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Good day and welcome to the Allied Properties REIT Fourth Quarter and Year-end Financial Results 2019 Earnings Conference Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Mr. Michael Emory, President and Chief Executive Officer. Please go ahead, Mr. Emory.
Thank you, Derek. Good morning, and welcome to our conference call. Tom, Cecilia and Hugh are here with me to discuss Allied's results for the fourth quarter and for the year ended December 31, 2019. 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 annual report. As you know, we pursue sustained profitability for the benefit of our unitholders by operating, acquiring and developing distinctive urban workspace and network-dense urban data centers in Canada's major cities.In 2019, we pursued our strategy, pardon me, with excellent short-term and long-term results. Most notably, we allocated $870 million to accretive acquisitions and another $425 million to development and value-add activity.In the face of this extraordinary level of capital allocation, we maintained strong balance sheet metrics by raising more capital at lower cost than any other year in our history. Cecilia will elaborate on our financial results. Tom will follow with an overview of operations. Hugh will provide a development update, and I'll finish with a few words on our near and longer-term outlook. So now over to Cecilia.
Good morning. I'll summarize our financial results, our balance sheet and a summary of our outlook for 2020. This quarter was one of our strongest ever. We achieved $0.58 of FFO per unit even with $810,000 of nonrecurring condo marketing costs at King Toronto included in the calculation. Our annualized quarterly EBITDA reached $333 million for the first time ever. Driven by rent growth in Toronto, Montreal and the UDC portfolio, our same-asset NOI in the fourth quarter was up 4% from the comparable quarter last year, driving 8% growth in our normalized AFFO per unit. For the year, we came in on the higher end of what we expected, with same-asset NOI growth of 5.5%. Moving on to our balance sheet and our capital program. Driven largely by the strength in our core markets, our NAV per unit at the end of 2019 was up 10.5% from the end of 2018. At year-end, net debt-to-EBITDA was 6.3x. Debt represented 26% of our fair value. Both of these metrics are in our targeted range. Interest coverage was 3.3x and making progress towards our goal of 4x. Our ratio of unsecured to secured debt was 3.8x at year-end, with unsecured debt representing 21% of our total debt. At year end -- sorry, pardon me, with secured debt representing 21% of our total debt. At year-end, our pool of unencumbered assets was $5.5 billion and represented 72% of our asset base. After closing acquisitions in January 2020, our pool now sits at $5.8 billion and represents 73% of our asset base. We intend to continue prepaying or repaying mortgages as they come due with the goal that the majority of our asset base will be unencumbered. We believe this will give us the strongest and most flexible balance sheet from both a defensive and offensive perspective in terms of responding to changing market conditions, acting on acquisition opportunities and financing our development activity. In Q4, Moody's upgraded us to Baa2 with a stable outlook, and DBRS upgraded us to BBB mid with a positive trend, which we're pleased with. Looking forward to 2020, we took the same careful approach in formulating our outlook as we did for 2019. Assuming we use our unsecured operating line to finance all of our activities in the year and assuming no acquisitions in 2020 as well as excluding condo marketing costs, we expect mid-single-digit growth in FFO per unit -- AFFO per unit as well as same asset NOI. We're starting the year with our portfolio being 95% leased. So there will be some contribution from occupancy take up. The other drivers will be the contribution from the $870 million of acquisitions completed in 2019, the development completion of 425 Viger and TELUS Sky as well as organic growth, primarily in our Toronto and Montreal portfolios. These are tempered by continued softness expected in our Calgary portfolio and vacancy expected in our Edmonton asset midyear. We expect both interest expense and G&A in 2020 to be at roughly the same level as 2019. Our approach is consistent with the approach we've taken over the last few years in formulating our outlook, so we're confident in our ability to see the puts and takes for the year. I will now pass the call to Tom for a discussion of our leasing and operating activities.
Thank you, Cecilia. The leasing environment remains strong with demand in all of our markets, and we leased 2.4 million square feet in 2019. We are holding at a very healthy portfolio-wide occupancy level of 94.5%. And no surprise, we have continued to grow in Toronto as well as in Montreal and Vancouver. Moving from east to west, I'll provide a brief update on our leasing activity in our major markets. Beginning in Montreal, we ended the year at 93.2% leased. Slipping slightly due to acquisitions, but we are determined to achieve 95% or better by year end 2020. With Le Nordelec, Cite Multimedia and our properties on de Gaspe being highly leased. And now with our redevelopment project at 425 Viger, 95% leased. Our focus in the coming months has 3 priorities: first, to continue to push the lease-up of the smaller spaces throughout the portfolio; second, to proactively address leases expiring prior to December 31, 2022; and third, to finalize the plans for the repositioning of 700 DLG.Moving to Toronto, we are very highly leased in our existing portfolio. And in this market, we were able to quickly fill any space that comes back to us, usually with significant rental uplifts. The leasing program at The Well, our JV with RioCan continues to grow nicely with 84% of the office space pre-leased. Some excellent high-value small [ core plates ] are available to the -- are now available to the market. In Calgary, we continue to maintain a very respectable 89.3% leased in this market. TELUS Sky, our development project with TELUS and Westbank, we are 64% leased. Three model suites will be completed in the next few weeks, and we will be -- they will be available to show prospective tenants. We expect that the bulk of the remaining space at TELUS Sky will be leased to smaller space users. In Vancouver, our portfolio is highly leased, and there's nothing material to report.Lastly, our urban data center space. We are in active negotiations with 2 users to backfill vacancy at 151 Front. At 250 Front, we have reached agreement to expand an existing tenant by 9,000 square feet and are now completing that paperwork. We also continue to work with 2 prospects for 16,000 square feet. If we complete these transactions, we will be 82% leased at 250, 99% leased at 151 and 93% leased in the UDC portfolio.I will now turn the call over to Hugh for a discussion on our development activities.
