Just continuing on Mark's question, I think last quarter on The Well, you said that you provide a little bit more detail on total cost in your return expectations. Are you guys close to providing that? Or you are --
Yes, we are not in a position to do that this quarter, Jonathan. We hope to be in a position to do that when we report on the second quarter of 2018. And we hope at that point in time, if my memory serves to have 85% of the cost tendered, without tendered cost we are low to provide a cost estimate and the corresponding return estimate, that will then have to, if you will live to, but once we have the tendering complete, we have made progress in the first quarter, but we want to be at around 75% to 85% tendered before we establish for the purposes of our constituents, the estimated total cost from the project and accordingly the estimated return on total cost. So, we're not close in the sense of being able to do anything today, but we are striving both Allied and RioCan to be in a position to provide that information to our respective constituents when we report on Q2, 2018.
Okay. Have you seen much in a way of cost inflation over the last year or so, versus I guess when you first undertook this, what you expected?
We have.
Okay, and then just --
And I'm not going to elaborate on that any further, although I will be in a position to elaborate on it when we report on the second quarter, but we definitely are seeing cost inflation in terms of construction costs at The Well.
And then just turning back to Calgary for a minute, what net effective rents are you getting there on your new leasing?
I can't answer that. I don't know whether Tom can or not or whether he's prepared to or not. It probably varies significantly from property to property.
It really does, but we're probably down 20% to 25% from the peak about 4 years ago, but it's beginning to come back up. Interest levels in the market is just getting better. We've hit the bottom, but we're down maybe 20% to 25%, yes.
One thing I think we can also add Jonathan is, we revise our market estimates in the different markets, or at least in the different regions, to be very precise, every quarter. And I think we're comfortable that we're hitting our market estimates in the Western region, and that is essentially Calgary because there is nothing much to lease in either Vancouver or Edmonton. So we are achieving our market estimates that we make on a quarterly basis.
Okay and then where do you sit on TELUS Sky, I think last quarter that you are talking to 3 tenants, if I recall correctly?
Yes, and we continue to be in discussion with 2 of those 3 tenants, one of them has stepped back. For the time being, we don't whether it has stepped back permanently or temporarily. But the other 2 are very much progressing towards conclusion. In the case of TELUS Sky, however, it's important to point out that those tenants are still at the stage of comparing TELUS Sky to the other available options. The tenants we allude to at The Well and at 400 West Georgia in Vancouver are well past that point in time. That is to say, they have determined that those are the locations they want and they are progressing towards the formal documentation of that preference with either West Bank in the case of 400 West Georgia or Allied and RioCan in the case of The Well. But in the case of TELUS Sky, the tenants we alluded to then and now are still evaluating other options, as you might expect in that market where options are plentiful.
We'll now take the next question from the line of Mario Saric with Scotiabank.
Maybe just sticking to Calgary and maybe more of a bigger kind of picture question. I think Tom mentioned that you firmly believe that the market bottoms are troughed and kind of highlighted with the decline in the NERs was from peak. So this was the kind of the real first opportunity for Allied in Calgary to kind of see how the qualified products fared during an economic downturn. So just curious to kind of hear your thoughts in terms of comparing and contrasting what is happened in Calgary for you the last couple years relative to what you saw in Toronto in the early 90s and maybe even during the global financial crisis, and whether that kind of emboldens Allied to increase their presence in Calgary going forward?
It definitely does Mario, and in fact, I would go even further. What's gone on in Calgary is much more analogous to what happened in Toronto in the first half of the 1990s, which as you know, and as we all know, was a [ veritable ] collapse of the office market. So to my way of thinking, what we've seen in Calgary, is probably the first 3 years of a 5-year collapse, and slow recovery. And as a result, we feel our Class I portfolio has held up extraordinarily well in the context of what I think is fairly characterized as a collapse. I think we never fell below 85% occupancy, if my memory serves. God knows we have to work hard to maintain even that modest level of occupancy by our standards, but we did. We never had to give away the form. We never had to provide ludicrously large endorsement allowances and we never had to accept, at any point in time, negative net rental rates. So from my perspective, the Calgary portfolio held up very well in the face of a more severe downturn than our Toronto portfolio has ever faced. Even in the financial crisis, which was from a real estate perspective very sudden sharp and finished or 2000 which was a dotcom precipitated kind of slowdown which we came through fairly well, but neither one of those slowdowns was as deep as severe and as protracted as the slowdown or collapse that occurred in the Calgary marketplace.So to my way of thinking, we're 3 years into a 5-year severe down cycle in the Calgary office market. I agree with Tom completely that we've bottomed out, and I do feel once again the Class I format has demonstrated resilience. Remember when Tom says 25% down from where we were 4 years ago, we're talking about Class I rental rates. So the fact that we were lower overall than the market generally, means that the -- if you will, erosion was much more severe than the general -- much less severe, pardon me, than the general commoditized market. So yes, I do feel it is a good example of Class I office space holding up well in a very severe downturn.
