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Good day, and welcome to the Allied Second Quarter 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Michael Emory, President and Chief Executive Officer. Please go ahead, Mr. Emory.
Thank you, Samantha, and good morning, everyone. Welcome to our conference call. Tom, Cecilia and Hugh are here with me to discuss Allied's results for the second quarter ended June 30, 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. Allied's second quarter results for 2020 are uniquely important in my opinion. In the face of a global pandemic and consequent economic disruption, they demonstrate convincingly that our team, our properties and our user base are resilient. Cecilia will elaborate on our financial results and discuss our balance sheet and short-term outlook. Tom will follow with an overview of leasing and operations. Hugh will provide a development update, and I will finish with uncharacteristically brief summary comments. So now over to Cecilia.
Good morning. I'll summarize our financial results, our balance sheet and our outlook. Our financial results. This quarter's results reflect the resilience of both our portfolio as well as our user base. We achieved $0.56 of FFO per unit and $0.50 of AFFO per unit, including $4.6 million of provisions relating to the global pandemic made in the quarter. $3 million of the provision is for abatements under the CECRA program, an additional provision of $1.5 million was recorded against deferrals granted to storefront retail users. Another $99,000 was written off as a result of nonpayment of rent in the quarter. FFO per unit for the second quarter was down 3.6% versus the comparable quarter as a result. AFFO per unit for the second quarter, however, was up 3.3% versus the comparable quarter due to lower regular leasing expenditures. Our annualized quarterly EBITDA, also including the provision held just shy of its high last quarter at $342 million. Driven by a decrease in variable parking revenue and the rent abatements provided under the CECRA program in all regions, our same-asset NOI in the second quarter was down 2.8% from the comparable quarter last year. While our Workspace portfolio was down 4% for the above noted reasons, our UDC portfolio was up 2% as a result of increased ancillary rental revenue. Moving to our balance sheet. Driven by development, NOI growth and the strength in our core markets, our NAV per unit at June 30 was up 10.8% from a year ago. Our IFRS value increment in the quarter totaled $37 million in addition to the $77 million invested through CapEx. This was driven by 700 DLG transitioning from purchase price to a discounted cash flow model for valuation purposes as well as a 25 basis point compression in the cap rates on our earned data center assets. The cap rate compression was based on new points resulting from 2 transactions in the data center space in the period. We accessed the unsecured debenture market on favorable terms in May, issuing our Series G $300 million 8-year bond with a 3.13% coupon. We used the proceeds to repay amounts drawn on our unsecured credit facility and for general working capital purposes. This allowed us to finish the quarter with $72 million of cash and nothing drawn on our $500 million unsecured facilities. We also have full access to an additional $100 million accordion -- sorry, an additional $100 million through an accordion feature. We're in an excellent liquidity position with the ability to fund all of our commitments through 2021. At quarter end, our net debt-to-EBITDA was 7.6x. Our total debt was 29.3% of IFRS value and interest coverage was 3.3x. Our ratio of unsecured to secured debt was 2.5x at quarter end, with unsecured debt representing 71% of our total debt. Our pool of unencumbered assets is $6.3 billion, representing 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 original internal forecast for 2020 calls 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, we revised our internal forecast for 2020 last quarter to flat to mid-single-digit percentage growth in each of same asset NOI, FFO per unit and AFFO per unit. While we do not forecast NAV per unit growth, we expect -- we continue to expect it in 2020. We also 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 $172 million to development and value-add activity over the remainder 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 will now pass the call to Tom for a discussion of our leasing and operating activities.
Thank you, Cecilia. Our leasing teams based in Toronto, Montreal, Calgary and Vancouver, completed 84 transactions, totaling 520,000 square feet of space in Q2. Rents held up nicely, and we achieved a healthy 16% increase on space renewed or replaced in the period. Our overall workplace portfolio maintained a 95% leased status. Through the quarter, we completed a number of important renewals and made leasing progress on our development projects. I'll provide brief leasing highlights on our major markets, starting with our Workspace portfolio, then our UDC portfolio in Toronto. In Montreal, we completed a 35,000 square foot expansion with Unity in Le Nordelec. And we completed a 35,000 square foot renewal with the Salt systems in CCMM. Our Montréal team completed an impressive 46 deals in the quarter. The Montreal portfolio is 93.5% leased. In Toronto, one of our major tenants at The Well exercised an option to expand for 90,000 square feet, and our workspace portfolio in Toronto is 98% leased. I should point out that over the course of the quarter, we took back only 2 spaces in the portfolio, totaling under 10,000 square feet of space for nonpayment of rent. One of the spaces was in Toronto. The tenant was a U.S.-based fitness studio who occupied 5,000 square feet of space on King Street just west of Spadina. Within 2 weeks of taking back this space, we had 3 offers and are now finalizing a deal to re-lease the space on exactly the same rental terms as the previous tenant. There are no broker fees, no allowances, and the space will be leased on an as-is basis. In Kitchener, we completed a 123,000 square foot renewal at higher than in-place rents. This transaction accounts for the lower quarterly increase in net rent on renewal in the quarter when compared to the prior quarter. We also made good progress in Calgary completing 17 deals in the quarter, including a 45,000 square foot renewal. Just subsequent to the quarter, we waived conditions on 2 deals, aggregating 12,000 square feet at TELUS Sky. To provide a little color on our recent activity in our portfolio in Calgary, so far this month, we've completed 40 physical tours of available space. In the context of the Calgary office market, our portfolio is a very respectable 90% leased. In Vancouver, we remain 95% leased. Given the office demand/supply dynamic in Toronto and Vancouver, we continue to expect upward pressure on rental rates over the remainder of 2020. We expect demand to remain strong in Montreal, though we expect the