Good day. Welcome to the Allied Properties REIT first quarter 2019 earnings conference call. Today's conference is being recorded. At this time, I'll turn the conference over to Mr. Michael Emory, President and Chief Executive Officer. Please go ahead, Mr. Emory.
Thank you, David. Good morning, everyone. Welcome to our conference call. Tom, Cecilia, and Hugh are here with me to discuss Allied's results for the first quarter ended March 31, 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. Starting with a brief overview, we continued to focus on operations, capital allocation, and risk management in the first quarter.
Supported by strong demand for urban workspace in major cities across the country, we propelled continued organic growth in our rental portfolio, made steady progress on our development portfolio, and fortified our balance sheet yet again. Cecilia will elaborate on our financial results for the quarter and our financial outlook. Tom will follow with an overview of our operating results. Hugh will discuss our development pipeline, and I'll finish with a brief discussion of our strategic outlook. Now, over to Cecilia.
Good morning. I'll address our financial results and balance sheet. First, financial results. Driven by occupancy growth in Montreal and rent and occupancy growth in Toronto and our UDC space, same-asset NOI in the first quarter was up 6% from the comparable quarter last year, driving 8% growth in AFFO per unit. This was as expected, and we continue to expect FFO, AFFO, and same-asset NOI to be in the low to mid-single-digit range for the year. Driven largely by the strength in our core markets, NAV per unit at the end of the quarter was up 11% from the end of the comparable quarter last year. The IFRS value adjustment in the quarter totaled CAD 104 million, excluding incremental capital investment of CAD 50 million. At CAD 288 million, our annualized EBITDA was up 11% from the same quarter last year. This growth is also consistent with our internal forecast.
Moving to the balance sheet. We took the opportunity at the end of February to fix the cost of CAD 230 million of capital allocated to development by issuing equity and paying down our unsecured operating line. We were able to do this in a minimally dilutive manner while making significant additional improvement in our debt metrics, which are now stronger than ever. At quarter end, net debt to EBITDA was 6.2 times and debt to gross book 27%, both solidly within our targeted ranges. Interest coverage in the quarter was 3.3 times, representing good progress towards our target of four times. Our pool of unencumbered properties has grown significantly and now totals CAD 4.3 billion, representing just under 70% of the IFRS value of our properties. This is up 42% from the same time last year.
On April 9th, Moody's upgraded our outlook from stable to positive, acknowledging our continued commitment to conservative financial management. At quarter end and today, we have nothing drawn on our unsecured operating line, leaving us with maximum liquidity of CAD 400 million before exercising the accordion option for CAD 100 million. This will allow us to fund all debt maturities and development activity well into Q2 2020. I will now pass the call to Tom for a discussion of our leasing and operating activities.
Thank you, Cecilia. Our leasing environment remains strong with demand in all markets. Between renewals and new deals in our existing portfolio and properties under development, we leased 850,000 sq ft in Q1. As of March 31st, 2019, our occupied area is just over 96%, and our leased area is 96.4%. We continue to earn significant lifts in net rents on space renewed or replaced in the portfolio. For the first three months of the year, rents grew by 19.6% on the affected area. While rental growth has largely been as a result of substantial increases in Toronto, we are 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.
Starting in Montreal, we made great strides in 2018, improving our leased area in this market, and we currently stand at 96.2% leased. A very slight dip from year-end due to an acquisition and a bit of turnover vacancy. With all of our larger projects highly leased, we have three priorities this year in Montreal. First, to continue pushing our smaller spaces very aggressively. Second, increasing net rental rates where possible. And third, to complete the lease-up of our redevelopment at 425 Viger. As for 425 Viger, our lead tenant committed last year to just over 100,000 sq ft, and it has recently agreed to terms for another 50,000 sq ft, which will bring the building to 50% pre-leased. There are active negotiations for the balance of the space in the building.
