Good day, everyone, and welcome to the Allied Properties REIT Third Quarter 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Michael Emery, President and Chief Executive Officer. Please go ahead.
Thank you, Lynette, and good morning, everybody. Welcome to our conference call. Tom, Cecilia and Hugh are here with me to discuss Allied's results for the Q3 and the 3 quarters ended September 30, 2019. We may in the course of this conference call make forward looking statements about future events or future performance. These statements by their nature are subject to risks and uncertainties that may cause actual events or results to differ materially, including those risks described under the heading Risks and Uncertainties in our most recently filed annual information form.
Material assumptions that underpin any forward looking statements we make include those assumptions described under forward looking disclaimer in our most recent quarterly report. By way of overview, we propelled strong internal and external growth in the 1st 3 quarters of 2019 with a mid single digit percentage increase in same asset NOI, FFO per unit and AFFO per unit and an 8% increase in NAV per unit. We also raised more capital at lower cost this year than any other year in our history. Perhaps most notably, we allocated that capital to acquisitions and developments that fit squarely within our investment and operating focus, while simultaneously improving our debt metrics to the point that they're now exactly where we want them to be. Cecilia will elaborate on our financial results.
Tom will follow with an overview of operations. Hugh will provide a development update and I'll finish with a few comments on our strategic outlook. So now over to Cecilia.
Good morning. I will summarize our financial results and how our balance sheet has been further strengthened by our capital program in the period. This quarter was one of our strongest ever. We achieved $0.57 of FFO per unit even with $1,300,000 of non recurring condo marketing costs at King Toronto included in the calculation. Our annualized quarterly EBITDA reached $320,000,000 for the first time ever.
Driven by occupancy growth
in Montreal,
Vancouver, Calgary and UDC and rent and occupancy growth in 3rd quarter was up 5% from the comparable quarter last year, driving 7% growth in our normalized AFFO per unit. We expected same asset NOI growth in the Q3 to be lower than the growth in the first half of twenty nineteen due to anticipated turnover vacancy in Toronto. We expect the area affected by turnover vacancy to re lease promptly and with material increases over prior in place net rent. We continue to expect FFO, AFFO and same asset NOI to be in the low to mid single digit range for the year. Moving on to our balance sheet and our capital program.
Driven largely by the strength in our core markets, our NAV per unit at the end of the quarter was up 8% from the end of the comparable quarter last year. At quarter end, debt to EBITDA was 6.7 times and represented 28% of our fair value, both metrics being in our targeted range. Interest coverage was 3.3 times and making progress towards our goal of 4 times. Our ratio of unsecured to secured debt was 1.1 times at quarter end, with unsecured debt representing 53% of our total debt. In light of very constructive market conditions and our ability to refinance existing debt favorably, we issued a $300,000,000 unsecured debenture in October.
Specifically, we used the proceeds to prepay $166,000,000 of mortgages and to repay our share of the construction loan on TELUS Sky, which was $96,000,000 This was materially preferable to extending the construction loan as it reduced our interest cost and extended the weighted average term to maturity of our debt. As a result of all these debt refinancings, we increased our pool of unencumbered assets to $5,200,000,000 representing 71% of our asset base. This brought our ratio of unsecured to secured debt to 1.9 times and unsecured debt as a percentage of total debt to 65%. It also extended the weighted average term to maturity of our debt to 5.3 years and reduced our interest costs. In addition, yesterday, we received an upgrade from Moody's to Baa2, which we're thrilled about.
We've indicated recently that we would be funding our activities in a more balanced manner between debt and equity. 2019 to date is a perfect example of this. Of the $1,175,000,000 raised so far this year, approximately $575,000,000 was equity and $600,000,000 was debt, which we've been able to deploy successfully towards $525,000,000 of acquisitions in the year as well as funding development activity and prepaying debt. We're pleased with the results of our capital allocation program to date. I will now pass the call to Tom for a discussion of our leasing and operating activities.
Thank you, Cecilia. The leasing environment remains strong with demand in all of our markets. Between renewals, new deals in our existing portfolio and properties under development, we leased 611,000 square feet in Q3 for a total of just under 1,700,000 square feet year to date. As of September 30, our occupied area was 94.5% and our leased area, 95%. We continue to see increases in net rents on space renewed or replaced.
For the 1st 3 quarters of the year, rents grew by 19.7% on the affected area. While rental growth has largely been a result of substantial increases in Toronto, we are now beginning to see rent increases in our Montreal portfolio. Moving from east to west, I'll provide a brief update on leasing activity in our major markets, Montreal, Toronto, Calgary and Vancouver, and then conclude with an update on our UDC space. Beginning in Montreal, over the last 24 months, we've made great strides improving our leased area in this market and we currently stand at 94% leased. At the start of 2019, we had 3 priorities in Montreal.
