Allied Properties Real Estate Investment Trust (APUN) Earnings Call Transcript & Summary

Good morning, and welcome to the Allied Properties REIT Fourth Quarter and Year-End 2022 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Michael Emory, Chief Executive Officer. Thank you. Please go ahead, Mr. Emory.

Thank you, operator, and I'm delighted to be starting this conference call on time unlike the last conference call. So good morning, everyone, and welcome to our timely conference call. Tom, Cecilia and Hugh are here with me to discuss Allied's results for the fourth quarter and year ended December 31, 2022. Nanthini, our incoming CFO, is also with us today. We may, in the course of this conference call, make forward-looking statements about future events or future performance. These statements, by their nature, are subject to risks and uncertainties that may cause actual events or results to differ materially, including those risks described under the heading Risks and Uncertainties in our most recently filed annual information form and in our most recent quarterly report. Material assumptions that underpin any forward-looking statements we make include those assumptions described under forward-looking disclaimer in our most recent quarterly report. Allied's operating performance in 2022 was strong. Our AFFO per unit was up 4% from the prior year, underpinning our 11th consecutive annual distribution increase and providing a takeoff point for our 2023 outlook of low to mid-single-digit growth in same-asset NOI, FFO per unit and AFFO per unit. Cecilia will summarize our financial results. Tom will follow with an overview of leasing and operations. Hugh will provide a development update, and I'll finish with our current thinking about Allied's future. So now over to Cecilia.

Good morning. I'll highlight key operating metrics, our financial position and progress on ESG. Our operating metrics remain healthy. In our workspace portfolio, we had increasing average in-place net rent per occupied square foot of $23.10 up from Q3 2022 and up 5% from $21.98 a year ago. We also continue to see strong rent growth on renewing space in the quarter, which was 6.1% on an ending to starting basis and 15.6% on an average-to-average basis. The seemingly contradicting data around leasing activity that we mentioned last quarter materialized more positively than could have been expected. Tom will provide details on that. We're pleased with our financial position. We allocated $264 million of capital in the quarter to revenue-enhancing activity and development completions, which is what we'll continue focusing on for the foreseeable future. Assuming we're successful in selling the UDC portfolio, we will allocate a majority of the proceeds to pay off debt, pushing our debt metrics back within our targeted ranges. We do not intend to allocate any capital to discretionary activities, including acquisitions in the coming year. On to ESG. We're committed to the continuous advancement of our ESG program in 2023. This year, we're continuing to evaluate our possible pathways to net zero carbon and are in the process of finalizing an internal shadow price of carbon. We're also implementing a new process to review the environmental performance of our portfolio on a quarterly basis to more proactively address potential performance efficiency issues of our assets. And we're advancing our physical climate risk assessment framework to include site-specific climate risks and adoption opportunities, progressively expanding this evaluation across our portfolio. We'll continue to disclose our climate-related risks and opportunities against the task force on climate-related financial disclosures, or TCFD, recommendations in our ESG report which is expected to be released by July of this year. We'll also continue to work to support Allied's users in achieving our shared ESG goals. We recognize the tremendous potential of our community to advance ESG by learning and working in partnership. Across the country, we're focused on serving our users and completing upgrade and development work to propel operating capabilities. Our team and our operating platform has never been stronger. With that, I'll pass the call to Tom.