Moving to Toronto, pre-leasing has been very successful at The Well, where we sit at 71% pre-leased, two years in advance of our turnover. Our leasing team remains very active touring prospects through our presentation center now that we're beginning to entertain one and two-floor users. Excellent small floor plates are available for lease, which will command the highest office rents. Demand for our existing portfolio in Toronto remains very high, with leased area of 98.9%. Moving to Calgary, we continue to maintain a very respectful 91% leased area in this challenged market. By far, the most active segment of the office market in Calgary is smaller tenants in the 2,000 to 5,000 square foot range. We can easily accommodate users of this size in our differentiated product along the BeltLine.
At TELUS Sky, our development project with TELUS and Westbank, we currently sit at 42% leased and continue to work with a number of potential prospects. We are building show suites, which will help us attract smaller tenants. TELUS Sky will be the most architecturally distinct, technologically advanced project in Calgary, and the smaller floor plates in the building are a big advantage in this market. In Vancouver, the office market, like Toronto, is exceptionally strong. We have very little availability in our existing portfolio, and all spaces are seeing activity. At 400 West Georgia, a Westbank project we are financing with an obligation to acquire a 50% interest upon completion, pre-leasing has gone extremely well. Agreement has now been reached with a new tenant of 15,000 square feet at very high net rental rates, bringing the pre-leasing to 86%. Lastly, our UDC space.
We are in the approval stages with a 10,000 square foot tenant at 250 Front and continue to work with two other tenants totaling 15,000 square feet. If we complete these transactions, we will be 76% leased at the property and 90% leased for our UDC space. Between now and December 31, 2020, 37% of our leased area matures among our three UDC facilities. We have now completed deals for over 40% of this space, with significant increases in net and ancillary rents. I will now turn the call over to Hugh for a discussion on our development activities.
Thanks, Tom. I will now touch on the quarter's development highlights. This quarter has seen progress made in both our active development projects as well as our future development pipeline. I will begin by giving an overview of the progress made on the projects we have under construction, and then give an update on the projects for which we are pursuing approvals. Projects under development. Working from east to west, we continue to make significant progress at our 425 Viger project. We've completed the infill component up to the 10th floor and are completing the framing of the addition on top of the building. This project remains on track for the completion at the end of 2019. Our work on the repositioning of the ground floor at Le Nordelec continues to progress smoothly. We are in the process of completing the landlord's work on the western half of the space.
This is scheduled to be completed in Q2 of this year. The building upgrade work is being executed consistent with our internal schedule and budget. The majority of the work should be completed by the end of this year. In Central Canada, both of the major office tenants have begun occupying the premises at King Portland Centre. On the residential side, we continue to anticipate construction to wrap up in Q2 2019, with the condo purchasers occupying the building beginning in the late spring. Construction on The Well continues to progress according to our schedule. At the end of the quarter, we had reached the third floor of the office tower. All other buildings on the site are progressing well, with the majority of the other buildings reaching grade in the summer.
We are pushing to have the majority of the work for the project awarded by the end of the summer. This, coupled with the workspace being well pre-leased, has significantly reduced the project risk profile. For the JV project with Westbank at Adelaide and Duncan, we have begun the demolition of the existing building. We intend to have the majority of the hard costs tendered by the end of the summer. For our JV project with RioCan on College Street, we have commenced the excavation on-site. This project is slated to be completed in Q1 2021. In Western Canada, we have handed over TELUS, their floors at TELUS Sky for their fit-out work. Occupancy continues to be scheduled for Q3 2019 for the commercial component of the building and late in 2019 for the residential component of the building.
In Vancouver, Westbank has reached the bottom of the 400 West Georgia site for excavation. While we have seen price escalations in construction costs, these have been accompanied by material rent escalations. With approximately 80% of the building leased and 70% of the cost locked in, we have greatly reduced the risk profile for this project.
intensification approvals. Our current focus for approvals is on our intensification projects in central Canada. In Kitchener, our partners, Perimeter Development, are finalizing two ancillary acquisitions required for The Breithaupt Block Phase III project. Once completed, we intend to turn our attention towards pre-construction work. We are currently projecting construction to begin in the late fall of 2019, with a two-year construction period. Our King and Spadina project with Westbank has progressed well in terms of pre-sales activity. In the spring, we launched the last phase of sales. To date, the sales have met our pro forma expectations. We anticipate construction to begin in the late summer of 2019. We continue to push for municipal approvals for our Adelaide and Spadina project, as well as our King and Brant project. We anticipate receiving the approvals in late Q1 2019 to early Q2 2019.
