Q1 Results for Allied Properties REIT

"Our financial results for the first quarter were modestly ahead of internal forecast, and we've seen a pronounced increase in leasing and acquisition velocity across our target markets, which bodes well going forward," said Michael Emory, President & CEO. "Leasing velocity is particularly evident in Toronto and Montreal, where we've completed a series of pivotal lease transactions. Acquisition velocity is particularly evident in Western Canada, where we've rapidly propelled our portfolio to early-stage critical mass."

Financial Results

The financial results for the first quarter are summarized below and compared to the same quarter in 2010: 

(in thousands except for per unit
and % amounts)
Q1 2011 Q1 2010 Change % Change
Net income 12,836 15,849 (3,013) (19%)
Net income per unit $ 0.30 $ 0.41 (0.11) (26.8)
Funds from operations (FFO)
under IFRS
 
13,343
 
-
 
-
 
-
FFO per unit (diluted) under
IFRS

$ 0.31

-
 
-
 
-
FFO pay-out ration under IFRS 109.1% - - -
Adjusted FFO (AFFO) under
IFRS

10,515

-
 
-
 
-
AFFO per unit (diluted) under
IFRS

$ 0.24

-
 
-
 
-
AFFO pay-out ratio under IFRS 136.4% - - -
FFO under GAAP 14,033 15,359(i) (1,336) (8.7%)
FFO per unit (diluted) under
GAAP


$ 0.33

 
$ 0.39(i)

($0.06)

(15.4%)
FFO pay-out ratio under GAAP 102.2% 83.7%(i) 18.5% -
AFFO under GAAP 10,688 13,181(i) ($2,493) (18.9%)
AFFO per unit (diluted) under GAAP $ 0.25 $ 0.34(i) ($ 0.09) (25.8%)
AFFO pay-out ratio under GAAP 134.2% 97.5%(i) 36.7% -
Debt ratio (% of fair value) 41.6% 46.1% (4.5%) -
Interest coverage ratio 2.4:1 2.9:1 (0.5:1) -

(i)Excluding a one-time lease termination payment.        

Net income, net income per unit, FFO, FFO per unit, AFFO and AFFO per unit were down significantly quarter-over-quarter due to an unusually large amount of turnover vacancy at Cite Multimedia in Montreal. This is a temporary situation that was fully anticipated. Most of the affected space either has been, or is about to be, re-leased. Once this re-leasing is completed, Cite Multimedia will have a higher level of net rent than Allied anticipated at the time of acquisition in 2007, a considerably improved tenant-mix and a better than normal lease-maturity schedule.

Leasing

Allied leased over 740,000 square feet of space in the first quarter. This extended its weighted average lease term to 5.6 years and reduced the average annual amount of area maturing from 2011 to 2015 to 8.7% of its total rental portfolio.

Allied finished the first quarter with leased area of 92.5%, up 110 basis points from year-end 2010. During the quarter, it renewed or replaced 47% of the leases maturing in 2011, in most cases at net rental rates equal to or above in-place rents. This will result in a an overall increase of 13.9% in net rental income per square foot from the affected space.

Allied completed several large renewals and expansions in its Toronto target market, including

 

  • the renewal of Algorithmic's lease of 55,814 square feet at 185 Spadina Avenue for a term of five years from December 31, 2011;
  • the renewal of Publicis' lease of 64,821 square feet plus and expansion of 3,084 square feet for a term of just under 11 years from December 31, 2011; and
  • the expansion of Kobo to 36,585 square feet at 135 Liberty Street and 53 Fraser Avenue and Critical Mass to 23,097 square feet at 312 Adelaide Street West.

Allied has moved steadily toward completion of the re-leasing of six contiguous office floors at Cite Multimedia in Montreal, having now leased (i) one and one-half floors to an existing tenant, SAP Labs, for a term of 10 years commencing September 1, 2011, and (ii) two floors to a new tenant, Abitibi Bowater, for a term of 10 years commencing January 1, 2012. Allied is finalizing the lease of two floors to another new tenant for a term of 10 years commencing September 1, 2011, and the lease of the remaining half-floor, along with space on the ground floor, to yet another new tenant for a term of 10 years commencing January 1, 2012. The annual net rental rates achieved or near finalization fully validate Allied's decision in 2010 not to renew the prior lease of the six office floors.

Acquisitions

In addition to the $102 million in acquisitions completed or announced earlier this year, Allied today announced that it has entered into agreements to purchase the following properties for $62 million:

 

Parking Adress

Spaces

Total Office Retail
GLA GLA GLA
100 West Pender Street,
Vancouver

0
 
81,590
 
75,858
 
5,732
10190-104 Street NW,
Edmonton

0
 
22,581
 
16,814
 
5,767
605-11th AVE SW,
Calgary

3
 
51,174
 
23,245
 
27,928
Total 3 155,344 115,917 39,427
Vancouver

The Sun Tower (100 West Pender Street) is located in Crosstown (between Yaletown and Gastown) at the intersection of West Pender and Beatty Streets, in relatively close proximity to Allied's properties in Yaletown. It is a landmark heritage property with 81,590 square feet of GLA and is fully leased to tenants consistent in character and quality with Allied's tenant base. On completion in 1912, it was the tallest building in the British Empire, known as The World Building, and served as the home of The Vancouver World newspaper. The building was renamed when the Vancouver Sun bought it in 1937 and is still known as The Sun Tower. The building was extensively restored, renovated and re-leased in the past 24 months. It is designated by the City of Vancouver as a Class A Heritage Property.

