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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, 2020. We may, in the course of this conference call, make forward-looking statements about future events or future performance. These statements, by their nature, are subject to risks and uncertainties that may cause actual events or results to differ materially, including those risks described under the heading Risks and Uncertainties in our most recently filed Annual Information Form and in our most recent quarterly report. Material assumptions that underpin any forward-looking statements we make include those assumptions described under forward-looking disclaimer in our most recent quarterly report. To begin, despite the disruption caused by the global pandemic, we pursued our mission in 2020 with encouraging short-term and long-term results. Most notably, we allocated $325 million to strategic acquisitions and another $252 million to development and value-add activity. In the face of continuing robust capital allocation, we maintained strong balance sheet metrics by raising a significant amount of capital on favorable terms, $700 million in unsecured debentures and $153 million in equity. Cecilia will summarize our financial results as well as discuss our balance sheet and our short-term outlook. Tom will follow with an extensive overview of leasing and operations. Hugh will provide a development update, and I'll finish with our current thinking on the future. So now over to Cecilia.
Good morning. First, our financial results. Our portfolio and our user base demonstrated resilience throughout 2020. Although our rental revenue was temporarily depressed, our same-asset NOI, FFO per unit and AFFO per unit in the fourth quarter were all up from the comparable quarter last year. Our fourth quarter was also stronger than our third quarter in each of these metrics. The same is true of our results on a full year basis, even with the inclusion of $10 million worth of nonrecurring items in the period. These nonrecurring items consisted of $5.1 million of abatements provided under the CECRA program, provisions on deferrals of $2.8 million and temporary erosion in our parking revenue. Second, our balance sheet. Our NAV per unit at December 31 was up 4.3% from the same time last year. Our IFRS value increment in the fourth quarter was up $15 million, primarily as a result of rent growth in Toronto, partially offset by continuing softness in Calgary. We finalized our green financing framework. It's been certified by Sustainalytics and is available on our website. Our intention is to have our next bond issuance be our inaugural green bond. This is a reflection of our ongoing commitment and sensitivity to ESG issues. At the end of the fourth quarter, our net debt-to-EBITDA was 7.4x. Our total debt was 29.2% of IFRS value, and our interest coverage was 3.4x. We estimate our developments, which have a 13.5-year weighted average lease term, will increase our annual EBITDA by approximately $70 million over the next 3 years. Not only will this augment our earnings per unit significantly, along with anticipated organic growth, it will materially reduce our ratio of net debt-to-EBITDA and materially increase our interest coverage ratio, our two most important debt metrics. Our pool of unencumbered assets is $6.5 billion, representing 73% of our investment properties. We intend to continue prepaying or repaying mortgages as they come due, with the goal of having the majority of our asset base unencumbered. We believe this will give us the strongest and most flexible balance sheet from both a defensive and offensive perspective. Third, our outlook for 2021. We expect low to mid-single-digit percentage annual growth in FFO per unit, AFFO per unit and same-asset NOI. Expected drivers of our year-over-year growth include a full year contribution of acquisitions completed in 2020, economic productivity from the development completion of 425 Viger as well as organic growth, primarily in our Toronto and UDC portfolios. These contributions are tempered by expected continuing softness in our Calgary portfolio and previously known nonrenewals in our Montréal portfolio. We expect our portfolio and our users to continue exhibiting resiliency through 2021. I'll now pass the call to Tom for a discussion of our leasing and operating activities.
Thank you, Cecilia. Our leasing teams in Montréal, Toronto, Calgary and Vancouver performed very well in Q4, and indeed, performed very well over the course of 2020. In all, they completed 258 transactions in the year with 105 transactions being new deals. That is 105 new tenants to the portfolio. Over the year, we achieved a healthy 17.2% year-1 base rent increase on space renewed or replaced. Overall, leased area decreased slightly to just under 93%, but the decrease was not due to the pandemic. There were 4 separate reasons. First, we acquired some buildings early in the year with vacancy. Second, there were a few nonrenewals, which were known to us. Third, we were partially de-leasing 2 buildings in Montréal and 2 in Vancouver to prepare for repositioning in 2021. And fourth, we added TELUS Sky to the rental portfolio in Q4, and that building is 68% leased. If we were to make an apples-to-apples comparison, our leased area would have actually gone up in 2020. I'll provide an update on leasing activities in our major markets, including an update on our UDC portfolio, then conclude with some remarks about the sublease market. Montréal, again in Q4 was our most active market with that team completing 38 deals in the quarter and a very impressive 130 deals for the year. While there were no noteworthy transactions in Q4 in terms of size, the team is currently working on an 89,000 square foot extension and expansion with an existing tenant and a new lease for 50,000 square feet in space that is currently vacant. I'll provide updates on these 2 transactions at our next conference call. In Toronto, we're 96% leased and concluded the 61,000 square foot lease extension mentioned as conditional on the Q3 call. We also relocated and expanded a fintech tenant for 37,000 square feet and relocated and expanded a tech tenant for 26,000 square feet in the quarter. Just subsequent to year-end, the team completed a 25,000 square foot lease with a law firm for 2 floors in the high-rise portion of the tower at The Well, bringing our leased area in the office component of that project to 86%. This most recent deal was completed at rents above pro forma. It's worth mentioning that this important transaction involved the Toronto leasing team and our most senior leadership. I would credit our fully engaged, in the office, fully available and focused attention to winning this deal. The tenant had a number of options, including renewal, and we're delighted to have them decide on The Well. In Calgary, we're at 81.7% leased, with the decrease in leased area largely attributable to adding TELUS Sky to our rental portfolio. We are currently negotiating with an existing tenant at TELUS Sky for an additional 26,000 square feet. The amount of space in our Calgary portfolio available for sublease declined in Q4. In Vancouver, we are 92.8% leased, representing a modest decrease in leased area after accounting for some strategic terminations needed for repositioning 2 separate buildings. The Vancouver market remained strong. We completed a renewal with a 47,000 square foot tenant in Q4 at rates 18% higher than in-place rents. The amount of space available for sublease in our Vancouver portfolio also declined in Q4. Under Tim Lowe's leadership, the Allied leasing team was fully engaged and did a great job staying connected with our tenants and the entire brokerage community throughout a most unusual year. For context, the team connected with over 700 individual brokers in our various markets via one-on-one virtual presentations. The team also completed 516 physical tours of space in 2020. We are well positioned to stay connected and have leasing strategies for each asset moving into 2021. In part, due to the efforts in late 2020, we appear to be off to a great start already this year. Our urban data center portfolio remains 89.4% leased with ancillary revenues growing. I thought it appropriate to comment on the subject of subleases, which is currently creating some chatter in the marketplace. Subleases are not a problem for us. Subtenants usually prefer to deal direct with the landlord and almost always want more term. Most often, we end up with a restructured lease and uplift in rent to market. We believe much of the space currently offered will be withdrawn from the sublease market as companies return to the workplace later this year. Already, 0.25 million square feet has been taken off the market in Toronto as companies have decided they actually need the space. We also believe the direct space will be absorbed at a faster pace in 2021 than 2020, as vaccines will allow the working population confidence to return to normal levels of activity this summer and fall. Allied's product is materially different than the commoditized office towers, where the bulk of the sublease activity -- availability exists. 56% of the sublease availability in our portfolio happens to be in Toronto with existing leases at well below market rates. We should be able to take advantage of subleases in our portfolio as they may happen with no downside expected. I will now turn the call over to Hugh for an update on our development activities.
