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Good day and welcome to the Allied Properties REIT Fourth Quarter and Year-end Financial Results 2018 Earnings Conference Call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Michael Emory, President and Chief Executive Officer. Please go ahead, sir.
Thank you, Ron. Good morning everyone and welcome to our conference call. Tom, Cecilia and Hugh are here with me to discuss Allied's results for the fourth quarter and year ended December 31, 2018. We may in the course of this conference call, make forward-looking statements about future events or future performance. These statements by their nature are subject to risks and uncertainties that may cause actual events or results to differ materially, including those risks described under the heading Risks and Uncertainties in our most recently filed Annual Information Form. Material assumptions that underpin any forward-looking statements we make include those assumptions described under Forward-Looking Disclaimer in our most recent quarterly report.Now for a brief overview. Favorable fundamentals, intense focus on operations, and years of deliberate capital allocation made for an active and successful 2018. We propelled strong organic growth in our rental portfolio. And we made excellent progress on our development portfolio, materially reducing construction, leasing and funding risk going forward. Cecilia will elaborate on our financial results for 2018 and our financial outlook for 2019. Tom will follow with an overview of our operating results. Hugh will discuss our development pipeline, and I will finish with a discussion of our strategic outlook going forward.So now, over to Cecilia.
Good morning. I'll summarize 2018 from a financial perspective and outline what we expect in 2019. Looking back to 2018, we achieved what we set out to achieve a year ago. Our rental portfolio generated 9.6% same asset NOI in the year, which was better than expected. Driving this was occupancy take up in Montreal, as well as rent growth in Toronto. Our portfolio also generated a year-over-year increase in AFFO-per-unit of 13%. As space that we leased in 2017 became economically productive in 2018. Moving on to NAV per unit growth. We place more importance on developing completions and organic growth driving NAV per unit growth than Cap-rate compression, which we can't control. We propelled 10% NAV per unit growth in 2018 even with a reduced IFRS value of $64 million reflected in our Calgary portfolio. In 2018 development completions and organic growth represented just over 60% of NAV per unit growth. And Cap-rate compression primarily at 151 Front and in our Montreal portfolio represented the balance.We were also able to strengthen our balance sheet yet again in 2018, with debt metrics at year-end that were stronger than ever. We pushed our net debt to EBITDA to 7.1x just outside our targeted range of remaining below 7x. We pushed our interest coverage ratio to 3.2x, within our target of being above 3x. We also pushed our debt to gross book value to 29%, also within our targeted range of remaining below 35%. We achieved this through 2 large equity offerings in 2018 totaling $450 million. We were able to use our favorable cost of equity to retire a large amount of debt without experiencing material earnings dilution.We also focused on improving liquidity in the year. In November, we amended our unsecured line to increase the limit from $250 million to $450 million, extending the maturity to January 2022. In December, we upward refinanced a $150 million unsecured term loan, drawing an additional $100 million at a fixed of 3.992%, which we used to pay down our unsecured line. We did this to finish the year with maximum liquidity in the form of $290 million of available room on our line.We grew our pool of unencumbered properties by 46% in 2018 bringing it to $4.3 billion at year-end, representing 68% of our IFRS investment property value. We continue with our unwavering commitment to the balance sheet.Now on to expectations for 2019. We finished 2018 with leased area of 96.7% and occupancy of 96.3%. So we will drive growth going forward through renewals and replacements, as well as occupancy gain in our urban data center portfolio. We expect the same asset NOI from our rental portfolio to continue growing in 2019, albeit at a more tempered pace than 2018, in the low-to-mid single digit range of growth. We also expect FFO and AFFO per unit growth to be in the low-to-mid single digit range tempered in 2019 by NOI declines arising from development starts and turnover vacancies both of which we plan to take advantage of by boosting our NOI meaningfully in the coming years.The most important development start is King Toronto, which Hugh will discuss shortly. The most important turnover vacancies are at Cite Multimedia, where we are making room for Morgan Stanley's expansion and 468 King West, which Indigo will vacate when it moves into King Portland Center, enabling us to upgrade and re-lease the building at current high net rental rates.We expect interest expense in 2019 to be higher by around $4 million. With respect to G&A in 2019, we expect it to run at a quarterly level similar to what we experienced in Q4. Note that our financial outlook for 2019 excludes, one, anticipated nonrecurring condo marketing expenses and condo profits in the year. And two, the financial impact of any acquisitions completed in the year.I will now pass the call to Tom for a discussion of our leasing and operating activities.