Okay. And then with the occupancy gain that you saw in Calgary this quarter, it seem like there is 5 or 6 assets where occupancy went up by 5,000 square to 9,000 square feet. Are you comfortable at this occupancy levels going forward? Or is there the opportunity to perhaps push it even higher in the coming 12 months?
We're comfortable that we can maintain as far as we can tell, Mario that because the activity level is pretty strong and there is a couple of good size smaller deals in the 5,000 square foot to 8,000 square foot range that we're working on now. So we don't see a reason at the moment to think that is going to slip.
One of the interesting attributes in the Calgary office market, Mario, is that everyone in the market, in the urban market, whether it's Class I or more conventional commoditized office operators, are building space out for rapid use. And this is probably the way the market is beginning to get the space re-let fairly rapidly on reasonably acceptable economic terms. That's not just happening in our portfolio, although Tom and the leasing team have been at the forefront of doing that. But the market generally is doing the same thing in an effort to make it easy for tenants to commit and to actually have a turnkey kind of solution right away. And I think that tactic on the part of our leasing team under Tom's guidance has been very, very successful. And I think is not unique to Allied or to the Class I segment of the market.
Certainly, even the larger floor plates in downtown Calgary are now being divided to try and do exactly the same thing attracting smaller tenants. We have an advantage in that, our gross rent is still much lower than in the downtown core, and if you took 5,000 square feet on a floor plate in one of our buildings in the belt line, there is presence. If you took 5,000 square feet in a large floor plate, you are kind of lost. So we do have some advantages and it is working, and we think it'll continue, Mario.
That makes sense. Okay, just maybe shifting gears to Montreal, which is a much bigger market for you relative to the Calgary, I think Tom you mentioned kind of gross rents in the $30 per square foot range today, has very strong appeal for large floor plate users. Similar to Jonathan's question in Calgary, how should we think about kind of net effective rent growth for your type of product in Montreal over the past kind of 6 to 12 months? Like what are you seeing on tenant [ incentives ] and NER growth in that market?
We're seeing modest NER growth. The market is strong, there's lots of users in the marketplace floating around, looking at various products. We're not seeing a spike in our rental rates. I'd say they are inching up, Mario. They're not spiking.
And is there any catalysts that you see in the next 12 months that could potentially accelerate that NER growth? Or is there simply enough availability in the market where rents will kind of get flattish, you have growth in occupancy, but not necessarily see a spike in rent growth that you're seeing in Toronto, for example?
Yes, I think it will be modest upticks in NERs. Nothing to think, otherwise really.
No, and to put that in context Mario, 6 to 12 months ago to use the timeframe you suggested, we would have anticipated good occupancy gain in our Montreal portfolio, but negligible or no rent growth. So if we fast forward to today, I think we continue to expect solid occupancy gain -- ongoing occupancy gain in our Montreal portfolio, and what I would call modest rent growth of the sort Tom describes.We don't expect to see Montreal approach Toronto or Vancouver, in terms of percentage rent growth. But the very fact that there is even a prospect of rent growth today is an improvement upon what we would have expected from the Montreal market as recently as a year ago. But I do agree with Tom completely, the rents in Montreal are not likely to spike in the way that they clearly have and probably will continue to in Vancouver and Toronto.
Understood. Okay. My last question just on the acquisition side. I think you mentioned to focus on stabilized acquisitions in Toronto, Vancouver largely driven by relationships, you've been cultivating for several years off-market type transactions. What type of yield should we think about in terms of potential going in [ yields ] on these types of stabilized acquisition?
