First Capital Achieves Formidable Yields By Holding Top Quality Assets

Jun. 9.14 | About: First Capital (FCRGF)

Summary

Q1 2014 FFO per share of $0.26 was higher than Q1 2013 FFO per share of $0.25.

Recent acquisition of $57.1 million of property and development land would allow for future growth.

2014 guidance for FFO per share of $1.05 to $1.07 supports 4.6% yield.

Company Description:

First Capital Realty (OTC:FCRGF) is Canada's leading owner, developer and manager of staple-goods-oriented neighborhood and community shopping centers in urban locations. The firm has positions in more than 160 properties totaling over 24 million square feet of gross leasable area.

Investment Rationale:

- Effective reallocation of capital demonstrated through the sale of low growth income generating properties and the purchase of development opportunities. In Q1, First Capital acquired $57.1 million of property and development land consisting of a 50% interest in Seton Gateway, a 128,000 square feet retail property in Calgary, for $36.7 million, 6 properties adjacent to existing shopping centers aggregating 78,800 square feet of gross leasable area and 0.6 acres in established retail nodes for $16.8 million, and a 67% ownership stake in one development land parcel in Toronto. Meanwhile, the firm disposed of two properties consisting of a 26,800 square feet shopping center in Laval, Quebec for gross proceeds of $3.3 million; and a 0.2 acre land parcel in Edmonton for $0.7 million. Management plans to dispose of a further $100 million to $150 million of low growth properties to enhance FFO growth. As a result of the capital reallocation, First Capital has been able to increase average rent on renewable by 10% or more every year since 2008.

- Top-notch asset quality dominated by well-located food- and drug- anchored retail properties in urban settings: First Capital focuses on high traffic centers in major cities in Ontario, Quebec, Alberta, and British Columbia. Same property occupancy was 96.5% in Q1/14, up from 96.4% year over year, and overall occupancy was 95.3% at Q1/14, up from 95.1% in the previous year. As a result, First Capital has been able to attract high-quality tenants with investment grade rating profiles, such as Loblaws, Sobeys, Metro, Wal-Mart, and Canadian Tire.

- Stable and predictable cash flows derived from lack of competition surrounding owned properties: The majority of First Capital's properties are located in urban settings, where close proximity development is restricted, making their positions highly defensible. In fact, management estimated the market rent to be $23-$25 per square foot versus current rent of $18.06 per square foot, demonstrating strong growth. Furthermore, property distribution is geographically diverse with 40% in Ontario, 26& in Quebec, 23% in Alberta, and 11% in British Columbia.

Source: First Capital Realty 1st Quarter 2014 Report

Given First Capital Realty's strong defensive positioning, high quality properties, and efficient capital allocation, I believe that they would be able to maintain and even increase their yield of 4.6%. In fact, I believe that First Capital should trade as a premium relative to its peers from the comparables table.

As a Canada focused property owner, First Capital is highly exposed to the Canadian real estate market. Although this does pose a sector related risk, I do not believe that the Canadian real estate market would suffer a major downturn in the near term. Similar to my views on the US Housing market, which can be found in this article, I feel that the Canadian housing market still offers upside albeit with greater risk.