In Western Canada, we are engaging a contractor to oversee the redevelopment of the Leahy building. With the redevelopment plan set, we have turned our attention towards pre-leasing the space. We intend to begin construction this summer with a nine-month construction period. I will now turn the call back to Michael.
Thank you, Hugh. The outlook for our urban workspace portfolio remains positive, as is evident from what Cecilia, Tom, and Hugh have just said. The outlook for our UDC space is equally positive, meeting or exceeding our internal forecast thus far in 2019. Our acquisition program got off to a good start this year. By the end of May, our acquisitions will aggregate CAD 94 million, with the largest component being allocated to income-producing properties in Vancouver and the remainder being allocated to small infill acquisitions in Toronto and Calgary. The equity component of the acquisitions, approximately CAD 80 million, has been or will be funded with our unsecured line of credit, which as Cecilia mentioned, is currently undrawn. Our acquisition outlook for the remainder of the year is also positive.
As I mentioned in our last conference call, we want to lever our platform more fully than we have in the past. Over the past five years, we've been expanding and strengthening our platform to keep pace with accelerating opportunity and activity. We can now strive to use our platform to enhance our investment and operating returns. While this isn't something we'll achieve overnight, we can now reasonably expect to do so and to initiate the process of doing so over the next six to 12 months. Overall, we continue to have deep confidence in and commitment to our strategy of consolidating and intensifying distinctive urban workspace and network-dense UDCs. All as we've outlined in this conference call presentation. 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. I hope this has been a useful and comprehensive update for you. We'd now be pleased to answer any questions you may have. David, I'll turn it back to you.
Thank you. The question and answer session will be conducted electronically. If you'd like to ask a question, please do so by pressing the star key followed by the digit 1 on your touch-tone telephone. If you're using a speakerphone, please be sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press star 1 to ask a question. We will go to our first question from Caitlin Burrows with Goldman Sachs.
Hi, good morning, team.
Morning.
I think sequential occupancy was only down 10 basis points, obviously from a high level. The renewal and replacement rate was down more significantly. Those two metrics seem to be telling different stories. Is it just that you had enough space otherwise leased to make up for the non-renewals? Any other explanation you can share for how occupancy held up so well, despite the renewal and replacement rate declining?
Yeah. You're referring to the 67% renewal replacement rate?
Yes.
Yeah. The way that metric works is it doesn't take into account where we would've renewed or replaced any maturities in Q1 2019 prior to Q1 2019. If we renewed and replaced maturities coming up in February 2019 and November, that wouldn't be part of that metric because it only takes into account the maturities as of January 1. We absolutely had other space leased up that meant that overall our portfolio held.
Got it. It was just that you had already addressed that space?
Exactly. We addressed it earlier.
Got it. That's great. Cecilia, when you were talking about the strength of the balance sheet, I think you made a comment about being able to fund development well into 2020. I was just wondering, does that suggest that you don't expect to raise additional equity as you complete further development progress throughout 2019?
Yeah, the statement is more around the fact that we don't have to. We don't have to go to either the debt or the equity markets for another year, and that we can absolutely fund using our operating ones.
Got it. Okay, maybe just one more. You guys talked about the early renewals for the urban data center properties. Will that boosted NOI be able to be recognized in 2019, or will that process not be in effect until 2020?
It will begin to have impact on 2019, at least consistent with our internal forecast and possibly even slightly ahead of our internal forecast.
Okay, thank you.
Next, we'll go to Chris Couprie with CIBC.
Good morning. I just wanted to carry on with the UDCs. Just on renewal, do you think about how you approach renewal activity at 151 Front differently than, say, 250 and 905?
We do primarily because more space is coming due at 151 Front in the near term than in the other properties. While not all the renewal activity is isolated at 151 Front, most of it is, and that's because most of the space is maturing in the next 36 to 48 months. Most of the space that is maturing, I should say.
