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Good day, and welcome to the Allied Properties REIT's Third Quarter 2021 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. Sir, please go ahead.
Thank you so much. Good morning, everyone, and welcome to our conference call. Tom, Cecilia, and Hugh are here with me to discuss Allied's results for the third quarter ended September 30, 2021. We may in the course of this conference call make forward-looking statements about future events or future performance. These statements, by their nature, are subject to risks and uncertainties that may cause actual events or results to differ materially, including those risks described under the heading risks and uncertainties in our most recently filed AIF 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.Our positive momentum continued in the third quarter. FFO per unit rose to a record level of $0.624. AFFO per unit came in at $0.519. Leasing activity exceeded our expectations, and we made significant and measurable progress with our ESG program. Average in-place net rent per occupied square foot rose again in the third quarter, coming in at $24.62 compared to $24.3 in the second quarter and $23.61, yes, in the comparable quarter last year. Our urban workspace and UDC space has become more productive over the past 7 quarters, and demand for this space has continued to accelerate since the third quarter of last year.Cecilia will summarize our financial results and speak about the ongoing augmentation of our financial and ESG reporting. Tom will follow with an overview of leasing and operations. Hugh will provide a development update, and I'll finish with our current thinking on the future. So now over to Cecilia.
Good morning. I'll touch on our balance sheet, acquisitions, new disclosure, and ESG progress. Our balance sheet. With the prepayment of $486 million in mortgages in the third quarter, 94% of our investment properties are now unencumbered. The prepayment was made possible by the issuance of our second green bond in August, which also pushed the weighted average term to maturity of our debt from 5.9 to 7.3 years, pushed the weighted average cost of our debt from 3.3% to 2.9% and got us closer to our target of 4x interest coverage.Acquisition. We've continued to act in the favorable acquisition environment, although we don't expect to see additional opportunities over the remainder of the year. Our approach to acquisitions didn't change during the pandemic with our first question continuing to be whether an opportunity makes us a better provider of distinctive urban workspace to knowledge-based organizations. The Dominion building is a great example. It's location, physical attributes, and operating history over several decades will allow us to accommodate smaller users who have more flexible workspace needs. This will help us as we reconfigure our other buildings in the area to accommodate the range of both small to large users.Our leasing disclosure continues to evolve. Given the scale of our rental portfolio, upgrade activity is taking place regularly in Toronto, Montreal, and Vancouver. The purpose of the upgrade activity is to better serve our users and, in turn, augment net rent per occupied square foot. As such, we included the lease area of our rental portfolio split between our stabilized and what we refer to as the transitional rental portfolio.The transitional portfolio represents properties where we are intentionally keeping occupancy low to facilitate longer-term upgrade activities. This quarter, it consisted of 6 properties, representing approximately 773,000 square feet of GLA. The stabilized portfolio has regular turnover vacancy that's an ongoing part of our business, but we're not suppressing occupancy. The transitional portfolio will vary depending on when the suppression of occupancy ends. We also added information on the net effective rents achieved on the leasing activity in the period. This adds another level of transparency that we hope you find informative.On to ESG. On October 15 of this year, we issued our second annual environmental, social, and governance report. We made significant progress on our reporting and disclosure by aligning to the global reporting initiative, or GRI, and the Sustainability Accounting Standards Board or SASB real estate standard. Next year's ESG report will also outline our progress in adopting the 11 recommendations put forward by the task force on climate-related financial disclosures, or TCFD. The TCFD recommendations cover 4 categories: governance, strategy, risk management, and metrics and targets.We'll be disclosing the Board's oversight of climate-related risks and opportunities as well as how we identify short, medium, and long-term climate risks for the organization. Ultimately, this means augmenting disclosure that matters to our employees, users, investors and communities. We welcome feedback as to how we can improve our disclosure on an ongoing basis. I'll now pass it to Tom for a discussion of our operating and leasing results.
