Allied Properties Real Estate Investment Trust (APYRF) CEO Michael Emory on Q1 2021 Results - Earnings Call Transcript

Allied Properties Real Estate Investment Trust (OTC:APYRF) Q1 2021 Results Conference Call April 29, 2021 10:00 AM ET

Company Participants

Michael Emory - President and Chief Executive Officer.

Cecilia Williams - Vice President and Chief Financial Officer

Thomas Burns - Chief Operating Officer and Executive Vice President

Hugh Clark - Executive Vice President of Development

Conference Call Participants

Jonathan Kelcher - TD securities

Caitlin Burrows - Goldman Sachs

Michael Markidis - Desjardins Securities Inc

Jenny Ma - BMO Capital Market

Mario Saric - Scotiabank

Pammi Bir - RBC Capital Markets

Matt Kornack - National Bank Financial

Howard Leung - Veritas Investment Research

Operator

Good day, and welcome to the Allied Properties REIT First Quarter 2021 earnings conference call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Mr. Michael Emory. Please go ahead, sir.

Michael Emory

Thank you very much. Good morning everyone and welcome to our conference call. Tom, Cecilia and Hugh are here with me to discuss Allied’s results for the first quarter ended March 31, 2021.

We may in the course of this conference call make Forward-Looking Statements about future events or future performance. These statements by their nature are subject to risks and uncertainties that may cause actual events or results to differ materially, including those risks described under the heading Risks and Uncertainties in our most recently filed Annual Information Form and in our most recent quarterly report. Material assumptions that underpin any forward-looking statements we make include those assumptions described under forward-looking disclaimer in our most recent quarterly report.

Despite ongoing shutdowns across Canada, our operating and leasing momentum continue to accelerate in the first quarter of this year. We collected 97.6% of our rental revenue; of the 2.4% we deferred, we expect to collect nearly 1.5% under the Canada Emergency Rent subsidy. Same asset NOI and FFO per unit were in line with the comparable pre shutdown quarter last year, while AFFO per unit was up 3%. The quarter once again confirmed that our team, our properties, and our user base our resilience.

Cecilia will summarize our financial results, as well as discuss our balance sheet and our short-term outlook. Tom will follow with an overview of leasing and operations, Hugh will provide a development update, and I will finish with our current thinking on the future.

So, now over to Cecilia.

Cecilia Williams

Good morning. First our financial results. Our portfolio and our user base continued to demonstrate resilience to the first part of 2021. The growth in average net rent per occupied square foot of 5.3% resulted in our same asset NOI holding despite the drop in our occupancy. We are also confident in the incremental economic contributions as the remaining space of our portfolio is taken up.

Second, our balance sheet. Our NAV per unit at March 31, was at 1.1% from the same time last year, our IFRS value increments in the first quarter was $8 million and incremental capital investment of $85 million, primarily as a result of rent growth in Toronto, partially offset by continuing softness in Calgary and Edmonton.

After finalizing our green financing framework early this year, we issued our inaugural green bond with a five year term and a 1.73% coupon for total proceeds of $600 million. Having been able to take advantage of the favorable interest rate environment puts us in a great position of liquidity today. It will be late in Q3 when we start drawing on our $500 million operating lines.

At the end of the first quarter, our net debt-to-EBITDA was 7.9 times. Our total debt was 31.1% of IFRS value, and our interest coverage was 3.3 times. We estimate our developments, which have a 13-year weighted-average lease term, will increase our annual EBITDA by approximately $79 million.

Not only will this augment our earnings per unit significantly along with anticipated organic growth, it will materially reduce our ratio of net debt-to-EBITDA and materially increase our interest coverage ratio, our two most important debt metrics.

Our pool of unencumbered assets is $6.9 billion, representing 79% of our investment properties. We intend to continue prepaying or repaying mortgages as they come due, with the goal of having the majority of our asset base unencumbered. We believe this will give us the strongest, and most flexible balance sheet from both a defensive and offensive perspective.

Third, our outlook for 2021. Based on accelerating, leasing momentum in our major markets, we continue to expect low to mid single-digit percentage annual growth in FFO per unit, AFFO per unit, and same asset NOI. We expect our portfolio and our users to continue exhibiting resiliency through the balance of 2021.

I will now pass the call to Tom for a discussion of our leasing and operating activities.

Thomas Burns

Thank you, Cecilia. Within the last 12-months, in order to improve our office market coverage, we added six leasing stuff to the team two in Montreal, two in and two in Calgary. In beginning exactly one year ago, recognizing that it is never been more important to stay in touch with the market, our internal leasing team embarked on a program to strengthen our relationships with the entire brokerage community.

Every active commercial broker in each of our markets received calls from Allied. We believe this personal contact on the part of our team has been the biggest reason for our continuous leasing success.

We know that, if we can get a potential tenants to physically tour available space, the chances of leasing it are greatly enhanced. Q1 2021 was no different, with calls to the brokerage community continuing. Remarkably, the team actually completed 30% more physical tours in Q1, 2021 than in Q1 2020, which was a pre-shutdown quarter.

In all, there were 201 tours conducted in our portfolio in the first quarter and 78 transactions completed, totaling 439,000 square feet. We achieved a 5.4 increase in year one net rents, on space renewed or replaced. That is a good number, but lower than our usual increases for two reasons.

