Allied Properties Real Estate Investment Trust (APYRF) CEO Michael Emory on Q1 2022 Results - Earnings Call Transcript

Allied Properties Real Estate Investment Trust (OTC:APYRF) Q1 2022 Earnings Conference Call April 28, 2022 10:00 AM ET

Company Participants

Michael Emory - President and Chief Executive Officer

Cecilia Williams - Executive Vice President and Chief Financial Officer

Tom Burns - Executive Vice President and Chief Operating Officer

Hugh Clark - Executive Vice President, Development

Conference Call Participants

Scott Fromson - CIBC

Jonathan Kelcher - TD Securities

Mario Saric - Scotiabank

Gaurav Mathur - IA Capital Markets

Jenny Ma - BMO Capital Markets

Mark Rothschild - Canaccord

Operator

Good day and welcome to the Allied Properties REIT First Quarter 2022 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Michael Emory, President and Chief Executive Officer. Please go ahead, Mr. Emory.

Michael Emory

Thank you, Justin and good morning everyone. 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, 2022. 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.

Allied’s first quarter results met or exceeded expectations with AFFO per unit and average in-place net rent per occupied square foot rising to record levels. Cecilia will summarize our financial results. Tom will follow with an overview of leasing and operations. Hugh will provide a development update and I will finish with our thinking on capital allocation.

So, now over to Cecilia.

Cecilia Williams

Good morning. I will summarize our Q1 results disclosure enhancements, the balance sheet and our ESG program. First, our Q1 results, FFO per unit of $0.61 and same asset NOI of 2% came in as expected for the quarter. AFFO per unit came above expectations at a record high of $0.56. Our forecast for 2022 of low to mid percent growth in each of these three metrics remains intact. Our occupied space continues to be increasingly productive. Average in-place net rent per occupied square foot is up 4% from a year ago to $25.13.

We expect this trend to continue as our occupied space increases over the course of the year. We enhanced our disclosure this quarter. With our most recent acquisition, we reached 1 million square feet in our Vancouver portfolio, representing early-stage critical mass. Accordingly, we are reporting on Vancouver independently of Calgary and Edmonton. We also added disclosure around the timing of NOI contribution from our development completions before the impact of decapitalization, which is included on Page 66 of the MD&A.

On to our balance sheet. The acquisition from Choice Properties will improve our debt-to-EBITDA ratio going forward. In terms of liquidity, we currently have access to $475 million on our operating lines before exercising the $100 million accordion. We are in a position to meet our commitments well into 2023 with our lines. On to ESG, we are currently developing our plan to a net zero carbon pathway. It will be outlined in our third annual ESG report, which will be released in July.

To summarize, commitment to our strategy and our balance sheet is unwavering. Execution by our team through our operating framework has been unwavering. In fact, the business has not only exhibited resilience through this time of uncertainty, but it’s grown and continued to evolve as we pursue our strategy in ever-expanding ways.

I will now pass it to Tom for a discussion of our operating and leasing results.

Tom Burns

Thank you, Cecilia. Despite the full lockdown in Montreal in January, we had a very good start to the year, completing 94 transactions totaling 440,000 square feet. Average net rents achieved on renewals or replacements in Q1 were 16.6% higher than average rents in the expiry term. Our leasing teams are motivated. We just had an experienced leasing manager in Vancouver. We have upgraded available space wherever possible to speed up the leasing process. We have completed a show suite at 1001 Robert-Bourassa and Montreal. We have made a few adjustments with our listing brokers across the portfolio to ensure that we have the best possible teams on every assignment and we are determined to move our leased area stats up meaningfully. There is currently a good action in all markets, which I will describe shortly.

Reviewing some information provided by CBRE on the Canadian office market as of March 31. I note that Allied is doing well relative to the market. We have lower vacancy rates than the downtown markets in every one of the cities in which we operate, except Vancouver. We are higher than the market in Vancouver by only 1.5% and that’s likely to change soon.

Before getting to a general update on leasing in our major markets, I thought it might be informative to provide a brief update on the 30 days post-closing of the Choice portfolio. The operations and leasing teams have been fully engaged in the weeks leading up to closing and we are able to hit the ground running absorbing these buildings into our systems seamlessly. We also onboarded 14 new employees with these acquisitions.

Post-closing, we completed a 3-year extension to Ontario Health previously Cancer Care at 525 University Avenue for 74,000 square feet. We completed a short-term extension with NRC at 1185 West Georgia for 5,900 square feet. We completed a 4-year deal for the last remaining office vacancy at 1508 Broadway. We are currently negotiating a short-term deal with a fitness club at 1185 West Georgia for 25,000 square feet and expect to finalize in early May. Early day discussions with medical-related use for 60,000 square feet at 175 Bloor, we started dialogue on lease renewal rental rates with Omni Hotels for 20,000 square feet at 1010 Sherbrooke. We have had many meetings with a major brokerage firm still in process of awarding listing assignments in 4 of the 6 projects.