Thank you, Cecilia. We are continuing our proactive approach to leasing by staying in constant touch with active commercial brokers in each of our markets. Results have been positive. Our leasing teams have had hundreds of meetings with the brokerage community over the quarter and tour volumes have increased. We completed exactly 100 transactions in Q3, totaling 621,000 square feet of space. When comparing average rents on maturing leases to average rents negotiated, we achieved a 20% increase in rents on space renewed or replaced in the portfolio. In general, rents are increasing and while a few tenants have elected to lease less space, most are maintaining the status quo, and many are choosing to lease more space to better accommodate employees. It's worth mentioning the amount of space available for sublease in our portfolio declined considerably over the quarter. We expect this trend will continue as companies realize they need their offices. I will now provide an update on leasing activity in Montreal, Toronto, Calgary, and Vancouver and conclude with an update on our urban data center portfolio.In Montreal, our leasing team was especially busy, completing almost half of all the transactions in the portfolio during the quarter. There were many small deals with new companies at our RCA and Alpro buildings in St. Henri. This is an encouraging sign for the future as we will be well positioned to handle expansion as many of these small companies will inevitably grow.The most notable transaction in the quarter was a new lease with Molson Coors for 30,000 square feet at 111 Robert-Bourassa. There are 2 other transactions of 50,000 and 30,000 square feet currently in progress in the same building. Enercon renewed for 22,000 square feet at 1001 Robert-Bourassa, and we are now negotiating a 50,000 square foot renewal with an existing tenant in that same building. We were delighted last quarter to announce the acquisition of Place Gare Viger. This project in Old Montreal is perfectly positioned to benefit from significant neighborhood evolution, supported by a mega hospital and many residential projects nearby. We are now finalizing a deal with the Madison Group for an event venue, an upscale food market, and a wine club totaling about 25,000 square feet. The event venue space and food market will open in summer of 2022 and the wine concept in Q4 2022.Moving to Toronto. We completed a lease with a major U.S. academic institution for 93,000 square feet at QRC West Phase 2. We leased 27,000 square feet to Nike Sportswear at 179 John and completed a 32,000 square foot deal with Faire Wholesale at 420 Willington. We are in the very final stages of negotiation for an extension and expansion with an existing tenant at 111 Queen East, who is committing to an additional 52,000 square feet, bringing their space to 120,000 square feet. We are on the conditional -- in a conditional period with one tenant and final negotiations with 5 more to effectively complete the lease-up of the office component of The Well. 4 out of 6 of these tenants are U.S.-based and are household names.Moving to Calgary. In the context of the overall market, we are doing well at 85.5% leased. Tour activity is good, mostly for small-sized users, which we can easily accommodate as many of our buildings have small floor plates. We completed 14 transactions in the quarter.In Vancouver, leased area is holding at 92%. We recently announced the acquisition of the Dominion Building, which is a great addition to our ecosystem in this city. The Dominion Building has approximately 140 small tenants, and we look upon this building as an incubator of small new businesses who can be accommodated elsewhere in our Vancouver portfolio as they grow. As for our urban data centers, we are 94% leased. We're in the process of completing 2 small transactions at 250 front, which when completed, will bring our leased area to 87% in that building. The level of activity, particularly in Montreal and Toronto, has been very encouraging, and we expect momentum will continue. Many U.S.-based organizations have been delaying decisions about expanding into Canada because it had been impossible to cross the border and physically see the real estate. Border restrictions were lifted in early August and immediately, there was a spike in tour activity from U.S.-based companies. We expect more activity in the coming months as people are now comfortable with traveling. I will now turn the call over to Hugh.
Thanks, Tom. This has been a solid quarter for Allied in terms of our development activities. I will begin by giving an overview of our major projects, and then we'll follow with that with an update on our planning activity for our development pipeline.Construction activity. Beginning in Montreal, work on the 3 main redevelopment projects, 400 Atlantic, 1001 Robert-Bourassa and RCA are all progressing well. The leasing team is actively marketing the improved spaces with interest being expressed for all 3 properties. We should be able to complete the majority of the base building work at 400 Atlantic by the end of the year. In Central Canada, we have been able to hit a major milestone at The Well. On September 1, the first tenants took possession of their spaces to start their fit-out work. The team has continued to make progress on the other floors in anticipation of the remaining turnover dates.The retail tenants should start to take possession of their spaces in the beginning of 2022. QRC West, Phase II and King Toronto continue to progress according to our schedule and remain on target for tenants to begin fixturing in Q2 and Q4 2023 respectively. While we had anticipated achieving occupancy at our JV project with RioCan on college in Q3, this has been delayed until Q4 of this year. At 19 Duncan, we anticipate handing over the first floors to Thomson Reuters near the end of the current quarter. Occupancy for the office component of that project is scheduled for the end of Q2 2022 and the residential to follow in 2023. In Kitchener, our JV with Perimeter remains on track for completing the base building work by the end of Q1 2022. In Western Canada, we continue to make progress on our Boardwalk Revillon building. Westbank is completing the remaining base building work at 400 West Georgia, pardon me, concurrently with a tenant fixturing. We anticipate that project being complete in Q2 2022.Planning activity. This quarter has seen progress made on all of our submissions for future intensification projects in Toronto. The team has turned their attention to advancing the design of the various projects to be able to address the comments of the municipal authorities. Due to the imminent municipal election in Montreal, we have revised our anticipated completion of the approval of the expansion of until Q1 2022. This quarter has seen progress made across the board of our development activity. The team has been buoyed by the milestone achieved at The Well and is focused on keeping up the momentum. I will now turn the call back to Michael.
