Our view: Post in-line underlying Q1 results, our positive view is intact. We expect FCR’s defensive portfolio to ride through a soft patch in economic activity in good form, despite some anticipated tenant turnover. As well, we’re encouraged by strategic advances in the portfolio optimization plan, with further progress anticipated over the coming months. Bottom line, while macro pressures continue to weigh on the sector, we see a favourable risk/reward mix in FCR's units. Maintaining Outperform, $20 PT (-$1).
Key points:
Organic growth off to good start, but expect some moderation. Operating metrics are in solid shape, with SP-stable NOI up 3.9% YoY, principally from rent escalations and higher variable revenue. Occupancy improved to 96.2% (+40 bps QoQ), while renewal leasing spreads were up a routine, yet strong 9.3%. Management noted demand remains robust from its essential needs tenants, although upcoming Walmart (Edmonton; ~40 bps of GLA) and Nordstrom Rack (Toronto; ~20 bps) closures will likely push occupancy lower through 2H/23. Importantly, however, FCR has received interest in both sites, with a sale/assignment of the Nordstrom space also a possibility. In short, we expect organic growth to slow through the balance of the year, but see an overall range of 2-3% through our forecast period.
Executing portfolio optimization plan remains at the top of the agenda.
While Q1 dispositions were quiet, the pace is set to rise with the previously announced $184MM closing through Q2 and Q3. In the face of challenging market conditions, the sales raise the tally to $360MM (~3% NOI yield, with pricing ~10% above IFRS values), marking good progress toward FCR’s $1B target by the end of 2024. As well, a further ~$140MM of assets are held for sale. Importantly, with proceeds partly allocated to paying down higher cost debt and unit repurchases, the transactions advance FCR’s objective of reducing leverage in an earnings accretive manner.
Estimates tweaked; three-year CAGR intact. Our 2023E-24E FFOPU are $1.13 (-$0.05) and $1.21, with revisions for lower NOI (including pending dispositions) and higher G&A (mainly attributable to Q1 activism related costs), partly offset by lower net interest expense. Our 2021A-24E CAGR is 2%, or 4% excluding other gains/losses, in line with FCR’s 4% target. Our current and one-year forward NAVPU estimates are unchanged at $21.50 and $23, with the latter implying 7% YoY growth.
Maintaining Outperform, PT trimmed to $20 (-$1) on a lower target multiple (15% discount to forward NAV vs. prior -10%) as sector valuations dial back amid heightened macro uncertainty. FCR is trading at 27% below NAV (16x 2023E AFFO/6.5% implied cap rate), below its retail peers (10% NAV discount) and our broader universe (24% discount). At current levels, we continue to see an attractive risk-adjusted return supported by its defensive, essential needs portfolio, reasonable earnings and NAV growth profile, significant value-add pipeline, and a visible path to de-leveraging.