Thanks, Tom. This quarter has been characterized by solid progress on a number of construction projects. While the second wave of COVID has had an impact on manpower at our construction sites, we have worked with our construction teams to try to minimize the impact on overall schedule. I will begin by giving an overview of our major projects, and then follow up with an update on planning activity for our development pipeline. Construction activity. Beginning in Montréal, our team has been focused -- focusing on the vacant suite upgrades and the upgrade of 400 Atlantic and 700 DLG. We have been able to make progress on both properties. We anticipate the projects to be completed by the end of the year and in the first quarter of 2022, respectively. In Toronto and Kitchener, our projects have progressed well despite the government restrictions on construction. Luckily, all of our projects -- all of our major construction projects fit under the exemptions that permit work to continue. The Well has reached the 36th floor of the main office building and will be topped off in early Q1. We have completed the handover of 2 of the 6 transfer slabs that have allowed us to close on those 2 air right sales. We anticipate closing on the remaining sales through 2021. Working with our construction managers, we have been able to minimize the impact of manpower reductions due to COVID. We continue to be committed to maintaining safe sites and meeting our lease obligations. In Western Canada, we have made solid progress on the Lougheed Building restoration and are now well underway in our work on the Boardwalk Revlon Building in Edmonton. In Vancouver, our partners, Westbank, are completing the installation of the envelope of 400 West Georgia. Tenants will begin their fit-up work in late Q2 and into 2022. Planning activity. Our focus this quarter has been to prepare for formal submissions for a number of intensification projects in Toronto and Montréal. We anticipate making the submissions in late Q1 and early Q2 for our Bathurst Street assembly, the Castle and Liberty Village and Nordelec's first expansion. These potential projects, when approved, will contribute approximately 500,000 square feet of office space to our pipeline of future intensifications. This quarter has seen progress made on all fronts of our development activities despite the impacts of COVID. While at this point, we do not anticipate material changes to the construction schedule of our major projects, we are working proactively with our various teams to address the impacts on manpower that we have seen over the past 3 months. I will now turn the call back to Michael.
Thanks, Hugh. The resilience of our platform, coupled with uninterrupted demand for distinctive urban workspace, enabled us late in the fourth quarter to increase our annual distribution for the ninth consecutive year. While speculation about the disruptive impact of working from home continues, every indication we've received from our users is that they'll bring their workforce back to the office once the pandemic is over. For most knowledge-based organizations, working from home for an extended period of time appears to be materially suboptimal in relation to culture, engagement and productivity. Our job is to continue to anticipate how urban workspace will evolve, just as we've done for decades now. In light of our experience since returning to the office in early July of last year, I continue to have deep confidence in, and commitment to, Allied's strategy of consolidating and intensifying distinctive urban workspace and network dense UDCs in Canada's major cities. I firmly believe that our strategy is underpinned by the most important secular trends in Canadian and global real estate. I also firmly believe that we have the properties, the financial strength, the people and the platform necessary to execute our strategy for the ongoing benefit of our unitholders. Acquisition activity has never been an end in itself for Allied, but rather has always been a means to providing knowledge-based organizations with distinctive urban workspace more effectively and more profitably. The same is true of our development, redevelopment and upgrade activity. We remain intent on augmenting our urban workspace portfolio on an ongoing basis and our UDC portfolio within a 3 to 5-year timeframe. Urban workspace in Canada is beginning to trade again following a hiatus during the shutdown and the early stages of the reopening with the most notable trades having occurred in Downtown Toronto and Downtown Vancouver at low capitalization rates. I expect meaningful acquisition opportunities to emerge for Allied in 2021, and we will be ready, willing and able to take advantage of them if, as and when they do. For the kind of workspace we want, the capitalization rates will be largely consistent with those that prevailed before the shutdown. A last comment or note on ESG. As you know, we made a commitment to submit formally to independent scrutiny with respect to our ESG performance by 2020. The most important single step was for us to obtain a GRESB assessment and to provide an annual ESG report. These reports, as you know, identify strengths and opportunities for improvement at Allied. What is most important, to my way of thinking, at least, is that they will assist the Board and management in establishing rational priorities going forward and will provide benchmarks for measuring improvement on a go-forward basis. On December 2 last year, we published our inaugural Environmental, Social and Governance report. As reported, we obtained the GRESB assessment and received a score of 64, which is not heroic, but which was recognized by GRESB as "a strong first year showing." We intend to obtain a GRESB assessment and to provide an ESG report on an annual basis going forward. On December 8 last year, Massey Hall announced that we had made a landmark contribution to the Massey Hall revitalization project. This support expands the project's original scope and introduces Canada's premier multi-purpose performance facility, the Allied Music Center, the home of historic Massey Hall. This partnership with Massey Hall will enable us to contribute meaningfully to our communities over an extended period of time. It will also enrich the experience of the many creative organizations and people who use our urban workspace across the country. Finally, as Cecilia mentioned a moment ago, we published our green financing framework yesterday. This is another step forward in our ESG journey. 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 go first to Caitlin Burrows with Goldman Sachs.
