Good day, and welcome to the Allied Properties REIT Third Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Michael Emery, President and Chief Executive Officer. Please go ahead, Mr.
Emery.
Thank you, Ron. Good morning, everyone, and welcome to our conference call. Tom, Cecilia and Hugh are here with me to discuss Allied's results for the Q3 ended September 30, 2018. We may, in the course of this conference call, 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. Our Q3 was active and successful. We propelled strong organic growth in our rental portfolio and made excellent pre leasing progress with our development portfolio. We continued to focus on large scale capital allocation necessary for a growing and successful development pipeline, strengthening our debt metrics meaningfully for the 2nd time in 2018. Cecilia will elaborate on our financial results for the quarter.
Tom will follow with an overview of our operating results. Hugh will discuss our development pipeline and I'll finish with a discussion of our outlook. So now over to Cecilia.
Good morning. I'll touch on the quarter's financial highlights, our approach to capital allocation and the rearticulation of our business. First, the quarter's financial highlights. Driven by occupancy gain and rent growth in Toronto and Montreal, our same asset NOI in the 3rd quarter was up 9.7% from the comparable quarter last year, driving 22.6% growth in our AFFO per unit. Same asset NOI for our urban workspace portfolio was up 10.7%.
This included higher than expected increases in
in
digit growth in same asset NOI. Driven largely by the recent completion of upgrade properties in Montreal and continued deleveraging, our NAV per unit at the end of the quarter was up 8.7% from the end of the comparable quarter last year. The IFRS value adjustment in the quarter was $155,000,000 excluding incremental capital investment of $49,000,000 At $272,000,000 our annualized EBITDA was up 4.8% from the same quarter last year. This growth is also consistent with our internal forecast. 2nd, our approach to capital allocation.
We use our unsecured operating line throughout the year to fund acquisitions, developments and mortgage repayments. As the line is drawn, we look to variability in the equity and debt capital markets. As a matter of interest, we received a term sheet enabling us to increase our unsecured operating line from $250,000,000 to $400,000,000 While this has an ongoing cost to us, we consider different financing options on our debt metrics and AFFO per unit. In terms of the specific debt metrics, we're most attentive to debt to EBITDA as it is less variable due to changes in the fair value of our assets. In deciding how low we go, our focus will ultimately be on debt to EBITDA.
We took the opportunity at the end of September this year to fix the cost of 155 $1,000,000 of capital 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 6.3 times debt to gross book value just below 28%, both solidly within our targeted ranges. Interest coverage in the quarter was 3.5 times, representing good progress towards our target of 4 times. Our pool of unencumbered properties has grown significantly in 2018 and now totals $4,100,000,000 representing just under 70% of the IFRS value of our properties.
This is up 49% from the same time last year. From a liquidity perspective, we finished the quarter with nothing drawn on our operating line, leaving us with full access to $250,000,000 which will expand shortly to $400,000,000 3rd, the rearticulation of our business, which you'll have noticed in the letter to unitholders as well as set out on pages 14 and 15 of the MD and A. Some have suggested in the past that there is a fundamental operating distinction between our urban workspace and our network dense urban data centers. We've never seen it that way. We look at our business as an integrated whole.
Our urban workspace and network dense urban data centers do essentially the same thing for knowledge based organizations that use our space. They provide urban environments for human creativity and connectivity. From a financing perspective, there are future implications of continuing to look upon our business as an integrated whole. The first and most obvious is that we do not and will not look upon our urban data centers as an opportunity to redeploy capital. The second is that our urban data centers afford the potential for outsized revenue growth without having to allocate significant amounts of capital, as we did previously in retrofitting 905 King West and 250 Front West.
The third is that our urban data centers going forward will fall primarily within our rental portfolio rather than within our development portfolio. We may one day expand existing facilities, but we're highly unlikely to develop new ones on a speculative basis. 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. In fact, each of our markets showed growth in leased area in Q3. We completed 1,100,000 square feet of transactions in the quarter and 2,000,000 square feet so far this year. Pre leasing activity on development projects continues to be strong, but more on that later.
Our occupied area increased by 0.21% over Q2 and 1.6% year to date. Leased dairy increased by 0.8% over Q2 and 1% year to date. We continue to show healthy lifts in net rent on space renewed or replaced. For the 9 months ending September 30, rents grew by 16% on the affected area. We fully expect this trend of very positive revenue growth on maturing leases will be sustained in the foreseeable future.