Thanks, Tom. In this quarter, we continued to make progress on both our active development projects as well as on our future development pipeline. I'll first provide an overview of our construction progress and then provide an overview of approvals. Projects under development. In Montreal, we have completed our base building work at 425 Viger. The tenant has taken possession and has commenced their fit out work. Our team has begun the initial prep work for the transformation of 700 DLG. We intend on establishing a fulsome vision for the property in Q2 with construction beginning in earnest in early spring. In Central Canada, we continue to make progress on our JV projects with Westbank, Perimeter and RioCan. Construction at The Well continues to progress on schedule. At the end of the quarter, we had reached the 14th floor of the office tower and are progressing above grade on a number of the other buildings. This project remains on track to meet our lease obligations for delivery of the base building. Construction has commenced at King Toronto with an anticipated completion on the commercial -- of the commercial component in late 2023.In Western Canada, despite some delays in the construction of TELUS Sky, we anticipate achieving occupancy on the commercial component of the building in late February. Intensification approvals. In Toronto, City Council has approved both our Adelaide and Spadina project as well as our JV project with Great Gulf at Adelaide and Brant. When completed, these 2 projects will add approximately 300,000 square feet of workspace and 40,000 square feet of living space. Both projects will be launched in late Q2 to early Q3. I will now turn the call back to Michael.
Thanks, Hugh. Our performance in 2019 was at or above the high end of our internal forecast. Our internal forecast for 2020 contemplates equivalent results. I continue to have deep confidence in our outlook beyond 2020 for 2 main reasons. One is our ability to serve knowledge-based organizations successfully and on an ever larger scale. And the other is our ability to allocate very large amount of capital, while adhering to a proven investment and development strategy. I believe the latter, our ability to allocate large amounts of capital with strategic coherence and discipline, will underpin our positive outlook for years to come. I also believe the ever-evolving Allied team will underpin our positive outlook for years to come. Building a strong, deep and well composed team is critical to the execution of any strategy.In my view, Allied has made consistent progress in this regard over the past decade, and will continue to do so moving forward. In recent years, we focused intently on interdepartmental and interregional coordination and accountability with demonstrable and encouraging results. Not only is the Allied team stronger, deeper, better composed and better organized than ever before. It is fully unified around Allied's vision and mission, about which I've spoken at some length recently. I won't repeat myself here other than to reiterate that Allied's vision and mission statements are the aspirational context within which we, as a management team, pursue sustained profitability for the benefit of our unitholders. This has been an uncharacteristically short management presentation on our part. But we took the time to write a short letter rather than a long one. I hope it's been a useful and comprehensive update for you, and we'd now be pleased to answer any questions that you may have.Derek, back to you.
[Operator Instructions] We'll take our first question from Mike Markidis with Desjardins.
On the enhanced disclosure on the UDC and the ancillary revenue, thank you, that was appreciated. I guess $4.3 million of ancillary in 2019 about 8.5% of the total for that segment. Are you able to comment on how that might compare to 2018?
No.
Okay. How should -- was there a material ramp through the quarters in 2019, or was it just a relatively stable amount?
There was -- I would -- what I would characterize as a gradual ramp through 2019.
Okay. And is that all attributable to 250 Front? Or is there any ancillary revenue coming from 151?
Actually, it's attributable to all 3 properties, 151 Front, 250 Front and 905 King.
Okay, got you. And I guess, the potential for the cross-connects at 151 Front, that wouldn't be reflected in that figure would it?
No. Only actual ancillary rental revenue earned period would be reflected in those numbers.
Okay. And then, I guess, in your outlook of same-property NOI coming in, in the mid-single digits. Is the growth in that ancillary base a meaningful number in that outlook?
It actually is. However, the same-asset NOI growth from UDCs in 2020 will be muted because of the turnover vacancy at 151 Front. So even though we do expect the growth in ancillary rental revenue to continue to ramp up gradually, it will be muted by the turnover vacancy at 151 Front in 2020. We don't expect that turnover vacancy to mute the impact in 2021 and beyond. But certainly, it will in 2020.
Got it. Okay. That's helpful. Cecilia, just looking at your debt ladder here. And I think you had prepaid a good amount or pretty much all of your 2021 mortgages. If you look to 2022, you've got a fairly significant balance of mortgages and an unsecured, probably 100 basis points give or take, higher than what you could do in the unsecured market. What would the defeasance payments on those, just given where bond rates are today? Is that something we could expect from a relatively -- to occur in a relatively quick manner? Or is the defeasance just too prohibitive at this juncture?
You mean the penalty on the Series B coming due in 2022, that one?
Well, I'm just looking at everything actually, so -- because you got your mortgages.
So -- I mean, we've been analyzing this over the last few weeks, the team has been, and the prepayment penalty on the Series B at this point would be, I think, too high for us to consider prepaying at this point. Yes.
And the mortgages, is that...
In with the mortgages for that matter in that period. Yes. Or else -- I mean, we would have taken advantage of that last year when we did the other mortgages, but it just didn't make sense from a prepayment penalty and the net savings, the annual net savings.
We'll next go to Mark Rothschild with Canaccord.
You've guided to similar growth in 2020 between same-store NOI and FFO per unit. And obviously, the amount of equity raised over the past year to strengthen the balance sheet and fund development is temporarily dilutive but also allows for NAV growth and development. Should we expect the focus to remain more in NAV growth and that looking forward in future years as same-store NOI growth is likely to remain at solid. Will you be willing to continue to sacrifice FFO per unit growth just for longer-term value creation? Or will the same-store NOI growth lead to stronger FFO per unit growth as we look forward into 2021?
Mark, if I understand the question, I think the need to sacrifice cash flow per unit growth in order to achieve the debt metrics we want is behind us. We've achieved that, and we fully plan to maintain that and to do the acquisitions and developments we have going forward on a leverage-neutral basis. So I do think that the need to depress, if that's the right word or put downward pressure on our earnings per unit growth in 2020, 2021 and beyond, won't be as pronounced as it was in the past. Maybe put differently, we won't be sacrificing short-term results for long-term value creation as much in 2020 and beyond as we felt it was appropriate to do in 2019, 2018 and 2017.