Maybe if we could just start with leasing activity. Renewals and replacements increased nicely in the quarter, but it has been trending down on a trailing 12-month basis. And occupancy is down, but of course, off very high levels, and you guys went through some of the drivers of that. But I was wondering if you have any visibility to reaching a trough occupancy. And if so, when that could occur and how much lower it might get?
We believe that our occupancy levels will be actually increasing over the course of the year. We -- as I mentioned on the call earlier, occupancy really was related to us de-leasing some space and adding some buildings that weren't included in the previous year, so -- in earlier quarters. So we're confident that we'll be able to continue leasing and maintain occupancy levels. With respect to the increase in rents on space replaced or renewed, we achieved 17.2%, which was very close to what we've been achieving in previous quarters for quite a long time. In this quarter, we actually had some unusual circumstances, mostly in our Calgary portfolio, which had an effect on those numbers, making a very modest change to that -- the rents that we achieved in the quarter. We don't think that that's going to happen in the future at all. We think that we'll be able to maintain big rental increases mostly because a lot of the states being renewed happens to be in Toronto, which is our best market, where we're confident we'll continue to get big upticks.
Okay. That's helpful. And then also, Michael, you mentioned near the end there that you thought there could be meaningful acquisition opportunities that emerge in 2021. So I guess, I was wondering, you mentioned that cap rates could be similar to before, but just recognizing that your cost of equity is higher and your leverage level is relatively higher. How would you finance those possible acquisitions? And what kind of decisions would come into mind in deciding if those acquisitions make financial sense for Allied at this point?
Well, we're fortunate to have a lot of latitude in terms of how we fund acquisitions in the near term. The big governor for us has always been our debt metrics, as you know. It has also always been suitability to our mission. So the first question we'll ask ourselves is whether the opportunity will enable us to provide distinctive urban workspace more successfully and more profitably. If the answer to that question is yes, then we will be very motivated to pursue the acquisition, and we'll make the decision as to the optimal form of funding in the context of the acquisition and what it might represent in terms of short-term accretion. The one thing that we have available to us in 2021 is the ability to use our balance sheet a little more aggressively than we have in the past. And we can do that because we're very confident of the $70 million that will be flowing into our EBITDA, starting actually in 2022 and accelerating meaningfully in 2023. So we have a lot of latitude, Caitlin, and we'll make each decision based on the circumstances at the relevant time. If our cost of equity improved, we might consider going that route. If it didn't, and the opportunity was extremely attractive, we might consider temporarily allowing our debt metrics to go a little higher than normal on a temporary basis. So I think it will be a decision that we'll have to make at the time under all the circumstances. But I can assure you of this, we will not hesitate to move and to act if appropriate opportunities present themselves. And the other thing I wanted to signal and want to reiterate is that those opportunities will not be cheap. Anything we want is expensive, period, full stop. We did manage in late 2020 to pick up some very attractive small infill acquisitions not at distressed pricing but at what I would call pricing we might not otherwise have been able to secure. With respect to larger acquisitions, I don't see that opportunity being open to us. We will have to pay full value. And if they fit our focus, as I've mentioned, we have the wherewithal to do it and the readiness to make whatever decision we have to make with respect to the type of funding we'll use.
We'll go next to Fred Blondeau with AI securities (sic) [ IA Securities ].
One quick question for Tom, I guess. It looks like Allied's portfolio outperformed the market in terms of sublet space, following up on your comment on that subject. What would be your base scenario in terms of sublet space in 2021 for Toronto CBD or Toronto core and also for Allied's portfolio?
Well, in Toronto, it actually accounts for 56% of all the sublease space that we have. And we are under market in those spaces being offered for sublease by about 25%. So we expect to be in a strong position if we're approached with subleases. Most of the subleases, Fred, are relatively short term, and most of the tenants that will be interested in those spaces will be coming to us looking for an extension to the term, giving us an opportunity to bring the rents to market.
Okay. And would you -- so from your standpoint, do you think that we reached somewhat of a peak in terms of some of the space or it will stabilize from here? And...
It's a good question. I think, actually, we may see a decrease over the course of the year because as tenants have already recognized, some tenants have already recognized, they're going to need the space, and they've taken it off the market already. So I'm not sure if we're going to see an increase in it, but we'll probably see a decrease. Remember, most of the spaces being offered for sublease, about 75% of them are spaces under 10,000 square feet. So they're small tenants who've been sitting at home, working from home, wanting to throw their space on the sublease market just to see what happens. They're not getting any takers. They're going to come back and use that space.
We'll go next to Jonathan Kelcher with TD Securities.
Just -- I guess, just sticking on the sublease space, it sounds like -- how much term roughly is left on the majority of that space?
I believe the weighted average lease term is 4 years.
Okay. I'm sorry, are you -- like just on the mechanics of that near term, I guess the tenants work on subleasing, and then they need approval from you and then you try to enter into a longer-term lease. Would that be a fair way of looking at it?
Yes. Usually, what happens, the incoming tenant or the subtenant doesn't usually like the existing lease. They want to make some changes. They'll want to put their stamp on the deal. So they'll come to us to say, "We want to sublease this space, but we need 5 extra years, and we don't want this provision in the deal." So gives us some leverage to say, "Okay, we'll give you the more term and we may modify that provision that you're asking for. But in return, we need an uptick in rents right now." That's how it usually works.
Okay. That's helpful. And Cecilia, just looking at the outlook for next year, on the same-asset NOI growth, how much of that is going to be driven by the UDC portfolio versus the remainder of the portfolio?
It's the central urban workspace portfolio and UDC really driving the same-asset NOI for 2021.
Right. But in Q4, I think it was 13% or so versus like 0.5% in the 2. Is that sort of a trend to expect going forward or do you expect more balance?
No, that wouldn't be the trend going forward. It would absolutely be more balanced in 2021.
Okay. And then just lastly, on the $450 million of development capital, how -- roughly, how does that pencil out over the next couple of years?
It is very much front end weighted. It is about roughly between $250 million and $280 million expected in 2021, and then most of the balance in 2022 with very little beyond that.