Moving from east to west, I'll provide a brief leasing update on our major markets, Montreal, Toronto, Calgary and Vancouver, and conclude with an update on our network dense urban data centers. Starting in Montreal, fueled mostly by tech sector growth, this market has been a great performer in 2018. Le Nordelec is 97.4% leased 6,300 Park, 96 percent City Multimedia, 97.5 percent and our properties on the Gaspe, 98%. We have some work to do to improve our occupancy in our buildings on Saint Laurent, but that area is also coming along well. Our target is to have the Montreal portfolio 97% leased by year end.
Construction at 425 Viger is proceeding well, where we are adding 100,000 square feet to a 200,000 square foot building. Leasing is going equally well. We have completed a lease for 95,000 square feet with a global brand and a 60,000 square foot deal is nearing the finish line. We expect to be 50% leased by year end. Rents are at or above pro form a.
Moving to Toronto, the prime focus of our leasing team in 2018 has been to secure pre leasing commitments for the well. With Shopify, Index Exchange and Spaces, we are now 71% leased with space expected to be turned over for tenant work early 2021. Activity at our presentation center remains brisk and we are currently working with 3 potential tenants for space totaling 180,000 square feet. Demand for our existing portfolio remains high with our biggest challenge being an ability to accommodate expanding tenants, as some would say, a champagne problem. Our portfolio in Toronto is 98.6% leased.
Moving to Calgary, our existing portfolio largely located in the BeltLine has held up well over the course of the downturn, and we now sit at almost 90% leased with activity levels continuing to improve. With respect to TELUS Sky, our development project with Westbank and TELUS, we are completing 3 transactions totaling 45,000 square feet. We expect to lease the balance of the space in this project in 1 or 2 floor increments. Consequently, we are planning to build out show suites in this project to assist with leasing as we have done with great success in our existing portfolio. It has been our experience that smaller tenants make decisions more quickly when the space is basically in move in condition.
In Vancouver, the market remains very strong and we're sitting at 96.8 percent leased. 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. 3 separate transactions have been finalized with 82% of the space now committed. Delivery for tenant work is not until mid-twenty 20. Lastly, our network dense urban data centers, 151 Front and 905 King are both highly leased.
At 250 Front, we are in the final stage of negotiation with a new tenant for sequential requirements of 10,000 square feet each, which will bring our leased area to 75%. Ancillary revenue continues to build at each of the facilities. The Cross Lake Fiber Cable Linking Toronto and New York mentioned last quarter is being installed as we speak. This will boost our ancillary rental revenue in 2019 and beyond. I will now turn the call to Hugh for 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, there has been significant progress made at our 425 VJ project.
We have completed the interior demolition and have now started work on the addition. This project remains on track for completion at the end of 2019. In Central Canada, we are nearing the completion of the commercial component of King Portland Centre. All of the tenants have taken possession of their spaces in order to commence their fit out work. We anticipate achieving occupancy for the commercial component by the end of the year.
On the residential side, we 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. For the office tower at the corner of Front and Spadina, we anticipate to be at grade by the end of the year with the remaining buildings coming to grade through Q2 2019. We have tendered out approximately 70% of the work for the project, anticipate to procure the remainder over the next couple of quarters. For the JV project with Westbank at Adelaide and Duncan, we have begun the selective demolition of the heritage structure.
We have seen cost escalations due to market conditions and so are actively looking at ways of mitigating our risks by locking into fixed price contracts. We currently stand at approximately 50% of hard costs in fixed price contracts. For our JV projects with RioCan on College Street, we have completed the intensification of College and Palmerston and have turned our attention to College and Manning. Both projects are being managed by RioCan. In Western Canada, TELUS Sky is nearing completion.
We anticipate the 1st office floors to be turned over to TELUS in late Q1 twenty 2019 for the commercial component of the building and late in 2019 for the residential component of the building. We have adjusted our project costs and timeline to take into account the delays in delivering the space and complications experienced during construction. In Vancouver, Westbank is well underway in the excavation of 400 West Georgia. This project is progressing according to our anticipated schedule. Intensification approvals.
Our current focus for approvals is on our intensification projects in Central Canada. Our King and Spadina project with Westbank was approved by the Ontario Municipal Board in August with the final binding zoning likely to come into effect by the end of the year. This has allowed us to commence presales activity for the residential component of the project. We have seen strong demand at an unprecedented price point consistent with our pro form a. We intend to commence construction in the summer of 2019.