Montreal. 1, to continue pushing our smaller units very aggressively. We're doing that successfully and filling small challenged spaces that have remained vacant for some time. 2, to increase net rental rates where possible and we're now seeing rents slowly but surely edge up. And 3, to complete the lease up of our redevelopment of 425 Viger, we were adding 100,000 square feet to a 200,000 square foot heritage building.
We currently stand at 53% leased in that project. We made the statement last quarter that we remain confident about leasing the rest of the building by year end. Well, that's not changed. We have all the remaining space under negotiation with 4 tenants. Moving to Toronto, the urban office leasing market, if you're a landlord, has arguably never been better.
Vacancy is extremely low, in our case 1.3 percent and rents continue to rise. When space becomes available for sublease, there are often multiple offers. Whenever we can, we end up terminating the existing tenant with a penalty to cover downtime, then realize sizable and immediate uplifts in rent from the new tenant. Base rents on King West are approaching $50 a square foot net. Pre leasing at the well, our JV with Rio Can continues to go nicely as users are recognizing the unique opportunity this project represents.
We are currently negotiating with tenants that will take us over 90% pre leased. Moving to Calgary, we continue to maintain a very respectful 88.5% leased. By far, the most active segment in the market in Calgary is smaller tenants in the range of 2000 to 5000 Square Feet. We can easily accommodate users of this size in our differentiated project product along the Beltline. At TELUS Sky, our development project with TELUS and Westbank, we commented last quarter that we were in the final stages of negotiation with a tenant of 62,000 square feet.
That deal is now done and end up being 80,000 Square Feet, bringing our leased area to 64%. As often happens in real estate is a building takes shape and potential users can physically see and fully understand the opportunity, interest levels increase. TELUS Sky is nearing completion and it's very distinctive form on the Calgary skyline is being noticed. As a result, our leasing activity has been up in recent months. In Vancouver, the office market like Toronto is exceptionally strong.
We have only 2% of our space available in our existing portfolio and all units are seeing activity. Lastly, our urban data center space. Our renewal program at 151 Front continues to exceed expectations. Year to date, we've renewed almost 25 percent of the GLA in the building and achieved a weighted average lease term of 13 years. Just after quarter end, we finalized an early long term renewal with another national carrier.
This transaction achieved a significant increase in revenue sooner than we expected and further solidifies our ecosystem. In Q3, vacancy increased in 151 as 2 tenants consolidated their operations, reducing their footprint in the building, but continue to require equal or greater power allocations. This is ultimately very positive for us as we're able to generate more revenue per square foot as tenants draw more power but require less space. We are currently in active negotiations with 1 potential user new to the market to backfill all of the space and expect to finalize the transaction in the near term. At 250 Front, we continue to work with 3 small tenants totaling 25,000 square feet.
If we complete these transactions, we will be 82% leased at 250 Front, 99% leased at 151 and 93% leased in the UDC portfolio. Before turning the call over to Hugh, I wanted to make a comment about the ecosystem we have created in our portfolio by virtue of our size, mix of tenants and strategic clustering of buildings. At 12,300,000 square feet of workspace with heavy concentrations in Toronto and Montreal, we are constantly working with our users to provide growth and occasionally downsize. I recently asked our leasing teams to identify how many times we've accommodated a tenant's need for more space. It was no real surprise to learn we've accommodated over 100 tenants in the last 5 years.
It's a definite advantage to be able to offer tenants flexibility to expand or contract within the portfolio. As we continue to grow, our opportunity to serve our existing customers just gets better. I will now turn the call over to Hugh for a discussion on our development activities.
Thanks, Tom. We continue to make progress on both our active development projects as well as on our future development pipeline. I'll first provide an overview of our construction progress and then provide an overview of approvals. Projects under development. We are nearing completion of the base building work at 425 Viger.
The project remains on track for completion at the end of 2019 with a lead tenant beginning its fit out work in the New Year. Work at Le Nor Lec is nearly complete. The team is now focusing on miscellaneous work for the existing and new workspace users. In Toronto, we have completed the work required to allow condo purchasers at King Portland Centre to occupy the majority of units. Registration and closings will occur in Q4, 2019 and Q1, 2020 respectively.
Construction on the well continues to progress on schedule. At the end of the quarter, we had reached the 9th floor of the office tower. We have reached grade on a number of other buildings. This project remains on track to meet our lease obligations for delivery of the base building. For the JV project with Westbank at Adelaide and Duncan, we have completed the majority of the excavation on-site.
We have adjusted the anticipated cost for this project to match our latest projection now that we have tendered the majority of the work. In Kitchener, our partners perimeter development have begun demolition and excavation on Phase 3 of our Breithaupt Joint Venture. In Western Canada, we have begun interior demolition of our Lockheed building. We continue to project a 9 month construction period, which should see the completion of the project in the summer of 2020. We anticipate achieving occupancy at TELUS Sky late this year with TELUS occupying the building in early 2020.
