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Edited Transcript of AP.UN.TO earnings conference call or presentation 2-May-19 2:00pm GMT

Q1 2019 Allied Properties Real Estate Investment Trust Earnings Call

TORONTO May 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Allied Properties Real Estate Investment Trust earnings conference call or presentation Thursday, May 2, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cecilia Catalina Williams

Allied Properties Real Estate Investment Trust - Executive VP & CFO

* Hugh Clark

Allied Properties Real Estate Investment Trust - EVP of Development

* Michael R. Emory

Allied Properties Real Estate Investment Trust - President, CEO & Trustee

* Thomas G. Burns

Allied Properties Real Estate Investment Trust - Executive VP & COO

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Conference Call Participants

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* Bradley Sturges

Industrial Alliance Securities Inc., Research Division - Equity Research Analyst

* Caitlin Burrows

Goldman Sachs Group Inc., Research Division - Research Analyst

* Chris Couprie

CIBC World Markets Corp. - Analyst

* Jenny Ma

BMO Capital Markets Equity Research - Analyst

* Jonathan Kelcher

TD Securities Equity Research - Analyst

* Mario Saric

Scotiabank Global Banking and Markets, Research Division - Analyst

* Matt Kornack

National Bank Financial, Inc., Research Division - Analyst

* Michael Markidis

Desjardins Securities Inc., Research Division - Real Estate Analyst

* Neil William Edward Downey

RBC Capital Markets, LLC, Research Division - MD of Global Equity Research and Real Estate Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Allied Properties REIT First Quarter 2019 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.

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [2]

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Thank you, David.

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, 2019.

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. Material assumptions that underpin any forward-looking statements we make include those assumptions described under Forward-Looking Disclaimer in our most recent Quarterly Report.

Starting with a brief overview. We continued to focus on operations, capital allocation and risk management in the first quarter. Supported by strong demand for urban workspace in major cities across the country, we propelled continued organic growth in our rental portfolio, made steady progress on our development portfolio and fortified our balance sheet yet again. Cecilia will elaborate on our financial results for the quarter and our financial outlook. Tom will follow with an overview of our operating results. Hugh will discuss our development pipeline and I'll finish with a brief discussion of our strategic outlook.

So now over to Cecilia.

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Cecilia Catalina Williams, Allied Properties Real Estate Investment Trust - Executive VP & CFO [3]

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Good morning. I'll address our financial results and balance sheet.

First, financial results. Driven by occupancy growth in Montreal and rent and occupancy growth in Toronto in our UDC space, same asset NOI in the first quarter was up 6% from the comparable quarter last year, driving 8% growth in AFFO per unit. This was as expected, and we continue to expect FFO, AFFO and same asset NOI to be in the low to mid-single digit range for the year. Driven largely by the strength in our core markets, NAV per unit at the end of the quarter was up 11% from the end of the comparable quarter last year.

The IFRS value adjustment in the quarter totaled $104 million, excluding incremental capital investments of $50 million. At $288 million, our annualized EBITDA was up 11% from the same quarter last year. This growth is also consistent with our internal forecast.

Moving to the balance sheet. We took the opportunity at the end of February to fix the cost of $230 million of capital allocated to development by issuing equity and paying down our unsecured operating line. We were able to do this in a minimally dilutive manner, while making significant additional improvement in our debt metrics, which are now stronger than ever. At quarter-end, net debt to EBITDA was 6.2x and debt to gross book 27%, both solidly within our targeted ranges. Interest coverage in the quarter was 3.3x, representing good progress towards our target of 4x.

Our pool of unencumbered properties has grown significantly and now totals $4.3 billion, representing just under 70% of the IFRS value of our properties. This is up 42% from the same time last year.

On April 9, Moody's upgraded our outlook from Stable to Positive, acknowledging our continued commitment to conservative financial management.

At quarter-end and today, we have nothing drawn on our unsecured operating line, leaving us with maximum liquidity of $400 million before exercising the accordion option for $100 million. This will allow us to fund all debt maturities and development activity well into Q2 2020.

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

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Thomas G. Burns, Allied Properties Real Estate Investment Trust - Executive VP & COO [4]

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Thank you, Cecilia.

Our leasing environment remained strong, with demand in all markets. Between renewals and new deals in our existing portfolio and properties under development, we leased 850,000 square feet in Q1. As of March 31, 2019, our occupied area is just over 96% and our leased area is 96.4%. We continue to earn significant lifts in net rents on space renewed or replaced in the portfolio. For the first 3 months of the year, rents grew by 19.6% on the affected area. While rental growth has largely been as a result of substantial increases in Toronto, we are beginning to see rent increases in our Montreal portfolio.

Moving from east to west, I'll provide a brief update on leasing activity in our major markets, Montreal, Toronto, Calgary and Vancouver, and then conclude with an update on our UDC space.

Starting in Montreal. We made great strides in 2018, improving our leased area in this market. And we currently stand at 96.2% leased, a very slight dip from year-end due to an acquisition and a bit of turnover vacancy, with all of our larger projects highly leased. We have 3 priorities this year in Montreal: first, to continue pushing our smaller spaces very aggressively; second, increasing net rental rates where possible; and third, to complete the lease-up of our redevelopment at 425 Viger.

