First Capital Real Estate Investment Trust (TSX: FCR.UN) is a developer, owner and operator of mixed-use urban real estate in Canada's populated centres. The company's focus is on creating thriving neighborhoods that create value for businesses, residents, communities, and investors.

Investment Rationale

• An Income Play: At the last closing price, the stock was offering a lucrative dividend yield of ~5.8%, which is significantly higher amid a lower interest rate environment. The company is providing a lucrative income opportunity to the income-seeking investors as low interest rate environment is expected to continue for some time. More importantly, the company has a consistent track record of dividend distribution to its shareholders over the past 10-years. Therefore, high yielding stocks with consistency in making dividend payment tend to stay in the limelight. Further, the company's dividend yield of 5.8% is approximately 1.7x of the S&P/TSX Composite Index dividend yield of 3.35%, and 7.5 times of the Canada 10-Year Government Bond Yield of 0.76%.

Dividend History Over Past 10-Years. Source: Refinitiv (Thomson Reuters)

• High Quality Urban Portfolio Continue to Support Businesses through the Pandemic: Despite the challenging environment brought forth by the pandemic, First Capital's exceptionally high-quality urban portfolio, which is focused on everyday essentials, continues to attract high tenant demand for its space. During the last two quarters, the Trust has completed over 1.3 million square feet of leasing activity comprised of approximately 1.0 million square feet of renewals with an average net rental rate increase of 9.2%. This leasing activity contributed to strong growth in the Trust's average net rental rate, which increased by 5.8% to CAD 21.84 over the prior year period. Overall, First Capital collected 92% of the gross rent due in the third quarter, before any deferrals or abatements.  Adjusting for approved deferrals and abatements, First Capital collected 98% of the gross rent due in the third quarter.

• Stock Registered a Breakout Recently: Shares of FCR.UN registered a bullish breakout on the daily price chart recently, as its shares crossover the crucial long-term as well as short-term support level of 200-day and 50-day moving averages, which is typically considered a bullish technical indicator. Further, stock’s short-length 50-day and 30-day SMAs are about to crossover the crucial long-term moving average of 200-day SMA, which is another bullish indication in the stock.

Technical Price Chart. Source: Refinitiv (Thomson Reuters)

• Strong Insiders Buying Since March 2020: The increased insiders buying in the FCR.UN counter over the past ten months indicates that insiders are quite bullish on the future performance. And they are utilizing the current discounted price as an opportunity to accumulated shares. Also, over the past three months insiders have consistently increased their buying activity and piled stocks near the current market price, which indicates that the insiders have found current market prices as a good entry level for future gain. This should give a lot of confidence to the retail investors.

Insiders Activity. Source: Refinitiv (Thomson Reuters)

• Risk Associated With Investment: The company’s operations are exposed to a variety of risks, including a reduction in the occupancy level, which can have a significant impact on the group’s performance. Further, the company is exposed to a reduction in the value of the properties under its portfolio. Lower properties prices could cause a reduction in profit or result in a loss during asset divestment.

Financial Highlights: Q3FY20

Source: Company Filing

• During the third quarter under review, total portfolio occupancy declined 0.3% from 96.3% at June 30, 2020 to 96.0% at September 30, 2020. Total portfolio occupancy declined 0.7% from 96.7% at September 30, 2019 to 96.0% at September 30, 2020.
• Net rental rates for the quarter increased 8.6% on 589,000 square feet of lease renewals when comparing the rental rate in the last year of the expiring term versus the first year of the renewal term.
• Net rental rates on the leases renewed in the quarter increased by 9.9% when comparing the rental rate in the last year of the expiring term versus the average rental rate over the renewal term.
• The average net rental rate increased CAD 1.19 to CAD 21.84 per square foot, representing a very strong year over year growth of 5.8%. The strong growth was primarily due to renewal lifts, rent escalations and dispositions.
• Total Same Property NOI decreased by 5.4% due to the impact of COVID-19, including increased bad debt expense due to CECRA.
• FFO decreased by CAD 0.08 per diluted unit over the prior-year period. The decrease was primarily due to CAD 8.7 million or CAD 0.04 per diluted unit of non-recurring gains and fees recognized in the third quarter of 2019. The decrease was also due to the impact of property dispositions completed over the past 12 months (impact of CAD 0.02 per diluted unit due to lost NOI net of interest expense savings) and a decline in interest income as a result of lower loans and mortgages receivable outstanding over the prior-year period. Additionally, FFO decreased due to lower Same Property NOI primarily due to higher bad debt expense.
• For the three months ended September 30, 2020, First Capital recognized net income of CAD 11.3 million or CAD 0.05 per diluted unit compared to CAD 65.5 million or CAD 0.30 per diluted share for the same prior-year period. The decrease was primarily due to a CAD 66.7 million reduction in the fair value of investment properties.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 40.11% of the total shareholding. RBC Global Asset Management Inc. and Gazit Canada, Inc. holds the maximum interests in the company at 10.11% and 6.71%, respectively. The institutional ownership in the FCR.UN stood at 44.43%, and ownership of the strategic entities stood at 8.12%.

Source: Refinitiv (Thomson Reuters) 

Valuation Methodology (Illustrative): Price to Earnings based Valuation Metrics

*Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters).

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Stock Recommendation: Despite a challenging business condition led by COVID-19 led disruptions, First Capital's exceptionally high-quality urban portfolio, which is focused on everyday essentials, continues to attract high tenant demand for its space. During the last two quarters, the Trust has completed over 1.3 million square feet of leasing activity, which is commendable. Also, the group collected 98% of the gross rent due in the third quarter.

The company's all construction projects experienced only minor delays and are progressing towards the completion within similar timeframes as originally planned. Further, the company has ample liquidity of CAD 835 million, and only 6% of the total debt is maturing in 2021.

Moreover, at the last closing price, FCR.UN shares were featuring a lucrative dividend yield of 5.8%, which is gigantically higher, given the lower interest rate environment. Further, a strong insider buying activity has been witnessed in the stock near the current trading level, which implies that the insiders are bullish on the future performance of the company's shares.

Therefore, based on the above rationale and valuation, we have given a 'Buy' recommendation at the closing price of CAD 14.88 on December 07, 2020.

1-Year Price Chart (as on December 08, 2020). Source: Refinitiv (Thomson Reuters)

 *Recommendation is valid at December 8, 2020 price as well.

Disclaimer

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