We'll go next to Jenny Ma with BMO Capital Markets.
Just want to revisit the acquisitions that you were talking about, Michael. I want to clarify if I understand this correctly. Are you saying that a lot of the opportunities you're expecting from smaller properties as opposed to larger properties like 700 DLG in 2019? Did I understand that correctly?
No. What I meant to say, and perhaps I wasn't clear, we actually were successful in the latter part of 2020 in securing a number of small infill acquisitions, which I think have very meaningful long-term potential for the business. What I anticipate in 2021 would perhaps be more -- a few more of those going forward. But what I'm anticipating more meaningfully is larger transactions in the Montréal, Toronto and Vancouver markets that would be more akin to the landing in terms of scale. And we will be very motivated to pursue those transactions if indeed they arise, and we expect to have to pay for them as we did in 2019. So what I meant to suggest or telegraph is our expectation that larger opportunities will be available to us in 2021. And if they are, we'll certainly be willing, motivated and able to pursue them.
Okay. So it sounds like it's probably weighted towards mid- to late 2021, is that fair, if they do come to pass?
The one thing about acquisitions that you can honestly never predict is when they're going to arise. It could happen tomorrow. There is nothing in our sights as we sit here today. But literally, given our experience over 18 years now, an opportunity could arise tomorrow or we could be looking into nothingness well into December. So we just have no way of predicting that. I just have a strong sense, based on what I'm hearing from others in the marketplace, that transactions of some consequence are likely to come to the market over the course of 2021. I'm hopeful that happens, but there's no assurance that it will. But I'm -- my sense is it will. And if it does, and those opportunities fit our investment and operating focus, we'll be all over them.
Okay. Great. And a separate, but related question. I'm wondering if you're seeing any distress in the market, probably on the smaller side, or you haven't seen much of that given what's going on last year?
Sadly, no. It feels much like the global financial crisis to me. I remember saying to investors then that the good news is there's no distress and the bad news is there's no distress. And that was actually reasonably accurate then and certainly is accurate now. I will say this, though, the smaller acquisitions that we saw over the course of 2020 and would expect to see over the course of 2021 are acquisitions from vendors who are not in distress, but are more motivated to sell than they would normally be. They're generally vendors who have a meaningful accrued gain in their asset who are not real estate professionals, but obviously, very shrewd business people, and to conclude that the disruption going on around them makes it more in their interest to monetize their gain rather than to wait for more gain on an if-come basis. So I would characterize the smaller transactions we did in 2020 that way. So people that are strong, not in distress, but more motivated by virtue of the disruption caused by the pandemic than they would have been pre-pandemic. The best example of that, in my mind, are the 3 fabulous assets we acquired on John Street. We've observed that row for years and years with interest and expressed interest for years and years with no takers. The same people or a few of the same people became much more receptive late in 2020, and they initiated the process that resulted in those transactions not huge allocations of capital but long-term assets that we would not have expected to be able to get our hands on pre-pandemic. So we love those. And that is the one maybe benefit on the acquisition side of the business from the pandemic. But they're relatively small in terms of aggregate allocation of capital, but I think they're significant going forward. Hopefully, we'll see more of those. But nobody's over-levered. Nobody's underwater to the mortgage. Nobody's in any kind of distress, at least that we can discern or at least anyone that owns the kind of assets we're interested in. There's just no distress there. Even in Calgary, there's no distress.
Okay. I want to move to the renewal and re-leasing rates. So it was mentioned it ticked down a bit in 2020 versus 2019. Just wondering if there was a tilt towards a reduction in the retention rate on renewals or just less activity from re-leasing. Was it really -- was driven by one or the other strongly?
Just to understand the question, Jenny, what ticked down or what tick down are you referring to? Are you referring to the...
The re-leasing rate, the 78%.
Yes.
It's down from sort of the mid-80 range that Allied has been trending at the last few years. So I'm wondering if it was a reduction in retentions or renewals or just less activity on the re-leasing side that resulted in the tick down in 2020.
Well, Tom might have a better specific sense than I do. But my sense, from my perspective, is we had more nonrenewals in 2020 than we did in 2019 that we knew about pre pandemic, and they were nonrenewals that resulted from the fact that the tenants had outgrown the space and we couldn't accommodate them. We hate that. But it's the one thing we can't defend against. So there are 2 in particular, Tom, that I'm thinking of that the tenant loved the building, had a good relationship with Allied but needed more space, and we simply couldn't provide it, either in that building or anywhere else in the portfolio. Am I right?
Completely correct. And a big influencer was there were 6 renewals in Calgary that took place that were coming off of long-term deals. So these would have been rents that were quite high. And the Calgary market has changed dramatically, so we ended up taking less rent. So that had a big impact on those numbers.
Yes. That would be the rent growth in Q4. That 7.3% or whatever it is was largely driven to the low level relative to Q3, Q2 and Q1 by those Calgary transactions. And then the lower renewal rate, if you will, were basically Toronto nonrenewals that occurred because we simply couldn't accommodate the growth of those tenants. And as I say, that's one thing we hate more than anything. And one of the reasons that growth in our asset base is important to us because we hate not to be able to accommodate a tenant that is growing and who is well disposed to our type of space and to us as an operator. But that's what brought the renewal rate down a touch in 2020. And it does happen sometimes.
Okay, great. I have a couple of modeling-related questions. Just on the capitalized interest, it looks like it went up by $1 million sequentially. So I'm wondering what drove that. Was it an increase in the borrowing base or something else? And whether or not that's expected to be carried forward into the next couple of quarters?
The -- Jenny, it's Cecilia. The residential inventory needs to be included when you are trying to recalculate the capitalized interest. I can walk you through it offline, but it's -- the information is in note 6 to the financial statements. So if you include that with the PUD balance and apply our weighted average cost of debt, it will get you within the range for the quarter.
Sure. That's very helpful. One last question. On the Québec subsidy for CECRA, was that the catch-up on the 1/2 of the landlord's portion that they were subsidizing? And how much of that contributed...
[indiscernible]
That's right? Okay.
Yes. That's right.
And how much of that contributed to same-store?
