Allied Eyes 10-Year Bond to Fund Office Push for Toronto Tech
(Bloomberg) -- Allied Properties Real Estate Investment Trust is planning to spend about C$1 billion ($790 million) over the next five years to meet the frenzied demand for offices by tech workers in Canada’s biggest city.
The office landlord and developer will commit a large chunk of that capital to The Well, 1.6 million square feet of office and retail space in Toronto, targeted for completion in 2021, Chief Executive Officer Michael Emory said. To help fund the project, he reiterated Allied aims to issue 10-year bonds in Canada, likely in the C$200 million range.
“We no longer have any doubt about our ability to issue a 10-year bond. There is demand for it and our bonds have traded very, very well,” Emory said in an interview at Bloomberg’s Toronto office. “There’s a very good chance we will issue a 10-year unsecured debenture in the latter half of 2018.”
Allied has been extending the maturity of its bond offerings since its debut sale of C$225 million of five-year notes in 2015, followed by six-and-a-half-year and eight-year bonds. Choice Properties REIT was the most recent industry player to sell 10-year bonds in the Canadian market, issuing C$750 million of 4.178 percent securities at 195 basis points above federal government bonds in March in what was Canada’s largest bond offering from a REIT.
Allied REIT’s longest bonds to date -- 3.636 percent notes maturing in 2025 that were sold in April last year -- traded at a spread of around 200 basis points on Thursday, according to data compiled by Bloomberg. That compares with a spread of around 170 basis points on similar-maturity bonds of higher-rated peers SmartCentres REIT and First Cap Realty.
Still, Allied’s spreads have shrunk since the beginning of the year, bucking a widening in the rest of the market including for SmartCentres and First Cap. Its units have returned 14 percent over the past 12 months to stockholders, compared with little change in the S&P/TSX Capped REIT Index.
Allied and RioCan Real Estate Investment Trust, the joint owners of the commercial portion of The Well are hoping to secure two tenants in tech, advertising, media or information by the third quarter of this year to represent just under 50 percent of the office space, which could cost as much as C$750 million to build. Negotiations with several tenants are ongoing, Emory said, declining to identify any. “It is progressing well and that’s the top priority, without question -- this is what we have to deliver this year,” he said.
Some of Allied’s current tenants include Shopify Inc., which will be a tenant at another Allied office project on King Street West.
“Activity in Toronto is the most intense as you’d expect it to be, given the demand that exists in the marketplace today,” Emory said. The downtown vacancy rate in Toronto was 2.5 percent for the first quarter of 2018, a historic low for the area, according to Avison Young.
Allied will probably also make several small acquisitions through the end of the third quarter so it’s likely the company will raise more equity too, though nothing is in the works at the moment, Emory said.
He’s also looking to add rental apartments to the development pipeline, as soaring house prices push more millennials into the leasing market.
“We don’t have a god-given right to own a home downtown,” Emory said. “But renting is a very dignified way to accommodate yourself and your family, and you want good rental stock created and managed by professional managers, not by remote condo owners.”
Though rentals won’t be become large part of Allied’s asset base they can be a “phenomenal asset” if cared for properly.
But new government rent controls in Ontario are a barrier to development -- so much so, that Allied and RioCan recently sold the residential portion of a mixed-use development on King Street West as condos instead of making them rentals.
“We’re at a point where it is economic to create rental, residential space and the residential stock in Ontario is horrific because of decades of rent control,” he said. “Now our ability to grow our revenue stream is at least compromised.”
Still, Toronto is undergoing “historic transformations” and a key draw for office tenants, is the infusion of historic brick-and-beam with modern spaces.
“Even the chartered banks are becoming aware of the fact that they need to use space as a means to compete for talent,” he said.
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