First, there were fewer deals completed in Toronto this quarter, and quite a number of deals completed in Calgary. And second, we were asked by a number of renewing tenants during negotiations to scale wins over the renewal term and not increase their rents early in the term, given the pandemic.

For long-term tenant relations, we often agree to delay an increase in rents to a year or two. Our lease areas dipped slightly in the quarter to 91.9%. There are three reasons that account for this temporary decline in the quarter. First, we had small mobbing rules in Montreal.

Second, we settled with a co- working company called Breather for seven small leases, totaling 35,000 square feet, rather than deal with the situation in bankruptcy. And third, we made small strategic terminations in Vancouver. We were optimistic about regaining lease area in the coming quarters.

The team recently tallied the amount of space currently under discussion in our portfolio, not including renewals at just over one million square feet. Montreal is leading in terms of activity because of the large lots of space available. While we will not complete all of the potential deals, we are very encouraged for future results on the level of activity today.

I will now provide leasing updates on Montreal, Toronto, Calgary, and Vancouver, and conclude with an update on our urban data center portfolio. Noteworthy transactions in Montreal during the quarter where the extension and expansion of moment factory to 80,000 square feet, and 21,000 square foot renewal with an independent gym at the RCA building.

Of interest it is the recent increase in activity from the various companies serving the film industry. We have a number of tenants in Montreal providing post-production services to the large studios in Hollywood.

As Hollywood has reopened for business, some of our tenants are arranging for more space to handle this spike in workload. This will no doubt result in an increase in LPs area in the coming month.

In Toronto, we maintained our leased area at 95.8%. We completed a new lease for 25,000 square feet at the below, and also complete a second expansion of Rose Rocket at 37 Front East adding 8,000 square feet.

In the Calgary market small spaces continue to lease the team completed a very impressive 81 tours in Q1 and lease more space and more deals than we didn’t Trump. We also managed to increase our leased area to 85% in Vancouver. We continued to deal these two properties.

As we repositioned the buildings for the long-term subsequent to the quarter, we completed a 17,000 square foot renewal at the landing with good uptick in that list, there were no leasing deals finalized that the urban data center portfolio in the quarter, but just subsequent to the quarter, we completed three deals at two 50 fronts for a total of 22,500 square feet.

Revenue will be faced commencing Q2 this year. These deals bring our leased area of 50 from 86% and our UDC portfolio to 94%. We are currently working with the transit on a transaction at one 51 front, which is completed. We will bring it to 100% lease.

We have remained unconcerned by the amount of space available for sublease in our portfolio. And can we afford to decline in the amount of space currently being offered. We express that expect this trend will continue as tenants withdraw their space from the market in favor of reoccupying.

As the year progresses, we will maintain our efforts to stay connected to the market. In recent weeks, we awarded four listings in Montreal to assist us with exposing for large lots of space. Our cold calling will continue and we expect results will be positive.

Now, I will turn the call over to Hugh.

Hugh Clark

Thanks, Tom. This quarter, we have been able to make progress on all of our major construction projects while COVID has had an impact on manpower and supply chains. We have not seen any material impact on our projects overall schedules.

All of our major projects have been exempt from any government mandated shutdown. I will begin by giving an overview of our major projects. And then we will follow that with an update on planning activity for development pipeline.

Beginning in Montreal, the team has been able to make solid advancements at our work at 400 Atlantic and 700 DLG. Our first days of vacancy upgrades is complete, and the team is focusing on leasing up the improved spaces.

In Toronto and Kitchener, despite the government’s restrictions on construction activity, we have been able to make solid progress on all of our large scale development projects. At the end of the quarter, we had reached the top floor of the main office tower at the well.

We have completed the transfer of three of the six air rights sales to our residential partners, and will complete the remaining over the next four months. The team has turned their attention to ensuring that the site is ready for tenants to start their pit at work. The first tenant begins their work in September.

At Adelaide and Duncan our partners have reached the fourth floor and continue to climb up the tower. Riocan is nearing completion at our JV project at - street and should start the lease up for this rental residential projects in the late summer.

On King Street, we have been able to excavate the majority of the site and have started the formwork for the lowest levels of the below grade. We anticipate reaching grade by the end of 2021. In Kingston, our partner perimeter continue to make good progress on our Bright Hat Phase III Phase three project. We have reached the 4th floor and anticipate construction to be completed by Q1 2022.

In Western Canada, we are nearing completion of the restoration of the building Calgary, and 400 West Georgia in Vancouver, work at the boardwalk Revelon building and Edmonton continues unabated planning activity, we have been able to make that being able to progress work on a number of future intensification projects in Montreal in Toronto this quarter.

This can include the formal submission so the first expansion of Linode Lec and the preparatory work for the two intensification projects in Toronto. The latter two submissions should be made in the following couple of weeks. The team has started the initial planning work for the intensification of the northwest corner of King and Spadina.

Despite the challenges of COVID on our workforces and supply chains, this quarter has seen solid progress made on all fronts of our development activity. Our team remains upbeat, and well prepared to ensure that we continue to push through the challenges.

I will now turn the call back to Michael.

Michael Emory

Thanks, Hugh. As I mentioned in my letter to unit holders, we continue to make small strategic infill acquisitions, principally in downtown Toronto. These afford respectable yields and augment existing concentrations with future intensification potential.

We allocated 100 million to acquisitions like these in 2020, and another 30 million in the first quarter of 2021. We expected to continue allocating relatively small amounts of capital in this way over the remainder of 2021.

