RE:TD commentEvent Forecast update.
Impact: NEUTRAL
Fundamentals continued to soften in the quarter as occupancy declined 120bps to 87.6%. The decline was due to a non-renewal in Toronto (which Allied anticipates filling with a short-term tenant) and upgrade activities at two Montreal assets.
Management highlighted that it still expects to achieve full year net occupancy gains during 2023, including an incremental rebound in Montreal. Leasing activity remains resilient, with management targeting its historical 75%-80% renewal rate for 2023. That said, management noted deals are taking longer to complete, owing to a softer economic environment and tenants' market. However, with only 12% of leases maturing through 2024, Allied is well positioned to ride out the current weaker fundamentals, in our view.
Tour activity back to pre-pandemic levels. Allied completed 292 tours in the quarter, +20% and +13% on a q/q and y/y basis, respectively, and well above the 219 quarterly average since the onset of the pandemic. Management noted that Q2 tour activity was representative of similar levels during the pre-pandemic market, and highlighted particular strength in the Toronto, Vancouver, and Calgary markets.
Revised guidance in line with consensus. We do not view management's lowered guidance as a surprise given it was already reflected in current consensus estimates (-0.7% and -0.4% FFO and AFFO growth for FY23). Allied now expects flat-tolow single-digit same-asset NOI, FFO, and AFFO growth for 2023. Management noted that the guidance revision was due to higher-than-expected H1/23 interest expense (which will dissipate in H2/23 following the ~$1bln in debt repayment) as well as longer timelines for completing leasing deals.
Forecast. Our 2023/2024 FFO/unit estimates decline 1% largely on higher interest expense and lower NOI. Our AFFO/unit estimates are -1%/-2%. Our NAV increased 2.3% owing to the UDC portfolio sale at a premium to our previous valuation.
TD Investment Conclusion Pro-forma the UDC sale, we believe Allied is well positioned to ride out a period of weak office fundamentals and at an 8.1% implied cap rate, we do not believe this is being reflected in the current unit price. We are maintaining our BUY rating and $27.00 target price.