Real estate investment trusts (REITs) underperformed in 2023 because of strong economic headwinds, including rapidly rising interest rates. The hardest hit sub-sectors were office and retail. Fortunately, industry experts predict a turnaround in 2024 after two years of challenging, if not abnormal, conditions.
Canada’s headline inflation fell to 2.9% in January versus the 3.3% consensus estimate. Even if the Bank of Canada decides to hold its key rate at 5% this month, the rate pauses in recent months have improved the outlook for REITs. Investment opportunities should open up once rate cuts begin.
Among the top picks is First Capital (TSX:FCR.UN). This obscure REIT had a strong finish in 2023 and is poised to benefit from a looser monetary policy. Also, at $15.80 per share (+3.95% year to date), the dividend yield is 5.47%. Income investors, especially, would welcome the generous monthly payouts.
Operational and financial highlights
First Capital owns and operates open-air, grocery-anchored shopping centres. The rezoning of development sites is ongoing. In Q4 2023, portfolio occupancy increased to 96.2% from 95.9% in Q3 2023. Because of the increase in the fair value of the properties, net income jumped 310% year over year to $173.8 million.
The REIT’s President and CEO, Adam Paul, said, “First Capital’s leading grocery-anchored portfolio delivered strong results with full-year 2023 lease renewal spreads accelerating to 12.1%, increased portfolio occupancy of 96.2% and an all-time high average in-place rent of $23.34 per square foot.”
Besides the resilient portfolio, strong cash collections, and solid leasing volumes, Paul said the REIT advanced its Portfolio Optimization Plan. During the quarter, net asset sales reached $116 million. First Capital expects to monetize over $1 billion of low-yielding assets by year-end 2024.
Strategic roadmap
Last month, First Capital presented a three-year (2024 to 2026) strategic roadmap with the theme “Discipline, Stability, Growth.” Paul said the roadmap is a clear vision for the future and aims to maximize First Capital’s value for investors. Management will continue to focus on driving FFO (funds from operations) per unit growth while strengthening the credit profile.
Currently, First Capital’s core portfolio of grocery-anchored shopping centres has the highest in-place rents, lease renewal lifts, population density, and connections to public transit. The portfolio of the development pipeline is located in Canada’s largest cities with high growth neighborhoods and exceptional demographics.
First Capital expects average annual same-property NOI (net operating income) growth of 2% to 2.5% in 2024 and at least 3% within three years. Property dispositions or asset divestitures would total approximately $1 billion on a cumulative basis, with an aggregate investment of $500 million in property development and redevelopment. Development completion would be around $200 million.
For long-term value creation, First Capital has allocated $100 million to $150 million to acquire multi-tenant, core grocery-anchored shopping centres, including strategic tuck-ins.
Consistent monthly distributions
First Capital is an ideal second liner in a dividend stock portfolio and reliable passive income provider. The REIT started paying quarterly dividends in 2014 before changing the payout frequency to monthly in December 2019. It hasn’t missed a monthly dividend payment since.