As Cecilia and Hugh have discussed, we continue to our take large amounts of capital to development activities with our completion and return estimates remaining intact. We estimate the current developments will increase our annual EBITDA by approximately $79 million and have a weighted average lease term of approximately 13-years.

As we look to the future, I believe we should base our decisions and our expectations on what people actually do, not on what they say they might do. Most of the behavior I observed in 2020 and thus far in 2021 suggests that, Canadians remain committed to the city as the principal venue for living, working and playing.

Demand for urban accommodation has not declined, but rather accelerated, putting upward pressure on prices. Demand for urban office space has not collapsed, but rather remained strong, putting continued upward pressure on rental rates in Montreal, Toronto and Vancouver.

Despite the fact that urban retail users have formed the economic brunt of the pandemic, many are committing to the few strong urban locations that come available, effectively looking right through the pandemic to a strong rebound.

People are betting on and committing to the city more than ever. Far from reversing in urban intensification depend; the pandemic seems more likely to have the long-term effect of accelerating it. It follows that, we continue to have deep confidence in our strategy of operating distinctive urban workspace and UDC in Canada’s major cities.

We continue to expect our operating and development environment to be generally favorable in 2021. And finally, we continue to have confidence in our internal forecast for 2021. I do hope this has been a useful and comprehensive update for you.

We are now pleased to answer any questions that you may have. Operator.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. We will now take our first question from Jonathan Kelcher from TD securities. Your line of open.

Jonathan Kelcher

Thank you. Good morning. First question, congrats on the leasing at 250 front of what kind of tenant was that?

Thomas Burns

There were three tenants, Jonathan, actually two tenants and three reasons. So, they have been with us for a while, and another looking for more space.

Jonathan Kelcher

Okay. So then you say the least the rents commenced in Q2 and then how did they build it beyond that?

Thomas Burns

Yes. So, all of those three start at June 1st of 2021 and the other two spaces will begin contributing in Q1 of 2022 in the phase over 12-months.

Jonathan Kelcher

Okay. And then what are your prospects for the remainder of the space?

Thomas Burns

Obviously, we continue to work on that. I think we may see some expansions in the future. We are also looking to complete leasing at 250 front. So, leasing cycle for these projects is a long one, but we are constantly working on it.

Jonathan Kelcher

Okay. That is helpful. Thanks. And then just switching on the development side, you guys signed leases for block and 400 Atlantic this quarter. Do you have any, I guess, people say they are going to be transferred in Q1 of next year. Do you have estimates on the total costs and we expected yields for those two projects?

Hugh Clark

We haven’t done any deals with you here. We haven’t done any deals had 404 [prevelon] (Ph), the leases that were described in the table are existing leases, because the building was partially least, partially the lease. So that is what we are referring to in those tables. And we haven’t disclosed the, it is to be determined, we haven’t disclosed the costs yet, we are still tendering that out.

Jonathan Kelcher

Okay. You still think it will be done those by Q1 next year?

Hugh Clark

Yes.

Jonathan Kelcher

Okay. Thanks, I will turn it back.

Hugh Clark

Thank you.

Operator

Our next question is from Caitlin Burrows from Goldman Sachs. Your line is opened.

Caitlin Burrows

Hi good morning. Michael, you mentioned planning for the long-term around what companies are actually doing versus what they say, they are going to do, which I think makes sense. I was wondering, if you could talk about how the office utilization or repopulation is going so far. And then we would have to base on conversation. So based on the conversations that you are having, what is your latest thoughts on more significant repopulation timing.

Michael Emory

I’m going to have Tom elaborate on it. But generally, our tenants across the country are beginning to establish firm timeframes for re-occupying their space, which is encouraging. And there has been virtually no need expressed on the part of our tenants to transform or modify their existing spaces across our portfolio.

There is one exception to that a user that needs to in a way de-densify, the utilization of their space. And when I say de-densify. I mean, they have to remove partitions, which actually create multiple pinch points within their space.

That is the exception that proves the rule in our case, that nobody feels the need at this juncture to modify their space for the purposes of returning to the office. But Tom has been conducting those discussions with our tenants on an ongoing basis, and can probably elaborate usefully.

Thomas Burns

Yes. I tend these 15 large size users in the portfolio in various parts of the country, and their media companies, tech companies, financial services, professional services, so a wide range. And they are planning on re-occupying their space in September, October timeframe, predominantly.

And they are going to be phasing in their population, usually starting around 25%, but expect to reach full levels. And again, that depends on vaccine rollout and public health, but they expect to reoccupy to 100% by the end of the year earlier.

Caitlin Burrows

And then I just on the topic of sublease space, that is something that it looks like it peaked in the recent past 6% at the year-end and now it is down to 5.3%, with noticeable declines in Toronto and Montreal.

So I was wondering if you could go through any details of this decline, whether it was due to some of that space being actually sublease. Whether that was directly with you or the original tenant taking it back and then your expectations of the sublease space going forward.

Thomas Burns

Very little of our space has been acting sub lease, it is been taking the space back off the market, recognizing that they are going to need it. There were a lot of small tenants that decided, we are working from all let’s draw our space on the sub lease market, and see what happens. They are not getting any takers. And they realize they need it. So, it is slowly coming off, we think that trend is going to continue for the balance of the year.