We continue to push for municipal approvals for Adelaide and Spenina project as well as our King and Brant joint venture project. We anticipate receiving their approvals in Q1 2019. Both projects have received great interest from potential tenants and so we are working diligently to achieve the approvals. In Western Canada, we have established a plan to redevelop the Lockheed building. We anticipate the design progressing through the end of the year with construction starting in earnest in Q1 2019.
The construction should be completed in late 2019 or early 2020. 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 network dense urban data centers is equally positive. In our last conference call, I mentioned that we were evaluating the possibility of increasing our exposure to assets where urban real estate and communications technology intersect. I also promised to follow-up in this conference call, which is what I'd like to do now.
We had 3 overriding how critical a component of Canada's communications infrastructure these assets have become. I believe we've done a good job on that in our MD and A for the Q3. 2nd, we wanted to ensure that these assets continue to be fairly and responsibly valued in our financial statements. I believe we've done a good job on that as well by ensuring that 151 Frontwest, in particular, is valued consistently with recently completed transactions in the United States. I also believe there's room for further growth in value of our urban data center assets as the income producing potential of 151 and 2 50 Front West and 905 King West continues to grow.
3rd, we wanted to develop a preliminary plan for increasing our exposure to network dense urban data centers in Canada. We've done that as well. But before I elaborate, I want to articulate our background thinking. It relates to our business as a whole. When we went public in 2,003, it was sufficient to say that Allied is in the business of consolidating Class I Workspace that is centrally located, distinctive and cost effective.
5 years later, it was necessary to add that Allied is in the business of intensifying underutilized land within its portfolio. A year later, it was necessary to add that Allied's business includes owning and operating the largest Internet exchange point in Canada and the 5th largest in North America. The need for more refined and precise articulation continued unabated from 2010 onward. In the early articulations of what we do, we made no mention of who we serve or why. In terms of the business we're now in, we serve: 1, users of urban workspace in Canada's major cities and 2, users of network dense urban data centers in Toronto.
There's significant overlap between the two groups of users as well as almost complete overlap in what we provide to them. Through our urban workspace and our urban data center space, we provide knowledge based organizations with distinctive environments for creativity and connectivity. Our workspace facilitates human creativity and connectivity in a deep and meaningful way. Interestingly, our data center space does exactly the same thing on a global basis through a vast and dense superhighway of networks. As I'm sure you've noticed, we now describe our business consistently with what I've just said.
This is a meaningful, accurate So with that as background, let me articulate our preliminary plan. First, after considerable reflection and evaluation, I consider it unlikely that we'll acquire network dense urban data centers in other Canadian cities. Downtown Toronto is so critical to Canada's communications infrastructure that there's no meaningful incentive to pursue the limited opportunities in Montreal or Vancouver. 2nd, I consider it probable that we'll drive consistent and material rental revenue growth over time at 150 and 250 Front West and 905 King West, both in terms of regular rental revenue and ancillary rental revenue. Needless to say, this will be reflected internal forecasts from 2019 onward and will be segmented in our MD and A going forward.
3rd, I consider it likely that we'll materially expand the capacity of 151 Front West when we construct the adjacent property at Union Center. The opportunity represented by Union Center deepens with the passage of time. We are now redesigning the workspace to exploit fully the remarkable opportunity inherent in the site. Furthermore, I believe the site may have considerably more development potential than we initially envisaged, a prospect that we are now exploring actively. If there's a material long term opportunity to increase our exposure to network dense urban data centers, it's almost certainly at Union Center.
A smaller opportunity may also exist at 250 Front as we have rights of expansion there. These opportunities aren't likely to be exploited within the next 2 to 3 years, but rather within the next 5 to 10 years, which I believe will prove to be the optimal timeframe. I think it follows that the expansion of our exposure to network dense urban data centers will be evolutionary rather than revolutionary, will occur organically over time and will not be executed on a speculative basis. Evolutionary though it may be, we're determined to make it happen and confident of our ability to do so. Overall, we continue to have deep confidence in and commitment to our strategy of consolidating and intensifying distinctive urban workspace in Canada's major cities and network dense urban data centers in Toronto, 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 do hope this has been a useful and comprehensive update for you. We'd now be pleased to answer any questions you may have.
Thank
And we'll take the first question from the line of Chris Couprie from CIBC. Please go ahead.
Good morning.
Good morning.
I appreciate the new disclosure on the incremental density in the MD and A. So you've identified a few new markets. I'm just curious in terms of the potential incremental density, if you have an idea of what percentage of
it would
be office commercial versus residential? And when you're looking at the potential development timeline, what were some of the what's the thinking involved in which projects were short, medium versus long term?
