Elevated interest rates have driven shares of companies in capital-intensive sectors such as real estate, utilities, and industrials lower over the last three years. However, the Canadian central bank has now reduced interest rates in each of the last three months, making real estate investment trusts (REITs) such as Firm Capital (TSX:FCD.UN) top investment options right now.
A falling rate environment should help Firm Capital and its peers to borrow capital at a lower rate and fuel their expansion plans. Further, a widening base of cash-generating real estate assets should result in higher cash flow and dividends over time.
Firm Capital has returned just 16% to shareholders in the last 10 years. However, if we adjust for dividend reinvestments, cumulative returns are much higher at 154%. Comparatively, the TSX index has returned 123% since late September 2014 if we account for dividend reinvestments.
Today, Firm Capital pays shareholders an annual dividend of $0.52 per share, indicating a forward yield of 8.9%. Let’s see if it’s time to buy the TSX dividend stock at current prices.
An overview of Firm Capital Property Trust
Firm Capital property is focused on creating long-term value for investors through capital preservation and disciplined investing to achieve stable distribution income. A REIT, Firm Capital plans to own and co-own a diversified property portfolio that includes multi-residential, flex industrial, net lease convenience retail, and core service provider professional space.
In addition to standalone acquisitions, Firm Capital also undertakes joint acquisitions with strong financial partners and existing ownership groups.
Firm Capital ended the June quarter with 64 commercial properties with a gross leasable area of 2.54 million square feet. It also owns five multi-residential complexes with 599 units and four manufactured home communities with 537 units.
In the last 12 months, Firm Capital has reported revenue of $60 million, up from $36.3 million in 2019. In this period, its gross profits have risen from $23.1 million to $38 million, while operating income has grown from $18.9 million to $32.7 million.
A strong performance in Q2 of 2024
In the second quarter (Q2) of 2024, Firm Capital reported a net income of $8.9 million, up from $5.6 million in the year-ago period. Its net operating income (NOI) rose by 6% year over year to $9.7 million as same-property NOI rose by 10%.
Firm Capital owns and operates a diversified and defensive portfolio in terms of geographies and asset types. For example, 49% of net operating income is generated from grocery-anchored retail, followed by industrial at 28%. Moreover, 38% of NOI is derived from assets located in Ontario, followed by Quebec at 37%.
Firm Capital emphasized that its portfolio is diversified by tenant profile, with no tenant accounting for more than 11% of total rent. Its top 10 tenants are large corporates, accounting for 30.6% of total rent.
A growing dividend?
Firm Capital pays shareholders a monthly dividend of $0.04333 per share. In the last decade, its annual dividends have risen from $0.37 to $0.52 per share. However, these payouts have not been increased since interest rates began rising in March 2022.
In Q2 of 2024, Firm Capital increased its adjusted funds from operations by 22% to $4.6 million or $0.124 per share. Notably, its payout ratio remains elevated at 105%, down from 128% in the year-ago period.
The payout ratio should be sustainable and allow the company to target acquisitions, service its debt obligations, lower long-term debt, and consistently raise dividends. While Firm Capital is growing steadily, it will need to lower its payout ratio significantly and shore up its financials.