Caitlin Burrows

Got it. Okay. And then maybe the last one, I think it was touched on in the prepared remarks just on the leasing spread number that you reported in the first quarter. Still up, but lower than in the past, when we you looked at the mark-to-market kind of potential that you guys show in the supplement, it does look like it could increase later in the year. So, just wondering if you could give some color on that. And to the extent you are confident in that increasing or that there could be some other risks?

Thomas Burns

I think it will increase later in the year as confidence builds a reopening momentum that takes place in the marketplace. And tenants are a little bit more flexible. We did give some tenants a little bit of a break by scaling up their rents in renewal periods. But I think as confidence builds, we will be able to see bigger increases right off the bat throughout the year?

Michael Emory

Yes, the other thing I would add Caitlin is, as the space renewed in Toronto goes up in terms of the total, so too, will the average rent increases, the ability to achieve very significant rent increases in Toronto, over are in place rents has not eroded one bps as a result of the pandemic.

So, as Tom mentioned, the lower number in Q1 was really a function of the fact that very little of the space renewed in Q1 was in Toronto. So, it does vary for us from market-to-market, in terms of the level of increase we can expect in Toronto is easily the highest.

Those numbers can approach 50% over prior in place. And we haven’t seen any pullback in the Toronto market. And frankly, Calgary is seeing more leasing activity than we expected. The rents are eroded, to put it mildly. But we can get deals done. And they do tend to represent some erosion in relation to prior in place levels of rent as we expect.

Caitlin Burrows

Got it. Okay, thanks.

Thomas Burns

Thank you.

Operator

Our next question is from Mike Markidis from Desjardins. Please go ahead.

Michael Markidis

Hi, thank you. And good morning to everybody. Just focusing back on that 5%, lease spread this quarter, just noticing within the mix, do we understand your explanation with regards to geography but there was a flat rent at $40 on any multiple leases an average of 40 which disproportionately threw off that that mix as well. And I suspect that might be due to a scale up over the course of the renewal term as expected, but just wondering if you give us a little bit more color on that particular space just given the high rent per square foot?

Thomas Burns

I would say you have hit the nail on the head like in terms of just giving the tenants the benefit of the doubt early in the term.

Michael Markidis

Okay, and would that have been specific to Toronto or just trying to get some color on where that space was?

Thomas Burns

Pretty well everywhere. In Calgary, somebody is coming up for 10-year lease, so rents are going to be lower. In Toronto, we see some tenants breaking early year break in. I would say same in Montreal.

Michael Markidis

Okay, great. Thank you. Just in terms of your leasing efforts, you guys have had pointed comments with respect to the increased activity on the leasing side, in terms of extra resources, but also extra efforts in business and reaching out to the brokerage community. In terms of tenants are looking for, is there anything that you are seeing in terms of is it unique to evolve your offering HVAC upgrades, stuff like that post-pandemic - in business on that front?

Thomas Burns

You were breaking up there for part of it, but was your question, do we need to modify our offering in the future?

Michael Markidis

Yes, I was just curious. I mean, Michael made the comment that nobody is looking to change the way their existing footprint. I’m just wondering on the new leasing side, if there is anything that tenants are looking for now that is different than what you may have seen in the past. And specifically just thinking about things like in the context of the pandemic HVAC upgrades or touchless water faucets, all that is kind of stuff that seemed to be becoming more topical with new books.

Thomas Burns

Not really. I don’t think people are as concerned about the physical office environment as they are getting to the office. So, we haven’t had many issues with respect to people’s concerns with the office environment itself.

Michael Markidis

Okay. Great. Thanks. Last one for me, before I turn it back. Just on the $79 million of EBITDA that you expect on completion of the existing pipeline. Do you have any thoughts on, based on your leasing expectations and the mix of space in that development pipeline? How long it will take you in terms of once you complete the developments to actually achieve the $79 million the rent?

Cecilia Williams

The larger projects are 100% leased or very close to 100% leased. So I’m thinking of Adelaide and Duncan is 100% leases to Thomson Reuters. Bright Hopes 3 is a 100% leased and Google, the Wells 85% leased to office component. So, I would say that, the bulk of that is based in, and you can go off the timing that we disclose in the MD&A in terms of when it will actually hit our EBITDA.

Michael Markidis

Okay, great. Thanks very much and I will turn it back.

Operator

We take our next question Jenny Ma from BMO Capital Market. Your line is open.

Jenny Ma

Thanks and good morning, everyone. Congratulations on the strong leasing quarter. I’m wondering if you could share what the average term in terms of timeframes are like, and is there a range that you can provide and hasn’t really changed from leasing activity you have seen in the pandemic front?

Thomas Burns

Not much change in terms of the lease terms. I would say, there is been a few occasions where we have elected to have shorter terms where we have had to compromise in - for shorter-term, waiting for the market to improve where we can get a bigger rents going forward. So, but generally the old page and the lease terms are quite identical.

Jenny Ma

Are you able to share what the average lease term for the leasing in Q1 was, roughly?

Thomas Burns

Don’t know it.

Cecilia Williams

Consistent with our in-place, so it didn’t change our…

Michael Emory

Yes, it didn’t go though the in place in any material way. So by implication, it is 5.6 years or something like that.

Jenny Ma

Okay, great. That is helpful. And I want to dig a little bit deeper in terms of that Toronto Calgary differential in the leasing activity. First of all, with Calgary, can you give us some more color on what kind of tenants are looking for new space right now? Does it have to do with a bit more confidence in higher oil prices or they sort of non oil and gas users? And do you see, Calgary leasing being an impact for the rest of the year was it really contained to sort of a Q1 event, either because of market conditions or just the timing of releases?