Thank you, Cecilia. Leasing environment remains strong with demand in all markets. In fact, each of our markets showed growth in occupancy in leased area over 2018. We leased 2.6 million square feet of space over the course of the year. Our occupied area increased by 1.1% over Q3 and 2.8% for the year. Our leased area increased by just 0.5% over Q3 and 1.5% for the year. Now stand at 96.7% leased portfolio wide. Interestingly, Calgary showed the biggest increase in leased area in 2018 and now sits at a relatively healthy 92%.We continue to earn significant lifts in net rents on space renewed or replaced. For the 12 months ending December 31st, rents grew by 18% on the affected area. While rental growth has largely been as a result of substantial increases in Toronto, we are beginning to see rent increases in Montreal.Moving from East to West. I'll provide a brief update on leasing activity in our major markets, Montreal, Toronto, Calgary and Vancouver and then conclude with an update on our network-dense urban data centers.Starting in Montreal, we made great strides over the course of 2018 attracting new large tenants to the portfolio and extending important leases. All of our major buildings are now highly leased but we needed to also focus on a number of small spaces in the portfolio that had been vacant for some time.Over the course of 2018, our Montreal leasing team marketed our smaller units very aggressively. And as it turns out very successfully. At year-end we exceeded our goal of 97% leased and reached 97.4%; largely because of the focus on smaller units. 97.4% is the highest level of leased area in over a decade for us in this market.Next up for Montreal is to complete the lease up of our development project at 425 Viger and to push rents on upcoming renewals.Moving to Toronto, our goal in 2018 was to substantially pre-lease the office portion of The Well. We stand at 71% leased and continue to work to attract new tenants to this project.We essentially have space for only 1 more large user of approximately 150,000 square feet, with the remaining balance of available space being smaller high-value floor plates at the top of the tower. Demand for the existing portfolio in Toronto remains very high with our most recent deals King and Spadina reaching $40 per square foot net. We have a few development projects in planning stages at King and Spadina with serious interest being expressed even before we have required city approvals.Moving to Calgary. We have done a very good job filling small spaces in the belt line, and have increased our leased area to 92%. With respect to TELUS Sky, our development project with West Bank in TELUS, we recently finalized 2 leases totaling just over 30,000 square feet, bringing the leased area to 42%. Currently there is 40,000 square feet of space under negotiation.In Vancouver, the market is very strong and we sit with very little space available for lease.Lastly our network-dense urban data centers, we're now documenting an agreed upon terms, with 1 user for 10,000 square feet at 250 Front and continue to work with 2 additional users, totaling 15,000 square feet. If we can complete these deals, our leased area would be 76%.During our last call we referred to the Cross Lake fiber cable being installed between New York and Toronto. And this cable is now in place at 151 Front. We expect this direct link to the U.S. will become active this year and boost our ancillary rental revenue.Between now and December 31, 2020, 37% of our leased area matures among our 3 facilities. We've completed deals for 30% of this space already and negotiated significant increases in rents and ancillary charges.We fully expect to complete renewals for all remaining space by the end of this year and expect significant increases in revenue on renewed leases.I will now turn the call over to Hugh, for discussion on our development activities.
Thanks Tom. I will now touch on the quarter's development highlights. This quarter has seen progress made in both our active development projects as well as our future development pipeline. I will begin by giving an overview of the progress made on the projects we have under construction and then give an update on the projects, for which we're pursuing approvals. Project under development. Working from east to west, we continue to make significant progress at our 425 Viger projects. Construction continues on the addition component of the development with significant advancement on the infill work and the additional floors on top of the existing structure. This project remains on track for completion at the end of 2019. Our work on the repositioning of the ground floor at Le Nordelec has made significant progress this quarter. The relocation of Le Nordelec from Cite Multimedia was completed at the end of January.We have begun evaluating the intensification potential of the property, with the goal of establishing the plan for the future expansion by the end of Q3. In central Canada, we're completing work on the commercial component of King Portland Centre. We anticipate tenants occupying the building starting in March. On the residential side, we anticipate construction to wrap up in Q2 2019, with the condo purchasers occupying the building, beginning in the late spring.Construction on The Well continues to progress according to our schedule. For the office tower at the corner of Front and Spadina, we have started work above grade. We have advanced work on the remaining buildings with the goal of coming to grade through Q2 2019. We have tendered the majority of the work for the project and anticipate to procure the remainder of the finishing work over the next couple of quarters.For the JV project with West Bank at Adelaide & Duncan -- we're progressing selective demolition work on the heritage structure now that the facade retention system is in place. We currently stand at approximately 65% of our costs, in fixed priced contracts with another 10% under negotiations. For our JV project with RioCan on College Street, we have commenced the construction. This is project is slated to be completed in Q1 2021.In Western Canada, the commercial component of TELUS Sky is nearing completion. TELUS is scheduled to commence fit out work in February. Occupancy continues to be scheduled for Q3 2019 for the commercial component of the building and late in 2019 for the residential component of the projects.In Vancouver West Bank continues their excavation work on 400 West Georgia. This project is progressing according to our anticipated schedule.Intensification approvals. Our current focus for approvals is on our intensification projects in Central Canada. Our King and Spadina project with West Bank has progressed both in terms of pre sale activity as well as design work. We anticipate construction begin in late summer 2019, we continue to push for municipal approvals for Adelaide and Spadina project as well as our King and Brant projects. We anticipate receiving the approvals in late Q1 2019 to early Q2.In Western Canada we have established a plan to redevelop the Lockheed building. Discussions with the city and province have progressed to a point, where we're engaging a construction manager. Our goal is to finalize our construction costs and schedule by the end of the quarter. I will now turn the call back to Michael.