I will now provide a general update on leasing activity in Montreal, Toronto, Calgary and Vancouver and will conclude with an update on our urban datacenters. Starting in Montreal, the team completed 38 deals and leased about half space leased in the quarter. With a very slow start to the year, the momentum is building every month. We completed two deals for a total of 77,000 square feet at 111 Robert-Bourassa and we completed a deal with an existing film industry tenant for 15,000 square feet at 740 Saint-Maurice. Just subsequent to the quarter, we leased 30,000 square feet to a marketing company in blocking a freestanding building at our RCA project.

We also just agreed to terms with a tech company for 40,000 square feet at 3575 Saint-Laurent with potential to grow to 60,000 square feet. As for what is next in Montreal, an existing tenant at Citi Multimedia has just reengaged in dialogue for 60,000 square feet of expansion at 111 Robert-Bourassa. We are also working with a life science tenant for 30,000 square feet at RCA and we are working with two companies for a total of 35,000 square feet at 400 Atlantic.

Moving to Toronto, at The Well completed a deal with a tech company for 62,000 square feet and also with a prominent music industry tenant for 26,000 square feet. We reported last call that we were negotiating a deal with an existing tenant, currently located at King-Spadina for 55,000 square feet at 185 Spadina. Over the course of those discussions, the tenant decided to concentrate more employees in Toronto and now require 120,000 square feet. And we are in active negotiations with this tenant at The Well. We have 3 other tenants interested in various sizes for the last available space in the project. One way or another, we expect to be 100% leased in the office component of The Well very soon.

In Calgary, we are maintaining 86% leased area, which in the context of that market is good. We completed 10 transactions in the quarter and have seen good activity at Telesky on the last remaining build-type suite and are working on an existing tenant to expand by 18,000 square feet. If we complete these transactions, we will be at 75% leased in that office component. We have made good progress at Vintage Towers in the Beltline and now we are 94.5% leased. In Vancouver, we are at 91% leased with good activity on available space.

To add further color to the comments on leasing in our workspace portfolio, in addition to the negotiations already noted, we currently have 600,000 square feet of interest in the early stages. And finally, we are 95% leased at our urban datacenter portfolio in Toronto. We are currently working on a transaction with an existing tenant to build all the remaining vacancy at 250 Front and expect to be able to announce a deal on our next call.

I will now turn the call over to Hugh.

Hugh Clark

Thanks, Tom. This quarter has seen the team reach a major milestone on one intensification project and significant advancements on a number of other current and future development projects. I will begin by giving an overview of our major projects and then we will follow back with an update on the work we have done on our development pipeline.

Construction activity. Beginning in Toronto, the Building Inspector has signed off on partial occupancy for the office tower at The Well. This will permit the tenants to occupy the spaces in the tower once they have achieved their own occupancy. This was a major milestone and the culmination of 10 years of work on this project for a number of key members. The remaining buildings are targeting occupancy over the next couple of quarters. The retail tenants will begin their fit-up work starting in Q2.

Work on our other projects in Toronto and Kitchener continues unabated. We have reached grading at King-Toronto and the expansion of QRC West and we will now start to see work progressing above grade. At Adelaide & Duncan, team continues to push towards partial occupancy in Q3. At the Breithaupt, our partners are completing the majority of base building work and will hand the space over to Google to start their fixturing in early Q2.

In Montreal, work continues on the upgrading work at 400 Atlantic, 1001 Robert-Bourassa and RCA. In order to address the needs of the Montreal market, we have decided to expand the work being done 400 Atlantic to include turnkey options for tenants. This has resulted in our pushing out of the date for 400 Atlantic being transferred out of the box. At 1001 Robert-Bourassa, the team has completed the model suite on the second floor. The work clearly demonstrates what we are capable of achieving with this building and is a useful tool for the leasing team to attract potential tenants.

In Western Canada, work continues on Boardwalk-Revillon. Like at 400 Atlantic, we have decided to provide turnkey options for tenants. This decision has already resulted in 1 week build being completed and a number of other potential tenants are indicating a preference for our building over other spaces in the markets.

Planning metrics. This quarter has seen a number of significant events for our future intensification projects. To begin with, in Toronto, we have completed the purchase of Great Gulf’s half interest in our King & Brant project. With full control of the projects, we are advancing the plans to improve the offering to better suit the knowledge-based users that we intend to serve. This includes adjustment design to reduce the carbon footprint and potentially achieving net zero carbon certification, exploring the use of hybrid wood and steel construction and the conversion of the condominium component of the project to rental residential. We are excited about the potential of this project and intend on bringing it to the market in the fall.

In Vancouver, we have entered into a joint venture with West Bank for the fourth phase of their main alley installment. This JV consists of a 200,000 square foot office development in the Mount Pleasant neighborhood. The project is already 50% leased to a major tech tenant. We are excited about the potential of this project, aligning with our transition plan for adopting low carbon design, our ability to serve users and life sciences as well as our expansion in Vancouver. We expect this project to take approximately 2.5 years to complete from the beginning of this year. I will keep you updated on the progress of the project going forward.

