Allied Properties Real Estate Investment Trust

So my apologies to you. A, for the delay and B, for the fact that we're actually conducting this on a cell phone from our office.

Anyway, good morning. Welcome to the conference call.

Tom, Cecilia and Hugh are here with me to discuss Allied's results for the third quarter ended September 30, 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 AIF and in our most recent quarterly report. Material assumptions that underpin any forward-looking statements, we may conclude those assumptions described under forward-looking disclaimer in our most recent quarterly report.

Allied's third quarter operations were encouraging, especially in the context of growing macroeconomic uncertainty. Cecilia will summarize our financial results.

Tom will follow with an overview of leasing and operations. Hugh will provide a development update, and I'll finish with our current thinking on capital allocation.

So now over to Cecilia.

Good morning. I'll highlight some operating metrics, our financial position and progress on ESG.

Our operating metrics remain healthy. We had our 12th consecutive quarter of increasing productivity from our space, reaching $25.56 average in-place net rent per occupied square foot.

We also continue to see strong rent growth on renewing space, which was 7.3% in the period. We are, however, starting to see the potential impact of recessionary fear in the form of extended time to get to an executed lease deal.

Despite tour activity remaining strong. We are keeping a close eye on the seemingly contradicting data to better understand changing market dynamics.

We're pleased with our financial position. We allocated $108 million of capital in the quarter to revenue enhancing and development activity, which is what we'll continue focusing on for the foreseeable future.

With over 91% of our debt now on a fixed rate basis, our exposure to rising interest rates is mitigated. Also, our liquidity position is strong, allowing us to meet our commitment into 2024 without having to access either the public capital market.

We're pleased with our progress on ESG. Our score rose to 86% in the 2022 GRESB assessment, up from 80 last year.

This improvement is a result of huge effort across the Allied team. And we're already working on what we want to achieve in time to report in next year's ESG report.

Across the country, we're focused on serving our users and completing upgrade and development work to propel operating capabilities. Our operating platform has never been stronger.

With that, I'll pass the call to Tom.

We had a solid third quarter leasing completing 112 transactions, totaling 424,000 square feet. Average rents achieved on renewals were 16.6% higher than average rents in the expiring terms.

We ended the quarter at 90.7% leased in the total rental portfolio and 91.4% leased in the stabilized rental portfolio. We started 2022 with an aggressive target of achieving 94% occupied, and we remain focused on achieving that level and higher, but we will not make it by year-end.

I note that Allied has lower vacancy rate than the downtown markets in every one of the cities in which we operate. We expect to continue to outperform the market and have good momentum leading into year-end.

In fact, we have 109 transactions in negotiation right now, representing 450,000 square feet of net new leasing, which we are trying to complete before year-end. I will now provide an update on meeting activities on our recently acquired portfolio, then provide a general update on activities in Montreal, Toronto, Calgary and Vancouver and will conclude with our urban data centers.

With respect to the properties acquired in March 31 of this year, we have made good progress on all fronts. Leased area in that portfolio is up slightly following lease recently completed for a restaurant space at 1508 West Broadway at Vancouver.

We are negotiating a renewal and expansion with our anchor tenant at 1010 Sherbrooke in Montreal and expect to finalize before the year-end. We have developed asset plans to optimize returns over the short, medium and long term for each asset.

As an update in this regard, we have started dialogue with Moment Factory and NORR Architects, both of which are Allied tenants, asking them to collaborate with us and our partners at [ OP ] Trust on the vision to completely reimagine the lobby at 175 Bloor Street East. We are very excited about transforming this prominent building over the next 12 to 24 months at a time when much of Bloor Street will be undergoing transition.

In the meantime, we're engaged with 3 small tenants to gain extension. Turning to our general market updates.

The most active market in Montreal. The team completed 44 transactions totaling 150,000 square feet.

Among the highlights in the quarter was a lease for 15,000 square feet at 400 Atlantic, and lease 15,000 square feet at 111 Robert-Bourassa. Just subsequent to the quarter, we completed a deal for 16,000 square feet at Cité MM.