Okay. Yes I understand. And maybe just one other question. When I look at the cap rates that you're using for your IFRS NAV, it's interesting that in every market you're in, you reduced the cap rate pretty substantially over the past year, except for Toronto. Would you say that maybe Toronto had already compressed more or maybe you're being more conservative in the cap rate, do you think for Toronto or is there anything at all I can -- any conclusions I can draw from that?
Mark, it's Cecilia. The way that we're, I guess, looking at Toronto is, Cushman does a complete appraisal of our properties every quarter. And so they would look to the most recent trades in the market and how they would compare both on a quality of asset perspective and the nature of the asset as it relates to our assets in China, which are primarily the Class I or the hybrid. So there's a bit of a lag in terms of reflecting lower cap rates in Toronto. We are seeing an increase in value in our Toronto assets from the market rate assumptions, and so that's why we're seeing an increase on the asset side of things on the balance sheet. It's really market leasing assumptions driven. But I think it is reflecting the cap rates in Toronto.
And I think in terms of the relative markets, Mark, cap rate compression is more pronounced in Montreal today than Toronto, only because Toronto, as you pointed out, had already compressed quite meaningfully in 2018 and 2017, whereas I believe cap rates are continuing to compress in Montreal opposite a pretty, pretty low base in Toronto. I personally can't see them going much lower in Toronto, I'd be delighted if they did, I suppose. But I think they've reached a point of stability. Whereas Montreal is still being discovered not only by international investors, but even by other Canadian investors, and there's downward pressure on cap rates. And then Vancouver, of course, has always been astronomically low and remains that way. So it does depend on the market. But if we showed little cap rate compression in Toronto in 2019, it's because the cap rates had already compressed previously.
We'll next go to Johann Rodrigues with Raymond James.
Just with respect to the FFO and AFFO growth. As recently as last quarter, the outlook for last year was low to mid-single digits. And this year, presumably, a part of that was the $1 billion of equity raised, like Mark said, inhibited the per unit growth there. And then the outlook for this year, you've dropped the low and you expect mid-single-digit growth. So would it be right to say that it was really -- the chief driver of you dropping the low would be that you wouldn't raise $1 billion of equity this year? Or is growth kind of accelerating if you neutralize the impact of the equity?
Well, I think a lot of the equity raised last year is matched to new earnings from the acquisitions we made over the course of 2019. So a big portion of the equity raised in 2019 was actually raised accretively to the business and a smaller portion of the equity raised in 2019 was allocated to getting our debt metrics where we wanted them to be. So we did put pressure on our earnings last year on a per unit basis in order to get our debt metrics to where we wanted them to be, but we also allocated a lot of equity to accretive acquisitions. Which is why I think, ultimately, we're very confident in our internal forecast for 2020 in the mid single-digit range without having to go low. Acquisitions are contributing to that confidence. Rent growth is contributing to that confidence. A bit of occupancy gain over the course of the year is contributing to that confidence. And as Cecilia said, we've become, I think, much more deliberate in identifying the potential puts and takes in a given year. But in my view, to sort of summarize, what I've said and to answer your question directly, I hope, our ability to generate earnings growth is accelerating in 2020. And we don't anticipate raising equity in a way that would decelerate it or put downward pressure on it in 2020. We -- our plan in 2020 and beyond is to raise equity on a leverage-neutral basis. We do not have to raise equity in an amount sufficient to put downward pressure on our debt-to-EBITDA or our debt to fair value. But we will certainly maintain those debt metrics, and we will fund our development and acquisition accordingly on a leverage-neutral basis.
Okay, great. And maybe Cecilia, the 4.3 million square feet of potential density that you guys mentioned as part of the appraised value. How is that being valued? Or what is the value of that?
Well, it would be -- part of it would be reflected in our intensification table. I'm not sure what you mean, how is that being valued project-by-project basis, so it might be land value in some instances or...
Some of it isn't being valued at all.
No, exactly. Yes.
And some of it's being valued if we have the ability and have the commitment.
That's right.
So I think it's 6 -- in Toronto, it's 6.3 million.
Correct.
How much of that is in the pipeline?
We have -- in Toronto, we have 1.5 million.
Yes. So that 1.5 million is probably valued.
Yes, less cost to complete. Yes.
That's what I'm saying. So -- and it would be valued probably on a cost per buildable foot basis. The remaining intensification potential in accordance with IFRS is not valued at all. So it's not until -- I think we have a present intention to develop and actually have no impediment to development that we can even assign a value to that intensification potential, even if the approval is in place. So we have a number of approvals in place, where the buildable area is not valued in any way, shape or form. I think the biggest approval in place that we do assign value to is Union Center, which is about 1.13 million square feet of space, and there we've assigned an amount to buildable.
Correct. Almost $100.
Yes. And that's -- to be quite precise, the appraiser has assigned that. Otherwise, there's no material approval to which or in relation to which value is assigned to the buildable.
Yes. So on Page 41, you'll see that, especially where we have zoning approval status that's complete, the appraisal fair value will reflect some of that. And so you can see that on a project-by-project basis.
Right. So maybe a better way to ask my question would be what is the average dollar per square foot value being assigned to that 4.3 million square feet?
I don't know. I'll have to...
Are we assigning value to 4.3 million square feet of density?I don't know where the -- your numbers are coming from, that's why I asked the question.
4.3 [indiscernible] ...
On page 39, it says of the 8.7 million square feet of potential incremental density, 4.3 million square feet is being reflected and 4.4 million is not.
Right. So 3 million of the 4.3 or whatever is detailed on Page 41, which are our future intensification projects that we've already earmarked as specific projects.
And have committed to develop?
Well we haven't started developing.
But we have assigned buildable value to it.
Correct. Yes. So that would be the bulk of it.
And most of those are in Toronto.
Yes. They're all in Toronto.
And my -- I mean, my guess is, and this is now a guess just based on market knowledge, the value we'd assign to them would be somewhere between $60 of buildable and maybe as high as $80 or $100 of buildable. So it would be within that range. It certainly would not be the ludicrous value levels that are assigned to condominium and buildable area.