Thank you, Hugh. Near universal consensus on vaccine mandates and passports bolstered the success of Canada's vaccination program in the third quarter and beyond. This is restoring the confidence necessary for people to return safely to a vibrant form of urban life. Canadian business is beginning to play its crucial role in leading the return. We saw and felt the growing restoration of confidence in our business throughout the third quarter and into the fourth. As of last Friday, 81% of the users in our portfolio occupying 73% of the total GLA in our portfolio have reopened their workspace and are bringing employees back. We don't have information at the moment on the exact number of employees that these users have brought back to their workspace. But we now know for a fact that the reopening in our portfolio is well underway and widespread. Another important leading indicator is parking revenue. It was up $700,000 in the third quarter, reflecting clearly the return to a more normal form of urban life.As you may recall, I articulated a thesis in April about the impact of the pandemic on the future of the commercial real estate industry in Canada. I made it clear then, and I reiterate now that I can't prove the thesis. Only human behavior over time will do that or not. What I can say now, however, is that human behavior, as Allied has experienced it over the past 7 months is consistent with and supportive of the thesis. I find this encouraging, and I look forward to learning more as this continues to play out over the remainder of the year and into next. I hope this has been a useful and comprehensive update for you. We'd now be pleased to answer any questions you may have.
Yes, sir. At this time, we will open the line for questions. [Operator Instructions] And our first question comes from Caitlin Burrows with Goldman Sachs.
Thanks for the detail on the stabilized versus transitional rental portfolio occupancy. I guess, given that this is new disclosure, we don't know what the trend has been. So as of September 30, it looks like the stabilized rental portfolio was 92% leased. Wondering if you can give us a sense for the stabilized portfolio's occupancy level, how much it's down from 2019 and your outlook for that portion, in particular from here?
Caitlin, I'd have to do a bit of guesswork because I'm not aware of analysis in that regard, though I think we should do it, and we will. But I would say, during the pandemic, our stabilized portfolio is down about 100 basis points or so. Most of it actually is not pandemic related in the sense that people have either contracted in the face of the pandemic or moved out completely in the face of the pandemic. Most of it is known non-renewals that we faced almost pre-pandemic and that actually actualized or materialized in the pandemic, and most of that would be at Cité Multimedia, which Tom refers to as 111 Robert-Bourassa, which is the largest single phase of Cité Multimedia, where the bulk of the expiry has occurred in the third quarter, and I think a bit more will occur in the fourth quarter. So guesswork, probably educated guesswork would get us to about 100 basis points in the stabilized portfolio, and the vast bulk of the decline in the pandemic certainly is in the transformational or transitional portfolio. But we will follow up on that in the next quarter and do a more precise calculation.
Okay. Great. And then maybe just thinking about all of the developments that you guys have going on. I know you talked about it last quarter that they would contribute about $80 million to EBITDA. It looks like that's still the expectation, which is good. I guess, with the well-being the most significant piece of that and it getting transferred to the rental portfolio in 1Q, can you give any further details on how you expect EBITDA in 2022 to be impacted by development?
I think the most useful estimate I can provide is that we will begin to see the impact on our statement in 2022. But the really significant and material impact will be felt more in 2023.
Got it. And will that pace mostly just be impacted by the timing of projects being completed? Or the timing of companies moving in? Or what's driving that timing piece of it, again, because what we see is just like The Well, in particular, is transferred in 1Q?
Yes. When occupancy commences, we can begin in most instances to recognize straight-line rent. But the actual rent, if you will, the cash rent won't commence until the tenant has actually occupied and is using the space. And that's going to occur over the course of 2022. By 2023, I don't think all of the space will be rent producing, but a significant amount of it will be from Jan 1, 2023, onward. So it really is the transitioning in of the actual users at The Well and the payment, the actual payment of rent commencing at The Well over -- really over the course of 2022. And 2023 will be the first year where we have the bulk of it, if you will, hitting our statement from Jan 1 onward. And that's when we anticipate the most significant upward movement in FFO per unit and AFFO per unit because we won't be pulling straight-line rent out of FFO to get to AFFO by that point, it will all be -- or primarily be AFFO as well as FFO per unit.
Caitlin, you might find it helpful if you look at Page 61 in the MD&A, it shows the rent commencement timing by quarter and the corresponding square feet. So I think that will give you a bit of a sense in terms of the contribution.
And that Page 61, that's the on the FFO basis or AFFO?
It just gives the rent commencement by user and the amount of square footage. So you can use an average NOI per square foot from what's on Page 60, and you would back into something that's pretty reasonable.
Sorry for all the follow-ups here, but that would be on an FFO basis or AFFO? Those date times there and...
It's actually NOI.
It's cash rent. So... Yes. Okay. Yes.
Our next question comes from Jonathan Kelcher with TD Securities.
You guys have some assets for sale, which is not something that's historically been the norm for you. Can you give us a little bit of color on what type of assets, what markets?