Edmonton

The Metals Limited Building (10190-104 Street N.W.) is located in the central business district on the southwest corner of the intersection of 104 and 102 Streets N.W.. It is a Class I property with 22,581 square feet of GLA and is fully leased to tenants consistent in character and quality with Allied's tenant base. Built in 1914 to house a warehousing and distribution business, the building on the property was extensively restored and renovated in 2004. It is designated by the City of Edmonton as a Municipal Historical Resource.

Calgary

The Roberts Block (605-11th Avenue S.W.) is located in the Beltline area on the southwest corner of 11th Avenue S.W. and 5th Street S.W.. It is a Class I property with 51,173 square feet of GLA and three surface parking spaces and is 98% leased to tenants consistent in character and quality with Allied's tenant base. Built in 1912 to house three different distribution businesses, the building on the property was extensively restored and renovated in the late 1990s. It is on the Inventory of Evaluated Historic Resources maintained by the City of Calgary.

Closing and Financing

The acquisitions are expected to close in July and August of 2011, subject to customary conditions. The purchase price for the acquisitions represents a capitalization rate of approximately 6.5% applied to the current annual NOI. On closing, all but the Calgary property will be free and clear of mortgage financing. Allied will place first mortgage financing on the Vancouver and Edmonton properties as it deems advisable. The Calgary property will be subject to a first mortgage in the approximate principal amount of $7 million, having a term expiring in February 29, 2012, bearing interest at an effective rate of 4.25% per year.

Rising Values and Liquidity

As part of its preparation for the adoption of IFRS, Allied completed an external valuation of its portfolio at year-end 2009, indicating a value of $1.3 billion, and another at year-end 2010, indicating a value of $1.55 billion. $104 million of the increase over the 12 months resulted from acquisitions, with the remaining $146 million resulting from appreciation in value. In conjunction with its first set of financial statements prepared in accordance with IFRS, Allied completed an external valuation of its portfolio at the end of the first quarter, indicating a value of $1.6 billion. The entire increase over the three months resulted from appreciation in value. In establishing the value at the end of the quarter, the appraiser used capitalization rates ranging from 6.3% to 8.5%, with the high-point being the capitalization rate associated with 151 Front. The weighted average capitalization rate for the portfolio was 7.2%.

The largest single value increase related to 151 Front. Allied took advantage of this by obtaining a commitment from the first-mortgage holder for $72 million in additional first-mortgage financing at an annual interest rate of approximately 5.5% and otherwise on the terms of the current first mortgage.

Allied has maintained a clean and conservative balance sheet. Expressed as a percentage of fair value under IFRS, its debt ratio was 41.6% at the end of the first quarter. Its interest-coverage ratio in the first quarter was 2.4:1.

On closing of the upward financing of 151 Front, Allied's debt ratio will increase to approximately 46.1%. While it plans to use its borrowing power to facilitate portfolio growth and value-creation, Allied fully intends to maintain its conservative approach to financial management.

Value-Creation

Allied accelerated its value-creation activity in the first quarter as part of an ongoing effort to build a value-creation pipeline that, in time, will make a recurring, annual contribution to the growth of its business.

Upgrade Activity

645 Wellington Street in Montreal is an upgrade project that is well underway. Milgram took occupancy of over 30,000 square feet on May 1. Allied expects to complete this project early next year. Allied recently announced two new upgrade projects, one in Montreal, a 530,000 square foot Class I property on de Gaspe in the Plateau area, and one in Vancouver, a 45,000 square foot Class I property on Homer Street in Yaletown. These acquisitions are scheduled to close in June of 2011.

Redevelopment Activity

At 905 King Street West in Toronto, Allied has leased the first 10,000 square feet to a key tenant and is close on the lease-up of the remainder, in all cases at considerably higher than anticipated net rental rates. Allied expects 905 King to become a rental property in the third quarter of this year. With its partner, Perimeter Developments, Allied also initiated the redevelopment of The Breithaupt Block in Kitchener, which is scheduled for completion in 2013.

Intensification Activity

The first phase of Allied's QRC West project involves the restoration of an existing Class I building and the addition of a new, LEED-certified component for combined leasable area of approximately 300,000 square feet. Allied expects to be in a position to commence the restoration of the existing Class I building shortly and is well advanced in negotiations with a prospective lead-tenant for the new component. In addition, Allied is in the process of initiating the approval process for three intensification opportunities in Toronto. QRC West, Phase II, has the potential for 74,000 of GLA, with a significant component being high-value retail space on Queen West. 388 King West and 82 Peter Street, which comprise a site on the northwest corner of King & Peter, have the potential for up to 800,000 square feet of space. 489, 495 and 499 King West, which constitute the best remaining development site at King & Spadina, have the potential for as much as 500,000 square feet of space. At least a year will be required to obtain municipal approval for each project. 

 

                 

 

 

 

 

on June 1, 2011