It was $700,000 that we received from the Québec government in Q4. So we netted the $5.8 million that we abated in Q2 and Q3 with the $700,000 subsidy in Q4 for a net abatement of $5.1 million in the year.
Okay. And that would be all of it, right? It won't come back in the quarters?
Correct. No more expected. Yes.
We'll go next to Brad Sturges with Raymond James.
Yes. Brad, you might be on mute.
Hello. Can you hear me?
Yes.
Great. Sorry about that. What -- I guess, based on your discussions with your tenants so far, what is the base case assumption that they're using in terms of more fulsome return to the office? Is it kind of back half of 2021, depending on the vaccine rollout or how is that -- how are those discussions going right now?
Well, I would characterize it this way. In the fourth quarter, people were really uncertain as to when the pandemic would be over, and they were really uncertain as to what over meant. With the advent of the vaccine, and I think the slow but steady progress in the distribution and, I guess, introduction of the vaccine to the populations around the world, that confidence has been growing. So there's still uncertainty on the part of our users as to when they will be comfortable coming back. I think a lot of people are thinking in terms of summer or sometime beyond that. But I wouldn't suggest that a great number of the office users in our portfolio who have stayed away have really decided definitively in that regard yet. There are a number of users who never went home, if you will, ourselves included to some degree. But with respect to those who did go home in a very big and emphatic way, I think they're still watching and haven't yet committed to themselves, let alone anyone else when they'll be returning. We maintain constant communication, not so much to force people to return, that's a decision that's entirely up to them, but to be ready for them when they do return. So if we had to evaluate today, it's -- I'm not expecting to see a heavy flow into the buildings beyond the people who are already here at least until the second quarter. I'm certainly not expecting anything of consequence in the first quarter.
And ahead of that, would you expect leasing activity or touring activity to ramp up ahead of that, maybe late Q1 into Q2, if there's a plan to return or make decisions on office requirements kind of into Q2 or Q3?
Leasing activity has been ramping up since the really late second quarter of 2020 and hasn't slowed for Allied one bit. As Tom mentioned, we did 258 transactions in 2020. That's a staggering number of transactions. 105 involve new tenants to the portfolio. So leasing has been ramping up discernibly and steadily in our portfolio since about June of 2020, and it hasn't abated one bit for us.
And maybe just my last question. Just going back to the sublease discussion for a second. Is it still -- in terms of your exposure, still mainly media advertising companies or have you seen any change in terms of financial services companies in the sublease market putting space up to market?
Haven't seen any change. And as you know, we have very little exposure to the financial services sector.
We'll go the next to Mike Markidis with Desjardins.
Sorry for beating a dead horse here. Probably you get some more interesting questions. But -- so on the sublease space, I think you mentioned The Wall is 4 years. And you said for Toronto, it's a 25% mark-to-market. Do you happen to know what the mark-to-market would be for the entire pool?
I think it's 18.8%.
Okay. And then, just on...
That's a pretty precise guess.
Maybe it's 18.7%. Maybe it's 18.9%.
Sure. And then just -- have you had any direct deals done in the past couple of quarters or -- you used to mention that historically you've been able to have them to come back.
Say that again, Mike.
I'm just curious, in the past couple of quarters, you've actually done some direct deals on the space that's been listed, if that expansion is purely in addition to the sublease space or if there's a net in terms of leases that have been done to it.
No, we've done many direct deals.
But just to be clear, Mike, are you asking, have we done direct deals on subleased space? Is that the question?
In the last couple of quarters, yes, in your leasing activity during the last quarters...
No, no. no, we haven't. We haven't.
Fair enough. All right. I'll leave that one alone. I think we saw 400 Atlantic transferred to the property and the development pool. And Michael, if I remember correctly, you mentioned 2 properties in Montréal. I think that might mean 1 additional and then 2 more in Vancouver. I just wondering if you could give us a little bit more color in terms of the extent of the de-leasing that's going to continue there and when those will be transferred to private at all.
Well, I think Tom mentioned the de-leasing, and so I'll let him identify the properties we -- are well known to us.
They're not -- one is 700 DLG, where we're repositioning that building. And the other one is El Pro in Montréal, where we're making way for larger floor plates to be available for the marketplace. And similarly, in Vancouver, there's 2 buildings, 342 and 375 Water, where we are doing the same thing. We're making way to accommodate larger tenants to the buildings.
Okay. So will the scope of those projects be the same as Boardwalk will be than 400 Atlantic in terms of necessitating a [indiscernible] transfer or is it going to be something that's just [indiscernible]?
No. No, they're just minor modifications physically to the buildings, whereas 400, there's a lot of work being done there, but these are small physical leasing issues.
Okay, great. Michael, I think in terms of the acquisition opportunity that you may see unfolding in 2021, I think you talked about in terms of the quantum and the scale of the transaction being similar to the landing. From a, I guess, characteristic point of view, is it more of a typical Class A-I type of opportunity set or do you expect that it might be more of the conventional 700 DLG later transaction?
I actually think both are possible. There could be a 700 DLG-like transaction, but there could also be transactions more akin to the landing. So I'm actually expecting them to fall sort of within that spectrum. And as I say, I have no idea which will present itself first or with more certainty. But I would think, it would fall within that entire range or that entire opportunity set that we now consider appropriate for Allied.
Okay. And just from the 700 DLG-type of transaction, is Toronto a market that would appeal to you on that basis or is it more a Montréal type of phenomenon where there isn't a single amount of supply coming on in the portfolio?
Yes. It's a really good play -- question. And it really is more a Montréal phenomenon. Montréal -- the way we think of it, Montréal is the upgrade market and Toronto is the development market. So I'm not aware of assets in Toronto that we would look upon the way we did 700 DLG in Montréal. And one of the things that made 700 DLG so appealing to us, in addition to its base building attributes was the fact that there is no new supply being created in that market or at least no new supply of consequence. And that's very clearly not the case in Toronto. And so I'd be a little more loath to try and compete with the new building technology in Toronto than I am in Montréal.
That's fair [indiscernible]. And this new housekeeping questions [indiscernible]. I just want to make sure I understood this correctly, I think Jenny pointed out. So the $700,000 net positive impact in terms of the adjustment for the Québec governments -- Québec government supporting of CECRA in Q4. Is that correct?