Thomas Burns

I think Calgary wasn’t as locked down the same way that we were in Israel. And I think the marketplace was more amenable to physical tours. The team turned on the tap full blast in terms of connecting with the brokers. The kind of tenants, we are seeing our tech tenants, professional services tenants, not oil and gas tenants in particular, as you know, Calgary is trying to make a big push on attracting tech and I think they are beginning to see some traction. Certainly we are. But I think the surge in activity in Calgary is attributable to the efforts we have made on personal connections with the brokers.

Jenny Ma

Okay, great. So I look at the rent roll for 2021 I guess it is Calgary, Edmonton and Vancouver all rolled up. Is there much more of less than in Calgary that might provide some downside because it looks like the average spread is pretty much flat? So is it because Calgary is rolled off, because it is Q1 leasing or is there more in there or it is offset by the events in Vancouver?

Thomas Burns

I don’t think we are going to see any more pressure on Calgary. I think it will maintain the same momentum.

Jenny Ma

Just switching gear to acquisitions. Michael, last quarter, you had talked about some potential for larger opportunities in the markets, particularly in Vancouver that you guys would be interested in? Could you give us an update on what you are seeing in the market? And, if you expect more product to be coming online, as you had indicated a couple of months ago?

Michael Emory

Yes, just to clarify what I foresaw and what I anticipated. And what I adverse it to in the Q4 conference call was the recommencement of trading of larger high quality bourbon office assets. And that has occurred, and it has occurred at price levels, identical to or even better than pre pandemic, as I expected. It is even started in Montreal, which doesn’t surprise me.

But actually, I’m most happy to see because Montreal was in many respects, the latest to really trade at an aggressive level pre pandemic and to see if we establish itself at that level so quickly. Call it so quickly following some kind of renormalization of trading is really encouraging to me.

Whether that recommencement of trading will bring large opportunities to allied or not, I don’t know. I have no wish, and no sense of urgency with respect to large acquisitions on analyze part in 2021. What I am thrilled about is the fact that we are seeing small infill acquisitions that enable us to augment existing concentrations of real significance in our Toronto market.

And they don’t represent large allocations of capital, but they are generating respectable returns. And the amount we were able to allocate in 2020, was not in material but not large at 100 million. Likewise, the amount we allocated in the first quarter was not large, but the longer term implications of the acquisitions are significant. Those are the acquisitions I want to focus on in 2021.

The fascinating thing about them, and this has become more apparent to us as we have worked our way through this unusual environment, is these are assets that would not have been available to us pre-pandemic, not because they are owned by week owners, they are not owned by week owners, but they are owned by owners who aren’t large established real estate organizations.

And what those owners did pre pandemic was entirely intelligent and correct. They ran with their game. And they have enormous gains accumulated in those smaller properties. The pandemic impressed upon them, that there is indeed risk associated with owning commercial real estate in major urban centers in Canada, and suggested to them that the wise investment conduct might be to realize that large gain and pass the assets on to larger organizations, better able to cope with the risks that is inherent in real estate ownership and operation.

So, all the acquisitions we have made in the first quarter of this year, are properties that simply would not have been available to us pre-pandemic. And that is where we see the opportunity arising for us out of the pandemic, not some for some sort of, large acquisition in Vancouver. I’m not saying one will presents itself.

But frankly, I’m less interested in that than I am in taking advantage of the opportunities that wouldn’t have come our way had the pandemic not occurred. So, trading has recommenced. The trading has occurred at cap rates, entirely consonant with the cap rates that prevailed pre pandemic.

And interestingly, and this isn’t something we anticipated initially, small acquisitions that would never have come our way, in a pre-pandemic environments are coming our way. And that is where we are focusing our energies and attention. In terms of capital allocation, the bulk of it is going to be toward development over the next two years. But if we can allocate relatively smaller amounts to these really potentially significant small acquisitions, that is where we want to go.

Jenny Ma

Great. That is a fantastic color. That actually leads to my next question on the acquisitions you completed in Q1, the one in Toronto and Calgary. I just want to be clear with the 432 Wellington assets. Is that income producing because I believe the tenant is not operating at this point for kind of leases in place for that property.

Michael Emory

Well, that is very interesting situation. It is a building on Wellington across from the wealth, one building West of our 420 Wellington, which is a building we have owned, since the REIT went public in 2003. It was run as the lease Select Bistro. It is a very popular restaurant in the neighborhood at large and has a long history in Toronto.

The operator happens to own the real estate as well, decided to retire most of the value in the business was reposed in the real estate and offered it to us. We agreed to buy both the real estate and the restaurant business.

Now let me assure you, Allied is not getting into the restaurant business. But we thought having the restaurant assets might make it more attractive to a new operator that we would attract to the property. And interestingly, it worked out exactly that way.

A major operator in this country is going to be operating the property as list select, with rent commencing on July 1st, at levels of net rents that are extremely encouraging and represents a very good return to us. The deal is structured so that we can regain access to the property after 5 years, although it is a ten-year deal, should we want to redevelop it at that point in time.

My guess is we will see that operation run for the full 10-year term of the lease. And we will re-develop that complex of properties on Wellington 10-years out. Occasionally, things do progress more rapidly than we expect, and if they do, we will have the ability to get that back 5 years from July 1st of 2021.