demand supply dynamic there to put less upward pressure on rental rates than in Toronto and Vancouver. Turning to our UDC portfolio. Last quarter, we reported renewing our single largest tenant of 60,000 square feet at 250 Front. This quarter, we leased 30,000 square feet of vacant space to 2 tenants. One is a new tenant for 21,000 square feet at 151 Front. And the second is a 9,000 square foot expansion for an existing tenant at 250 Front. These new deals will be phased with rents commencing in Q1 next year. 151 Front is now 97% leased, 250 is now 73% leased, and our UDC portfolio is an overall 89.5% leased. I think it's important to mention something about the performance of the Allied team over this challenging quarter. We have continued to actively recruit and have successfully onboarded 23 new people since our offices closed March 17. We established a committee to plan the reopening of our 200 very different buildings as well as the reopening of the Allied offices in Toronto, Montreal, Calgary and Vancouver. This committee was composed of people from our operations, experience, UDC and talent teams. This collaborative effort produced a thoughtful and comprehensive return to the office program, which included physical changes to our buildings, along with detailed communication of protocols to all of our tenants across the portfolio. The ultimate goal was to roll out a plan to make all of the employees of our tenants feel comfortable and safe about returning to the office. Under the leadership of Doug Riches, our Senior Vice President, National Operations, we have accelerated the integration of our urban data center and workspace operations and have already seen positive results. Our leasing team performed well in the quarter, as mentioned earlier, but they've also been working to prepare strategies in all markets for all of our space to hit the ground running in September. September is the beginning of a traditionally strong leasing period every year, and we expect this year to be no different. Our lease documentation team handled all of the usual documentation in the quarter while also working with our property management teams preparing the significant volumes of the CECRA paperwork. And of course, our frontline building operators and operations supervisors and the entire UDC staff who have not stopped attending to our buildings every single day. I will now turn the call over to Hugh for an update on our development activities.
Thanks, Tom. Our primary focus this quarter has been to assess the impact of COVID-19 on our development projects. This activity consists of determining and quantifying the known impacts, predicting potential future impacts and then establishing mitigation measures to minimize the current and expected impacts. We have worked with the various project teams to assess the current impact and to estimate the continued risk of our -- to our projects. These potential risks include disruptions to the supply chain, claims by trades for delays to the project and risks associated with lease obligations. While we can never be sure of these continuing risks, we believe that we have been able to quantify sufficiently what risks exist today. While we have been focusing on the impacts of COVID-19, we have still been able to make progress on our construction projects. I will begin with a brief summary of our ongoing development projects and then a brief overview of our planning work that we have begun. In Toronto, we continue to make progress at The Well. We have formed up to the 23rd floor of the office tower and are forming various floors of the remaining buildings. Progress on-site should permit us to close on 2 of the 6 air rights sales to the residential purchasers in late 2020. The remainder of the air rights sales will close in 2021 and the beginning of 2022. We have adjusted the cost of the project to take into account the risks previously described. At King Toronto, we have started bulk excavation and shoring on site. The sales activity will continue at a reduced pace throughout construction. Our projected construction schedule anticipates the first commercial occupancy occurring at the end of 2023 and closings of the condominium units in phases through 2024. At Adelaide and Duncan, we have reached the P1 level below grade. While we believe we will be able to meet the timing requirements of the lease to Thomson Reuters, we have provisioned for a 2-month delay to the project, both in terms of timing and cost. In Kitchener, we have completed the bulk excavation and have started the formwork. We believe that it was prudent to adjust the completion date of the project from Q4 2021 to Q1 2022. We are working with our development partners, Perimeter, to determine if we need to increase the contingency for the project to deal with this delay. In Western Canada, we have received the occupancy permit for the residential floors of TELUS Sky. We anticipate the first residential renters will move into the building in August. Construction continues unabated at the Lougheed building, planning activity. While our primary focus has been on our existing construction projects, we continue to push our future development projects through the design and approval phases. The launch of these projects will be dependent on the market conditions. I will now turn the call back to Michael.
Thank you, Hugh. As Tom mentioned, we've reopened our own office space across the country and are working closely with our user base to repopulate our buildings in a manner that accords fully with recommended and required public health practices. I'd be remiss at this point if I didn't expressly acknowledge the many frontline members of the Allied team who worked through the shutdown in an environment of elevated health risk. I very much want to recognize them as having gone above and beyond the call of duty in an effort to protect our assets, our revenue streams, our customers and our communities. As I mentioned at the outset, our second quarter results are uniquely important, in large part because they occurred entirely in the context of a sudden and severe operational challenge caused by an exogenous global event that no one could have anticipated. In reporting on our results, we've resisted the temptation to engage in speculation of the sort that became rampant in the height of the shutdown. This is not because our vision of the future has changed. But rather because we believe that actual results speak more loudly about Allied and its business than speculation, whether it's our speculation or anyone else's speculation. I will, however, conclude by reiterating what I've said for some time now. 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 believe that our strategy is underpinned by the most important secular trends in Canadian and global real estate. We also 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. I do hope this has been a useful and comprehensive update for you. We've now be pleased to answer any questions you may have.