We are now working to finalize a 26,000 square foot deal with a food service tenant at Cité MM. When completed, this deal will be enormous upgrade to the food offering in the complex and the neighborhood.

We have various stages of negotiation with large users at 1001 and 111 Roberta. These potential tenants represent a total of 425,000 square feet.

In Toronto, we completed 26 deals totaling 135,000 square feet in the rental portfolio. The office component of the well is 98% and we're in discussions with a few groups for this last remaining piece.

Our building of 468 King, 185 Spadina and 135 Liberty are being upgraded and that was a completion making these buildings ready for new tenants in 2023. In Calgary, we're maintaining our leased area number at 85.6%, which in the context of that market is quite good.

We completed 17 transactions totaling 40,000 square feet during the quarter. TELUS Sky is 72% leased, and we have early-stage negotiations with 1 tenant for 20,000 square feet and if completed, will bring that project to 76% leased.

In Vancouver, we completed 19 deals totaling 45,000 square feet. We are 94.1% leased with good activity on available space.

Finally, to our UDC space in Toronto, we completed a renewal expansion in the quarter with an existing tenant at 250 Front, bringing us now to 99.5% leased in that portfolio. I will now turn the call over to Hugh.

Thanks, Tom. This quarter has been progressively on both current construction projects as well as our planning for future projects.

I will begin by giving an overview of our major projects and then we'll follow that with an update on work we have done on our development pipeline, construction equity. Beginning in Montreal, the team continues to advance work on the rehabilitation of 3575 Boulevard Saint-Laurent and the RCA building.

The transformation of 1001 Robert-Bourassa, and the 13 [indiscernible] of work at 400 Atlantic. These 4 large-scale multiyear redevelopment projects continue to remain on track to remit the teams to position the properties as premier workspace for knowledge-based organizations can serve.

In Toronto, we have made progress on all of our active construction projects. As well, the team continues to complete spaces for both the office and retail users to commence their fit-out work.

For the expansion of QRC West, we have reached the third floor. While we had hoped to have a building topped out by the end of October, industry-wide labor shortages have pushed that date out to early December.

We continue to make progress on our joint venture projects with West Bank in both Toronto and Vancouver. In Toronto at Kings Toronto, we are climbing above grade with some parts of the project had reached the third floor.

At 19 Duncan, the team continues to push to achieve occupancy late in the October or early November to allow Thomson Reuters to occupy their space. We hope to top off the building by the end of the year.

In Western Canada, work continues on Boardwalk-Revillon and our JV project with West Bank at Main Alley in Vancouver. At Main Alley, the team has begun the foundation work that will permit us begin climbing up to grade by the end of the year.

Based on the work for this project is anticipated to be completed in late summer. Planning activity, the team has been primarily focused on the execution of asset development and redevelopment projects this quarter.

In Montreal, the team has commenced preliminary discussions with the city on potential rating space that would accommodate life sciences uses at the east block of [ Garcia ]. These initial discussions have been positive, and we plan on beginning an assembling team to determine the full potential of the site.

Overall, the team has made solid progress across all of our development activities. The team has taken advantage of the work done in previous quarters on our new development approvals, the focusing to focus on advancing work on the vacancy upgrades, redevelopment projects and major development projects.

I will now turn the call back to Michael. [Technical Difficulty]

Okay. I think we're back on the line, Michael, if you want to continue.

Well, this is proving to be quite an adventure. I have to extend apologies again.

I feel compelled to point out that the conference call provider is an organization that supports working from home, and that may explain the complete disaster that they have perpetrated on us at this point in time. [Technical Difficulty]

Ben, are we live now on the line? Okay.

We're live.

Okay. We're live.

I'm almost at a loss for words, and I don't think I've ever been at a loss for words in my adult life. Anyway, let me continue.

Capital allocation is always important but never more so than in times of macroeconomic uncertainty. As mentioned last quarter, we're focusing on completing the developments in our pipeline, which we expect will add approximately $82 million to our annual EBITDA over the next few years.

This alone will improve our relatively strong debt metrics in an organic manner. I hope that this has been a somewhat useful and comprehensive update for you.