Thank you, Hugh. The outlook for our urban workspace portfolio remains positive, as is evident from what Cecilia, Tom and Hugh have just said. The outlook for our network-dense urban data centers is equally positive. From here on I will use the acronym UDCs to refer to our urban data centers.In our last conference call, I followed up on the possibility of increasing our exposure to UDCs. I started by reiterating how critical a component of Canada's communications infrastructure our UDCs have become. I also emphasized our responsibility to ensure that our UDCs continue to be fairly valued in our financial statements.Finally I articulated a preliminary plan for increasing our exposure to network-dense UDCs in a way that wouldn't alter the risk profile of our business. I characterize the plan as evolutionary rather than revolutionary. Something that would occur organically over time, and wouldn't be executed on a speculative basis.I remain confident in the preliminary plan. You will recall that the first step is to propel NOI growth over the next 5 years. Continued occupancy gain at 250 Front West, will contribute meaningfully, though it will plateau as we approach full occupancy. Rent growth and growing interconnection revenue will also contribute meaningfully. We intend to report regularly and specifically on NOI growth from our UDC asset base.This will enable us to build a growth forecast based on actual quarterly results rather than on assumptions about lease up rental rates and the rate that cross connections are established at the facilities. Allied's opportunity set continues to expand while remaining within our investment and operating focus. This bodes well for acquisitions in 2019, an activity that is notoriously hard to predict.In 2017 and 2018 we completed $123 million and $143 million in acquisitions respectively. We expect to exceed this level of acquisitions in 2019, perhaps materially. An example of our expanding opportunity set arises from the fact that owner-operators in Vancouver have begun to approach us directly with investment opportunities. This will enable us to expand our portfolio at a time when urban Vancouver is transforming from a secondary to a primary Canadian office market. I consider it imperative that Allied penetrate Vancouver more fully as we aspire to be a leading provider of urban workspace in all major Canadian cities.We made progress in Vancouver last year and will make further progress this year. Another example arises from the fact that global real estate investors are more interested than ever in Canada's major cities, particularly Montreal, Toronto and Vancouver.I believe this will extend to Calgary in due course. Many of these investors are intent on working with Canadian organizations that have a strong urban platform. This may prove timely for Allied and I will explain why. We very much want to lever our platform more fully than we have in the past. We are fortunate to have ready access to low-cost capital. We've certainly taken advantage of this in building our business and will continue to allocate large amounts of capital to our business going forward. We haven't yet taken full advantage of our platform, which I consider to be understandable.Over the past 5 years, we've been expanding and strengthening our platform to keep pace with accelerating opportunity and activity. I believe we've done a very good job in this regard, and can now reasonably strive to use our platform to enhance our investment and operating returns. This is not something I expect to achieve overnight, but it is something I'm intent on achieving and something that we can reasonably expect to achieve over time.Overall, we continue to have deep confidence in and commitment to our strategy of consolidating and intensifying distinctive urban workspace and network-dense UDCs. All as we've outlined in this conference call presentation. We firmly believe that our strategy continues to be underpinned by the most important secular trends in Canadian and global real estate.We also firmly believe that we have the properties, the people and the platform necessary to execute our strategy for the ongoing benefit of our unit holders.I hope this has been a useful and comprehensive update for you. We'd now be pleased to answer any questions you may have.
[Operator Instructions] We'll take the first question from the line of Chris Couprie with CIBC.
Just 2 quick ones from me. Just on the guidance that you guys provided for '19, with respect to 250 Front. Does that include any incremental leasing? And so on your revenue growth? And then secondly, just strategically you called out increasing your exposure to Vancouver. Where do you potentially see that business growing?
