Allied Properties Dangles Data Center Asset Sale

(Bloomberg) -- Allied Properties Real Estate Investment Trust, a landlord to companies including Google and Morgan Stanley, is fortifying its balance sheet as pessimism takes hold over the future of office properties.

The Canadian company is attracting widespread interest for its proposed sale of data centers in downtown Toronto, which it values on its balance sheet at about C$1.2 billion ($883 million), Chief Executive Officer Michael Emory said in an interview. The company hopes to seal a deal in the second quarter. 

Allied will use the money to repay debt, which should free the company from having to sell bonds or raise equity for the next five years, with rates and valuations currently reflecting a bearish view on office real estate, he said.

“Neither the bond market nor the equity capital markets are interesting to us in their current state,” said Emory, who founded the company and will become executive chairman in May, when Cecilia Williams takes over as CEO. 

“The problem right now is sentiment,” Emory said, expressing faith that companies and their employees will realize that working in-person brings competitive advantages. “We’ve had our day in the sun and we’ll have it again. But today is not that day.”

The rise of remote work has investors and lenders viewing the long-term prospects of office landlords with skepticism, as they question whether the spaces will ever fill up like they did before Covid. Data from Kastle Systems shows office occupancy in the 10 largest US cities was less than 50% of pre-pandemic levels last week, while Canadian cities like Toronto, where many of Allied’s most valuable properties sit, have consistently lagged their American peers. 

Those worries have weighed on both the shares and bonds of office landlords like Allied. Its stock is down more than 50% from the high reached in 2020, and the market yield of Allied’s latest bond issue is around 6%, roughly double what it was when the securities were priced in August 2021, indicating how much more it would cost to borrow if it tried again now, according to data compiled by Bloomberg.

More pressure came on Thursday from Moody’s Investors Service, which put Allied’s rating of Baa2, the second-lowest investment grade rating, on review for a potential downgrade. The ratings provider cited high debt levels, leasing risk and weaker near-term liquidity — though it said a successful sale of the data centers will help.

Emory said the Moody’s review validates the company’s decision to sell the assets, which, in combination with increased earnings from the completion of development projects, will bring Allied’s debt levels down over the next two years.

“The preliminary indications of interest are very encouraging,” he said about the data centers sale. “There are domestic prospects, there are North American prospects, and there are global.”