Lord knows it hasn't been a continuous one. We'd now be pleased to answer any questions you may have.

I can't vouch for the success of the connection, but we will do our very best to answer any and all questions you're able to put to us. Ben if we could turn this over to questions now, that would be very helpful.

First question, just maybe give a little bit more color on the longer sales cycle you guys are seeing for leasing. Is that all types of tenants, all geographies, maybe just a little bit more color on that.

Yes. I think it's a good question, and it's an interesting experience we're having.

I think we would say that the high volume of tour activity is constant across our major markets, Montreal, Toronto, Calgary and Vancouver. And I would say the beginning of the stretching out of negotiating timeframes is more or less constant as well.

As Cecilia mentioned, there is an inherent contradiction in what we're seeing because typically, we would see tours decline concurrently with negotiating timeframes stretching out. What we're seeing now is somewhat contradictory, but I don't think we can ignore, the stretching out of negotiating time frame.

The fourth quarter is going to be extremely important to us in this regard. As Tom mentioned, I think we have 109 transactions in the works.

Now we never get every transaction done no matter how buoyant the environment. But it's if negotiating timeframes continue to stretch out and people put decisions off into next year, that will tell us one thing.

If on the other hand, we get our normal level of transactions across the finish line in the fourth quarter, that will tell it one thing else. I can't tell you or predict now which of those 2 realities will present themselves.

The one thing I can assure you is we will know soon and we will include what we learned in our projection or internal forecast for 2023. I don't know if that's terribly helpful, Jonathan.

Yes, that is -- sorry. Are you still seeing tour activity sort of maintain itself into Q4?

Yes.

Okay. That's helpful.

And then secondly for, I guess, 2023 renewals, you don't have a ton, I think only 11% total. But like -- how are those conversations going?

Do you think you'll get your same sort of normal annual renewal rate?

I think we rolled out and I think a lot of conversations have been taking things for a while, and I think we'll get our share as usual.

Okay. So there's no big known vacancies coming?

There's -- we know -- we have everything that is going to happen with respect to -- not going to be surprised by -- I think it's maybe the best answer. We're aware of all the nonrenewals for 2023 and appreciating everybody else.

And then just lastly, just to clarify in case I missed this or whatever in your remarks, Tom. But I think you said you had about 450,000 square feet under negotiation right now.

And then when you were talking about Montreal, you said there was 425 square feet under negotiation. Is that correct?

Yes. But it's a different category of tenants.

Those are larger transactions that probably will take a few more months to advance them, but there's 450,000 square feet of negotiations taking place right now that we hope to complete before year end. The 425,000 square feet in Montreal includes 2 big ones that is going to take us a little bit of time to sort through.

Okay. So those are sort of separate numbers then.

I wanted to get a better sense of the trend for capitalized interest as some of your projects finish off. I think this quarter, it's sitting at $14.6 million.

So I'm just wondering if that's nearing sort of max value. And if you can give us some guidance in terms of how that kind of comes off in the next couple of years.

Yes. I think you can assume that the Q3 level is what will come through the next couple of quarters.

And I'll give more specific guidance on that on our Fab 1 call as it relates to our 2023 forecast.

Okay. So could I presume that it's going to be fairly lumpy then between, let's say, the second half of '23 and into '24?

Yes. Because as our development completion transfer to the rental portfolio in tranches, you will see it kind of lumpier.

So there'll be more of an average for the year that I can give for next year on the Feb 1 call.

Okay. So just a bit further on that.

So if we take the Well, for example, it would be on a -- I guess, a phase by phase or a specific building-by-building basis. Is that sort of the trigger for capitalized interest to come in for the property?

Correct. So you can use the timing that we include in the stacking chart in the MD&A, Page 7 and 4 where we have rest commence that should give you pretty good approximation of the timing of decapitalization.

Okay. That's really helpful.

And then switching to the 94% occupancy target down that you guys are pushing out. I'm just wondering if you'd be willing to venture perhaps a time frame for when you think Allied could get to that point.

We would not.

