TD comments after conferenceEvent Forecast update.
Impact: SLIGHTLY NEGATIVE
While the 2024 outlook translates into FFO/unit that is slightly below consensus, the 9% decline in the share price this morning is an over reaction, in our view. It was not surprising to us that 2024's outlook would be more uncertain than in previous years (which our estimates already reflected) with a higher/more volatile interest rate environment extending the decision-making time frame on what are large, multi-year capital commitments by tenants. We were encouraged to hear that activity remains robust with touring activity up on a year-over-year basis (confirming what we heard at our early January conference; link) and that there is ~600,000sf of leases under active negotiation. With a minimal 7% of leases maturing in 2024 (no significant expected non-renewals) and 10% in 2025, we believe Allied is well-positioned to ride out current weaker market fundamentals. Allied's balance sheet is also in good shape with Q4 D/EBITDA of 8.2x (management's calc) and $1.1 billion of liquidity.
Forecast.
Our 2024 FFO/unit estimate declines 1% on lower NOI, while our 2025 estimate declines 4% on lower NOI and higher interest expense. Our NAV estimate declines 7% to $28.10 on a lower NOI outlook.
Valuation.
With Allied's unit price down ~9% today, it is trading at an 8.4% implied cap rate and a 37% discount to our revised NAV. The 9.2x P/Forward AFFO valuation remains well below its historical 17.2x average and close to the low 8x levels seen at the bottom of the GFC and last October. Versus U.S. comps (Exhibit 8), Allied trades at a 23% discount on P/AFFO, versus the 1% historical discount since 2018.
TD Investment Conclusion
We expect continued near term volatility in Allied's share price that we believTe is currently more sentiment driven than based on fundamentals. For investors that can stomach the volatility, we view the current 10% distribution yield as secure over the near-term, and view the current trading price as an attractive entry point. We are maintaining our BUY rating and lowering our target price to $23.00.