Thank you, Cecilia. We had a good Q4, leasing 520,000 square feet of space, and totaling 1.9 million square feet of space leased in our rental portfolio in 2022. We leased another 210,000 square feet over the course of the year in our properties under development. Average rents achieved in the quarter on renewals were 15.6% higher than average rents in the expiring term, and 13.2% higher over 2022. Average in-place rents in the rental portfolio have increased every quarter for 13 consecutive quarters. Activity is good in each of our markets, particularly in units under 10,000 square feet, which have been built out. We have created separate leasing strategies for every building in the portfolio, and we have just the right brokerage team for each of our buildings listed, and a very motivated in-house leasing team heading into 2023. I will now provide an update on leasing activity and our 2023 leasing priorities for our major markets, Montreal, Toronto, Calgary, and Vancouver. I'll also provide an update on some retail leasing initiatives. Montreal continues to be our most active market, with the team completing 42 transactions in Q4. Our focus in 2023 will be leasing 111 Robert Bourassa, 1001 Robert Bourassa, as well as Place Gare Viger. We expect to finalize a 60,000 square foot deal at Place Gare Viger in the next few days, getting the year off to a good start. In Toronto, we completed 32 transactions totaling 214,000 square feet over the quarter. Upgrade work at 185 Spadina and 468 King, is nearing completion, and now underway at 135 Liberty. Leasing these three properties are a high priority for the Toronto team this year. Planning work to reposition 175 Bloor and 110 Yonge, is progressing nicely. In Calgary, the team has done an excellent job maintaining an 88.2% leased area, which relative to the market, is solid. Our focus for this year will be to lease the Lougheed building and to complete the leasing at TELUS Sky. As for Vancouver, we're 94% leased, with only 62,000 square feet available for lease, comprised entirely of small units. Our focus for 2023 will be leasing the Landing, Sun Tower, and 1040 Hamilton. Turning to retail, I thought it would be useful to highlight some recent initiatives. Amenities can make the difference in an office user's decision to lease space, and we've always made an effort to provide unique offerings in the retail portion of our portfolio. In Montreal, we're finalizing a deal with a global food and beverage company who are trying something different. 26,000 square feet of space at CCMM, will be transformed into multiple independent chef-operated food specialty units, together with an event venue utilizing a large portion of the common area of the building. This will become a great amenity to our building and the neighborhood, but it will also become a destination for tourists and downtown residents. Projected opening is spring 2025. Also, in Montreal, we are planning the remerchandising of the retail offering at 1001 Robert Bourassa, to include food, fitness, and upgrade service uses. Projected completion, fall 2025. In Toronto, we continue to upgrade the amenity offerings on King West, and King Toronto Retail will be a huge addition to the neighborhood. We are negotiating a 40,000 square foot food and beverage restaurant, entertainment, and event venue, a unique offering in Canada, and sure to become an anchor for this neighborhood. The balance of the 120,000 square feet of retail space will be leased to upscale retail restaurant and service amenities. Interest in this project, not surprisingly, is very high. Projected opening is Q2 2025. While these uses are not imminent, the leasing and planning will all happen this year. We'll keep you apprised of our progress. I will now turn the call over to Hugh.

Thanks, Tom. This quarter, we have been able to make progress on both current construction projects, as well as our planning for future projects. I will begin by giving an overview of our major project, and then will follow that with an update on work we have done in our development pipeline. Beginning in Montreal, the team has been able to advance the rehabilitation work at both 3575 Saint-Laurent, and the RCA building, and the transformation of 1001 Robert Bourassa. With the close on 700 Saint-Hubert, part of the Gare Viger complex, we have begun the landlord's work component of the work. This work will further distinguish the space available in the building. We hope to have the work complete in Q2 of this year. In Toronto, we have made progress on all of our active construction projects. We were able to achieve a significant milestone at both our Adelaide and Duncan, and expansion of QRC West projects. In December, we achieved the first phase of occupancy for the office tower at Adelaide and Duncan. The second phase should occur in Q2 of this year, and the phased residential occupancies will occur in late 2023 and early 2024. At QRC West, just subsequent to year-end, we poured the last floor. Glazing and masonry work has begun to enclose the building. The team is gaining momentum on the project, and should be able to turn the space over to our tenant in Q3 of this year. We continue to make progress at The Well and King Toronto. At King Toronto, we have poured up to the fourth floor. With progress onsite, we are beginning to have discussions with potential tenants for some of the commercial spaces, as Tom just alluded to. In Vancouver, our joint venture partner, Westbank, continues to advance work at Main Alley. We are climbing out of the hole, and anticipate reaching grade early in Q2 and topping off by the end of the year. This quarter, the team has been focused on execution of active development and redevelopment projects, and work on our vacant suite upgrade program. Overall, the team has made solid progress across all of our development activity. The team has taken advantage of the work done in previous quarters on our new development approvals to focus advancing work on the vacant suite upgrades, redevelopment projects, and major development projects. I will now turn the call back to Michael.