Okay. I always got to ask.

And then lastly, just wondering in terms of capital allocation, these are small numbers, but Wondering what your thoughts are on the distribution, Allied got a pretty good track record of an increase on an annual basis. And given the EBITDA that you're expecting to come in from developments.

Is that something that gives you comfort in perhaps maintaining that track record that you've built?

That's a good question and a fair question. As you know, it is a Board decision.

What I can say as part of management is that we see no reason why our pattern will not be maintained late in 2022.

I appreciate the incremental disclosure on your top tenants. Can you kind of give us a sense as to what will happen with the cloud space?

It seems like the maturity is pretty imminent on that. Should we expect that this tenant will continue on or if not, what are the prospects?

Yes. No, I think it's a good question, and I do think that disclosure was helpful.

The -- not the cloud infrastructure activity, but the hyperscaling activity, which is the largest component of the 3 is not the highest and best use of network and interconnection space. And happily, we will be getting that space back at the end of this year.

And we will be releasing it as network and interconnection space probably at a 20% to 25% premium to what we're obtaining now. The reality is hyperscalers don't need the capacity of high-quality network and interconnection space and aren't prepared to pay for it long term.

We, in turn, don't want to accommodate hyperscalers not because it isn't a great use, but it's not the highest and best use of the UDC portfolio we have. So we will be working that and indeed have been working it very successfully for some time now.

We're very close to releasing 1/3 of that space. And I'm extremely confident that we'll release the entire space at a very significant increment.

The timing that the hyperscale use afforded us was really, really helpful to us. It sort of bridge the 5-year gap.

We got the facility fully leased. And now we can upgrade that last component.

So I don't see it ever accommodating hyperscalers again, not because they're not good users, but they're simply not prepared to pay the levels of rent that we can command in network and interconnection space of the sort we have.

Okay. Fair enough.

And I saw that, I think, generally, you brought up your mark-to-market potential on the UDC portfolio. But -- just from a modeling standpoint, I guess, we can assume that, that component of the near-term maturity comes off and then kind of is built back up over the course of next year?

Or should we assume it takes a little bit longer than that?

No, the course of next year, I think, is correct. And you're quite right.

The the rent chart, which is an important part of our disclosure was altered to reflect exactly what you and I have just been discussing.

Okay. Fair enough.

And then on 400 West Georgia and the new development component of the Place Gare Viger, can you give us a sense -- like I think I had the modeled for this quarter and next, but what would the timing be on when those are brought in or purchased and brought into IPP?

Yes. Place Gare Viger this quarter, indeed, it's expected to close at the end of this week or tomorrow in fact, which is great.

It's a spectacular building and we're extremely pleased with it, and we're working extensively with a tremendous roster of biotech and life science users as we had hoped to complete that space. The 400 West Georgia is also going extraordinarily well.

There is expansion occurring within the building and within the tenant base in the building that should get the final 3 floors leased before the end of the year. And I believe that will transition at some point in 2023, do we know when around the middle so mid-2023, midyear next year.

Okay. So that's very helpful.

And then on the G&A for this quarter, Cecilia, was there anything one time in nature, it was lower than, I guess, what we were forecasting. But I don't know if we -- there's some seasonality, I think, obviously, Q4 is a bit higher, but how should we think of this figure in the context of looking forward?

I think Q3 is a good base to assume going forward. There is seasonality because of when the restricted units are amortized earlier in the year and then like you mentioned, Q4 based on final compensation payouts, but otherwise, Q3 didn't have any unusual onetime items in either direction.

Okay. Perfect.

And then I have one here on straight-line rent, but I think that was development deliveries probably and it converts to cash rent over a period of time in the next quarter or 2? Or will it stay elevation as you're developing more.

Correct -- sorry, I think...

I think honestly, it doesn't matter. I'm not going to model it in not much detail, so I'll leave it at that.

I'll ask 1 last one, though, just a bit of a more general commentary. I mean we've always looked at Allied as kind of a place that you'll have the flight to quality, given the assets that you own and the type, but we're trying to kind of weigh this against what's happening with technology companies, just from a valuation standpoint.

