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Good day, ladies and gentlemen, and welcome to the Allied Properties REIT First Quarter 2020 Earnings Conference Call. For your information, today's conference is being recorded. I would now like to turn the call over to your host, Mr. Michael Emory. Please go ahead, sir.
Thank you, Elaine. Good morning, everyone, and welcome to our conference call. Tom, Cecilia and Hugh are on the line with me to discuss Allied's results for the first quarter ended March 31, 2020. 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 and in our most recent quarterly report. Material assumptions that underpin any forward-looking statements we make include those assumptions described under forward-looking disclaimer in our most recent quarterly report. As you know, a global pandemic overshadowed the first quarter of 2020, forcing people around the world to confront a sudden and severe public health crisis. Governments, businesses and citizens have implemented extreme physical distancing measures in an effort to mitigate the spread of a novel virus, COVID-19. The physical distancing measures necessary to mitigate the spread of the virus have caused severe economic disruption. Governments and central banks worldwide have provided massive economic stimulus to counter the disruption and are likely to provide additional stimulus going forward. While this bodes well for recovery, there is no way to predict at this time the duration or severity of the current economic downturn. Allied's first quarter results were not impacted by the global pandemic and consequent economic disruption. We propelled strong internal and external growth in the quarter, with a mid-single-digit percentage increase in the same asset NOI, FFO per unit and AFFO per unit and an 11.7% increase in NAV per unit. Cecilia will elaborate on our financial results as well as discuss our balance sheet and our short-term outlook. Tom will follow with an overview of leasing and operations. Hugh will provide a development update. And I'll finish with a few words on our long-term outlook. So now over to Cecilia.
Good morning. I'll summarize our financial results, our balance sheet and our revised internal forecast for 2020. First, our financial results. This quarter was one of our strongest ever. We achieved $0.58 of FFO per unit even with $587,000 of nonrecurring condo marketing costs at King Toronto included in the calculation.Our annualized quarterly EBITDA reached a new high of $343 million. Driven by rent growth in Montreal and rent and occupancy growth in Toronto, our same-asset NOI in the first quarter was up 4.3% from the comparable quarter last year, driving 5.2% growth in our normalized AFFO per unit. Moving to our balance sheet. Driven by development, NOI growth and the strength in our core markets, our NAV per unit at March 31 was up 11.7% from a year ago. At quarter end, our net debt-to-EBITDA was 6.8x, and our total debt was 27% of IFRS value. Both of these metrics are within our targeted range. Interest coverage was 3.3x and moving towards our goal of 4x. Our ratio of unsecured to secured debt was 2.1x at quarter end, with unsecured debt representing 67% of our total debt. At quarter end, our pool of unencumbered assets was $6 billion, representing 73% of our investment properties. After closing The Landing last week, our pool now sits at $6.2 billion and represents 74% of our investment properties. We intend to continue prepaying or repaying mortgages as they come due, with the goal of having the majority of our asset base unencumbered. We believe this will give us the strongest and most flexible balance sheet from both a defensive and offensive perspective in terms of responding to changing market conditions, acting on acquisition opportunities and financing our development activity. Moving finally to our short-term outlook. Our first quarter results can't be taken alone in formulating an outlook for the remainder of 2020. We anticipate some downward pressure on our rental revenue in the short-term as a result of the global pandemic and consequent economic disruption. Most indicative of what we can expect in the second quarter is our rent collection for the month of April, which is the first full month during which physical distancing measures were in place across Canada. Gross monthly rent due in April was $54 million. 74.4% of this is from office use, 15.4% from urban data center use, 7% from retail use and 3.2% from parking use. In light of the current economic disruption, we have granted a 1-month rent deferral to users in genuine financial need, which for us, includes a significant portion of our retail users and a very small portion of our office users in early stages of business development. We expect to grant another 1-month rent deferral to such users for the month of May. To date, we've collected 90% of the total amount due in April and granted 1-month deferrals totaling $4.2 million, which represents 8% of the total amount due. This leaves 2% of the total amount due in April to be collected. We're actively pursuing collection of these amounts and expect to be successful in most instances. Users of our UDC space experienced a surge in activity in late March and throughout April. The use of our Meet-Me-Rooms and cross-connection capability is rising accordingly, as is the need for additional power, which we can supply profitably in meaningful quantities. We expect the surge to provide a boost to our earnings in 2020 and a more material boost to our longer-term earnings. We expect to be in a position to quantify this more fully when we report our second quarter results. It's clear from the above that we'll experience some erosion in our rental revenue over the balance of 2020, primarily in the form of turnover vacancy in space we originally expected to be productive throughout 2020. We don't believe the short-term erosion will be material, especially when we consider probable positive offsets flowing from our UDC space and other aspects of our operations. Our original internal forecast for 2020 called for mid-single-digit percentage growth in each of same-asset NOI, FFO per unit and AFFO per unit. In light of the global pandemic and consequent economic disruption, our revised internal forecast for 2020 calls for flat to mid-single-digit percentage growth in each of same-asset NOI, FFO per unit and AFFO per unit. We expect to allocate a large amount of capital in 2020 with the same strategic coherence and discipline we demonstrated in 2019. We're committed to allocating $335 million to development and value-add activity over the course of 2020, and we expect to allocate additional capital to accretive acquisitions. There are material areas of uncertainty with respect to our revised internal forecast, the most significant being the fact that we can't predict the duration of the physical distancing measures that are now in place across Canada. We also can't predict how consumers will respond in the short term when physical distancing measures are lifted or relaxed. I'll now pass the call to Tom for a discussion of our leasing and operating activities.