Okay. For like 250 Front, for example, do you anticipate you would be getting ahead of the renewals earlier than you would, say, for 151 Front?
They're less pressing, certainly, than 151 Front. The mark-to-market opportunity is probably less significant at 250 Front than it is at 151 Front. 151 Front definitely has priority in terms of boosting our NOI going forward.
I got it. Thanks. Just any update on the ancillary revenues?
They continue to build. We are hoping by year-end to begin segmenting the rental revenue and ancillary rental revenue lines. I would expect to be in a position to do that when we report on the year as a whole. I don't expect to start doing that quarterly, however, until Q4 of 2019.
Okay, great. Thanks. I'll get back in line.
Okay. Next, we'll go to Jonathan Kelcher with TD Securities.
Thanks. Good morning.
Good morning.
I guess your largest tenant is down to about two years, and I guess this is sticking with the UDC space. Have you started renewal discussions there, and is that something where you can expect a big uplift?
We don't expect a big uplift, but the discussions between Allied and that particular user are more or less ongoing. We do not expect a big uptick there.
Okay. Is that one lease or a number of leases?
It's a lease with three components to it or three areas comprising the total area.
Okay. You're not worried about the renewal at all?
The expenditure made by the user, in connection with the space, is extraordinarily large, in the hundreds of millions of CAD. We do not anticipate any difficulty on renewal. We also, and I think it is important to emphasize this, we do not see that as a material mark-to-market opportunity. The rent existing today is very high on a per square foot basis, and we do not expect it to increase materially on renewal.
Okay. What about term on renewal? How long would you be? Would that be a five-year renewal, 10-year renewal?
The likely renewal is five years.
Okay, thanks. Then just switching gears, the Breithaupt development, was that contemplated at the beginning of this year? Maybe you can give us a little bit more color on that deal.
The background is as follows. Last year, I think early in the year, our partner, Perimeter, and ourselves initiated the rezoning of the adjacent parking lot with the city in an effort to be proactive, so that we'd be in a position to move quickly should the demand materialize for a significant amount of additional space. The rezoning went well. It was a long process, but it went well. Our partner, Perimeter, did a very good job of shepherding it through. It, I think, resulted in a very appealing structure for knowledge-based organizations. The ultimate user didn't, if you will, appear until later in the process. Fortunately, we were ready and well advanced in the approval process, and it allowed us to move rather quickly with the users.
The possibility was certainly in contemplation throughout last year and early in 2019. It wasn't until we reached terms with the user that we knew we had a project we could initiate in the near term.
Okay. That is helpful. Thanks. I'll turn it back.
Thank you.
Next, we'll go to Mike Markidis with Desjardins.
Hi there. Thanks. Just following up on the UDC segment, had a pretty healthy uptick sequentially from both an NRI and NOI perspective. I know you haven't disclosed specifically the build and ancillary revenue, but would it be safe to assume that was a driver of that sequential increase?
The biggest driver, Mike, was occupancy gain, or if I could put it this way, economic occupancy gain. I believe, a single tenant who went from a fixturing period into a full rent period. There certainly was rent growth and ancillary rent growth in that number, but the biggest driver was occupancy gain.
Okay. That's helpful. Thanks. Then Tom mentioned in his comments that the space maturing before the end of 2020, I think 40% of that has since been addressed at a materially higher rent. What I'm just trying to get a sense of is, those deals, they take effect when? Does the rent impact hit initially? Is it a blend and extend, or is it something that you're still waiting for the impact to occur?
In some cases, the rent may happen before expiry, but typically it's at expiry.
Okay. The lease maturity data that you break out on page 25 of the MD&A, does that reflect stuff that hasn't yet kicked in? If you address something in 2020 that now is no longer an expiry, but the rent impact hasn't kicked in, is that reflected in that table?
It reflects whatever is maturing as of March, the timing as of March 31st, 2019. If there's an early renewal, we won't be showing it as the same maturity. It'll be updated accordingly to the new maturity.
Right. I guess that would be then missing some of the potential upside. Am I interpreting that correctly, or?
Is what you're saying, Cecilia, it'll move off the charts?
