(FCR.UN-T) C$17.97
Solid Progress on Debt Reduction; Valuation Recovery Underway
Event
Post-Q4/22 outlook update. Initial views here.
Impact: SLIGHTLY POSITIVE
Enhanced capital allocation plan: Management reiterated its confidence in executing the $1bln+ disposition plan. With $179mm now complete, there remains ~$900mm, which is represented by 28 properties under consideration (~$30mm average value — a "sweet spot" size, in our view). Most are development sites and none are multi-tenanted grocery-anchored shopping centres. FY2022 dispositions were completed at an average 15% premium to IFRS values.
NAV revision: We have raised our NAV/unit estimate by 2.4% to $21.70 (still 8% below the $23.48 IFRS NAV) on slightly higher NOI. FCR's IFRS cap rate increased 10bps q/q, possibly due to the sale of King High Line (LTM sub-3% cap rate).
Forecast revision: Our 2023/2024 AFFO/unit estimates slipped 4%/2%, mostly due to higher interest costs, and also higher G&A costs and lower interest/other income. Our 2023 estimate now essentially represents flat y/y performance, in contrast to management's outlook for positive growth. Our 2024 estimate still implies an attractive 6% three-year CAGR. We expect FCR's distribution to remain well-covered going forward and are currently forecasting an AFFO payout ratio of 81% in 2023 and 76% in 2024.
Management is seeing no signs of economic weakness: New leasing at some notable properties includes 3 Dollaramas (3080 Yonge, Mount Royal Village, and Maple Grove), KITH taking the vacancy at 80 Yorkville Ave, a to-be-named tenant taking the below-grade former McEwan space at 1 Bloor East, and a Marcello's grocery store taking the largest space at Bayside Village.
Development poised for acceleration: FCR guided towards development spending to double in 2023 to $200mm-$225mm. FCR has nearly 1,000 residential units under active construction currently, and planned 2023 starts would add nearly 800 more (all at 100%).
TD Investment Conclusion
At 17.0x 2023E P/AFFO, 83% P/NAV, and 77% P/IFRS-NAV (two closest peers: 15.6x/89%/83%), we view FCR's current absolute and relative valuations as heavily discounted and poised for recovery as the REIT continues its progress on balance- sheet deleveraging. We reiterate our ACTION LIST BUY rating.