Thank you, Cecilia. Leasing momentum in 2019 continued into Q1, and activity remained strong until mid-March when it began to taper, though many lease negotiations continue. Overall, leased area in our workspace portfolio is at 95%. Average rents on space renewed or replaced grew substantially in Q1, showing a 24% increase on the affected area. Through the quarter and in April, we completed a number of important renewals and made leasing progress on our development projects. I'll provide brief highlights on leasing activity in our major markets, but wanted to use this call to focus mostly on how the Allied team has operated during this unprecedented time. Following are a few leasing highlights, workspace first then UDC. Starting in Montreal, we completed a 15,000 square foot lease with Beanfield at [indiscernible]. And subsequent to the quarter, Unity committed to a 35,000 square foot expansion at Le Nordelec. We continue working with Moment Factory in Denver on planning the repositioning of 700 DLG. At quarter end, our Montreal portfolio was 93% leased.In Toronto, we continued discussions with one of our major tenants about making an additional pre-leasing commitment of 60,000 square feet of The Well. Our rental portfolio in Toronto is 99% leased. We made good progress in Calgary and are now finalizing a 45,000 square foot renewal, and we are moving toward completion of 3 leases aggregating 12,000 square feet at TELUS Sky. Our Calgary portfolio is 90% leased, well above the norm. In Vancouver, 2 of the tenants who made pre-leasing commitments at 400 West Georgia have exercised options for additional area, and that project is now 95% pre-leased. Our rental portfolio in Vancouver is also 95% leased.Given the office demand/supply dynamic in Toronto and Vancouver, we expect continued upward pressure on rental rates over the remainder of 2020. We expect demand to remain strong in Montreal, though the demand/supply dynamic there putting less upward pressure on our rates.Turning to our UDC portfolio. We completed a renewal just after the quarter with our single largest tenant at 250 Front. This 60,000 square foot lease now expires August 31, 2022. As Cecilia mentioned earlier, usage of our data center space has increased during the pandemic. All of the available space at 151 Front is under negotiation.Now to the team. While working through the myriad of issues caused by the global pandemic, the Allied team has stepped up in so many ways. Even though we've been physically separated, our communication has been constant. Following are just a few comments about how each of our departments continues to contribute. Our technology team have made sure we had all the right tools to communicate. Our property managers have done an exceptional job answering questions mostly about security, while collecting rents. Our accounting team have come through big time completing 2019 year-end adjustments and compiling all the numbers for our Q1 report less than 30 days from quarter end. Our UDC team have not missed a beat implementing new protocols for building access in a rigorously controlled environment that needs to remain fully operational in all circumstances. Our experience team has created a weekly newsletter for building users. They've also prepared a comprehensive package identifying all sources of government health to share with our building users. Our asset management team continues to track our performance internally and is also tracking our accounts receivable daily. Our talent team provides us with daily news on the virus in each of our operating regions. The team has also actually hired 3 new employees during the shutdown. Our leasing team are creating virtual tours of available space to stay in touch with the brokerage community and potential tenants. Dozens of deals are being discussed across the portfolio. Our operations supervisors and building operators are at the properties every single day. Last but not least, we promoted Doug Riches to Senior Vice President, National Operations. As many of you know, Doug has so ably run our UDC operations since 2009. Doug will continue to oversee our urban data centers, but will now turn his attention to our workspace portfolio as well. Over time, best practices and policies in our UDC and workspace portfolios will become fully integrated.I will now turn the call over to Hugh for an update on development activities.
Thanks, Tom. While our construction activity has been affected by COVID-19, we have been able to make progress on a number of projects this quarter. I will begin by giving a brief overview of the effects of the physical distancing on our construction projects and then a brief overview of other preparatory work that we have begun. Construction activity. Our ability to make progress in construction projects has varied across the country. In Montreal, we have had to stop all construction activity temporarily, though it now appears it will restart in May. In Toronto, Calgary and Vancouver, we have had some projects continue with little impact and others continue with more material impact. A few smaller projects have stopped altogether. In Montreal, for both 425 Viger and Le Nordelec, our base building work was completed prior to the construction moratorium being enacted. This has significantly reduced the impact on Allied. We have some small-scale landlord work projects and relocation projects that have had to be postponed. The team has been working proactively with our consultants and contractors to prepare for the pending recommencement.In Toronto and Kitchener, the majority of our projects fit under the Ontario government's permitted activity. The Well, 19 Duncan and College & Manning are all mixed-use projects that have all continued to progress, though at a slightly reduced pace. We experienced a temporary drop in manpower when physical distancing measures were first implemented, but have seen a rebound over the past couple of weeks. We currently expect there to be approximately 2 to 3-week delay in our schedule for these projects. Our projects at King and Spadina and Breithaupt Phase 3 have both been impacted. Neither of these projects fit squarely under the province's exemptions. This has resulted in a reduction of construction activity on-site. We will assess the impact on these project schedules once the moratorium is lifted.In Calgary and Vancouver, construction continues on TELUS Sky's residential floors. We have seen a large reduction in manpower which has resulted in a delay in occupancy for the top of the building. We were able to achieve occupancy for the office floors. The delay on the upper floor occupancy will affect our residential rental schedule. We have pushed out the anticipated start of that program until the late summer. Work on the 400 West Georgia, the Lougheed building and the restoration of the Sun Tower continues unabated.Planning activity. While the pandemic has had an impact on construction, we have been able to progress on future development planning. In Montreal, we are continuing to progress the initial planning for the multiphase intensification of Le Nordelec. In Toronto, we're in the final design stages for both King & Brant and Adelaide & Spadina. While COVID-19 has impacted progress on our construction projects, we have been fortunate that this has been minimal. The third-party contractors that are working on our projects have done a great job making progress monitoring that workers follow protocols to ensure their safety.I will now turn the call back to Michael.