Yes.
Well, if it moves off the chart, then the potential's been realized. I think the implication is whatever's on the chart, that potential still exists.
Absolutely.
Yeah.
Yeah.
Because it hasn't expired or been early renewed. If it's been early renewed, we take it off the chart.
Correct.
Which I think we should do because whatever opportunity is inherent in it has been realized.
Yeah.
Okay. No, that's fair. Okay, that's what I was getting at. Perfect. Okay. Just, Cecilia, can you confirm when the exact date of TELUS getting possession of their space at TELUS SkyWest?
That was at the-
25th.
Yeah, the end of March 25th. That's when-
Was at the end of March.
Yeah.
Okay. There was no contribution then in Q1 from that.
No.
Okay, perfect. Lastly, for me, just noticing that the development pro forma for King Toronto, the cost went up and the yield went down. I am sorry if you already said this, but where are you guys from a fixing the cost perspective on that project today?
We have not fixed any construction costs. We are just starting now with the contract documents that will be used for tendering. This was an update based off of work that our construction manager has done for us to budget for the project.
Okay. You have to remind me, I think the way you guys were disclosing it was the profit from the condo sales was sort of netted and captured in the expected yield of that development on the commercial component, correct?
That's right.
Okay.
Similar to how we calculate it for King Portland Centre.
Okay, perfect. Any potential impact on the cost side on the condo component would also be captured in that net number.
That's right.
Correct. Yes.
Yeah. Okay. That's it. Thanks so much.
Thanks, Mike.
Okay, next we'll go to Mario Saric with Scotiabank.
Hi, good morning.
Good morning.
Just a couple of really quick questions. First on the UDCs, again, coming back to that space that has been, I guess, renewed early, the 40%. You mentioned material kind of increase in NOI. Can you quantify what the uptick's been?
It's in the 30% range, Mario.
Okay. Great. On KPC or King Portland Centre, I may have missed it, but was there any FFO contribution in the quarter?
I think there would have been, Cecilia, because of the.
There would have been some straight line rent.
Yeah, straight line rent
from Indigo and Shopify.
Yeah
future, but it wouldn't have been for the full quarter.
Sorry, I didn't catch that. I think Shopify's rent commencement date was January 1st of 2019.
Oh, sorry. Okay. I'm glad you're here.
I think there was a contribution, Mario, and I think we'll see a full contribution in Q2 from the building. We'll have a full contribution to FFO and AFFO, whereas most of the contribution thus far has been just to FFO, but that's been backed out on AFFO because of the straight lining. It would be my guess.
By the end of the year, we'll also be adding the King Portland Centre to the development completion disclosure that we have, similar to QRC West and The Breithaupt Block in Kitchener, as well as 180 John. You'll be able to see the breakdown of the development cost as well as the stabilized NOI and the yield on cost, as well as value creation.
Got it. Okay. My last question is a bit of a broad question with respect to Toronto and its positioning within kind of the global tech-centric gateway cities. We've seen a lot of rent growth, in Toronto recently. There's a building supply pipeline that's addressing the very strong tenant demand. When we look at rent levels in Toronto and compare them to other kind of tech-centric markets like San Fran or Seattle or New York in the U.S., they're still relatively low. I guess my question is, what's the governor in terms of rent growth in the market? I know supply is coming online, aside from supply, the tenant ability to pay higher rent, how do you think about that in the context of tenants looking at Toronto versus other gateway cities in the world?
Mario, is your comment in relation to gross rent or net rent? Just as a matter of interest, because one of the factors in Toronto could be the level of realty tax exigible in connection with commercial space. I don't know if you're comparing Toronto's gross rent to other cities' gross rent levels or Toronto's net rent to other cities' net rent levels.
It was more on the net. Let's say more on the net rent side.
Yeah. I suspect our realty taxes are high relative to other cities, but I don't know that. I'm sure some of the employment costs would impact that as well, between the different cities, whether employment costs are higher here. I do think there is not necessarily the same upside in Toronto that might have existed in some of the other gateway tech cities. I remember back in 2000 going to San Francisco, and there, the Class I rental rates had actually converged with the Class A rental rates because of the demand in the marketplace in relation to the supply. That convergence has never happened. I do think there's been a bit of a convergence since 2000 between the two categories, but I don't imagine there will ever be complete convergence between the two categories.
