Allied Properties Real Estate Investment Trust (TSE:AP.UN) reported second-quarter leasing activity that exceeded management’s expectations, while continuing to pursue asset sales and debt reduction as it works to strengthen its balance sheet and concentrate its portfolio on higher-quality urban workspace.
President and CEO Cecilia Williams said the REIT has entered “a new phase” following more than a decade of portfolio investment and development. Management is now focused on realizing earnings potential through leasing execution, capital discipline, deleveraging and selective dispositions.
Leasing Activity and Occupancy Outlook
Senior Vice President and COO J.P. Mackay said Allied represented 5.5% of office inventory in its operating markets but accounted for 7.4% of new leasing activity in the first half of 2026. He attributed the performance to the quality of the portfolio and the company’s operating platform.
During the quarter, 463,000 square feet of leasing occurred in the rental portfolio and 59,000 square feet occurred in the development portfolio. Rental-portfolio leasing included 105,000 square feet of new leases and 358,000 square feet of renewals. Heritage workspace represented 71% of total leasing activity.
- Allied’s Heritage and Modern portfolios were 87% leased.
- Its Flex portfolio was 78% leased.
- New-leasing spreads, excluding Flex space, rose 8% on an ending-to-starting base-rent comparison and 9% on an average-to-average basis.
- Year-to-date average leasing costs were C$6.27 per square foot annually, compared with C$7.01 in 2025.
- Professional services and TAMI tenants accounted for more than three-quarters of transaction volume in the first half.
The REIT retained its year-end occupancy target of 84% to 86%, despite the stronger second-quarter result. Mackay said the company needs to lease between 1.05 million and 1.35 million square feet in its rental portfolio through new leases and renewals that affect 2026 occupancy. Allied had leased 633,000 square feet toward that goal year to date.
Management expects occupancy to be flat or slightly lower in the third quarter due to known non-renewals and the timing of lease commencements. Of 545,000 square feet maturing during the remainder of 2026, Allied expects about half will not renew.
Allied’s largest known 2026 non-renewal is Sun Life’s 56,000-square-foot space at the De Gaspé portfolio in Montreal, which expires at the end of August. Mackay said Allied is in advanced discussions with a TAMI tenant to backfill as much as 45,000 square feet, with occupancy expected in the fourth quarter of 2026 or first quarter of 2027.
Pipeline Growth and Market Conditions
Allied said it had 1.7 million square feet of leasing activity underway, its largest reported pipeline. The figure includes 1 million square feet of new opportunities and 717,000 square feet of renewals. Of the new-leasing activity, 632,000 square feet was at the prospect stage and 394,000 square feet had reached the offer stage.
The total pipeline has increased 33% since the beginning of 2026, while the new-leasing pipeline has risen 42%. Mackay said the company averaged a 1.3 million-square-foot total pipeline per quarter in 2025 and 950,000 square feet in 2024.
Management said its March initiatives to increase broker engagement and simplify leasing for small and midsize tenants have helped generate activity. The measures include tour bonuses, new-lease commission bonuses, accelerated commission payments, short-form gross-rent leases, construction oversight and built-out space.
Mackay said broker-led tour activity rose 39% in the quarter, while tours at Allied’s 10 highest-vacancy properties increased 79%. However, he said lease negotiations remain prolonged and the new-lease conversion rate was 29% in the first half, compared with 56% for all of 2025 when the new-leasing pipeline was smaller.
Management said it continues to face competition from incumbent landlords offering aggressive renewal terms. Mackay said Allied lost three Toronto leasing opportunities totaling roughly 75,000 square feet during the prior 30 days, with incumbent landlords retaining the tenants.
Allied sees positive momentum in downtown west Toronto and downtown south Montreal as demand extends beyond central business district triple-A buildings. It said demand remains softer in Kitchener, Toronto’s Bloor Street corridor, Montreal’s Mile End and Mile Ex areas, and Vancouver’s Gastown and Yaletown neighborhoods, although Yaletown tour activity improved during the quarter.
Financial Results, Valuations and Dispositions
Williams said same-asset net operating income declined 12.6% from the prior year, compared with Allied’s prior expectation of a 10% decline. The difference was driven by a one-time retroactive property-tax assessment.
Funds from operations were C$0.24 per unit and adjusted funds from operations were C$0.17 per unit, both in line with management’s expectations. Williams said the results reflected the property-tax assessment and lower-than-expected interest income.
The REIT recorded a C$760 million fair-value reduction on investment properties during the quarter. Williams said the adjustment followed recent market transactions and reflected higher market discount rates and capitalization rates rather than a fundamental change in the portfolio’s quality.
In response to analyst questions, Williams said the valuation reduction was primarily related to Toronto and Montreal, with smaller amounts related to Vancouver, Toronto House and Calgary House. Some of the reduction related to assets held for sale. She said it was fair to characterize the adjustment as affecting nearly every property to some degree, and that management was comfortable with its IFRS valuations.
Allied completed or secured approximately C$321 million of dispositions and reduced net debt to EBITDA to 12 times. The company said the assets sold were non-core, lower-yielding and geographically isolated properties. Mackay said the cash yield on closed asset sales was 3.4%, rising to 4% when including the firm sale of 1010 Sherbrooke West.
Management said it was finalizing an agreement of purchase and sale for Toronto House and had launched Calgary House’s sale process in June. Allied said its outlook for both dispositions remained intact but did not provide additional details.
Outlook and Other Updates
Williams said Allied updated its same-asset NOI outlook to reflect capital reallocation toward development completion and near-term leasing, while maintaining its broader expectations for dispositions, occupancy and deleveraging. She said the REIT remained confident it would meet its FFO and NOI guidance ranges, though results were expected to fall toward the lower end.
The company also confirmed that it expects little interest income during the second half of 2026. Williams said a loan associated with KING Toronto was credit-impaired during the quarter after a Westbank entity unrelated to Allied’s loans encountered a financial situation. She said the impairment reduces quarterly interest income by approximately C$3 million to C$3.5 million.
For KING Toronto condominium inventory, Allied said a 30% default rate had already been included in its financial statements. Williams said the company will have a customer-care team engage existing purchasers and a sales team market the remaining 8% of units over the next 18 months.
Allied also announced the appointment of Craig MacIntyre as senior vice president and chief financial officer. Williams said MacIntyre previously spent nearly two decades in capital markets and corporate finance, most recently at CREIT and Choice Properties.
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.