[Operator Instructions] Our first question will come from Jonathan Kelcher with TD Securities.
Can you maybe give us a little bit of color on the various markets on how tenants are reopening their offices and maybe some discussions that you're having, at least at a high level on future space needs.
The best way to start, Jonathan, is at the moment, we're having no material discussions with any user anywhere in the country about expansion or contraction. It's simply not a matter that has been a subject of discussion between ourselves and our users. The principal focus has been over the last 8 to 12 weeks, been safely reopening the buildings and the protocols that we collectively, and we collectively, I mean, Allied as owner and our users as occupants, wish to see in place to mitigate the risks associated with the ongoing global pandemic as fully as we can. Those discussions have been extensive. They've been very valuable to us, and I hope very valuable to our tenants. There have literally been no discussions about reconfiguring space, densifying space, de-densifying space, partitioning space, departitioning space. None of those discussions have been occurring between ourselves and our users. With respect to the markets, Vancouver opened, as you know, on May 18, our office opened that day as well. The indications we have is that our buildings at least are repopulated at the 40% level roughly. Retail users are and have been active continuously from May 18 and the sort of indications we're getting are that retails -- retailers are running at around 70% of normal top line numbers. Again, we don't get formal reports from most of our retail users, but that's the indication that we're getting from Vancouver. Calgary opened on the 15th of June. The retail acceleration there has been much, much slower than in Vancouver. And again, our sense is the population is around 40% of the normal workforce in our buildings. Toronto opened later our office on July 6. We very much wanted to be ahead of our users, and we were, I think, with Toronto moving to Phase III on Friday or Stage 3, I guess, I should say, we'll start to see our buildings, East and West of the core begin to repopulate. But right now, I would say, 10% would be the high watermark in terms of the percentage of the existing workforce that have returned to our buildings. So it's still very much an incipient reality in Toronto. Montreal, interestingly, which reopened at essentially the same time our offices and the larger market has repopulated faster than perhaps any of the markets across the country. Even our 700 de la Gauchetière, which is the one and only tower or full height, high-rise tower that we own, has repopulated rather quickly. I would, again, be picking a number a little bit out of the air, but I think easily, we're at 50% in Montreal. So it appears to have repopulated most rapidly. So that's where we're at. We're not in a position to really predict the rate of repopulation in Toronto yet, even though we've been in our offices since the 6th of July.
Okay. That's helpful. And then just changing gears a little bit on -- for your UDC portfolio, you wrote in your letter that you're having discussions with tenants about increased allocations of power and significant CapEx that you would have to undertake to do that. How much capital are you talking about? And what sort of returns would you be targeting there?
Well, just to explain where the capital is required, as we allocate additional power to an existing user, we will need to create the backup capability. So we'll need backup diesel generation capability, which is sort of thought of and spoken of in our world at UDC as e-power. It will be our obligation to fund that. They are not enormous amounts of money, but they are not -- they're in the millions, but not the tens of millions in terms of allocating additional power in a meaningful way. The return, in terms of, what I'll call the new regular rental revenue, would be very high, double-digit easily.
Okay. That's -- and when would you expect to start on that? Would that be in 2020 or 2021?
We won't see that impact our statement in 2020 at all. We may start the work, and we may start the commitment process in 2020. It may have some impact in the latter part of 2021. But it won't have any impact in 2020.
Our next question will come from Mark Rothschild with Canaccord.
Michael, maybe -- maybe just following up on your comments about Montreal. You've been -- you've spoken several times about your opinion on work-from-home going forward over the long term. Would you say that you have a stronger view of Montreal than maybe some other markets like Toronto in what you're seeing now? Or in general, do you think that this will play out similar over the long period?
I think however this is going to play out, it will play out in each major urban market roughly the same way. Montreal doesn't have the demand velocity that we see and continue to see in Toronto and Vancouver, but it's also not creating new supply. Whereas in Toronto and Vancouver, the industry is creating material amounts of new supply that is very well pre-leased and I think, is appropriate, ultimately to meet the excess demand that exists today. So we've been saying for some time pre pandemic, and I would reiterate it largely post pandemic whenever we get to that point in time, that the supply in Toronto and Vancouver will catch up to the demand and the upward pressure on rental rates will dissipate. As long as we don't create excess supply, I wouldn't expect rental rates to come down. But I would expect 2 or 3 years out, the upward pressure on them to dissipate almost entirely. Again, Montreal might see a longer period of more modest rent growth because no new supply is being created, and because the education complex there is creating an ever-growing talent pool that continues, right through the pandemic, to be appealing to the kind of users we serve. So I don't think Montreal will do better than Toronto. In whatever transition occurs as a result of working from home, I think the major cities in this country will be affected pretty much the same and I don't think any city has a structural advantage in that regard. Although none of the major cities in this country can match Toronto for the size of the talent pool and the velocity of the demand.
