First Capital Real Estate Investment Trust T.FCR.UN

TD 2

[retiredcf]

Keeping the faith. GLTA

First Capital REIT

(FCR.UN-T) C$14.67

Tracking Well Towards 2024 Financial Targets

Event

Post-Q2/23 outlook update. Initial views here.

Impact: SLIGHTLY POSITIVE

• FCR's Q2/23 results delivered a beat on FFO and AFFO, historically high renewal leasing spreads, further solid execution of the $1bln disposition plan, and a reiteration of management's 2024 financial goals (Exhibit 4).

• Tailwinds for leasing markets: Management cautioned not to view the +14% renewal leasing spread as the “new normal”. But all the ingredients are there to suggest to us that pricing power on retail leasing is shifting more and more in the landlord's favour. Since 2018, we estimate that Canada's population has grown at a rate 2.5x as fast as the growth in retail space. Over the past 18 months, rising construction and financing costs have resulted in a slowdown in new development just as Canada's population growth has accelerated. We reiterate our view that the tenant base in today's shopping centre industry (i.e., that survived the initial onset of the pandemic) is likely at its strongest level in over a decade. Bottom line, we see the current population-driven demand growth and below-average tenant attrition levels combining to result in tighter leasing markets and upward pressure on rents (particularly in categories catering to daily necessities).

• FCR's $91mm of newly announced dispositions not only demonstrate the continuing liquidity for smaller properties in good locations, but these sale prices were also strong at 40% above IFRS FV and did not include any vendor financing. With these, FCR is now $460mm through its $1bln disposition program that targets lower leverage and FFO growth through year-end 2024. This deleveraging should act as a key catalyst for the unit price, in our view.

• Forecast/NAV: Higher interest rates and the Q2/23 beat resulted in our FFO/unit and AFFO/unit estimates being largely unchanged for 2023 and falling 1%-2% for 2024. Our forecast (incorporating a modest slowdown in NOI growth early next year) calls for largely flat AFFO/unit in 2023 and 4% growth in 2024. Our NAV/unit estimate slipped 1% to $20.80 on a +10bps increase in cap rate (Exhibit 2).

  TD Investment Conclusion

  We see FCR's current trading valuation as excessively discounted and reiterate our ACTION LIST BUY rating and $19.00 target price.