First Capital REIT is a pure-play grocery-anchored shopping center REIT focused on Canada’s strongest demographic markets. By fair value, the portfolio is 48 per cent Greater Toronto Area (GTA), 12 per cent Greater Montreal area (GMA), and 11 per cent in each of the Calgary and Vancouver markets.
On Sept. 22, the REIT announced an enhanced capital allocation plan to monetize $1B of low-yielding assets where value-enhancing goals have been achieved to drive increased earnings growth and improved debt metrics. The plan is expected to take two years and will improve First Capital’s annual earnings growth rate to four per cent.
In addition, the supply and demand backdrop for grocery-anchored shopping centers is increasingly favourable with minimal new supply and a high degree of recession resistance. Over 85 per cent of First Capital’s tenants are necessity-based retailers which offer essential goods and services. In a recessionary environment these tenants, and as a result, First Capital’s properties will outperform peers more exposed to discretionary retailers.
The REIT’s second quarter results demonstrated this portfolio resilience with same-property net operating income growth of 3.8 per cent on a year-over-year basis driven by higher rents, and a strong portfolio occupancy rate of 95.6 per cent. Furthermore, rent spreads on renewal leasing increased to 11 per cent, above First Capital’s longer-term and year-to-date pace of nine per cent.
With a new capital allocation plan designed to surface value and units of the REIT trading approximately 40 per cent below comparable private market values (the most discounted valuation in the Canadian shopping center REIT space), First Capital is well positioned for strong unit price outperformance.