And obviously, there's been a bit of a shift in the market. How should we gauge kind of reflect between these 2 kind of opposite like quality in a tougher office market, but also technology companies facing some financial pressures.

Do you think it impacts the leasing going forward for your portfolio?

Here's how we're thinking about it to date, Matt, and you articulate -- you articulate it well. It is becoming clearer and clearer to us that Allied does represent a flight to quality in all our major markets, whether it's Montreal, Toronto, Calgary or Vancouver and that is encouraging.

We are not seeing any diminution in the demand on the part of tech users for space in our major markets. And indeed, we continue to see more demand emanating from tech users in the city of Calgary than is historically the case.

Now admittedly, the historical case is almost negligible. But nonetheless, we are seeing more demand on the part of tech users in the city of Calgary.

In Montreal, Toronto and Vancouver, it remains the vast bulk of the demand we are seeing. I don't know, Tom, whether the 109 deals you're looking at can be categorized in terms of tech and non-tech, but my guess is it's probably pretty tech-heavy.

Tech would be the biggest chunk. I'm guessing third -- that you're just looking at is now.

So that's the probable answer.

Yes. And the knowledge base would get us much higher.

And that's the interesting thing. Tech, it depends what one needs by tech, and I'm not trying to be good or cute in saying that.

But in Montreal, for example, it's much more multimedia post-production type of knowledge-based organizations in Vancouver, it's pure tech it's what any of us would define as tech. And then in Toronto, it's probably a combination.

So at the moment, Matt, we're not seeing impact on tech demand for our space. That doesn't mean we don't over the remainder of 2022 and into 2023.

But we're not seeing it yet. But again, we think more in terms of knowledge-based than tech.

And I think that is a broader cross section. I mean, post-production and multimedia on fire.

Hollywood is busily trying to make up for the fact that we consumed, I don't know, 5 years of content in 1.5 years at the pandemic. So that we're seeing real depth in.

I don't know whether it comes within the rubric of tech or not. Yes, [indiscernible] still high.

Is that tech?

Yes, biotech and life science, the demand -- we're seeing it most pronounced in Montreal. Is that tech or is it not?

I don't know. But we're absolutely seeing more demand there, and it is beginning to translate into deals.

Fair comment.

I don't know if that's helpful, but that's kind of how we see it now. And we're obviously going to be monitoring this super carefully.

Makes sense. And if I could, just 1 quick follow-up.

On the Viger, the site, I think it's to the east. I think at a time, you were considering an RFP for something in the vaccine production type area.

Is that what you're discussing with the city? Or has it evolved into something broader biotech-wise?

I think what Hugh described in his presentation is the piece adjacent that has an old entirely replaceable building on it. We're working with Hugh and his team by working with the city now to get it approved for biotech in that science.

So we don't have a specific tenant earmarked for that site, but we are making real progress and clearly have the support of the city in rezoning it for biotech and life sciences. And we also and Tom is leading this charge, we also are developing extensive relationships with existing and potential biotech and life science users because there's no doubt that they want to concentrate in that part of Montreal near the [indiscernible].

I mean there's absolutely no doubt whatsoever. And so we want to make that particular opportunity available to satisfy that use because we won't be able to meet all the demand in the building that we're closing on tomorrow.

We will meet some of it, which is great. But we certainly won't be able to meet all of it, and we'd like to be able to meet more of it going forward.

But that's sort of a medium-term kind of reality. It's going to -- working with the city of Montreal was a long process.

And then actually leasing and building is also a long process. So that is not imminent.

But I do think it's a very real avenue of growth for Allied in the city of Montreal.

Okay. That makes sense.

That area of the city has come a long way with this one.

So -- it's amazing, the transformation there.

Two very quick questions from me. Now firstly, just focusing on the decline in leasing velocity and when you're speaking with tenants, can you comment on how much of this decline can be attributed to the work from home debate versus being in a reflectionary cycle?

It's a great question. And here's how we think about it.