Yes. The only assets we have for sale are the ones that we've designated, I believe, for accounting purposes as held for sale. They are 3 in number. One is 8 Place du Commerce in Montreal. It was acquired probably 6 years ago as part of a 4 property portfolio. It was the one property in the portfolio that we didn't particularly want or have much interest in. But we very much wanted the other 3 and in order to make that transaction easy and efficient, we acquired the fourth. It is on Nun's Island, and it has benefited from a municipally led change to the zoning. With the result, it's become much more valuable today than it was when we acquired it. It remains noncore for us because the density is probably best brought into existence in the form of residential space, and that's not something we have any interest in doing independently of a big mixed-use project like 19 Duncan or The Well.So we have put it on the market through CBRE. The process is just about complete, and we will be going through the process of getting that closed in the first half of 2022. The 2 assets in Toronto, again, are noncore. They're on the North East corner of Bathurst and King. They're quite shallow, and we are entering into a transaction with the province of Ontario to have those become part of the Ontario line system, and we are getting credit for the residential density on the site as well as the income-producing potential that we have benefited from historically. And again, the aggregate consideration for those 3 assets, they are 3 separate properties, although we think of the Toronto properties as one, will exceed the equity components of the first phase of Place Gare Viger, which is exactly what we set out to fund by putting these noncore assets on the market or negotiating the sale of these noncore assets as the case may be. But we have no other properties on the market for sale.
Okay. So do you have other properties that you would sort of your bottom tier properties that you might consider noncore? Or is this just sort of a one-off that kind of fit to build to buy the Montreal asset?
Yes. I would characterize this more as a one-off as an opportunity to provide the most efficient form of equity for an acquisition that we believed was very strategic and indeed, possibly even transformational for Allied. We are fortunate not to have many noncore assets. And indeed, to elaborate on that a little bit, Jonathan, even though it wasn't exactly the question you asked, we have long suggested that we would sell the Boardwalk Revillon building in Edmonton, simply because we didn't see the opportunity to grow there in a way that was meaningful in the context of our business. Now that Hugh and his team are well underway, indeed nearing completion for an exhaustive redevelopment of that complex, we have reversed our decision or I have reversed my inclination to dispose of that property. It will be one of the best brick and beam buildings in the country and accordingly, something that Allied should own and operate going forward. So I really don't see much opportunity to sell noncore assets in Allied's portfolio anywhere in the country today. Okay. That was helpful. I'll turn it back.
Our next question will come from Scott Fromson with CIBC.
Just a question on the large amount of inventory coming on board in Toronto over the next few years. How do you -- what are your current thoughts on how it's going to affect you, particularly the backfill?
Well, comment one, we're a big part of that inventory. I think roughly 1.5 million of 8 million square feet and obviously, in Toronto, we're all but fully leased in relation to that office component. So we don't see it having any impact on our development portfolio. The backfill space has been fairly carefully quantified over the years, both pre, during, and certainly post pandemic. It's known. It's well understood. It will be backfill-space owned and operated by very strong, well-funded owner operators and that backfill space will be upgraded. It will not be allowed to deteriorate. It will be upgraded. It will remain competitive. And the best guess that we've seen, and again, this work was done pre-pandemic, during the pandemic and will certainly be updated on an ongoing basis by the advisory community. But the best information we've seen suggests that if the absorption say, this year and in the next 3 years is half of the absorption in the prior 4-year period, then we end up at around 9%, 10% vacancy in the urban market.So we don't see it having any material impact on our existing rental portfolio either. People will not be running out of 500-522 King West in order to go into Commerce Court to backfill whatever backfill vacancy might be there. It has never happened in any supply cycle, and it won't happen now. Tenants will move. There will be competition. I don't think there will be material downward pressure on rental rates, but there will certainly see a plateauing of the rent growth that we've been seeing quite significantly in 2018, 2019 and indeed, even last year and this year. Even that mid-teens average rent growth over prior in place, that's not sustainable in a market that's in equilibrium.It's that significant today because the demand continues to exceed the supply. By the time the supply is delivered in full, it will easily have caught up with the excess demand. And I would expect to see rental rates plateau at that point in time and rent growth revert -- the best case scenario is rent growth reverts to something more normalized, 2%-3% over prior in place rather than mid-teens or even as high as 20%, which we have seen in the past.So that's what I'm expecting to flow from the completion of the supply underway. No significant new projects have been initiated nor do I expect there will be. We're on the record pre-pandemic, and we stand by this whole heartedly of not being prepared to initiate a large-scale development until we get through this supply wave that we're in the midst of and a significant part of. So we don't see the backfill as a big risk to the market, but it will certainly -- it will certainly mitigate the rather unusual rent growth that we've seen in the last 5 years.
Our next question will come from Jenny Ma with BMO Capital Markets.
Great to see some strong leasing activity, particularly at The Well and QRC West 2. It looks like the expected yield has improved now that you've gotten some visibility on the expected income. Can you just talk to us about a bit of background about how that came to be? And any commentary on what large block users might be out there? Or there's a lot of them looking for space?
Well, there's a number of large block users looking for space in the current circumstances, in particular or specifically with respect to how the deals came to be for us at QRC West Phase 2. We've been working on the transaction that took place for the better part of the year. We actually came close to a few other transactions for the entire building as well. The nature of the architecture and the position of the building is quite attractive. Hugh can comment on the actual returns that we're going to achieve there, but they're quite good.We're very happy with the deal that was done. The academic institution that we refer to is also taking the ground floor of the building, and they'll be animating the ground floor, and we think adding a lot of life to Queen Street West when it needs it. So we're really happy about that transaction. As for the deals at The Well, we have been working for 5 years continually pushing this project. And it's just a lot of years of hard work coming to fruition right now. The project is taking place. You can see it on the skyline. We're really delighted with how it looks. And the marketplace is responding accordingly.I think the amenity package that we've got at The Well is very attractive. The views are outstanding, and it's just something that the marketplace wants. And our leasing team aren't taking any chances. They're in constant, constant touch with every active commercial broker in Toronto. So proof is in the pudding. We'll see in the coming weeks or months that we can finalize these deals that are on the table now. I think we can. And we're going to enjoy a fully leased office component coming into the year.