As for 425 Viger, our lead tenant committed last year to just over 100,000 square feet and it has recently agreed to terms for another 50,000 square feet, which will bring the building to 50% pre-leased. There are active negotiations for the balance of the space in the building.

Moving to Toronto. Pre-leasing has been very successful at The Well, where we sit at 71% pre-leased 2 years in advance of our turnover. Our leasing team remains very active touring prospects through our presentation center now that we are beginning to entertain 1 and 2 floor users. Excellent small floor plates are available for lease, which will command the highest office rents. Demand for our existing portfolio in Toronto remains very high, with leased area of 98.9%.

Moving to Calgary. We continue to maintain a very respectful 91% leased area in this challenged market. By far the most active segment of the office market in Calgary is smaller tenants in the 2,000 square feet to 5,000 square feet range. We can easily accommodate users of this size in our differentiated product along the Beltline.

At TELUS Sky, our development project with TELUS and Westbank, we currently sit at 42% leased and continue to work with a number of potential prospects. We are building show suites, which will help us attract smaller tenants. TELUS Sky will be the most architecturally distinct technologically advanced project in Calgary, and the smaller floor plates in the building are a big advantage in this market.

In Vancouver, the office market, like Toronto, is exceptionally strong. We have very little availability in our existing portfolio, and all spaces are seeing activity. At 400 West Georgia, a Westbank project we are financing with an obligation to acquire a 50% interest upon completion, pre-leasing has gone extremely well. Agreement has now been reached with a new tenant for 15,000 square feet at very high net rental rates, bringing the pre-leasing to 86%.

Lastly our UDC space. We are in the approval stages with a 10,000 square feet tenant at 250 Front, and continue to work with 2 other tenants totaling 15,000 square feet. If we complete these transactions, we will be 76% leased at the property and 90% leased for our UDC space. Between now and December 31, 2020, 37% of our leased area matures among our 3 UDC facilities. We have now completed deals for over 40% of this space, with significant increases in net and ancillary rents.

I will now turn the call over to Hugh for a discussion on our development activities.

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Hugh Clark, Allied Properties Real Estate Investment Trust - EVP of Development [5]

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Thanks, Tom.

I will now touch on the quarter's development highlights. This quarter has seen progress made in both our active development projects as well as our future development pipeline. I will begin by giving an overview of the progress made on the projects we have under construction, and then give an update on the projects for which we are pursuing approvals.

Projects under development. Working from east to west. We continue to make significant progress at our 425 Viger project. We have completed the infill component up to the 10th floor and are completing the framing of the addition on top of the building. This project remains on track for the completion at the end of 2019.

Our work on the repositioning of the ground floor at Le Nordelec continues to progress smoothly. We are in the process of completing the landlord's work on the western half of the space. This is scheduled to be completed in Q2 of this year. The building upgrade work is being executed consistent with our internal schedule and budget. The majority of the work should be completed by the end of this year.

In Central Canada, both of the major office tenants have begun occupying the premises at King Portland Centre. On the residential side, we continue to anticipate construction to wrap up in Q2 2019, with the condo purchasers occupying the building beginning in the late spring. Construction on The Well continues to progress according to our schedule. At the end of the quarter, we have reached the 3rd floor of the office tower.

All other buildings on the site are progressing well, with the majority of the other buildings reaching grade in the summer. We are pushing to have the majority of the work for the project awarded by the end of the summer. This, coupled with the workspace being well pre-leased, has significantly reduced the project risk profile.

For the JV project with Westbank at Adelaide and Duncan, we have begun the demolition of the existing buildings. We intend to have the majority of the hard costs tendered by the end of the summer. For our JV project with RioCan on College Street, we have commenced the excavation onsite. This project is slated to be completed in Q1 2021.

In Western Canada, we have handed over the TELUS their floors at TELUS Sky for their fit-out work. Occupancy continues to be scheduled for Q3 2019 for the commercial component of the building and late in 2019 for the residential component of the building.

In Vancouver, Westbank has reached the [border] of the 400 West Georgia site for excavation. While we have seen price escalations in construction costs, these have been accompanied by material rent escalations. With approximately 80% of the building leased and 70% of the costs locked in, we have greatly reduced the risk profile for this project.

Intensification approvals. Our current focus for approvals is on our intensification projects in Central Canada. In Kitchener, our partners, Perimeter Development, are finalizing 2 ancillary acquisitions required for The Breithaupt Phase III project. Once completed, we intend to turn our attention towards preconstruction work. We are currently projecting construction to begin in the late fall 2019, with a 2 year construction period.

Our King and Spadina project with Westbank has progressed well in terms of pre-sales activity. In the spring, we launched the last phase of sales. To date, the sales have met our pro forma expectations. We anticipate construction to begin in the late summer of 2019.

We continue to push for municipal approvals for Adelaide & Spadina project as well as our King & Brant project. We anticipate receiving the approvals in late Q1 2019 to early Q2 2019.

