Allied Announces Third-Quarter Results
TORONTO, Oct. 30, 2024 (GLOBE NEWSWIRE) -- Allied Properties Real Estate Investment Trust ("Allied") (TSX: "AP.UN") today announced results for the three months ended September 30, 2024. "Our occupied and leased area remained steady for the second consecutive quarter, and our urban workspace portfolio continued to outperform the market," said Cecilia Williams, President & CEO. "With demand rising in Canada's major cities, we expect our leasing activity to accelerate over the remainder of the year and into 2025."
Operations
Allied's portfolio is comprised of three urban workspace formats. Allied Heritage is a format created through the adaptive re-use of light industrial structures for office use above grade and retail use at grade. The buildings are inherently distinctive, clustered in the urban core and generally low-rise. Allied Modern is a format created specifically for office use. The buildings are generally mid- to high-rise, clustered in the urban core and distinctive by virtue of design, integration with heritage structure and/or integration with the different elements of mixed-use, amenity-rich urban neighbourhoods. Allied Flex is a limited format for buildings that Allied intends to redevelop comprehensively within a five-to 10-year period. Because of the near-term transformation of these buildings, Allied can make workspace in them available on more flexible than normal terms.
Utilization of, and demand for, Allied's workspace continued to strengthen in the third quarter. In the Montréal rental portfolio, demand for storefront retail space and Allied Heritage was most pronounced. In the Toronto rental portfolio, demand across all three formats was strong, giving rise to a 1.5% increase in leased area. In the Calgary and Vancouver rental portfolios, demand for Allied Heritage was most pronounced.
Allied conducted 266 lease tours in its rental portfolio in the third quarter. Its occupied and leased area at the end of the quarter was 85.6% and 87.2%, respectively. Allied renewed 60% of the leases maturing in the quarter, closer to its normal level of 70% to 75%.
Allied leased a total of 640,331 square feet of GLA in the third quarter, 617,743 square feet in its rental portfolio and 22,588 square feet in its development portfolio. Of the 617,743 square feet Allied leased in its rental portfolio, 174,065 square feet were vacant, 100,342 square feet were maturing in the quarter and 343,336 square feet were maturing after the quarter. 94,262 square feet of the vacant space leased in the quarter involved expansion by existing users, a long-standing trend in Allied's rental portfolio that appears now to be regaining momentum.
Average in-place net rent per occupied square foot continued its steady improvement, ending the third quarter at $25.30. Excluding a short-term renewal at an Allied Flex property in Toronto, Allied maintained rent levels on renewal in the third quarter (up 0.5% ending-to-starting base rent and up 10.3% average-to-average base rent).
Results
Operating income from continuing operations was $83 million, up 4.2% from the comparable quarter last year. Allied's net loss and comprehensive loss was $94 million, in large part due to fair value adjustments on investment properties, Exchangeable LP Units and derivative instruments.
With temporary downward pressure from Allied's recent portfolio optimization transactions at 400 West Georgia in Vancouver and 19 Duncan in Toronto, FFO(1) was $75 million (53.5 cents per unit), down 10.5% from $84 million (59.8 cents per unit) in the comparable quarter last year. AFFO(1) was $65 million (46.6 cents per unit), down 14.5% from $76 million (54.5 cents per unit) in the comparable quarter last year. This resulted in FFO and AFFO pay-out ratios(1) in the third quarter of 84.1% and 96.6%, respectively, and year-to-date of 82.4% and 91.2%, respectively. Same Asset NOI(1) from Allied's rental portfolio was down 3.1% while Same Asset NOI from its total portfolio was up 1.1%, reflecting the productivity of its upgrade and development portfolio.
_____________________________________________________________________________(1) This is a non-GAAP measure and includes the results of the continuing operations and the discontinued operations (except for Same Asset NOI, which only includes continuing operations) and excludes condominium related items, financing prepayment costs, and the mark-to-market adjustment on unit-based compensation. Refer to the Non-GAAP Measures section below.
Non-Core Property Sales and Portfolio Optimization
Allied has made steady progress this year in selling non-core properties at or above IFRS value. This includes the completed sale of three properties in Montréal for $51 million, the net proceeds of which were used to repay short-term, variable-rate debt. It also includes the pending sale over the remainder of the year of five properties (including the TELUS Sky reorganization) for approximately $142 million, the net proceeds of which will be used for the same purpose.
In the first half of 2025, Allied intends to sell additional non-core properties at or above IFRS value for approximately $200 million. Management expects to use the bulk of the net proceeds to repay the $200 million series C senior unsecured debenture due on April 21, 2025.
Debt Financing and Balance-Sheet Optimization
Just prior to the end of the third quarter, Allied completed the offering of $250 million aggregate principal amount of series J senior unsecured debentures for a term of four years bearing interest at 5.534% per annum. The proceeds were used to repay short-term, variable-rate debt.