Okay. Great. And maybe just one more question. So that 0.5 million or so square feet of leases that expire over the remainder of the year, clearly you're showing that you expect positive leasing spreads. How much clarity do you have on this leasing? And what are your expectations? And I'm not sure when Tom made the comment that your confidence in September will be no different than maybe in previous years. Is that just referring to the UDC portfolio or the entire portfolio?
That was in reference to the Workspace portfolio in particular, Mark. September is always a very, very buoyant leasing time. And we don't think it's going to be any different this year. It might even be stronger because, as I mentioned in July, for example, where our people track the number of tours, we have 40 physical tours in July in Calgary. That's unusual because there was some pent-up demand. We think that's going to continue. And come September, provided the health is good, and we keep the numbers down, we think we're going to see a really active fall leasing period.
Our next question will come from Chris Couprie with Canadian Imperial Bank of Commerce.
A quick question on the UDCs. The ancillary revenue LQA NOI for the quarter, it increased from the previous quarter, but I don't know, for some reason, I thought it was going to increase at a more rapid rate. Can you maybe just comment at all in terms of ancillary revenue trends in the quarter? Because I guess in Q1 when the pandemic hit in March, there was -- I'm guessing that caused the initial spike, but maybe I'm wrong. Could you give me some clarification on that?
I will, indeed, Chris. What we've seen in the second quarter, and it is the first time we've quantified it, we've seen approximately $414,000 of new ancillary rental revenue that we didn't forecast when we prepared our internal forecast for 2020. Over half of that is unquestionably or highly likely to be recurring. So the way I look at it is we have roughly $1 million in 2020, if we extrapolate back to the first quarter and then forward to the third and the fourth. Whether that will begin to accelerate from $200-plus thousand per quarter in Q3 or Q4, I don't know. But I do know it won't decelerate. So the way we're looking at it is we expect UDC to contribute approximately $1 million in 2020 to offset the revenue that we have lost and will lose for the month of July under the emergency rent relief program. So it will help ameliorate the negative impact in a way that wouldn't have occurred based on our forecast when we put it together.
Okay. Fair enough. Just one last question for me on the balance sheet. So the transaction that was contemplated to sell the properties in Montreal didn't take place. And the -- my understanding was that the proceeds with that -- from that were to be used towards helping to fund The Landing. So maybe just a comment on where your balance sheet sits right now and maybe in the context of -- I think, Cecilia, you mentioned that you're going to have the ability to fund all your commitments through 2021. Is that assumed to be keeping your balance sheet within your targeted range?
The answer is essentially yes, but let me be precise. We did not complete the proposed sale of 2 assets in the city of Montreal and use the proceeds essentially to fund The Landing. What we did in anticipation of that sale not going through was funded The Landing essentially with debt. That did put a little bit of upward pressure on our debt to EBITDA. Our debt-to-EBITDA is today, I believe, 7.6, 7.5. That's a little higher than we would like it to be. Our view is it should be 7 or slightly into the high 6s. That's the only implication. In terms of cash flow and earnings, the implication is very positive for us because we would have given up a very substantial amount of earnings on the sale of the Montreal assets, which would not quite have been offset by the earnings from The Landing. Now of course, we have the benefit of both. So the only implication to us of doing what we did is we put a little bit of upward pressure on our debt to EBITDA. We've always said, we're quite comfortable with temporary escalation above our ideal ratios, and we see ourselves in that position now. But again, only marginally. So speaking for Allied corporately, I'm delighted we did not sell those assets in Montreal. I never wanted to, but I thought it would be good for Allied to demonstrate that we could fund growth in that manner. I am now convinced, based on that transaction and other approaches that have been made to us subsequently, that we could easily fund our growth in that manner. But I'm very glad we didn't have to under the current circumstances because I would much prefer to own all of those assets in Montreal at the moment. And I don't think our ability to fund growth by disposing of undivided non managing interests in our assets in Montreal, or Toronto, or Vancouver, for that matter, is impeded in any way by the fact that, that particular transaction didn't close. So we were doing what we thought was best for Allied under the circumstances. I'm thrilled that we got The Landing. I'm almost equally thrilled that we didn't sell even a non managing half interest in those assets in Montreal.
Okay. So just the idea of selling non managing interest in other properties is currently on the table? Or is not something that you are necessarily dying to do right now?