The team has also advanced work on the approval of other future intensification projects in Toronto. While we had hoped to achieve approval for our [indiscernible] by fall, it now looks to be likely given in the new year due to the fall municipal election. We should also achieve approval in The Castle earlier in the new year. The team has advanced work on the approval of our project at the corner of King & Spadina with a formal commission having been committed just subsequent to the end of the quarter. The team is excited about the advancements on the active construction projects as well as the future intensification opportunities. With the purchase of the Choice Properties portfolio, the team is gaining work on establishing plans for a number of those buildings. Our work at 1001 Robert-Bourassa will be instrumental understanding the potential that some of these buildings hold and how we can transform the user’s experience.

I will now turn the call back to Michael.

Michael Emory

Thank you, Hugh. At the end of the first quarter, as others have alluded to Allied completed its largest acquisition ever, along with its largest equity issuance ever with the equity being issued at $50.30 per unit, our NAV per unit at the end of 2021. We published our preliminary vision for integrating these 6 properties into our large focused and distinctive rental portfolio. The vision document is available on our website, and I’d urge those of you who haven’t looked at it to spend a few minutes to go through it. In my opinion, an important industry theme this year will be the large-scale rebalancing of diversified portfolios in Canada between strong and experienced real estate entities.

Allied’s acquisition at the end of the first quarter was an excellent example of just that. It represented an important and compelling strategic refinement for Choice Properties and a significant and well-conceived expansion of operating capability for Allied. Allied intends to remain within two capital allocation guide rails this year. The first is not to increase our ratio of net debt to annualized EBITDA in funding discretionary acquisitions. The acquisition from Choice Properties, as Cecilia noted, actually improves this ratio. The second is not to issue large amounts of equity significantly below NAV per unit in funding such acquisitions. Again, we paid approximately 75% of the purchase price to Choice Properties by issuing equity at our NAV per unit as at year end 2021. Clearly, we can make large discretionary acquisitions within the articulated guide rails.

Allied did not utilize its ATM program in the first quarter of 2022. We currently have over $475 million available on our revolving credit facility with another $100 million available through the accordion feature. This liquidity is more than sufficient to meet all of our current commitments over the remainder of 2022 and well into 2023. Allied is intent on growing its business, not shrinking it, all with a view to serve knowledge-based organizations more comprehensively and more profitably over time.

Given our proven strategy and ability to execute, we will continue to allocate capital with a view to consolidating the ownership and operation of distinctive urban office and storefront retail space, which we aggregate into the term urban workspace in Canada’s major cities. We believe that our strategy is underpinned by the most important secular trends in Canadian and global real estate. We also believe that we have the properties, the financial strength, the people and the platform necessary to execute our strategy for the ongoing benefit of our unitholders and our many other constituents. I hope this has been a useful and comprehensive update for you.

We would now be more than pleased to answer any questions you may have.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question today will come from Scott Fromson with CIBC.

Scott Fromson

Hi, good morning, folks.

Michael Emory

Good morning.

Scott Fromson

You gave a pretty comprehensive overview. So I have just some very minor questions. Just wondering how TIs have been trending? Is there any changes with leases currently under negotiation? And how does it compare with comparable periods, say, early in the pandemic and pre-pandemic?

Tom Burns

I would say that TIs have maintained their level throughout. The only difference is in some cases, as alluded to in the speaking notes, we’ve elected to provide some build-out suites, which actually comes along with the corresponding rent increase for us. But generally, TIs have been more or less the same.

Scott Fromson

Okay, thanks. And of the leases maturing in 2022 and into 2023, is any of the GLA earmarked for this transitional portfolio?

Michael Emory

That is a good question, Scott. I don’t think any of us can answer that [indiscernible] kept remind me doing that, there is a large space of coming back that needs to be upgraded.

Cecilia Williams

I don’t think there is anything material coming maturing.

Michael Emory

Yes. Certainly, nothing occurs to me, although it’s something we should look at carefully so we can answer the question more confidently.

Scott Fromson

Okay. And final quick question. Have any of the users at The Well or future users of The Well put any committee – committed space up for sublease?

Hugh Clark

I don’t believe so. I think that there was talk of one doing it at one stage, but I don’t believe there are any.

Tom Burns

I think the architects were thinking about it, putting one floor on, but it’s not clear yet whether they, in fact, are prepared to put that on the market. And that’s a relatively small tenant and a good one. But I know they were thinking about putting half of their space on the market. And I don’t know whether they have done that yet or not. We certainly haven’t had to compete against it. That I know for sure.

Scott Fromson

That’s great. Thanks very much, I will turn it over.

Operator

And our next question will come from Jonathan Kelcher with TD Securities.

Jonathan Kelcher

Thanks. Goo morning. First question, just to clarify, Tom, in your remarks, did you say you’re in discussions with 600,000 square feet of space right now?

Tom Burns

Yes. The comment was at the end of the further work space comment, and it was just to suggest that there are lots and lots of conversations taking place, and the total was about 600,000-odd square feet across the portfolio at the very early stages. There is a lot of interest at the moment.

Jonathan Kelcher

Okay. I just wanted to clarify that. On The Well, obviously, good leasing action there for you guys and I guess you’ll get the space that Shopify gave back leased up pretty soon. Can you maybe give us a sense of what the difference on rate that you expect to get on that space versus what Shopify had under contract?