Correct.
Okay. So and then offsetting that would have been $500,000 provision. So basically $200,000 in this quarter?
Yes. I mean, I guess, if you want to look at it that way, yes.
Yes. Okay. No, I get that. And then just -- I think you guys pointed out to the fact that the finance, roughly $5 million of the process for effective communication, around $2 million of that will be repaid in the first quarter. Is that the first set of commencement of repayments? Because I don't think you've given that color before. Is that -- have you received any of the other deferrals back yet?
That -- the reason we inverted to that, Mike, is because that repayment is really coming directly from the Emergency Rent Subsidy. So we haven't made any representation with respect to, what I might call, ordinary repayment. But we actually know that, that $2 million will be paid to us early in 2021 under the Emergency Rent Subsidy. And indeed, at least half of it is in our pocket. Oh, I guess, Cecilia says, all of it is in our pocket today. So when it comes to something as certain as the government paying up, we're prepared to, in a way, essentially netted against the deferral. So in our mind, I think the net deferral in Q4 was something like $3.5 million or so?
Correct.
And we -- but we didn't -- we felt it was important to report the actual deferral because indeed, we did defer that receipt. But that -- $2 million of that deferral, I guess, has already been paid off, and the money is in our bank account. And the -- in fairness to the government, we should acknowledge that while the paperwork is cumbersome, we've worked closely with our tenants to assist them because it's very much in our interest to do so. And the government has been very prompt to pay once the paperwork is completed and submitted. We noticed that on CECRA, the payment was stunningly expeditious for a government, and the same is true on the rent subsidy. So I think that's worth acknowledging. The government really has been intent on providing support to these businesses and I think is to be commended for having done that.
Okay. It sounds like it's having a positive effect. And just lastly, Cecilia, the FFO add-back for TELUS Sky, I think it's been the same for the last couple of quarters, and you kind of transferred it to the rental pool. And I understand that there's still some spend and activity that has to happen there. How should that line evolve in your internal forecast in 2021? Should it be tapering down gradually or do you expect it to be a step change at some point?
Sorry, what page are you looking at?
Well, just in your FFO reconciliation, there's the notional interest capitalization on the JV, about [indiscernible].
Well, the capitalized interest will drop off completely as occupancy takes place over 2021, and we complete....
Okay. So it's more of a gradual slope as opposed to a waterfall?
Yes. Yes.
We'll go next to Matt Kornack with National Bank Financial.
A quick follow-up on Mike's questioning there with regards to the impacts of COVID in the quarter. So $500,000 you took in terms of a provision. There were no abatements of rent during the quarter, were there?
No. No abatements in Q4.
And I know you had provided some information, and clearly, I think this relates to $2 million that you've now received. But I think you had collected 70% of October rent at the time of Q3 reporting for tenants that were subject to CECRA. Did that trail off and then, ultimately, you're getting back the funds in Q1? Is that how we should think about it?
If I understand the question, CECRA kind of ended on September 30. So whatever implications for us that arose from CECRA hit our statements in the second and third quarter. There are perhaps some tenants who transitioned from, let's call it, CECRA tenants to deferral tenants, but it's a small amount. Most of our deferral tenants have been deferral throughout this disruption, let's say. And the good thing is almost every CECRA tenant qualified for the Emergency Rent Subsidy. And even tenants who didn't qualify for CECRA appear to qualify to some extent for the rent subsidy. So there's no -- whatever deferral we're reporting in aggregate would represent the total deferral we provided in the year. And whatever provision we've taken in relation to that, which I think is $2.7 million or $2.8 million would relate to those deferrals going forward. But there is no -- like the CECRA tenants didn't all of a sudden go into default at the end of the CECRA program. In fact, I don't think any of them have. We may have helped some of them a little bit more in Q4, and we may be prepared to help them in Q1 and 2 of this year. But probably more importantly, the Emergency Rent Subsidy has really taken over where CECRA ended, and it's taken over in a way that didn't require us to abate any rent, which, of course, is very helpful to us. But the CECRA tenant base didn't fall off a cliff at the end of the CECRA program. That's for sure.
Okay. No, fair enough. I just know with the government that there was a bit of a delay in terms of guys receiving those funds. So being able to pay rent for Q4 may have been an issue, but it sounds like it's not much of an issue. And that...
Well, that -- yes, and we would effectively have bridged them through that, Matt. So that's why $2 million of that, we bridged instead of a CECRA tenant -- yes, we bridged them over the quarter end. And we're prepared to continue to bridge people in relation to known Emergency Rent Subsidy receipts because our experience is the government does indeed pay up and does -- do so pretty promptly.
Okay. No, that makes sense. And then on parking, sequentially, it improved, but I assume either there was an anomaly in December 19 or there's some seasonal uptick in parking revenue in Q4. But it looks like year-over-year parking was still down $1.5 million, I mean not surprising considering the state of the pandemic we were in. But can you comment on parking? I mean, obviously, once we're back open, presumably, that comes back and people may not want to take public transit, so we may actually beat some pressures there. But just thoughts in terms of your forecasting for parking in 2021.
We were seeing it recover in Q3 and even in Q4. I think then the -- if I can call it, the second shutdown has probably put some pressure on that recovery. And I would expect that to continue through the first couple of quarters in 2021 and begin to recover in Q3 and Q4. And we would have factored that into our internal forecasting.
Okay. That makes sense. And you mentioned on -- I guess, Cecilia, you were talking about TELUS Sky and the residential there. Can you speak to how that lease-up is going? Obviously, you have a stunning product. Just interested in how it's performing relative to pro forma.
Sure. I'll jump in here. It's performing according to our revised predictions that we made last summer when we started to do the lease-up. So we still anticipate it will take a couple of years until it reaches, I guess, stabilized NOI.
Okay. And last one, with regards to the leasing, and I understand that we're going to get a little bit more clarity next quarter in Montréal. But are either of those 2 in Cité Multimédia knowing that there was some expected turnover there?
We -- yes, that turnover is, again, built into our internal forecast. Tom and Tim Lowe and the Montréal team are very much on top of that. And Tom has been encouraged by the level of activity. Our listing brokers have generated already long ahead of the actual expiry dates. So I think not to put words in your mouth, Tom, but I think we're pretty comfortable with that.
