Valued at $3.7 billion by market cap, First Capital REIT (TSX: FCR.UN) has delivered stellar returns to long-term shareholders. In the last 25 years, the real estate investment trust (REIT) has returned close to 750% after adjusting for dividend reinvestments. Comparatively, the TSX index has returned 550% to shareholders in this period.
However, in the last decade, cumulative gains for First Capital REIT are around 49%, lower than the TSX index gains of 132%. Today, First Capital stock is down 23% from all-time highs, but it offers shareholders a tasty dividend yield of 4.8%.
Let’s see if First Capital is a good stock to own right now.
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Is First Capital stock a good investment?
First Capital develops, owns, and manages mixed-use real estate in Canada’s most densely populated cities. It aims to generate stable and growing cash flow for investors, the majority of which is distributed via dividends. It ended the third quarter (Q3) of 2024 with 22.2 million square feet of gross leasable area and $9.2 billion in total assets.
First Capital’s strong fundamentals are supported by its grocery-anchored real estate. Part of a recession-resistant sector, First Capital saw an increase in occupancy rates and same-property net operating income in Q3 of 2024. It also saw strong growth in rental rates on lease renewable spreads. The REIT continues to secure higher contractual growth rates during renewal terms, which should drive future cash flow higher.
First Capital explained that its lease renewal spread is calculated by measuring the increase in net rent per square foot from the last year of the expiring term to the first year of the renewal term. In Q3, this spread was 12.4%, and the REIT confirmed it has successfully negotiated rental hikes throughout the renewal term.
Historically, yearly rental hikes have averaged between 1% and 1.5% annually. Notably, these rental hike rates have almost doubled in the last three quarters.
Is First Capital REIT a good dividend payer
In the first nine months of 2024, First Capital reported an FFO (funds from operations) of $1.4 per share, up from $0.87 per share in the year-ago period. Comparatively, its dividend payout has totalled $0.645, indicating a payout ratio of just 46%.
A low payout ratio allows First Capital to reinvest in acquisitions and lower balance sheet debt. The company ended Q3 with a net debt of $4.1 billion and paid $163 million in total interest in the last 12 months, compared to $154 million in 2023.
However, investors should note that First Capital has lowered its dividend payouts several times in the past. For instance, its annual dividend fell from $0.86 per share in December 2020 to $0.43 per share in January 2021.
Today, First Capital benefits from high and stable occupancy rates, a top-tier renewal spread, and industry-leading net operating income growth. It expects FFO to grow by 3% annually on average in the near term, which should support its dividend payouts.
In the last five years, First Capital has spent $667 million on property acquisitions and earned more than $2.2 billion from asset dispositions, a portion of which strengthened its balance sheet.
Analysts remain bullish and expect the REIT to gain over 12% in the next 12 months. If we adjust for dividends, total returns may be closer to 17%.