Intensification approvals. Community Council has approved our Adelaide and Spadina projects. The zoning should be combining by mid-twenty 20. We anticipate receiving similar approval for our King and Brandt in November with binding approval to occur in December of this year or January of 2020. These projects will be brought to the market in the New Year.
I will now turn the call back to Michael.
Thanks Hugh. While certainly underpinned by strong market fundamentals, our results in the 1st three quarters of 2019 were also made possible by an investment in operating strategy that we've executed relentlessly and creatively since our IPO in 2003. We have deep confidence in and strong commitment to our strategy of consolidating and intensifying distinctive urban workspace and network dense UDCs. We firmly believe that our strategy continues to be underpinned by the most important secular trends in Canadian and global real estate. We also firmly believe that we have the properties, the people and the platform necessary to execute our strategy for the ongoing benefit of our unitholders.
Raising and allocating capital successfully are critical to the execution of any strategy. In my view, the ability to allocate large amounts of capital successfully is the determinative capability. Without it, there can be no ongoing ability to raise capital successfully. Allied has proven ability to raise large amounts of capital at low cost. This year alone, we completed 2 equity offerings for aggregate proceeds of $575,000,000 and 2 unsecured debenture offerings for aggregate proceeds of $600,000,000 More importantly, I believe Allied has the ability to allocate large amounts of capital while adhering to a proven investment and operating strategy.
The net proceeds of the equity offerings this year were used primarily to fund acquisitions and developments, whereas the net proceeds of the unsecured debenture offerings were used primarily to refinance existing debt. Our ability to raise and allocate large amounts of capital bodes well for our strategic outlook. We expect to allocate large amounts of capital to acquisitions and developments over the remainder of 2019 and in the coming years. While the public capital markets are certainly variable, we are confident in our ability to raise the needed capital at low cost and in a manner consistent with our unwavering commitment to the balance sheet. Among other things, the capital raised in 2019 enabled us to achieve our targeted debt metrics on or ahead of schedule.
While we fully intend to maintain our debt metrics within targeted ranges, we see our unsecured debenture program becoming a more important source of capital going forward. We believe that unsecured debentures are the optimal debt instrument for a public real estate organization, particularly one like Allied with an active and substantial development and value add pipeline. Accordingly, we intend to repay or prepay all outstanding mortgages in as opportune a manner as possible. Building a strong, deep and well composed team is also critical to the execution of any strategy. In my view, Allied has made consistent progress in this regard over the past decade.
In recent years, we focused intently on interdepartmental and interregional coordination and accountability with demonstrable and encouraging results. Not only is the Allied team stronger, deeper, better composed and better organized than ever before, It's fully unified around Allied's vision and mission, which I spoke about in my letter to unitholders. I won't repeat myself here other than to reiterate that Allied's vision and mission statements are the aspirational context within which we pursue sustained profitability for the benefit of our unitholders. I do hope this has been a useful and comprehensive update for you. We'd now be pleased to answer any questions you may have.
Back to you, Lynette. Thank
We'll hear first from Fred Blondeau from Echelon Wealth Partners.
Thank you and good morning.
Good morning.
I just wanted to touch on your expectations in terms of development costs. Looks like you once again increased your cost estimates for some of your projects. What would be your general views or your base scenario on development costs for the next 12 months, 24 months?
It's impossible to predict the extent to which they'll escalate, but they will escalate. The good news for Allied is as we speak today, a very, very significant portion of our development costs are now fixed contracts.
That's fair. Thanks. And in terms of residential development, what should we expect in regards to revenue and I guess net profit margins for Q4 and next year?
Very little. Our rental residential assets are not going to be operational for another 2 or 3 years. The only residential revenue we will be earning in the remainder of 2019 and the early part of 2020 will be condo revenues, which of course aren't part of our recurring revenue stream or our recurring earnings base. So they will be isolated and to be quite honest inconsequential as far as we're concerned.
Okay. And just looking at your strategy down the road, do you still see enough development opportunities to counterbalance for, I guess, a less compelling buy in ground in Canada? Or there could be a time when you would start looking for potential acquisitions maybe in
the U. S?
I don't envisage Allied looking to the U. S. Or outside of Canada's major cities for at least 5 years.
Okay. Okay, great. Thank you.
You're welcome.
We'll hear next from Chris Couprie from CIBC.
Good morning.
Good morning.
Just had a couple of questions on Montreal. 700 DLG, the occupancy in the MD and A versus what was kind of in the initial press release. I'm just wondering if you can reconcile what happened there. And It looks like maybe there was a change in the GLA.