And one of the things I'd add, which you can quantify in general, Jenny, is that the net effective rental rates at The Well as we've moved up the building and remember that it was leased at the bottom first, and we've moved progressively upward. The net effect of rental rates we've been able to attract have gone up very significantly. And most of the deals that Tom has described today are in the top third of the building, so the smallest floor plates. And when you can get a relatively small floor plate in a very high-caliber building that happens to be in the higher levels of the building, you will pay for it.And fortunately, the very significant users that Tom and the team have been dealing with are more than prepared to pay for it and the net effects are actually higher than we anticipated and that, too, is encouraging. So whatever change you've seen in our forecasted unlevered yield for The Well would be driven in part by those rents. And I'm sure if there has been a change at QRC West Phase 2 Hugh, it would be driven by the actual rent rather than the projected rent.
That's right.
That's great to hear. That kind of leads me to my next question. I see that the IFRS cap rate on the PUD portfolio went down quite a bit from 6% to 4.3%. Is that largely being driven by The Well?
Yes. That would be driven by The Well.
And is the catalyst for that, the visibility towards leasing or market indications? Is that what drives it?
Correct. So as the leasing continues as well as the construction continues, and there's, I guess, less of a question mark around the cost to complete, then the cap rate comes down essentially.
Okay. And was that being driven by the office lease? Or was there a component of retail in there as well?
It would be both.
Okay.
It would be both that brings the risk of the overall project down. And as you know, we have it appraised. We have our entire portfolio appraised every quarter by Cushman. So as the risk comes down, they now flipped it into a DCF from a cost to complete basis. So it does bring down the risk and accordingly, the cap rate.
Okay. Great. And then my last question is with regards to G&A. It looks like it was fairly low this quarter, but it kind of had a $1 million range on a quarterly basis. Can you give us any guidance on how to think about that for the next year or 2? And if there's any inflation related impact to that as well?
Yes. So Q2 had a few -- well, had $1.2 million of a onetime item that we called out. And so I think if you use Q3 less that amount, so roughly $5 million a quarter, very roughly, you'd be pretty close to what a trend, a quarterly run rate would be. There are some chunky items in there. But overall, if you use that for a year, you won't be far.
Our next question will come from Mario Saric with Scotia Bank.
I just want to make sure you can hear me okay.
Hear you loud and clear.
Perfect. Okay. So I wanted to focus on occupancy a little bit with respect to the questions. And I'd echo the appreciation for the new disclosure on the transitional portfolio. So my question kind of pertains to the expected pace of lease-up on those transitional 6 assets, how much more combined kind of CapEx is required to fully upgrade those 6 assets to where you envision it to be?
Mario, probably the biggest of the 6 is the RCA building in Montreal. It is a spectacular complex in St. Henri. It had an enormous number of small users in it when we bought it. A number of those have moved either over to our Elpro building or elsewhere to facilitate the build-out. There's a very significant build-out that is nearing completion now. And there's also a very significant user looking at that space. So to answer the question directly, where we can have the greatest impact on the transformative or transformational portion of the portfolio is at RCA and the significant anchor leasing objective is not complete, but is very advanced toward completion, could be completed in the fourth quarter, although we can't be assured at this point in time that it will be. But we're basically at the point in most of the transitional or transformational buildings to actually begin the releasing process.Now again, at RCA, for example, the re-leasing is going to be phased. We won't do -- I forget the size, but it's about 250,000 feet or so. We're not going to re-lease that all at once. There's no way. But we probably will re-lease at around 50,000 feet at a time. And that, I think, is achievable. And the preliminary response we've had to the modified space has been very encouraging. Any color, Tom, in that regard?
You know what, we're replacing the windows in that building, and it's changing the look of the building from the outside. But even more importantly, it's really enhancing the look of the building from the inside. I was actually in the building in a tenant space last week, and the changes that we're making are really going to make a huge difference. And there will always be a lot of small tenants in this building because of the configuration of the building. It's a great location, and it's going to be leased up as soon as the -- in fact, most of the building is covered with scaffolding today. And it's holding us back a little bit, Mario, in terms of some leases. But when it's completed, and it will be completed over the next few months, this building is going to really do great. The one block that Michael was referring to that could accommodate a large user is a single building in the middle of the project with exposure to the highway, and we're negotiating with a tenant now for that space. Fingers crossed, we can get that deal done.
Perfect. I guess, in the comment that most of it's ready to begin releasing now would imply that most of the capital required what the initiatives has already been deployed?