There are count -- well, that's an exaggeration. Let me speak. There are a number of extraordinarily well-funded interests who would be ready, willing and able to engage in those kind of transactions with Allied, especially in the Toronto market, but also in the Montreal market. We are not under any sense of urgency with having to execute those kind of transactions because of the liquidity position we enjoy and because of the strength of our balance sheet. So we could do it, but at the moment, we have no present intention or desire to do it. To my way of thinking, that is a secondary source of funding for growth. Our preferred source of funding for growth is raising equity in appropriate quantities. Fortunately, because of the $1-plus billion we raised last year on extraordinarily good terms, we have no need or we're under no compulsion to raise equity now and won't be for a very long period of time. But our preference always will be to raise equity. Not to sell off our assets because we continue to see our portfolio as an integrated, coordinated, coherent hole that allows us to serve tenants better in each of our target markets. Selling a half interest doesn't really impede that because we would retain managing control over the asset and as a result, we could serve our tenants as well as if we owned the whole thing. So it's not an objectionable way of funding growth to us. It would have to be a non managing interest. But our preferred way of funding growth always has been equity, and going forward, I think will be equity. Even when we announced that we were doing this particular transaction in Montreal, or working toward doing it, I think I indicated pretty clearly that we saw this as an exception and not as a normal mechanism in the near-term for funding our growth as a business. Now of course, I said that pre pandemic, but it's equally applicable to my way of thinking post pandemic or at whatever stage in the pandemic, we're now in.
[Operator Instructions] Our next question will come from Matt Kornack with National Bank Financial.
With regards to the SECRA accounting, I think Québec is ultimately going to pick up half of that, at least the landlords' component, but it looks like you haven't accounted for that in your current filing. Do you have a sense; a, how much Québec represented of SECRA? And am I correct in that you're taking the full 25% as opposed to 12.5%?
First of all, you are correct that the regime in Québec is slightly different from the regime in the rest of the country. We have assumed, for our purposes a full 25%. If we are able to qualify in Québec with respect to our Québec tenancies for the lower amount, that will be a benefit to us that we haven't currently accounted for. We've, I believe, Cecilia, taken the worst-case of 25% across the board.
Correct.
So there are a significant number of users in Québec in our portfolio who qualify under the emergency rent relief program. I don't have the number.
I have it.
Okay.
The -- of the $3 million, $850,000 was in Montreal.
Okay. Perfect. And then just generally, with regards to SECRA and the deferrals, I mean, you're still operating in markets that have fairly tight vacancy levels. I mean, SECRA, it sounds like was not forced upon landlords, but encouraged. But I'm just interested in your thoughts as we look at going forward, the hope is that those tenants survive to the other side, but should they not -- is your assumption that, that space is releasable and presumably at maybe higher rents?
In certain instances, yes. The way we looked at it is as follows: if a user in Allied's portfolio qualified under the program, we were fully prepared to participate with them in the program. And indeed, I believe, Tom, we did all the paperwork, which was horrendous and is ongoing, in order to have our tenants avail themselves of, in effect, the taxpayer covering 50% of that rent. This will extend into July, and we will participate for the month of July with the same tenants who qualify. We don't expect it to extend beyond July. And we think the majority of the users who qualify will make it through to the other side. We know most of them. There are a significant number, interestingly of office users in that number. I think around 45% of the total was represented by office users. But we do expect minimal fallout. And I don't think we've sensed any stress there. The bigger area for us in terms of potential fallout are the deferrals we've given to the larger independent operators. And that's why we chose to make a $1.5 million provision against the $5 million of deferrals that we afforded to our users in the second quarter. We expect to extend most deferrals through to the end of July. And we expect the deferral program to stop at the end of July, and we will be looking for full rent for the month of August. And we will be establishing repayment regimes on a case-by-case basis with these users, all of whom are very well-known to us, and all of whom we've had a long-standing relationship with. But they're larger retail enterprises, for the most part, and we felt it was appropriate to anticipate some of that deferral not being repaid. I think we might have been a tad conservative, which is not a bad thing to be in these circumstances because we just don't know how hard it's going to be for our storefront retail users to return to some sort of normal level of top line revenue. And obviously, we're going to be living that with them on an almost daily basis now that we're back in place across the country. And certainly, moving to stage 3 in Toronto is going to be a big help, because Toronto, if I'm not mistaken, Tom, represents about 67% of our retail revenue?
Correct.
Yes. The real action is Downtown West and to a lesser extent, the St. Lawrence market area in Downtown East. That's where the vast bulk of our rental revenue comes from, and that's where the vast bulk of our deferrals would have been granted to people who weren't national retailers, but were rather independent local operators, well-known to us, who have made a lot of money from their space over a very long period of time. But we were prepared to help them out by giving them cash flow relief. But we weren't prepared to abate their rent, and we're not prepared to abate their rent.
Okay. No, that makes sense. And I would assume, I mean, I'm one of the lucky few that's in the office right now in the downtown core. But the path is completely dead, but your retail gets some foot traffic from density, residential density that's been built around it. So I'd assume they're doing relatively better than the Food Courts downtown. And presumably, we'll see an increase as people go back to the office as well.
They are indeed because as you point out, there's an existing population in Downtown East -- Downtown West and the St. Lawrence market area that is already patronizing the vast bulk of our retail users. And the city has been very proactive in enabling the restaurants, in particular, to establish patios, either in the curb lanes on the sidewalks and that's allowed them to do business in a manner that consumers appear to feel is safe, and consumers are clearly prepared to patronize. So we can actually watch physically, the reopening take hold. And I fully expect that Downtown East and Downtown West Toronto will reopen much more rapidly than the core because our retail is street located -- street front and because our buildings are generally low rise, and it's much easier to manage physical distancing in the context of a low-rise building than it is in the context of a very high-rise building, although the latter is possible, and that will be done well -- as well by owners and by occupiers. But I expect to see -- I expect to see our submarkets repopulate faster.
