Allied Properties Real Estate Investment Trust (AP-UN-T) completed a successful 2018 with the acquisition of six strategic in-fill properties for $125 million at the end of the year – one each in Toronto, Calgary, and Montreal, as well as three in Vancouver.
The Vancouver acquisitions not only fit into Allied’s in-fill strategy, but give it scale in that key Western market. Michael Emory, Allied’s president and CEO, said the company is “particularly delighted to have achieved meaningful penetration in urban Vancouver at a time when it’s clearly transforming into a primary Canadian office market.”
“It has been a very active year in three fundamental respects. No. 1, development: we’ve made significant strides in removing the leasing risk from our development pipeline and that was probably our overriding objective for the year,” explained Emory.
“Second, acquisitions: we didn’t expect 2018 to be a particularly active year for acquisitions but primarily as a result of acquisitions in the second half it ended up to be quite a strong year in terms of acquisitions not only in terms of quantity but also the quality of the acquisitions.
“We really managed to pick up very helpful, strategic in-fill acquisitions in Montreal, Toronto, Calgary and, in some respects most importantly, in Vancouver which is a very hard market to penetrate.
Allied updated long-term financing
“The third area of intense activity and progress over the course of 2018 would be . . . the long-term funding of our business and all aspects of it. We did two very successful equity issuances in 2018. One in June for $300 million, one in September for $100 million, and we used a lot of that equity to retire debt. What that did for us was allow us to strengthen an already very strong balance sheet even more.
“The significance of strengthening the balance sheet relates really both to acquisitions and to development because it gives us latitude in the next four years as we complete the developments in our pipeline and as we continue to make acquisitions. It gives us extreme financial flexibility in relation to that very capital-intensive activity.”
On Dec. 14, 2015, Allied had entered into an unsecured, $150 million loan with a Canadian chartered bank for a term ending on Dec. 14, 2018. The REIT subsequently secured an upward refinancing of the loan to $250 million for a term ending in 2026 at 3.992 per cent.
“That was the final third step in 2018 in our capital allocation program,” said Emory. “It’s a year that I would characterize as a very good one for Allied.”
Going forward, Emory said, Allied’s financial situation provides defensive abilities should the market deteriorate and earnings come under pressure, as well as giving it offensive latitude in funding development activity.
Intensification in urban areas
He said Allied is intent on remaining a preferred public vehicle through which to participate in the urban-intensification trend in Canada’s major cities – which he called the most important trend in relation to the company’s business.
Emory said the pace of urban intensification is accelerating in Canada. He expects development will become a more important component of Allied’s growth as projects are completed.
“We’re focused on the major urban markets in Canada and we’ve tended to cluster our ownership in those urban areas. So we never want to own one building,” he said. “We want to own clusters of buildings close to one another.
“When we talk about an in-fill, it usually means it is adding to an existing concentration of properties, on the horizontal plain so to speak, that we consider important. It fits well within, or adds to, an existing concentration that we have in either Montreal, Toronto, Calgary or Vancouver. . . . Those are the hardest acquisitions to make because everybody knows that we want them.”
Allied’s most recent acquisitions
Here is an explanation by Allied of the properties it acquired in the latter portion of 2018:
* Located immediately west of Allied’s 662 King West and on the northeast corner of King and Bathurst in Toronto, 668 King West is a strategic acquisition giving Allied control of an underutilized corner site comprised of 17,400 square feet of land with 149 feet of frontage on King West. 668 King West includes a two-storey building with 6,934 square feet of GLA, all of which is leased. The assembly has intensification potential, though Allied does not intend to pursue this potential in the near term;
* Located in Saint-Henri, an emerging mixed-use neighbourhood in Montréal directly west of Griffintown and south of Westmount, 644 Courcelle St. is comprised of 77,289 square feet of land, 184,294 square feet of GLA in a large four-storey brick-and-beam structure and a surface parking lot for 64 cars. The building is 83 per cent leased. While it provides a stable level of rental revenue today, 644 Courcelle Street represents upgrade opportunity over the next three to five years;
* Located on the Beltline, adjacent to GM Glenbow and Webster Galleries (a Calgary joint venture with First Capital) and opposite Allied’s Cooper Block, 802 11th Avenue SW gives Allied and First Capital control of a half block fronting on 11th Avenue SW, bounded by 8th Street SW and 7th Street SW. 802 11th Avenue SW includes a single-storey building with 7,319 square feet of GLA and 19 surface parking spaces, all of which is leased. The properties also have intensification potential, though Allied and First Capital have no immediate plans for it;
* Located in Vancouver’s Yaletown and Gastown submarkets, 1220 Homer St., 151 West Hastings St. and 342 Water St. are class-I properties with an aggregate of 81,529 square feet of GLA, all of which is leased. They represent a significant addition to Allied’s portfolio at a time when urban Vancouver is transitioning into a primary Canadian office market. All tenants have net leases with regular rent escalations.
Eight developments underway
Allied said it expects to complete 10 urban development projects in the next four years with aggregate GLA (at Allied’s share) of approximately 2.3 million square feet; 175,000 of which will be in Vancouver, 311,000 in Calgary, 300,000 in Montréal and approximately 1.53 million square feet in Toronto.
In a letter to unitholders in the fall, Emory wrote Allied expects to allocate $1.2 billion to its urban development program from the beginning of 2018 to the end of 2022, with about $300 million being allocated in each of 2018, 2019 and 2020 and smaller amounts 2021 and 2022.
As of Sept. 30, Allied had the following eight properties under development;
* TELUS Sky, Calgary; office, retail, residential; 218,000 square feet GLA on completion;
* King Portland Centre, Toronto; office, retail; 136,320 square feet GLA on completion;
* 425 Viger, Montreal; office; 300,000 square feet GLA on completion;
* Adelaide & Duncan, Toronto; office, retail, residential; 228,000 square feet GLA on completion;
* The Well, Toronto; office, retail; 746,000 square feet GLA on completion;
* King & Spadina, Toronto; office, retail; 115,000 square feet GLA on completion;
* The Lougheed, Calgary; office, retail; 92,600 square feet GLA on completion; and
* College Manning, Toronto; retail, residential; 30,300 square feet GLA on completion.
Those eight properties totalled 1.87 million square feet.
Focus on four major Canadian markets
Emory said the company will continue to focus “intensely” on completing the developments currently in Allied’s pipeline.
“I don’t see us undertaking a material amount of new development at the moment. I think we’re benefiting from a huge wave of demand in the marketplace. I think that wave will begin to subside probably in 2021, 2022 as the supply is created to meet the demand,” he said.
“So I don’t see us starting large new developments at this juncture. But I see us as continuing to work very hard to complete the very significant amount of development we have underway and I think the conditions are very favourable.
“I see us continuing to consolidate properties which is just a fancy way of saying buying properties that make our portfolio stronger with focus on the four major markets – Montreal, Toronto, Calgary and Vancouver. And I see us continuing to ensure that we have the greatest amount of financial flexibility in terms of executing our strategy as possible.
“Part of that of course is determining the optimal point in time to raise equity and exploring other ways of funding our activities.”