Allied Properties REIT (AP.UN-T) will spend $400 million to purchase two Montreal office properties, the almost million-square-foot 700 De La Gauchetière Street West from Dream Office REIT (D.UN-T), and the 343,579-square-foot RCA Building.
Allied is paying $322.5 million for 700 De La Gauchetière, and $80 million for the RCA Building. Allied says the purchases are conditional on regulatory approvals, but that it has completed its due diligence on the properties.
To finance the equity portion of the purchases, as well as several smaller acquisitions which have recently closed, Allied will issue a $300-million stock offering.
In a release announcing the deal, Allied said the purchases add to its portfolio of 18 urban properties in Montreal comprising 4.3 million square feet of leasable space. Among the other holdings are 5445 and 5455 de Gaspé Ave. (969,558 square feet), Cité Multimédia (958,849 square feet) and Nordelec (877,376 square feet).
“Montréal has emerged as a premier urban environment in Canada for knowledge-based organizations,” Allied says in the release. “This derives in large part from the number and quality of the institutions of higher learning in the city. The scale and quality of the built-legacy in Montréal has also contributed to its remarkable emergence in the past decade.”
Comprising over half a city block bounded by de la Gauchetière West on the north, 600 de la Gauchetière Street West (currently the head office of National Bank of Canada), Viger Avenue West and Robert-Bourassa Boulevard, 700 DLG is in the southern portion of Montréal’s downtown core.
It is close to Allied’s 425 Viger Avenue West, which is being expanded and retrofitted to provide “distinctive urban workspace” to knowledge-based organizations. Fifty per cent of that property is pre-leased to a global knowledge-based organization and Allied said the balance is expected to be pre-leased shortly.
About 700 De La Gauchetière
Completed in 1983 for Bell Canada, 700 De La Gauchetiere is comprised of 935,866 square feet of GLA and 693 underground parking spaces. It is 96 per cent leased.
Like many of the properties, Allied has upgraded in Montréal and elsewhere, 700 De La Gauchetière has large floor plates (34,000 square feet), 14-foot floor-to-ceiling height and column spacing which favours the open planning required for contemporary urban workspace.
“Our business is defined not so much by the specific workspace format we own, operate and develop, but rather by the workspace users we serve on an ongoing basis,” said Michael Emory, president & CEO of Allied, in the release. “If any particular format enables us to serve knowledge-based organizations better and more profitably, we’ll seriously consider it and, in the right circumstances, do it.”
The possibility exists to create an additional workspace and urban-data-centre space by transforming portions of the existing structure above and below grade.
Through a user-led transformation, some of the workspace in 700 De La Gauchetière has recently been improved in similar fashion to the environments that Allied develops, owns and operates in major Canadian cities. Allied said the renovations are similar to workspace occupied by Ubisoft, Framestore and Sun Life Financial at Allied’s 5445 and 5455 de Gaspé.
The company intends to both work with existing and future users to continue this workspace transformation, and transform the extensive public and common areas at 700 De La Gauchetière. The three- to five-year time frame for this work is designed to continue to appeal to knowledge-based tenants and increase asset value.
On closing, 700 De La Gauchetière will be subject to a first mortgage of $148 million at a 4.2 per cent annual interest rate. The term expires on October 1, 2022, while amortization is over a 25-year period.
Located on the north side of Saint-Antoine Street West, between Lenoir Street and Lacasse Street, the RCA Building is part of Saint-Henri, a mixed-use neighbourhood west of Griffintown and south of Westmount.
It is very close to El-Pro Lofts, which Allied acquired late last year. Well-served by public transportation, Saint-Henri is known for older structures that can be adaptively re-used for distinctive urban workspace. Notre Dame Avenue connects Saint-Henri to Griffintown and to Old Montréal.
As an example of its potential, Allied said the area is evolving much the way King Street West did in Toronto from 1996 onward.
A class-I structure with a long and rich history, the RCA Building is comprised of 220,535 square feet of land, 343,579 square feet of GLA over five storeys and a surface parking lot for 215 cars. Approximately 107,000 square feet of the land can be intensified in time.
The building is 82 per cent leased to a diverse group of knowledge-based organizations, many of which continue to expand within the building. Allied also intends to upgrade this property over time.
On closing, the RCA Building will be free of mortgage financing. Allied will fund the purchase via the share offering.
Allied’s other recent acquisitions
Allied has also completed $101 million in acquisitions in Toronto, Kitchener, Calgary and Vancouver in 2019.
It will use the balance of the net proceeds of the share offering to repay its unsecured line of credit; effectively funding the equity component of its acquisition program in the first half of 2019 with the net proceeds.
A syndicate of underwriters led by Scotiabank, RBC Capital Markets and Goldman Sachs Canada Inc., will serve as joint bookrunners. The bought-deal offering comprises 6,240,000 units at $48.15 per share.
An over-allotment option allows for the purchase of an additional 936,000 units on the same terms and conditions.
Closing of the offering is expected to occur on or about June 19 and is subject to regulatory approvals.
On closing of the offering and over-allotment, Allied expects its total indebtedness ratio will be 28.3 per cent, its net debt as a multiple of annualized adjusted EBITDA will be 6.6:1 and its interest coverage ratio will be 3.4:1.
Allied says its portfolio, on closing of all transactions, will reach $4.4 billion.
Dream also selling Ottawa office asset
In addition to selling 700 De La Gauchetière, Dream said it is in advanced negotiations to sell its office property at 150 Metcalfe St. in Ottawa. It plans to proceeds from these potential dispositions will be used to repay debt, invest in its capital and development program and potentially repurchase shares.
Once the sales are complete, Dream will no longer own any properties in the Ottawa or Montreal regions. It will increase its presence in the downtown Toronto and Greater Toronto Area to approximately 86.5% of its portfolio.