I think more than anything else, what will keep the rental rates from escalating indefinitely and to a level maybe that matches other tech gateway cities, is the fact that really good new supply is being created. There's a lot of it. There are good operators in the city. I wouldn't be betting on continued double-digit rent growth in Toronto much beyond 2022, 2023. I really believe that supply and demand will converge then, and the upward pressure on rental rates will subside. I don't think rental rates will drop necessarily, although they will if we create oversupply, which I think is not likely at the moment, but it's something we have to watch for continuously. I think there's a built-in governor on how rents escalate in the urban Toronto office market, and I really think it's the supply pipeline. It's really good.
It's really well located, and it represents an expanding part of Toronto's core. There are not any sort of supply constraints to create great product in this city, and we hope to be part of that creation process. I see it as the biggest governor of rental rates. The demand we know exceeds the supply now, I don't believe that is sustainable. I think supply will catch up with demand, and that'll keep a lid on rental rates. That's a very speculative answer, but it's the best I can do as an answer to that question.
Okay. No, I appreciate that. You have a larger portfolio in Montreal as well. Have you seen any, on the margin, international tenants or tech tenants coming into or looking to establish a space in Canada? Are you seeing any of that demand looking at Toronto saying, "Okay, the rents may be a bit high," and then focusing on Montreal for the first time?
I think actually, they're focusing on both cities and on Vancouver. If you pick all of the usual suspects in the global tech universe, they are all expanding in Vancouver, Toronto, and Montreal. Montreal probably serves more tech users in relation to the total demand in the market than Toronto. Toronto has the benefit of not only having tech demand but having financial services demand and a broader range of demand. Most of the growth in Montreal, I believe, is emanating from tech advertising, media, and information users. That's because the talent pool there is so significant, and people are looking to capture that.
I don't think anyone is saying, "I got to get out of Toronto and get to Montreal because I can save money." I think they're basically saying, "I got to lock down as much talent as I can in Toronto, and I got to lock down as much talent as I can in Montreal. Frankly, I got to lock down as much talent as I can in Vancouver." We're seeing that in many tenants in our portfolio, really across the country.
Okay. Thank you for the call.
Please.
Okay. Next, we'll go to Neil Downey with RBC Capital Markets.
Hi, good morning.
Good morning.
Perhaps some questions for Hugh or Michael, just back on Breithaupt Block III in Kitchener. As I recall, this development will be on the large surface parking lot to the north or the west of the building. As I recall, that lot's pretty full during the day. What will be the parking accommodations at this site?
There's an ancillary property that we're purchasing in order to build a structured parking facility that'll serve both the Breithaupt Phase I, II, as well as this Phase III.
I think Michael did make some comments about Perimeter and their requirement to secure some additional parcels of land. Is that what that relates to?
Yeah, we're just closing on some land. That's what I was referring to. We haven't closed on a couple of houses that are on that site, but we have gone firm. We just need to close on them.
Okay, there will be structured or deck parking built as part of this scheme because I thought there was some pushback locally to that proposal.
That is not part of this phase of the development, but the site will allow for it, and we have the approvals for it. Over the next couple of years, we will build the new building that has some below-grade parking. We will build a structured parking facility on another lot. There remains space on the Breithaupt Phase III, a large parking lot area for future development. It would be a Phase IV potential expansion of the Breithaupt.
Okay. I believe your disclosure showed that this Phase III is on a 100% basis, is roughly 300,000 square feet. I may have overlooked it, where do you stand on a leasing commitment or commitments? Have you made any disclosures with respect to which tenant or tenants are making those commitments?
The space is committed, Neil. We have not made disclosure with respect to the identity of the tenant for reasons that are typical in our business, as you know.
This is a commitment for 100% of the space?
That's correct.
Okay. Super. Just to finish up, on the subject of costs in Vancouver at 400 West Georgia, do you have an order of magnitude number as to what the total expected cost of that project will be now?