Tom Burns

I’m so glad Jonathan, you asked that question. We should see a $15 per square foot uptick in rent on the 90,000 square feet that Shopify didn’t take up.

Jonathan Kelcher

Okay. And what sort of percentage increase is that?

Tom Burns

That’s almost 50%.

Jonathan Kelcher

Almost 50%. Okay.

Michael Emory

Maybe like 15% on 35%, right, roughly, so 40%. And Jonathan, just to clarify what Tom said in regard to The Well, there is roughly 120,000 square foot – feet remaining to lease, including the 90 that Shopify did not exercise their option on. And we’re in the very fortuitous position of having a single tenant seriously considering the 120,000 square feet at roughly $15 above what Shopify was obligated to pay. And then in addition, there are three tenants with an aggregate of 120,000 square feet in the same position, if I understand, the where we achieve the change. So we are at – just so you know, this is why we’re speaking with extreme confidence. A, that the remainder of The Well is for all practical purposes leased; and b, that we will get a $15 uptick in relation to what Shopify was obligated to pay under its lease.

Jonathan Kelcher

Okay. That sounds very good. And then just lastly, turning to the balance sheet, you guys do have a fair amount of floating rate debt. Maybe what’s your thought process on hitting the unsecured market? And what sort of term would you be looking at right now if you were to do it?

Michael Emory

Well, the only floating rate that we have, Jonathan, would be the facility we recently put in place to pay down the line. And the reason it’s floating is because it gives us complete optionality going forward. It has a 3.5-year term, if I remember correctly, we can always fix the rate if we consider it advisable to do so. But we’re going to let it float because that gives us the option of prepaying without any cost. And if the bond market was to improve we might consider repaying with the proceeds from an issuance in the bond market. Similarly, if our cost of equity was to improve, we might consider repaying it by issuing equity. So what I like about the floating rate in this particular instance is it gives us real optionality over the next 6 to 12 months as to how we permanently finance, if you will, that $300 million or $400 million facility. And we wouldn’t normally be interested in variable rate, as you know. And as you likely point out, but in this instance, we were very interested in the variable rate, primarily because it gave us complete optionality going forward in terms of either fixing the rate on the existing facility or repaying it with debt raised in the bond market or equity raises in the equity capital markets. And of course, now we don’t know which of those three alternatives, we might elect, but having the ability to elect them in light of ongoing changes in the environment is really valuable to us.

Jonathan Kelcher

Okay, that’s helpful. I will turn it back. Thanks.

Operator

And our next question will come from Mario Saric with Scotiabank.

Mario Saric

Thank you and good morning.

Michael Emory

Good morning.

Mario Saric

Out of curiosity, what happened during the quarter that led to higher-than-expected AFFO internally?

Michael Emory

I suppose it would be two things. Number one, the NOI growth was solid and as expected, our parking revenue improved not quite to pre-COVID levels, but close. And then finally, the – our regular leasing CapEx was probably lighter in the quarter because most of our leasing costs actually in 2022 and onwards will be related to income enhancing rather than regular leasing expenses. So we will have significant leasing expenses in 2022, but a very significant component of them will relate to improving the revenue-producing potential of the properties actively being upgraded, particularly those in Montreal. And just for the record, the three in Montreal that I’m alluding to in that regard with the RCA, El Pro and the 1001 Robert-Bourassa.

Mario Saric

Okay. And then maybe switching gears to the kind of market rent and occupancy. Just on the occupancy side, I can appreciate the expectation for a meaningful uptake as Tom was noting in the commentary. In the shorter-term, do you think internally that Q1 leased an economic occupancy represented trough?

Michael Emory

Do I think it has troughed in Q1 of 2022? Is that the question?

Mario Saric

Yes. That’s it.

Michael Emory

The answer is yes, with one possible exception, and that is at 1001, we will be taking space back on the upper floors. Again, as part of our repositioning program, I don’t know how we will characterize that, Mario, we haven’t really had the time to determine that. But that could – that only could have a negative impact on our occupancy over the remainder of 2022. Nothing else that I’m aware of, can and will. And certainly, we’re becoming more confident with each passing week or month of our ability to achieve our leasing objectives for 2022. But we are going to be taking back four or five floors at 1001 Robert-Bourassa. But I don’t look upon that as, if you will, vacancy, that’s really part of a repositioning program. And it’s one that will take the form that we’ve described at some length at 1001 with Robert-Bourassa where the floors transformed magnificently from chalked up, ugly, light-entrapped space into open very well eliminated very spacious cubically and otherwise. And we’ve got to make that transformation before we can re-lease the space on the terms we know we can now achieve in the market. So that would be the only thing that might hit numerically in 2022. But as I say, that’s part of a long-awaited repositioning program that we’re now fortunately in a position to execute very, very successfully. And we know the demand is there. But we’ve got to make the transition first before we can lease the space.

Mario Saric

Got it. And just on those four or five floors, is there a target of return on capital that you’re looking at? Or is that difficult question to answer insofar as it’s part of the overall bigger redevelopment at the property. Like how should we think about the return associated with repositioning the space?