Allied has obtained a commitment for a $63 million first mortgage on 375-381 Queen Street West in Toronto for a term of five years bearing interest at approximately 4.7% per annum and a $100 million first mortgage on 425 Viger Street West in Montréal for a term of five years bearing interest at approximately 4.9% per annum, the net proceeds of which will be used to repay short-term, variable-rate debt over the remainder of the year. Allied and Westbank have obtained a $180 million first-mortgage financing commitment on 400 West Georgia in Vancouver for a term of five years bearing interest at approximately 4.75% per annum, the net proceeds of which will be used to repay the current short-term, variable-rate facility. These three financings will materially reduce Allied's annual interest expense and extend the term-to-maturity of its debt.
Allied and Westbank have obtained a commitment for $100 million of first-mortgage financing on the residential component of TELUS Sky with the intention to obtain a higher amount of CMHC-insured financing in due course. Allied and Westbank are working toward finalizing a commitment for approximately $340 million of CMHC-insured, first-mortgage financing on 19 Duncan in Toronto for a term of 10 years bearing interest at approximately 3.5% per annum. With funding scheduled for the first quarter of 2025, the net proceeds will be used to repay the current construction financing and will materially reduce Allied's annual interest expense and extend the term-to-maturity of its debt.
"We're committed to maintaining and ultimately improving our access to the debt capital markets and will continue to manage our balance sheet accordingly," said Michael Emory, Founder & Executive Chair. "We're also committed to growing our FFO and AFFO per unit going forward. These commitments are mutually reinforcing, well within our operating capability and responsive to the rightful expectations of equity and debt investors."
Outlook
Thus far in 2024, Allied experienced steady demand for urban workspace, urban rental-residential space and urban amenity space, as well as strong and quantifiable engagement among users of space in the Allied portfolio generally. Management expects this to underpin a slow but steady return to earnings and value growth in 2025 and beyond.
Financial Measures
The following tables summarize GAAP financial measures for the three and nine months ended September 30, 2024, and 2023:
For the three months ended September 30
(in thousands except for % amounts)
2024
2023
Change
% Change
Continuing operations
Rental revenue
$
146,593
$
138,455
$
8,138
5.9
%
Property operating costs
$
(63,364
)
$
(58,558
)
$
(4,806
)
(8.2
)%
Operating income
$
83,229
$
79,897
$
3,332
4.2
%
Interest income
$
10,302
$
14,887
$
(4,585
)
(30.8
)%
Interest expense
$
(31,361
)
$
(27,447
)
$
(3,914
)
(14.3
)%
General and administrative expenses (1)
$
(2,141
)
$
(5,964
)
$
3,823
64.1
%
Condominium marketing expenses
$
(17
)
$
(137
)
$
120
87.6
%
Amortization of other assets
$
(390
)
$
(388
)
$
(2
)
(0.5
)%
Transaction costs
$
(136
)
$
—
$
(136
)
100.0
%
Net income (loss) from joint venture
$
450
$
(908
)
$
1,358
149.6
%
Fair value loss on investment properties and investment properties held for sale
$
(47,359
)
$
(126,253
)
$
78,894
62.5
%
Fair value (loss) gain on Exchangeable LP Units
$
(57,983
)
$
44,757
$
(102,740
)
(229.6
)%
Fair value (loss) gain on derivative instruments
$
(16,689
)
$
11,186
$
(27,875
)
(249.2
)%
Impairment of residential inventory
$
(32,082
)
$
(15,376
)
$
(16,706
)
(108.6
)%
Net loss and comprehensive loss from continuing operations
$
(94,177
)
$
(25,746
)
$
(68,431
)
(265.8
)%
Net loss and comprehensive loss from discontinued operations
$
,
$
(8,212
)
$
8,212
100.0
%
Net loss and comprehensive loss
$
(94,177
)
$
(33,958
)
$
(60,219
)
(177.3
)%
(1) For the three months ended September 30, 2024, general and administrative expenses decreased by $3,823 or 64.1% from the comparable period. This was primarily due to the fair value adjustment on the total return swap of $3,676 on unit-based compensation plans. The fair value adjustment on the total return swap is added back in the calculation of FFO defined in REALPAC's "Funds From Operations (FFO) & Adjusted Funds From Operations (AFFO) for IFRS" issued in January 2022.
