Allied Sees Improving Office Demand As It Tackles Debt
Allied Sees Improving Office Demand As It Tackles Debt
Allied Properties, one of the country’s largest office real estate investment trusts, continues to face pressure to lower its distribution as questions persist about its debt.
The Toronto-based REIT reported its earnings for the third quarter and said its portfolio’s occupancy and leased areas were 85.6% and 87.2%, respectively, as of Sept. 30.
The REIT that owns almost 15 million square feet of space also said it renewed 60% of its leases maturing in the quarter. Its average is 70% to 75%.
“Our urban workspace portfolio continued to outperform the market,” said Cecilia Williams, president and CEO of the REIT, in a statement. “With demand rising in Canada’s major cities, we expect our leasing activity to accelerate over the remainder of the year and into 2025.”
On the debt front, Allied noted that before the end of the quarter, it completed an offering of $250 million of unsecured debentures for four years at 5.534% per annum, using the proceeds to repay short-term, variable-rate debt.
The REIT has also obtained a commitment for a $63 million first mortgage on 375-381 Queen St. West in Toronto for a term of five years at about 4.7% per annum and a $100 million first mortgage on 425 Viger St. West in Montreal for a term of five years at approximately 4.9% per annum. Net proceeds will be used to repay short-term, variable-rate debt over the remainder of the year.
‘Difficult operating environment’
Allied and development partner Westbank Corp. has also obtained a $180 million first-mortgage financing commitment on 400 West Georgia in Vancouver for five years at approximately 4.75% per year, with net proceeds to be used to repay the current short-term, variable-rate facility.
“These three financings will materially reduce Allied’s annual interest expense and extend the term-to-maturity of its debt,” the REIT said in a statement.
While Allied is addressing debt maturities, Raymond James analyst Brad Sturges said the REIT continues to face a near-term investment risk on its loan exposure for development with Vancouver-based Westbank.
“We seek improvements in a few key areas before we become more constructive on Allied’s near-term total return prospects, like: 1) a clear recovery in underlying Canadian office leasing demand and supply fundamentals; 2) greater sustainability in its monthly distribution rate; 3) improving balance sheet strength with a reduction in financial leverage metrics towards target levels; and 4) minimizing dilution and/or impairment of Westbank-related development projects and loans,” the analyst said in a note.
Mark Rothschild, an analyst with Canaccord Genuity, said the challenging operating environment the REIT has faced is likely to continue in 2025.
“Our fundamental outlook for Allied remains unchanged,” Rothschild said in a note to investors. “The REIT continues to face a difficult operating environment and has a significant amount of debt maturing at rates lower than the cost of financing.”
He also encouraged Allied Properties to reduce its distribution even though management has said it has no intention to do so.
Rothschild also doubts Allied’s forecast about leasing activity accelerating in 2025.
“Canaccord Genuity believes that with new supply coming on-line and no material improvement in demand for office space, it will be difficult for the REIT to grow occupancy materially over the next year,” said Rothschild.
Source CoStar. Click here for the full story.
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