TD commentsTHE TD COWEN INSIGHT
We see several possible factors contributing to the recent +31% unit price rebound, and therefore have raised our Dream Office target price to $21. That said, with the valuation relative to Allied now back near historic highs, we are lowering our rating to HOLD from Buy.
Further outperformance remains possible, in our view, but await further clarity on interest rates, leasing, and dispositions.
Event: Yesterday after market close, D.un issued a press release in response to the recent unit price rally (+31% since April 2, vs. +11% for AP.un and 2% for the S&P/TSX Capped REIT Index). The release reiterated its pursuit of a few dispositions (nothing firm yet), and also its goals around improving occupancy and liquidity, and reducing leverage and costs.
Impact:
SLIGHTLY POSITIVE Possible reasons for the unit price rally include: i) potential progress on the dispositions of 438 University Ave and 212-220 King St W.; ii) downtown Toronto market data indicating physical occupancy continues to reach new post-pandemic highs (link); iii) nationwide office market space absorption turning positive in Q1/24 (link) and supply headwinds substantially dissipated vs pre-pandemic. We also believe some short-covering has occurred. We have also seen capital begin to flow back into the global office sector (albeit largely limited to high quality assets), and share prices of some real estate service providers and U.S. office REITs have been hitting new highs since H1/22 (e.g., CBRE-N, SLG-N). Also, Artis REIT (AX.un) has acquired a further 183k D.un units for ~$3mm since Q4 reporting.
We reiterate our cautious optimism on planned dispositions, with 438 University benefiting from a recent large government lease extension, and 212-220 King St W boasting highly unique and rarely-available locational attributes. Dream Office could also elect to sell some or all of its remaining 4.7% stake in DIR.un (valued at $177mm using last night's closing price). Reported leverage at Q4/23 was 11.5x Debt/EBITDA and 50% Debt/GBV.
Valuation (Figure 2). Following the recent price rally, D.un now trades at 13.6x 2024E P/AFFO vs. Allied at 10.0x, and at a 64% P/NAV vs. Allied at 69%. We note that D.un's trading valuations relative to AP.un on both metrics are now close to their historical highs, excluding during the 2023 SIB (Figure 1). Q1/24 Results. Dream Office is set to report Q1/24 results on May 9.
Valuation D.un is trading at 13.6x 2024E P/AFFO versus Allied at 10.0x (Figure 2), and a 36% NAV discount versus Allied at 31%.
Justification of Target Price Our $21.00 target price (previously $18.00) is based on a multiple of 13.5x14.0x (previously 11.5x-12.0x) applied to our 2025E AFFO/unit and represents a 36% discount to our NAV. Our target multiple increases on improved sentiment.