Thank you, Hugh. In my opinion, equity market valuation of public real estate entities is now largely disconnected from underlying real estate values. I've seen this occur several times in Allied's 17 years as a public real estate entity. In every instance, real estate values did not follow the equity markets down but rather the equity markets caught back up with underlying real estate values in a reasonably short period of time. This is exactly what I expect will happen this time around.We continue to have deep confidence in, and commitment to, our strategy of consolidating and intensifying distinctive urban workspace and network-dense UDCs in Canada's major cities. We firmly believe that our strategy is underpinned by the most important secular trends in Canadian and global real estate, and that these trends will not be altered in any material way by the global pandemic or its aftermath. We also firmly believe that we have the properties, the financial strength, the people and the platform necessary to execute our strategy for the ongoing benefit of our unitholders.To conclude, I don't believe any aspect of Allied's vision or mission has been, or will be, undermined by the global pandemic and its aftermath. People will not retreat from cities nor will they become less social. We are and always will be social beings. Sensitivity to wellness and sustainability will be more pronounced than ever, but it will not be new in any way to city builders. Perhaps most importantly for our vision and mission, the men and women who constitute knowledge-based organizations are not going to retreat in droves to technologically-empowered home offices. Indeed, as one perceptive Canadian put it, the dream of working from home has been destroyed forever by COVID-19. I've never dreamed of working from home, and I never will. But I think that particular Canadian is absolutely correct.I hope this has been a useful and comprehensive update for you in this unusual time. We'd now be pleased to answer any questions you may have.
[Operator Instructions] We will take our first question today from Jonathan Kelcher of TD Securities.
First question, just on the data centers. I guess you're expecting the increase in the power and the interconnection fees to mostly offset any weakness that you'll see in the rental portfolio. Is that all it is? Or do you expect any leasing gains to help there as well?
Our expectation is primarily that the UDC revenue that we didn't anticipate in 2020 will offset some of the turnover vacancy that we think we may experience over the course of 2020. It would be the principal offset.
Okay. And then would it be fair to say that the interconnection revenue is mostly 250 Front and power -- the increase in power would be from both 250 Front and 151?
The interconnection fees would emanate from 250 Front, and 905 King. There is also rack revenue and conduit revenue increases that we would expect from 151 Front. So it's a combination of those 3 things, plus the fact that a number of the users we expect will require additional power, which we have the ability to provide. And of course, the rental rate they pay is based on power as opposed to square footage. We translate it to square footage simply because it's a terminology we are most accustomed to using. But in fact, it's the amount of power availability that governs how much rent is paid. And as we increase it, more rent is paid by existing users.
Okay. And so are you benefiting from the time-of-use savings that Ontario is getting right now? Or is that something you pass along?
The -- we might benefit from the Hydro reduction. We're looking at that, but most of it would pass through. Maybe not all of it, but most of it would pass through for the benefit of the users.
Okay. And then just secondly, the lease extension that you did close the quarter, that seems relatively short. Can you maybe give a little bit of color on why it was just sort of 1.5 years extension?
It's actually 2. And Tom, who oversaw that, along with Doug Riches, can speak to it very well.
That's how the option was written, Jonathan. So they execute -- they exercise 2 years. They have 3 years to go, but they went ahead for 2 years.
Okay. So would you still be working on a further extension with them?
We will be. We're not right now, but we will be.
I think, Jonathan, that particular user plans to bolster the requirements from the facility and was able to execute a 2-year extension without engaging in that negotiation with us. So we fully expect that user to continue to occupy the premises well beyond the 2-year extension, but it will be bolstering its expectations from us and from the operation of the facility over the next 2 years as part of that. And we're fully prepared for that and fully conversant with it. But the user didn't want to exercise more than 2 years of renewal because of that. And it was the only basis on which they could exercise renewal, was 2 years. They have flexibility under their lease, and they chose that flexibility for those reasons, which isn't a bad omen at all. It actually is designed to help us and help us work towards a more rigorous facilities management protocol going forward, which, we'll see them there, I believe, for a very long period of time.
We take our next question from Mario Saric of Deutsche Bank (sic) [ Scotiabank ].
Did you change jobs?
So apparently, I haven't, but the question might persist, I guess. The -- just on the operational side, the 1 million square feet that remains to expire through 2020, include the 370,000 square feet into Montreal and Toronto. It looks like the overall disclosed mark-to-market on that is 17% versus the 24% that you did in Q1. Can you talk about the nature of the discussions that you're having on renewals and perhaps the average lease durations that tenants are thinking about? Are you seeing appetite for shorter-term lease extensions in this environment? And how would the 17% you think look on a net effective rent basis?
Mario, sorry, there's a little bit of a reverberation when you speak. I couldn't hear the question that clearly. Could you -- I only got parts of it. Could you repeat it? Sorry about that.
Sure, I'll try again. Is that better?
Yes that's a little better. Maybe just speak a bit loudly, that would be helpful.