There is nothing but peril in answering that question, but I will anyway. Yes, they are off-market. We would expect them to be higher at least in the very near term than would be achievable in what I might call the more commoditized urban office market. So, we would certainly be low to pay or to have an unlevered yield below 5%. And I don't think there is any reason for us to anticipate doing a substantial acquisition at an unlevered yield below 5%. So I would expect it to be somewhat above 5%, how much would depend on the relationship between the in-place rental rates and the market rates.And that's where you're seeing a little bit of downward pressure on what I would call the face cap rate because there are a lot of properties now where the in-place rental rates are materially below the market rates and clearly a vendor is going to want to get some recognition for that and usually the way that is achieved despite having a lower cap rate.So if you're looking at a fully stabilized asset where in-place rents and market are more or less in line, I certainly wouldn't expect to pay below 5% or to have an unlevered yield below 5%, if there was a big disparity between in-place in market and I could get to that reasonably soon, the cap rate could be lower. So hopefully that's helpful, but I think the most important point I want to communicate, is that we are focusing on stabilized acquisitions and infill acquisitions as opposed to low-yielding acquisitions with significant value-add potential.Our portfolio of property with significant acquisition potential is so great and so complete in terms of concentration that I don't envisage us allocating capital to similar types of opportunities in the next 12 to 24 months. Also frankly, most of what we want in that regard, certainly in Toronto, we've already been able to acquire. And that's why the focus is really now on stabilized acquisitions that will contribute to earnings per unit growth on a reasonably immediate basis.
We'll now take our next question from the line of Chris Couprie with CIBC.Please go ahead.
I've just got a couple questions on 250 Front, I'll just kind of ask them all at once. #1, the annualized NOI at the facility is down sequentially by over $1 million, I am just wondering what happened there? Two, just on the ancillary revenues, any flavor on what kind of sequential growth we saw and then just on the leasing, if you can give us any color on the number of visitors maybe year-to-date versus a year ago and the tenants that -- the prospective tenants that you have, would you characterize them more like the TELUS Sky type or there's still in the kind of comparison shopping phase or more or like The Well type where it's, they decided as 250 Front and it's just negotiations?
I'll answer the second question. Cecilia will answer the first and Tom will answer the third. The second question about growth in ancillary rental revenue, we're not in a position yet to provide what I would call a confident estimate of the rate of growth or more importantly really the magnitude of growth that we expect from the ancillary rental revenue. It is growing, it's been slow, but it's been steady and we're going to need a couple of quarters before we can confidently project the level to which we expect that particular element of the revenue from 250 Front to settle out. As to the differential between Q4 and Q1 --
Yes, on the LQA NOI from -- in Q4 that was primarily -- the difference was primarily driven by some year-end adjustments booked in Q4, that aren't there in Q1. So you can use the Q1 number as a better run rate in terms of our 61% occupancy going forward.
So, for that, there is going to be a year-end adjustment each year, is that how we think about (Technical Difficulty)?
Is not usual, it was slightly larger than -- it otherwise would have been, but there is certain things that are just beyond our control and that's what impacted us in Q4 there.
Thanks.
In terms of leasing in the number of visits to the property, it hasn't necessarily increased. You have to remember that the pool of potential tenants is fairly limited and we do have the best tenants in the business in our buildings and we continue to work with them for growth and there is probably half-a-dozen maybe 10 other large organizations that we're always talking to try and sort out deals in this building, but it's not as if the number of visits has changed, it's always been existing, but it hasn't changed. It's not going up or down. The 10,000 square foot tenant that we are working with now is a new tenant to 250 Front, but an existing tenant elsewhere. So, we continue to work with both large cloud users and the large collocation companies as our principal tenants.
And I would characterize the tenants we've adverse it to in our disclosure as being more akin to the tenants we're talking about -- at The Well than at TELUS Sky. They have decided that the facility is where they want to be and we're simply finalizing the huge technology spend that they have to make and the documentation that has to be entered into in order to bring that to fruition. But the tenants we've identified on a no-names basis are no longer in the selection process. They've made their decision and we're working towards executing that decision in a way that's appropriate for ourselves owner and for them as user.
We'll now take the next question from the line of Matt Kornack with National Bank Financial. Please go ahead.
Just want to quickly touch base on the 2 development projects on King West, similar to Jonathan's question, what is your expectation in terms of providing more detail on the cost and outlook for those? I know there's a condo component to both, so when would you anticipate potentially go into market on those?
We do hope to begin the marketing of 489 through to 539 in the third quarter of this year and when I say marketing that would be principally the condominium component. So I would hope when we report on Q3 or Q4 at the latest, we're able to provide the parameters of the development in terms of total cost and anticipated return on total cost, with respect to that. 540 to 544 King West is a newer opportunity that we have worked on with Great Gulf enabling us to combine our 544 King West with First Gulf, 540 King West and to create a retail office and rental component with a very rational floor plate for all the different uses. I'm very pleased with that particular joint venture and would hope to be able to provide more definitive information about the joint venture objective and perhaps even the financial parameters of the joint venture in Q3 or at the latest Q4 of this year.