For the nine months ended September 30
(in thousands except for % amounts)
2024
2023
Change
% Change
Continuing operations
Rental revenue
$
436,920
$
413,082
$
23,838
5.8
%
Property operating costs
$
(192,829
)
$
(177,920
)
$
(14,909
)
(8.4
)%
Operating income
$
244,091
$
235,162
$
8,929
3.8
%
Interest income
$
34,676
$
34,856
$
(180
)
(0.5
)%
Interest expense
$
(84,724
)
$
(76,808
)
$
(7,916
)
(10.3
)%
General and administrative expenses (1)
$
(15,959
)
$
(16,848
)
$
889
5.3
%
Condominium marketing expenses
$
(117
)
$
(449
)
$
332
73.9
%
Amortization of other assets
$
(1,150
)
$
(1,118
)
$
(32
)
(2.9
)%
Transaction costs
$
(136
)
$
—
$
(136
)
100.0
%
Net income (loss) from joint venture
$
1,737
$
(1,491
)
$
3,228
216.5
%
Fair value loss on investment properties and investment properties held for sale
$
(211,534
)
$
(278,081
)
$
66,547
23.9
%
Fair value (loss) gain on Exchangeable LP Units
$
(472
)
$
55,267
$
(55,739
)
(100.9
)%
Fair value (loss) gain on derivative instruments
$
(13,031
)
$
18,519
$
(31,550
)
(170.4
)%
Impairment of residential inventory
$
(38,259
)
$
(15,376
)
$
(22,883
)
(148.8
)%
Net loss and comprehensive loss from continuing operations
$
(84,878
)
$
(46,367
)
$
(38,511
)
(83.1
)%
Net income and comprehensive income from discontinued operations
$
,
$
124,991
$
(124,991
)
(100.0
)%
Net (loss) income and comprehensive (loss) income
$
(84,878
)
$
78,624
$
(163,502
)
(208.0
)%
(1) For the nine months ended September 30, 2024, general and administrative expenses decreased by $889 or 5.3% from the comparable period primarily due to fair value adjustments on the total return swap on unit-based compensation plans of $1,993. This was partially offset by lower capitalization to qualifying investment properties of $779 primarily due to the directly attributable employee costs related to the disposition of the UDC portfolio in 2023. The fair value adjustment on the total return swap is added back in the calculation of FFO defined in REALPAC's "Funds From Operations (FFO) & Adjusted Funds From Operations (AFFO) for IFRS" issued in January 2022.
The following table summarizes other financial measures as at September 30, 2024, and 2023:
As at September 30
(in thousands except for per unit and % amounts)
2024
2023
Change
% Change
Investment properties (1)
$
9,667,178
$
9,717,184
$
(50,006
)
(0.5
)%
Unencumbered investment properties (2)
$
8,386,958
$
8,342,560
$
44,398
0.5
%
Total Assets (1)
$
10,930,951
$
11,274,187
$
(343,236
)
(3.0
)%
Cost of PUD as a % of GBV (2)
10.7
%
11.6
%
—
(0.9
)%
NAV per unit (3)
$
43.76
$
49.83
$
(6.07
)
(12.2
)%
Debt (1)
$
4,321,654
$
3,834,573
$
487,081
12.7
%
Total indebtedness ratio (2)
39.7
%
34.2
%
—
5.5
%
Annualized Adjusted EBITDA (2)
$
394,432
$
416,068
$
(21,636
)
(5.2
)%
Net debt as a multiple of Annualized Adjusted EBITDA (2)
10.7x
7.9x
2.8x
—
Interest coverage ratio including interest capitalized and excluding financing prepayment costs - three months trailing (2)
2.3x
2.5x
(0.2x
)
—
Interest coverage ratio including interest capitalized and excluding financing prepayment costs - twelve months trailing (2)
2.5x
2.5x
—
—
(1) This measure is presented on an IFRS basis.(2) This is a non-GAAP measure and includes the results of the continuing operations and the discontinued operations. Refer to the Non-GAAP Measures section below. (3) Prior to Allied's conversion to an open-end trust, net asset value per unit ("NAV per unit") was calculated as total equity as at the corresponding period ended, divided by the actual number of Units and class B limited partnership units of Allied Properties Exchangeable Limited Partnership ("Exchangeable LP Units") outstanding at period end. With Allied's conversion to an open-end trust on June 12, 2023, NAV per unit is calculated as total equity plus the value of Exchangeable LP Units as at the corresponding period ended, divided by the actual number of Units and Exchangeable LP Units. The rationale for including the value of Exchangeable LP Units is because they are economically equivalent to Units, receive distributions equal to the distributions paid on the Units and are exchangeable, at the holder's option, for Units.
Non-GAAP Measures
Management uses financial measures based on International Financial Reporting Standards ("IFRS" or "GAAP") and non-GAAP measures to assess Allied's performance. Non-GAAP measures do not have any standardized meaning prescribed under IFRS, and therefore, should not be construed as alternatives to net income or cash flow from operating activities calculated in accordance with IFRS. Refer to the Non-GAAP Measures section on page 16 of the MD&A as at September 30, 2024, available on www.sedarplus.ca, for an explanation of the composition of the non-GAAP measures used in this press release and their usefulness for readers in assessing Allied's performance. Such explanation is incorporated by reference herein.
The following tables summarize non-GAAP financial measures for the three and nine months ended September 30, 2024, and 2023:
For the three months ended September 30
(in thousands except for per unit and % amounts)(1)
2024
2023
Change
% Change
Adjusted EBITDA
$
98,608
$
104,017
$
(5,409
)
(5.2
)%
Same Asset NOI - rental portfolio
$
73,892
$
76,221
$
(2,329
)
(3.1
)%
Same Asset NOI - total portfolio
$
84,495
$
83,574
$
921
1.1
%
FFO
$
77,645
$
83,719
$
(6,074
)
(7.3
)%
FFO per unit (diluted)
$
0.556
$
0.599
$
(0.043
)
(7.2
)%
FFO pay-out ratio
81.0
%
75.1
%