Thanks, Hugh. Allied has proven from its inception to be resilient, and we have every reason to be confident that this will continue. In the past three years, we deepened, strengthened, and integrated the numerous and diverse members of the Allied team across the country. We continued the renewal and diversification of our board of trustees. We implemented a longstanding succession plan for senior leaders. We made significant and measurable strides in improving our ESG practices, and we took decisive steps toward reaffirming our mission and maintaining our commitment to the balance sheet. These elements of resilience signal our strategic and tactical direction going forward, and establish a solid foundation for our future. The last element of resilience that I mentioned, involves the sale of our UDC portfolio. I believe we've done a good job of explaining our reasons for making this decision. The comprehensive sale process is being launched today, and will extend over three to four months. We will not be able to comment further on the process until it's complete, but we'll obviously advise you as soon as the outcome is known. Now, many of you on the call know that I can easily be enticed into talking too much about Allied's affairs. What I would ask you in this instance, with respect to our UDC portfolio, is that you not ask me or any other member of the Allied team about the progress we're making until we have a concrete result to report on. I would really appreciate that, and I will not be enticed into speaking too much in this circumstance. 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] Our first question comes from Jonathan Kelcher from TD Securities.

Congrats Cecilia and Tom. First question, just on the leasing done in the quarter, and you guys haven't given this data for a long time, but the average term to maturity of 3.5 years on new leases and 2.5 years on renewals is the lowest since you guys started reporting that and seems a little low to me. Can you maybe give a little bit of color on that?

It's probably some short-term deals done to facilitate longer-term leasing. We've done a lot of shorter-term deals in the Montreal portfolio to facilitate longer terms -- longer planning at El Pro at RCA at $35.75. There's a number of buildings where we've done the shorter-term deals to plan for our future.

Okay. So it's not a function of tenants kind of just sort of kicking any space decisions down the road in a softer market?

It is not.

Okay. And then secondly, just on the well. A couple of questions there. First, maybe can you give an update on retail leasing?

We will leave it to RioCan to do that, Jonathan in its upcoming conference call, which I'm sure they will do. Good progress continues to be made, but RioCan is leading that effort. We're very pleased with the progress, but I think it's best that they report to the market on that specifically.

Okay. I figured as much, but I thought I'd try. And then just on the Shopify sublease space, how do you see that playing out? And do you think that's something that sort of comes to fruition at some point in 2023?

We have long experience dealing with good customers who need or want for various reasons to sublease their space and we've worked collaboratively and successfully with almost all of our customers in that regard. We consider Shopify to be a valued long-term customer of Allied and we will work with Shopify in its effort to sublease its space at the well. It's highly probable that anyone subleasing for a very long term will want direct privity of contract with the owner. And again, we have, in many instances, been able to accommodate our users in that regard, and we fully expect to be able to do that here, although we've got to address it on a case-by-case basis. But we are committed to work with Shopify in achieving its goals. They have a real advantage, in my opinion, because of the very low lease rate, they have the benefit of which was established in 2018 as part of a lead tenancy. That, I think, is going to assist them in their efforts greatly. And as I say, we will collaborate fully in an effort to help them get out from under this particular obligation. I don't want to predict, Jonathan, whether it will get done this year, next year or the year after because there's nothing but downside for me in making that prediction. Fortunately, for us, there is no economic implication to the timing. But I -- if I had to guess, I think what Shopify has to offer is very desirable to a significant number of potential users, and I would expect them to be successful. But I certainly don't want to predict a time frame, especially in this uncertain environment.

Okay. Now do you think having that space out there on the sublease market impacts any of your other leasing initiatives in the same area?

Not in the least.

Okay. And then just lastly, you had -- you have Shopify down is 1.1% of total revenue. Does that -- are you now counting the well as part of that or?

Yes, they're paying rent there so that would be part of the stack.

Our next question comes from Scott Fromson from CIBC.

Congratulations, Cecilia and Hugh as well as Michael for his new role. I'm not sure how new it will be on the strategic side. But anyway, just turning back to the well. You've done a good job talking about the Shopify. Just wondering besides Shopify and Torstar, are there any other users putting space back to the market?

The only possibility there, Scott, to my knowledge would be the tech end Index.... Index Exchange, I think they may be -- but again, it's kind of soft and it's kind of vague at the moment.

And Quadrant have a very small piece...

That's available.

Okay. So including that other space available at the well, do you have a current figure for the percentage of the portfolio that is available for sublease.

I think we reported on Q4. I don't know if we'd have a current one.

