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Drop in valuations results in $499M Q4 net loss for Allied

Revenues rise, but rental and development property values down $495M

Cecelia Williams, president and CEO of Allied Properties REIT. (Courtesy Allied)
Cecelia Williams, president and CEO of Allied Properties REIT. (Courtesy Allied)

Allied Properties REIT suffered a $499.34-million net loss in its fourth quarter ended Dec. 31, in large part due to a $425-million decline in rental property valuations in Toronto, Montreal, Calgary and Vancouver and a $70-million drop in development property valuations in Toronto and Montreal.

Allied’s (AP-UN-T) rental revenue rose, however, to $150.9 million in Q4 2023 from $135.92 million in the comparable quarter a year earlier. Operating income from continuing operations was $81.87 million, up from $77.29 million during that same period.

“Our portfolio will not only hold up well in this economic environment, as it has during past downturns, it will ultimately emerge stronger than ever because of our integrated team, our operating platform, our solid financial position and our unique and concentrated urban properties,” president and chief executive officer Cecilia Williams said during a Feb. 1 conference call to present Allied’s results. 

Data centre sale strengthened balance sheet

Allied sold its Toronto data centre portfolio of freehold interests in 151 Front Street West and 905 King Street West and a leasehold interest in 250 Front Street West to Japan-based KDDI Corporation for $1.35 billion last year to strengthen its balance sheet and reaffirm its commitment to distinctive urban workspaces. 

Toronto-headquartered Allied had $10.61 billion in total assets at the end of 2023.

The REIT's year-over-year debt ratio fell to 34.7 per cent from 35.6 per cent and Allied has $1.1 billion in liquidity, according to senior vice-president and chief financial officer Nanthini Mahalingam.

“We have the financial strength to continue operating and executing our strategy with minimal reliance on the public capital market,” Mahalingam added.

Leasing activity

Allied’s occupied and leased areas at the end of the quarter were 86.4 per cent and 87.3 per cent, respectively. The REIT conducted 272 lease tours in its rental portfolio in the fourth quarter, which was 20 per cent higher than a year earlier. 

“We believe we're at an inflection point and that leasing momentum, which accelerated in the last quarter of 2023, will continue through the coming year,” said Williams, who is confident occupancy will return to the 94 to 95 per cent range, but didn’t want to provide a timeline for that to happen. 

“Our concentrated portfolio of urban workspaces in mixed-use, amenity-rich neighbourhoods continues to appeal to knowledge workers.” 

Allied leased 559,683 square feet in its rental portfolio and 50,381 square feet in its development portfolio in the fourth quarter. 

Longer leasing timelines

Senior vice-president of national operations J.P. Mackay said leasing timelines have risen from three to nine months before the COVID-19 pandemic to 12 to 18 months now.

“As of today, we have more than 1.1 million square feet of leasing activity under negotiation or at the prospect stage,” Mackay said, later adding about 60 per cent of that total is under negotiation. 

“In terms of non-renewals, it's really related to this economic environment,” Williams said. “Companies have a harder time making long-term commitments with the uncertainty in the economy, particularly interest rates.

"So as stability returns and certainty returns, we do expect our level of renewal activity to improve.”

Rents continued to rise

Average in-place net rent per occupied square foot continued to rise in the quarter, reaching $24.10. Allied continued to achieve rent increases on renewals.

While Allied will strive for flat metrics in 2024, management recognizes that they may contract by up to five per cent. 

“We’re heading into 2024 with a lower level of economic occupancy than we've ever had,” Williams observed.

The metrics are expected to contract in the first half of 2024 as no economic occupancy gains are anticipated. Management expects economic occupancy gains in the second half, but isn’t certain of the magnitude given the current macroeconomic environment.

Developments to be completed in 2025

Allied transferred 567,747 square feet of gross leasable area (GLA) from being under development to its rental portfolio, at an average in-place net rent of $35.74 per square foot, in the second half of 2023. 

The REIT will continue to transfer material amounts of GLA from being under development to the rental portfolio throughout 2024 and 2025. 

All of Allied’s development will be completed by the end of 2025, according to Williams.

“We do see the opportunity to intensify on sites that we already own with a residential component, to build out what we think is the best way to be community builders, which is with mixed-use sites,” Williams said. 

“That being said, it's not our area of focus right now. Right now we're focused on leasing and optimizing our urban office portfolios.”

Montreal redevelopment proceeds

While Allied’s development activity is concentrated in Toronto, its redevelopment focus is in Montreal.

The largest and most advanced redevelopments in Quebec’s largest city are the 344,662-square-foot RCA Building and the 956,738-square-foot 1001 Boulevard Robert-Bourassa.

Allied acquired the RCA Building in 2019 and began upgrading infrastructure and rationalizing its large floor areas, increasing temporary vacancy considerably in the process.

It had completed approximately 60 per cent of the redevelopment and leased 51,430 square feet of GLA to life science, educational and technology users by the end of last year.

Allied also acquired 1001 Boulevard Robert-Bourassa in 2019 and began transforming its public areas and full floors. It had completed 80 per cent of the transformation at grade by the end of 2023, with the remaining 20 per cent scheduled for completion by early April.

Allied also completed the transformation of nine full floors and leased 144,217 square feet of GLA, primarily to knowledge-based organizations. Another 18,000 square feet of GLA are under negotiation.

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