Regular readers of my articles will know that I am a big fan of First Capital Realty (TSX:FCR) for many reasons, one of which is that it doesn’t have a lot of dud properties in its portfolio.
It is often the case with a high-quality real estate company that for every desirable property they have in a super-urban location, they have one in the middle of nowhere that is a money-pit and eventually gets sold at a fire sale price.
In contrast, the vast majority of First Capital’s properties are in highly strategic and super-urban locations where the foot traffic keeps going up. Today I am going to comment a bit on its third-quarter results, which just came out a few days ago and I am also going to look into my crystal ball to try to see what catalysts are at play to unlock its embedded value in the form of greater shareholder returns.
Solid third-quarter earnings
So, let’s start by looking at the company’s recently announced Q3 earnings and focus on a few key metrics that are very important for a REIT or a real estate company. The single most important metric in this industry is funds from operations (FFO) or some form of adjusted FFO.
While most investors got stuck with the fact that the overall FFO numbers were a little bit down from the comparable nine-month period in 2018, I zoned in on the FFO per share number and that increased nicely from $0.92 for the nine months in 2018 versus $0.95 for the same period this year.
In reality, shareholders should only care about per share metrics because the share count can go up or down depending on equity financing, share repurchases, and dividend reinvestments. Now, granted, this FFO per share growth wasn’t exactly stellar, but this company’s motto might as well be “slow and steady wins the race.”
Now let’s look at another metric that is not exactly mainstream, but matters hugely to shareholders, and that is the average population density within a five-kilometre radius of its properties.
Historically, this metric has been substantially higher for First Capital than for any of its competitors and that trend doesn’t show any signs of losing steam. The company reported an average population density of 280.000, up from 250,000 at the end of 2018.
While this may not seem super meaningful, the reality is that higher density translates into higher FFO for the company because more people cycle through its buildings and buy stuff from its anchor tenants like grocery stores.
Foolish last word
The title of this article suggests that I believe there is a super-charged catalyst that will boost share price by 50% and yes, I do believe that there could be a strategic buyer in the wings who might be interested in purchasing the entire company, lock, stock, and barrel.
My thinking is that Brookfield Property Partners has been quite vocal recently about wanting to grow its scale in Canada, after a decade of romping around the world snapping up trophy assets in New York and London.
Brookfield has a meaningful presence in Canadian urban markets, especially Toronto, but it has nowhere near as much as the real estate arms of some pension funds. Brookfield wants to change that situation but they need scale and they have publicly said that they are very interested in large urban growth centers. For me, that is code for Toronto, which leads me to believe that First Capital may be very much on Brookfield’s M&A radar screen.
The company’s stock is currently trading at $21.50 per share, well below its net asset value (NAV) of $23.08. In my view, a reasonable buy-out multiple would be 1.3 times NAV, which is calculated to be $30 even. Brookfield has enough financial firepower to make the deal happen and assuming that was the case, the buy-out premium to current stock price would be about 40%.
Whether or not Brookfield does snap up this high-quality company, the reality is that large institutional investors will continue to be owners of this low volatility, low drama real estate company. Smart investors would do very well to accumulate shares in the $21 to $21.50 range and wait patiently for a suitor to show up with a big chequebook.
