Post by
retiredcf on May 04, 2023 9:44am
CIBC Raise Target
EQUITY RESEARCH
May 3, 2023 Earnings Update
FIRST CAPITAL REAL ESTATE
INVESTMENT TRUST
Trimming The Lean Fat
Our Conclusion
With the events of the recent activist campaign behind it (the brouhaha as we
dubbed it), FCR reported a strong quarter highlighted by an impressive 4%
SP-NOI growth, and a portfolio that we view as largely stabilized at ~96%
occupancy. The REIT continues its portfolio optimization plan, divesting
~$360MM of properties (closed or under commitment) that carry an average
yield of <3%, which includes properties such as the well-known Hazelton
Hotel and ONE Restaurant. With approximately two-thirds of the “plan”
remaining, we see the program of recycling low-yielding, non-core assets into
higher-yielding assets (including FCR units), future development
opportunities, and paying down high interest debt as a very viable path to
unlocking unitholder value over time.
We are maintaining our Outperformer rating and increasing both our NAV
estimate and price target to $21.00 (from $20.50 and $20.00, respectively)
off an unchanged 5.75% utilized cap rate, implying NAV parity and in line
with the pre-pandemic historical average, a time frame we believe represents
a more normalized state. Trading at a widened valuation gap relative to its
retail peers (22% discount to consensus NAV vs. ~18% discount for its peer
group), we believe the units have material upside potential. The conclusion of
the activist campaign should serve as a catalyst for unit price appreciation.
Key Points
Earnings Results: FCR reported a Q1/23 headline miss of $0.25 FFO per
unit, trailing consensus estimates of ~$0.28. We note that included in the
headline figure is a one-time ~$7MM (~$0.03 per unit) expense related to the
now abandoned activist campaign, which when excluded puts the reported
figures in line with estimates.
Balance Sheet: FCR continues to maintain a conservative leverage profile,
with net debt/total assets of 44.6%, a slight increase from 43.8% in Q1/22. As
lenders begin to place an increasing priority on debt-servicing capabilities in
their assessment to extend credit, we note that the REIT currently has a
stable interest coverage ratio of ~2.4x, above its current covenant
requirements. Additionally, the REIT reported an IFRS value of $23.48 off a
~5.20% utilized cap rate.
Debt And Liquidity: The REIT currently has ~$372MM in debt maturing in
2023 representing ~9% of its total debt stack. With ~$1.1B in undrawn
facilities and available cash, FCR has ample liquidity to cover any immediate
debt maturity obligations.
Distribution Sustainability: FCR reported an FFO payout ratio of ~86.3%,
an increase from 43.5% in Q1/22. We note that the increase was a result of
the REIT doubling its distribution in Q3/22, and we project a 2023E forward
payout ratio in the mid-70% range, more in line with its pre-pandemic
historical distribution rate