Our next question comes from Jonathan Kelcher with TD Securities.
Just turning back to the ancillary revenue on the UDC. At 151, is the new Meet-Me-Room from the Crosslake Fibre connection up and running?
Yes. Just beginning.
Okay. And is much of that the ancillary, the annualized ancillary revenue from Q4, is that -- has that contributed much to that?
Not really.
Okay. Can you guys quantify the revenue opportunity there?
We'll have to let it build, Jonathan, before we can confidently provide an estimate. It has just started. The rate at which it builds will really be dependent on the take-up of the Crosslake Fibre itself. And that's something we have no control over, and it's something we have no rational basis for providing an estimate on. Intuitively, I would think, in the interest of redundancy, there will be fairly significant take-up. And obviously, the developer of the cable is of the same view. But we wouldn't be confident projecting that forward until we have either half a year or a year of actual results because these things don't build rapidly as you know. But when they start to gain momentum, they can become very significant. But until that actually starts to happen. In fact, we're very low to make any kind of projection. For our own purposes and for the purposes of the market.
Right. So there wouldn't be a lot of that in your same-property NOI assumptions then?
There -- sorry, go ahead.
Okay. I was just going to say, and do you think that the 151 cross-connect opportunity can be bigger than the one you have at 250 Front?
Not in the short term. Not in the near term. In the near term, the biggest single cross-connect opportunity is at 250 Front. And interestingly, there may even be a fairly material opportunity at 905 King. I believe Tom, a major cloud infrastructure provider, has set up an on-ramp at 905 King West, which again is now extent and is beginning to be used, but not at a rate that would enable us to project. So 905 King, I shouldn't say, unbeknownst to us but I guess, not consistent with what we originally expected now has its own dedicated on-ramp to the cloud, and we could see some revenue building there as well. And I wouldn't have predicted that 2 years ago.
Okay. And then just switching to the leasing outlook in Toronto and Montreal are you guys aware of -- are there any large RFPs out there? Or do you just expect sort of steady state leasing over the course of the next year?
There's always some RFPs floating around. But we're looking at filling small spaces, 10,000, 20,000, 30,000 square-foot spaces as well as some larger ones. So the market is active and running on all cylinders, so we're not relying on big RFPs. There are a few but it's consistent in both Montreal and Toronto at all size levels.
Okay. Are any of the RFPs large enough that they might kick-start another office tower?
I think the probability of that is low. Right now, I mean, there is a tower being built by Broccolini for National Bank, as everybody knows. There is some potential movement back into the intercity with large users. I think the probability of that grounding a large new office development is low. And certainly, in transforming 700 DLG, we are not counting on any such user or any such requirement to fill the building. We want to have an ecosystem with, ultimately, within 700 DLG that in a way, will sort of connect with 747 Square-Victoria and 425 Viger where a major global tech firm occupies 75% of the building. So we're more intent on creating the kind of ecosystem we have in all of our concentrations across the country. We're not looking for a major Canadian entity to move into 700 DLG, although we wouldn't turn them away. But we're really creating the building or recreating the building to serve the kind of ecosystem of users that we're in the business of serving on a daily basis.
Okay. And then similar for Toronto?
Absolutely. And that's why, Jonathan, we think it highly unlikely that we'll start Union Center. There isn't a use around that I'm aware of material enough to represent a large enough pre-leasing commitment at Union Center for us to start it. So we will be, as Hugh mentioned, we will be starting some smaller development projects or intensification projects this year and perhaps next. But none of them will be 1 million-plus square foot office buildings, that'll come with the next cycle as -- in our view. And as I say, I'm not aware of a requirement in Toronto that would be even close to adequate to kick off Union Center. And even if it is, we're not out there looking for it.
We'll next go to Chris Couprie with CIBC.
Wanted to just turn back quickly to the UDCs. And the ancillary revenues, you kind of identify its resources, conduit space, rack space and cross-connect. Is there a way you could give us an idea of the contribution from these 3 different sources, and which of them have the better growth outlook?
We deliberately didn't break that information down for all kinds of reasons, including competitive ones. And we don't think it adds a great deal to the disclosure if we did it. We understand, as I'm sure you do, Chris, that the normal level of ancillary rental revenue for UDCs is higher than the current level that Allied has -- was it 8.6%, Cecilia?
Yes.
The normal level is somewhere between 12% and 15%. And our goal over time is to move to that level of ancillary rental revenue. We do believe that the biggest driver once momentum is established, will be rental of cross-connect space. But that's probably the only helpful thing I can add, we're simply not prepared to break it down between rack space, conduit space and cross-connect space at this juncture. And I don't think we'll be inclined to do that ever. But we will certainly, when we have a rational basis for predicting the growth in the rental of cross-connect space. We'll be the first to provide it.
Okay, that's fair. And just a question on the cloud provider choosing 905 King versus 250 Front. What would have been kind of the factors that would have droven their decision to locate there versus the "cloud facility"?
Current presence in 905 King West.
Okay. And then maybe just switching gears. I know you're probably still drinking the champagne from the recent credit rating upgrade. Is there any idea as to what the requirements would be to get a further credit rating upgrade? And is that something that is anywhere on your radar?
We're currently analyzing that. It's primarily -- well, I should say DBRS has changed a little bit their approach, and so we're still going through what their new matrix assessment is. But if I had to guess, it would probably be debt-to-EBITDA driven with less of an emphasis on absolute EBITDA dollar amount level, which would have been what drove them in the past. And then on the Moody's side, it would be continued debt metrics where they currently are with some improvement on the debt-to-EBITDA level. So where we are currently targeting to remain below 7x, I think Moody's would look for us to stay in the low 6s, but I'd have to confirm that.
Okay, great. And then maybe just any comments that you might have on the acquisition environment maybe going across the country?