In Western Canada, we are engaging a contractor to oversee the redevelopment of The Lougheed Building. With the redevelopment plan set, we have turned our attention towards pre-leasing the space. We intend to begin construction this summer, with a 9-month construction period.

I will now turn the call back to Michael.

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [6]

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Thank you, Hugh.

The outlook for our urban workspace portfolio remains positive, as is evident from what Cecilia, Tom and Hugh have just said. The outlook for our UDC space is equally positive, meeting or exceeding our internal forecast thus far in 2019.

Our acquisition program got off to a good start this year. By the end of May, our acquisitions will aggregate $94 million, with the largest component being allocated to income producing properties in Vancouver and the remainder being allocated to small infill acquisitions in Toronto and Calgary. The equity component of the acquisitions, approximately $80 million, has been or will be funded with our unsecured line of credit, which, as Cecilia mentioned, is currently undrawn. Our acquisition outlook for the remainder of the year is also positive.

As I mentioned in our last conference call, we want to lever our platform more fully than we have in the past. Over the past 5 years, we've been expanding and strengthening our platform to keep pace with accelerating opportunity and activity. We can now strive to use our platform to enhance our investment and operating returns. While this isn't something we'll achieve overnight, we can now reasonably expect to do so and to initiate the process of doing so over the next 6 to 12 months.

Overall, we continue to have deep confidence in and commitment to our strategy of consolidating and intensifying distinctive urban workspace and network-dense UDCs, all as we've outlined in this conference call presentation.

We firmly believe that our strategy continues to be underpinned by the most important secular trends in Canadian and global real estate. We also firmly believe that we have the properties, the people and the platform necessary to execute our strategy for the ongoing benefit of our unitholders.

I hope this has been a useful and comprehensive update for you. We'd now be pleased to answer any questions you may have.

David, I'll turn it back to you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll go to our first question from Caitlin Burrows with Goldman Sachs.

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [2]

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Hi, good morning, team. I think sequential occupancy was only down 10 basis points, obviously, from a high level, but the renewal and replacement rate was down more significantly. So those 2 metrics seem to be telling different stories. Is it just that you had enough space otherwise leased to make up for the non-renewals? Or any other explanation you can share for how occupancy held up so well despite the renewal and replacement rate declining?

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Cecilia Catalina Williams, Allied Properties Real Estate Investment Trust - Executive VP & CFO [3]

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Yeah. This thing -- you're referring to the 67% renewal replacement rate?

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [4]

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Yes.

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Cecilia Catalina Williams, Allied Properties Real Estate Investment Trust - Executive VP & CFO [5]

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Yeah. So the way that that metric works is, it doesn't take into account where we would have renewed or replaced any maturities in Q1 2019 prior to Q1 2019. So if we renewed and replaced maturities coming up in February 2019 in November, that wouldn't be part of that metric because it only takes into account the maturities as of Jan 1. So it's -- we absolutely had other space leased up that meant that overall our portfolio held.

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [6]

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Got it. So it was just that you had already addressed that space?

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Cecilia Catalina Williams, Allied Properties Real Estate Investment Trust - Executive VP & CFO [7]

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Exactly. We addressed it earlier.

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [8]

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Got it. That's great. And then, Cecilia, when you were talking about the strength of the balance sheet, I think you made a comment about being able to fund development well into 2020. So I was just wondering does that suggest that you don't expect to raise additional equity as you complete further development progress throughout 2019.

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Cecilia Catalina Williams, Allied Properties Real Estate Investment Trust - Executive VP & CFO [9]

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Yeah. This statement is more around the fact that we don't have to. We don't have to go to either the debt or the equity markets for another year and that we can absolutely fund find using our operating line.

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [10]

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Got it, okay. And then maybe just one more. You guys talked about the early renewals for the urban data center properties. Will that boosted NOI be able to be recognized in 2019 or will that process not be in effect until 2020?

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [11]

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It will begin to have impact on 2019, at least consistent with our internal forecast and possibly even slightly ahead of our internal forecast.

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Operator [12]

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And next, we'll go to Chris Couprie with CIBC.

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Chris Couprie, CIBC World Markets Corp. - Analyst [13]

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Good morning. Just want to carry on with the UDCs. Just on renewal, do you think about how you approach renewal activity at 151 Front differently than, say, 250 and 905?

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [14]

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We do, primarily because more space is coming due at 151 Front in the near term than in the other properties. So, well, not all the renewal activity is isolated at 151 Front, most of it is, and that's because most of the space is maturing in the next 36 to 48 months -- most of the space that is maturing, I should say.

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Chris Couprie, CIBC World Markets Corp. - Analyst [15]

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Okay, but for like 250 Front, for example, do you anticipate you would be getting ahead of the renewals earlier than you would, say, for 151 Front?

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [16]

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They are less pressing certainly than 151 Front. And the mark-to-market opportunity is probably less significant at 250 Front than it is at 151 Front. So 151 Front definitely has priority in terms of boosting our NOI going forward.

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Chris Couprie, CIBC World Markets Corp. - Analyst [17]

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Right. Got it. And then just any update on the ancillary revenues?