The fact that tour velocity continues to accelerate is to me, fairly definitive in terms of those users having made the determination that workspace is a major component of how they get their work done and as such, a very good signal. My interpretation of the stretching out of the negotiating framework that's entirely base on what I would call uncertainty in the face of an anticipated recession.

People are just saying, should we wait 6 months before we make a 5-, 10-, 15-year commitment. And I believe that has everything to do with recessionary fear and nothing to do with organizations having made the determination that they work from home.

Okay. Great.

And just to stay on that line of thinking, when you're thinking about net rents across your portfolio and even the broader market, given that we're going to be in a tough macro phase. How are you thinking about demand and net rents going forward, especially since you just mentioned that tech demand may slowed down slightly for the rest of into 2023 as well?

I didn't quite get the question, Gaurav. Are you asking what our thoughts are with respect to demand in the near term?

What are on net rents -- are on net rents in the near term as you go through a tough macro phase.

Yes thoughts on metrics, Gaurav?

Sorry, net rents.

Net rents, sorry. Anytime net rents -- look Yes, our belief is -- and again, we I want to express this with appropriate caution and caution isn't exactly my strong set, but I think it's appropriate here.

In Toronto, we expect to continue to see upward pressure on rental rates on renewal -- that's for sure. We continue to believe there will be some upward pressure on rental rates with respect to our development.

Now they're just about lease, which I'm very happy about. But I think we expect to see upward pressure there.

in Montreal, which is much more an upgrade market, we certainly expect to see upward pressure on rental rates in the buildings that we have redeveloped and 400 Atlantic is a great example of that, which is leasing up now because the redevelopment is complete and then in Vancouver to the extent we have vacancy, I do expect the upward pressure on rental rates to continue. But in the Montreal market with respect to completed space, I don't envisage much upward pressure on rental rates in 2023 and 2024, but I do expect to see it in the upgraded properties, big time.

Toronto, in terms of our space, generally, I think we will continue to see some level of upward pressure. I've always expected that to plateau once the new development inventory is completed.

And certainly, by 2024, I would expect rental rates in Toronto to start to plateau, but not before that. And now, again, a that's an expectation.

It's imperfect, but what we're seeing on the ground suggests that that's the case, but that could deteriorate if the recessionary fears start to take hold in a big way, then that clearly could put downward pressure on rental rate. The interesting thing is the recessionary fears, which are real, have had more impact on the capital markets than they have at the moment on our operations, but that doesn't mean they won't have impact over the remainder of 2022 and into 2023.

We've always done well in a downturn always and we know we will get again whatever the downturn brings. So I really do want to express a caveat with respect to what we're seeing because it could change.

The environment within which we're operating could deteriorate, especially if we go into a deep recessionary environment.

Maybe just coming back to the -- coming back to the occupancy comments. Maybe stitching together everything that you said today, Michael, with respect to leasing the pipeline, the developments coming online, that there's obviously some recessionary concerns that certainly quoted.

If there's enough momentum to drive occupancy higher over the next few quarters? Or do you see it kind of just holding steady or -- any color you can share on that front?

Well, you're trying to ask me the same question jenny ask me albeit more indirectly in your case. Look, I really want to avoid trying to predict anything between now and when you actually provide our 2023 outlook.

Of course, I expect occupancy to increase over the remainder of the year and into next but there is a level of uncertainty that I think, would make it almost imprudent for me to prematurely make that prediction. So I think the right thing for us to do is to experience Q4.

One thing to remember, leasing isn't that cyclical. It tends to slow down a little in August because everybody's working from home, so to speak, or working from their cottage or just at the cottage, but it picks up very rapidly in September.

And the one thing we know from long experience is December 31 is a massive deadline for leasing. We were actually finalizing deals on December 31, 2021.

I remember. I wasn't here, but a big part of the team was, and they were literally signing deals that date.

So it's a big, big deadline in the leasing cycle that we have experienced over a very long period of time now. And frankly, before I make any bold pronouncements, I really want to see how the fourth quarter plays out.

Got it. That's helpful.

Just a -- I did have a question on the 2023, your estimated development contribution. I think there's a schedule on Page 10 something of the MD&A.