I know, that makes sense. With regards -- 2 quick timing things on 425 Viger as well as 151 Front, there was significant lease-up -- or sorry, the 425 came online or moved into IPP, but there was lease-up at 151. How much of that would have been in this quarter versus in future quarters with regards to straight-line rent and cash rent.
The rent won't start until early 2021 in UDC.
And 425 Viger, is that in straight-line rent at this point? Or is it still fixturing?
It's still in straight-line rent, which they're still in fixturing.
Yes. The hesitation there just detail wise, because construction was shut down in Québec for about 2 months, the actual rent payment date has been pushed out 2 months, as you would expect. So Google will pay rent 2 months later -- or the commencement date of rent payment will be 2 months later than it would have been but that property has been in straight-line because Google has been in occupancy for some time now.
Okay. Yes. No, that makes sense. I will say as a case study of one, I am far preferring my office to my dining room table, so take that.
As are the 4 of us.
Our next question will come from Howard Leung with Veritas Investment Research.
Can you talk about maybe your individual property densities. You gave some color earlier, high-rise versus low rise, whether that has affected your discussions with specific tenants concerned about health and safety and whether you've noticed that could change the rate of repopulation for each of those buildings?
The interesting thing for us is the vast bulk of our properties in Toronto are low rise. The building we're in, QRC West is the highest building we own and operate in Toronto, and it is 17 stories. King Portland Center, Hugh, is 14 stories. Those would be the 2 highest buildings until The Well is completed and then, of course, it will be a full-on high-rise tower within our portfolio. But at the moment, everything is low-rise, it's fairly easy to manage movement at QRC West and King Portland center. The real, if you will, litmus test we have is Montreal. We have fewer buildings in Montreal, and they are all generally higher rise on average than our buildings in Toronto. We haven't seen any, in a way, impediments to the population of the Montreal buildings by virtue of their being somewhat higher rise because they're still, instead of 4 to 6 stories, they might be 10 to 15 stories, on average. The one very notable exception for us is 700 de la Gauchetière. And interestingly, that building has repopulated itself or is being repopulated at a rather rapid rate. National bank brought back a significant number of its employees in that building and in 600 DLG, which is its head office, on the first day that it was permissible for people to reoccupy office space in downtown Montreal. So it has gone more rapidly. And so for us, the only experience we have with a very high-rise tower hasn't suggested any diminishment in repopulation. But as I say, that's the only experience we have. My sense is the high-rise towers in Toronto are going to repopulate a bit more slowly. But again, as a lot of the financial institutions and professional firms have said, they're assessing things almost on a day-by-day basis. So everybody is responding to what they should respond to, I believe, which is data. And I think also the desire not to have the public transportation system go from empty to full capacity overnight. That is something I think the occupants of the towers are striving to collaborate with the mayor on, to prevent that sort of immediate full capacity utilization of the public transportation system. And I think that's wise. I think that's wise. So our experience hasn't been helpful in actually suggesting that low-rise will populate faster than high-rise because the one high-rise building we have has repopulated rather quickly.
That's very interesting. I guess kind of turning to market rates and the estimates that were put out, I guess, for this quarter, obviously, leasing spreads are still very strong. Have you seen any difference at all kind of pre- and post pandemic? And your recent rate estimates, are those all kind of rates you've seen since the lockdown?
We have seen rates hold based on our expectations. The deals we've been doing over the course of the quarter were the -- more or less the same numbers we were doing pre pandemic. The rates have not diminished. Recognize in Toronto, there's only 2% vacancy in office space. There is continued demand. So if a tenant happens to be seeking space, they don't have many alternatives. So rents have held, same in Vancouver. Calgary has slipped a little bit, although we've done well. Kitchener, we did a large renewal that actually increased a little bit in terms of its relation to in-place rents. So we're not seeing rates negatively affected in any of our markets.
And I think Cecilia and Tom, every quarter, we reassess our market rates for the purposes of that table with brokers and appraisers across the country.
On the specific space being available. Not just a general market numbers but specific spaces.
Yes. So that chart or table, which I know is valued by us as owner operators and by our constituents is refreshed on a quarterly basis and is based on independent input, not just Michael, Tom, Hugh and Cecilia. It's actually based on independent input.
And it's today's rates.
Yes.
We're not...
Okay. No, that's great. Yes. That's a good clarification, and it is a great table. I guess moving to SECRA. You mentioned in your remarks that there were some take ups for office users. Can you just point me into if there's any particular industries that you saw? Or was it kind of all across different -- they're all small tenants, but across different industries?
It was very much office users whose revenues were suppressed by 70% or more from normal. So the ones I remember seeing, and Tom, you maybe, were organizations that are in the business of event planning, for example, publications for event planning, publications for travel, travel advisory. So it was office users whose business was materially slowed by the pandemic. There were a great many office users who thought they were eligible because of their size who were disappointed to learn that their revenues hadn't -- well -- they were disappointed to learn that they hadn't sustained revenue declines that would qualify them under the emergency program. Anyone else that you can think of, Tom, any types of users?
