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

Thank you. Hello everyone, thank you for joining us and welcome to the Allied Properties REIT second quarter 2026 earnings conference call. After today's prepared remarks we will host a question and answer session. If you would like to ask a question please press star 1 to raise To withdraw your question, press star 1 again. I will now hand the conference over to Cecilia Williams, President and CEO. Cecilia, please go ahead.

Thanks, Ben, and good morning, everyone. Welcome to our Q2 conference call. Please note that certain statements we make during the course of this conference call that are not statements of historical facts may constitute forward-looking information and forward-looking statements about future events or future performance. These statements are based on management's current expectations and are subject to risks, uncertainties, and other factors that may cause actual events or results to differ materially from historical results and or from our forecasts. including those described under the heading Risks and Uncertainties in our 2025 Annual Report. Material assumptions underpinning any forward-looking statements we make include those described under the heading Forward-looking statements in our 2025 Annual Report. In addition, certain non-IFRS financial measures may be discussed on this call. References to non-IFRS financial measures are only provided to assist you in understanding our results and performance trends and may not be appropriate for any other purpose. For further discussion on these matters, please refer to our 2025 Annual Report under the heading Non-GAAP Measures. Turning to our prepared remarks before we take questions. Allied is entering a new phase. After more than a decade of investing in and developing our portfolio, we're focused on realizing its earnings potential through leasing execution, disciplined capital allocation, and a stronger balance sheet. We're also continuing to strengthen our portfolio by selectively disposing of assets. These actions improve financial flexibility while creating a higher quality portfolio positioned for long-term growth and value creation. This morning I'll focus on three areas. Operating fundamentals, the balance sheet, and the financials. JP will cover leasing by market in more detail. Starting with leasing and operating fundamentals. The office market is entering a different phase than we've experienced over the past five years. Demand for high quality urban workspace is improving while future competitive supply continues to contract. These fundamentals increasingly favor the portfolio we've built over the past decade and are contributing to our improving performance. Our operating business continues to strengthen, and the clearest evidence of this is that while Allied represents 5.5% of the office inventory in our market, we've captured 7.4% of leasing activity year-to-date. Leasing and occupancy both finished ahead of our expectations with the portfolio ending the quarter 84.4% occupied and 86.7% leased. We completed 522,000 square feet of leasing during the quarter and our new leasing pipeline is now 42% higher than the beginning of the year. These are important leading indicators that suggest our portfolio is positioned well for the next phase of the market. Financial flexibility continues to improve. We completed or secured approximately $321 million of dispositions and reduced net debt to EBITDA to 12 tons. Those actions keep us on the path toward our deleveraging objectives. Turning briefly to the financial results, It's important to distinguish between the underlying performance of the business and certain accounting and one-time items that affected reported earnings this quarter. Operationally, the business performed largely as we expected. Same as the NOI, declined 12.6% versus the 10% we had expected. This was lower due to a one-time retroactive property tax assessment. FFO per unit was 24 cents and a FFO per unit was 17 cents in line with our expectations and both reflect the non recurring property tax assessment together with lower than expected interest income during the quarter. Given recent market transactions, we recorded a fair value reduction on our investment property. The adjustment reflects higher market discount rates and capitalization rates rather than any fundamental change in the quality of our portfolio. Importantly, our broader outlook remains substantially unchanged. While we've updated our same asset NOI outlook to reflect capital reallocation toward development completion, and near-term leasing. Our expectations regarding dispositions, occupancy, deleveraging, and the overall direction of the business remain intact. Before I conclude, I want to mention how pleased we are to welcome Craig McIntyre, who joins Alloy as Senior Vice President and Chief Financial Officer. Craig spent nearly two decades in capital markets and corporate finance, most recently of Crete and Choice Property.