Secondly, the Let me answer that first, then we'll get to your second question. The GLA increased because there is an area below grade that we believe we can convert to income producing area. That's that. The change in occupied area is solely a result of our having obtained possession of the 2nd floor from National Bank as expected and frankly as hoped for in August or September of this year. This will allow us to basically create the base building environment on that floor that will represent how we want to transform the building going forward.
So National Bank was able and under the terms of the arrangement put in place with the prior owner to give that space back to us, it was effectively functioning as swing space and we were delighted to get it back because it enables us to basically create what will be a large scale model suite that will illustrate what the space will be like when we get rid of the hideous drop ceilings and the drywall fire rating around the columns, etcetera, etcetera, etcetera. So that explains that.
Okay, perfect. And then I guess just two follow-up questions. 1, just occupancy in Montreal in general, those two buildings that you recently acquired, what's the kind of expectation or thoughts on time to lease those properties up? And then secondly, there was an increase in the intensification opportunity in Montreal. And I was just wondering if that was associated with the buildings that were recently acquired or
we acquired the RCA building approximately 80% occupied. We expect to lease the remainder of the space or the 20% that's unoccupied reasonably expeditiously. Having said that, we are not going to develop or execute a final strategy for either the RCA building or the ElPro Lofts building in the St. Henry sub node in the near term. We're going to continue to run them as they have been run, which is essentially as community buildings for a large number of smaller tenants.
That's because we want to understand more fully how that submarket is evolving and how those buildings can be optimally reconfigured for long term occupancy by the kind of tenants we serve. In terms of the additional intensification opportunity in Montreal, my guess is not having reviewed it specifically with the team, it all derives from the RCA building.
Okay. Thanks a lot. I'll turn it back.
You're welcome.
We'll hear next from Jonathan Kelcher from TD Securities.
Thanks. Good morning.
Good morning.
First on 151 front, when did that when in the quarter did that vacancy occur? And really what I'm really asking is how much NOI did you not have in the quarter?
It came back in August of this year.
Okay.
So presumably 2 thirds of the quarter.
Okay. And when it sounds like you're talking to a tenant, would that would you sort of say mid next year you'd expect the revenue to come back?
Yes. We're working on dates now and it looks like it'll be in the second half of the year. That will get finalized hopefully shortly and it may even be phased and some of it will be deployed into 2021.
Okay. And would it be fair to assume that on the renewals that you did in the quarter at 151 that you're now going to start to get more interconnection fees?
No. And ancillary revenue will go up somewhat, but the real increase is what we call normal or regular rental revenue and it's significant.
Okay. So would it be fair to say you're leasing the new the space is vacant right now, the market rents you show for your UDC, would that be sort of a fair ballpark to look at?
Yes.
Okay. And then just switching to TELUS Sky, a good quarter leasing there. What type of tenants are those?
Almost exclusively TAMI tenants. Okay.
Are they sort of new to the market or expanding or are you sort of stealing from the belt line there?
If I had to guess, I'd say half are new to the market and half are, if you will, coming out of other properties in the city.
Okay. And what sort of TIs do you expect on TELUS Sky and actually 425 VJ when they come on next year?
What sort of leasehold improvement allowances? I mean, as we budgeted them, we expect them to come in.
Okay. But you haven't disclosed those budgets yet, have you? That's not in your total cost?
Yes.
Okay. Thanks. I'll turn it back.
We'll move next to Mario Saric from Scotiabank.
Hi, good morning.
Good morning.
Maybe just coming back to Jonathan's question on 151 front, just very high level, if we had to summarize kind of the revenue post consolidation of the 2 tenants at the higher rent with the expected revenue coming in from on the backfill space if and when it gets done? What kind of uptick in overall revenue on that space would that represent in percentage terms?
Well, it's likely going to be somewhere in the range of double the rent that was there before. They're coming off of leases that were in existence for some time, Mario, and we're going to quite likely double the revenue. Perfect.
Okay. And then maybe shifting gears back to Montreal. I think you've been mentioning for a couple of quarters now that you're starting to see kind of rent growth in the market. How would you characterize the ending in which you think the rent growth cycle in Montreal stands today in comparison to Vancouver and Toronto, which you've articulated maybe slowing in a couple of years when supply comes on. I'm just curious in terms of the duration, the expected duration of the rent growth cycle that you see in Montreal and why that may be different from past cycles in the city?
Mario, I think and this of course is educated guesswork rather than scientific estimation. But my guess is we'll see rent growth for a longer period of time in Montreal than in Toronto and Vancouver simply because there's no material amount of new supply being added to that market and there is significant demand. So I think the rent growth will be more modest than we've experienced in Toronto and Vancouver, but I also think it will last longer simply because there is unlikely to be any material new supply of office space built in the city in the next 2 to 3 years. Whereas in both Vancouver and Toronto, as you know, there is material new supply under construction that is almost certainly going to satisfy a very significant portion of the excess demand for workspace in the urban core of both cities.