With respect to the first question, Chris, the vast bulk of the intensification we envisage in the future will be office space. That is what we do. The demand for it is deep. And so the vast bulk of that number will be urban workspace having the attributes that people need and want in order to attract, motivate and retain the employees they need to drive their businesses forward. In terms of the second aspect of your question, we tried to anticipate where we would direct our attention over time.
And of course, the only thing we know about the estimate is that it will somehow be wrong. But one thing I can say that helped guide us here is we don't anticipate undertaking any additional new large projects in the next 2 to 3 years. We do anticipate undertaking smaller projects in the next 2 or 3 years. And by smaller, I mean a range that would start at the low end with QRC West Phase 2 of 80,000 to 90,000 square feet at the high end, which would be Spadina and Adelaide at 200000 to 300000 square feet. Within that range, we see initiating projects not rapidly and not continuously, but we see initiating projects over the next 2, 3 years.
We expect the demand wave that is now very evident in Montreal, Toronto and Vancouver to ebb 2 or 3 years out. And so our timing would certainly have taken that into account. And I think very large opportunities we have being put into production. So it is educated guesswork, but it's based on the assessment primarily that we don't want to overcommit in the near term because we expect this wave of demand, which is very strong and very deep, has to subside or moderate 2 or 3 years out as the supply is created to meet the excess demand.
So I'm guessing that Union Center is going to be either in the medium or long term bucket Of the 1,100,000 square feet that's currently estimated on a completion, is there a component of that, that includes 151 Front Expansion? Yes. Approximately how much of that?
We haven't yet quantified that. But whereas we once thought it would be a small, if not negligible component of Union Center, we now envisage the possibility of it being a larger segment of Union Center. And it would be premature, I think, to try and quantify that other than to say we envisage it being a larger component than we did, say, 24 months ago. And the structure of the building lends itself well to the establishment of urban data center space at the base. Because at the base of the building, you don't really get good viewpoints north until you rise above 151 Front.
So that becomes ideal location for urban data center space. So I do expect it to be material, but it would be irresponsible really to project how much we would comfortable creating 5 years down the road. The other thing I will say though is we will not create that space on spec. Got it. That's not to suggest that we'll have every square foot leased up when we commit, but we will not create that space on spec any more than we will create the workspace at Union Center on spec.
Great. Thanks. I'll turn it back.
Thank you.
And we'll now move on
to the next question from the line of Mike Markidis with Desjardins. Please go ahead. Hi, good morning, everybody. First of
all, congrats on getting the move go ahead on King Toronto. Couple of questions on that project. Just with respect to the development pro formas that you've put forth in the or introducing this MD and A, can you just walk us through how that's going to work? I mean, there is a material condominium component here. So I'm just looking at the 9% to 11% return and just want to get an understanding of does that refer to the entire expected sale proceeds on the condos plus the smaller commercial component or is it just on the commercial component?
And I'll let
I'll let involving condominium space is we have envisaged the profit on the sale of condominiums effectively reducing our cost on the residual commercial component and then taken the yield on that commercial component as a percentage of the reduced cost. That's how we look at it. Although there are other ways to evaluate it. But in terms of the disclosure we've made, that's exactly how we have presented it or how we have calculated it.
Okay. So of the $313,000,000 of total cost, roughly how much of that would be attributable to the condominium component?
About 2 thirds of that would be attributable. For space, the building is broken up into about 2 thirds residential and 1 third commercial. Okay.
And would it be too early at this juncture to talk about what the anticipated development profit on the condo component would be?
That's something that we will look to disclose potentially in Q4, Mike.
Yes. The sales process is underway now. It is going very well. And as Hugh mentioned, we're achieving price points that I think are unprecedented in the market. The second phase of marketing, I believe, will begin this week.
There will be a 3rd phase. We're not yet sure whether it would be initiated this year or early next year, and that decision will depend entirely on how we think we can optimize the outcome. So it would be a bit premature to articulate the profitability of the condominium component of the transaction. But I think that's something we can responsibly do in Q4 or in conjunction with our Q4 results because we'll have very hard and almost complete data on which to base that.
Okay. And with the 50% now that's going to be transferred to Westbank to establish that partnership, will there be any funding provided by Allied for Westbank's purchase or is that just going to be a straight cash exchange?
That will be partially cash, partially funded by us with a good yield on the portion we fund.
