Our view: On the back of largely in-line Q3 results, our constructive view is intact. Supported by strong demand for its grocery-anchored assets, we expect FCR to continue posting solid organic growth in the face of rising consumer pressures and immigration policy changes. As well, the disposition program is incrementally advancing, providing a line of sight to lower leverage and a structurally stronger valuation. In short, FCR continues to deliver as advertised. Outperform, PT raised to $20 (+$1).
Key points:
SP NOI growth guidance raised; immigration changes likely not enough to derail near-term momentum. Excl bad debts & lease termination fees, SP NOI was +3.7% YoY (+3.3% YTD) from higher occupancy, higher rents, and lower non-recoverable costs. Renewal leasing spreads remain robust (+12%), while occupancy crept up to 96.5% (+20 bps QoQ). On the back of strong progress, FCR expects 2024 SP NOI growth to “meet or exceed 3%”, up from its prior +2.5-3% call. For 2025, we expect the pace to hit ~4%, particularly as cash rents accelerate at 1 Bloor East. As for Canada’s recent immigration target reductions, FCR cited minimal anticipated impact on its three-year view. Over the mid-term, we think it's conceivable that organic growth tailwinds could ease. Still, our near-term outlook is unchanged, with in-place rents below market, muted new supply, and tenants still catching up with the significant population growth of recent years.
Lower rate climate should help grease the wheels on dispositions. Asset sales were muted in Q3, with the 9M/24 tally at $152MM. However, adding to the $66MM of firm deals announced last quarter, FCR struck a new agreement to sell its 50% interest in 200 West Esplanade (North Vancouver) for $29MM. That brings YTD completed/announced sales to ~$275MM, closer to FCR’s ~$400MM target. With $236MM of assets held for sale, we believe the more favourable rate environment vs. 1H/24 should support stronger traction. Our 2025E-26E reflect $800MM of dispositions as FCR works to reduce D/EBITDA to the low-8x-range by Q4/26 (vs. current 9x).
Healthy growth outlook, while curbing leverage. Our 2024E-26E FFOPU are $1.35, $1.25, and $1.34. Our 2024E-26E operating FFOPU are $1.36 (+ $0.04), $1.25 (-$0.04), and $1.28 (-$0.04) with revisions for the positive Q3 variance, modestly lower NOI, and higher G&A. Stripping out the clutter from lower visibility amounts, our 2023A-26E OFFOPU CAGR is 3%, marginally ahead of its retail peers (2%), while simultaneously improving leverage. Our current/1yr fwd NAVPU estimates remain at $21/$22.50.
Outperform, PT to $20 (+$1) on a higher target multiple (10% discount to fwd NAV vs. prior ~18% discount) amid stronger sector valuations. FCR is trading at 15% below NAV (6.3% implied cap/17x 2025E AFFO), below its retail peers (-7% P/NAV) and in line with the sector (-15%). We see a decent entry to a name with a healthy growth profile, superior quality assets, a line of sight to a stronger balance sheet, and multiple value-creation channels