Got it. Okay. And then just sticking to Montreal, I guess after the acquisition of the RCA building and 700 DLG, Montreal is about 46 percent of your portfolio GLA and notably less on NOI. As you've highlighted, there's a lot of positive momentum in Montreal, especially for loft style space that you own. How should we think about your future growth in the market in relation to total portfolio growth?
Meaning, is there a cap in terms of what you would like Montreal to be as a percentage of the total portfolio? Or is it very much, again, opportunity based in terms of investment going forward?
We don't have a preconception about what relationship our Montreal portfolio should bear to our Toronto portfolio, which will always be our largest, especially in terms of earnings, but frankly also in terms of area, even though at the moment, the rental portfolio in Montreal slightly larger than the rental portfolio in Toronto. Once you factor in the development completions, Toronto will again be much larger in terms of both area and total NOI or total earnings. I don't feel the need at this point to curtail or slow down the exploitation of good opportunities in the city of Montreal. There does come a point in time where we would probably take the view or take the position that we don't want any additional exposure to Montreal relative to our remaining exposure in Toronto, Calgary and Vancouver, but I don't think we're there yet. We're seeing a very encouraging number of infill acquisition opportunities in Toronto, in Calgary and in Vancouver.
I'm actually very pleasantly surprised that we are able to acquire these opportunities that are so strategic to existing concentrations we have on such favorable economic terms when there is so much money chasing so little real estate, but we remain able to do it. And the opportunities generally come to us off market, not all the time, but generally. So while Montreal has certainly been the highlight in terms of sheer volume of growth in 2019, we've actually had a really encouraging number of infill acquisitions in Toronto, in Calgary and in Vancouver in relation to the size of those markets. So they're not falling behind Montreal in terms of area and especially in terms of earnings or NOI as might appear at first blush. But all that said, there does come a point in time when we're going to want our portfolio in Montreal to bear which is a which is a market where we expect to be able to continue to grow and where we expect to be active for the foreseeable future.
Understood. Okay. My last question and somewhat related, given your commentary on a positive acquisition pipeline in your markets, in the past you've talked about potentially introducing JV relationships, whether it's on acquisitions or potential development activities going forward. Is that something that you envision coming to fruition more on the acquisition side or on the development side in the near term?
In the near term, Mario, more on the acquisition side. Maybe to elaborate a little bit because that was rather a terse answer. We've reached a point where the incentive to joint venture developments, especially developments that are solely owned by Allied is diminishing. Our financial capabilities, our development capabilities and our ultimate operating capabilities make it very prudent for us to undertake those kind of developments for our own account and on a solo basis, if you will. So my expectation is that the kind of collaborative activities that we've been talking about in terms of leveraging our balance sheet will take the form of acquisitions.
Pardon me, not our balance. Cecilia corrects me quite well.
We're not leveraging our balance sheet.
That's almost an FMA at Allied. We're going to leverage our platform, Mario, not our balance sheet. My apologies.
Understood. I guess, and I guess the implicit assumption in all of that would be Union Center would inherently be a development that would fall into the next development cycle as opposed to anytime soon?
I would say 2 things in that regard. A, you're quite right, it will fall into the next development cycle in all probability. Number 2, in all probability, we will do it on our own.
Okay. Thank you.
We'll move next to Mike Markidis from Desjardins.
Thank you. A couple of things on my agenda here. So first off, it sounds like there's a lot of good stuff going on in the UDC portfolio just with even though you have some transitory downtime at 151 Front, a little bit of incremental leasing at 250 and space under negotiation, which could take that number up meaningfully. At the same time, the NOI contribution from UDC has plateaued over the last several quarters. So going forward, if the stars were to align, let's say, you get to 100% on $250,000,000 and just given the leasing that you've done at $151,000,000 it sounds like you're getting significant bumps on early renewals right now.
Where do you see sort of the $13,000,000 to $14,000,000 of quarterly NOI going to over the next couple of years?
Mike, I'd rather hold on that one. We have resisted the temptation to project forward with respect to UDC, even though we have stated publicly and we stand by the statements that we expect it to grow at a rate that would exceed the rate of growth in our workspace portfolio. We may be in a position at the end of Q4 when we report annually to segment our UDC income streams, if you will. And we may be prepared based on that to make a cautious forward projection. But we have resisted the temptation to do so, so far and I'm going to resist it today as well.
Okay. That's fair. I guess then just in terms of the contribution of the revenue streams, it sounds like there's a little bit of ancillary income uptick at 151 Cross Lake. I can't recall if that's done yet, but I think you're expecting to set up another meet me room there, which would drive material interconnection fee revenue. And I think there's also a meaningful ancillary revenue opportunity at 2.50 Front.
