TD down target price againTHE TD COWEN INSIGHT Q1/24 was overall in-line, with good progress since last quarter on addressing the remaining 2024 lease expiries. That said, occupancy took a step back, and the 206,000sf lease maturity at 74 Victoria St remains unaddressed. Although we await further clarity on occupancy and updates on dispositions, we reiterate our HOLD rating on D.un.
Impact: SLIGHTLY NEGATIVE
D.un's unit price is -15% since our April 10 downgrade, with the lead-up rally coinciding with insider buying by Dream Unlimited (adding 1% to hold 31.3% excluding management holdings) and Artis et al adding 2% to hold 18.77%. Despite this, we view D.un's trading valuation as fairly full relative to Allied (figures 5 and 6). Although the 12.5x P/AFFO absolute valuation and 9% implied cap rate appear cheap (and could ultimately prove to be), we believe at this time it sufficiently discounts the lingering balance-sheet concerns and office market's uncertainty. We are encouraged to hear management reiterate the ~$50/ unit valuation view for 2028 from the September 2023 investor day. Continued increases in downtown Toronto office utilization measures are also encouraging (LINK), with Wednesdays averaging 74% of pre-pandemic and Tuesdays-Thursdays likely similar.
The 90bps and 270bps q/q decline in committed and in-place occupancy, respectively, appears temporary (Figure 3). Committed leases for occupancy later in 2024 include 134,000sf in downtown Toronto (+7% rent, 7.6-year WALT). The 55,000sf industrial space (110bps of the total portfolio) at 1020 Birchmount Road has been re-leased as of Q3/24 at nearly double the rent.
Despite management not updating its 2024 occupancy, SPNOI, and FFO outlook, out of caution, we have reduced our forecasts slightly (Figure 1). Things we are watching at D.un: We understand the REIT continues to pursue dispositions, including 438 University and the 212-220 King St West assembly. We generally view dispositions at a reasonable price favourably. The 206,000sf government lease at 74 Victoria St expires in Q4/24, with multiple active discussions ongoing to fill this potential vacancy. Management is discussing with various lenders to extend/refinance the $225mm Adelaide Place mortgage ($340/sf) that matures in 2025. Adelaide Place's committed occupancy was -2% q/q and +1% y/y in Q1/24 to 81%.
Dispositions and debt refinancings remain key potential catalysts, in our view. The REIT has Debt/EBITDA above 11x, and 2025 debt maturities include the large $225mm Adelaide Place mortgage.
Justification of Target Price Our $19.00 target price (previously $20.00) uses a 12.5x-13.0x multiple on our 2025E AFFO and is ~37% below our NAV/unit estimate. Our target multiples are well-below historical averages to reflect higher vacancy and a slower leasing market, along with a muted transaction market for Office properties in Canada.