Over the next few quarters, we'll be deploying the capital there. We can do some of the work while the tenants start fixturing. So it's some of it is consolidating space, relocating smaller tenants to El Pro, for example, to facilitate these larger blocks. In terms of Capex, we're probably spending $100 a square foot, but seeing $6 to $7 gain on net rent. So it really -- it makes sense to make this kind of investment.
Perfect. Okay. More broadly speaking, on occupancy, economic occupancy fell 100 basis points to just north of 90% on the known -- I'll use the word Cité Multimedia vacancy. But it looks like based on your disclosure, you recovered the vast majority of that post Q3, 90% is near historical trough in terms of occupancy. How should we think about the broader occupancy outlook for II kind of through 2022 and is 95% your traditional base case kind of occupancy level, is that still achievable in a post COVID environment?
Absolutely, it is achievable. It is as achievable in a post COVID environment as it was pre COVID. I don't expect to see any material improvement in occupancy over the remainder of 2021, but I do expect to see it begin to improve in 2022. I don't think we'll get back to 95% in 2022. I'd love to. But I think realistically, that won't happen. But I would expect to get back to the 95% level in 2023. And as we do this, the one really encouraging thing for our business is, our same-asset NOI will get a tremendous twofold boost. It will, first of all, get a boost simply by virtue of the increase in occupancy. And we love, in a way, being in this position because this is a position where the gross is actually the net. So whatever we get in gross rent actually falls to the NOI line completely.But the second driver will come from the fact that it will propel our average in place net rent per occupied square foot because we're going to be taking rents up from what would be better than industrial rent levels, but would be quite modest levels of rent for good office space to levels of rent for good office space that will be quite high. So we'll see same-asset NOI growth come out of the increase in occupancy over the course of the next, let's call it, 18 to 24 months. But I don't think we can get back to 95% in 2022, but I do think we'll be back to 95% in 2023 unless, unless we propel other large-scale upgrades. But I don't see any at the moment that we're going to be initiating. I think we've initiated most of the upgrades that we want to initiate. And the only exception to that might be the Dominion Building, which we're going to close in about 2 or 3 weeks. We might indeed depress the occupancy there temporarily, but we do envisage going in there and blowing the existing tenant base out at all.In fact, we're going to work with the existing tenant base. But that could precipitate some early stage turn over, but other than that, I'm not aware, Tom, of any sort of large-scale upgrade that we're likely -- okay, Hugh points out. We may indeed do some work on 3575 Saint-Laurent in Montreal. It's a great building that I think was the second building we acquired in the city probably around 2006. It's really well-located close to the university. But I think there is an opportunity there to depress the occupancy boost -- boost the NOI through upgrade over time. So that would be the one exception to what I said. But as I say, most of it is really in the St. Henri node. It's RCA and El Pro and then a bit in Vancouver.The Landing, we've suppressed the occupancy in The Landing in order to rationalize the utilization and we've been very successful there. As you know, we got Microsoft I think, to extend on 2 floors for about 44,000 square feet, which is terrific. But we do have more vacancy there than will be sustained once we upgrade the building to the level that we think is appropriate for that building. But 3575 is a good use of capital going forward. So I think that time frame is reasonable, Mario. I'd love to get back in 2022, but I don't think that's going to happen. But I do think we'll be back in 2023 to the sort of mid-90s level that we consider normalized or stabilized.
Got it. And the commentary in terms of no expected improvement in occupancy over the course of '21, presumably, that's referring to the economic occupancy of both the lease occupancy, which, again, given some of the leases that have been post Q3 would be moving up. Is that a fact?
Yes. That's correct. Because there is still some non-renewal at 111 Robert-Bourassa that actually occurs in the fourth quarter. So we'll offset some of that, but I don't think -- we'll probably offset it, but we won't more than offset it.
Okay. And then just like looking at the '22, are there any kind of known tenant vacancies in excess of, let's say, 50,000 square feet that you're aware of that may impact the fluidity of those occupancy gains over time?
There's a lease in Kitchener that is expiring that we'll need to be paying attention to that is sizable. It's in spectacular space. I think we'll handle that pretty quickly. But that's the only one that comes to mind, Mario.
Perfect. Okay. And then just maybe on the -- coming back to Cité Multimedia on the market rents. Can you give us any sense of the change in the market rent on a net effective basis on the 80,000 square feet or so that a in close kind of negotiations relative to the expiring rent? Was there a material change?
I'd say there's a modest increase in rents in the building with the new leases. Some of the leases came off some pretty high rents. They were induced heavily. And we're achieving the same or better in most cases.
Okay. Perfect. And then just lastly on liquidity, full liquidity in this quarter is just shy of $300 million. The $86 million of assets held for sale, arguably offsets kind of the acquisition of the Dominion Building in Vancouver and the remaining 50% interest in the Glenbow Assembly in Calgary that you noted as a subsequent event. How do you feel about that $300 million of liquidity kind of going into 2022? And how would you rank the available options to bolster that liquidity stand today?