Our outlook for acquisitions continues to be favorable. We are evaluating a number of opportunities. What I hope unfolds this year and have reason to expect could unfold this year is a number of additional smaller infill acquisitions in Montreal, Toronto, Calgary and Vancouver that augment existing concentrations that Allied has already established. We love those transactions. They often carry with them longer-term intensification opportunity, but they come with acceptable accretive levels of current yield. We were very successful in 2019 in that regard, and I believe we'll continue to be in 2020. There is a possibility -- there are possibilities in 2020 for larger-scale acquisitions. They take a great deal longer to negotiate and execute, and they are much less certain, if you will, or there are many more variables beyond our control that can impact on whether or not we do acquisitions of the kind of magnitude we did in 2019. But I believe there are opportunities for Allied that fit our investment and operating focus perfectly in 2020, that we may be able to avail ourselves. I think they will tend to be later in the year as opposed to earlier in the year because they take so much time to negotiate, structure and execute. But we hope to have a steady pace of acquisitions over the course of the year. And as I say, what really excites me about 2019, or our experience in 2019, is the fact that we can continue to acquire small infill acquisitions that fit our investment and operating focus perfectly on acceptable financial terms even though everybody knows what Allied does. And even though there's an incredible wall of money out there chasing product. We're able to capture a lot of this off market because we're such a reliable buyer and because we will pay what those opportunities are worth to us. So I love the fact that we can continue to do that, notwithstanding our size, notwithstanding the fact that everybody in the world sees us coming, miles and miles away. The RCA building in Montreal was a large-scale example of that last year and our ability to continue to acquire Class I assets of a very high caliber, and in some cases, with considerable scale isn't diminished one bit. There is a lot of Class I space left for Allied to consolidate in Montreal, Toronto, Calgary and Vancouver. And there are larger transactions that we can execute that will be both accretive and fit squarely within our focus. So the outlook is positive. I do think, just like last year, the larger acquisitions will be back-end weighted in the year if they occur at all. And the smaller infill acquisitions will continue at a more regular pace.
Yes, sorry, I'm -- maybe -- did I miss in terms of the larger acquisitions in terms of what market you think they are more likely to be in?
I think there are 4 markets we focus on: Montreal; Toronto; Calgary; and Vancouver. I think I can say this much, the larger acquisitions won't be in Calgary. They could be in Montreal, they could be in Toronto and they could be in Vancouver.
We'll next move to Matt Kornack with National Bank Financial.
With regards to 425 Viger, it sounds like your large tenant expanded from 53% to 75%, but the other 20%, is that a similar type user to the large tenant that's in that building or going to be in that building?
It's a tech user as well.
Okay. And I guess, that gives you more confidence with regards to the strategy at 700 de la Gauchetiere as well as what you're doing on Square-Victoria more generally?
It does. It certainly does. The large floor plates that exist in those buildings are very attractive to those users.
And on the recent acquisition, there's the World Trade Center. I mean, obviously, the retail is, I would think an opportunity there. But what else do you see in terms of upside within that building. Clearly, it fits the Class I designation. But it seems like maybe there's more than just what the current tenants are?
I think, Matt, near term, the retail does represent the most significant opportunity. And when I say near term, that isn't today, tomorrow or even necessarily this year. But I think there's a real opportunity to enhance the retail space in the complex sooner rather than later. I think it's going to take longer, a matter of years, at least, to take advantage of the opportunities inherent in the workspace. And I think they have 2 basic categories or fall into 2 basic types of opportunity. One is simply rationalizing the space itself. There are inefficiencies that I believe we can eliminate and create additional area without compromising the quality of the space. And in fact, probably enhancing the quality of the space. There is a modest intensification opportunity there. It's around 60,000 to 80,000 square feet in 1 component of the asset. So I think it's -- it will be, in time, not in the near term, in time, basically rationalizing the workspace and potentially adding a modest amount to it, that's what we see at 747 Square-Victoria. That opportunity is much more pronounced and in my view, much more imminent at 700 DLG. And our goal is ultimately to transform 700 DLG, first and foremost, 747 Square-Victoria and the remainder of 425 Viger in a coordinated manner. I actually believe we can have each of those buildings contributing to the success of the other 2 by integrating the way we operate and manage them and allocate the right kind of users to the different buildings. And obviously, they represent expansion area or expansion potential for the other buildings or the users in the other buildings as well as other users in our space in the city of Montreal. We had 1 experience at Citi Multimedia which was horrifying to Tom and I in that we lost a great tenant there that we really valued, and I think had an excellent relationship with simply because they needed more space, and we didn't have the space to accommodate their new need. And that's not a position we'd like to be in. And I think what Square-Victoria and 700 DLG allow us, among other things, is the opportunity not to be in that position again.Fortunately, for us at Cité Multimédia, Morgan Stanley essentially backfilled that space, and we wouldn't have been able to accommodate Morgan Stanley's need had that particular user not outgrown the building. But we did lose 1 terrific user that we would love to have maintained a relationship with. And I think who would very much like to have retained a relationship with us, but we simply didn't have the space. Now we do.
Makes sense. On Montreal, generally, it sounds like you're pretty positive in terms of lease up, getting to 95%, but you also mentioned or Tom mentioned in the comments that you're proactively addressing leases. Is there anything sizable that you'd expect not to renew or that may have space issues at this point?
There's none that come to mind at the moment. But part of our leasing program is always to be forward-looking and to not be surprised. So the environment is strong in Montreal. So we're pushing out perhaps a year further than we ordinarily would to get things done.
Okay. No, that's good. And then you mentioned infill, I mean you slowly are putting the puzzle pieces together on the The Esplanade and Front East. When should we expect a project or some sort of sense as to the opportunity for that plot of land that you're putting together there?
