Our view: Post in line Q3 results, our constructive view on FCR is intact. In the face of economic headwinds, we believe its defensive portfolio remains positioned to deliver healthy organic growth. Indeed, high & stable occupancy, strong renewal spreads, and the backfill of vacancy at 1 Bloor St. E. speak to the portfolio's strengths. As well, we expect further progress on the portfolio optimization plan will monetize value created and drive earnings growth, while simultaneously de-leveraging. In short, we continue to like the setup at current discounted levels. Outperform, $17 PT (-$2).
Key points:
Organic growth slowed, but fundamentals in strong form overall. SP- stable NOI eased to +1.4% (+2.6% YTD), mainly due to Nordstrom lease termination in June at 1 Bloor St. East. That said, FCR has made significant progress on backfilling vacancy at the property. Notably, 32K sf was leased to Altea Active at rents that exceed Nordstrom’s ~$85/sf, with another 20K sf leased to Nike and a global retailer (rents commence in late 2024). Aside from modest WeWork exposure (25K sf at King High Line; we estimate < $0.01/unit potential impact), FCR cited a deep leasing pipeline with strong demand across its core retail tenants. Coupled with minimal new supply and solid leasing spreads, our forecasts reflect +2-4% SP NOI through 2025.
Portfolio optimization plan on track; confidence remains high. Including deals under contract, FCR has sold $517MM of assets since Q4/22 at a <3% yield, well on its way to its $1B target by the end of 2024. Notwithstanding headwinds from rising interest rates, transactions were priced at 14% above IFRS values. Management remains confident in selling the balance and reiterated its targets for <10x debt/EBITDA by Q4/24 (<$4B net debt) and $1.20+ of 2024 FFOPU. Considering the encouraging progress, our 2024E reflect a further $460MM of dispositions, with our leverage dropping to the low-9x range from 10.1x.
Earnings estimates tweaked, NAV trimmed. Our 2023E-25E FFOPU are $1.17 (+$0.02), $1.20 (-$0.01), and $1.25 (-$0.01). Our 2021A-24E CAGR is 2%, fairly close to its retail peers (3%) and in line with the sector (2%). Excluding other gains/losses, our CAGR is 4%, in line with the growth implied by FCR’s 2024 FFOPU target. We lowered our NAVPU to $20.50 (- $1) on a higher cap rate (+25 bps), with our 1YR FWD NAVPU at $22 (-$1).
Outperform, PT curbed to $17 (-$2) on the reduction of our FWD NAV and a lower target multiple (25% discount to FWD NAV vs. prior -18%) amid a higher for longer rate backdrop. FCR is trading at 35% below NAV (13x 2024E AFFO/7.1% implied cap), below its retail peers (24% NAV discount) and in line with our universe (34% discount). We believe uncertainty surrounding the pace of potential further reductions of Artis/Sandpiper’s stake in FCR could serve as an overhang. Still, from our lens, current levels provide an attractive entry to a defensive name with high quality assets, healthy growth, and a visible path to a stronger balance sheet.