First Capital Real Estate Investment Trust FCXXF

RBC

[retiredcf]

August 1, 2023

First Capital REIT
Q2 results slightly ahead; steady organic growth, more progress on asset sales

TSX: FCR.UN | CAD 14.63 | Outperform | Price Target CAD 20.00

Sentiment: Positive

Our view: FCR reported Q2/23 FFOPU of $0.30, slightly ahead of RBC/Street at $0.29E/$0.29E, and +7% from last year ($0.28). On the whole, a decent quarter with solid renewal spreads and steady organic growth, notwithstanding a telegraphed slip in occupancy. The +$0.01/unit spread to our call was mainly from higher NOI and other income, partly offset by higher interest costs. Importantly, as FCR works to de-lever, another $91MM of asset sales were announced, raising the total to $460MM (<3% yield) at 17% above its IFRS values and nearly halfway to its ~$1B target by Q4/24. C/C Aug-2 (2 pm ET; 1-800-898-3989; ID 4501769).

Highlights:

• SP-stable NOI +2.2% (+3.1% YTD) from rent escalations and variable revenue. Total SP NOI (incl. redevelopments) +2.2% (+3%).

• Total occupancy declined to 95.9% (-30 bps QoQ, +30 bps YoY), with SP-occupancy at 95.9% (-40 bps QoQ). The drop was mainly due to the previously noted Walmart (Edmonton) and Nordstrom Rack (Toronto) vacancies (total ~70 bps of GLA).

• Renewal leasing spreads were robust at +14% (11% YTD). In-place net rent $22.97/sf (-0.4% QoQ, +1% YoY).

• Reported NAVPU down slightly to $23.13 (-1% QoQ, -5% YoY). In Q2, FCR booked $105MM ($0.49/unit) of fair value charges on the portfolio to reflect market conditions and rising interest rates. The IFRS cap rate increased to 5.3% (+10 bps QoQ, +30 bps YoY) vs. our 5.4% NAV cap rate and the current 6.7% implied cap.

• More progress on the disposition program. In Q2, FCR completed $122MM of previously announced asset sales. It also announced $91MM of new dispositions, including development land at Place Panama (Montreal), Yonge/Davis Centre (Newmarket), and 30/30A Hazelton Ave. (Toronto). The three properties were sold for 40% above IFRS value, with closings between Aug-2023 to Jan-2024. At Q2/23, assets held for sale total $223MM.

• Investments picked up to $120MM in Q2 for developments/acquisitions. Purchases incl. a $55MM land acquisition at its Centre Commercial Maisonneuve property in Montreal, where the land lease and tenant leases were set to expire. By acquiring the land based on a vacant value and renewing the major tenants at materially higher rents, FCR notes it immediately created value.

• NCIB was quieter in Q2, with $4MM of units repurchased ($24MM YTD at $15.36/unit).

• Debt/assets 44.5% (-10 bps QoQ, +40 bps YoY); 10.3x debt/EBITDA (-0.1x QoQ, -0.6x YoY), or 10.1x excl. activism costs.