And presumably given your experience at King Portland which was quite successful, you know, [ the sense as to ] who maybe wanted to go into that building but couldn't, would those be the potential tenants, I would assume on the office component of that project?
Yes, there is a large list of tenants needing accommodation and wanting to be in the King West market. All of whom of course are known to Allied, so I do see pre-leasing the office component of that project, which won't be that large, in relation to what we're now doing for example at The Well. And -- so yes, I do think the demand for that space exists, will be able to make some space available to users with smaller requirements, for which I know there's very significant demand, but yes, there continues to be surplus demand for space in the King Spadina node and if it's actually new office space integrated with old, it has deep appeal and it's very marketable.
Okay and then just one last question with regards to 489 to 539, I would assume the bulk of that value is in the condo component of the property. So you would be getting a cash influx from that I guess within, if you can complete it by 2022 within the next couple of years. Would you then use that to fund some of the other development components within Allied?
Absolutely, and in fact the way we look at it and I don't know whether this is correct from an accounting perspective, but from a business perspective, the way I'm looking at it, is we will end up owning our share of the commercial component with the very, very, very low cost base.But in terms of the actual utilization of the funds, you're quite right, those funds actually will find their way into either our project at The Well or one of the -- or 19 Duncan or one of the other projects that we're working on. Actually, it wouldn't be 19 Duncan because we've arranged construction financing there. But yes, in terms of actual funds, it will slow, but in terms of how we will look at the project from Allied's perspective, our cost of the commercial component will be subsidized by the profit from the condo sales just as we've looked upon I think King Portland Centre with RioCan in our most recent quarter, you'll see the return estimates, that basically taking the profit from the condominium sales and reducing the cost of the residual commercial accordingly. So King -- well 489 to 539 King is a much larger condo component than King and Portland, but the same principle will apply in terms of how we evaluate the project from the vantage point of our unitholders. But the actual cash will be deployed in other developments for sure.
Okay. Now that makes sense. Last question, Montreal some interesting transactions in that market and your type of properties at cap rates that were pretty low. Are there still opportunities to buy there? Or has everything been priced in [ caps ] at this point based on pretty optimistic views on rents I guess?
That's a good question, and I don't know if the low cap rate at which the transactions occurred, is going to create inflated expectations in the market or not? We haven't seen in the early part of 2018, any material stabilized acquisitions that would be of interest to us. That may be a function of the fact that there aren't many left, although I think it's probably simply more of a function of availability. We may and are more likely to see in Montreal upgrade opportunities. These would be things that are a little bit rundown and rugged that we might be able to improve both physically and in terms of the tenant profile. There is 1, that I'd become aware of recently. I don't know how great our appetite is for that kind of product in Montreal today. We would be prepared to buy fully stabilized, but we obviously are not prepared to transact at the level that the year-end transactions occur that they were very good assets with very good lease profiles, but there is no growth potential. And we certainly see no reason to acquire at those very modest levels of unlevered yield.
[Operator Instructions] We will now take the next question from the line of Howard Leung with Veritas Investment Research. Please go ahead.
I just wanted to go back to The Well for a second, and ask about the tenants, are there smaller tenants kind of just waiting in the wings that are looking forward to 3 large which we complete and you are confident that after those 3 deals will be signed back -- they were beyond on board as well?
Absolutely, there are many tenants who've been after us about The Well far too small for us to consider at the moment, but the market has great interest, in fact, I was in a meeting this morning with our leasing people. And one of our leasing people identified that there were about 25 users from 10,000 square feet to 30,000 interested in King West, where we have no space whatsoever. So the market is deep, we're just not able to touch those tenants at The Well yet, but once we do complete the larger transactions, we're expecting great interest in the balance.
I didn't sense any equivocation in that answer at all.
Yeah, that was a pretty confident. It's just kind of a bigger picture question about development pipeline. There is quite a few things for you coming up, both developments and intensifications, how do you think about the capital structure for the -- financing it given that you have the 40% indebtedness ratio as a target that you don't want to breach, how do you think about where you are going to find the capital for this development?