Okay. So the question was just pertaining to your 1 million square feet that are expiring through 2020. And I'm just curious on the appetite that tenants are showing in terms of maybe going shorter lease duration on the lease renewals and how the 17% mark-to-market that you have disclosed, do you have an idea how that may look like on a net effective [ rent ] basis?
Right now, we have no indication that people up for renewal or users up for renewal want to truncate renewal terms. In fact, quite the opposite. And right now, we have no indication that net effective rates on renewal are going to be below our expectation. Everything that we've negotiated through the shutdown has been consistent with our internal forecast, so we don't see any evidence yet of users wanting to improve the terms of their renewal in light of what's going on in the global pandemic and consequent economic disruption.I think that makes a lot of sense given the supply/demand dynamics in Montreal, Toronto and Vancouver. Toronto, there remains almost an element of desperation on the part of those people who need larger office requirements. And when I say larger, I mean [ 15,000 ] square feet and up. They're very hard to come by. A lot of people need them. And for that reason, we don't expect any material alteration in the way people are prepared to commit to new space or renew existing space. And we've never had pushback during the last 2 or 3 years on the escalating rental rates or on the time frame that we wanted in relation to the renewal. So there's no evidence of that yet, that doesn't mean we won't see such demands occurring. But as of today, there's no indication of that at all.
Okay. My second question is just on capital deployment. And if we look back, it's been almost 10 years since the GFC and roughly around that time, I think Allied as an entity was thinking about external growth opportunities and thinking about international expansion into kind of typical quasi-buildings, which is what they were called at the time, versus expanding the opportunity set within existing market nodes. So sticking to the existing nodes with the past taken at the time, I just wanted to dig a bit more into your comment on the disparity between public and private market valuations and your expectation for completion of acquisitions during the year. Can you maybe provide some context or color in terms of those comments and whether you feel Allied as an organization could perhaps take advantage of the crisis that you're seeing today to perhaps expand internationally sooner than you otherwise would have anticipated?
Yes. It's a good question. We certainly see the economic environment that we're in and that we expect to be negative for some time now to afford us opportunities that we wouldn't otherwise have seen in a more normal economic environment. I think they will predominantly be infill opportunities in Montreal, Toronto and Vancouver, perhaps also in Calgary. Although there, they will be very small as they have been in the past. I don't see this as a launching pad for Allied to enter other markets. It certainly may create opportunities in those other markets that would be appropriate for Allied to pursue. But our feeling is we have so much opportunity in the major Canadian cities that we're focusing on, that it would be a misallocation of capital to look outside of those cities, and certainly outside of Canada, for growth opportunities in the near term, which I would sort of characterize as 3 to 5 years. I just don't see that as being appropriate for an organization that has such strength in Canada's major cities. And I believe we'll have continued significant opportunities to grow. And possibly as a result of the economic downturn, we're now in an -- those opportunities might be more favorable financially than they would be in a normal market. So no, I mean, to answer the question directly, no, we do not see this as a launching pad to expand our geographic focus.
Understood. Okay. And then maybe just a quick follow-up on the public versus private discussion. Would you view this as an opportunity then to perhaps repurchase units a bit more aggressively than you have in the past?
Good question, and the answer is no. We have never used our NCIB for anything other than our long-term incentive compensation program, and I don't consider that to be an appropriate use of capital by an organization like ours. I think we will be fairly valued within a reasonable time frame. Historically, that has been the case. And we don't believe in buying our units even if they're discounted in the market at the moment. We feel we can deploy capital to build our business and augment our portfolio that will be much more productive over time. So I don't see us doing that.
Great. My last question just comes back to the urban data centers and kind of dovetails on Jonathan's question earlier, the comment was the expectation for a material boost to 2020 earnings, but perhaps an even greater longer-term impact on the cash flow stream from UDCs coming out of this. So do you think that this crisis, in some ways, better enables you to lease up the remaining kind of 56,000 square feet of availability at 250 Front? Or are they independent of each other?
No. I think it does. I think it will increase the demand for space and power. And as you know, they're intertwined, and I do believe it will allow us to build out the ecosystem at 250 Front. As Tom mentioned, the turnover vacancy that we had at 151 Front, which we signaled, I believe, when we laid our 2020 forecast out on February 5, that is actually in negotiation with tenants that will augment the 151 Front ecosystem in a very, very meaningful way, and we would expect the same to occur at 250 Front over time. So the answer is, yes and yes, I suppose.
We take our next question from Jenny Ma of BMO Capital Markets.
Just following on the discussion about the data centers, the incremental short-term boost that you expect from that subsegment, how much of it would you consider to be variable, such as power usage? And then when you're thinking about how you assume it's going to offset some turnover vacancy in the office portfolio, what kind of, I guess, current situation, work-from-home, shelter-in-place, do you assume in terms of that variable component?
Well, the good news, Jenny, is none of it's variable. So to the extent there's a surge in revenue, it's not variable. It's because either the cost of rack space, conduit space has gone up, if you will, permanently or interconnections have been established, theoretically at least, permanently. One could always see a reduction in interconnections, but I don't know that that's ever happened. So we assume once an interconnection is established, it's more or less a permanent component of the revenue stream. That's why we want to be very careful in evaluating this, both in terms of its impact on 2020 and in terms of its longer impact on our business and why we're waiting until the second quarter, which I think we'll report on July 29, to provide more granular disclosure in that regard.
So it's not a -- so I guess because of the surge in power usage, you're expecting it to either be charged at the high watermark or even if -- or you don't expect that usage to go down even if we slowly start to trickle back to the office and work-from-home becomes a lower proportion of workers? I'm just trying to understand that relationship.