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [18]

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They continue to build. We are hoping by year-end to begin segmenting the rental revenue -- ancillary rental revenue lines. So I would expect to be in a position to do that when we report on the year as a whole. I don't expect to start doing that quarterly, however, until Q4 of 2019.

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Operator [19]

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Okay. Next, we'll go to Jonathan Kelcher with TD Securities.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [20]

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I guess your largest tenant is down about 2 years, and I guess is sticking with the UDC space. Have you started renewal discussions there? And is that something where you can expect a big uplift?

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [21]

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We don't expect a big uplift. But the discussions between Allied and that particular user are more or less ongoing. But we do not expect a big uptick there.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [22]

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Okay. Is that one lease or a number of leases?

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [23]

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It's a lease with 3 components to it, or 3 areas comprising the total area.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [24]

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Okay. But you're not worried about the renewal at all?

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [25]

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The expenditure made by the user in connection with the space is extraordinarily large, in the hundreds of millions of dollars. So we do not anticipate any difficulty on renewal. But we also -- and I think it's important to emphasize this, we don't see that as a material mark-to-market opportunity. The rent exigible today is very high on a per square foot basis, and we don't expect it to increase materially on renewal.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [26]

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Okay. What about term on renewal? How long would you be -- would that be at a 5-year renewal, 10-year renewal?

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [27]

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The likely renewal is 5 years.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [28]

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Okay. And then just switching gears to Breithaupt development. Was that contemplated at the beginning of this year? Maybe give us a little bit of more color on that -- on that deal.

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [29]

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The background is as follows. Last year, I think early in the year, our partner, Perimeter, and ourselves initiated the rezoning of the adjacent parking lot with the city in an effort to be proactive so that we'd be in a position to move quickly should demand materialize for a significant amount of additional space. The rezoning went well. It was a long process but it went well. Our partner, Perimeter, did a very good job of shepherding it through. And it, I think, resulted in a very, very appealing structure for knowledge based organizations. And the ultimate user didn't, if you will, appear until later in the process. But fortunately, we were ready and well-advanced in the approval process, and it allowed us to move rather quickly with the users. So the possibility was certainly in contemplation throughout last year and early in 2019. But it wasn't until we reached terms with the user that we knew we had a project we could initiate in the near term.

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Operator [30]

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And next we'll go to Mike Markidis with Desjardins.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [31]

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Just following up on the UDC segment. It had a pretty healthy uptick sequentially from both an NRI and NOI perspective. I know you haven't disclosed specifically the build in ancillary revenue. But would it be safe to assume that that was a driver of that sequential increase?

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [32]

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The biggest driver, Mike, was occupancy gain -- or, if I can put it this way, economic occupancy gain. I believe a single tenant who went from a fixturing period into a full rent period. There certainly was rent growth and ancillary rent growth in that number, but the biggest driver was occupancy gain.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [33]

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Okay. That's helpful. And then on the -- Tom mentioned in his comments that the space maturing before the end of 2020. I think 40% of that has since been addressed at a materially higher rent. What I'm just trying to get a sense of is, has that -- those deals, do they take effect when the -- does the rent impact it initially? Is it a blend (inaudible) or is it something that you're still waiting for the impact to occur?

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Thomas G. Burns, Allied Properties Real Estate Investment Trust - Executive VP & COO [34]

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In some cases, the rent may happen before expiry, but typically it's out expiry.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [35]

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Okay. And then the lease maturity data that you break out on Page 25 of the MD&A, does that reflect stuff that hasn't yet kicked in? Or if you address something in 2020 that now is no longer an expiry but the rent impact hasn't kicked in, is that reflected in that table?

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Cecilia Catalina Williams, Allied Properties Real Estate Investment Trust - Executive VP & CFO [36]

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It reflects whatever is maturing as of March -- the timing as of March 31, 2019. So if there is an early renewal, we won't be showing it as the same maturity. It will be updated accordingly to the new maturity.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [37]

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Right. So I guess that would be then missing some of the potential upside. Is that -- am I interpreting that correctly or--?

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [38]

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Is what you're seeing, Cecilia, it'll move off the chart?

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Cecilia Catalina Williams, Allied Properties Real Estate Investment Trust - Executive VP & CFO [39]

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Correct.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [40]

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Yes.

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [41]

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Well, so if it moves off the chart, then the potential has been realized. But I think the implication is whatever is on the chart, that potential still exists.

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Cecilia Catalina Williams, Allied Properties Real Estate Investment Trust - Executive VP & CFO [42]

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Absolutely, yeah.

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [43]

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Yeah, because it hasn't expired or been early renewed. But if it's been early renewed, we take it off the chart.

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Cecilia Catalina Williams, Allied Properties Real Estate Investment Trust - Executive VP & CFO [44]

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Correct.

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [45]

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Which I think we should do because whatever opportunities inherent in it has been realized.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [46]

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Okay. Okay. No, no. That's fair. Okay, that's fair, again. Perfect. Okay. Just, Cecilia, can you confirm when the exact date of TELUS getting possession of your space at TELUS Sky was?