Michael Emory

It’s a little difficult to articulate in isolation, but what I can say that is useful is that we do expect to achieve on that project, the kind of spread we would achieve on a development. And as you know, Mario, from long conversation with us and others, we won’t do anything if we don’t think we can achieve at least a 150-basis point spread to the cap rates. And I’m very confident actually, of our ability to achieve at least that in relation to 1001. It’s going to be most likely achievable at the end. I don’t know whether any segment about four or five floors we will get there. But what we’re targeting, we’re basically looking upon that to perform like a development for us. That our total cost will get us to the point where there is at least a 150 to 200 basis point spread between the unlevered yield and the actual cap rates that we could sell to building out in the market. And we are encouraged certainly by the cap rate end of that equation in the Montreal market. It has traded more strongly, more rapidly than I would have expected in Montreal, Vancouver has traded rapidly and strongly, but that was no surprise at all. And I think Toronto is not going to be a surprise either. But I was amazed to see how rapidly the demand to buy urban office space reasserted itself in the city of Montreal, and it’s far from over. It’s just starting.

Mario Saric

Okay. Just two more quick ones, just first on market rent. And then the last one just on the comments in the letter to unit holders that you made. So on market rents, like some of the brokerage of CBRE put quarterly data stats and actually showed market rents coming up a little bit in Toronto, but that could be impacted by changing composition in terms of new supply coming on board and so on and so forth. It looks like your estimated market rent came down a little bit versus Q4, but it seems like most of that is related to Calgary. So if we just step back and say if 3, 6 months ago, you were – you had space in the market, let’s say, 25 net in your core portfolio in Toronto, like what are you asking for today on that space? Has changed materially or significantly in either direction?

Tom Burns

I want to understand the question, Mario, you’re asking whether or not we’re confident that we will continue to see rental uplift in the strong market because...

Mario Saric

So not so much the positive lease spreads, but rather the actual kind of underlying market rent for your assets or for your portfolio. Does that change in either direction quarter-over-quarter over the past 6 months?

Tom Burns

I think that they held on very, very well. There is a limited supply in a lot of the product that we have.

Michael Emory

My sense is, and Tom, you’re more active on a daily basis, certainly than I am. But my sense is the level of rent, our core Toronto portfolio commands has not eroded one bit and really has continued to grow through the pandemic, maybe somewhat more modestly than it would have in a different environment. But it appears to me to have continued to grow. We’re just not letting anything go at a low rate. We just aren’t doing it. And it’s not because we’re so tough or so smart, we just don’t have to. There is always someone there to take the space. And we will always wait for the level of rent that we believe our portfolio can command. This is why I think our average in-place net rent per square foot keeps going up quarter after quarter after quarter. Because basically, there is not a huge gap between what we expect for our space, and what the market is prepared to pay.

Tom Burns

Nobody is lowballing us. We don’t see tenants coming to us with really lowball numbers at all.

Michael Emory

One of the things to appreciate about our leasing world, and it’s very interesting, and we’ve all lived it now for probably 5 or 6 years. Price is never what we negotiate. And again, it’s not because we’re confident because the market is pretty well understood by the intermediaries. So the real issue for us is always whether our space meets the requirements and aspirations of the employer. If it does, the market is pretty efficient at determining what our space is worth. And we just don’t lose business over price. And in fact, I can think of an example, which I don’t mind sharing, there was a major marketing firm located on Bloor Street who looked at The Well for a reasonably big requirement, maybe 200,000 square feet, maybe more. And it was clear that deal was being run out of New York by people who didn’t know anything about the market. And the only thing they care about is was price. So we basically sent them down to the innovation center on the waterfront, where they could get a good cheap space. I’m kidding, we didn’t send them there, but that’s where they went. But that’s what they were looking for. They didn’t care about anything else with price, and we have no wish to have them in The Well, and we didn’t need to. So our rental rates have not eroded. If anything, they continue to grow. And as we’ve said, at The Well, they continue to surprise us on the upside.

Tom Burns

The big conversation there was about an ability to expand. These are largely tech companies, and they are interested in how they can grow and the advantage we have is we can expand these tenants within our portfolio, maybe no in the building that they are in, but certainly elsewhere in the portfolio. And a perfect example is the one I cited where we’ve got a tenant and 25,000 square feet at King-Spadina, wanted to grow. Plus, they needed 55,000. We’re interested in 185 Spadina, very keen, super interested. All of a sudden, they said that’s not going to be big enough for us. We need more space. Okay. We know about this space that Shopify aren’t taking. Let’s talk about that, and we’re getting close to a deal. So it’s really a tenant is interested more on the building or anything.

Michael Emory

And the Toronto market, it’s really efficient. Like nobody steals space from anybody and nobody grossly overcharges for space. The established sophisticated users are very well advised and the intermediaries in Toronto are very, very good. It’s an efficient market. There are very, very few price SKUs in high-quality urban office space. It’s just retail can be a little more subjective, but office the, if you will, the buyers are very well advised and the sellers know exactly what they are doing and exactly what needs to be done.