The level of activity has been surprisingly high. So we're very encouraged.
Okay. No, that's good to hear. And it's good to see that Montréal, they seem to be a little bit more proactive in returning to the office.
We'll go next to Howard Leung with Veritas Investment Research.
Just wanted to follow up on some of the 2021 forecast questions for same-asset NOI. I guess, aside from the economic occupancies of 425 Viger and completed buildings, are you forecasting an uptick in occupancy for the Viger portfolio or is it mainly driven by rent growth for renewals?
It would be mostly driven by rent growth.
Okay. No, that's helpful. And then just -- I'm just hearing a trend of, I guess, smaller spaces, those under 10,000 square feet, there seems to be -- either tenants to grow out of them or existing tenants are -- maybe there's -- some of them are subleasing them. Are you seeing the profile of demands throughout the pandemic shift towards maybe larger spaces? Is there -- have you seen potential tenants shift more there? Just kind of wondered your thoughts about that.
I would say the mix is more or less the same. I don't think that there's a shift in size requirements at all. In Montréal, we ended up doing 130 transactions in the year. That's been a very, really active market, and it was a mix of size. There's a lot of small deals. But I don't think that there's going to be a change in size requirements going forward.
Right. Right. So it sounds like...
One of the things -- sorry, Howard. One of the things we may be seeing, and I really will emphasize may, is the expansion in the type of tenants or user interested in the kind of space we operate appears to be expanding. And that was evident pre pandemic, I have to say. But it appears to be continuing, and most notable in our minds in that regard is the deal with the law firm that Tom mentioned at The Well for about 25,000 square feet. I don't believe we've ever had a large law firm requirement in our portfolio anywhere in the country. I certainly can't think of it if we have. And I think that's significant and consistent with what we've been seeing on the part of professional services firms, including firms as exalted as Deloitte, who are looking at the kind of space we provide, whereas perhaps 5 years ago, it would have been unthinkable for them to do so. So that change certainly doesn't appear to have been arrested by the pandemic, and I don't know if I could conclude that it's been accelerated by the pandemic, but it's still happening.
Of interest, there was a law firm that we have on John Street in Toronto doubled in size in 2020. They went from 9,000 to 18,000 square feet. And so -- I'm not sure that means there's a trend, but there's two examples of professional services firms making a commitment to our kind of product.
And that of course -- that is encouraging to us, and that's why these transactions are far more meaningful to us than merely the square footage they represent.
Right. Yes. It sounds like it's a shift of demand from a certain class of tenants, too. So that's good to know.
We'll go Next to Dean Wilkinson with CIBC.
Apologies for taking you over an hour.
No problem.
Michael, you mentioned anything Allied wants to buy is going to be expensive. That's in fact a given. But the flip side of that is your debt has probably never been cheaper. And can you talk a little about what you're seeing in the debt markets relative to the expense of the debt rolling over the next couple of years? And even within the context of those green bonds that even though those may be expensive, given that your debt has never been cheaper, but that's more than the countervailing force against that, and it might not impact sort of coverage ratios from that perspective?
I'm inclined to answer by saying yes, yes, yes and yes. The debt market is astounding to us and has been for some time and, clearly, to our peers in the industry and the sector as well. There was a very interesting analysis done by one of your peers in the industry comparing how the debt markets have treated Allied paper in comparison to how the equity capital markets have treated Allied units. And I think the gap is vaster for Allied than any other entity, any other public real estate issuer in the country. Now on one hand, that's appalling to me and shame on the equity capital markets. On the other hand, it signals opportunity in the clearest sense of the term. And obviously, we're going to try to avail ourselves of the very favorable valuation of our paper that appears to be prevailing in the debt capital markets. And we will -- we have been striving to do that for some time, and we're going to continue to strive to do that. And I think the other thing I would say is, we are prepared temporarily to allow our debt-to-EBITDA to go up from its current level: a, because the cost of debt is so attractive; and b, because we know our debt-to-EBITDA ratios are going to come under wonderful downward pressure in 2022 and 2023. So yes, yes, yes and yes.
The equity markets will eventually get it right.
We'll go next to Pammi Bir with RBC Capital Markets.
I'll try to keep this quick. Just in terms of the comments around leasing, can you provide some sort of color on maybe what tenants are seeking in terms of changes to the lease terms in terms of renewals or new leasing duration or more flexibility in the leases? Are you seeing any of that at this stage or...
None. They're consistently looking for long terms.
Got it. In terms -- and then just lastly, just coming back to the law from lease at The Well. I'm just curious what were some of the factors that drew them to the property relative to, I think, their existing space that you said they had an option to renew on.
I think they were attracted to the amenities that are going to exist at The Well. It gives them an opportunity to refresh their space without renovating internally. But I think that they were attracted to a brand-new building that's going to have probably the best amenity package in the city.
Yes, especially from a neighborhood perspective. And there's no question, Pammi, that, that particular tenant made the decision they made because they believe it would help them attract, motivate and retain the kind of talented young men and women they need going forward. So what we loved about the transaction was it's a law firm, which is an unusual use for us in our portfolio. Number two, they have made the clear decision that in order to succeed, they needed to operate from collective workspace. And number three, they were persuaded at the end of the day that their ability to attract, motivate and retain talent would be enhanced by locating at The Well. There's no question in my mind that, that is what motivated them at the end of the day.
Got it. That was very helpful. I guess -- sorry, go ahead.
And they were -- no, no. Sorry, nothing.
No. Actually, I think you might have me leading to my next question, just on the -- I'm not sure if you have any sense of what the rents would have compared between what they're relieving versus what they're getting at The Well.
I would think the gross rents are a little bit lower at The Well because they have the benefit of the IMIT Grant in the first 10 years of their lease term at the well. But otherwise, I think there'd probably be parity between the rents, where they are and the rents that they will be paying at the well.
We'll go next to Mario Saric with Scotiabank.
