Allied Properties Real Estate Investment Trust (TSE:AP.UN) used its fourth-quarter 2025 earnings call to outline a balance sheet-focused action plan and introduce a multi-year outlook through 2028, while also acknowledging that 2025 results fell short of management’s expectations.
The company did not hold a question-and-answer session, citing its concurrent equity offering announced the prior day.
Leadership update and balance sheet “action plan”
Williams said 2025 was “a challenging year” and that Allied did not meet certain operating and deleveraging targets. She pointed to slower-than-expected lease finalization and higher interest expense tied to carrying debt associated with completing the development pipeline and advancing settlement of loans receivable. Those factors weighed on earnings and delayed balance sheet improvement, which she described as “unsatisfactory and below our expectations.”
In response, management began executing an action plan aimed at strengthening the balance sheet and improving financial flexibility. Williams described three components:
- Expanding the property disposition program
- A distribution reset implemented in December
- A marketed equity offering announced the day before the call
Williams said the equity offering was a capital structure decision made after assessing alternatives. She noted that while asset sales are underway, their timing is not entirely within the company’s control. She also cautioned that taking on additional leverage could pressure Allied’s investment-grade rating and raise interest expense. While acknowledging potential dilution if the equity offering is completed, she said management concluded the offering was an appropriate step to support the capital structure.
2025 financial results: stable revenue, lower operating income, higher interest burden
CFO Nan reviewed 2025 results and balance sheet actions. She said rental revenue was stable at approximately CAD 592 million, while operating income declined to CAD 317 million, primarily due to non-renewals and asset dispositions.
Same-asset net operating income (NOI) declined by about 1% for the year, which management said was in line with revised expectations. Nan emphasized that interest expense remained elevated, and said the slower-than-anticipated pace of dispositions contributed to performance pressure.
Allied closed CAD 93 million of dispositions in the fourth quarter of 2025, with an additional CAD 46 million expected to close in the first quarter of 2026. Nan said dispositions took longer than anticipated, contributing to year-over-year declines in FFO and AFFO of 12.8% and 12%, respectively, versus a prior expectation for roughly a 10% contraction.
Leverage, fair value adjustments, and loans receivable provisions
Nan said Allied’s indebtedness ratio increased from 45% in the third quarter to 51% at year-end. She attributed the change primarily to approximately CAD 1 billion in IFRS fair value adjustments tied to cap rate expansions, updated cash flow assumptions, and higher construction costs.
The company also recorded a CAD 128 million provision for expected credit loss on a portion of its loans receivable, based on a probability-weighted recovery assumption under IFRS.
On specific financing updates, Nan said Allied:
- Extended the maturity of the 150 West Georgia loan to December 2026 and expanded the facility by CAD 27 million to facilitate completion and sale, supported by incremental collateral
- Extended the KING Toronto loan to March 2027 and expanded the facility by CAD 23 million to fund construction while the construction loan remains inaccessible
Nan said these steps were “not preferred,” but were taken to help safeguard Allied’s investment and enable continued progress.
Leasing and occupancy: stronger second half, but near-term vacancy pressure expected
Chief Operating Officer JP said his remarks would be limited given the ongoing equity offering, focusing on leasing data and portfolio activity.
JP said leasing fundamentals improved in 2025, particularly in the second half, supported in part by higher physical utilization and return-to-office mandates. In the second half, Allied reported a 57% increase in new leasing compared with the first half, while expansion activity rose 180%. The average tour size increased more than 30% versus the first half, and sublease availability decreased 50% in the second half.
For the full year, Allied achieved 2.7 million square feet of total leasing activity across its rental and development portfolios, including new leasing and renewals, representing a 22% increase compared to 2024. However, JP said this was offset by 231 basis points of occupancy decline related to M&A consolidation and bankruptcies. Allied ended the year with occupied and leased area in the rental portfolio essentially unchanged from year-end 2024 at 85.3% and 87.4%, respectively.
Sublease availability declined 53% in 2025 to 2.6% of total gross leasable area (GLA). JP said leasing in the modern segment of the portfolio in Toronto and Montreal supported an improved credit profile and sector diversification among the top 10 tenants.
In the fourth quarter, Allied completed 732,000 square feet of leasing activity, including 393,000 square feet of new leasing (376,000 in the rental portfolio and 17,000 in the development portfolio), which JP said represented a 40% conversion rate.
Looking ahead, Allied’s three-year forecast anticipates a gradual move toward its historical average rental portfolio occupancy of approximately 90%. JP said the company expects a modest decline in occupancy in the first half of 2026 from known non-renewals, with year-end 2026 occupancy forecast at 84% to 86%, followed by 86% to 88% in 2027 and 88% to 90% in 2028. He said achieving those levels requires annual leasing volumes similar to 2025.
At the end of the fourth quarter, Allied had 1.2 million square feet, or 8.5% of GLA, maturing in 2026, and forecast a retention and replacement rate of roughly 69%. JP identified the largest known non-renewal in 2026 as Sun Life Financial at Allied’s Gaspé portfolio in Montreal (56,000 square feet) maturing at the end of August. He also said vacancy is concentrated, with 10 assets accounting for 55% of total vacancy, attributing those vacancies to “non-structural, event-driven factors” such as M&A consolidation, bankruptcies, and relocations to new developments within Allied’s portfolio.
2026–2028 outlook: “reset year” and deleveraging focus
Management introduced a multi-year outlook for 2026 through 2028, which Williams said was intended to be evaluated over time based on execution and the reasonableness of assumptions. She said the outlook reflects two primary assumptions: potential occupancy improvement as market conditions normalize, and continued deleveraging expected to reduce balance sheet pressure.
For 2026, Nan said Allied estimates NOI of CAD 310 million to CAD 320 million and FFO of CAD 185 million to CAD 400 million, with net debt-to-EBITDA in the mid-11x range. Under current assumptions, she said net debt-to-EBITDA would move into the low-10x range by 2027, driven by EBITDA growth from economic occupancy in the organic portfolio and development completions, along with incremental debt reduction as the company closes on the KING Toronto condominiums in 2027.
Nan added that management anticipates potential growth in FFO and same-asset NOI in 2027 and 2028 as leasing activity annualizes. She characterized 2026 as a “reset year,” while citing improving market fundamentals, including increased demand for well-located office space and limited supply.
Williams closed by reiterating that Allied’s priorities are disciplined execution of the distribution reset, asset dispositions, and the equity recapitalization aimed at strengthening the balance sheet, positioning the company to benefit from improving fundamentals over time.
About Allied Properties Real Estate Investment Trust (TSE:AP.UN)
Allied Properties Real Estate Investment Trust is a real estate investment trust engaged in the development, management, and ownership of primarily urban office environments across Canada’s major cities. Most of the total square footage in the company’s real estate portfolio is located in Toronto and Montreal. Allied Properties derives nearly all of its income in the form of rental revenue from tenants in its properties. The majority of this revenue comes from its assets located in Central Canada.