I guess two questions. A, is that still the case in your mind? And B, have we recognized even a smidgen or a fraction of that potentially yet?
The answer is unequivocally yes. And you identified the key opportunities perfectly, Cross Lake Fiber at 151 Front, AWS Direct Connect for the most part at 250 Front. They have begun to build and we expect to be in a position to report in conjunction with our year end results, the extent of the bill to date. It isn't dramatic. It wouldn't choke a horse yet, but it is beginning to build and it may afford us a basis by year end to start to cautiously project what the build might look like and what rate of build we might be able to expect.
But it has I mean, you identify the revenue sources very correctly, and it has begun to build. And as I say, we will in all likelihood be prepared to disclose very specifically that build by year end along with the mark to market growth that we've seen in the regular rental revenue. And 2 other, what I'll call, ancillary rental revenue sources that have also been growing, but that we don't expect to grow as meaningfully over time as we would hope the interconnection revenue does.
Okay, great. I look forward to that. Two smaller ones here on my end. Just with your first condo closings happening in 3Q, it looked like the margin was pretty slim relative to what one might expect on a condo project. Is there a timing impact there?
And I guess going forward, I know it's not part of your recurring FFO, but if we think about the remainder of the closings that are set to happen in the Q4 of this year and Q1 of next year, would you expect to see a material uptick?
Hi, Mike. The incremental condo profit that you saw of $421,000 was just on top of the $10,000,000 that was already recognized. And so if you look on Page 41, it gives you a better sense of the net condo profits to date. The $421,000,000 was based on upgrades that were done by the occupiers of the 50 units with an adjustment on final construction costs on those. So the margins are certainly not only $421,000 They'll be over $10,000,000 by the time everything is registered and closes in Q1 of 2020.
So under IFRS, the bulk of that profit would have been recognized when the assets were moved into inventory a year or 2 ago.
Got it. Got it. So it's fair value adjustment beforehand and not a store for us. Exactly. Okay.
And then lastly on 400 Georgia, can you just remind us in terms of when that project is expected to be stabilized? And then from a timing perspective, when the, I guess, classification on your year end would move from being a receivable to actually having 50 percent ownership interest?
We anticipate that one being completed within 2 years, at which point it will enter into our we will close on the property and will enter into our income producing property portfolio.
So it sounds like that's about 2 years out. Okay,
great. That's it for me. Thank you.
Thank you.
Caitlin Burrows from Goldman Sachs. Your line is open.
Hi, good morning. Good morning. Maybe Canada's Western region, the same asset NOI growth picked up in the quarter to up 3.1%, which is the highest in a few years. So I guess I was wondering, could you give some color on whether that's due to any new strength in Calgary or just maybe a mix impact from more Vancouver and or Edmonton?
Hi, Caitlin. It's primarily driven from Vancouver. So just the strength of the market there.
Got it. Okay. And then another quick one on the condo side. I think you guys previously said that the condo marketing expenses would come down in the second half. Didn't look like that quite happened in the Q3, but wondering if we should still expect that either in the Q4 or later?
We remain involved in the sales activity through Q4, but then it should teeter off dramatically in the New Year.
Got it. And then last one, just last quarter you announced the Westbank deal and we thought that interest income would increase with that, but that was another one that close to flat in the quarter. So just wondering, why was that? And should we expect an increase in interest income going forward?
So part of the loan to Westbank on 400 West Georgia was repaid, and it was almost offset by refinancing on 720 BD, which is why you would have seen it not increase. We would expect that to increase over the next few quarters as the loan on 720 BD increases.
Got it. Okay, that's all for now. Thanks.
Thank you.
We'll hear next from John Rodriguez from Raymond James.
Hi. The 3,000,000 square feet sorry, the 3,000,000 square feet of potential incremental density that in the statements you say has some attributable value, I guess in the NAV. Do you know what the value of that would be maybe on a per square foot basis?
I don't know off the top of my head, Johan. I can tell you that it is made up of the sites that are identified in our future intensification potential, which is on Page 34. So that would be 2,600,000 square feet of the 3,000,000. And then there's an incremental 400,000 square feet where there's land value that's been identified and baked into the IFRS value to get to the 3,000,000
dollars Okay. And then on your expires, it looks like in the Western region, there's about 270,000 square feet expiring next year, where the expiring rent is looks like $2.50 above market rent. Can you just maybe talk about that? And is the expectation that you'll see kind of a slip in rents on renewal or?
Sorry, which year you're looking at, in 2021?
2020. No, 2020. 2020. Yes. I think our current expectation is that there is a negative gap, if you will, between in place and market.
I think the bulk of that space is in the City of Edmonton, not the City of Calgary. But we do expect that negative mark to market, if you will, in 2020 as we sit here today. That could change for the better, it could change for the worse, but that would be our expectation today.
Okay. Okay, Edmonton. Okay. Thanks. I'll turn it back.
