Allied Properties REIT has decided to offer its downtown Toronto urban data centre (UDC) portfolio for sale following a review of options for the three properties.
In an announcement Monday morning, Allied reports “selling the portfolio in its entirety now is optimal financially and operationally.” It has retained Scotiabank and CBRE to market the assets and facilitate any transaction.
“Our principal motivation here is two-fold,” said Michael Emory, Allied’s president and CEO, in the announcement. “First, we want to reaffirm our mission and pursue it over the next few years with low-cost capital.
“Second, we want to supercharge our balance sheet and reduce our dependence on the capital markets going forward.”
Proceeds from a sale would be utilized primarily for debt reduction and to finance its development activity, the release states. The REIT could also use some of the proceeds to repurchase units under its NCIB.
The Toronto data centre portfolio
The network-dense, carrier-neutral data centres are located at 151 Front St. W. and 905 King St. W. (freehold interests) and 250 Front St. W, (leasehold interest) in Toronto.
The portfolio is unencumbered and does not include 20 York St., the site for Union Centre.
The properties are connected via high-count diverse fibre, which Allied claims allows it to support more telecommunication, cloud and content networks than any other Canadian data-centre portfolio.
The trust entered the sector in 2009 when it acquired 151 Front St. W., the largest internet exchange point in Canada and one of the largest in North America. It has expanded the portfolio by retrofitting portions of 905 King St. W. and 250 Front St. W.
Emory confirmed in the announcement Allied wants to stay committed to its main focus as an owner and operator of urban workspace in major Canadian cities.
“Our UDC portfolio was connected to our mission from the beginning, but it is not core to our mission in the way urban workspace is,” Emory said in the announcement. “As a stabilized asset in a currently favoured sector, the portfolio represents a promising and timely monetization opportunity, one that could enable Allied to grow its business going forward in the most flexible and prudent manner.”
Allied wants balance sheet flexibility
The announcement also notes Allied has worked to maintain flexibility in its balance sheet. During the past three years, the trust states, it has funded upgrade and development activity and taken advantage of “compelling in-fill acquisition opportunities that would not have arisen in a stable economic environment.”
During the first three quarters of 2022, Allied reported $845.3 million in acquisitions and had $203.9 million allocated to development.
It remains committed to its strategy, but that activity has pushed its debt metrics to the high end of where management wants it to be – despite an already fairly conservative strategy concerning debt.
The REIT is also now operating in a higher-interest-rate environment, with predictions a recession could be looming.
As of Q2 2022, Allied reported a total indebtedness ratio of 34.3 per cent (interest coverage ratio of 2.9 times; net debt as a multiple of EBITDA 9.6 times). It had about $9.5 billion of unencumbered assets among its $10.8 billion in assets.
The sale of the UDC portfolio would allow it to bring its leverage “squarely within target ranges” and set the table for further growth as development completions over the next few years improve earnings.
Allied management says it expects interest savings from the transaction to offset the decline in earnings which would result from a sale.
About Allied Properties REIT
Allied is an owner and operator of urban workspace in Canada’s major cities and network-dense UDC space in Toronto.
The trust, which is also based in Toronto, has a diverse portfolio of properties across Canada valued at $10.8 billion as of Q3 2022. It has about $1.5 billion in its pipeline of properties under development.
Allied says it mission is “to provide knowledge-based organizations with workspace and UDC space that is sustainable and conducive to human wellness, creativity, connectivity and diversity.”