I will now turn the call to JP. Then, Cecilia, I'll start by providing a summary of our leasing performance, followed by market commentary and in our leasing pipeline along with the associated risks and conclude with observations on the market and our evolving approach to leasing. starting with leasing performance. As Cecilia highlighted, in the first half of 2026, we captured strong market share. completed 7.4% of total new leasing activity, while representing 5.5% of the total rental stock in the markets in which we operate. This underscores the quality of our portfolio and strength of our operating platform. Equally encouraging, our new leasing pipeline has increased 42% since the beginning of the year. demonstrating continued improvement in operating fundamentals and a favorable response to the new initiatives introduced at the end of Q1 to increase engagement with the brokerage community and make it easier for small to mid-sized organizations to leave space in our portfolio. Our portfolio continues to outperform the market in Montreal, Toronto, Kitchener and Calgary. Our Vancouver portfolio is 100 basis points lower than the market because of higher vacancy in Gastown. Our occupied and leased area in Q2 ended slightly lower than Q1 at 84.4% and 86.7% respectively, While down moderately from Q1, occupancy ended higher than our outlook of 82% because of earlier than anticipated occupancy from leasing activity. To achieve our occupancy target of 84 to 86% by the end of the year, we need We need to lease between 1.05 and 1.35 million square feet in our rental portfolio through new leasing and renewal activity that impacts occupancy in 2026. This is consistent with the volume leased in 2025. to date we've leased 633,000 square feet against our target. and there have been no material unanticipated non-renewals or terminations that would alter our objective. We expect occupancy will be flat or down slightly in Q3 because of known non-renewals that won't be fully offset by the timing of new lease commencements. and reaffirm our outlook of 84 to 86 percent occupancy by the end of the year In Q2, we completed 522,000 square feet of total leasing activity, in line with the level of leasing activity in Q1. 463,000 square feet of leasing activity occurred in the rental portfolio, and 59,000 square feet occurred in the development portfolio. Within the rental portfolio, 105,000 square feet represent new leasing, and 358,000 square feet represented renewals. Total leasing activity in the first half of 2026 was in line with H1 2025. Both in square feet and number of transactions. And our conversion rate for new leasing was 29%. Leasing activity in Q2 was concentrated in our heritage workspace segment, which accounted for 71% of total leasing activity. Our heritage and modern portfolios are 87% leased, and our flex portfolio is 78% leased. New leasing spreads, excluding our flex workspace segment, increased 8% when comparing the ending to starting base rent and 9% when comparing average to average. Average total leasing costs year to date are $6.27 per square foot per annum, compared to $7.01 in 2025. Average leasing costs for new leases are $9.50 per square foot per annum and $3.76 for renewals. The composition of our leasing profile remains anchored by professional services and TAMI users, which collectively represented more than three quarters of the transaction volume in the first half of 2026. Our retention and replacement rate was 77%, slightly higher than our forecast for Q2. The average rental rate increased 1.3% when comparing the ending to starting base rent and 7.8% when comparing average to average, which is, which was in line with our forecast. In 2025, we successfully renewed Google at the BrightHop block in Kitchener, which addressed our largest 2026 maturity, representing 97,000 square feet at our 50% share. Our largest known non-renewal in 2026 is Sun Life at our Degaspe portfolio in Montreal. representing 56,000 square feet, expiring at the end of August. We are in advanced discussions with the TAMI user to backfill up to 45,000 square feet of the Sun Life Space with lease commencement in Q4 2026 or Q1 2027. We are forecasting a replacement and retention rate of 69% in 2026. In 2027, our largest known non-renewal is STI, a Crown Corporation of the Province of Quebec at 747 Square, Victoria. As part of a broader public sector consolidation, SQI will return 18,000 square feet in September 2026 and approximately 100,000 square feet in December 2027. We are actively touring users with 2028 requirements through the SQI space. There are no material non-renewals known at this time for 2028. Lastly, sub lease availability increased by 30 basis points relative to Q1 and is 2.7% of GLA. The weighted average lease term of space available for sublease is five years, which reduces the risk of imminent direct vacancy and