Anything that was related to production in Hollywood, which got shut down. So post production, those kinds of firms took a hit. But generally, anything related to travel events, restaurants, clearly they were affected.
We were surprised, Howard, actually, at the number of office users who initially requested participation in the program.
There were hundreds.
I almost swallowed my heart when I heard the number, but we were, in a way, delighted to learn that the vast majority of them, while they may have met the size requirement, had not experienced revenue erosion. And of course, we were quite happy to learn that. And they paid their rent. There's nothing wrong with trying. But once they understood, how the regime worked, they understood they weren't eligible. It had nothing to do with us, and they paid their rent.
Each tenant has to attest -- each tenant is compelled to attest with a signature that their revenues were hit. As soon as they realized, oh, we have to actually sign to say all this, it became evident quickly that they couldn't qualify. So there was hundreds that didn't qualify.
I was happy that only 7.2% of our revenue emanates from users who qualified for the program. That's a pretty strong indication of how sizable our users are and how creditworthy they actually are. So once we got the ultimate number, the real number, we were quite pleased with the relatively modest percentage of our monthly, quarterly or annual rental revenue that they represent.
Our next question will come from Mike Markidis with Desjardins.
I was just wondering if you could just comment on now that we're sort of moving towards at least progressing towards a more normal state, what you've seen in the private market from an acquisition perspective, if anything at all?
The private market is operating pretty much the way it did in the global financial crisis. Nothing good is available. Nothing good is for sale. Nobody with a good asset is going to put it on the market in these circumstances. And that was exactly what happened during the global financial crisis. There are some, I would call it, distressed or quasi distressed assets in the market now, failed condominium projects, land that was once conceived for condominium projects that are probably no longer viable. Some of it might represent infill opportunity for Allied, but not much of it. But anything big, anything substantial in the urban office market is unavailable. So to date, it's kind of like the global financial crisis. The good news is there's no distress. And the bad news is there's no distress. We are not going to see significant distressed opportunities, I don't believe as a result of the global pandemic. We might see smaller infill opportunities that were in weaker hands become available. But in quantum, they'll be relatively inconsequential for Allied. So my current feeling is we're not going to see much by way of opportunity. And if someone brought a high-quality asset to the market today, it would be heavily, heavily bid. And it would sell out on terms comparable to what would have happened pre pandemic. I can't prove that, of course, but that's my strong -- I know if a great asset for Allied came up, we'd be bidding hard. And I know there are many well-funded organizations in this country and outside this country that would be bidding aggressively against us.
Okay. That's great color. And then just hypothetically, if that -- any of those opportunities that you would be bidding hard came to fruition. Just curious, when you look at your leverage targets now that you're kind of at 30%. I know you've got a way to go when you're going to 35%. But is that a hard and fast target? Or are you willing to use your balance sheet if the equity markets don't recover in order to take advantage of something that might come to fruition?
We would not be prepared to compromise the balance sheet on a long-term basis to do an acquisition. We might be prepared to compromise it -- compromise, I don't even like the word, to alter our debt metrics in the short term. But if there was a large acquisition opportunity today, the only way we would be prepared to fund it would be with equity. If the equity markets weren't receptive on terms that we thought it appropriate, we'd pass.
Our next question will come from Jenny Ma with BMO Capital Markets.
Hopefully, I'll be quick. Just wondering with regards to Google's news that they're going to continue working from home through next summer. Does that impact anything at Viger or The Breithaupt Block as far as the timing of the projects or any changes to the plan? And then the second question is...
No.
Absolutely nothing?
Nothing at all.
Okay. Good. And are they in any of your offices in a material way?
I'm sorry.
Are they in any of your offices aside from these 2 developments as current tenants?
Other than perhaps our urban data center portfolio, no.
Okay. And then my second question is with regards to Shopify, they had announced with their results that they're going to terminate some leases and maybe sublet some space and take a $32 million charge. Wondering if that affects any of your buildings?
It does not.
And our last question will come from Mario Saric with Scotiabank.
Just a couple of really quick ones. In terms of July rent collection, given Toronto's getting into Phase III tomorrow, is it fair to say that the July rent collection would be comparable to your Q2 average that you disclosed?
Yes. Yes.
Okay. And then at 35 - 39 Front Street East, overall, it looks like your Toronto portfolio occupancy came down 100 basis points to [ 97.7% ]. This quarter, that's pretty consistent with the broader Toronto market decline in Q2, but it looks like 35 - 39 Front Street accounted for about 80 basis points of that, so pretty much all of that. So can you maybe provide some color in terms of what happened there and plans for releasing the 35,000 square feet?
Sorry, Mario, just clarity on the question, you broke up a little bit there at our end. You're -- are you trying to link the sequential decline in occupancy to 35 - 39 Front? Is that the question?
Yes. It looks like most of the decline in occupancy in Toronto was related to a vacancy there. So I just wanted to get more color in terms of what happened there and what the plans for releasing are?
The space is on the market. It's active.
It's a nonrenewal.
Just a tenant who need to be accommodated with bigger space that we have.
And so it's a nonrenewal in the quarter. It must have been.