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Hugh Clark, Allied Properties Real Estate Investment Trust - EVP of Development [47]

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That was at the--

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Thomas G. Burns, Allied Properties Real Estate Investment Trust - Executive VP & COO [48]

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25th.

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Hugh Clark, Allied Properties Real Estate Investment Trust - EVP of Development [49]

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Yeah, the end of March -- March 25. That's--

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [50]

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It was at the end of March?

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Hugh Clark, Allied Properties Real Estate Investment Trust - EVP of Development [51]

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Yeah.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [52]

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Okay. So there was no contribution in Q1 from that.

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Hugh Clark, Allied Properties Real Estate Investment Trust - EVP of Development [53]

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No, no.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [54]

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Okay, perfect. And then lastly from me, just noticing that the development pro forma for KING Toronto did -- the cost went up and the yield went down. I'm sorry if you already said this. But where are you guys, from a fixing the cost perspective, on that project today?

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Hugh Clark, Allied Properties Real Estate Investment Trust - EVP of Development [55]

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We have not fixed any construction costs. We are just starting now with the contract documents that will be used for tendering. So this was an update based off of work that our construction manager has done for us to budget for the project.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [56]

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Okay. And does the -- you have to remind me. I think the way you guys were disclosing it was the profit from the condo sales was sort of netted and captured in the expected yield, like, of that development on the commercial component, correct?

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Cecilia Catalina Williams, Allied Properties Real Estate Investment Trust - Executive VP & CFO [57]

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That's right.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [58]

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Okay. So--

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Cecilia Catalina Williams, Allied Properties Real Estate Investment Trust - Executive VP & CFO [59]

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Similar to how we -- similar to how we calculate it for King Portland Centre.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [60]

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Okay. So I guess -- okay, perfect. So then any potential impact on the cost side on the condo component would also be captured in that net number?

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Cecilia Catalina Williams, Allied Properties Real Estate Investment Trust - Executive VP & CFO [61]

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That's right.

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [62]

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That is correct.

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Operator [63]

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Next, we'll go to Mario Saric with Scotiabank.

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Mario Saric, Scotiabank Global Banking and Markets, Research Division - Analyst [64]

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Hi, good morning. A couple of really quick questions. First on the UDCs, again coming back to that space that has been, I guess, renewed early, the 40%. You mentioned material kind of increase in NOI. What -- can you quantify what the uptick has been?

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [65]

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It's in the 30% range, Mario.

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Mario Saric, Scotiabank Global Banking and Markets, Research Division - Analyst [66]

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Okay, great. And then on KPC or King Portland Centre. I mean, was there any FFO contribution in the quarter?

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [67]

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I think there would have been, Cecilia, because of the--

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Cecilia Catalina Williams, Allied Properties Real Estate Investment Trust - Executive VP & CFO [68]

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There would have been some straight-line rent from Indigo and Shopify beginning to fixture. But it wouldn't have been for the full quarter.

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Hugh Clark, Allied Properties Real Estate Investment Trust - EVP of Development [69]

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Sorry to interrupt, but I think Shopify's rent commencement date was January 1 of 2019.

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Cecilia Catalina Williams, Allied Properties Real Estate Investment Trust - Executive VP & CFO [70]

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Oh, sorry. Okay. I'm glad to hear.

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [71]

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So I think there was a contribution, Mario, and I think we'll see a full contribution in Q2 from the building, and so we'll have full contribution to FFO and AFFO, whereas most of the contribution thus far has been to just to FFO, but it's been backed out on AFFO because of the straight-lining. It would be my guess.

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Cecilia Catalina Williams, Allied Properties Real Estate Investment Trust - Executive VP & CFO [72]

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And by the end of the year, we'll also be adding the King Portland Centre to the development completion disclosure that we have -- similar to QRC West and Breithaupt Block and Kitchener as well as 180 John. So, I'll be -- you'll be able to see the breakdown of the development costs as well as the stabilized NOI and the yield on cost as well as value creation.

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Mario Saric, Scotiabank Global Banking and Markets, Research Division - Analyst [73]

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Got it. Okay. And then my last question is a bit of a broad question with respect to Toronto and its positioning within kind of the global tech-centric gateway cities. We've seen a lot of rent growth in Toronto recently. There is a building supply pipeline that's addressing kind of the very strong tenant demand. But when we look at rent levels in Toronto and compare them to other kind of tech-centric markets like San Fran or Seattle or New York in the U.S., they're still relatively low. So I guess my question is, what's the governor in terms of rent growth in the market? I know supply is coming online, but aside from supply and the tenant ability to pay higher rent, how would you think about that in the context of tenants looking at Toronto versus other gateway cities in the world?

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [74]

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Mario, is your comment in relation to gross rent or net rent? Just as a matter of interest because one of the factors in Toronto could be the level of realty tax exigible in connection with commercial space. So I don't know if you're comparing Toronto's gross rent to other cities' gross rent levels or Toronto's net rent to other cities' net rent levels. That would be--

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Mario Saric, Scotiabank Global Banking and Markets, Research Division - Analyst [75]

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It was more in the net -- let's say, more in the net rent side?

