What Allied Properties Real Estate Investment Trust (AP.UN) Said on Its Q3 Earnings Call

Key Points

• Allied is cutting its distribution and accelerating asset sales to retain approximately C$126 million annually and repay debt. It expects about C$660 million in 2026 sale proceeds and is targeting a mid-11-times debt-to-EBITDA ratio by year-end, while expanding its longer-term disposition program by C$750 million to C$1.5 billion.
• Third-quarter FFO fell to C$38 million from C$65.7 million a year earlier, while AFFO declined to C$21.6 million. Allied also lowered its 2026 outlook for NOI and FFO, citing weaker operating income, reduced Westbank loan interest income and higher leasing costs.
• Leasing activity is improving, with the pipeline up 49% year to date and the year-end occupancy forecast raised to 86%-86.5%. However, management expects much of the cash-flow benefit from current leasing expenditures to emerge in 2027 and 2028.

Allied Properties Real Estate Investment Trust TSE: AP.UN said it is reducing its distribution and expanding its asset-sale program as it seeks to lower leverage, while management pointed to improving leasing activity that has yet to fully translate into earnings and cash flow.

President and CEO Cecilia Williams said the distribution reduction will retain approximately C$126 million annually within the business. The additional cash, together with proceeds from accelerated property dispositions, is intended to support debt repayment while maintaining capacity for leasing and capital requirements.

“Our priorities are clear: reduce leverage, streamline the portfolio, and convert our leasing progress into recurring cash flow,” Williams said.

Lower Earnings Outlook and Quarterly Results

For the third quarter, Allied reported funds from operations, or FFO, of C$38 million, or C$0.194 per unit, down from C$65.7 million, or C$0.470 per unit, a year earlier. Adjusted funds from operations, or AFFO, totaled C$21.6 million, or C$0.110 per unit, compared with C$61.2 million, or C$0.438 per unit, in the prior-year quarter.

Chief Financial Officer Craig MacIntyre attributed the FFO decline principally to lower operating income, reduced interest income from Westbank-related loans, and lower interest capitalization as development and upgrade projects were completed. Operating income was about C$12 million lower year over year, while interest income declined by approximately C$9 million.

Gross interest expense before capitalization declined about C$4 million, or 9%, from the prior year as debt balances were reduced, MacIntyre said. However, the amount of interest capitalized fell materially, increasing the interest expense recognized in earnings.

AFFO was also affected by higher leasing costs. Regular leasing expenditures totaled C$10.5 million during the quarter, compared with C$1.7 million a year earlier. MacIntyre said the spending reflects increased leasing activity that is expected to contribute partially to cash flow in 2027, with the full benefit expected in 2028.

The REIT recorded a fair-value loss of approximately C$39 million across investment properties and properties held for sale during the quarter. Management said valuation changes reflected leasing activity, capital requirements and selective capitalization-rate adjustments, although overall valuation parameters were relatively stable.

Allied lowered its 2026 outlook for net operating income to C$300 million to C$305 million, from a previous range of C$310 million to C$320 million. It now expects annual FFO of C$170 million to C$175 million, down from its prior outlook of C$185 million to C$200 million.

Dispositions and Debt Reduction

At Sept. 30, Allied’s net debt-to-EBITDA ratio was 12.5 times on a nine-month annualized basis. MacIntyre said the increase from the second quarter largely reflected lower EBITDA after the REIT recorded no interest income from Westbank-related loans during the quarter.

Allied has completed C$321 million of dispositions and has firm agreements for about C$340 million of further sales expected to close in the fourth quarter, including Toronto House and 19 Duncan. Management expects total year-end proceeds from completed and firm transactions of approximately C$660 million, exceeding its original C$500 million target for 2026.

Proceeds are expected to be directed toward debt repayment, with Allied targeting a mid-11-times debt-to-EBITDA ratio by year-end. The REIT also expanded its multi-year disposition program, targeting an additional C$750 million to C$1.5 billion in sales through 2027 and beyond.

MacIntyre said the company’s focus will remain on non-core and non-strategic properties, but that no asset is necessarily off the table if selling selected core assets could produce favorable pricing and support faster deleveraging. He described a sub-eight-times debt-to-EBITDA ratio as a healthier long-term level for an investment-grade REIT.

Allied faces C$700 million of unsecured debentures maturing in April 2027. The REIT currently expects to repay at least C$350 million of that amount with disposition proceeds and refinance the remainder through secured or unsecured debt, depending on available pricing and terms. MacIntyre said secured debt currently appears more attractive than unsecured debt, citing a pricing gap of roughly 50 basis points and demand for high-quality office properties.

Leasing Momentum Supports Higher Occupancy Outlook

Chief Operating Officer J.P. Mackay said leasing activity and the REIT’s pipeline continued to strengthen. Allied raised its year-end occupancy outlook to between 86% and 86.5%, from its earlier range of 84% to 86%.

Occupied area stood at 84.9% at the end of the third quarter, while occupied and leased area was 86.8%. The company completed 427,000 square feet of leasing during the quarter, including 226,000 square feet of new leasing and 161,000 square feet of renewals in its rental portfolio.

• Allied represented 5.5% of rental stock in its markets but accounted for 7.6% of total new leasing activity in the third quarter.
• Its leasing pipeline reached 1.95 million square feet, up 49% since the beginning of the year and 12% from the second quarter.
• Heritage workspace accounted for 70% of third-quarter leasing activity.
• New leasing spreads, excluding flex workspace, rose 3.4% on an ending-to-starting base-rent comparison and 15.9% on an average-to-average basis.

Mackay said the company is in advanced discussions with a technology, advertising, media and information, or TAMI, user to backfill up to 45,000 square feet of space vacated by Sun Life at the de Gaspé portfolio in Montreal. Allied also said it had consented after the quarter to a sublease for the remaining Shopify space at The Well, meaning the entire Shopify space there is now subleased.

Management said it has not seen a negative impact from artificial intelligence on leasing activity. Mackay said the REIT has instead experienced a net positive effect as AI and AI-adjacent firms seek space in its markets.

Westbank Loans and Development Updates

Williams said Allied’s priority at 150 West Georgia is maximizing recovery of its outstanding loan. Construction delays and discussions with an established operator have moved the expected resolution into 2027. The REIT has retained Finnegan Marshall to monitor construction progress and costs and said it is engaged with interested parties, without identifying them.

Williams acknowledged that impairment of the C$270 million loan is possible but said management does not see that outcome currently.

At KING Toronto, Allied said completion remains on track for the second half of 2027. MacIntyre said management remains comfortable with projected costs and timing, and expects units to be delivered ahead of the project’s May 2028 outside Tarion date. The REIT’s default assumption for KING Toronto buyers remains 30%, he said.

Williams said the company’s immediate focus is executing on property sales, applying proceeds to debt repayment and converting signed leases into recurring cash flow. “We know confidence will be earned through results,” she said.

About Allied Properties Real Estate Investment Trust (TSE:AP.UN)

Allied is a leading owner-operator of distinctive urban workspace in Canada's major cities. Allied's mission is to provide knowledge-based organizations with workspace that is sustainable and conducive to human wellness, creativity, connectivity and diversity. Allied's vision is to make a continuous contribution to cities and culture that elevates and inspires the humanity in all people.

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