Q3/24: OUTLOOK RAISED AGAIN AS TIGHT MARKET SEES RENTS PUSH HIGHER
THE TD COWEN INSIGHT
FCR delivered another quarter of operational strength with occupancy just 40bps shy of the historic high, widened rent spreads, and no signs of any meaningful tenant weakness. The tone of the market — particularly for urban grocery-anchored shopping centres — suggests that well-located retail space is increasingly considered scarce. FCR remains among our best ideas to play this theme.
Impact: SLIGHTLY POSITIVE Initial views: here
FCR reported Q3/24 results that met expectations, with AFFO in-line and continued operational strength. FY2024 SPNOI growth guidance was raised for the second- consecutive quarter (to above 3%, from 2.5%-3.0% prior, and 2.0%-2.5% initially), and introduced at “higher still” (we could see 4%) for FY2025 based in part on cash rent commencements at One Bloor East. Occupancy is nearing historic highs and rent spreads on renewal leasing largely held-in at the Q2 levels which had gapped meaningfully higher. Mgmt confirmed that the sudden increase in rents is not being supported by tenant inducements, which means “net effective” rents are up considerably y/y.
Mgmt shares our view that last week's sharply-reduced immigration targets should not disrupt Canada's strong shopping centre leasing market. We reiterate our view that the leasing market for most retail space is at its best in many, many years, and seems to be strengthening further.
Our target price rises to $21 on a roll-fwd to 2026E, and is now 97% of our new $21.60 NAV/unit est. (+3% on higher FTM NOI). If/as the current bond market volatility subsides, we see potential to lower cap rates, which would provide further NAV upside. Our forecast is largely intact (5% AFFO CAGR next two years). We forecast no growth in interest expense in 2025, following an 8% increase this year.
Dispositions. FCR agreed to sell its 50% stake in the newly-built 200 West Esplanade, North Vancouver rental residential/retail property for $29mm (est. $1,000/sf, $650k/suite, ~4% cap rate, and slight premium to FV). Assets held-for-sale increased to $236mm as no prior committed deals closed since Q2 (though closings are expected in Q4/Q1). We estimate that the $11.3mm density bonus recognized in Q3 related to last year's sale of 5051 Yonge Street implied $125/sf buildable on an undiscounted basis.
Valuation. We maintain that FCR (15.5x 2025E AFFO) and its Cdn. peers (avg: 13.4x) are trading at an unsustainable valuation discount to U.S. peers (currently at 20.3x). FCR's 11% sum of distribution yield + 2025E AFFO growth is among the highest across both the Cdn. and U.S. peer groups.
Quarterly Results vs. Estimate: AFFO/unit (TD calc) of $0.272 was in line and -2% y/y as interest expense, dispositions, and temporary downtime at One Bloor continue to offset very strong leasing performance. FFO/unit (f.d., ex-items) of $0.306 narrowly missed our estimate/consensus of $0.31 after adjusting for a one-time $11.3mm density bonus payment relating to the 2023 sale of 5051 Yonge Street. NOI (on a cash-basis) was slightly ahead of our forecast.