I don't think we have disclosed that.
No, I don't think we have, Neil. In fact, I'm pretty sure we haven't disclosed either that or the anticipated yield on total cost, primarily because we're not an owner now. We're simply a lender to that project. I can say, however, for what it's worth, that the yield on total cost that we anticipated when we initiated that project, or we initiated the financing, I should say, with Westbank, we are very confident we will achieve.
Okay. Thank you very much.
Thank you.
Okay, next we'll go to Matt Kornack with National Bank Financial.
Good morning. Michael, in the past, you've mentioned that you didn't want to take on a significant project in Toronto on the office side in this cycle. I noticed that you put up swanky new renderings for Union Centre and have the team of Bjarke Ingels and Westbank helping you out there as well. Is anything changing on that front? Would you anticipate launching something development-wise on that property, or are you just positioning for the next cycle with these new renderings?
No, it's a good question. The Globe and Mail article that you refer to, which was a very good article by the way, I think did create a little bit of confusion in that regard. I welcome the opportunity to clarify. I had mentioned, I think, that we were redesigning the Union Centre building, and indeed what The Globe featured was the result of that redesign effort with help from Westbank and with significant input from Bjarke Ingels Group. We have resubmitted to the city. We actually need to complete a full rezoning in order to go from what was approved, to what we now envisage. It's a significant increase in area. Potentially, we'll go from 1.13 million sq ft to 1.7 million sq ft. The floor plates will be considerably larger, which, as you know, for knowledge-based organizations, is very desirable.
The height will be slightly greater, but not dramatically so. It's really simply expanding horizontally to create larger floor plates and also redesigning the core, to create a much more efficient floor plate. We expect to get that through the rezoning process in 2019 successfully. I don't think it's at all likely or probable that we will initiate this project in this cycle. The redesign was largely intended to optimize what we believe is a uniquely good site for a contemporary office property in downtown Toronto. We wanted to make sure that what we built there took optimal advantage of the site and really represented the best conceivable workspace in the city of Toronto, if not the country as a whole. We don't believe we can pre-lease it to a level that would be risk appropriate, in what we see as the remainder of this demand wave.
Rather than even, how can I put it, market it proactively, we're choosing to focus on projects that are on land Allied has owned for some period of time with very low land cost, and are very discreet and compact. It's reasonable to initiate those projects in the next two or three years. I don't believe it would be wise to initiate Union Centre. The lavish article in The Globe, while informative and accurate about our redesign, did not signal any intention on Allied's part to launch this project.
Fair enough. Is there a data center expansion as part of that project as well? If so, would it be feasible to build the expansion and the capability to build on top of it at some point in the future, but not build at the time you built the data center?
The answer to the first part of the question is unequivocally yes. It is an exceptional opportunity to create additional network-dense urban data center space, and we will take advantage of that opportunity in due course. We have not currently contemplated constructing the UDC component now and then delivering the remainder later. I don't think that would be practical or feasible. I think pre-leasing the urban data center component in the fullness of time, is something that could help reduce the risk associated with actually launching the construction. We're not prepared to pursue the leasing of that component at this point in time either. We see that as one of the material opportunities we have to expand our UDC space in the future, and one of the principal reasons, we would never consider selling our existing UDC portfolio.
No, that makes sense. Switching markets to Montreal, where you guys have been exceptionally successful. To 425 Viger, the tenant that you've leased to there is a pretty high-profile one. Was that a relocation or is that an expansion in the city of Montreal? Also, given how successful you've been in that market, it wasn't on your list of places you're targeting for new acquisitions. Is that just a function of lack of availability of product that you'd like to purchase, or is there something else to that?
Two comments. One, the identity of the tenant at 425 Viger is not a matter of public record. That tenant is, in effect, relocating and expanding within the city of Montreal. With respect to acquisitions in Montreal, given the success we've enjoyed in the market, given the strong pace of demand for high-caliber, knowledge-based organizations, we remain very interested in growing our Montreal portfolio. We are working toward a significant acquisition now, in the CAD 80 million range, that I think is likely to go through, but we're not across the finish line yet. There are other opportunities of consequence in the city that we're evaluating. We certainly wish to continue to expand our portfolio in Montreal, and believe that both our team and the fundamentals in the marketplace warrants that expansion.