Okay. Just switching topics then. Michael, appreciate your comments on the urban data center space and what your plans are there. It's very helpful. It seems like you seem I mean, I know this is 5 to 10 years out, but it seems like the bigger opportunity in terms of expanding would be at 151 Front in conjunction with Union Center.
I'm just trying to get a better understanding of why that might be the case relative to what you have at 250 Front because if I remember correctly, you got a material opportunity to expand your footprint there in more maybe a more cost effective way.
Agreed in every respect. I think simply in terms of magnitude, the opportunity at 250 Front is smaller. So the amount of space we can and likely will create at Union Center, that will be a literal extension of 151 Front, I think will be much larger than any additional area we can create at 250 Front. I think you do make a good point. It is conceivable that we could pursue the smaller opportunity at 250 Front sooner in time then we are likely to pursue the opportunity at 151 Front.
So of the 2, 250 might be something we can pursue more imminently, but it will necessarily be smaller in scale than anything we can create at 151 Front and will require in our view now that we expand purely on a build to suit basis rather than on a spec basis. So I just see the opportunity as smaller in scale than the opportunity that is associated with the construction of Union Center. But it is one that we could conceivably pursue sooner in time.
Thank you. I'll turn it back.
Thank you.
We'll now take the next question from the line of Jonathan Kelcher with TD Securities. Please go ahead.
Thanks. Good morning.
Good morning.
Just going back to Union Center, you said you wouldn't start that without significant pre leasing on both the data center and the office. So do you have to have sort of on both?
Yes.
Okay. And then secondly, you're just in sticking with the urban data center, you talked about potential significant rent growth. Can you quantify your thinking on that? How should we think about that going forward the next couple of years?
What I'd like to suggest again is that we provide you with more granular guidance in that regard when we report on Q4 because it will, at that point in time, be built into the 2019 internal forecast. We've obviously done a great deal of work on that, Jonathan, and I'd love to talk about it, but my colleagues might be upset with me if I did. But I do think it would be appropriate and responsible for us to provide more guidance in that regard in conjunction with our year end results. Because then literally our estimates will be baked into our 2019 and indeed into our forecast for the following 2 years. So we'll do that then.
I will only say at this juncture that we are confident in the ability of these assets to generate above average earnings growth on an annual basis in the next 3 to 5 years. But I think it's incumbent upon us to quantify what above average means. But it's the outlook is encouraging, and we'll certainly share it in a quantitative way when we've finalized our own thinking in that regard.
Okay. Now would part of that be the remaining lease up at 250 Front?
No. That's just that's part of it that's been baked in forever, if you know what I mean. This would be in addition to that.
Okay. And then and just on the Cross Lake, I guess you're going to get you're going to be able to charge on cross connects and you said in the MD and A that there you have a significant amount of them already in place at 151 Front. Is there potential longer term to be able to charge for the existing cross connects?
It's a very good question. And I think my answer would be a tentative yes, but we're really talking about the long run because the existing arrangements are arrangements that have been established with the existing users of space at 151 Front. And in some respects, the rental rate we derive from them on a per square foot basis takes cognizance of those cross connections. So we do think it will be possible in the fullness of time to change the basis upon which we charge for cross connections and to have the charges more direct. But it isn't something we can do today.
And indeed, the existing understanding between ourselves and our users, which Allied, of course, will honor, will preclude us from doing that until at the earliest point in time, the users lease is up for renewal. So the answer is yes, but it is not something that forms a significant component of our expected revenue growth in the next 5 years. It might potentially become a component of revenue growth for Allied in the 5 to 10 year time frame, but it will not become meaningful in the 1 to 5 year time frame. But there are other revenue growth areas at 151 Front, at 250 Front and at 905 King, which will grow materially, we believe, in the 1 to 5 year time frame.
Okay. Thanks. I'll turn it back.
We'll now take the next question from the line of Mario Saric with Scotiabank. Please go ahead.
Hi, good morning.
Good morning.
Just dovetailing on the last question in terms of the cross connects that exist at 151 Front today and how those may be taken into consideration from a rental perspective in the existing in place rents. Do you have any sense in terms of what the kind of longer term net potential upside may be? Like for example, if your net rent is $130 a square foot, is that reflecting the full potential of the cross connects at the building or is there additional upside above and beyond what's in the net rent today?