loss of economic productivity. Moving to our leasing pipeline. We currently have 1.7 million square feet of leasing activity underway. This is the largest our pipeline has been since we began reporting this metric. And it comprises 1 million square feet of new opportunities and 717,000 square feet of renewals. Of the new activity, 632,000 square feet is at the prospect stage. And 394,000 square feet has progressed to the offer stage. Our total leasing pipeline has increased 33% since the beginning of the year, and our new leasing pipeline has increased 42%. For context, we averaged a pipeline of 1.3M square feet in each quarter in 2025 and 950,000 in 2024. Turning to market commentary. The increase in our leasing pipeline reflects improving fundamentals. In Q2, the Canadian office market achieved a major milestone, marking a full year of sustained recovery. For the first time since the start of the pandemic, national office leasing recorded four consecutive quarters of positive net absorption supported by, one, increased demand resulting from higher fiscal utilization as organizations continue to revert to an office-centric model. Two, a scarcity of premium availability in AAA assets, which nationally sit at 9.4% vacancy, just 100 basis points higher than vacancy in Q1 2020, which is driving an increase in demand for Class A assets in and around the CBD. Three, national downtown space remains on par with 2018 levels and has now dropped below 10 million square feet. And four, a decline in total construction, which has fallen to a 22 year low. As a result, no new urban supply is expected in the near term. Despite the improvement in operating fundamentals, bifurcation is becoming a structural reality across the country. Premium assets in the CBD are benefiting from accelerating rent growth and contracting concessions, bolstered by the absence of new supply. Lower tier inventory remains under pressure, requiring aggressive incentives to secure and maintain tenant interest. We continue to see positive leasing momentum in our core concentrations of downtown West Toronto and downtown South Montreal. This trend began in the second half of 2025 as AAA assets released and demand extended to Class A buildings in and around the CBD. Leasing activity in Kitchener remains slow, as demand is currently concentrated in the suburban market. Calgary's recovery remains tempered by consolidation in the energy sector. the market is benefiting from structural supply side corrections resulting from conversions, including the Beltline where our portfolio is concentrated. And in Vancouver, Gastown and Yaletown continue to lag the financial district. So we're starting to observe an improvement in tour activity in Yaletown. We continue to believe the path to market stabilization will unfold in two phases. Phase one is underway and driven by higher fiscal utilization, flight to quality and return to office mandates. Phase 2 will be driven by improved economic output and employment growth in office-using sectors, propelling further expansion and fostering demand for new entrants to the Canadian market that have been largely absent for five years. Well, phase 1 momentum was robust in the second half of 2025 and has continued into the first half of 2026. We are monitoring the depth of driven demand and its ability to sustain positive absorption going forward. The Bank of Canada's recent economic update suggests a slow but constructive normalization in economic conditions, which should ultimately support office using employment and incremental demand for high quality workspace in our core markets. However, uncertainty remains elevated with key risks tied to the evolving Canada-US trade framework, slower population growth, and war-related supply disruptions. Lastly, an update on management's new approach to leasing following the organizational change announced in February. In March, we introduced incentives to increase engagement with the Broadbridge community by offering tour bonuses, commission bonuses for new leasing, and accelerated commission payments. We also introduced initiatives to make it easier for small to mid-sized organizations to lease space in our portfolio. by offering short form gross rent leases, end to end construction oversight and build out space. These tactics aim to reduce friction in the leasing process and align with how tenants screen tour and shortlist properties. By removing obstacles related to fit and readiness earlier in the process and investing in areas where tenants perceived the most risk, specifically speed to transact, price certainty, and space delivery, we're able to further differentiate our product. These new initiatives have been well received as evidenced by the increase in our leasing pipeline. demonstrate our willingness to be more flexible in growing occupancy. I will now turn the call back to Cecilia.