With respect to the first question it does not include incremental leasing or interconnection revenue growth. Same if you will, basis as last year we certainly aspire to achieve both but we weren't prepared to assume either in finalizing our internal forecasts for 2019. With respect to Vancouver, we expect to grow in the conventional areas for Allied, which would be Gastown, Crosstown, Yaletown and potentially Railtown. We also are interested in what's transpiring in the Mount Pleasant area. So there is a strong base of high tech business in the city of Vancouver. It wants to be housed in a manner that is entirely consistent with the way Allied has served it's users over 2 decades now, and we want to be a big part of that in Vancouver.
So would you say you have a target in terms of the share of your business that will eventually come from Vancouver?
We do. I am a tiny bit hesitant to articulate it but I'll get over that quickly. We want to get to 1 million square feet in that market as soon as possible. So I'm not suggesting we're going to get there overnight or this year, but to us 1 million square feet of high caliber Class I office property is a bare minimum as far as we're concerned, for critical mass.
Your next question will come from the line of Mark Rothschild with Canaccord.
Last year or maybe 2 years ago rather you exited some markets that were not worth to you anymore and over the past year you haven't really stalled much. I'm curious if as you look up your portfolio, do you see assets in your market that you'd want to sell, either just not core assets or smaller assets that you want to sell, and to that point how does this relate to your funding requirements for your development as far as, you know you've been very successful in reducing leverage to issuing equity. Does that fit in at all going forward?
It's a good question. We don't see any material amount of noncore assets in Toronto or in Montreal, although there are an inconsequential few. Where I do see the possibility over a 2 to 3 year timeframe of monetizing a more material amount of our current investment base would be in Ottawa and in Edmonton. It is not possible for Allied to grow in those markets either materially in terms of asset base or in terms of earnings and while we love the buildings we have in each market, and while they are excellent buildings and in a way the best Class I buildings in those markets. It probably doesn't make us, it doesn't make sense for us to own the long term, so I would see us in 2 or 3 years not this year and not next year, because there are certain operating achievements we want at each building before we would be in an optimal position to sell them. But in 2 or 3 years I could see us selling those. So it's probably far enough in the future Mark, that it wouldn't be any material part of our development program, because most of our development costs are awaited in '19 and '20. So I don't think the timing will be convenient for funding our existing development commitments. But I do think it's something that we want to do in the fullness of time.
Just 1 other question. I think that Tom mentioned that you have had some improvement in Calgary more in the belt line area it sounds like as opposed to downtown. Are you seeing any recovery at all in downtown and Michael you made a comment about increasing your exposure to Calgary and that you think long term this will be a good market. Is this an area where we could see more investments this year?
Yes, it is a market where we would see more investment. It's likely to be on the belt line as opposed to on Sixth or Eight Avenue. But it won't be large in scale. There don't appear to be any large opportunities in the Calgary market today. But there do appear to be more or less continuous smaller opportunities that fit our investments and operating focus and we'll certainly take advantage of them when they arise or when we can initiate them. But again I don't see it taking on any consequential scale in 2019. The 20 million to 30 million maybe -- would be kind of the top end that I would hope for in that market. We're really expecting a much larger amount of acquisition in the Vancouver market.
We will now take the next question from the line of Mario Saric with Scotiabank.
Just coming back to a question on the guidance. And I think Cecilia you mentioned a couple of impacts coming from the King development, Indigo leaving and then Cite Multimedia I guess a tenant turnover there, I presumably going to Nordelec. How would you quantify the impact of those 3 items on the guidance for '19? And then looking at out in terms of planned re-leasing of the space at Cite and where Indigo is departing, how do you think of what the potential upside on new rental leases in terms of the [ doubt ] in the rent going forward?
Mario, I think the most material of those 3 anticipated changes in 2019 is 468 King by far. It's around a 65,000 square foot building when Indigo leaves, we will substantially retrofit and upgrade the building. That'll take us, I would anticipate at least 12 months, certainly take us all of 2019. And I would expect a very significant increase in NOI on the re-leasing of that space. The rents in the market, as Tom mentioned, are approaching $40 net, which is a dramatic increase over what Indigo is currently paying. And we also expect to be able to convert the sub, if you will, the sub-ground floor and the ground floor into retail. That was the 1 instance in the early days where we, if you will, succumbed to the pressure of office users to occupy ground floor and elevated basement space. And we very much want to get that back and convert it to retail. And of course, we would expect in that case, the rents to be somewhere in the $80 to $90 net per square foot range, probably a little lower in the basement and maybe a little higher on the elevated ground floor. So there will be, I think a contribution coming from 468 in 2020 but it will simply be a bit of a drag on us in 2019.