So, it is a perfect example of the kind of opportunity that wouldn’t have come our way and wouldn’t have been accessible had the pandemic not occurred. And it is also a transaction that validates in the fullest possible terms, the kind of retail net rents that we can achieve at -- and they are every bit as high as they were pre-pandemic, if not somewhat higher.

Jenny Ma

Okay, great. That is really interesting. And I’m pleased to hear that -- will be coming back in some form. My last question is about the preferred rents and the service component, that 1.5% other that 2.4%. I’m just wondering, given the different structure surge versus CECRA that 1.5%, is that an estimation on your part of the tenants you believe who are eligible or who are indicated to you that the eligible, or is there some sort of an agreement in place that Allied had inviting that the tenants in terms of accessing the surge assistance?

Hugh Clark

Yes. The latter. So, we have worked with the tenants. We have helped them process their applications through the program. We know the applications have been accepted and we have a commitment from the tenants to provide those funds to us on account of their rent on receipt.

Jenny Ma

So let’s describe the flow through the Allied as payment is received by the tenant?

Thomas Burns

Exactly.

Jenny Ma

Perfect. Thank you very much.

Michael Emory

Thank you.

Operator

We take our next question from Mario Saric from Scotiabank.

Mario Saric

I wanted to, for the first question, I wanted to just come back to the lease renewal spread the 5.4. Just maybe help us kind of better quantify the impact of scaling back the rent increases as you termed it. Do you have a sense of what that 5.4 would look like either on a year or two basis or on a weighted average rent over the term of the new lease?

Hugh Clark

Mario We don’t, we should actually and we will provide that, but we did not make that calculation. And in light of your question, and in retrospect, we should have. We can make that calculation, we will. And I think it is an important bit of additional disclosure. So we will provide that.

Mario Saric

And then maybe shifting over to the guidance, which was intact. I believe. The call at the start of the year was kind of a relatively flat occupancy, over the course of the year ticked down 50 to 70 basis points. But based on your commentary, it does sound like you expected to pick back up again. Is it a fair comment, to say that the expectations for the economic occupancy to be pretty consistent with our Q4 [2020] (Ph) at the end of the year?

Hugh Clark

We do expect occupancy to increase over the remainder of 2021 principally in Montreal. That is not guaranteed, but given the level of activity, given the depth of our team in Montreal, and given the relationships with the brokerage community with Tom adverse it to in his prepared remarks, we do expect to increase occupancy in our overall portfolio over the remainder of 2021 and we do expect the bulk of that increase to come from Montreal.

Mario Saric

Understood. Just on that point in Montreal, there was 90,000 square feet roughly of increased vacancy quarter-over-quarter. How much of that would you say was orchestrated by Allied versus from abroad or in general declining lease renewals?

Hugh Clark

I think and I’m going by memory and Tom can correct me. I think a big chunk of that would be part of building transformation. We will see some non-renewals in Q4 of 2021 in Montreal, which we adverted to when we discussed our internal forecast for 2021.

So we do expect well, we do know those are coming. We are making a lot of progress on them now. But I believe the bulk of, if you will, the increase in vacancy in Montreal in the first quarter was largely transformative work at Elpro and the RCA building and 400 Atlantic. So I think the bulk of that scenario was, if you will transformational rather than non-renewal or erosion.

Mario Saric

Got it, okay. And then just sticking to the guidance one last question, and it pertains to -. I think as Tom mentioned a smaller, the smaller the three pieces will commence rent and in June of this year is, is that now reflected in your intact guidance or do you continue to exclude it from your original?

Hugh Clark

It is a good question. You are right that we did not in our internal forecast, contemplate any rent increase as a result of lease up to 250 Front. So, I suppose it would be modestly incremental to our guidance, but we don’t expect it to have impact in 2020, I wanted to have material impacts in 2021. But it will certainly have material positive impact in 2022 and beyond. I think that is probably right.

Thomas Burns

I would say that is right, and in contact, I said the smallest of the three leases there, the smallest lease is about 10% or 11% of facilities. So, it is a small portion of the 22,500 square feet.

Mario Saric

I guess, what I’m just trying to understand is that the guidance is intact. And I was just curious about how you feel about the code in office portfolio today, relative to three months ago, I guess in relation to that guidance, it sounds like it is pretty consistent?

Hugh Clark

Yes, we are entirely comfortable with the internal forecast, as it relates to our urban workspace portfolio, there has been nothing that has occurred to reduce our confidence or to cause us to be more cautious. And in the, the success at 250 Front, is incremental through our internal forecasts. But as Tom points out, it is not going to be materially incremental in 2021.

If we are successful in increasing occupancy in Montreal, in the face of the renewed non-renewals that I had version - in Q3, that two would be incremental, but it would be late in the year. So, even if we are fortunate enough to get there, it would not likely have much impact on 2021, it would clearly have impact on our run rate for 2022.

Mario Saric

Okay. I wanted to shift gears to 250 Front. So, that the leasing was nice to see you on the two - on 20,000 square feet that was leased, how much capital on your entity required to prepare that space for the lease if?

Thomas Burns

There was some capital but less than normal, the first tranche were basically no capital required. And the other two modest amounts, let’s say.

Mario Saric

And I think Michael in the past you have talked about a longer term plan to commit capital through 250 in terms of increasing the capacity productivity capability, or are you at a point now where you can quantify how much capital you are thinking about how it is going to be spent and how it may impact the productivity at 250 Front going forward and the types of returns you could give me here?