There was a drop in the estimated NOI contribution in 2022 relative to what I think you had last quarter, now this does -- these numbers having overall $80 million, but they can -- they turn around, I guess, on a quarterly basis in terms of your disclosure. But was anything in particular that drove that rather sizable drop from the disclosure in Q2.

This is again the 2023 NOI contribution from developments?

Very simply, Pammi, it's just timing of completion and commencement of [indiscernible].

Okay. So ...

The aggregate number isn't impaired in any way. It's the timing of rent in 2023 is going to be a little later than we initially forecasted.

I think it would -- most of that be tied to the rent. It looks like [indiscernible] of the leases were pushed back by a quarter or 2 or something like that.

Yes. And Pammi, your -- the connection we have with you is not good.

So if you could just speak a little louder, it would be helpful.

Okay. Maybe just switching gears with respect to capital recycling.

You've done a little bit in terms of dispositions this year, but -- and I think there's still 1 property that's held for sale. As you think ahead and you kind of balance your leverage targets as well, can you maybe just provide some color on how you're thinking about capital recycling over the next call it, a year or so?

Yes. And thank you for that telephonic clarity.

That was really helpful. I heard the whole question.

We have for several years now been, if you will, representing to you and our constituents that we have considerable optionality in terms of monetizing, nonmanaging interests in our rather large national portfolio. And we've also represented that we have been working on developing those relationships quietly and systematically even through the pandemic in an effort to gauge how much optionality we have, how significant it could be, how efficiently we could execute transactions of that sort.

So I think the best answer that I can give to you is that we are very confident of our ability to monetize nonmanaging interest in various aspects of our portfolio. On financial terms, that would be very attractive to us.

And the proceeds of which we would dedicate almost certainly to proactively improving our debt metrics. They're going to improve organically for the reasons we've discussed on completion of the development pipeline.

But we are well prepared to take a more proactive approach to doing that. I'm not projecting that we will or loans, but I am saying in response to your question, that we are very well prepared in terms of relationships and in terms of forethought to execute on that kind of transaction if we consider it to be in the best interest of Allied and its constituents.

That, I think, is helpful as I can be. So even though we haven't talked about this a lot over the past 2 or 3 years, we have been both thinking and working towards establishing our capability in that regard.

I'm like a boomerang. I keep coming back.

Just a question on the King Toronto. The asset impairment there, was that just straight up on the front end, uncontracted costs coming in higher just because of inflation?

Or was there something else going on there?

The life cost increase but also the delays in the construction as well as the higher cost of equity or cost of [indiscernible].

Got it. And then I guess, natural extension of that on the $300 change million that you've got left on the cost to complete under the PUD, is there any element of that, that would be, let's call it, uncontracted risk given inflation and sort of the increased costs associated with that?

Or do you have a big enough buffer baked into those construction budgets to be able to absorb that?

The intention is to have that built in contingency into that number. So we have a large [indiscernible] set aside to deal with those kinds of cost increases.

Perfect. And we know contingencies always get used so...

Sorry for a prolonging this event with a little a couple of questions, but we're almost there. The first question is the qualification on the leasing development leasing pipeline.

You do have about 400,000 square feet expiring in Q4. So your comment on discussions about the 450,000 square feet of net new leasing.

Would that be above and beyond 400,000 [indiscernible] expiring?

Mario, sorry, the connection is bad, and I don't think any of us quite got -- I know if you're talking about 450,000 square feet of net new leases, but I couldn't get the question.

So the question was, Tom talked about 450,000 square feet of net new leasing discussions that's fairly comparable to the amount of expiring in Q4 of this year. So I just wanted to get a better understanding of what is the $450,000 is kind of above and beyond what is expiring.

It's above and beyond. Generally, Mario, the chunk of the 450,000 square feet are absolutely brand-new deals for us, new tenants.

There are some tenants that are renewing for expanding. That's also a factor in 450,000 square feet.

But a big chunk of it is brand new tenants. Is that answering your question?

I think so yes. Yes, I don't -- And my second question just dovetails kind of on the capital recycling comments, Michael that made earlier.

