TD downgradeEvent
Resuming coverage following completion of 5.75% $40mm convertible unsecured debenture.
Impact: SLIGHTLY NEGATIVE (majority of target price reduction reflects sector-wide revisions made this month)
Our Take: While the offering was somewhat unexpected, the proceeds are slated to support the growth of the Trust's income producing property portfolio, which we view favourably. Impact is in advanced stages of negotiations for over $55mm (at the Trust's interest) of GTA multi-family assets (~100 suites at the Trust's interest) and land slated for redevelopment. In our previous note (link), we highlighted the progress made over the past 12 months growing the recurring income portfolio, which is up 83% y/y on a GLA basis. Pro forma the assumed acquisitions, the Trust's multi-family portfolio increases ~20% to ~580 suites (~$1.2mm of NOI on an annualized basis).
Offering. The converts carry a 5.75% interest rate, just 25bps above the rate on its $30mm convert issued on August 3, 2021, and matures on December 31, 2027. The conversion price is $8.00, which is below the most recently published NAV/unit of $9.31. The proceeds will be directed to eligible impact investments in accordance with the Trust's Impact Framework, although initially they may be used to pay down the existing balance on its credit facility ($13.2mm drawn as at May 2, 2022).
Forecast. Our 2022/23 EPS estimate declines largely on lower assumed FV gains, to reflect the broader macro uncertainty. We have included an additional $55mm of acquisitions under equity accounted investments.
We have also lowered our NAV/ unit estimate to $9.30, from $9.50, to reflect changes made across our coverage earlier in June (link).
TD Investment Conclusion Impact continues to make good strides advancing its strategy, as well as growing its recurring income portfolio. We still see a good runway of growth and NAV discount compression for investors to benefit from. With an 8.3% yield (second highest in our coverage), we believe investors are being well compensated as they wait for the valuation to improve.
We are lowering our target price to $6.50 on the back of our lower NAV/unit estimate and sector-wide target price revisions made both earlier this week and this month (link, link).