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [76]

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Yeah. So I suspect our realty taxes are high relative to other cities. But I don't know that. I'm sure some of the employment costs would impact that as well between the different cities, whether employment costs are higher here. But I do think there is not necessarily the same upside in Toronto that might have existed in some of the other gateway tech cities. I remember back in 2000 going to San Francisco and there the Class I rental rates had actually converged with the Class A rental rates because of the demand in the marketplace in relation to the supply. And that has never -- that convergence has never happened. I do think there has been a bit of a convergence since 2000 between the 2 categories, but I don't imagine there will ever be complete convergence between the 2 categories. So I think more than anything else what will keep the rental rates from escalating indefinitely and to a level maybe that matches other tech gateway cities is the fact that really good new supply is being created. There's a lot of it. There are good operators in the city. So I wouldn't be betting on continued double-digit rent growth in Toronto much beyond 2022, 2023. I really believe that supply and demand will converge then and the upward pressure on rental rates will subside. I don't think rental rates will drop necessarily, although they will if we create oversupply, which I think is not likely at the moment. But it's something we have to watch for continuously. So I think there is a built-in governor on how rents escalate in the urban Toronto office market, and I really think it's the supply pipeline. It's really good, it's really well-located and it represents an expanding part of Toronto's core so that there are not any sort of supply constraints to create great product in this city, and we hope to be part of that creation process. But I see it as the biggest governor of rental rates. The demand we know exceeds the supply now, but I don't believe that is sustainable. I think supply will catch up with demand, and that will keep a lid on rental rates. That's a very speculative answer, but it's the best I can do as an answer to that question.

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Mario Saric, Scotiabank Global Banking and Markets, Research Division - Analyst [77]

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Okay. No, I appreciate that. You have a larger portfolio in Montreal as well. Have you seen any, on the margin, international tenants sort of coming into or looking to establish a space in Canada? Are you seeing any of that demand, looking at Toronto and saying, okay, the rents may be a bit high, and then focusing on Montreal for the first time?

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [78]

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I think actually they're focusing on both cities and on Vancouver. So if you pick all of the usual suspects in the global tech universe, they are all expanding in Vancouver, Toronto and Montreal. Montreal probably serves more tech users in relation to the total demand in the market than Toronto. Toronto has the benefit of not only having tech demand but having financial services demand and a broader range of demand. Montreal is -- I mean, most of the growth in Montreal, I believe, is emanating from tech, advertising, media and information users, and that's because the talent pool there is so significant and people are looking to capture that. So I don't think anyone is saying, I've got to get out of Toronto and get to Montreal because I can save money. I think they're basically saying, I've got to lock down as much talent as I can in Toronto and I've got to lock down as much talent as I can in Montreal and frankly I've got to lock down as much talent as I can in Vancouver. And we're seeing that in many, many tenants in our portfolio really across the country.

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Operator [79]

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Okay. And next, we'll go to Neil Downey with RBC Capital Markets.

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Neil William Edward Downey, RBC Capital Markets, LLC, Research Division - MD of Global Equity Research and Real Estate Analyst [80]

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Hi, good morning. Perhaps some questions for Hugh or Michael, just back on Breithaupt Block III in Kitchener. As I recall, this is on the -- this development will be on the large surface parking lot of the north or the west of the building. And as I recall, that lot's pretty full during the day. So what will be the parking accommodations at this site?

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Hugh Clark, Allied Properties Real Estate Investment Trust - EVP of Development [81]

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There is an ancillary property that we're purchasing in order to build a structured parking facility that will serve both the Breithaupt Phase I/II as well as the Phase III.

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Neil William Edward Downey, RBC Capital Markets, LLC, Research Division - MD of Global Equity Research and Real Estate Analyst [82]

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And so -- I think Michael did make some comments about Perimeter and their requirement to secure some additional parcels of land. Is that what that relates to?

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Hugh Clark, Allied Properties Real Estate Investment Trust - EVP of Development [83]

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Yeah. We're just closing on some land. That's what I was referring to because they-- we haven't closed on a couple of houses that are on that site. But they -- we have gone firm we just need to close on them.

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Neil William Edward Downey, RBC Capital Markets, LLC, Research Division - MD of Global Equity Research and Real Estate Analyst [84]

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Okay. So there will be structured or deck parking built as part of this scheme? Because I thought there was some pushback locally to that proposal.

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Hugh Clark, Allied Properties Real Estate Investment Trust - EVP of Development [85]

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That is not part of this phase of the development, but the site will allow for it and we have the approvals for it. So then, over the next couple of years, we will build the new building that has some below grade parking. We will build that structured parking facility on another lot. And then there remains space on The Breithaupt Phase III large parking lot area for future development. So it would be a Phase IV potential expansion of The Breithaupt.

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Neil William Edward Downey, RBC Capital Markets, LLC, Research Division - MD of Global Equity Research and Real Estate Analyst [86]

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Okay. And I believe your disclosures show that this Phase III is, on 100% basis, is roughly 300,000 square feet. I may have overlooked it, but where do you stand on leasing commitment or commitments? And have you made any disclosures with respect to which tenant or tenants are making those commitments?