Historically, for us, it used to be whether our mixed-use amenity-rich urban neighborhood was more important to the tenant than access to the underground path. And there are very rational reasons for preferring both. It was never about cost it was whether the environment suited the users of the building better. If it did, the tenants were coming to us. If it didn’t, they were going to the conventional towers. And again, that’s very rational. It depends on what the user needs and wants for its people. And we even lost Apple, I think, to – they came out of Mississauga, we thought, for sure, they would come to our portfolio. We have a relationship with them in Vancouver. And they went to the South Core because connection to the path system which I consider to be rather imperfect in the south core, but nonetheless, it exists. It was more important to Apple than being in a mixed-use amenity-rich urban neighborhood which is where we have our concentration and strength. So that tends to be more determinative of where people end up than pricing. Nobody as I say – I should say, very few projects succeed by being cheaper. It just doesn’t work that way anymore. They succeed by being better able to serve the needs of the user. And the user will pay the price because it’s an efficient market.

That’s probably more of an answer to last quarter, Mario, but it is an interesting, and you see we’re living this. And I just know our rents are not eroding. They are actually increasing. And Toronto is where – well, Vancouver, they are increasing at a crazy level as well. So some – but Toronto is super strong. Montreal the increases are much more temperate. It’s a different market. The demand velocity is different. But fortunately, also, there is no new supply being created in any meaningful sense. So it’s different in that perspective.

Mario Saric

Yes, the conviction and enthusiasm coming out loud and clear. So I appreciate that. Just my last question, I just want to come to, Michael, your comment on the large-scale rebalancing diversified portfolios in Canada being a key theme this year. You’ve done the Choice deal. Is that kind of suggesting that there could be other larger-scale opportunities to build the portfolio and your market on the horizon?

Michael Emory

Well, and I want to be careful not to create anxiety in the listeners, but I know that in 2022 and probably 2023, a lot of rebalancing is going to occur. And there is sort of two basic categories of rebalancing as I see the market. There are the weak aggregators who have had to disaggregate and to rationalize themselves back to something sustainable going forward. I don’t see that affording any opportunity for Allied at all. Nothing of interest there. But I think it’s going to be a significant part of the trading volume in 2022. And I think that real estate is going to find its way into stronger hands or maybe put differently, more appropriate hands. And I think that’s good for the market generally, and it’s also good for trading volumes. And it also reflects, I think, the reality of ongoing demand on the part of different investors for different assets. I think the pension fund interests are also going to be rebalancing from a position of very considerable strength, not from a position of weakness because they probably consider themselves overweight Canada. That is definitely going to elicit opportunity for buyers, whether it elicits opportunity for Allied remains to be seen. I’m inclined to think it will. But as I say, it remains to be seen.

Choice is a similar transaction in my mind, and it is one of the reasons I expected to see what I alluded to in the first quarter conference call. But what I don’t know is whether the opportunities that will come forward will fit Allied’s focus or not. If they do fit Allied’s focus, we will certainly look at them and determine whether it’s appropriate for us to allocate capital to them at that point in time under those circumstances. I can imagine that it will be, but I can imagine equally that it won’t be. And as I’ve said to investors for some time over the course of 2022, investors are very aware of what we did in terms of acquisitions. Investors are completely ignorant of what we haven’t done or what opportunities we haven’t pursued over the last 20 years. And believe you me, if an opportunity isn’t right for us at the point in time that it presents itself to us, we will pass without blinking an eye, we have a lot to do as it is. And we are dedicated to and excited about doing it. So we are not going to make acquisitions just for the sake of making acquisitions ever. We never have, and I think that’s one of the reasons we have one of the most coherent portfolios in all of public real estate in Canada. And we intend to see that continue. But if something will make us a better provider of distinctive urban workspace in Canada’s major cities, we will look at it. If it’s opportune for us to allocate capital to it, we will do it. If it is an opportunity for us to allocate capital to it, we will pass knowing that another deal will come 2, 3, 4 months later, as interesting or more interesting. So our goal is to consolidate and to continue to consolidate. Our goal is not to shrink as I said shrinking is of no interest to me. But we will only consolidate if it represents appropriate capital allocation for Allied given its history as a pretty good allocator of capital, in my opinion. Again, a little more than you asked for Mario, but what the heck, I thought I would give you an answer.

Mario Saric

Again, the enthusiasm and conviction is coming out loud and clear, so I appreciate the detail on all the questions. Thank you.

Operator

And our next question comes from Gaurav Mathur with IA Capital Markets.

Gaurav Mathur

Thank you and good morning everyone. So, given the demand velocity for class higher brick-and-beam space in the MTV cities and the inherent flight to quality, in your opinion, is there any potential upside in the current environment to the targeted occupancy of 94%?

Michael Emory

Are you asking Gaurav, whether we hope to achieve more than 95% occupancy – 94% occupancy on a stabilized basis?

Gaurav Mathur

Yes.

Michael Emory

I want to answer that carefully, because I get myself in trouble all the time by overpromising. And I really want to avoid that. I do think on a fully stabilized basis, it’s not unreasonable for us to expect our portfolio to be above 94% occupancy. But I do not think there is any realistic possibility of our getting above 95% occupancy in 2022. I wish there was. But I think that alone is – it’s not a stretch goal, but it’s not a low bar either. That is an ambitious goal that we have established for ourselves and are committed to, but we can’t lively have that happen. We are going to have to work very hard and have some good outcomes in order to get there.