Thanks, JP. Six months ago, we outlined the clear operating plan. Since then, we've been executing against it. Leasing is ahead of our expectations. The balance sheet continues to strengthen. Market fundamentals are gradually improving. Most importantly, the business itself is becoming simpler, more focused and increasing driven by recurring . With that, Ben, we'd be pleased to take questions.

We will now begin the question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Jonathan Kelcher with TD Cowan. Jonathan, your line is open. Please go ahead.

Thanks. Good morning. First question, just on the $760 million of write downs, was that consistent across the Heritage, Modern and Flex portfolios? And how much of that was related to the assets held for sale?.

Some of it was related to the assets held for sale, but it was really the disposition that we completed in the quarter, creating new price points, and we felt it was prudent to apply across the portfolio. It was primarily Toronto and Montreal with a little bit of Vancouver.

an amount on Toronto House and Calgary House as well. Okay so just so we think about it like almost every property got hit a little bit I think that's a fair comment. OK. Secondly, on the leasing, the occupancy was a couple hundred basis points better than the 82% you guided to for Q2, but you didn't change your full-year target. Is that just you guys being a little conservative or should we be thinking about you guys being closer to the higher end of that 84 to 86% range?.

Jonathan, at this time we are not revising our outlook. We'll continue to evaluate it over the course of the year.

Okay, fair enough. And then just lastly, for 1185 West Georgia and 1010 West Sherbrooke, what were the cap rates on those transactions? Jonathan, the.

The cash yield on the assets that have closed is 3.4. And when we include 1010 Sherbrooke, which is firm, the cash yield on our disposition program to date is 4%.

Okay, thanks. I'll turn it back. Thank you. Your next question comes from the line of Brad Sturgis with Raymond James. Brad, your line is open. Please go ahead.

Good morning. Just going back to the the the discussion around occupancy. I think you said you're expecting some non-renewals in Q3. I just want to clarify how much space at this point are you expecting to get back by the end of September?.

Brad, we have 545,000 square feet that matures over the balance of the year. We expect approximately half won't renew. the largest known non renewals in 2026 occur in the second half and specifically Sun Life will occur in in Q3. and when we could see forecast, it was heavily weighted towards Q4, and that's why you have the disconnect in timing. And so we anticipate occupancy will be flat or slightly down next quarter as a result.

Got you. That's helpful. Just as the leasing pipeline builds and it sounds like you're getting traction with new prospects, how should we think about lease negotiation timelines and your ability to convert prospects into signed leases? Have you seen any indicators of...

improvement in some of those KPIs? It's still taking longer than we would like, Brad. Our conversion rate was 29% in the first half of the year, and that's slightly lower than 2025, but it also reflects the increase in our pipeline over the past quarter or so. We're certainly encouraged, as you identify with our increased leasing pipeline, specifically our new leasing pipeline has increased 42%. What we find is because there's not a lot of new entrance to the market, we're often competing with incumbent landlords who are offering renewal terms. Case in point, in the past 30 days, we lost out on three transactions where we were one of two finalists, the other all being incumbent landlords often renewals. Those were here in Toronto and and amounted to about 75,000 square feet, and so we continue to see protracted leasing timelines. We're encouraged by our leasing pipeline, though, and typically we're competing with incumbent landlords for renewals. who ultimately offer aggressive terms to try and retain tenants. So we certainly hope as the scarcity and premium availability continues to diminish that those timelines contract, but we haven't seen that yet.

Okay. Just last question, just trying to get an update on I understand where you are in the process on selling Toronto and Calgary house. Are you still expecting, you think you can complete something by year end at this point and how, I guess you took some write downs on the assets, How do you think about further revisions on pricing expectations for those two assets?.

Our outlook in relation to the disposition of those two assets, Brad, remains intact. We are finalizing an agreement of purchase and sale for Toronto House and we're not prepared as a result to comment further on that disposition. We launched the sale process for Calgary House in June. We've been very pleased with the response and given the state of that process, we won't comment further on that asset either.