I do not expect it to go down as people go back to their normal work environment, no.
Okay. And then I want to clarify a comment that Tom had made earlier. You mentioned that all the available space at 151 is currently under negotiation. So with the -- at 90% occupancy, it's for the 10% that's unoccupied at this time?
Correct.
Correct.
Okay. And what kind of a timing do you expect that to come online if the negotiations go as planned?
The timing or the usage will be phased starting in, say, spring of 2021 through the balance of 2021.
Okay. Great. And then, Michael, I wanted to get your thoughts on the CECRA program. Where is Allied positioned on that program offered by the government? And what percentage of your tenants do you believe would qualify for it, given what we know about it now?
Right. No, it's a good question. We haven't mentioned it in any of our disclosures yesterday because of the lack of clarity at the moment about the program. But having said that, I think the fundamental objectives of the program is well conceived. I think it is right for the federal and provincial governments to assist small and medium-sized users who have had their revenue crushed to 0 overnight. I think the notion of having the government bear 50% of the cost, the landlord bear 25% of the cost and the tenant bear 25% of the cost, is inherently equitable. I think a significant number of the users to whom we've afforded deferral would qualify in the sense that they are in the small or medium-sized enterprises, and they have seen their revenues reduced by 70% or more. Unfortunately, there's a lack of clarity now, and I believe this will be addressed, but there's a lack of clarity now about a number of things with respect to qualifying for this assistance, and with respect to the administration of the program and with respect to provincial involvement, which has actually added to rather than reduced confusion to date. Optimist that I am, I think the governments are well-intentioned. I think a workable program will be established. And I think if it is, and it is helpful to the users to whom we've extended deferrals, we will participate.
Okay. Great. When we look out at the May collection, given that it's tomorrow, what kind of color could you give us on what you may be expecting based on the conversations you've had?
It's a good question. We fully expect to roll the deferrals forward to the month of May, as I think we indicated. We would be striving for results similar in May to the results we achieved in April and have no reason to expect material differences. In that regard, our office users have met their obligations for the most part. The only office users we've extended deferral to are very small, early-stage enterprises, mostly in the 2 Montreal buildings, El Pro and the RCA building, which are buildings we want to reposition 2 or 3 years out, and we're very prepared to work with those users now and maintain those buildings as they are buildings serving a large number of very small users. And we'll transform them in due course once we develop a vision for the transformation of both buildings, which aggregate almost 500,000 feet.So that's kind of where I see it. I think may -- it's hard. There are people who try to stare us down unsuccessfully ultimately. There are 1 or 2 very small situations, which are, again, incorporated into the numbers we've provided where we might actually take the space back because we can actually more profitably get it out to office users. So this would be second story space currently used by quasi-retail tenants that we might turn around and satisfy some of the incredible demand that exists for space over the next -- 2 or 3-year space for the next little while. So May, we are striving to achieve what we achieved in April, and I guess it's a little hard to look forward to June because I think we may see some changes in terms of the physical distancing measures to which we're all subject in the month of May, but we certainly will in Montreal and in Quebec, obviously. I think we might in Ontario and British Columbia as well. But May, we're striving to achieve what we achieved in April.
Our next question comes from Chris Couprie of CIBC.
Just following up on the rent deferral. So what's the mechanism that you're intending to collect the deferrals? Is it kind of over the course of a certain period of time? Are you adding for the term? Or how are you actually deferring the rents?
It's a good question, Chris. And what we've done is simply granted a deferral. We have made no provision with the user as to how it will be paid back, when it will be paid back and on what terms. We'll do that on a user-by-user basis or on a case-by-case basis, once we all have more visibility in terms of what the slowdown or the shutdown actually represents for those businesses. And I think it will vary from user to user. For example, if you look at our retail tenant base today, about 13% of it -- and it, of course, represents 7% of our revenue, about 13% of our retail tenant base is what we call early-stage retail outlets that haven't been in our space for a very long period of time. The next category, 49% are established but largely independent operators who have been in our space for a long period of time and have been there profitably. And then finally, about 37% of our retail users are what I would characterize as national or international tenants who have been able to and have supported themselves through this particular crisis.So we'll be dealing with primarily retailers in the early stage category and the established independent category, 13% of the total, 49% of the total, respectively. We'll probably be more flexible with the first category, the 13%. We might even get to the point where the deferral becomes more than a deferral. With the established operators, we'll probably have a different approach. We'll establish a repayment mechanism over time, recognizing that they will be operating very profitably from the space again.So these are the kind of thoughts that we'll be applying as we deal with the specific deferrals to date. So we haven't asked anything of anyone. We've sort of given a blank deferral and in theory, we could demand that payment on the 1st of May. We, of course, won't do that, but we could do that. And -- so that's how we're going to approach it. I think as we approach June, what we are going to do with these deferrals is going to become clearer. Hopefully, the government program will make it easy for a significant portion of our users. But even if the government program isn't -- for some technical reason, that would actually make no sense, but nonetheless, for some technical reason that isn't applicable to our users, we will work with them to help them get through the difficulty they're experiencing through no fault of their own.
Sounds very fair and responsible. And just switching gears, with respect to acquisitions, I think you mentioned that the idea is likely to be focusing on infill opportunities. Would you estimate that this is -- if these were going to take place, it's going to most likely be back half-loaded? And then secondly, with respect to the partial asset sale in Montreal, is that still on track? And is this something that you're planning to do more of?