Yes, it's a very good question. Here's how we think about it. If we look at the properties under development to which we have committed ourselves, today I believe, we have about $1 billion to spend over the next 5 years and its front-end weighted in the next 3. And we, of course, track this very carefully and respond very quickly to any changes upward or downward in that amount. But the best way to think about it today is, there is about $1 billion dollars of commitment we've made to complete the existing properties under development and indeed that would include the transactions that I spoke about with Matt, just a few moments ago, and it would also include 425 Viger.The way we're looking at it is as follows; if we had the ability to finance it all with unsecured debenture financing, we would because that would have the least impact on our earnings per unit. The one governor for us or the one factor that limits the extent to which we can avail ourselves of unsecured debenture financing are our debt ratios. About which we are adamant, so the debt ratio will have to remain between 30% and 35% on an ongoing basis and the debt to EBITDA ratio will have to remain at least in the 7s, but frankly, we'd like to see it migrate a bit lower than that. So the governor for us are the debt ratios, once we get to the point we're taking on or availing ourselves of debt, we push the debt ratio up, we will then include equity as a component of how we fund the development activity. And this year is a good example, not only how we retiring around $65 million in mortgage debt this year, which is what we've been doing for years now. We have a significant commitment to development and we will need to fund that on a permanent basis at some point this year or very early next year. And the process through which will go as a management team and ultimately as a Board is to what extent can we utilize unsecured debenture financing or even secured financing should that be desirable from our perspective. And then, to what extent do we need to avail ourselves of equity.Right now, the need to avail ourselves of equity following large acquisitions in 2018 is modest. If we were to undertake large acquisitions over the balance of the year that would change, if you will, the ratio or change the equation and we take cognizance other accordingly and we probably match the equity offering to the acquisition. So that's how we think about it and I think on an ongoing basis, how we anticipate thinking about it in the next 5 years.
And just following up on that. You mentioned that Calgary some of the properties, look like there -- is bottomed out and they're improving, is there any chance that you would look to kind of sale some of those property to finance some of the developments in Toronto?
No, I think the likelihood of that happening is very low, because I think the properties we were able to secure between 2010 and 2015 are exactly the kind of properties Allied should own and operate, and I also believe the long-term future of Calgary as a city is good. So our wish is to be part of the Calgary office market on a long-term basis. Certainly, we could monetize existing assets to fund development, if the debt capital markets or equity capital markets were less available to us and this is why we attribute so much importance to the unencumbered pool. Because it is 2 things to us, one, unencumbered assets are much easier to monetize than encumbered assets either through sale or through conventional first mortgage financing.So from our perspective, the flexibility we need increases as our unencumbered pool close and as you know, it has grown very significantly in the last 4 years or so. And our outlook would be for it to continue to grow in relative terms, as part of our portfolio. We have not refinanced the mortgage in at least 4 years and I don't see any real incentive for us to do so in the next little while -- by that I would mean this year and next year, because we think in the long run, it's better to bear the higher cost of unsecured debenture financing, in terms of achieving financial flexibility for our business, especially in relation to the very significant needs we expect to have going forward for capital.
We'll now take the next question from Mike Markidis with Desjardins. Please go ahead.
Thanks again, everyone hear me this time?
Yes, we hear you loud and clear Mike, don't know what happened earlier.
I don't either, I checked, it wasn't on mute, but success. Okay, great. Michael, just following up on your commentary in your primary focus for stabilizing the assets in Toronto and Vancouver, it sounds like that more opportunity driven at this juncture, but I would sense, maybe you can correct me if I'm wrong, part of that is also your expectations for rent growth in those markets. But with your sort of quasi-line in the sand for a stabilized and levered yield of 5% that be in reference to those markets or for Allied on average? And then if 5% is the number for Toronto, Vancouver, what would be the stabilized yield you would look for in Calgary or Montreal?
Okay. So the answer is yes. I was alluding to Toronto and Vancouver with that cap rate. And I'm sure I'm going to live to regret having said that, but that's okay. It's legitimate to try to establish a target. In terms of Calgary, the recent transactions we did jointly with First Capital had an unlevered yield in the 6.5%, 6.7% range, to me that was attractive. Those assets happen to have meaningful long-term intensification potential which is exactly why both First Capital and Allied we're interested in them. But the fact that they're giving both of us that level of leverage yield in the interim to me is an attractive opportunity, and certainly if I could do that again on the belt line, in Calgary, under those parameters, I would definitely do it.Montreal as bullish as I'm on Montreal and as bullish as I'm on the way our format serves the kind of tenant base that's growing in Montreal. I would tend to look for a little bit of a higher cap rate there than I would be able to achieve in the City of Toronto for the simple reason that there is much less rent growth in Montreal than there is here in the city. So I would -- to peg a rate is probably perilous, but if I can get 5% in Toronto, I'd expect a better cap rate in Montreal.