Okay. Thank you.
We'll move next to Matt Kornack from National Bank Financial.
Good morning, guys. I think in Tom's comments, you mentioned something to the effect that King West net rents are now at $50 a square foot. Just looking at what you have coming up for maturity in Toronto, I guess Kitchener is in there as well, but Toronto is the bulk of it. You're sitting at low $20 net rents on the existing. Would you say that is that just a very small pocket within King West?
Do you think that's sustainable as supply comes online? And sort of how does it trail off as you move off of King West onto Richmond or even onto the east side of King?
I think the demand is really strong and supply will remain very low and rents should be maintained up in the high 40s, low 50s. The rents on King West are the highest, but it doesn't diminish a great deal if you remain in the neighborhood.
Okay. So there's an exceptional mark to market opportunity in your existing leases. And that's been a pretty significant rise just in the near term as well. What would you say sort of 2, 3 years ago King West net rents would have been at?
Maybe high 30s, maybe mid 30s.
Okay.
And then I guess on King Toronto, one for Cecilia as well as just a more general comment. Can you speak to how the condo sales have gone there? There have been some anecdotes that seem to be quite positive. And then how will that be accounted for? Because it sounds like in your answer to Mike earlier on the existing King Portland ones that there's earlier recognition of that gain?
We haven't disclosed how they how many units have been sold, but we have certainly met our targets for presales prior to construction beginning, which should commence in November.
Okay. And on the accounting of it, Cecilia, if you could quickly touch on how it will ultimately be accounted for?
Yes. So Page 38 in our Q3 MD and A shows the breakdown of what's currently in our residential inventory, so not part of our investment properties. So the King Toronto piece currently stands at $114,000,000 on our balance sheet in inventory. That would have been transferred over. I don't remember if it was Q4 or Q1.
And so it would have been transferred over at fair value less the cost to complete. And so you'll see that balance increasing based on spend essentially. And then when we disclose the results under development completions when it's completed in 2023, you'll see what the net proceeds are. It's we tried to outline it in footnote 3 on Page 37. So the estimated gross proceeds from the res will be $280,000,000 in our share and that's netted against the estimated total cost of the project, which is how we get to the yield on cost on Page 37.
I can walk you through the more detailed calc if you like. We did try to lay it out, but it's not No,
no, no, that makes sense.
And Matt, it's Michael speaking. I think I can be a little more forthcoming with respect to the sales. I mean, Hugh is right, we haven't announced these sales publicly. But I can say confidently and I think appropriately that at least 72% of the units are sold today unconditionally with very substantial deposits in place. I can also say that the price per foot is unquestionably a record in the King Spadina node and certainly noteworthy in urban Toronto as a whole.
I know that's consistent with sort of the general rumors out there, but congratulations on the project. And then with regards to the retail, is it going to be a similar approach to what you've done on the well in that you wait until closer to completion so that you can maximize the rents you get on the retail component?
Absolutely. We will not even begin leasing the residual commercial component of King Toronto for a year. We're working with an agent that we have selected for that project on developing a merchandising plan and on developing a target market for King Toronto. But we have no intention of striving to enter into lease transactions in the next 12 months. If someone came out of the blue with a marvelous offer for us, we'd obviously speak with them.
But our intention is not to even initiate the leasing of the office component, which has actually become quite excellent in my view. It was originally less than optimal, but the way the structure was ultimately designed, the office space has become perfect for King and Spadina. The retail space is very good. It has certain challenges and certain tremendous opportunities associated with it. And we're really working through a merchandising plan and a leasing program for that.
Tom is overseeing it, but the team is adamant that we won't even begin discussions unless something unusual comes out of the woodwork for at least a year. Remembering that we can't deliver on that project until when, Hugh? Yes, of 2023. End of 2023. So pre leasing to office users is of course standard fare.
Pre leasing to retail users, especially over such an extended time frame is not normal. And in our view, at least, when it comes to urban streetfront retail, it's not optimal.
Right. Well, needless to say, looking forward to seeing it be built. Thanks, guys.
Thank you. So are we. And I think we're going into the ground and Hugh just has one more thing to worry about.
It's small though.
Small and simple.
We'll move next to Brad Sturges from IA Securities.
Hi there. Good morning.
Good morning. Just with the commentary around the unsecured debt market that you plan to utilize, obviously, with the credit rating upgrade, the plan is to repay mortgage debt that's outstanding. I guess, what would be the timeline to or thought process to have that all fully repaid? And then any commentary or thoughts on what the prepayment cost could be associated with that?
Yes. I'll answer the question almost in reverse. The bulk of the existing mortgages that have modest prepayment costs associated with them have been prepaid. The balance at the moment and this of course can change with time and interest rate fluctuations, but the balance at the moment would be inappropriately expensive to prepay. So in the near term, we think we've exhausted all little gap between prepayment cost and the present value of interest savings.