My view, Mario, is the current levels of net rent do not, if you will, reflect the value of the cross connects. And that's simply a function of history. So I think the opportunity, at least in theory, is material. But until we start demonstrating it in practice, I'm loathe to get overly excited about it. But I do believe that current rental rates for space at 151 Front are below market independently of the fact that the tenants are entitled to, if you will, nonrevenue generating cross connects in the Meet Me Room.
They do pay for rack space in the Meet Me Room, but that amount is modest in relation to what I'll call the market for cross connections. So I do think there is at least in theory significant potential revenue growth at 151 Front not only from the rental of space, but also from the conversion in time or the more active exploitation of the cross connections that are in place there. But as I say, we feel about growth in the next 5 years is not predicated on monetizing that enormous number of cross connections at 151 Front, but rather is predicated on establishing new cross connections there on a different financial basis and other areas of earnings growth there. So I think it's almost unwise at this juncture to begin to look forward 6 years and beyond and postulate dramatic growth, simply because there's a lot that will have to be thought through and evaluated in terms of our relationship with our users. And certainly, we don't want to do anything that would be taken amiss by the, if you will, the ecosystem of users at 151 Front.
So it's a possibility, but not one that we would even venture to quantify yet.
Okay. And then maybe a related question. Given 151 as you articulated the 151 front is expected to be a much bigger part of Union Center relative to what you envisioned 2 years ago going forward? How does that change, if at all, your optimal ownership of Union Center in terms of JV relationships
and what It's a really good question, and we've discussed that internally. I think almost certainly to the extent we have a JV partner at Union Center, which is highly likely, we will stratify the urban data center component and own it in its entirety and then share the ownership of the urban workspace component with our partners. I don't believe there's any reason for us to share ownership of the urban data center space with our joint venture partner. But there is good reason for us to do so with respect to the urban workspace.
Understood. Okay. My last question pertains to the incremental intensification disclosure that you provided, which I thought was really useful and maybe delving or pushing the envelope on some of the educated guesswork that you talked about earlier on. Of the 7 800,000 square feet that you've identified, you've noted kind of 2,100,000 square feet already in your appraised fair value. What would have differentiated what is in your appraised value today relative to the other 5,700,000 square feet?
Yes. It's really a conceptual and actual reality that Cecilia can perhaps confirm, but the way we look at it is this. If we have approval in place for intensification, that doesn't necessarily mean we recognize for the purposes of IFRS the incremental value associated with that approval. And there's one exception to that and that is where we have an asset that we intend to intensify and there is no material impediment to our intensifying, then we can recognize the incremental value resulting from approval. But a good example of this, there are numerous projects in our portfolio where we have approval in place, but we have no present intention of initiating the intensification.
And therefore, we won't recognize that value until we have that intention. Is that a reasonable description, Cecilia? Yes.
I think the bulk of it would be what's currently earmarked as future development projects in the intensification table, Mario, on Page 37. So they're not part of the current PUD, but because we have either current zoning approval or current very detailed plan to kick that off at some point in the future and we have the ability values.
Understood. Okay. And then just maybe an interesting question. In terms of that 7,700,000 square feet, how would the kind of value per buildable square foot for that look today in your opinion?
That is a good question and something that we'll take under advisement. It is difficult. It would vary, of course, from market to market. And right now, it would also be important to recognize that most of what we intend to create is office space and the value per buildable square foot for office space is lower than it would be for residential space. So we'd have to look at it on a market by market basis, and we'd have to take what I think would be the conservative assumption that it will all be built out as office space.
And when I say conservative, I mean conservative in the sense of value per buildable square foot. Obviously, given the demand for office space and given the probably term sustainability of that demand, the value for office space per buildable foot is definitely on the rise. But it wouldn't rival, for example, the value per buildable square foot for condominium residential, which just continues to skyrocket as we all know. So I wouldn't want anyone to use sort of 200 a foot and think that the that would be an accurate valuation of the buildable area. If I was to just stick my thumb up in the air and guess, which I've been known to do sometimes at my peril, we're looking at $70 dollars to $100 a foot.
And again, we'd have to be more refined than that because in Montreal, it would be lower. Clearly, in Calgary, it would be lower. Clearly, in Vancouver, it could even be higher. But I wouldn't want anyone to apply $200 a foot to that number and conclude that, that kind of unrecognized value is reposed in our portfolio. That would be too optimistic.
Understood. Okay. And the $70,000,000 to $100,000,000 a square foot, just again, very blue sky number, that would reflect the existing status of the land as opposed to like fully zoned or would that be kind of the envisioned value upon appropriate zoning?