So with respect to the second question first, we entered into a formal agreement of purchase and sale with the subsidiary of the Canadian pension fund on the 24th. It is conditional until June 15. And after that, will be mutually conditional on Competition Act approval. We do expect that transaction to close. We expect it to close in early July, and we did actually confirm that in the press release. I don't see that unleashing a plethora of similar transactions in Allied's portfolio. It was very appropriate in the context of acquiring The Landing, and it was also very appropriate in terms of establishing a relationship with this particular Canadian pension fund. But I don't think we'll see a sudden surge of such transactions on Allied's part. But we do recognize there are circumstances where that form of, if you will, capital redeployment, could be advantageous for Allied. And when it is, we'll absolutely entertain it and I believe, have the capability of doing it.In terms of the first question -- or first part of the question, we have been seeing small infill opportunities even before the global pandemic started. The acquisition we made on The Esplanade basically completes a spectacular assembly that we have between Front Street and The Esplanade. I see more things like that coming our way in Montreal, Toronto and Vancouver. And I wouldn't suggest we're going to run out and buy the world in the second quarter. But if really good opportunities come our way and if they are priced better than they might otherwise be, we'll certainly look at them.
We take our next question from Mike Markidis of Desjardins.
The first question I have is just with respect to the potential cadence of the decline in your outlook. I know there's a lot of uncertainty, but just curious if you see the biggest impact being in 2Q and then it starts to reramp in the third and fourth quarter and accelerate into 2021, or if it's supposed to be the opposite way in direction?
My thinking, Mike, is Q2 may not see much of the decline because I think the decline is going to take the form of having to take space back, and I don't see us doing that in Q2. I would see that more likely to occur in Q3, if at all. So I think I expect Q2 will be largely kind of a standstill quarter in the sense that we won't see much erosion. But clearly, our receivables will go up because of the deferral we've made. We also may be in a position -- and by the way, we, as everyone else will report on that very precisely, so that our constituents can see through the deferral numbers well and correlate them perfectly to the receivable increase that they represent. So I kind of see that as sort of a transitional quarter, and then the impact really affecting us in Q3 and Q4. That's kind of how I expect it to play out.
Okay. That's helpful. The $335 million of capital commitments on development value-add, was that a full year or remaining 2020 number?
Thank you. It's a good question, and the disclosure was maybe not perfect, but it's actually full year. So a good part of that's already been funded. We did say throughout the year. So it is a full year number, not a remainder of the year number, yes. Yes.
And do you happen to know what the remaining balance of that is roughly?
We've already invested $70 million of that $335 million, Mike.
$70 million. Perfect. Okay. Just with respect to the step change in the power capacity -- or the power revenue that you have, could you remind us what the power capacity of your 3 UDCs are? And how much room you have to grow that with existing infrastructure?
Cecilia, do you have those numbers? We actually have been asked and we do have those numbers. Do you have them at hand, Cecilia?
Yes.
Sorry to put you on the spot, I don't. I should, but I don't. It is -- it's very material, but I will have to dig those numbers out, Mike. They're not in the materials I have in front of me. Yes. Sorry about that. I should have...
We can follow-up offline if it's not in your figures. And then the last question I have, Michael, is just more of a theoretical one. Just thinking about your comments with real estate values or equity values not matching the real estate values and your comment about potentially being more aggressive if you see prices come down a little bit than they otherwise would have. How does Allied look at its cost of capital in the shorter term? I mean with the stock price being down, does that impact your thoughts on funding? Would you look to use your balance sheet strength to take advantage of opportunities with the expectation that the equity price recovers very quickly? I'm just trying to circle the square with respect to your thought process on that.
Yes. It's a good question as well. The way we're looking at it now is the bond market has actually, or appears to have -- I don't want to talk as though I'm an expert, I'm more a customer than an expert. But the bond market appears to have stabilized. And although spreads have increased, the terms on which unsecured debentures can be issued are very attractive. So right there, we have a funding mechanism that is priced in a way that is appealing to us today. The equity capital markets are not pricing Allied in a way that would be attractive to us today.We -- I don't believe we have ever issued equity below our NAV per unit. And I think I've said in the past, and I'd reiterate it now, we would be better able to issue equity below our NAV per unit. And so if equity was the appropriate form of capital, and in order to get it, we had to issue below our NAV per unit, I think we would pass on the opportunity. I don't think we'll ever be in that position. But if we were, we would forgo the opportunity rather than raise equity below the NAV per unit. Now again, on the last one, it's hard to make these statements hypothetically, and you never really know what you're going to do until you're faced with a concrete situation. But hypothetically, at least, we would not be willing to access the equity capital markets today under the circumstances. And only if our cost of capital improved and bore the relationship to NAV per unit, would be inclined to avail ourselves of the equity capital markets.
Okay. And just before I turn it back, when you speak to your NAV, are you referring to your book value per unit or your internal thoughts as to what your NAV per unit may be?
Oh, no. No. That's our official NAV per unit. If we had to comply with my internal thoughts, we may never issue equity. But happily -- my internal thoughts don't govern our decisions in that regard. No, no, absolutely, our NAV per unit as expressed in our financial statements and perhaps also as evaluated by the analysts who cover our stock. I mean, we take cognizance of that as well. And we'll get that -- I hope we can get that data...
I have it.
Awesome, Cecilia. Thanks. Go ahead.
Okay. So 151 Front, we have capacity of 40 megawatts, and 15 of that is currently allocated. At 250 Front, we have 20 of capacity and 8 of it is allocated. And at 905 King, we have 10 of capacity, with 4.5 of it allocated.