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [87]

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We -- this space is committed, Neil. We have not made disclosure with respect to the identity of the tenant for reasons that are typical in our business, as you know.

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Neil William Edward Downey, RBC Capital Markets, LLC, Research Division - MD of Global Equity Research and Real Estate Analyst [88]

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And so this is a commitment for 100% of the space?

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [89]

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That's correct.

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Neil William Edward Downey, RBC Capital Markets, LLC, Research Division - MD of Global Equity Research and Real Estate Analyst [90]

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Okay, super. Just to finish up on the subject of costs. In Vancouver at 400 West Georgia, do you have an order of magnitude number as to what the total expected cost of that project will be now?

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [91]

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We -- I don't think we have disclosed that. No, I don't think we have -- in fact, I'm pretty sure we haven't disclosed either that or the anticipated yield on total cost primarily because we're not an owner now. We're simply a lender to that project. I can say, however, for what it's worth, that the yield on total cost that we anticipated when we initiated that project or we initiated the financing, I should say, with Westbank, we are very confident we will achieve.

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Operator [92]

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Okay. Next, we'll go to Matt Kornack with National Bank Financial.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [93]

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Good morning. Michael, in the past you've mentioned that you didn't want to take on a significant project in Toronto on the office side in this cycle. But I notice that you've put up swanky new renderings for Union Centre and have the team of Bjarke Ingels and Westbank helping you out there as well. Is anything changing on that front? Would you anticipate launching something development-wise on that property? Or are you just positioning for the next cycle with these new renderings?

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [94]

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It's a good question and the Globe and Mail article that you referred to, which was a very good article, by the way I think did create a little bit of confusion in that regard. So I'm -- I welcome the opportunity to clarify. I had mentioned, I think, that we were redesigning the Union Centre building and indeed what The Globe featured was the result of that redesign effort with help from Westbank and with significant input from Bjarke Ingels Group. We have resubmitted to the City, so we actually need to complete a full rezoning in order to go from what was approved to what we now envisage. And it's a significant increase in area. Potentially it will go from 1.13 million square feet to 1.7 million square feet. The floor plates will be considerably larger, which, as you know, for knowledge based organizations, is very desirable. The height will be slightly greater but not dramatically so. It's really simply expanding horizontally to create larger floor plates and also redesigning the core to create a much more efficient floor plate. We expect to get that through the rezoning process in 2019, successfully. But I don't think it's at all likely or probable that we will initiate this project in this cycle. The redesign was largely intended to optimize what we believe is a uniquely good site for a contemporary office property in downtown Toronto. We wanted to make sure that what we built there was -- took optimal advantage of the site and really represented the best conceivable workspace in the City of Toronto, if not the country as a whole. But we don't believe we can pre-lease it to a level that would be risk appropriate in what we see as the remainder of this demand wave. So rather than even -- how can I put it -- market it proactively, we are choosing to focus on projects that are on land Allied has owned for some period of time with very, very low land cost and are very discrete and compact. It's reasonable to initiate those projects in the next 2 or 3 years. I don't believe it would be wise to initiate Union Centre. So the lavish article in The Globe, while informative and accurate about our redesign, did not signal any intention on Allied's part to launch this project.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [95]

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Fair enough. And is there a data center expansion as part of that project as well? And if so, would it be feasible to build the expansion and the capability to build on top of it at some point in the future but not build at the time you build the data center?

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [96]

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So the answer to first part of the question is unequivocally yes. It is an exceptional opportunity to create additional network-dense urban data center space. And we will take advantage of that opportunity in due course. We have not currently contemplated constructing the UDC component now and then delivering the remainder later. And I don't think that would be practical or feasible. But I think pre-leasing the urban data center component in the fullness of time is something that could help reduce the risk associated with actually launching the construction. But we're not prepared to pursue the leasing of that component at this point in time either. But we will -- we see that as one of the material opportunities we have to expand our UDC space in the future and one of the principal reasons we would never consider selling our existing UDC portfolio.

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Matt Kornack, National Bank Financial, Inc., Research Division - Analyst [97]

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That makes sense. Switching markets to Montreal, where you guys have been exceptionally successful. And 425 Viger, the tenant that you've leased to there is a pretty high profile one. Was that a relocation or is that an expansion in the City of Montreal? And also, given how successful you've been in that market, it wasn't on your list of places you're targeting for new acquisitions. Is that just a function of lack of availability of product that you'd like to purchase? Or is there something else to that?

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [98]

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Two comments. One, the identity of the tenant at 425 Viger is not a matter of public record. But that tenant is in effect relocating and expanding within the City of Montreal. With respect to acquisitions in Montreal, given the success we've enjoyed in the market, given the strong pace of demand from high-caliber knowledge based organizations, we remain very interested in growing our Montreal portfolio. We are working toward a significant acquisition now in the $80 million range that I think is likely to go through, but we're not across the finish line yet. There are other opportunities of consequence in the city that we're evaluating. So we certainly wish to continue to expand our portfolio in Montreal and believe that both our team and the fundamentals in the marketplace warrant that expansion.

