Raise their target by $1.50 to match those of RBC and CIBC. GLTA
First Capital REIT
(FCR.UN-T) C$16.23
Relative Valuation Premium Returns; Lowering to BUY
Event
Post-Q4/23 update. Initial views here.
Impact: SLIGHTLY POSITIVE (but downgrading on relative valuation)
Retail Space Demand. The optimism we have been hearing from FCR management
continues to show up in quarterly results, with near-record renewal leasing spreads
of +13.5%, and occupancy almost back to pre-pandemic levels. Importantly, most of
the handful of spaces/properties that have pulled occupancy lower in recent years
has now been leased or are under contract/conditional agreement. These include
Cedarbrae Mall, Deer Valley Marketplace, Stanley Park Mall, Fairview Mall, and of
course One Bloor East, where the high rent/sf leases should give a boost to NOI
growth in 2024/2025. FCR's tenant 'watchlist' remains "thin", and we continue to see
FCR's high ("over 90%") concentration in daily necessity/non-discretionary retailers
offering good protection through any upcoming economic slowdown.
Dispositions/Portfolio Optimization Plan: Adjusted ND/EBITDA ticked lower to
9.8x, while progress on the $1bln disposition plan reached $633mm, with IFRS
FV premiums now averaging 21% (14% previously). Both the pricing and liquidity
(particularly on density land) should provide more investor confidence in FCR's IFRS
NAV, which increased 3% q/q to almost $22/unit (35% above last night's close). FCR
is tracking ahead of its 2024 targets (Exhibit 6). We look forward to any post-2024
guidance forthcoming at the February 21 Investor Day (registration: here). Our
revised forecasts show year-end 2025 ND/EBITDA sub-9.5x.
Developments. Budgeted costs for active (re)developments increased to $643mm,
with the inclusion of Yonge & Roselawn, but should fall in 2024 (expected additional
25% sale of Yonge & Roselawn, partially offset by adding 1071 King St. West).
Forecasts: Our AFFO/unit estimates are +3%/+6% for 2024/2025 as our previous
estimates reflected the higher interest-rate outlook in late October. Our 2023-2025
AFFO/unit CAGR rises to +4.5% and reflects dispositions/deleveraging. Our $20.30
NAV/unit estimate increased ~5%.
TD Investment Conclusion
We still see good value at the current 14.6x P/AFFO valuation (vs. 20x pre-pandemic
in early 2020), and 6.4% implied cap rate (5.5% in early 2020), but the relative
valuation premium to RioCan and SmartCentres has now largely recovered (exhibits
8 and 9). We are lowering our recommendation to BUY, with a new $19.00 target
price.