Comparables Table

Ticker (OTC: OTC:CROMF) (OTC: OTC:CWYUF) (NYSE: GRP) (OTC: OTC:MRCBF) (OTC: OTCPK:RIOCF) (OTC: OTCPK:HRUFF)
Company Name: FIRST CAP REALTY CROMBIE REAL EST CALLOWAY REAL ES GRANITE REAL EST MORGUARD CORP RIOCAN REIT H&R REAL-REIT UT
Latest Fiscal Year: 12/2013 12/2013 12/2013 12/2013 12/2013 12/2013 12/2013
Latest Available Period Date: 3/31/2014 3/31/2014 3/31/2014 3/31/2014 12/31/2013 3/31/2014 3/31/2014
52-Week High 18.57 14.67 26.64 39.08 136.50 26.36 22.65
52-Week High Date 6/4/2014 6/17/2013 5/26/2014 4/30/2014 5/26/2014 5/16/2014 4/16/2014
52-Week Low 15.48 11.62 21.82 32.32 97.41 21.95 18.58
52-Week Low Date 9/9/2013 8/22/2013 6/24/2013 8/7/2013 6/17/2013 8/15/2013 6/24/2013
Daily Volume 261,917 713,124 295,104 73,732 1,494 739,391 1,239,258
Current Price: 6/6/14 17.27 12.23 24.99 36.44 131.67 25.48 21.54
52-Week High % Change -0.9% -10.5% -0.6% -6.9% -2.8% -0.9% -1.5%
52-Week Low % Change 14.5% 7.2% 14.5% 17.6% 41.1% 18.8% 15.9%
Total Common Shares (NYSE:M) 208.36 72.7 134.1 46.9 12.6 304.1 270.0
Market Capitalization 3,612.7 944.4 3,311.9 1,713.8 1,647.9 7,742.9 5,847.5
Total Debt 3,419.5 1,859.6 2,717.0 83.9 2,134.0 5,520.4 5,976.2
Preferred Stock 0.0 - - - - 240.1 -
Minority Interest 3.0 397.8 531.9 5.0 14.6 - -
- Cash and Equivalents 84.4 1.0 30.4 68.5 121.7 33.5 30.3
Current Enterprise Value 6,952.2 3,201.1 6,530.4 1,734.2 3,675.4 13,472.7 11,795.6
Valuation Average Median
Total Revenue LFY 613.3 288.5 567.5 197.4 490.2 1,118.7 1,137.2 821.8 640.3
LTM 605.0 301.6 572.8 201.2 493.3 1,108.2 1,200.2 829.5 637.0
FY+1 596.5 348.4 560.7 204.0 489.9 1,101.9 1,223.0 853.2 646.5
FY+2 620.4 368.2 576.3 226.0 501.7 1,163.4 1,229.9 880.5 659.8
EV/Total Revenue LFY 11.15x 11.30x 11.48x 8.67x 7.17x 11.55x 10.29x 9.6x 10.7x
LTM 11.55x 10.90x 11.65x 9.14x 7.36x 12.41x 10.10x 9.8x 10.5x
FY+1 11.66x 9.19x 11.65x 8.50x 7.50x 12.23x 9.64x 9.4x 9.4x
FY+2 11.21x 8.69x 11.33x 7.67x 7.33x 11.58x 9.59x 9.1x 9.1x
EBITDA LFY 362.0 171.6 364.7 165.4 206.0 696.3 557.0 430.8 359.5
LTM 350.6 184.1 368.9 169.1 206.0 666.5 572.7 427.1 353.9
FY+1 355.4 216.0 359.7 173.7 225.9 690.8 780.7 467.4 357.6
FY+2 369.2 225.8 371.1 192.3 230.4 730.9 796.9 490.4 370.1
EV/EBITDA LFY 18.89x 18.99x 17.87x 10.35x 17.07x 18.55x 21.00x 17.7x 18.2x
LTM 19.83x 17.39x 17.70x 10.26x 17.85x 20.21x 20.60x 18.1x 17.8x
FY+1 19.56x 14.82x 18.15x 9.99x 16.27x 19.50x 15.11x 16.7x 16.3x
FY+2 18.83x 14.18x 17.60x 9.02x 15.95x 18.43x 14.80x 16.0x 15.7x
EPS LFY 0.98 -0.24 1.95 3.54 16.48 2.26 1.27 3.23 1.92
LTM 0.85 -0.18 1.35 2.41 12.09 2.23 1.13 2.43 1.45
FY+1 0.89 0.72 1.90 2.50 13.20 1.68 1.68 2.61 1.68
FY+2 1.11 0.78 2.00 3.08 15.43 1.77 1.71 2.98 1.74
P/E LFY 17.53x - 12.52x 10.59x 7.41x 10.63x 16.34x 18.8x 10.6x
LTM 21.22x - 19.25x 15.69x 11.32x 11.86x 19.80x 15.2x 14.4x
FY+1 19.37x 17.14x 13.30x 14.63x 9.90x 15.23x 12.92x 17.2x 14.9x
FY+2 15.55x 15.73x 12.59x 11.87x 8.47x 14.48x 12.69x 14.9x 13.6x
Revenue Growth 1 Year 9.0% 14.3% 4.1% 12.2% 27.2% 7.4% 41.9% 14.0% 10.6%
5 Year 7.4% 11.9% 6.8% -10.0% 9.5% 10.0% 16.4% 9.5% 8.4%
EBITDA Growth 1 Year 7.8% 14.9% 3.2% 17.9% 16.0% 6.2% 3.6% 8.9% 7.3%
5 Year 8.5% 10.1% 5.5% 3.4% 5.7% 9.4% 8.1% 8.1% 6.9%
EBITDA Margin LTM 57.95% 61.0% 64.4% 84.0% 41.7% 60.1% 47.7% 54.8% 55.7%
FY+1 59.58% 62.0% 64.2% 85.1% 46.1% 62.7% 63.8% 57.7% 60.8%
FY+2 59.51% 61.3% 64.4% 85.1% 45.9% 62.8% 64.8% 58.0% 60.4%
Click to enlarge

Source: Bloomberg

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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