Michael Emory

No, it would be irresponsible, I think to even try. Our focus, of course, is to complete the lease up to 250 Front, which happily we have finally made decent progress on in April of this year. But we are not at a point, where we would begin to plan for taking additional amounts of space from the landlord in that complex, the CBC.

And so, we are really not in a position to, in a way, anticipate or forecast or predict growth at 250 front over and beyond what we have. Even though, as we have discussed, we have tremendous power allocated there along with power at 151 front. So, the potential to increase the economic productivity of those two facilities is material. But, I don’t think, it is fair to suggest we have made any progress in that regard thus far, Mario.

So it isn’t something that is likely to have any impact on 2021. And I would be surprised if it has a material impact on 2022, to be honest. But it is a capability that exists, and it is a capability that I think we will ultimately deploy or exploited. And there is a cost of capital associated with that exploitation. But it is not imminent, I don’t think given the experience we have had in the last 12-months.

Mario Saric

Okay. And my last question is more of a housekeeping item. Parking revenue was down $1.5 million year-over-year. Do you have what sense of why the number was down in Q1 of this year?

Michael Emory

Same Mario, $1.5 million.

Mario Saric

Perfect. Okay.

Michael Emory

Thank you.

Operator

We take now our next question from Pammi Bir, RBC Capital Markets. Your line is open.

Pammi Bir

Hi everyone. Thanks. Good morning. Maybe just coming back to the other grants and leasing spreads. Have you had to perhaps step up at all in terms of whether it is induced some sort of incentives and any comments on how you see perhaps net effective rents trending over the balance of the year?

Thomas Burns

There really hasn’t been any change in the kind of incentives we have been providing the tenants on these renewals. So, we will be consistent with EMER going forward.

Pammi Bir

And have there been any instances where there are perhaps a free rent periods that might be out of the ordinary or longer?

Thomas Burns

That is a good question, but we are almost allergic to free rent periods. So, no change there.

Pammi Bir

Got it. Just maybe switching gears, thinking about the development. We have been hearing a lot about rising costs again, or maybe this is just a continuation for quite some time. But it seems, the pressure seem to be heating up. If you look at the development portfolio, the yields that you mentioned, and we can see in this. They are holding in pretty steady. Can you talk about maybe what you are seeing from a cost perspective and where do you see potential pressure on those yields going forward?

Michael Emory

Sure. I will take this. I don’t see any pressure on any of our yields during their projects, mostly just due to where we are in tendering. So, I think that, we are re-evaluating for future projects, taking into account cost escalations. But for all of our existing ones, just given where we are and what we have tendered and what we have locked in. I don’t see any impact on our yields.

Pammi Bir

Got it, thank you so much

Operator

We take now our next question Matt Kornack from National Bank Financial. Please go ahead.

Matt Kornack

Most of my specific questions have been answered, but maybe a more general one. And looking at the third-party brokerage report, it is a little counterintuitive, I guess, our intuition in terms of where the vacancy has been highest, and it seems to be in King West and East due to the sublet move, but just generally wondering how you think this all plays out in the downtown core and what the knock on effect of that may be? I know, I have been going into the office since July. And it seems the only reason to be at King in New York is to be in the office. So your thoughts generally on those dynamics and how it may impact your business going forward?

Thomas Burns

I think I can summaries that, Matt, pretty usefully. I think if we look at downtown east and downtown West were Allied, has its portfolio concentrations. I think it has a slight advantage in the context of the ongoing pandemic, and in the early stages of the reopening, primarily because they are mixed use neighborhoods with established residential populations there to in a way provides demand to the storefront retail users, and the buildings are lower rise.

So it is a little easier for people to repopulate if as he gets to the buildings in a manner that they feel is safe. But I think that advantage is temporary only. I think once the vaccination rollout achieves its level of, if you will, a distribution that is necessary for public health purposes. I think the core will repopulate and be every bit as vital as it was pre pandemic.

And the retailers, the needs, the tower complexes who have suffered so intensely during the pandemic, because the towers are empty, will again achieve the kind of sales volumes that they were accustomed to. So I don’t see any systemic erosion in the conventional central business district, at the end of this pandemic.

I think our properties may have a slight advantage in the early stages of the pandemic. But I think once we are back to normal, and I am convinced we are returning to normal now, although we are certainly not there. I think the towers will repopulate and operate just as they have, historically.

And I think the buildings east and west of the core will repopulate and operate just as they have previously. So I don’t think there is any systemic weakness in the office towers in the core of Toronto or frankly in Montreal or Vancouver, either.

Matt Kornack

And on Montreal and Vancouver, and I mean, it seems at least at this point, and everybody’s feeling similar circumstances, although to back seems to them a little bit better than the third wave. But it seems like Montreal has been more active. Is that something cultural? Is there new businesses that are being formed there are going to Montreal at the moment? Just interested in some of the divergence and leasing trend amongst the Canadian markets?

Hugh Clark

Well, in our case, it is been considerably more active primarily because we have more space to lease. In Toronto, I think our occupancy is around 97% and 98% it is quite high. And there is not a lot of occupancy gain that we can achieve in Toronto.

In Montreal, I think it is around 92% or so there is a great deal of occupancy gain that we can achieve there. So, part of the activity differential is simply the fact that we have more space to lease in that market. The other part of it, I believe is related to what Tom alluded to in his prepared remarks.