Gaurav Mathur

Okay. Thank you for that Michael. And my final question and I am going to change gears here. Now the Choice Properties deal comes off as a win-win for both sides. And given your comment on rebalancing in the Canadian REIT landscape, are you thinking of using the LP units mechanism a lot more for future acquisitions, just so you can stay within your capital allocation guardrails?

Michael Emory

It’s a good question and a fair question. And until we did the Choice transaction, we had never conceived of that mechanism as something we could avail ourselves on a large scale. But I think what the Choice transaction has taught us is we can actually execute that kind of transaction on a large scale. And it does have real value to a seller in terms of deferring significant amounts of capital gains and recapture tax as long as you believe in Allied’s units and Allied’s business. So, I don’t want to suggest we are going to see an avalanche of transactions like this, but it’s a possibility that we recognize more fully. And if approached by an owner of assets that fit our investment and operating focus that was prepared to trade on this basis, we would now look upon it with more favor and more confidence and be better able to exploit that opportunity. So – and frankly, there are elements of that kind of transaction that I really like in terms of allocating capital and building Allied’s operating capability. So, I am not sort of signaling to the world, please come talk to us. But it wouldn’t surprise me. Nobody has yet, just to be clear. But if people did approach us over the remainder of the year and into next year on that basis or perhaps even we approach others on that basis, that wouldn’t surprise me either. So, once the possibility becomes apparent, it simply becomes part of how you view the opportunities that you have as a business. And for sure, we see this as a very good model for transacting between sophisticated parties, who can understand the implications and derive the benefits from this kind of, if you will, utilization of units as currency.

Gaurav Mathur

Thank you, Michael. I will turn it back to the operator.

Michael Emory

Thank you.

Operator

And our next question comes from Jenny Ma with BMO Capital Markets.

Jenny Ma

Thank you and good morning.

Michael Emory

Good morning.

Jenny Ma

I appreciate the discussion on the guardrails for capital allocation. And I am wondering, in terms of the ATM, how should we think about it under this new context? Is it something that falls outside of the guardrails just given that it’s fairly small in quantum, or is it something you put aside given that the Choice portfolio transaction allows you to, I guess use up your equity and therefore the ATM is not necessarily a tool you need to use to for now?

Michael Emory

It’s a good question and a fair question. And we have consistently responded to it by saying it does not fall outside guardrails. It is not an exception. We would – we will to raise very considerable and very substantial amounts of equity through our ATM. But we won’t do it at prices significantly below NAV per unit. So, it does not fall outside the guardrails. It falls squarely within it. The dry run in the fourth quarter I could argue, fell outside those guardrails, because we just wanted to see how that system worked, and we were very encouraged with the results. But we didn’t even consider using the ATM in the first quarter, because it – certainly pre-announcement of the Choice transaction, we were nowhere near NAV per unit. And even as we began to rise toward NAV per unit subsequent to announcing the Choice transaction, then the whole market got distracted understandably with all kinds of uncertainties and anxieties, which I fully understand. So, it – just to be clear, it does not fall outside the guardrails.

Jenny Ma

Okay. Great. That’s very helpful. Turning to the IFRS cap rate in particularly, the UDC portfolio, the cap rate on that has been pretty flat for almost 2 years now. We saw a gap down by over 40 basis points this quarter. I am just wondering if you can give some color on what drove that, were there some other transactions that it was being marked again? So, is it a bit of a catch-up as had it moved in a while? Anything would be helpful there.

Cecilia Williams

Sure. There was a transaction involving QTS that was announced late last year and closed earlier this year. And so that provided the appraisers with another data point. They always look at 1 Wilshire and 60 Hudson as the comparable properties to our UDC assets, even though they are not directly comparable, but they are just as unique, let’s say, as our UDC assets. So, with that transaction, it did make them and us more comfortable in bringing down the cap rates across the board.

Jenny Ma

Okay. So, that was the key driver of that?

Cecilia Williams

Yes.

Jenny Ma

Great. And then lastly, at the last call, you talked about the potential for the CBC building to transact, do you have any update on that front, particularly as it pertains to Allied and your options?

Michael Emory

No. We really have no update at all, but I will say three things in an effort to be helpful. One, we have not reached agreement with CBC on the acquisition of 250 Front, and I do not know whether we will or not. Number two, if we do a transaction won’t occur until late 2022 or early 2023. And number three, if we do, we have multiple options in terms of how we fund such an acquisition and we will not go outside the guardrails to do that deal. But there is no new information, Jenny, on that transaction. And frankly, I am quite happy that the public process that CBC and CBRE felt the need to go through is over and whether it will result in Allied doing a deal on that building or not, I truly do not know.

Jenny Ma

Okay. Actually, one more question on that front. If you end up doing some things is bringing on a partner something you would consider?

Michael Emory

Yes.

Jenny Ma

Great. Thank you very much.

Michael Emory

Just to be clear, it’s something we have considered, so yes, absolutely. And that’s not the only alternative we have.

Jenny Ma

Great. Thank you. I will turn it back.