So it seems like the ability to execute on [indiscernible] the JVs that you're referring to see really high on good terms. Just curious in terms of -- I don't know if you can answer the question, but in terms of the willingness, how do we think about the catalysts going forward, whether it's macro economic uncertainty, whether it's further increases in private market cap rates and [indiscernible] Class A assets.

What are some of the factors that you're thinking about in terms of the willingness of executing on that potential strategy?

Okay. I think I got the question.

And there are 3 things that we're evaluating in thinking about this. One is while this -- while it's not the goal or the purpose, we'll only execute a good trade.

The goal isn't to execute a good trade. That is -- that as a goal is insufficiently motivating for us.

But it's sort of a necessary condition, but not a sufficient condition. It has to be a good trade, number one.

More importantly, getting to goals, there are 2 goals that are motivating to us. And would take necessary to sufficient.

Number one, we may want to proactively improve our debt metrics and not wait for the organic improvement to occur. That's number one.

Number two, we always want to establish relationships where complementary expertise becomes part of what we achieved through the transaction. And since 2011, we have been establishing joint venture relationships with organizations, not so much because they brought capital to the activity, but because they brought complementary expertise.

Our relationship with perimeter is a great example. They have real development expertise along the perimeter of the Greater Toronto area.

We don't. And so the relationship we established the perimeter way back in 2012, I think it was involved not really bringing us capital at all.

We brought the capital to the program, but bringing us expertise in developing in Kitchener that we simply didn't have and how successful that partnership has been, Westbank likewise, RioCan, likewise. In each case, the partner brought complementary expertise.

And in each case, the relationship has made us stronger and made us more successful in whatever we happen to have been focusing on collectively. So to sort of summarize this because it is a good question, and we have been thinking about it for a very long time.

Number one, necessary that we do a good trade, but not sufficient. 2 and 3, it has to help us address our debt metrics in a meaningful way and it has to bring complementary capability, I wouldn't call it, necessarily expertise but complementary capability to Allied.

And we've been saying for 2 or 3 years now, and I've frustrated that we haven't been able to deliver on this, although [indiscernible] to me and us, a pandemic has intervened and we seem to be moving out of the pandemic into a recession. So I don't feel terrible about not having achieved this broader goal to date, but we want to lever our platform.

Our history primarily is levering our access to the capital markets. And now and for some time, we wanted to lever our platform so if we do a deal of the sort I described or alluded to, it will be something that levers our platform or brings complementary expertise to our business overall.

Long-winded answer, but hopefully a helpful one, Mario. But I want to repeat one thing emphatically.

We're not just going to go out there and do a trade so that we can establish a data point that's going to make everybody feel warm and fuzzy. We will not do that for 2 reasons.

One is kind of an idiotic undertaking; and two, it won't make anyone feel warmer and fuzzier in this environment. So that was not the rationale that will support what we do, if we do anything in this regard.

If I may, just one last one, I mean, for Cecilia. Just in terms of the IFRS were pretty flat this quarter, a slide from the uptick in Calgary [indiscernible] came out yesterday with cap rate survey again not actual transactions on a survey basis kind of noting cap rates for downtown office [indiscernible] across the board, 25, 30 basis points in all major markets.

In terms of your thought process on the cap rate, is it simply assumption of just no trades within Allied specific type properties or notwithstanding that the confidence level high that cap rate indeed has not changed for your properties?

So we do adjust our cap rate, but it it's based on actual transactions completed as opposed to different research reports. So there was a trade in Calgary in Q3, which justified us getting up the cap rates in some of our Calgary assets, and we will continue looking at other transactions that take place in assets that might be comparable to our asset base and then -- and we'll revisit accordingly.

Okay. Well, thank you, Ben, and thanks to all of you for enjoying this most adventurous conference call with us.

I think at the end, we did manage to share a lot of information with you, and I hope you found it helpful and I hope all the conference calls that you participate in going forward are technologically better than this catastrophe was. So thank you again.

And if there are follow-up questions, don't hesitate to call any of us.