I think that's one that's very much in the longer term. It's an awesome assembly. It's -- I think it's either just under or just over 2 acres of land now. And there's a portion in the middle of those marvelous heritage structures that was actually built in 1950, and nobody is going to regret that disappearing. And it will be the area that we can use to anchor the new structure while preserving either all of or much of the marvelous heritage structure. But I don't see us executing that in any meaningful way whatsoever for as much as a decade for 2 reasons. One is we've got so much to do that is further advanced in the approval process. And #2, there are a number of great users in that complex that have longer-term leases, and we're getting a very good return on our capital from the 8 or so constituent buildings in that aggregation. So I think that's one of those projects that we'll think about, at least for the time being, as 10 years out. I've found in the past that what I originally thought was 10 years out is 2 years out. And I'd be thrilled if it transpires that way in this case. But I do think it's probably 10 years out. They're really, really good users in that complex, and we wouldn't want to bear the cost of buying them out of their -- out of their space. And we wouldn't want to have the bad relationship with them that would flow from buying them out of their space, even if we paid them really generously for it. Nobody likes to terminate a successful business prematurely. And there are just too many of them for us to be able to do it on a -- on a noncost prohibitive basis. So I really do think it's 10 years down the road, but 10 years down the road, that is one awesome intensification opportunity.
Absolutely. One last technical question then I'll turn it back. On TELUS, it looks like you've extended a loan to the construction loan. And then it's JV accounted at this point. Is there any interest income associated with that in the JV figures? Or is that in interest income elsewhere in the financial statements?
No. The interest income is essentially a loan into the project that equals our 1/3 interest. So it's kind of a loan to ourselves, so that we wouldn't be recording any interest income.
Okay. So that's just the way you're structuring the holding of that asset.
Yes. We tried to address the legal structure in 2019 that we wouldn't have to do equity accounting because we think it's silly. But under IFRS, we had to, now that there was a P&L impact. So we had to equity account for it. But we provided all of the reconciliations in the MD&A, I believe it's Page 63 and 64, so you can see if your model is on a proportionate consolidation basis. We've reconciled everything back so that you can still keep your model on that basis and have the relevant TELUS Sky figures.
And also, Matt, the underlying economics of that. Cecilia understands the equity accounting, I have made every effort not to understand it. But the underlying economic reality there is we paid off our share of the construction financing because it was in our financial interest to do so. And so that's what creates, if you will, the fiction of our lending to ourselves. But the -- what we did there in the interest of managing our interest cost and managing our balance sheet, optimally was retire our share of the construction facility. That was the real action on our part that then precipitated this particular accounting treatment.
Next, we'll go to Howard Leung with Veritas Investment Research.
I just wanted to fill into the same-asset NOI forecast for 2020. I guess, looking at -- thinking back to last year, the projection was low to mid-single digits. And I guess the driver of that would have been Toronto and Kitchener and also the UDCs.Looking at this year, you've made comments that maybe UDC isn't going to grow potentially at the same rate and the same asset basis. So what's the -- what do you think are the drivers for mid-single digits, like a little higher than last year's forecast?
First of all, just to confirm your question or the premise of it. We don't expect nearly as much of a contribution from UDCs in 2020 as we enjoyed in 2019. And that's a temporary vacancy situation. I think the drive from rent growth in Toronto and some occupancy gain in Montreal is what will more than offset or at least completely offset the temporary shortfall in UDC.
Right. And is there any forecast for declines in Calgary as well as baked into there?
I think that I remember a modest decline in Calgary. Cecilia -- well, it wasn't a big deal. But...
Yes. It would be similar to what you would have seen in the 2019 figures.
Okay. Yes, that's pretty modest. And then just turning to Toronto, Kitchener and leasing, the spreads there for next year look pretty significant. It's almost $10 a square foot, do you think you can capture pretty much the whole gap on renewals?
Yes, especially in Toronto, I think the numbers are actually fairly conservative. We're seeing huge uplifts on anything we're doing in Toronto and in Kitchener.
Yes. It's one of the widest I think I've seen. And then just maybe one last one. The Well, I saw the valuation from Q3 to this quarter was kind of taken up by 10%. Is that just cap rate compression on the -- on the development project?
No. It would be driven partially by just the spend on the project. So as we invest in the site, it affects the IFRS value. I don't believe there were any material changes in the assumptions in terms of the unleased area.
Okay, great. Yes, I think the NOI forecast looked pretty stable.
We'll next go to Mario Saric with Scotiabank.
Just a couple of questions. First, on the acquisition side, Michael, last year, you talked about kind of an evolving model with the company in terms of potentially engaging more in JV initiatives based on kind of your discussion of the potential acquisition opportunities that could present themselves this year. How do you think about the positivity associated with incremental or new fee income and perhaps risk diversification versus not getting all of it for yourself or all the upside associated with such transactions to yourself. How do you think about that balance today versus a year ago? And should we expect that more of the bigger transaction might be done on a JV basis going forward?
Yes, really good question, Mario. I did very explicitly state probably at this time last year that we wish to leverage our platform more deliberately and more meaningfully than we had historically, and we worked on a number of transactions in 2019 that would have achieved that for us. Those particular transactions, interestingly enough, did not come to fruition, not because I think we can't do what I suggested we would be doing on a more meaningful scale, but simply because the investment profile didn't quite fit the needs of the 2 sides of the equation, if you will.Interestingly, lots of opportunity flowed directly to Allied out of that initiative. Looking into 2020, the determination on Allied's part and on the part of other sources of material capital for investment in real estate is undiminished, and it is my hope that we will achieve what we set out to achieve early in 2019 in concrete terms over the course of 2020. Interestingly, the acquisitions that we're working on now are acquisitions that were more than competent to execute on our own both financially and operationally. But they are of a scale large enough to merit joint participation in them, and we'll be evaluating the relative merits of doing it on our own or doing it with a more passive source of capital as we go forward and as the opportunities become more concrete.But we remain of the view that it's in the interest of Allied's business long-term to lever its platform more effectively and more fully than it has historically, and it's an important goal. It's a longer-term goal. I had hoped to achieve an example of it in 2019, although we didn't. It wouldn't impact our forecast for a given year. But it is something we very much want to achieve, believe we can achieve and believe will expand the opportunity set for our business going forward. So yes, one of the larger potential acquisitions, in particular, could be something that we execute in a way that allows us to lever our platform more than we have in the past.
