Bullboard - Stock Discussion Forum First Capital Real Estate Investment Trust T.FCR.UN

Alternate Symbol(s): FCXXF

First Capital Real Estate Investment Trust is a Canada-based open-ended mutual fund trust. The Company owns, operates and develops grocery-anchored, open-air centers in neighborhoods with various demographics in Canada. The Company targets specific urban and suburban neighborhoods, which are located in Toronto, Montreal, Vancouver, Edmonton, Calgary, and Ottawa. Its portfolio of properties... see more

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First Capital Real Estate Investment Trust > TD Notes

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Post by retiredcf on Aug 18, 2023 6:29am

TD Notes

Takeaways from Q2/23 Reporting

Fundamentals Remain Strong, but Investor Focus on Rates Persists

Q2/23 results were overall strong and slightly ahead of expectations, with y/y AFFO/ unit growth of +3.2% being the highest in a year despite significant interest cost headwinds (+33% on a per-unit basis) and vs. our +2.4% forecast (all averages are index names only). The beat was driven by higher NOI growth offsetting slightly higher-than-expected interest expense growth.

Q2/23 Observations

Fundamentals across most sectors remained strong in Q2/23, as evidenced by the 6.0% weighted average SPNOI growth (Exhibit 7), up from 5.8% in Q1/23.
Through the reporting season, we became incrementally more bullish/optimistic on seniors housing, western Canada residential, and retail leasing spreads.
Results (including leasing velocity/pricing) and management outlooks generally did not reflect any near-term economic weakness. That said, we have started seeing some potential early signs of a pending slowdown.
Although there was encouraging progress on dispositions by some (e.g., FCR.un, AP.un, CAR.un, KMP.un, HR.un, and AX.un), overall market activity remains relatively subdued.

SPNOI growth was led by Industrial (+9.1%), Residential (+8.8%), and Seniors' (+6.5%), while Diversified/Retail also had a strong showing at +6.3%/+3.8%. Our SPNOI growth forecasts now call for +5.3% in 2023 (up from +4.5%) and +4.8% in 2024 (4.9% previously).

At the AFFO/unit level, our forecasts are overall largely unchanged, despite once again reflecting higher interest rates for a longer duration. We forecast a sector average two-year AFFO/unit CAGR of +5.7% (previously 5.8%) led by Seniors' at +25% (recovery from pandemic impacts), Industrial (+10%), and Residential (+7%). We have below-average forecast growth for Retail (+3%), Office (-2%), and Diversified (-1%).

Despite a strong earnings growth forecast, the valuation dynamic we have seen since short-term interest rates spiked in 2022 persists (exhibits 2-4). Canadian REITs are trading at a 75% P/NAV vs. the 99% long-term average. On an FFO yield spread to the GoC 10-year bond yield, the sector appears slightly undervalued at 5.1% versus the 4.9% adjusted long-term average. However, given the inverted yield curve vs. the two-year GoC bond yield, Canadian REITs do look relatively expensive at 4.1% vs. the 5.8% long-term average.

We continue to rate the sector OVERWEIGHT. Our three ACTION LIST BUY names are CAPREIT, First Capital REIT, and Granite REIT.

Overall, fundamentals remained robust for our three preferred asset classes (Residential, Industrial, and Retail), and we are particularly encouraged by the strong leasing results achieved in Q2/23.