Yes. I would say, in my opinion, there's little difference in our case between zoned and unzoned in the sense that our estimates as set forth in the MD and A are based on what we're supremely confident we could achieve on rezoning today. So even if it doesn't happen to have approval, my estimate of value would be that it's more or less identical with the value that would be applicable if approval was in place. But clearly, there's more certainty attached to an existing approval. But one thing we've learned from long experience now, when we're creating workspace in the urban environment operating within the parameters established by the current zoning, we are almost invariably successful in getting what we anticipate in terms of density and coverage.
So what Hugh and his team and the finance and asset management teams have done in the MD and A is endeavor to determine reasonably what we can achieve on these different opportunities given our experience today in getting municipal approvals in the relevant marketplaces.
Okay. Thank you for that.
No problem.
We'll now take the next question from the line of Howard Leung with Veritas Investment Research. Please go ahead.
Thanks. I just want to ask about the equity issue to pay down the line of credit. What's do you have a view on interest rates? It seems like you're shying away from variable rate debt. And if you think they're rising over time, how do you think that will affect office cap rates in the next few years?
Good question. We hate variable rate debt and have very little, if any, of it. In fact, the only variable rate debt that I believe we have is the operating line and we make a practice of fixing that on a regular basis either in terms of equity issuance or unsecured debt issuance. We do believe interest rates are on an upward trend, not dramatically, but noticeably. I don't expect the trend that we anticipate to have a material impact on office cap rates.
Urban office space is so greatly in demand that I think it is certainly buffered in relation to interest rate increases. And I don't think it would be reasonable to assume that cap rates are going to somehow rise just because and in tandem with the rise of interest rates. Clearly, if we see material increases in interest rates over time, that's going to have some impact on office cap rates. I don't think that's built into the way the market is operating now. People are paying very aggressive capitalization rates for high quality urban office space in Montreal, in Toronto and in Vancouver.
Trades are beginning to occur in Calgary. Clearly, there it's more on a contrarian basis. But I believe that the likely rise in interest rates won't materially change the capitalization rate for urban office space. Beyond urban is a different question and outside of our sphere of knowledge and understanding.
Right. No, that makes sense. And in the and for the urban data centers, I did want to ask a question there. The extra exposure this quarter was pretty helpful. On the ancillary revenues, have you started to look at the churn rates?
And I would imagine the churn rates are very low, but they are monthly contracts?
There are different forms of ancillary rental revenue in the portfolio today and looking forward. They are all very stable even though the charge for them is monthly. So to illustrate this, at 151 Front, when people run fiber from their space to the Meet Me Room, they pay for space in the conduits. They do so on a monthly basis, but no one ever doesn't renew, if you will, its monthly entitlement because nobody can Likewise, in the MeetMe room, people pay for rack space on a monthly basis, but no one ever contracts, but rather expands there again because it's that interconnectivity that allows them to achieve their overall objectives. And finally, the cross connection, the monetized cross connections similarly are charged for on a monthly basis.
And while our experience in that area is, if you will, the least long term at the moment, it again appears it's like the other 2 components in that nobody doesn't renew or doesn't extend their cross connection. If anything, the number of cross connections seems to just grow and grow and grow as the need to interconnect becomes more and more profound. And the whole movement that is underway in the world to the cloud basically is the assurance we have that the monthly cross connections, while again, in theory monthly, are really almost permanent realities. At least as this cloud evolution unfolds, perhaps down the road, if it one day peaks, it's conceivable people will cut back on their connection to the cloud. But again, I think that's more a theoretical possibility than a probable one.
Right. No, that makes sense. It seems like you think they're sticky enough that you would have also that pricing power in the future as well. Absolutely. And then just maybe one for Cecilia.
On the $650,000,000 of PUD, how much of that or how many of those 8 projects, I guess, are valued based on cost and which ones are valued based on fair value, less cost to sell?
I'm just flipping to the page, Howard. So the bulk of those so the ones where there is leasing done, which would be a lot of the larger ones, it would be a DCF model, where there isn't a certain level of leasing achieved, like over 50%, it would be largely assumption driven. So I'm not sure if that's what your is that what your question is? How are they currently undervalued? Yes.
Yes. Yes. TELUS is cost plus. That will flip into more of a DCF as we get closer to completion and we achieve a bit more on the leasing side of things. Kent Portland Center is fully leased, 425 Viger is a 3rd lease, Adelaide and Duncan is fully leased.
So all of those would be just straight up DCFs less the cost to complete.