Okay. Sounds good. Thank you. Your next question comes from the line of Lauren Calmar with Desjardins. Lauren, your line is open. Please go ahead.

Thanks. Good morning. Maybe just going back to the write down. I was just sort of wondering, is this kind of the last big write down or should we expect more to come? And the reason I ask is because in Toronto, for example, I think the IFRS cap rates are still roughly like 100 basis points below where you've seen some core class A office properties transact.

over the past six months. So just wanted to get your thoughts there. We're very comfortable with where our IFRS valuations are at this time.

Okay. And then in, I think it was on the 1Q call, we talked about the King Toronto loan and you mentioned it wasn't credit impaired and then obviously this quarter it was. Can you just maybe explain the change in circumstances that led to it being credit impaired?.

There was a West Bank entity, not one that is related to any of our loans, but within the West Bank group of companies, let's say, that did have a financial situation that resulted in us feeling it was prudent to.

to credit and pair the loan with us. Okay. And then I guess just like sticking with that is sort of a three, three, three and a half million dollar reduction in quarterly interest income the correct way to think about the impact of the impairment? Yes, yes, it is. Okay, okay. And then just the last one on... the other West Bank situation you guys have going on at 150 West Georgia. There was, I think, an announcement from TELUS. They were going to be potentially working with West Bank to to develop a data set. I'm just wondering if you'd give us any update around that and the 125 million, I believe that was baked into the, the outlook and how comfortable you are with repatriating that and then maybe also.

what your expectations are for when the loan matures at the end of the year? We don't have an update on 150 West Georgia at this time, Lauren. As soon as we do, we'll be in a position to provide more color. Okay, thank you very much. Thank you.

Your next question comes from the line of Mario Saric with Scotia. Mario, your line is open. Please go ahead.

Hi, thank you. Good morning. Maybe for JP, you mentioned the 29% new lease conversion in the first half of this year. if which is i think similar to last year per your comments if we went back on average post-coveted and maybe if you have the data even pre-covet how about 29 compared to historical average.

Mario, we don't have that data pre-COVID. What I can share is our conversion rate in 2025 was 56%. However, our new leasing pipeline at that time was much smaller than it is today.

Okay. And then just on the recorded leasing allowances and commissions, I think it was $23 million this quarter. Just from an accounting perspective, is the $23 million related to the 520,000 square feet that was leased this quarter, or is there a timing difference that we should be aware It reflects Mario leases that commenced in the quarter. Okay. And then just regarding King Toronto, Is it fair to say that the risk of any further write-downs has decelerated quarter over quarter? Yes, that's a fair statement. Okay, that's it for me. Thank you.

Thanks, Mary. Your next question comes from the line of Sairam Srinivas with ATB Karma Capital Markets. Sairam, your line is open. Please go ahead.

Thank you, Peter. Good morning, everybody. Good morning. Just going by your comments on OPEX cost and the impact in the quarter, there was a bit of a drag on operational costs this quarter as such. Do you expect the drag to sustain, and how long should we be thinking about the drag on the cost of such?.

Do you mind repeating that? We had a hard time hearing.

Sorry, Debbie. Just checking to the operating cost drag you saw on the portal, I'm just trying to wonder like what the timeline of the drag looks like, and then we should probably expect that drag to kind of decrease.

What I can share is that over the past five plus years, our operating margin has been in the mid 50s. It's lower today, but our three year outlook contemplates us returning to an operating margin in the mid 50s.

Sorry, I'm sorry. Sorry. And maybe just looking at non-renewals in the quarter, is there a particular reason why you saw these renewals and is there a common trend of such tenants not essentially wanting to renew at this point in time?.

Again, apologies, we're having a hard time hearing. Is your question in relation to non-reveals in the quarter?.

Yes, and if there's any particular reason for the non-renewals.