It is. Yes.
And they simply needed bigger space, which is always a frustrating way to lose a tenant, Mario, but we didn't have bigger space for them. That's really great space. That's one of the first brick and beam buildings we acquired in the late 1980s. That will go nicely. We won't have any problem moving that space. It's beautiful space.
Yes. I know the building fairly well, and I would agree, it's a very good space. Any sense in terms of what the expiring rent was relative to your estimated market rent in the space?
Off hand, I don't know the number, Mario, but I would say that it is far less than we would be able to get today. They've been in the premises for quite a long time.
It's an old...
So we'll see a nice uplift when that gets released.
Got it. Okay. And then just my last 2 questions just both relate to the UDC portfolio. So the ancillary revenue this quarter was 10.2%. Of total revenue was about 10% last quarter. I think you noted in the past that in the U.S., you typically use benchmarks closer to about 15% in terms of ancillary versus overall. How long do you think -- or I guess: a, do you think that's possible to Allied over time? And how long might that take to reach those types of levels?
We do think it's possible, and it is our goal to get to a normal level of what we call ancillary rental revenue at around 15%. I can't credibly and confidently tell you today how quickly we expect to get there. Will we get there in a year? No. Will we get there in 3 to 5 years? Yes. But we have not done and aren't confident based on the experience we've had thus far, in projecting the time frame for that inclusion in our income statement. The more time that goes by, and we've now got an Edge site, as you know, at 905 King, we've got the AWS Direct connect portal at 250 Front. And they are accelerating or utilization and cross-connections there are accelerating and clearly got a boost as a result of the pandemic, but we don't have enough data yet, and we're still too early in the process to project how fast we're going to get to where we believe we will ultimately get with those assets.
Okay. And then I guess, last question, kind of similarly, but on the 250 Front, too, it was nice to see the lease occupancy tick up to 73%, the data demand is very strong as evidenced by the U.S. data center REITs being up 30% to 35% year-to-date. How do you think about the pace of stabilizing the 173 square feet out of 250 in terms of 73% gravitating closer to call it 90%, 95% over time? And what kind of conditions need to take place for that to transpire?
Well, we're working on a number of deals, Mario, that hopefully will happen. The cycle that it takes to do a deal in UDC is a long one. The deals that we were -- that we announced this morning have been in the works for a long time. And every time we make a statement as to when we think something will happen in UDC, it takes longer. So I don't -- I won't be able to give you a number or a date when we will be at 95% occupancy. It's just taking some time.
Okay. And any sense in terms of how 250 has performed relative to global peers for the existing tenants? I think that's one thing you've talked about in the past in terms of existing tenants trying to allocate resources across various geographies. How has 250 kind of held up performance wise?
It has performed exceptionally well for its key tenants, which is why they renewed and why we expect they will continue to renew on an ongoing basis.
Okay. And do we have time for one more question? Sure. Okay. Our last question will come from [ Arena Propapadua with Presma ].
I'm just wondering, do not any of your existing tenants, sublease their space or put their space on the sublease markets?
Yes. We actually report every quarter on the sublease space in our portfolio. I can't think of the page reference now but Cecilia will get it for you. So we -- since the global financial crisis, we have reported on the sublease space in our portfolio every quarter. It's on Page 23 of our quarterly report. And the sublease space did go up in Toronto and Vancouver in Q2. Interestingly, it went down in Montreal in Q2. And but again, to answer your question, we do track that, and we do provide that information on a quarterly basis. Typically, for us, sublease space works in our favor economically because it's never large enough to represent competition to us. And invariably, when our existing tenants put it on the market for sublease that the people they're dealing with ultimately want to come back to us and get additional tenure, or additional lease term with the result that they usually end up contracting with us directly. And we, more often than not, end up generating higher levels of net rent. And so the relatively small amounts we have available for sublease now, we would expect, to work ultimately in our favor.
Okay. Understood. And just my last question on recent change in immigration policy in U.S. How do you think that will affect demand for office space in Canada, especially from big tech, for example? Just to get your opinion?
Certainly, from about 2016 onward, the U.S. approach to immigration has favored Canadian cities meaningfully. We almost felt it shortly after the election in Toronto and Vancouver. And I believe it will continue to favor Canadian cities. And much of the growth we've seen has been driven by immigration and by a flexible attitude on the part of the federal and provincial governments to the granting of work visas. So it is a plus for our cities. I am of the view, and this is speculation, so I'm not going to put it forward as revealed truth. But I'm of the view that Canadian cities are going to become more attractive post pandemic than they were pre pandemic because they've demonstrated their resilience in such a dramatic way relative to many other parts of the world. But again, that remains to be seen. But that would be my prediction, if I was asked to predict what's going to happen in Canada. I think we will become a better opportunity for talent from outside the country to come into the country. And I think our covenants are generally very, very supportive of that and see that as being in Canada's best interest, whether it's a liberal government or a conservative government. So that's how I would look at that.
There are no further questions in the queue at this time. Now I would like to turn the call back over to our speakers for any closing remarks.
Thank you again, Samantha, and thank you all for participating in our conference call. Have a good day. Be well, and be safe. Thank you again, and goodbye.