And then shifting gears to 250 Front, granted the guidance doesn't reflect any incremental leasing there or incremental ancillary revenue. But just as you sit today at the property, how do you feel about the leasing prospect today versus a year ago? And what would you say would be the difference between the 2 in terms of potential to lease it up today versus a year ago? Is it simply just the passage of time or how do you feel about the space today versus a year ago?
I'll give you my view. You may have to qualify it given my, I don't know, unrestrained optimism. But I would say our view of the lease-ability is better today than it was a year ago primarily because there are a number of possibilities that are much further advanced. And that those prospects have not gone away and won't go away, but require an inordinate amount of time to get from, if you will, conception to the point where a decision is made. So there are, Tom alluded to I think, 15,000 square feet. Those are material new users of space in the facility. We've been working on them for over a year. So we are -- if you will, by virtue of the inflection of time, we're closer to the finishing line there than we were a year ago.
The other thing I would add Mike is that the users that we're dealing with are kind of sticky. They're going to attract others. Once done and in place they will attract additional users to the building that we're not currently working with. So those are important ones for us to complete. And we continue to make progress; slow, but we're getting there.
And the only consolation regarding the slowness Mario is the users themselves told us right out of the gate what their timeframe was for a decision and they haven't disappointed us. It has taken every bit as long as they told us it would. But Tom makes a very good point. And that's what I was alluding to about them being important new users. They're users that actually attract other users. Whereas with the exception of AWS Direct Connect, none of the existing users at 250 Front attract other users. I think, Tom.
That's fair to say.
But AWS Direct Connect does, but that would be the only 1. So I, guarded optimism, but we just don't want to have a substantial assumption built into our internal forecast that we would run the risk of not meeting or not satisfying.
Okay. And then sticking to the UDCs, the IFRS cap rate on the assets was flat quarter-over-quarter. So we saw a pretty nice downtick in Q3. What do you see as being the catalyst to potentially see further compression in those cap rates? If there is further compression potential?
I think the biggest catalyst would be transactions for other network urban-dense data centers in North America or perhaps even in other parts of the world. That was what underpinned the decline in Q3. And I think additional transactions would have impact on the cap rate that would be applied. And of course that industry tends to function more -- or more on multiples, but we translate it into cap rates.
I think also Mario as we develop the -- as we continue to develop the strategy around those assets and continue finding new revenue streams that aren't always square footage related, that will feed into the appraisals, assumptions and model. So if it's a combination of what we plan to do with the asset as well as transactions in the market.
Okay. Anyway, it was mentioned on those fee streams that you're expected to disclose them when they actually surface. What kind of timing should we think about in terms of the incremental exposure?
We're going to start in Q1 2019.
Okay. My last question just comes back, Michael, to your comment on the platform and having not taken advantage fully of the platform yet. And you believe you can do so now to enhance returns over time. You also mentioned increasing international interest in Canada's major urban markets and also, let's say in enhancing acquisition pipelines. Are we -- it sounds to me like there's an opportunity potentially to do joint ventures with other partners outside of just pure development. Is that a fair comment? And if so, would you consider selling partial stakes in existing assets to fund future growth going forward?
There's a lot of questions inherent in that but I think I can answer them well. It's become ever more apparent to us as we almost travel the globe, representing Allied to institutional investors that our cities have gained prominence globally as a place to invest, be it directly or through the capital markets. When we were in Asia recently, not only did we meet with equity investors, we actually met with a number of organizations who have interest in investing directly in Canada, but who don't have the platform that would be necessary in order to execute that kind of execution, simply as an example. So what we're thinking is in the past, we've never levered our platform the way developers that we deal with do. We've never levered our platform by owning partial interests and managing the entire asset, which has been done by a number of our peers in the Canadian public real estate space. So we do believe that our platform plus our embedded value add portfolio gives us the basis to generate preferred returns on joint projects. And we certainly do want to manage entire assets, even though we'll have a co-ownership interest only in them. Will we be selling our existing asset base or a percentage interest in it in order to achieve that? I think that's less likely. I think what's more likely is that we will acquire assets that fit our investments and operating focus, with others who are more passive in terms of how they invest. And we'll augment our return by managing the entire asset. But as I say, this isn't something that we expect to achieve overnight, but it is something we now feel we can very effectively and realistically strive to achieve. The platform is very well developed. The team is very deep. The expertise is very comprehensive, in my opinion. And we can not only pursue the opportunities that we are pursuing, but we can pursue additional opportunities and pursue them in a way, where we use our platform more and maybe our capital less, to generate the kind of returns we want. Although as I mentioned, there is no possibility that we're not going to be allocating significant amounts of capital to our business going forward. That will always be, or at least in the near-term that will be a significant component of what we do, but that's how we're thinking about it.