Awesome. Thanks, Cecilia. And I think next question would be great.
Our next question comes from Howard Leung of Veritas Investment Research.
[ You presented for growth ] on Q1, but just wanted to tie that in with COVID maybe. The renewal rate for maturing leases was 61% and that's, I guess, down from last year's Q1 and the previous Q1 before that. How much of that has to do with COVID? And -- or is that just more of a coincidence?
Yes. It's a good question, and it is entirely coincidental. We had a nonrenewal at 1050 Homer in Vancouver. It was the mini dealership, like our mini dealership here in Toronto on King West, it grew to a point where it needed a more conventional dealership. So it had nothing to do with COVID. We have a small tenant. The QRC East, again, unrelated or not renew, I should say. And then the gap closed its store at 375 Queen. That was part of our redevelopment of QRC West Phase 2. So we've de-leased that entire property now and are going to commence the development of Phase 2 of QRC West.And then the other interesting element to a nonrenewal, for us was that the two buildings I mentioned in Montreal, the RCA building and the Elpro building, where some of the smaller users didn't renew because they were unwilling to pay the modestly higher levels of net rent that we thought were appropriate given the state of the market. And we'll be replacing them, I think, quite easily, especially now that we can afford short-term occupancy to people who may need that flexibility. So it really was coincidental, and there was absolutely no COVID-19 impetus for any of the nonrenewals that we had in the first quarter.
Right. Yes, that makes sense. So Q1, there's really no effect from COVID. I guess looking to the leases that you announced, the new leases signed in April and the extensions, are you noticing there's any kind of change in how the tenant plans to configure those spaces, maybe with square footage per employee? Is it higher? Is it lower than before? No change or nothing you see at that moment yet?
At the moment, nothing in that regard. We haven't noticed. People want more space for all kinds of reasons, but they have more to do with business expansion than necessarily trying to set up a 6x6 grid within the space. So we haven't seen any suggestion that COVID-19 is either inducing people to compress their space because they can have people work from home or to expand their space because they want to use more square footage per person in order to affect the physical distancing on an ongoing basis. We haven't seen any indication of either. I would anticipate, as we go forward, we may see both. We may see some people that feel they can contract their space a little bit, and we may see some people who need to expand their space requirements a bit. But I don't expect it to be material either way, but only time will tell for sure.
Right. Yes, for sure. It's a lot of uncertainty out there. I guess this is a good segue for kind of my last question. But more in a bigger picture view and maybe thinking about tail risk. What does it take, kind of in your view for the larger users, especially those that lease your space like large tech, to really shift their preferences and use of office space?
What -- here's my belief. At the end of the day, we as a workspace provider, are serving the men and women who constitute the knowledge-based organizations who are technically, if you will, our tenants. And I believe that it is what those men and women want that will dictate how workspace evolves, and I believe it's what they want that has dictated how workspace has evolved in the last decade or 2 as the real estate industry became more sensitized to what was really happening with their users. So what would be required for a mass exodus from the kind of workspace we provide to the market, would be the men and women, the highly-educated, highly-motivated men and women who have opted to live in the inner cities to decide that from this point forward, they want to work in a cocoon-like environment in their homes, which is technologically feasible.I don't see that happening. I actually believe the opposite might happen. But I certainly don't see the ultimate users of our space wanting to retreat from it. And I think the employers will always do what is necessary to attract, retain and motivate their invaluable employees. So what it would take would be for those employees to decide en masse, or to a very significant degree, that they want to work from home. And I think if that happened, or if it happens, then the employers would strive to accommodate them, and the demand for the kind of space we provide in theory would go down. That's what it would take, in my opinion.It wouldn't be some accountants, thank goodness, thinking I can save money by reducing my space and shoveling all my creative people into home offices. That isn't what's going to happen. The accountants don't run the world as it relates to our workspace anymore. That's why our workspace has evolved the way it's evolved. It's ultimately run by the users, by the men and women who have the capabilities to propel the businesses of our tenants. They're the ones that choose. They're the ones who will determine what happens. And my very strong belief based on years and years of experience, not just because I'm an old or an aging baby boomer, is they're not opting for work-from-home in any appreciable way.
Right. And yes, that was really insightful. And speaking as a former accountant and someone who's a little tired of working at home, again, I understand that.
No problem, and no disrespect intended for accountants. But it is important, it's not an economic -- of course, economics always matter, but it's not an economic decision, it's a human resource and almost leadership decision now, which is great and which, in my view, gives me confidence that there won't be a material change in how people use workspace going forward as a result of the pandemic. There will be continuous change just because it's a very human reality and our job is to keep pace with, if not, get ahead of the change.
We take our next question from Matt Kornack of National Bank Financial.
With regards to your retail leasing, do these deferrals necessarily open the discussions on those leases? Could you change the structure of those going forward? And also maybe add sort of percentage rent-type possibilities in there so that you can participate on upside as these things reopen?
