Allied Sees ‘Inflection Point’ in Office Market As Space Tours Increase

Jun 27,2024 6 Comments By The Lilly Commercial Team

Some Analysts Take Wait-and-See Approach Despite REIT’s Leasing Optimism

Allied Properties Real Estate Investment Trust is seeing signs that could lead to a pickup in leasing activity in its portfolio, but even with that, one analyst following the REIT thinks Allied might be forced to cut its distribution next year.

The increase in touring activity at Allied’s nearly 15 million-square-foot office portfolio has been encouraging recently, Allied President and CEO Cecilia Williams said during an earnings conference call this week.

“Renewals were at healthy spreads to in-place rents,” said Williams. “I believe we are at an inflection point, and leasing momentum will continue through 2024.”

Allied said it conducted 300 lease tours in its rental portfolio in the first quarter and that its occupied and leased area at the end of the quarter was 85.9% and 87%, respectively. It would be difficult to pinpoint when the jump in interest in its office space would lead to increased occupancy, Williams said.

Allied, one of the country’s largest office landlords, reported its first-quarter earnings on Tuesday. The REIT said its operating income from continuing operations totaled $78 million in the first quarter, up 2% from the same quarter last year.

The REIT’s net loss during the quarter was approximately $19 million, primarily due to a fair value loss on investment properties from $31 million in declines in development property valuations in Toronto, Edmonton and Montreal and an $88 million decline in rental-property valuations in Toronto.

Property Sales Planned

Moving forward, Allied said it has plans to sell less-strategic properties in its portfolio at international financial reporting standards, or IFRS value, for aggregate proceeds of up to $200 million.

Management has initiated the sale of properties in Montreal and Toronto in response to unsolicited offers, the REIT said.

Three properties in Montreal are expected to be sold early in the third quarter for aggregate closing proceeds of approximately $64 million, plus a potential residential density bonus of up to $16 million on the final rezoning of one of the properties.

Mark Rothschild, an analyst with Canaccord Genuity, said it was difficult to see any material improvement in occupancy in the near term despite management’s comments on increased tenant tours of vacant space.

“As we progress through 2024, the REIT is heading into two years that have significant debt maturities, which could put additional pressure on a payout ratio that is above 100% when considering the true cost of signing leases in the current environment,” the analyst said in a note. “In particular, the REIT has $1.5 billion of debt maturing through 2026 at an average rate of 3.2%, while the current market rate is likely closer to, if not above, 6%.”

Even as management remains committed to its distribution, Rothschild said that could prove too optimistic.

Brad Sturges, an analyst at Raymond James, also had doubts about the REIT’s optimism on leasing.

“Office lease negotiation timelines remain long,” Sturges said in a note. “We maintain our wait-and-see stance as it relates to how much of Allied’s positive leasing indicators will ultimately translate into stabilization and recovery in Allied’s average occupancy rates.”

Jonathan Kelcher of TD Securities noted that only 5% of the REIT’s leases are maturing in 2024, with another 10% in 2025. “We believe Allied is well positioned to ride out current weaker market fundamentals,” Kelcher said in a note.

Allied’s position on the office market comes after CBRE issued a report last month stating that office construction across Canada had dropped to its lowest level since 2011 in the first quarter, with no new projects breaking ground. This should give the market a chance to stabilize, the brokerage said.

“Canadian office markets had a promising start to the year, recording a total 439,000 square feet of positive net absorption of space in the first quarter,” CBRE said. “This represented the first quarter of positive net office leasing activity at the national level since the third quarter of 2022.”

Nevertheless, the national vacancy rate climbed to 18.4% in the first quarter, a 10 basis point jump from the previous quarter, CBRE said.

Source CoStar. Click here to read a full story.

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Allied Sees ‘Inflection Point’ in Office Market As Space Tours Increase

Some Analysts Take Wait-and-See Approach Despite REIT’s Leasing Optimism

Property Sales Planned

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