Understood. Okay. And then my second question just pertains to Montreal and valuations. Michael, I appreciate your commentary in terms of Montreal being the 1 market where you could see cap rates come down even further. I was a bit surprised to see the IFRS cap rate flattish in Montreal, Q4 versus Q3. But is that something that the appraisers are maybe a bit lagging in terms of timing and that's something that could come to fruition with Q1 results? Or are you very comfortable with the IFRS cap rate today?
I can't predict quarterly, and I'd get in trouble with my colleagues if I did. But I do believe, over the course of 2020, we very well might see a decline in the IFRS cap rate for the purposes of valuing our Montréal portfolio. And I do think appraising -- appraisal practice is a backward-looking more than forward-looking process. So in fact, I think it is deliberately and probably properly a backward-looking rather than forward-looking discipline. So yes, I -- if we were to see some compression translate through our IFRS values in the Montreal portfolio over the course of 2020, it wouldn't come as a surprise to me. And maybe not even to Cecilia.
Okay. My last question just pertains to Toronto rents that have come up quite a bit in the market. When you're talking with tenants today and in the past, Michael, I think you mentioned the ultimate governor of rents is going through a new supply when it comes online and that very well could be a couple of years from now in terms of anything of scale. But in the near term, within those couple of years, when you have discussions with tenants, what -- are you seeing any incremental pushback in terms of the rents that you're asking? And if so, are you seeing any trend in terms of tenants kind of saying Toronto -- that Toronto's too expensive. Are they considering the suburbs or maybe different parts of Toronto given the rapid increase in rents in Downtown today?
We're seeing very little pushback, Mario. To give you an example, not long ago, we had a tenant needing to sublet their space in Downtown West, they had about 30,000 square feet. They needed more space than we could provide for them. So they had no choice but to grow somewhere else. There were 8 offers on their space as a sublease. We converted the -- that into a direct deal. But the market is just waiting for space to come available in our portfolio. So we don't see any reduction in the demand. The rent is being accepted as market.
Tom, am I right in remembering that someone at King and Spadina in a real high-quality building of ours agreed to a $50 net rate?
Yes, we're achieving -- actually, we just did a deal about 2 weeks ago at $51 at the beginning rent and going up over the term with next to no allowance.
Yes. So I think so far, Mario, no pushback and no reverse migration to the suburbs. I don't think that's going to happen anytime soon, I really don't.
Got it. But maybe not necessarily to the suburbs, but are you seeing anything with respect to international global tenants that are looking at Canada and saying 9x or 10x at a time we were located in Toronto, but maybe we're considering a different market today. Are we otherwise [ willing to have a path ]?
No. No, indication of that in any of our dealings. I think the only people that move to the inner or outer suburbs are people who are trying to address markets there. So some of the accounting firms have located, I think, out in [ Vaughan ] somewhere. They haven't gone there because of cost. They've gone there because there's a big client base in that area, in that geography that they want to serve better and that's rational. But nobody needing to capture a specific talent pool is looking outside of Toronto because it's somewhat less expensive. At least no one to our knowledge is and no one -- we've never had a situation in negotiating with users for our space where someone said, you know what, it's too expensive. I'm going out to the suburbs. I -- it's just never happened. Okay. Now that's not to say it can't happen. But we're certainly not at the point. In fact, now it's -- as Tom suggested, if a piece of space comes available in our portfolio, restored brick and beam or otherwise, it's incredible to demand and the speed with which that gets released and the price points. Tom told us about the $50 net number, it was late last year, and even I found that hard to believe. But he was absolutely correct in what he relayed to us.
And maybe with a space like that with very few other options, like what's the governor for the tenant in the near term? Again, if supply is a couple of years out in terms of that being $50 net or $53 or $54 or $55. How do you assess that?
It really -- I think it's basically supply and demand. This clearly was a space that suited that tenant to a tee in terms of area, in terms of attributes. I personally -- if I had to guess, I don't see rents in our Tier 1 Class I portfolio in Downtown West rising materially above that point, nor would we be counting on that. And indeed, there may come a point in time where we can't even replicate that level of net rent, especially once the supply catches up with the demand. Our feeling is, Mario, that during that interlude between now and the point in time when supply catches up with the excess demand, there's going to be continuous upward pressure on rental rates, and nobody is going to capitulate and go to the suburbs. And now once the new supply is extent, I don't think we're going to see anything dropping off a cliff. But clearly, users are going to have more options. And clearly, the upward pressure on rental rates is going to either lessen or disappear altogether. And it's even possible that there's some downward pressure that -- but it's amazing how adamant people are or certain users are in acquiring the kind of space that's available in our Class I portfolio in Toronto and elsewhere for that matter. I mean, Nordelec is another incredible example. So the demand for the format is huge. The demand for the hybrid format is huge. And in fact, the demand for new space that is technologically better and is designed in a humanistic way for the kind of knowledge-based organizations we serve, the demand for that is huge. What isn't in demand is commoditized boxes and nobody is creating commoditized boxes anymore. The new space that's being created is designed better and I think is more thoughtful than -- and of course, there are variations on that spectrum. But some of it's close to commoditized but some of it's really very good. I think Ivanhoe Cambridge's development for CIBC is going to prove to be a very good example of urban workspace that will work for the knowledge-based organization that CIBC is.
Office leasing decisions are entirely based on employees. Its employees are demanding interesting comfortable clean workspace with amenities nearby period. They want to walk to work, ideally, they want to maybe ride a bike. So the urban environment is in high, high demand. We're never compared to the suburbs.
Our next question comes from Jenny Ma with BMO Capital Markets.
I want to ask -- so Michael, 1 year ago, we were talking about your evolved outlook on the Vancouver office market and what we've seen since has really played into that. So just wanted to get an update on your views on the timing of getting to your 1 million square feet goal. And if I may, maybe if you could talk about a sort of a longer-term big audacious goal for how much you think you could acquire in Vancouver over the longer term?