It's a good theoretical question. I would probably articulate a couple of principles that we would follow in that regard. Number one, we are not going to reduce rental rates for anyone. We don't believe that is appropriate under the circumstances. So if someone is looking to us to reduce their rental rates going forward, we're not going to do it. We'll take the space back. I don't think that will happen often. But if it does, that's what will happen. We're also not interested, to be honest, in percentage rent. We never have been, primarily because it's a very difficult entitlement to monitor. And rather than put ourselves in that position, we have always chosen to fix the rental rate and -- to allow the tenants to profit, if that's how their business evolves, and not to, if you will, enter into a business partnership with our tenants. So I don't see us doing that.I think -- as I say, it will be a case-by-case discussion between ourselves and each individual user, the viability of the user is key. Clearly, we can't support someone who doesn't have the ability to be viable going forward. I don't think there are many situations in our portfolio like that. We will expect the users who have profited from our space very significantly over a very long period of time to support their own businesses and their own space ultimately, although we're prepared to help them on a cash flow basis. So these are the kind of principles, Matt, that will apply as we engage in these discussions. And fortunately, because of Tom and the great operations teams we have across the country, we know our tenants extremely well, and every discussion is personal and every discussion, I guess, respects the circumstances that prevail in the relationship.
And then, I guess, by extension, a lot of these retail spaces, there have been escalations and market rents, and presumably, some of them are sitting on below-market rents. But are you willing to work with them? And is there the ability, I guess, to access a portion of that going forward if you're going to provide cash flow in the interim?
It could. That might be one of the quid pro quos we ask for in exchange for support we've provided. So it could be. There, we either expect repayment sooner or we might increase the level of rent payable to better reflect the current market rates. So I think that is the kind of discussion that will be had. And as I say, Tom and the operations team are simply outstanding in terms of the quality of the relationships they have with our users, who as you can imagine, are really stressed. I can't even imagine what it would be like to have your revenue go to 0 overnight.And so we will work with these people fairly, in an effort to balance the interest of our customers with the interests of our unitholders. Ultimately, it's in the interest of our unitholders to have viable rent-paying tenants once the pressure from this pandemic begins to lift. So we think it's enlightened self-interest that guides us in these discussions with these users, many of whom we've had a relationship with for years and years and years and know we can count on to run a good business if they're allowed to do it.
Fair enough. With regards to the disposition in Montreal, would IFRS fair value account for what the value of that asset was at this point in Q1?
I'm not quite sure what the question is. But...
Well, was there a mark-to-market, I guess, as a result of that, that would have been reflected in Q1 results or...
No, the...
Was it at-market?
Actually, that asset, I believe, did increase the IFRS value of -- one of those 2 assets did increase in Q1, and the ultimate disposition price will more than validate that increase.
Okay. Fair enough. And then for Cecilia, on straight-line rent, is there anything in there with regards to some of the near-term assets that you're delivering on the development pipeline? And is that number, I guess, a good run rate for the rest of the year?
I'm going to have to check. I can't remember off the top of my head. I'll get back to you on that.
Okay. No worries. And I think that's it for me. I got the kids out of the house, so my home office is a little less frantic today than it has been for the last couple of weeks. Looking forward to getting back to my real one.
Okay. Thanks, Matt.
We take our next question from Brad Sturges of IA Securities.
Just in terms of the UDC portfolio and thinking about capital investment strategies going forward, given the positive trends you're seeing in the space, does that change your near-term and longer-term view in terms of the capital investment in new opportunities, whether it be at DLG in Montreal or pursuing other opportunities in existing markets?
Brad, unfortunately, you were really reverberating on -- in my earphones, at least. I think what you asked is, do we expect to see opportunity to expand our urban data center footprint in other cities? Is it...
I guess besides the 3 assets you have, with -- does the trends you're seeing currently change your view in terms of new capital investments for new opportunities in Montreal, Vancouver or even pursuing something else in Toronto?
It probably increases the interest we would dedicate to opportunities for urban data center capacity comparable to what we have in Toronto. So if, for example, we had the ability to create urban data center -- network denser than data center capability in the city of Montreal, for example, or Vancouver, we would probably be more disposed to look at that now in light of what we're experiencing in Toronto when -- than we were previously. And we are indeed, and have been for some time, disposed to do that. It's not a top priority for us in the sense that we're scouring the world and turning over every stone in search of such opportunity. We have other priorities in terms of capital allocation and in terms of allocation of human resource.But it is something that we have been thinking about and are evaluating, and 700 DLG is a very, very good example of where that may be possible. But again, I would not put it at the top of our priority list now, just as I didn't have it at the top of our priority list before the advent of the global pandemic. But it is a longer-term opportunity that we have seen for some time. And certainly, what we've learned through this experience probably predisposes us more in favor of these opportunities. But again, we have so many other transformational work underway that we're probably going to focus our capital and our resources there in the very near term. I hope that's helpful.
Yes. That's very helpful. In terms of same-property or growth guidance there, parking revenue is a pretty small segment, but have you seen much in terms of cancellations of monthly passes, for example, from tenants within the building? Or is there a lag effect to that, and you could see that cancellation grow in the coming months?
Fortunately, most of the parking lease is provided under a lease, so it's not an option that the tenant has. It's an entitlement and an obligation. So I'm not aware of anyone trying to cancel their parking obligations. Obviously, our in-and-out traffic will be down in April, May and June. And -- but the bulk of the parking revenue emanates from basically commitments under the office leases to users. And so those commitments are not optional, they're kind of mandatory along with the rest of the space. So I don't believe -- to my knowledge, we haven't had anyone trying to get out from under those obligations on an interim basis or otherwise.
We have no further questions at this time.
All right. Well, thank you very much for participating in our conference call. We appreciate your time, your input and your feedback. We'll certainly keep you apprised of our progress going forward in this unusual time. Thank you again, and have a great day and be safe. Thank you, operator.
Thank you. Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation. You may now disconnect.