Operator

And our next question will come from Mark Rothschild with Canaccord.

Mark Rothschild

Thanks. Good morning everyone.

Michael Emory

Good morning.

Mark Rothschild

Michael, you spoke about why you like this deal with Choice where you were able to issue equity. To what extent in the future would you care about someone’s intention on owning the units for a long-term or short-term when do you do any transaction like this? And maybe be even more direct to what extent has Choice indicated to you, how long-term they would plan to own the units?

Michael Emory

It’s a fair question, Mark, but I am really loath to speak for Choice or for the corporate group, of which it is an integral part. I do think that group assigns real value to the units over and above the fact that they facilitate deferral of taxation. But I don’t feel competent or entitled to articulate views on behalf of either Choice or the corporate group, of which it’s apart. Is it relevant to Allied, yes. So, to answer that part of the question, if I thought they were going to flog the units at the earliest possible moment in the most expeditious possible way, I would be less inclined to do such a transaction. But can anyone give me assurance ahead of time that they won’t do that, no. But can I rely on the perceived integrity of the counterparty, yes. Am I prepared to in this circumstance, clearly, yes, in other circumstances as well. But I have to acknowledge, on behalf of Allied, there is no assurance that the holder of those units is going to do anything beyond the contractual hold period other than sell them. But – yes. I think that’s probably the fairest and most useful answer I can provide. Is it relevant to us, for sure. Did we think about it a lot, for sure. Did we take advice from Goldman and Scotia on the matter, sure. But we also know that no holder of roughly $600 million of Allied’s equity is going to paint itself into a corner. It’s just not going to happen. And I wouldn’t do it either.

Mark Rothschild

And I appreciate that. Thanks. Maybe just one more question. You clearly are positive on the fundamentals in your core markets for understandable reasons. And that is part of what gives you confidence to do a large acquisition. To what extent do you look at the impact of rising interest rates on potential value as you look at acquisitions now, or do you believe that there is enough capital out there looking for properties and fundamentals will improve enough that you don’t necessarily feel concerned about that?

Michael Emory

I am not expecting the rise in interest rates to have any material impact on capitalization rates for high-quality urban office assets. I may be wrong. But I don’t see that happening. I think the demand in relation to the supply is such that transitory changes in interest rates aren’t going to affect the value people assign to those kind of almost irreplaceable assets. I may be wrong, but that’s my expectation. It doesn’t – we are a long-term buyer. It has virtually no impact on how we look at value because, a, we use a relatively modest amount of leverage. What really is important to us is cost of equity, of course, and that’s the biggest driver in terms of our willingness to pay. And again, we are willing to pay because we are an operator, not because we are trading assets. And I think most of the people buying the kind of assets we look at are not really conducting any kind of financial arbitrage. They are acquiring assets to operate them to add value, in some cases, to trade based on the added value, in Allied’s case to own forever and to serve users ever better. So, I don’t think that’s going to happen, Mark. But again, this could take on a dimension, and we see in the papers almost daily suggestions that it might take on a bigger dimension, rates may go up faster in an effort to cool everything down. At some point, that has an impact. But again, most real estate buyers are not conducting any kind of arbitrage to debt. In the old days, that’s exactly what we all did. But we are not really arbitraging to debt cost anymore. It’s a whole different ballgame.

Mark Rothschild

Understood. Okay. Thanks. That’s helpful.

Operator

And our next question comes from Irina Pulyakhina with Precima.

Unidentified Analyst

Yes.

Michael Emory

Yes. You are loud and clear.

Unidentified Analyst

Thank you for taking the question and I apologize. I wanted to know what’s your outlook with the ducted market given how strong we perform in Q1? And what kind of tenants are expressing interest in leasing space and maybe expectations for the rest of the year?

Tom Burns

Again, I didn’t hear that clearly your question relates to the Calgary market and our perception as to what’s happening there, and will we continue to see that market improving. And we actually are physically seeing the changes now in Calgary. I am not sure if you have been Downtown there lately, but there are people back on the streets, people on needs, there is a rush hour again in Calgary in the morning and the evening. Calgary is coming back to life. And we are seeing a corresponding increase in traffic through our buildings. So, we are confident that Calgary is going to come back and we are seeing some real good activity in that marketplace. I am hoping that answers your question.

Unidentified Analyst

Yes. What’s the leasing activity, what kind of tenants do you see most interest from?

Tom Burns

Increasingly, we are seeing tech tenants show up in Calgary. It’s an area where the City of Calgary has been pushing really hard to drive tech to the city, and the city has great appeal as an environment for young families. And I think tech will continue to see growth in that market. And certainly, we are seeing our share of it.

Unidentified Analyst

Okay. Thank you.

Operator

And that does conclude the question-and-answer session. I will now turn the conference back over to you for any additional or closing remarks.

Michael Emory

Thanks again, Justin, and thank you all for participating in our conference call. These were great questions. And hopefully, we were able to provide helpful answers. We look forward to keeping you apprised of our progress going forward until we next speak. Be well, and thank you, again, for showing up today.

Operator

Well, thank you. That does conclude today’s conference. We do thank you for your participation. Have an excellent day.