Toronto's The Well was jointly developed by Allied Properties REIT and RioCan REIT.
Allied Properties Real Estate Investment Trust units AP-UN-T dropped by 28 per cent on Wednesday after the office property owner surprised investors with a $500-million share sale to pay down debt and missed its year-end target for building occupancy.
Allied units closed at $10.14 on Wednesday, below where they traded during the 2008-09 global financial crisis and down 82 per cent from their all-time high in 2020. Investors were startled by the share sale, as well as by changes that include a $1.4-billion portfolio writedown and plans to sell another $500-million in properties to fix the REIT’s balance sheet.
On a conference call Wednesday, Allied chief executive officer Cecilia Williams described the changes as an “action plan” that will strengthen the balance sheet in a challenging leasing market and also improve the company’s long-term growth prospects.
Without them, she said, Allied faced the prospect of seeing its investment grade credit rating cut to junk status, which would increase borrowing costs.
Allied Properties REIT slashes distribution by 60 per cent as units trade near financial-crisis lows
Allied, like many office building owners, has struggled because occupancy remains low relative to prepandemic levels. However, the REIT also amplified its problems by pursuing development opportunities over the past decade.
Historically, REITs owned income-producing assets and were designed to be safe, stable investments that paid reliable monthly distributions. Allied struck a partnership with Vancouver-based developer Westbank, and the projects they developed together continue to cause problems for the REIT, largely because of the debt incurred.
Allied has been trying to reduce its debt load by selling properties to raise cash, including its data centre portfolio in downtown Toronto for $1.35-billion. The REIT also cut its monthly cash distributions by 60 per cent in December in order to conserve cash to help pay down debt.
But those efforts haven’t been enough. Allied owes lenders approximately $4.7-billion, including a $600-million debenture that comes due on Feb. 12. The REIT plans to tap its line of credit to repay the debenture, then use money from the equity offering to pay down its line of credit.
Allied planned to sell the units at a price between $10 and $10.50 each, according to sources working on the transaction. The Globe and Mail is not disclosing the sources’ names because they are not permitted to speak for the REIT.
Prior to the share sale, Allied had a $1.9-billion market capitalization, implying the $500-million offering will dilute existing owners by 26 per cent.
The REIT plans to raise $350-million by selling units in a marketed equity offering, and an additional $150-million by selling units to the Alberta Investment Management Corp. in a private placement. Allied and its banks are conducted a marketing campaign that will set the price of the units being sold by the REIT.
The AIMCo transaction will proceed only if Allied completes the public sale of units, which is being led by the investment dealers arms of Bank of Nova Scotia BNS-T, Canadian Imperial Bank of Commerce CM-T and Royal Bank of Canada RY-T.
On Wednesday, credit rating agency Morningstar DBRS put Allied under review after the REIT missed its year-end leasing and asset sales targets. In a release, Morningstar DBRS said if Allied failed to sell properties and complete the equity offering, “there could be further negative implications to the credit rating.”
Allied’s development woes largely stem from its partnership with Westbank, which started in 2013 and expanded over the following decade. Their projects were fruitful for many years because interest rates remained low, but the situation changed in 2022 when central banks started aggressively raising rates to combat inflation and many construction projects went overbudget because of cost increases.
In the wake, Westbank ran into financial trouble and Allied was forced to restructure their joint developments.
In Vancouver, for instance, Allied had lent $198-million to Westbank for its development of 400 West Georgia, but in 2024 the REIT converted $130.5-million of the loan into equity and ended up owning a 90-per-cent equity stake in the project.
In Toronto, Allied did the same with a development known as 19 Duncan, converting $67.5-million of a loan still owed by Westbank to equity.
Allied also has yet to calm investors’ nerves about its large developments, including the KING Toronto project in downtown Toronto, designed by the Bjarke Ingels Group. On Wednesday, Allied said it extended a credit facility to the project until March, 2027, and also expanded it by $23-million. On the conference call, chief financial officer Nanthini Mahalingam said the project’s construction loan “remains inaccessible.”
Investors are also spooked by a $1.4-billion portfolio writedown this week, something Allied attributed to falling property values, adjustments to its cash flow assumptions in its rental portfolio and construction cost increases in its development portfolio.