Well, I think I can say confidently that we're right on schedule for our 1 million square feet. 400 West Georgia has been an extraordinary success. It's well out of the ground now. And I believe 1 of the users in the building, an excellent tech firm that I don't think is yet publicly identified, has exercised its right to expand and has increased the total leased area. And then there's another firm that I think has a right to expand exercisable, either in Q2 or Q3 that we fully expect to exercise. And indeed, they may even exercise early in an effort to just get things finalized. So that project has gone as well as a project can go so far. I mean, it's not over and there's still construction risk, although it tends to be much greater below grade than above grade. Our project on Beatty Street is at the early stages of approval, but it has the potential to be, and I'm very confident will be another excellent example of distinctive urban workspace. We haven't initiated the leasing there in a formal way because I think we're finalizing the municipal approval, and it's never wise to get ahead of the municipality in leasing office space. But we expect that's a larger project, it's 600,000 square feet of leasable area, roughly, our share being 300,000. And assuming we continue to progress that project, we'll absolutely get to our 1 million square feet within the time frame we contemplated. Big, hairy, audacious goal. I don't have enough visibility at the moment to sort of intelligently establish one for the city of Vancouver. I actually believe, like Toronto, the supply in the city of Vancouver is going to catch up to the excess demand in the next 2 or 3 years, and it may indeed be that we stay at our 1 million square feet for a period of time, even though we hate standing still anywhere, but the market conditions in Vancouver may be such that, that's just where we stay.There are a few opportunities there that we may look at later this year that could change that outlook. But I would say my current reasonable outlook for Vancouver is on schedule to get to 1 million square feet. But by the time we do, the conditions may be such that we will have to stay there for a period of time before a significant growth spurt. But we look -- this is a long game, it's not a game, but this is a long-term business, and we're determined to become a key player in the city of Vancouver, as we are already in the city of Toronto and the city of Montreal.
Okay. So the opportunities that you mentioned, would they be somewhat similar to what you've done in Montreal with 700 DLG and Square-Victoria in terms of taking some more conventional office space and fitting it out so that it appeals to the knowledge-based workers?
One that I have in mind is it -- I wouldn't call it analogous to 700 DLG. But it would be almost an adaptive reuse kind of product, where we take a building that is currently used for an altogether different purpose and adaptly reuse it and the scale is not inconsequential. But that's something that if it arises at all will be later this year or early next. That would be the only exception to the, sort of, the tranquility of 1 million square feet that I've sort of contemplated.
Okay, great. Just a couple of modeling-related questions. Cecilia, in talking about the guidance, I think you had mentioned that you don't expect or the guidance didn't contemplate any additional condo marketing costs to flow through in 2020. But I guess, there's just been a lot of buzz on KING Toronto. So I'm just wondering if maybe some of those costs were already booked in Q4 '19 or if there might be some that trickles through into 2020.
Yes. Cecilia needed to step away to deal with something else, Jenny, but I can answer that confidently. There will be a small amount of condo costs incurred in 2020 in relation to KING Toronto. The bulk of them have been incurred. I think what Cecilia meant is our internal forecast for 2020 of mid-single-digit percentage growth in same-asset NOI, and more importantly, FFO per unit and AFFO per unit ignores that small amount of condo cost that will bear in 2020. Technically, it is carved out of FFO. But because it's a nonrecurring cost relating to a project, we look upon our recurring FFO number that excludes those costs as the one that really reflects where the business is going. So I think what she meant when she said that was that the very small amount of costs we incur this year at our share, we'll simply ignore it in terms of our real FFO run rate. Even though, technically, it has to be included in FFO in accordance with the white paper.
We do have a follow-up question from Mike Markidis with Desjardins.
Sorry, just 1 last quick one here. On King and Brant and Spadina. Is that one that's going to be transferred into PUD, is it one that, just given the market, it doesn't look like those projects are too big, trying to get a sense of the marketing project and the construction commencement will be concurrent?
Yes. Good question. King and Brant is more likely to be transferred into PUD sooner. It's relatively small, Mike. I should know the magnitude, but it's so small that it's not something I have to track very carefully. It will probably go into PUD late this year, early next year. Spadina is going to -- Spadina is a good income-producing group of properties at the moment, whether or not it goes into PUD is going to depend on pre-leasing. And I think it wouldn't go into PUD until some time in 2021 at the earliest. So we don't see either individually or collectively having much impact on our PUD percentage.
Okay. Got you. King and Brant, it sounds like -- sorry, go ahead.
And as I say, the only thing that will have any impact in 2020 would be King and Brant, and it's pretty small. How much, Hugh, is this?
There's only 30,000 square feet existing square footage in 544 that would be transferred over.
Yes. So it's a pretty small loss of earnings, and it's a pretty small increment to the PUD. Yes.
Just that one with 130,000 on completion, no requirement for pre-leasing there. And then Adelaide and Spadina sounds like double roughly of that amount. You'll look for some pre-leasing on that one.
Absolutely. And I think it's a very achievable pre-leasing, but we absolutely will want to achieve it before we commit irrevocably to the construction.
Okay. And sorry, I lied. One last one. Just with the forward sale of the residential component of The Well. Can you remind us, is that a 2020 event? And what the quantum of capital coming back to Allied would be?
I think that's spelled out in the MD&A. It actually occurs over a few years -- a couple of years, both in '20 and 2021 because there's different closing dates by tower.
And do we quantify it?
I thought so.
So, yes I seem to -- I kind of remember the number, but I don't want to -- I think it's better that we look it up, right? I can't remember it. I think -- I seem to think our share was around $45 million but...
We do quantify the total, for sure. Yes.
Okay. So we -- yes.
I'll have a look and if I need further clarification, I'll just send you guys a note.
It does appear we have no further questions at this time, I'd like to turn the conference back over to Michael Emory for any additional or closing remarks.
Thank you, Derek, and thank you to everyone for participating in the call. Appreciate the questions, and we look forward to keeping you apprised of our progress going forward in 2020. Thank you, and have a great day.
Thank you. And again, that does conclude today's call. Again, we thank you for your participation. You may now disconnect.