We're very comfortable with our liquidity position, Mario. One of the things that we embarked on a few years ago once we received the Moody's credit rating was to start incrementalizing our way to a larger line that was more appropriate for the size of our business. So every couple of years, we've been adding $100 million to our line. So we'll be expanding our line from $500 million to $600 million on Jan 1, 2022. So we're very well covered for our commitments in 2022.
Okay. Our next question comes from Howard Leung with Veritas Investment Research.
There was some pretty helpful stat around the users returning back. Michael, I think you mentioned 73% of GLA. I know you mentioned that as well that those workers, you're not sure how many are going back yet. But when you look at, I guess, your category of users by sector, business services and ecotech, are there any categories in particular that are coming back or not coming back, anything you want to call out? And anything you've heard so far from them about how many days they're letting their users come back or their employees come back?
Yes. So we would not have that information. We do have that information segmented, pardon me, by city. And we do have it segmented by, if you will, basic type. So for example, UDC, they never left, period, full stop. Retail is well above 90% reopened, if you will, office ranges from -- I guess it would be, yes, around 60% in Calgary to a high of 87% of total area in Vancouver. And that's not surprising at all. Toronto is about interestingly, about 77% and Montreal is about 71. Again, they're slower and have historically been slower than Vancouver. We just don't have the data nor is it really possible for us to acquire the data in a short period of time, as to how many people any given organization is bringing back at any given point in time. We can use our own experience as a little bit of a proxy.We've been running at about 50% repopulation for over a year now. Now again, we're in the somewhat unique position of being an essential service because of the physical nature of the work we execute. And we're now trying to understand what the requirements are with respect to office space in Toronto and in Ontario because we're probably accommodating anywhere from 80% to 95% of our employees today, but they're cycling in and out in a way that keeps the number at any one point in time at 50%. So that's our experience. We're probably more advanced than most of our tenants, although some of our tenants are like us, essential services, and they've really -- they've never really shut down in the way some organizations have. But we don't have that data. It's hard to assemble.And frankly, it's very clear that almost every tenant is in a transitional phase now. But what we do know is that the doors are open, the offices are working, and people are coming in and out of them on a continuous basis. But I wish I could lean repopulation numbers from that, but we can't. And indeed, gathering that -- I don't know -- I don't know how cooperative tenants would be in providing that information, number one; and number 2, it would be a massive data gathering exercise. So we put these numbers forward as indicative, but they're up big time over the past 8 weeks. That's for sure. So people clearly are returning. And that return is accelerating.And if we look at the retail users, especially in the King-Spadina area and the St. Lawrence market area, they are fully back, and they are doing all the business that they can do. There's still some difficulty getting workers, which is why not everybody is open for lunch yet, but the demand is there. They simply aren't at a point where they can serve the demand and the margin for dinner is much, much higher. And it's getting as frenetic in those urban neighborhoods as it was pre pandemic. But I unfortunately don't have any supplemental information. I know that roughly 73% of our space is reopened and populated. But I don't know how the population compares to pre-pandemic levels.
That's still helpful. And good color. A question about leasing. The -- in that leasing spread chart in the MD&A, just noticed that the starting base rent for the renewal replacements is pretty similar to the average base rent on the renewal and replaced leases. Does that mean that, I guess, for those leases signed in Q3 that there's no step-up in -- within the term the lease?
Howard, it's Cecilia. The average to average is -- includes the -- any fixturing period. So it would be over a longer period of time than the -- obviously, the ending to starting. So it does get a little bit distorted because of that, but they absolutely are in the leases on renewals and replacement.
Right, right, because the fixturing period, right? Is that...
Yes, exactly.
Okay. Okay. And then maybe just one more for you, Cecilia, on the transitional space disclosure, that's pretty helpful that you're starting to call that out. Does that transition offers stabilize? Would that affect any calculation in the same asset NOI? Or is it not -- are those not related?
No, we included everything as part of the rental portfolio, including the transitional properties. So it would be part of the 6.3% increase that we had in the quarter.
Our next question will come from Matt Kornack with National Bank Financial.
I'll try to keep it quick. On The Well, and this maybe is more of a comment than a question, but would it be possible to get, but maybe with Q4 kind of a sense as to how the FFO, AFFO and capitalized interest would trend as that comes online? I know I think Shopify enters fixturing or is in fixturing now. So presumably, they'd be in FFO in Q4, but any sense on that? And maybe the retail versus office split on NOI, I don't know if you can make a comment on that now.
Well, I can certainly speak to the first part of your question, Matt, I think that could be something that we provide as part of our outlook for 2022 on our February call.
Okay. So in terms of guidance for ranges of FFO, AFFO, et cetera? Okay. No, that makes sense. And then on Cité Multimedia, is the Molson space? Is that the top floor that was leased to SAP? And then I guess, if there is new space that's coming off post quarter, are you in discussion on that? I mean, you've noted the 50,000 square feet that you're in discussions, but where else are you in terms of the potential leasing at that building?
