Similar to RBC. GLTA
Rates Aside, Everything Is Right On Track
Our Conclusion
FCR reported an in-line quarter with a trifecta of growth coming from
contractual rent increases, 477K sq ft. of lease renewals signed at a healthy
12.% lift, and increased interest income, while continuing to execute on the
Portfolio Optimization Plan. With ~$517MM in completed and planned
dispositions (of which ~$100MM is projected to be completed in Q4 at a 19%
premium to carrying values), the REIT is effectively halfway through its $1B
target by the end of 2024, and has more than proven its ability to monetize
its high-quality assets at values in excess of book. While management has
acknowledged the headwinds associated with the current rate environment
(a view we share) on disposition activity, we note the assets for sale are
arguably less rate-sensitive as their ultimate purchasers may be acquiring
the properties for a higher and best use (i.e., land and excess development
density).
Despite these distinct attributes, FCR units still trade at an ~11x P/FFO and
34% discount to consensus NAV (vs. a historical average of ~16x and -13%,
respectively). As such, we remain Outperformer rated, but reduce our
forward NAV estimate to $18.00 (from $20.00) and price target to $17.00
(from $19.00), factoring in a 6.00% utilized cap rate (+25 bps) reflective of
the current and prospective rate environment and implying a slight discount
to NAV. We concurrently introduce our 2025 FFO estimates.
Key Points
Earnings Results: FCR reported Q3/23 diluted FFO per unit of $0.32,
ahead of consensus of $0.30. We note that the headline figure includes a
one-time $3.8MM legal settlement related to foregone rent which, when
adjusted for, puts the results right in line with expectations.
Debt Rolls: At quarter-end, the REIT had ~$708.5MM of principal mortgages
and debentures maturing through 2024 (~17% of its total debt stack) at a
weighted average interest rate of 4.2%. While we acknowledge the
headwinds associated with refinancing risk given the current elevated rate
environment, we note that the REIT is actively utilizing proceeds from
dispositions to reduce portfolio leverage (9.9x current net debt/adjusted
EBITDA ex. non-recurring costs vs. <10x target, and a marked improvement
from 10.9x in Q3/22).
Balance Sheet and Liquidity: FCR reported D/A of 46.3%, a slight increase
from Q3/22. Subsequent to quarter-end, the REIT arranged a new $100MM
unsecured revolving operating line to replace a maturing facility, in addition
to increasing an existing facility by $50MM. As a result, the REIT now has
~$998MM in available liquidity on a proportionate basis. Additionally,
management increased its utilized IFRS cap rate by 30 bps Q/Q to 5.6%,
resulting in a ~$432.8MM fair value loss in investment properties and a
reported NAV of ~$21.26/unit.