TD comments after conferenceTHE TD COWEN INSIGHT
We view this morning's ~4% unit price decline as somewhat surprising given the in-line quarter and increased optimism in management's outlook. Steady near-term occupancy gains should translate into SPNOI growth in 2025, which would be a positive catalyst, in our view. Management is also making good progress on the balance sheet, and we view the mid-8x leverage target as achievable.
Impact: NEUTRAL
Occupancy has potentially reached an inflection point. Following two consecutive quarters of occupancy gains, management was notably more confident in near-term leasing prospects.
This is based on: 1) increasing utilization in the portfolio, which is consistent with broader stats (Fig. 4); 2) a higher lease conversion rate (68% in Q3 vs trailing 12-month avg of 42%); 3) increasing expansion activity from current tenants; and 4) increasing size of mandates +10,000sf. Near-term occupancy gains should be supported by ~960k sf of leasing activity under negotiation, and no known material non-renewals through 2026. With only 2%/10% of leases maturing over the balance of 2024/25, we continue to believe Allied is well-positioned to ride out current weaker market fundamentals.
Expecting further leverage improvements next year. Allied continues to make progress on its deleveraging efforts, with D/EBITDA falling 20bps q/q to 10.7x. Management reiterated its mid-8x target in 2026. We view this level as achievable (although our more conservative EBITDA growth forecast keeps our Q4/26 estimate at >9x).
We believe Allied is wellpositioned to manage its near-term debt maturities (Fig. 7), supported by $400mm in non-core asset sales by 2025 ($190mm to close by year-end; avg 3.5% yield), $683mm in mortgage commitments, and last month's $250mm debenture issuance.
Forecast. Our AFFO/unit estimates are largely unchanged in 2024/2025 while we have modestly increased our 2026 estimates +1.5% on lower interest and G&A expense, partially offset by lower NOI. Despite management expecting a “steady return to earnings” in 2025, we still forecast a 3% decline before turning modestly positive in 2026 (+2%). Our NAV estimate declines 3% to $22.40 (lower NOI).
Valuation. Allied's current 10.6x P/Forward AFFO is well below its historical 16.9x average. Versus U.S. comps (Figure 12), Allied trades at a 46% discount on a forward multiple basis, compared with a 5% average discount since January 2018. We see good absolute and relative value in Allied and believe investors are being well compensated to wait for improving operating metrics.