Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Allied Properties Real Estate Investment Trust (APYRF, Financial) reported a 5.5% increase in operating income for Q2 2024, reaching $82 million.
- The company successfully closed on the 400 West Georgia and 19 Duncan transactions, which are expected to yield significant strategic benefits.
- Total portfolio same asset NOI grew by 1.7% for the quarter, indicating stable performance.
- Average in-place net rent per occupied square foot continued its upward trend, reaching $25.08.
- Leasing activity showed strong momentum, with total leasing transactions up 25% compared to the prior year and new leasing transactions up 45% year-to-date.
Negative Points
- Leverage increased significantly from 9.4 to 10.9 in Q2 2024, primarily due to recent acquisitions.
- The company faces short-term pressure on earnings and debt metrics due to the stabilization of 19 Duncan and other recent transactions.
- Upcoming debt maturities in 2025 and 2026 require proactive refinancing and asset sales to manage liquidity.
- The company is selling non-core assets to manage debt, which may impact future revenue streams.
- Occupancy rates have stabilized but are still below pre-pandemic levels in some markets, particularly in Montreal and Toronto.
Q & A Highlights
Q: First question just on the leverage it was up quite a bit in Q2 over Q1. Was that in line with your expectations?
A: Yes, it was Jonathan. With the acquisition of 400 West Georgia and 19 Duncan we anticipated the leverage to go up. It's temporarily a downward pressure on our debt metrics due to the stabilization of 19 Duncan in particular with the rental residential lease up that is what will bring the EBITDA in later this year in early 2025. We do expect the debt metrics to improve over the balance of the year though Jonathan.
Q: Switching gears to leasing for the balance of this year and into next can you talk about any larger blocks that you know that you'll be getting back and where you stand in terms of activity on those?
A: In terms of maturities, JP can talk to the top two or three that we have coming back. In Montreal we have later this year some space at 1010 Sherbrooke that is maturing that we expect to renew. We have some space at 1001 coming back that we look to upgrade but no blocks of space that are material in size the largest being roughly approximately 30,000 square feet.
Q: On the disposition front, great to see the progress you've made there already. I was wondering if you could give us a rough idea of the cap rates or even the target cap rates that you're looking to achieve on these dispositions.
A: I would just say Lorne that they're on the lower yielding assets and they're not all necessarily cap rate driven and we'll be using the proceeds to pay off higher cost debt so it'll be overall accretive.
Q: Could you maybe walk us through some of the key assumptions to getting to 8 times leverage by mid-2026?
A: Absolutely. So we have the contributions from our development pipeline which -- if you look at the incremental contribution year-over-year and building up to that $85 million by mid-2026 that's one piece. And the $85 million comes from our ground-up development. We also have our upgrade category which is the redevelopment category which is not part of that $85 million and that will also contribute to that growth. Organic growth has JP alluded earlier that leasing momentum is picking up so organic portfolio will contribute and some of the refinancing that we're currently working on so lowering our interest expense including lowering our overall debt through the disposal strategy that we have ongoing.
Q: As part of the debt refinancing plan obviously you've suggested to look to be active in the secured mortgage market. I'm just curious if you can provide a little bit of color in terms of the debt availability that and the appetite by lenders to provide new mortgages in the market today and what the indications of credit spreads would be in the secured market at the moment.
A: Currently if you're borrowing against the lock our cost of borrowing is like 6.7% all in. On secured financing we have term sheets that range from 5.2% to 5.5%. So you're looking anywhere from 100 bips to 150 bips based on the asset, the quality of the asset, the tenancies. You have a great tenant with a great covenant with great wealth. You're looking at LTV of 65% on loan to value and we've had quite a few assets that we've identified. Obviously we still want to keep our unencumbered properties in the -- up to the 80% range but we'll -- definitely use that source of funding right now because the secured is definitely a lot cheaper than using our lock. And we have the flexibility because right now we sit with 87% of our assets unencumbered.
Q: On the leasing side of things, if I just kind of look at the average term you're getting on your renewals, it's around three years, -- I guess a bit below the typical five-year term. How do we interpret that? Is that kind of fair to say that that's just tenants seeking more flexibility or what are you hearing from that side?
A: I would suggest looking in isolation. It probably doesn't represent a meaningful sample or provide sufficient visibility to tenant intentions broadly across our portfolio. Our vault in Q2 was 5.8 years. Interestingly, there's no change in our vault compared to Q2 2020. So the average term length across our portfolio remains unchanged over the past number of years. And then new leasing activity in the quarter was 6.5 years. So generally speaking, we haven't seen observed any discernible trend over an extended period which would suggest that tenants are looking for shorter term durations than historically.
Q: Can you just maybe expand on the types of buyers that you're actually getting interest from on an unsolicited basis and then is there any anticipation of providing any VTB financing?
A: Sure, so the types of buyers are private, smaller family buyers, North American, European. It's funny, there's a lot of capital from outside of Canada looking to invest in Canada and in terms of our appetite to provide VTB, it's zero. There will be no VTBs.
Q: On 400 West Georgia, what can you share in terms of the interest that you've received on the remaining space to lease up there? And then just on 19 Duncan, what was sort of the rent that you're targeting per square foot?
A: At 400 West Georgia, as you know, there are four floors totaling 60,000 square feet. There is interest on all of the floors among eight prospective users of which one is an existing tenant looking to expand. Some are looking at the entirety of the space and some are looking at a portion of the space. And with respect to your question relating to 19 Duncan, the residential rates that we're targeting average, in the mid fives on a per square foot basis, mid to high fives.
Q: On the King Toronto project. You took an impairment charge of around $6 million this quarter, so can you provide some color on that? And do you expect or do you foresee further delays regarding this project?
A: The impairment this quarter was because of some cost overruns and mainly related to supply chain management related issues. On the closing, it's being delayed by a couple of quarters. We expect to close by mid-2026. And that would be the tail end of the condo closings. The condo closings will begin in late '25, early '26, but they'll take about two quarters to complete.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