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Operator [99]

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And next, we'll go to Jenny Ma with BMO Capital Markets.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [100]

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Just a question on the NOI from the UDCs. I just want to reconcile what was booked in the quarter versus the LQA that was disclosed in another page. It looks like it was $54 million if you annualize the Q1 number, but then the LQA disclosure has it at about $51 million. Is there something that's missing between the 2 numbers? Or how do we reconcile that?

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Cecilia Catalina Williams, Allied Properties Real Estate Investment Trust - Executive VP & CFO [101]

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You're looking at the same asset NOI for the UDC portfolio? So that, the same-asset NOI for the UDC portfolio included what would be the equivalent like a short-term holdover rate, so a short-term extension, which is at a higher rate. For the purposes of normalizing the LQA NOI, we don't want -- we don't think it's appropriate for people to have that included in the long-term run rate because it is a short-term extension. So we treat it just like any other holdover rate for same-asset NOI purposes.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [102]

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Okay. Got you. Now, is that Q1 only? Or is that spillover into parts of the rest of the year?

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Cecilia Catalina Williams, Allied Properties Real Estate Investment Trust - Executive VP & CFO [103]

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It does spill over into Q2.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [104]

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And that's it?

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Cecilia Catalina Williams, Allied Properties Real Estate Investment Trust - Executive VP & CFO [105]

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Yes.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [106]

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Okay. So that differential is pretty much entirely related to that factor, then?

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Cecilia Catalina Williams, Allied Properties Real Estate Investment Trust - Executive VP & CFO [107]

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Pretty much.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [108]

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Okay, great. And then as far as the condo marketing costs, should we be expecting any future costs? Or were they pretty much booked in Q1?

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Cecilia Catalina Williams, Allied Properties Real Estate Investment Trust - Executive VP & CFO [109]

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No. There will be future costs. But those -- we've captured the ones that were appropriately incurred or accrued relating to Q1. So we do expect them to continue through the balance of 2019.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [110]

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Can you give us a sense of the magnitude of that?

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Hugh Clark, Allied Properties Real Estate Investment Trust - EVP of Development [111]

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I think that we'd be probably spending the same that we have spent in Q1 over the next quarter and then it will diminish dramatically in Q3 and Q4.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [112]

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Okay.

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [113]

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Yeah. It's clearly a declining number and one that won't recur in 2020 at all. But the selling program isn't over yet, so, yeah, I think Hugh's estimate is a very good one.

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Jenny Ma, BMO Capital Markets Equity Research - Analyst [114]

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Okay, great. And then my last question is with regards to the G&A and how to look at it from a run rate standpoint for the balance of the year, given that it was a little bit on the high side in Q1 versus I guess the average for last year. But is that a good proxy for the rest of the year where there are some non-recurring items?

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Cecilia Catalina Williams, Allied Properties Real Estate Investment Trust - Executive VP & CFO [115]

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I think it's a pretty good proxy for the year. So you can use that, and that would have been consistent with what we indicated in the February call as well in terms of our expectations for the year.

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Operator [116]

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And we do have another question. Next, we'll go to Brad Sturges with IA Securities.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [117]

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Hi, good morning. Just a follow-up on, I guess, the UDC ancillary revenue opportunity, just to maybe clarify, understand more in terms of the ramp-up for the rest of the year. Is that really just a function of the combination of renewals and, I guess, the introduction of the 3rd meet-me room at 151?

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [118]

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The ramp-up of what we call ancillary revenue is related in part to the mark-to-market of existing arrangements and in part to the new meet-me room at 151 Front and the existing active meet-me room at 250 Front. And actually, I believe, Tom, even the kind of incipient meet-me room at 905 King, although it's [materially] -- it's probably smaller.

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Thomas G. Burns, Allied Properties Real Estate Investment Trust - Executive VP & COO [119]

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It's smaller, for sure.

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [120]

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So it would be the aggregation of those things.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [121]

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But for the lease-up of 250 Front? Would that have a contribution to that stream as well?

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [122]

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The 250 Front will definitely contribute to the growth in the ancillary revenue over time. The lease-up of the balance might have some impact on that growth. But they're certainly not directly correlated. That's an independent reality now that will drive off the AWS Direct Connect portal and other things in the facility. Lease-up could actually enhance it, depending on the nature of the organizations to whom that additional area is leased. Some could have a really positive impact on ancillary revenue growth. Others could be neutral. But I think our assumption is that the remainder -- the lease-up of the remainder will be largely neutral to the growth in the ancillary rental revenue and it will grow, if you will, on its own merit and with its own independent momentum as people want to connect to Amazon's websites -- or Web Services directly and things like that in the facility.

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Operator [123]

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Okay. And these are -- those are all the questions I have. I'll turn the call back over to our speakers for any additional or closing remarks.

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Michael R. Emory, Allied Properties Real Estate Investment Trust - President, CEO & Trustee [124]

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Well, thank you, David, and thanks to each of you for participating in our conference call. We look forward to keeping you apprised of our progress. Thank you, again, and have a great day.

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Operator [125]

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And that does conclude today's conference. We thank you for your participation. You may now disconnect.