Our view: Post a largely in line Q1 print, we remain constructive on FCR. In the face of a decelerating economy, we expect the REIT’s everyday needs portfolio to remain operationally resilient. Indeed, SP NOI is off to a better- than-anticipated start, with momentum set to build through 2025 on the back of strong leasing. Layering on further expected progress on portfolio optimization, a line of sight to lower leverage, and a heavily discounted valuation, we maintain our Outperform rating; PT trimmed to $18 (-$1).
Key points:
Operationally sound, with tailwinds at its back. Excluding bad debts and lease termination income, total SP NOI rose a steady 2.3% YoY, with higher rents more than offsetting the drag (140 bps) from Nordstrom’s 2023 exit. Occupancy (96.2%, flat QoQ) held up better than FCR anticipated on earlier re-leasing of a portion of the previously cited Montreal office vacancy and 50K sf of former Walmart space in Calgary. Supported by resilient demand, minimal new supply, and a skinny tenant watchlist, FCR’s tone on leasing remains constructive with double digit renewal spreads (+11% in Q1) anticipated for the year and tailwinds to support occupancy gains. We expect 2024 organic growth to track a similar pace as Q1, but accelerate to ~4% next year as the backfilling of 1 Bloor East becomes more visible.
Portfolio optimization/debt reduction continue to gain field position. In Q1, FCR sold $147MM of assets at a ~2% unlevered yield, on pace to hit its 2024 target of >$400MM (<3% yield). Notably, transaction pricing was well above prior IFRS values. Notwithstanding rising bond yields, FCR remains confident in further advances, particularly given the quality of its assets, smaller transaction sizes, and deals put under contract in recent weeks ($149MM held for sale at Q1). Our estimates reflect a further $250MM of asset sales this year. With proceeds partly earmarked for debt reduction, we see Q4/24E debt/EBITDA at low-9x, falling to mid-8x by Q4/25E.
Forecasting healthy earnings and NAV growth. Our 2024E-25E FFOPU are $1.28 (+$0.07) & $1.27 (+$0.02) with revisions for Q1 results (development assignment fee and lease termination income) and slightly higher NOI. Our 2024E-25E operating FFOPU (excl. other gains/losses) are $1.27 and $1.27, implying a 4% 2023A-25E CAGR, slightly ahead of its retail peers (3%) and the sector (3%). Our current and one-year forward NAVPU are unchanged at $20.50 and $22, with the latter reflecting 7% YoY growth.
Maintaining Outperform, PT trimmed to $18 (-$1) on a lower target multiple (20% discount to FWD NAV vs. prior 15% discount) as sector valuations remain under pressure amid higher bond yields. FCR is trading at 27% below NAV (6.9% implied cap rate/14x 2024E AFFO), below its retail peers (19% NAV discount) and in line with the sector (26% discount). We continue to view current levels as an attractive entry to a name with superior quality, defensive assets, a decent growth profile, and a visible path to lower leverage.