Great. Thanks. I appreciate the call.
Okay. Next, we'll go to Jenny Ma with BMO Capital Markets.
Thanks. Good morning, everyone.
Morning.
Just a question on the NOI from the UDCs. I just want to reconcile what was booked in the quarter versus the LQA that was disclosed on another page. It was CAD 54 million if you annualize the Q1 number. The LQA disclosure has it at about CAD 51 million. Is there something that's missing between the two numbers, or how do we reconcile that?
You're looking at the same-asset NOI for the UDC portfolio?
The same-asset NOI for the UDC portfolio included what would be the equivalent of a short-term holdover rate. A short-term extension, which is at a higher rate. For the purposes of normalizing the LQA NOI, we don't think it's appropriate for people to have that included in the long-term run rate, because it is a short-term extension. We treat it just like any other holdover rate for same-asset NOI purposes.
Okay, gotcha. Now, is that Q1 only, or does that spill over into parts of the rest of the year?
It'll spill over into Q2.
That's it?
Yes.
Okay. That differential is pretty much entirely related to that factor then.
Pretty much.
Okay, great. Then as far as the condo marketing costs, should we be expecting any future costs, or were they pretty much booked in Q1?
There will be future costs. We've captured the ones that were appropriately incurred or accrued relating to Q1. We do expect them to continue through the balance of 2019.
Can you give us a sense of the magnitude of that?
I think that we'd be probably spending the same that we had spent in Q1 over the next quarter, and then it will diminish dramatically in Q3 and 4.
Okay.
It's clearly a declining number, and one that won't recur in 2020 at all. The selling program isn't over yet. I think Hugh's estimate is a very good one.
My last question is with regards to the G&A and how to look at it from a run rate standpoint for the balance of the year, given that it was a little bit on the high side in Q1 versus, I guess, the average for last year. Is that a good proxy for the rest of the year, or are there some non-recurring items?
I think it's a pretty good proxy for the year, so you can use that. That would've been consistent with what we indicated in the February call as well, in terms of our expectations for the year.
Okay, great. That's all for me. Thank you.
Thank you.
Okay. We do have another question. Next, we'll go to Brad Sturges with iA Securities.
Hi, good morning.
Good morning.
Just to follow up on, I guess, the UDC ancillary revenue opportunity, just to maybe clarify or understand more in terms of the ramp-up for the rest of the year. Is that really just a function of the combination of renewals and, I guess, the introduction of the third Meet-Me Room at 151?
The ramp-up of what we call ancillary revenue is related in part to the mark-to-market of existing arrangements, in part to the new Meet-Me Room at 151 Front and the existing active Meet-Me Room at 250 Front. Actually, I believe, Tom, even the incipient Meet-Me Room at 905 King, although its materiality is probably its smallest.
It's smaller, for sure.
It would be the aggregation of those things.
The further lease of 250 Front, would that have a contribution to that stream as well?
The 250 Front will definitely contribute to the growth in the ancillary revenue over time. The lease-up of the balance might have some impact on that growth, but they're certainly not directly correlated. That's an independent reality now that will drive off the AWS Direct Connect portal and other things in the facility. Lease-up could actually enhance it, depending on the nature of the organizations to whom that additional area is leased. Some could have a really positive impact on ancillary revenue growth. Others could be neutral. I think our assumption is that the lease-up of the remainder will be largely neutral to the growth in the ancillary rental revenue, and it will grow, if you will, on its own merit and with its own independent momentum as people want to connect to Amazon's web services directly and things like that in the facility.
Great. Okay. Thank you.
You're welcome.
Okay. I do show those are all the questions I have. I'll turn the call back over to our speakers for any additional or closing remarks.
Well, thank you, David, thanks to each of you for participating in our conference call. We look forward to keeping you apprised of our progress. Thank you again, have a great day.
That does conclude today's conference. We thank you for your participation. You may now disconnect.