We'll now take the next question from the line of Mike Markidis of Desjardins.
Michael, just following up on Mario's line of questions there regarding the leveraging the platform. Maybe to ask it a little bit more directly. Have you had direct conversations with entities at this point? I'm just trying to get a sense of how close you might be to doing something in this regard?
I think the right way to answer that question is, we have been having such conversations with entities for some time now. And by some time, I would mean the last 24, maybe even 36 months. So a number of passive sources of capital have wanted to collaborate with us and we have expressed interest in doing so. But we haven't made it a priority. A great example Mike, to give you some color is everybody and his brother wants to be part of Union Centre. As you know, we're probably not going to initiate the development of Union Centre in this cycle. I don't want to take on another large development project at this point in the development wave, even though I believe there's a few years left in that wave. So we've had discussions around concrete opportunities but we've never pulled the trigger, if you will. We're not in a point or in a position today where we're about to pull a trigger, but we are in a position today where we're prepared to allocate our time and our resources to pursuing these opportunities a bit more aggressively. And to considering them a bit more fully as we go forward. It's -- the time is right, it was a little premature 2 or 3 years ago and last year, our overriding focus was to get the development portfolio de-risked in terms of leasing, construction and funding. Now that that's been achieved; and this isn't to suggest we're going to sleep on that, there's still lots of work to be done; but now that that's been achieved, this is where I'd like to focus a little bit more of our time and our effort.
That's great color. And then I guess Union Centre, when fully develop is a very much different type of asset than perhaps the typical Class I building, at least in its Class I form, without a significant intensification. So I guess just in terms of the acquisition of a stabilized typical Class I property, do you find that those potential capital sources that you alluded to having interest in Union Centre, would they have the same amount of interest for the typical Class I property?
If we wanted to put a portfolio of Tier 1 Class I properties together and sell a half interest, we could do that yesterday and we could do it at a very high price. We don't want to do it. Where I think there is -- so the answer is yes, there's interest. We'd have to create scale and we'd have to give up half of what we own and we have no interest in doing that. What I think is more likely though is a lot of the people who have approached us are very interested in being at the forefront of the creation and provision of urban workspace and they perceive us to be there. So a project like QRC West, a project like King Portland Centre or a project like 19 Duncan, there would be enormous interest in participating collaboratively with us in projects like that, either during the development phase or on completion. And I think that's where probably the greatest amount of interest is because the one thing these sources of capital, I think strive for is scale. So would they buy 500-522 King West or a co-ownership interest? Probably would, but I think, if we parceled everything at King's, bind it together and offered a half interest on managing, I think it would fly out the door, but we'd rather die than do that.
And then just with respect to your comments on Vancouver and it sounded like you're alluding to A, much bigger year this year relative to the past couple from an acquisition perspective. And B, an emphasis on the Vancouver market. Just given the valuations of that marketplace, is this something that given current conditions you believe Allied can do accretively from day 1 or is that something where you might be facing some dilution initially?
I think the most realistic prospect is probably neutrality or very, very modest accretion, but that would be the best we can hope for there. And when I say this, I'm talking about year 1. Over time, as we work the larger portfolio, one that's more coherent and has more capacity for working and reworking then I think we could earn our way to what would be not dramatic accretion but material and meaningful accretion. But going in, it would not be anything to write home about in terms of short-term accretion.
Last 1 from me before I turn it back. Just on Vancouver as a marketplace, it perhaps has a more robust supply pipeline than even Toronto does. Just curious how you view the supply-demand dynamic of Vancouver relative to how you see it in Toronto?
I think theoretically, there's a bit more risk of oversupply in Vancouver than there is in Toronto. But I think ultimately at this stage, at least the risk is theoretical. Most of what's being built is committed to -- in tune notable instances by Amazon. And certainly the success we've had at 400 West Georgia gives us confidence that there's a lot of demand that needs to be supplied and satisfied. So I don't think it's a big near-term risk. But I do think 1 way you can defend against it is by having the kind of properties that we tend to focus on which do tend to be more resilient and a bit more sticky. But there is a lot of supply being created but there's not -- the really high-quality supply is not speculative.
[Operator Instructions] We'll now take the next question from the line of Jenny Ma with BMO Capital Markets.
So Michael, just a couple more questions about Vancouver. You had mentioned that the sellers are now approaching you with opportunities. So just wanted to get some color on what their profile is? If you can comment on that? What their motivation is? Is there any correlation with some of the nerves around the residential market spilling over to commercial? What's created sort of this scenario where there's more acquisition opportunities for Allied?
