Our view: Amid concerns of a decelerating economy, we expect FCR to continue putting up healthy organic growth, backstopped by its defensive, urban concentrated assets and a tight retail backdrop. As well, progress on the portfolio optimization plan is encouraging, as management’s ability to monetize value created in challenging conditions should ease investor concerns on execution risks. Given a healthy growth profile and steeply discounted valuation, we maintain our Outperform rating; PT to $19 (-$1).
Key points:
Asset quality and tight fundamentals underpin sound operational view.
Q2 SP-stable NOI increased 2.2% YoY (+3.1% YTD) from higher rents and variable revenue, partly offset by lower occupancy (-40 bps QoQ to 95.9%). Quarterly renewal spreads can swing around, but FCR’s +14% print (+11% YTD) was particularly robust and marked its second-highest on record. As well, based on interest from multiple tenants, FCR expects to backfill its former Nordstrom Rack space by early 2024 at materially higher rents. In short, strong population growth, limited new supply, and FCR’s strong assets seem well positioned to counter an economic slowdown. Our 2023E–24E organic growth calls remain in the 2.5–3.5% range.
Monetizing value created, one deal at a time. FCR announced another $91MM of dispositions, including development land in Montreal, a non- core income property in Newmarket (sub-4% cap rate), and a property in downtown Toronto. Importantly, aggregate pricing is 40% above FCR’s book value. The sales also mark further progress toward FCR’s $1B target by Q4/24, with $460MM announced to date at unlevered yields of <3% and 17% above IFRS values. In short, despite market challenges, FCR has managed to monetize value created, de-lever, and drive earnings growth by redeploying proceeds into paying down higher-cost debt, unit repurchases, and select acquisitions. We expect the disposition pace to pick up in 2024, with our D/EBITDA dropping to the low-9x range from the current 10.3x.
Respectable growth, all things considered. Our 2023E–24E FFOPU are $1.15 (+$0.02) and $1.21, and we introduce 2025E at $1.26 (+4% YoY). Our 2021A–24E CAGR is 2%, marginally below its retail peers (3%) but in line with the sector. Excl. other gains/losses, our CAGR is 4%, consistent with FCR’s target and in our view a strong pace in the context of simultaneous de-leveraging. Our current/1Y FWD NAVs remain at $21.50/$23.
Outperform, PT to $19 (-$1) on a lower target multiple (~18% discount to FWD NAV vs. prior -15%) amid higher rates. FCR’s trading at 32% below NAV (14x 2024E AFFO/6.7% implied cap), well below its retail peers (-16%) and the sector (-26%). We believe uncertainty surrounding a potential reduction of Artis/Sandpiper’s stake in FCR may continue to serve as an overhang (it appears AX reduced its stake in Q2). Still, we see current levels as an attractive entry to a name with high-quality assets, healthy growth, a framework to de-lever, and a large pipeline of value-add opportunities.