Cashed Up And Ready To Go Our Conclusion
FCR reported a headline beat, driven by both higher base rents and
occupancy, further aided by one-time lease termination fees and recoveries
(which we note are perhaps a bit more than one-time albeit less predictable).
Net investment activity for the quarter saw ~$66MM in dispositions and
~$37MM of expenditures. The REIT continues to advance its $1B disposition
plan, completing ~$710MM of property disposition and related transactions
since the inception of the optimization plan. With ~$1B of liquidity, FCR is
well positioned to fully settle its upcoming debenture maturities, with any
excess likely allocated towards the repayment of variable rate debt exposure.
Concurrent with the quarter, we are increasing our price target to $19.00
(prior $18.00), at parity to our forward NAV estimate given the potential for
continued outperformance if indeed a soft economic landing is to be
achieved (a dynamic we believe the market has correctly implied). FCR
remains Outperformed rated.
Key Points
Earning Results: FCR reported headline Q2/24 diluted FFO per unit of
$0.32 compared to consensus of $0.30. The beat was driven by a 40 bps Y/Y
pick-up in occupancy to 96.3% and lease termination fees. Reported SPNOI
increased 4.6%, however after excluding lease termination fees the resulting
growth in SPNOI was an as expected 3.7%.
Debt And The Rate Environment: As the interest rate environment
continues to shift downwards, we expect the majority of FCR’s near-term
debt maturities to roll without any material headwinds (indeed the proceeds
of the recent debenture fully fund such). FCR has ~$373MM in debt maturing
in 2024 (~$281MM in debentures at 4.79%, ~$61MM in mortgages at 4.0%
and the balance in credit facilities), representing ~9% of the REIT’s total
debt. The REIT has an additional ~14% of total debt rolling in 2025 at a
similar interest rate profile. Given the downward trajectory of current interest
rates and where the 10-year GoC currently sits, we do not expect any
material headwinds to arise from any refinancings going forward.
Balance Sheet: Net debt to total assets increased 60 bps Y/Y to 45.1%, and
this represents a modest increase of 20 bps sequentially. Additionally, the
REIT remains within its target of net debt/EBITDA of 9.2x. The REIT reported
a NAV per unit of ~$21.82 on an unchanged IFRS cap rate of 5.5%,
decreasing ~1% since year-end 2023, driven by FV decreases on investment
properties partially offset by retained funds from operations. Liquidity
remained ample at ~$1.2B.
Distribution Sustainability: FCR reported an AFFO payout ratio of 83.8%,
an increase of 110 bps Y/Y. Looking forward, we estimate the payout ratio
will stabilize in the upper 70% range, consistent with the REIT’s historical
average.