I think there are 2 things. And we've experienced this before actually many times. What we found is the best way to stimulate this kind of opportunity is to actually do things. To actually be active in the market. So when we started buying in King and Spadina in 1998, the mere act of doing so actually brought more opportunities our way, even though people understood at least conceptually what we were planning to do. And that's happened to us again and again and again over the years when we bought Cite Multimedia in Montreal, everyone thought we were on drugs back in 2007. And all of a sudden, opportunities came out of the woodwork. They may have thought we were idiots prepared to buy anything. But interestingly enough, the kind of opportunities that came out of the woodwork were the very kind of opportunities we focus on. I think that's what's happening in Vancouver. The announcement with respect to 400 West Georgia, probably the known success of the leasing effort there. And then the 3 or 4 small acquisitions that we made over the course of 2018, I think attracted attention of organizations there that own assets and want to either collaborate with us or see if we're prepared to acquire assets efficiently and quietly. There are even some who see us as an opportunity to get into the Toronto market. And indeed, I think I would characterize our relationship with Westbank as in a way having evolved that way. We represented for Westbank the opportunity to penetrate the Toronto market more fully. And I think we've helped Westbank materially in that regard. They in turn allowed us to penetrate the Vancouver market at a time when we were almost ready to give up the ghost and conclude that we could never achieve critical mass there. So I think it's activity driven more than anything else.
So would you characterize these organizations as being domestic or foreign or is there a mix of both?
Almost entirely domestic. Local domestic.
That's interesting. Moving over back to Toronto, maybe this is something for Tom to jump in with but could you give some color on sort of the velocity of deal flow from the tech users? There's a lot of press on just sort of the unprecedented demand coming from that. Are they taking -- are they doing deals where they're taking more space than they need in anticipation of future growth? And with the vacancy where it's at some of them have sort of come up against constraints and even taken up space in the typical office buildings closer to where the analysts are sitting. What -- when do you -- do you see any sort of plateauing in that and if they sort of get up against the wall as far as supply or lack of supply, do they sit and wait until something opens up in downtown or does it start spilling into the suburbs or expanding in other markets?
Lots of questions there, Jenny, but I would say that the demand on the part of the tech companies is unrelenting. They all want to be located in downtown Toronto or near downtown Toronto. They are making commitments that are firm on large chunks of space with options to expand in time. We don't allow the tenants to paint us into a corner so that we can't deal with that space there. They've got options on, we've put time limits on it but they're all planning for the future. Where they will continue to grow when there's no more supply? I'm not sure. I think that they'll wait and expand in downtown Toronto, wherever they can.
So it's kind of a downtown robust attitude towards looking at the space?
It seems like that. The tenants that we're talking to are focused. And then we're talking to a few now who are located in the suburbs and they're 100% determined to be downtown.
So I guess the constraint as far as the demand goes, it's really on space as opposed to their own growth flattening out? Is that fair to say?
Hard to predict their growth, but they're certainly a constraint on space.
We'll take the next question's from the line of Matt Kornack with National Bank Financial.
Quickly on the a Cite Multimedia move, is that -- is Morgan Stanley expanding into Cite space or are they moving to some other space in the property?
They're expanding into Cite space and other. And they are also -- are they taking larger back space?
Yes, they're taking larger back space and there's an expansion to the building as well.
It's a very large expansion. I think we described it in our Q3 results. But in any event, it is the Cite space for sure. And [ larger back ] and it's a very big expansion. And as you may recall Matt a very lengthy extension as well.
And just looking at your 2019 Eastern Canada renewal spreads, there's a bit of a downtick. Is that related to this expansion or is that some other lease within Eastern Canada?
No, it's not related to the expansion. In fact, I think the expansion rents were fixed last year and are very appealing and represent growth. Those -- it's an interesting question. It arose even at the board meeting yesterday. Why are these differences negative in Montreal? The process we go through is, we calculate of course the in-place rent. That's arithmetic, that's easy to ascertain. And then, we have the different brokers who serve us with respect to different buildings in the market, whatever market it happens to be, provide us with their estimates of market rent. The estimates in Montreal have been low in my opinion. And again, this is just me speaking, but they have been low for a while. We see no reason to, if you will, contest those estimates. But I think those estimates understate the market rents for our space in the Montreal market. I think though, I actually, I think the estimates for Calgary are entirely accurate and the erosion inherent in those estimates. I do expect to experience over time, but I don't expect to experience material erosion in the Montreal market place.