Right. And for the well, because it's at 71% pre lease now, is that would you start using DCF? Or is it still pretty far out from from that to use cost?
I think, because of the retail component, which we're purposely keeping at 0% leased until we get closer to completion, that will still be a bit more of a hybrid. So Cushman would take the leases that we have and not have assumptions for that commercial component, but it's still largely assumption driven. And so we would need to get closer to completion to get more of a strict DCF approach. So it's still a bit of a hybrid, less the cost to complete.
Right. No, that's helpful. And I guess, there's an internal limit of kind of 15% of PUD as a percentage of GBV. And right now, it's at 8.9%, and I think part of that is the fair value risk. Do you anticipate having getting closer to that as you do more DCF fair value?
Yes. So when we look at our spend our development spending, which as you know total will total $1,200,000,000 from the beginning of 2018 through the following 5 years, we do expect that PUD percentage to peak at about 12% in 2020, and then we expect it to come down. And so as Michael said, we won't be initiating any large projects in the next 2 to 3 years. And we wouldn't want to get much north of 12% either. So that's where we see it peaking out.
We'll now take the question from the line of Matt Kornack with National Bank Financial. Please go ahead.
Hi, guys. I just wanted to quick touch operationally, your Eastern Canada and I presume it was Montreal number in terms of same property NOI growth was pretty spectacular this quarter. What's driving that? Is there anything one time? And now that the occupancy has sort of reached stabilized levels, do you anticipate what is a normal number on that portfolio?
So the Montreal same asset NOI was certainly driven by higher weighted average occupancy in the period. So 3 month comparison to 3 month comparison, we were up about 70 basis points in terms of weighted average occupancy. So it's not as much rental growth, although we are starting to see that in Montreal. It was more occupancy take up Q3 to Q3. Going forward, it will be less occupancy take up and more the smaller rent growth that we will see on renewals and replacements.
What would we expect going forward?
My expectation is that Montreal same asset NOI will moderate as we get closer to the 97% that Tom referred to this year. If we're successful getting to 97%, there will be some growth next year as the leased area converts to occupied and rent paying area. But I fully expect the same asset NOI growth in Montreal to moderate once we've got sort of full economic occupancy at the 97% level running through our income statement. It's really hard to improve or to generate occupancy gain off a 97% base. We might be able to do that in Toronto, and in fact, we clearly have.
But I wouldn't expect to be able to do that as easily in Montreal, but I do expect built in rent escalation and rent growth in Montreal would allow us to continue to generate same asset NOI growth, just not quite as material as Q3 2018.
Fair. And I was recently at a leasing conference in the city, and it sounds like for Nordelec, you're doing better than expected in terms of some of your rental rates on new leases there. Is that a fair assessment?
I think it is fair. Nordelec has leased up somewhat more rapidly than we expected at net rental rates, pardon me, somewhat higher than we initially expected. We have an opportunity at which is interesting. It's currently carried, I think, in our PUD, if I'm not mistaken. Its density of around 251,000 square feet.
And it was originally envisaged by the vendor as residential density. But we now believe given how well Nordelec has performed as a workspace venue for TAMI users in the city of Montreal, we actually are looking at developing that 250,000 Square Feet Plus as additional rental workspace at nordelec. So the results there have exceeded expectation. And we believe, especially once we get the work done that's underway at Nordelec to make it function the way it needs to for a vast number of users that will be able to expand the office space in that complex.
Matt, the Nordelec, the density that Michael is referring to is in the intensification table on Page 37.
Okay. And presumably, with Airbnb locating in a building next to you a new build, that area is becoming its own little tech office node to some extent?
It is and it's developing a great vitality and a great vibe. And Notre Dame is just it's a bit like Queen West. It just keeps going and going and going in that direction. So yes, it's becoming a wonderful node for TAMI users in the city of Montreal.
Fair. Last question for me with regards to the Kingspinina project and the retail component there. Is it fair to say that you'll lease the well in advance of actually focusing on that? Obviously, it's a couple of years after the well's completion. And would you take a similar approach as you're taking at the well where you wait towards the end of the project before you lease the retail component?
Yes and yes.
Okay. Thanks guys.
Okay.
And there
are no further questions at this time. Mr. Emery, I'd like to turn the call back to you for any additional comments or closing remarks.
Thanks, Ron, and thanks to each of you for participating in our conference call. We'll keep you apprised of our progress going forward. Have a good day. Thank you.
Ladies and gentlemen, this does conclude