Given the time, I suspect it's only the 6 of us are still on the call now. So I'll ask 2 really quick ones here, more clarification questions on the sublet space and kind of impressions that both Tom and Michael, you mentioned. So first on the sublet space. And Tom, I won't ask for an answer with a digit or investment in it. So don't worry, no decimals involved. It's not like internally Allied is a little more comfortable about the broader market sublets was today than it did during the Q3 call. Is that a fair statement? And is the simple driver behind that, that we're closer to tenants coming back into the office today relative to 3 months ago or is there something else leading to that increased confidence it can be best of case?
I'm sorry, I could not hear the question.
I think, the question is what accounts for the difference in total vis-à-vis sublease space in Q4 relative to Q3 when we were a little more uncertain. I'm not sure if we were sounding more concerned in Q3, Mario. We probably just weren't expressing ourselves properly. I mean, sublet space is optically problematic in any office market, as you know. But in our portfolio, it has always redounded to our benefit over time. And I think recognizing that the bulk of this is actually in Toronto makes us probably more confident than ever that however this unfolds, it will unfold to our benefit over time and with a high degree of certainty. So I don't think anything has changed. Although Tom's comments about the fact that some sublease space has been pulled off to the market in the interim, I think, is noteworthy. It was -- people reflexibly threw it on the market and probably thought, hey, if somebody comes along and grabs it, hallelujah. And then -- so it could be those people or they might have thought, hey, we're going to work from home forever. And as reality set in, either way, they might have taken that off the market. We do feel now, just as I think I mentioned in Q3, we know the tenants in each of the spaces in our Toronto portfolio who are subleasing space and their motivation is not because they plan to work from home going forward. Their motivation is their top lines are under pressure and have been under pressure for a while. One's a media group, not a great place to be right now, especially print media. Another couple of ad agencies. Again, still viable businesses, but ad agencies have had their top lines -- conventional ad agencies have had their top lines under pressure for quite a while now. So I don't think we're more or less confident now about our sublease space than we were, and we've seen it go down in Calgary and Vancouver, which actually, to me, is much more important. Toronto sublease space has never bothered us, and we've never had anything but good outcomes from it.
I thought we'd expressed no concern about subleases in Q3. It hasn't been a threat to us before and we don't expect it to be, but there hasn't been any change in the mood.
Yes. Okay. That's helpful. And then just to clarify, in terms of 50,000 square feet that you referred to, that's the broader Toronto market as opposed to Allied's portfolio in Toronto?
Yes, it is, Mario.
Okay. My second clarification question would come back to Michael, a comment that you made that in discussions with tenants, they feel -- you feel like they're fully committed coming back into the office. Is that comment grounded in the expectation that tenants are coming back into the office or the expectation that tenants are going to continue to keep the existing footprints that they have? And is it still too early to conclude on that?
I think the working premise would be that people are going to maintain the footprints they have and not contract or expand, but it is too early to assert that definitively. Lots of users are evaluating their needs in light of what they've learned and in light of what they expect to transpire in the future. And I don't think we have enough data yet from our actual users to conclude even tentatively where that may go over the next 12 to 24 months. But we are very confident based on ongoing discussions, which have continued really since Q3 and into 2021 now that the users we spoke to will be bringing their workforce back to the office when the pandemic is over. How, at what pace, to what extent long term, we don't have enough data yet to make any kind of meaningful conclusion. Although it does appear to us that most of the users we serve are not contemplating having significant components of their workforce working from home. But again, at the end of the day, it's how reality unfolds and how people behave that will actually tell us where the market is going. Talk is cheap, whether it's my talk in favor of people returning or some other clown's proposition with respect to working from home. Its what people do that really matters, and that's what we're trying to gauge. And we don't have enough data yet to make definitive conclusions as to what's going to happen over the longer term with respect to how our tenant base is going to use their space. I'm reasonably confident about it, but I will be much more confident as tenants begin to return and as they begin to use their space on a full-time basis again.
One little bit of color, Mario, is I mentioned a tenant in our Montréal portfolio who is looking at expanding, and they are looking at taking about another 20,000 square feet of space. And what they've said to us is they've had an office that had people densely packed into it. They want to make available more meeting room space in the future, allowing people to spread out just a little bit. So this is a tenant that's been super successful right through the pandemic, and they're saying, "We want more space for our employees, and we're not going to have them jammed into the same space." We may see some of that, early days.
Yes. That's an interesting point, Tom. But my last question is that we've been in this pandemic for about a year now. One of the question marks facing Allied coming into this pandemic is, how would a smaller tenant in terms of size fair during an economic crisis? And so just on that front, I'm curious to hear, in totality, since the pandemic started, like how many office tenant business failures have the portfolios seen?
Truly negligible, Mario. The office tenant base has held up extraordinarily well, small, medium and large organizations, small, medium and large requirements, just as we experienced during the global financial crisis. Almost all of the stress has been quite understandably felt by the retail component of our tenant base. And we've had very minimal failure there so far, part certainly because we've been prepared to work with some of the users in whom we have confidence and with whom we have relationships. But there -- I mean, the -- I can think of one example only in the office component of the tenant base, which was a smaller coworking entity, not spaces. Spaces has been awesome throughout, but a very small coworking entity in our portfolio, where we basically allowed them to give back 8 small locations aggregating...
15,000.
Yes, 15,000 square feet and retain 2 others, and they would have failed had we not done that. That's the only instance I can think of where any significant amount of space was, shall we say, surrendered to us with our cooperation. And I don't believe there have been any bankruptcies within the office tenant base, certainly not any one of any consequence whatsoever. So it's -- it has followed exactly the path we went on or went down in the global financial crisis. There, too, there was minimal stress in our office tenant base, and all of the stress was felt by the retail component of the tenant base. And the stress that they experienced then was nowhere near as dramatic as the stress that's being experienced by our tenant base now. But interestingly, the tenants then we're nowhere near as established in their space and in our portfolio as they are now. So, so far, there's been negligible failure in our tenant base as a result of the pandemic, and I mean negligible.
And at this time, there are no further questions.
Thank you, Jennifer, and thanks to each of you for participating in our conference call. We look forward to keeping you apprised of our progress going forward. If, in the interim, you have any questions, you know all of us can be reached by telephone. We're in the office and we're hard at work. Thanks very much, and have a great day.
This does conclude today's conference. We thank you for your participation.