Okay, that's fair. And just lastly, and then this might be just technical classification. I just noticed that you guys moved the Le Nordelec from [ PUD ] back to intensification and it's sounded like you're getting quite enthusiastic about that opportunity last call. So, just curious if that was just a technical re-class or if anything's changed with respect to your expectations on future activity there?
I think it was in a way of technical reclassification, but it was also in a way of recognition of progress because a component of that was Shell Retail and Tom and the Montreal leasing team have done a great job in getting some of the Shell Retail built out and leased to the very kind of tenants that Allied believes can contribute to the amenity-rich environment our tenants need. So to some extent, it represents, what I call partial completion of a component of that PUD element. The other component was somewhere between 250,000 square feet and 300,000 square feet of buildable area. We now believe and I don't want to create a miss-impression here. But we now believe that we are approaching a point in time where it would make sense for us to determine, how we're going to build out that space. And my view is and I think my colleagues agree with me on this, that the optimal way for us to take advantage of that opportunity, is to create additional office space.So we are now planning with our architecture and advisors, the optimal office configuration of that 250,000 square feet to 300,000 square feet. So we haven't committed to do this yet. But my belief is, it's much more imminent today given the success we've had at Nordelec than it was when we did the transaction. So I call it a combination of technical reclassification and partial progress toward the realization of the potential of that opportunity.
We'll now take our next question from the line of Fred Blondeau with Echelon Wealth Partners. Please go ahead.
I promise, I'll be very quick, I have a one quick question here. With such a focus on Toronto and Montreal, I was wondering, how you feel in regards to the smaller markets we're exposed to at the moment and I guess in which you are a bit less active and now that the Quebec portfolio was sold. For example, Edmonton, should be consider this market is a non-core market at this time? Or you're still committed to your existing markets at the moment?
Yes, well I can't promise to be brief Fred, because I never out, but it's a good question and I'm happy to answer it. We were delighted, as an organization with having successfully exited the Victoria, Winnipeg and Quebec City markets over the last 24 to 36 months. We believe that there was very little opportunity in those markets for Allied to grow its business -- even where it has come, since we took a position in those markets. I would say, we remain committed to the remaining 7 markets that we are currently in -- the 4 major markets, of course, are Montreal, Toronto, Calgary and Vancouver. Our asset in Edmonton is large, is excellent, is located in the most dynamic urban area of Edmonton, which is the ice district and has a very meaningful value-add opportunity attached to it.So, we are committed to that asset long term. I mean, is how we look at it now. Kitchener, which is a very unusual market on its face, is a market to which we are committed long term. The warehouse district in Kitchener because of its essential connection to Toronto is for all practical purposes and extension of Toronto [ and online ], it's serving very high caliber tenants and the University of Waterloo is what anchors Kitchener as a marketplace.Our asset in Ottawa, The Chambers is an extraordinary asset, which has performed extremely well for us and to which we are committed long-term. So, I would say we're committed to the 7 markets we're in Canada, but our focus is on the 4 major markets. To be sure, we don't expect to be able to grow materially beyond where we are in Edmonton, in Ottawa, or in Kitchener. And ironically, if there's an area where we might be able to grow somewhat significantly in those 3 markets, it would be Kitchener.We do believe that we've now found a way to enter the Vancouver market successfully. That's been a tough market for us to penetrate. The pricing is very, very rich as everybody knows. We have managed to accumulate around 300,000 square feet, very good asset that have performed very well, but given our relationship with West Bank, we now feel we can access that market in a slightly different way but will be accessing the market through the creation of very distinctive urban office space with West Bank and 400 West Georgia is the first instance of that.So I think as long winded is that answer is, I think the real message is the markets we're in today and the assets in them, we remain fully committed to. There is very, very, very, very little in our portfolio today that we would regard as noncore, and we would look to selling as a noncore asset.
Mr. Emory, there are no further questions at this time, I'll turn the call back over to you for any additional or closing remarks.
Thank you, Ron, and thanks to all of you for participating in our conference call. We'll certainly keep you apprised of our progress as we move forward and we look forward to speaking with you again in conjunction with our Q2 results, if not sooner. Thank you very much and have a great day.
Ladies and gentlemen, this does conclude today's call. Thank you for your participation and you may now disconnect your lines.