I think that will change as we go forward. I think the bulk of unsecured debenture offering that we do, let's say, in the next 12 to 18 months will be to repay existing unsecured debt, where the prepayment penalties, if any, are much, much more appropriate in relation to interest cost savings. So I don't see a great deal more mortgage financing prepayment in the next 12 to 18 months, although rates could change in a way to make that more opportune for us as we put it in the letter. But I don't think it's going to be opportune in the next 12 to 18 months.
Okay. So the $166,000,000 that was? Sorry.
Sorry, I apologize. Every mortgage that has been prepaid, the $166,000,000 the relationship between the prepayment penalty and the present value of the interest savings has been very, very favorable or put to the negative differential has been very, very small. But there are a number of mortgages that come due over the next 12 to 18 months. Obviously, we'll repay those with proceeds from unsecured debenture financing in all likelihood. But if you look at our debt maturity schedule, there's not too much of that left in 2020.
There's a bit more in 2021 and then a fairly substantial amount in 2022, I believe.
Okay. And then just last question. Just maybe going back to the infill acquisition opportunity or what you're seeing, just maybe give a little bit of a broader sense or general sense of what the quantum of that pipeline or the opportunities you're looking at right now within Toronto, Calgary and Vancouver?
Fair question. If I'm looking to the remainder of 2019, the order of magnitude is $50,000,000 to $80,000,000
Great. Thank you.
We'll hear next from Howard Lung from Veritas Investment Research.
Good morning. And I just wanted to turn to the potential incremental density. You've added kind of over 300,000 square feet. And most of that I think has to do with the acquisitions in Montreal, but there's also a little bit in Western Canada. I think that was added.
Do you are you continuously still identifying incremental density opportunities even with your existing portfolio?
Yes.
Yes. Although the little bit of incremental excess density, I believe, would be associated with recent acquisitions we've made in the City of Vancouver. But to answer your question, it is an ongoing activity of the asset management and development team here at Allied.
Right. And just related to that, I think there was a 2,700,000 square feet that was in the fair value in Q2 and now it's $3,000,000 that's reflected out of the $8,700,000 What's the process for that to kind of determine when that gets recognized in the appraised fair values?
That is a conversation between Cushman, who does our quarterly appraisals of our entire portfolio and our asset management team. And it's very much an asset by asset assessment. And so they would reassess every single site that we own and determine each quarter whether there's a new land value that needs to be added to the IFRS value in terms of determining how that should be reflected on our balance sheet. So it would be recognition of incremental land value that under IFRS, Cushman and management would feel is appropriate to recognize on the balance sheet.
Am I right in
thinking So something
Go ahead. Sorry.
Sorry, sorry. Go ahead.
No. Am I right in thinking that one of the factors we have to consider is whether it's actually developable today.
Correct.
If there's an impediment like
an existing lease
or a structural weakness in terms of additional, we can't recognize it until we've addressed that impediment?
Yes. Or we take what we refer to as a hybrid approach and 388 King West would be a perfect example of that. We have a tenant in place, and so we can't necessarily get to any development activity right away, but it's something that would be in Cushman's model maybe 15 years down the road. And so it would be part of the terminal value that then gets discounted. So it's a very site by site specific assessment that gets done.
Right. That makes sense. And I guess something like with Union Center because it's further along in the intensification process, would that be one of the buildings that is recognized? Or is it might not be because there's still tenants?
It is partially recognized because there's absolutely no impediments to our constructing that project other than our own if you will. We are free and entitled legally to construct that project today and therefore can and have recognized some of the value inherent in the land. If on the other hand, there was a material impediment to our ability to do that like an existing tenant whose lease we had to work through or live through in order to get to the point where we could build, then that would clearly, if you will, impede our ability to recognize that value in the IFRS statement. But in the case of Union Center, a significant portion of that land value is recognized in our IFRS valuation.
Right, right. No, that makes sense. And then I just want to turn to the to TELUS Sky. I think there was an increase in pre leasing, which is great. And then there's also a, I think it's a slight increase in the cost as well, the anticipated total cost.
And there's still, I think, about just under $15,000,000 left of estimated costs. Do you expect that to the cost estimates to continue to go up for that project? Or is that kind of the final around $145,000,000 is probably the right number?
We don't expect that number to go up. What we've done is taken a kind of a fulsome look at the project. There have been delays in delivering space, which has resulted in cost escalations. So we've now taken a more fulsome look at it and believe that this is where it's going to land.
Okay, sounds good. Thanks guys. I'll turn it back.
Thank you.
And at this time, there are no additional callers in the queue.
Okay. Well, thank you everyone for participating in the call. We look forward to keeping you apprised of our progress on an ongoing basis. Until then, have a great day. Thank you.