So yes, Molson’s will be taking the top floor of the building. You're right on the money. And the 50,000 square foot and the 30,000 square foot tenants, the 50,000 square footer is an existing tenant looking for expansion, and we're getting very close to that. The 30,000 square footer is a brand-new tenant to the marketplace, and we're getting close to that one. And there's probably 3 or 4 others that we're in conversation with.
Okay. Perfect. So that sounds good. I'm blanking here, sorry. Just -- I'm looking forward to see what you guys have proposed for 3575 Bay and it's over 11, so I'll leave it there.
Actually, 3575 Saint-Laurent. No problem.
I went to McGill, I own a property not far from it. There you go.
I thought we had a property I didn't know about on Bay Street.
Our next question will come from Pammi Bir with RBC Capital Markets.
I will try to keep this quick just given the time. But just -- and I do apologize if this was answered earlier. But in terms of the additional leasing at The Well relative to the update that was provided a couple of weeks ago, just on some of the new leasing, I guess, it's roughly 300 basis points. Can you talk about maybe just the types of tenants on those new leases? And are those tenants relocating to The Well? Or is that incremental new space for them?
It's a mix. There's a media tenant. There's 1 -- 2 tech tenants. There's a pharmaceutical tenant and a financial tent. And most of them are relocations to The Well. I'd say 4 out of the 6 and 2 are new to the market.
And we just have one more questioner in the queue, Mario Saric from Scotia Bank.
Sorry. Just one more on my end and potentially The Wall as well, given how important it is going forward. The development yields so that 5.1% to 5.9% in terms of the range this quarter versus last quarter. As the leasing risk or the visibility improves, what is your confidence level like in terms of like the lower end of that range or potentially hitting the higher end of that range?
So our confidence levels to be in the middle of that range. I think there's still a little bit of visibility on the retail rents that we need to achieve. The office is -- we've basically got 2/3 of the NOI, if the property figured out. So it's really in that -- the last retail deals that we're working on now with RioCan.
And then like you've done a fantastic job of leasing up the office space, and there's various reasons for that. How would you characterize the importance of the retail vision at the property to essentially getting to 100% occupancy on the office side? Like where is it rank in terms of importance?
I think the retail vision is critical to both the actual lease-up and then the ultimate success of the complex as a whole and the retail component as well. I think RioCan and Allied have together done a very good job of developing the right vision for the retail component and executing the right kind of leasing to get the outcome we need. It has meant that the retail leasing has to follow the office leasing, primarily because we'll get the best results when we can show the physical environment or at least the general outline or parameters of the physical environment to prospective users. And we're at that point now. So I believe the vision for the retail component of The Well is critical to the completion of the mixed-use project in a way that we'll see it complement the King and Spadina neighborhood and actually meaningfully integrate with the King and Spadina neighborhood and become an extension of it. And I think we have the right vision. The market is the core to that vision. That was an idea Tom had many years ago. It's an excellent idea. It's very hard to execute. It's easy to say, it's very hard to do. I know RioCan has talked to something like 400 local food and food service interests in the city in an effort to populate or curate the market in the right way. It would be very easy to let someone else do that. But we wouldn't get the quality of outcome that we want. And so Allied and RioCan are adamant that this will be curated by the owners, and we will not surrender control to anyone would be operator of the market or the food complex within The Well and I am very confident in the outcome. I've always expected it would occur much closer to completion than the office leasing.Our experience in the intercity has always been the office leasing can get done way ahead of construction completion. Retail leasing just doesn't happen that way in the intercity. So there's nothing untoward or discouraging about the fact that the retail leasing is following the office leasing. In fact, that's exactly what we expected, and we're very happy to be at a point in time where we can now show 2 retail users, the incredible environments we're creating there, and we can also tell them that the office component is approaching 99.5% lease-up and that the residential components are sold out if they're condominium and are under very, very good stewardship if their rental stewardship, which will be partially represented by RioCan itself.In a way, I kind of regret that we didn't participate in the residential component, but not really, because it's not an essential part of what we do, whereas I believe it is becoming an essential part of what RioCan is, and I think it made a great deal of sense for RioCan to be part of that component of The Well going forward. It isn't as crucial or central to Allied's core mission, but I do believe it's central to RioCan's core mission. So we love the retail. We know it's going to complement our enormous amount of retail on King Street. It's not going to diminish it. It's going to complement it. And that's good for everybody. So that's kind of my perspective, Mario. I don't know if that was your question exactly.
If I could add one thing, Mario, every single office tenant asked about the retail, everyone. And everyone, were really comfortable and impressed by the vision. So it was a very important element of our leasing success. I'd like to say it was entirely because of the leasing team working hard. That's only a part of it. But the vision was a huge part of our success. The retail vision.
And speakers at this time, we have no further questions in the queue.
Okay. Well, thank you all. I hope this has been a useful and comprehensive update for you. We'll certainly keep you apprised of our progress going forward. Thanks again and have a great day.
Thank you, ladies and gentlemen. This concludes today's teleconference, and you may now disconnect. Please enjoy the rest of your day.