And given where you're sitting occupancy wise, you can sort of be patient and push rents as was mentioned in the initial commentary?
Yes.
With regards to G&A, Cecilia, I didn't understand if you meant that Q4 should be a run rate annualized number or if we should take the average for 2018 as being sort of a number that we should look at only because I think there's some sort of maybe bonus type stuff in Q4 or is that a good carry?
Yes, I think you can use Q4 2018 as a run rate for each quarter in 2019.
Okay. So it'll be a little bit higher as a percentage of NOI next year?
A little bit. Yes.
On the King project, I think you've changed the disclosures slightly with regards to what's in the cost versus the return. And it's only, I think now the retail component or the remaining commercial component. Can you provide any information as to -- you give a, I think, a sales proceeds and an expectation on the condos, but what the cost would be for that?
What we've been averaging or what we've been targeting for the condo proceeds is in line with what is typical for the market. So the kind of profit margin on the proceeds versus cost is average. What is normally achieved in the market is what I would say.
Can you give a ballpark range as to what the typical market would be?
It would be in the 20% to 25% profit margin.
And then, Cecilia on the availability of unsecured term loans. What's the depth of that market and to what extent can you continue to use it whilst the unsecured bond markets are a little bit volatile with regards to spreads? And on the other side is, I know you don't like mortgages, I don't think you've really taken out too many of them, but would you entertain looking at mortgage debt selectively given the spreads on unsecured debt or will you go with this term loan type product?
Every time we look at putting a mortgage on a property, we end up shuddering at the thought, to be perfectly blunt. Even having achieved beyond our target of un-encumbering 50% of our asset base. We'll keep a close eye on where the unsecured bond market is and just continue looking at all of our options. So we're hoping that the bond pricing becomes more favorable than it was at the end of last year. We certainly want to continue with our unsecured debenture program. I'd love to do a 10-year bond as everybody knows but the pricing has to make sense.
And the bank market, Matt, in our experience sort of opens and closes quite repeatedly. It does seem to open when the bond market is not receptive. And my guess is the market we availed ourselves of, in December I believe it was, is not going to stay open indefinitely. Hopefully at that point, the bond market will be more receptive but we weren't prepared to transact in the bond market at the end of 2018 and -- under any circumstances. And if the pricing remained that way we would not. There are many alternatives out there to the bond market and the bank market if I can call it that is just one of them.
And I guess scale is still sort of the impediment to bond rating increase at this point because you arguably have some of the best credit metrics in the space. Is that fair to say?
Yes from -- what I've been told by DBRS is right now our credit rating is based on the assumption that all of our development, the $830 million spend over the next 4 years is funded with debt. And so I've been told that if we show that and I'm going to use the exact term that I was given, it's a technical term, good chunk of the spending in 2019 if that is funded with equity as opposed to with debt that we might fall on the right side of the bubble with respect to BBB mid versus BBB low. Now obviously, there's no guarantees on that and we certainly don't intend to fund all of our development with that. But what the definition of a good chunk is remains to be seen. And in the meantime, we'll just continue managing our activities conservatively as we always have. And we'll also be working with Moody's to get a better understanding of what they would look for in terms of an upgrade. I think from Moody's it's not as much as the funding profile as it is the debt to EBITDA metric, which we're very focused on and wanting to keep that below 7x. So we'll be working with both of those agencies in 2019 to get a better understanding of what exactly we need to do for an upgrade.
I guess at this point, it makes sense for them to look at the fact that your cost of equity is not far off from where your cost of unsecured debt is.
We'll take the next question from the line of Mike Markidis of Desjardins.
I have a follow-up for Tom. Tom sorry, I missed commentary a little bit with respect to the UDCs, I think you had mentioned something to the effect of the amount of square footage maturing by 2021. But then it started talking about 30% of that space being removed -- renewed and having it all done by the end of the year. Were you talking about the entire amount for 2021 or were you just talking about having 30% of this year's done and hoping to have the remainder of this year done by the end of the year?
Between now and the end of 2020, there's about 37% of our UD space, UDC space maturing. 30% of that space, we've already dealt with and completed. And we're working on the rest.
And that 30% that you've got done, is that already reflected or deducted from the lease maturity profile that's shown in the MD&A?
No.
It's not. Okay. So you've already into 30% of that. Okay. That's helpful for me.
It appears there are no further questions at this time. Mr. Emory, I'd like to turn the call back over to you for any additional or closing remarks.
Well thank you, Ron. And thanks to all of you for participating in our conference call. We look forward to keeping you apprised of our progress. But in the meantime, all the best and have a good day. Thank you.
Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect your lines.