I would estimate it's closer to 5%. We had 3.3 no, you know what, it'd probably be about 4% because our share of the space at the well is only 50%, Scott. So closer to 4% than closer to 3%.

Right. Okay. That's helpful though it's not really that significant. And just on the debt refinancing, what I mean, I suppose it really depends on what happens with the UDC sale. But in the absence of that being monetized within the calendar year, your availability on the unsecured facility is kind of running a bit low. Do you expect to refinance up that or are there other plans for refinancing, including the $200 million choice note?

We certainly will if we have to, Scott, but we don't anticipate having to do that at all.

Our next question comes from Lorne Kalmar from Desjardins.

Congrats, everyone. I know Nam got left off. So I'll say congratulations over there. And maybe just sticking with the debt side of things. Are you guys able to prepay any unsecured debentures in the coming year?

There's a lot we can prepay without penalty and we will. I don't think any of it is unsecured debenture financing.

Yes, it would be more of the unsecured term loans that we have our eye on.

Okay. Great. That's very helpful. And then on 700 Saint-Hubert, I think it was 24% leased. And I believe that's sort of where it was when you guys made the announcement. What's sort of the outlook for getting that asset leased up?

The outlook is extremely positive. We are days away from 60,000 square feet being completed, and there's a 40,000 square foot tenant that we're negotiating with as well. So that building, we're hoping to get leased up before halfway through the year.

Okay. Great. And then maybe just flipping over, or I guess, sticking with leasing, what kind of demand -- like what sort of groups are you seeing demand from right now?

It's a mix. We have tech tenants. We have academic institutions. We have gaming, we have media, we have advertising. We have professional services. It's a real mix.

Okay. So there's not really one segment of the market that's been stronger than others for you guys right now?

No, I would say not.

No.

And it all falls within what we consider to be knowledge-based organizations. That is our core constituency with respect to using urban workspace and continues to be.

Of course. And then maybe just last one for me. I know there's no expectation to undertake any significant acquisition activity. I'm assuming that doesn't include 400 West Georgia, correct?

Yes. I mean that is simply completing a process that was started a long time ago, and likelihood will represent a net return of capital to us as opposed to a net outflow. So yes, it does technically include 400 West Georgia. But as we say, we don't consider that a discretionary acquisition. We committed to that 4 years ago or so. But rest assured that we have no intention of making material acquisitions in 2023. And indeed, I think it's highly unlikely we'll make any of consequence at all. We're not even seeing the small infill acquisitions right now that we saw in such magnitude during the pandemic and which we took advantage of. But no, discretionary acquisitions are off the table for 2023.

That's one way to make it. Yes, I think you made something extremely clear.

Our next question comes from Mario Saric from Scotiabank.

I wanted to initially focus on the occupancy. It was flat quarter-over-quarter, but if we back out the UDC reclass, it was up 30 to 40 basis points quarter-over-quarter in Q4. So based on kind of some of the leasing discussions, Tom, that you referenced in terms of how diverse it is, do you internally feel comfortable labeling Q3 '22 occupancy of the trough in this cycle?

Hope so. We've gotten lots on the go. We do have some nonrenewals that we're facing. We know about them. We're aggressively addressing them. But I hope that Q3 2022 was the bottom.

Great. Okay. And then Tom, your comment on that 60,000 square foot deal at Gare Viger in Montreal, is that - just to clarify, is that net new 60,000 square feet?

Yes, it is.

Okay. And then when I look at the guidance for '23, what's kind of the embedded occupancy range in that low to mid-single-digit growth guidance?

Mario, we are not going there again. I did that in 2022, and I lived to regret it, but we're not going there again. We stand by our forecast of low to mid-single-digit growth, but we're not going to extract and isolate other metrics that are embedded in that forecast because the metrics will change over the course of the year. Some will get better, some will get worse, but we're confident of our ability to deliver within those parameters. And I would add one more thing. I think the market is substantial with occupancy and/or vacancy, depending on how you want to express it, misses the point radically. But I do understand that it is a concrete number to which people can attach their view. But it's only minimally reflective of the underlying reality of our business. But having said that, I think most importantly, we are just not prepared to establish a target for occupancy gain in 2023, but we stand firmly behind our outlook with respect to same asset NOI, AFFO per unit and FFO per unit.