And that is the post production entities in the city desperately need more space, in order to meet the demand that all of a sudden has represented itself, from Hollywood and elsewhere in terms of the creation of new content.

One of the interesting things about the pandemic, and I was reading about this, I’m certainly no expert in this area. During the pandemic, we consumed like five years of content in one year, and all the content providers are out of content and desperately need to create new content.

So, I think that is part of what we are seeing in Montreal, Montreal is always been driven in our time there by the Tami - tenant complex. And a big part of that in Montreal, interestingly, is animation, games development and post production.

And that is been augmented by artificial intelligence. And more recently, interestingly, by the by the major tech complex, the so called game companies, which has got to be one of the ugliest back rhythms ever.

But in any event, Montreal has a lot of natural demand velocity, because it is such a successful city for knowledge based organization. So, that is the other driver in my estimation, but in our situation, specifically, it is, it is really because we got more space, at least there.

Matt Kornack

Okay, fair enough and I appreciate the color.

Hugh Clark

Okay.

Operator

Our next question, and the second last for the moment is from Howard Leung from Veritas Investment Research. Your line is open.

Howard Leung

I wanted to touch base or after both the sublease space, the table that we showed in the quarter, you show the drop, just make that is encouraging to Toronto and Montreal. Just wanted to know, I guess two things. The first is that quarter, you would, you talked about the composition of it, I think you mentioned 75% of it was, under 10,000 square feet, Is that still the case with the staff space. And the other one I want to ask is the delta between Q4 and Q1, if you have those figures, do you know how much space was added and how much space was taken off to make that etcetera?

Thomas Burns

There wasn’t much space added to the surveys market and space that was taken off. There was a couple of 30,000 footers. Only the rest were small, 535 - 7000 square footers. And we think we will see it, right.

Howard Leung

So, it sounds like it is still -- sorry go ahead

Michael Emory

One of the things we have learned is that, in major urban markets that are more advanced in the reopening, uh, the same thing has occurred on a larger scale. Most of the subleased space that came on the market during the pandemic is actually removed by the very tenants who put it on the market as they plan to re-utilize it or repopulate it.

So in London, for example, the trend that Tom articulate is much further advanced apparently, than it is here in Toronto. So based on that too, we are anticipating, as we progress toward reopening that we will see more and more of that space, at least in our portfolio and I expect in the general market as well, come off the market and being pulled by the tenants off, as opposed to leased by the tenants to sub-tenants.

Howard Leung

Right. Yes. So it sounds like the same story as last quarter, where tenants are just, they are just trying to lock-in and as things we opened, they should take it off. I guess it is still, we are still in early in 2021, but I wanted to look at the next year, given that we hope for a rebound in 2022. Looking at the leads ladder, it looks like there is kind of a bigger proportion of leases coming up for renewal, especially in Toronto. Is it fair to say, I guess if we are going to get a rebound that, the growth rate might be higher than this year in terms of same as NOI and its appropriate?

Michael Emory

Well, I’m just looking at the table on Page 38 of our quarterly report. And if I look, and make sure, I’m reading it correctly, we have got about 750,000 square feet rolling in Toronto in 2022. And the in-place rent is 21.47 and the estimated market rent is 26.63.

So that would suggest a very significant amount of growth is achievable in 2022, if our market estimates are correct. And as you know, we review those every quarter with the brokerage community on a space-by-space basis.

So that is a reasonable inference from if you will, that schedule and that chart, especially if you drill into Toronto and Kitchener, which are grouped, but Kitchener doesn’t have much overall impact on that number. It is primarily Toronto and there is a fairly respectable gap between in place and our current estimate of market rents.

Howard Leung

Right and I guess, speaking to the year one, year two renewal that you talked about. You don’t anticipate at this time to have to do that with the Toronto tenants that are expiring next year, right? I guess this is more of a Q1 2021 strategy.

Michael Emory

Yes. I would say it is something we do expect to do in 2021. And as Tom mentioned, the tenants accept the rent increases, but have asked us if we would ease them into it rather than have it occur, if you will overnight.

And in the interest of longer-term tenant relations and for tenants who have been long-term occupants of our space, we are prepared to do that. It is not a function of weakness, it is actually a function of strength and it is appreciated.

And it gives the candidate, a tough year, if you will, during which they won’t be utilizing the space to not have to withstand the rent increase. But I think, I would hope by 2022, we will not be doing that, because the tenants will indeed be using their space and have to bear the full brunt of the increase from day one.

So I think it is a very good move on the part of our operations and leasing teams who have done what we did in 2021, because most of the tenants who have agreed to these renewals are even using the space or at least not using it in any material way.

So I think it was a very good thing to do. But it wasn’t a function of weakness at all. It was simply an effort to recognize the circumstance with users who have been part of our portfolio for a long period of time, and with whom we have a very constructive and generally longer term relationship.

Howard Leung

Right, yes, I’m sure they also appreciate a - room as well. That is it for me. Thank everybody.

Michael Emory

Thank you.

Operator

And appears there are no further questions at this time. And I would like to turn the conference back to you for any additional or closing remarks.

Michael Emory

Okay. Well, thank you all for participating in our conference call. We will certainly keep you apprised of progress as we move forward. Be safe, be well, and we will be talking soon. Thanks so much.

Operator

This concludes today’s call. Thank you for your participation. You may now disconnect.