Pat McKeough responds to many requests from members of his Inner Circle. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions.
Q: What is your opinion of the following investment: First Capital Realty? Thanks.
A: First Capital Realty Inc. (symbol FCR on Toronto; www.firstcapitalrealty.ca) owns, develops and operates shopping centres throughout Canada. It focuses on big cities, including Toronto, Montreal, Calgary, Vancouver, Ottawa and Edmonton.
First Capital owns interests in 157 properties. Supermarkets and drugstores account for 31% of its rental revenue, followed by national and discount retailers (15%), medical clinics, gyms and daycare facilities (14%), restaurants (13%) and banks and government offices (11%). Other retailers supply the remaining 16%.
The company’s largest tenants include Sobeys, Loblaw, Metro, Canadian Tire, Wal-Mart and Dollarama.
First Capital’s revenue rose 3.0% in 2014, to $661.4 million from $642.1 million in 2013. That’s mainly due to scheduled rent increases; the company also renewed leases at higher rates.
Overall cash flow gained 4.6%, to $228.6 million from $218.5 million, while per-share cash flow rose 3.1%, to $1.00 from $0.97, on more shares outstanding.
Real estate investing: Malls anchored by chains that hold up well during economic slowdowns
First Capital bought $226.9 million of properties in 2014, mainly lots next to its existing malls. It also sold 10 properties for $245.7 million.
In February 2015, the company raised $86.5 million by selling 4.37 million common shares for $19.80 each. It used the cash to fund a recent deal to buy three properties in Toronto.
First Capital is making this purchase through M+M Urban Realty LP, a 53%-owned joint venture with an unnamed institutional investor. The company’s share of the purchase cost is $37 million. It will use the remaining $49.5 million from the share issue to fund planned developments on its own properties.
The company benefits by focusing on malls in growing urban areas. The fact that grocery retailers or drugstores anchor almost all of its shopping centres is another plus, because these businesses tend to hold up well during economic slowdowns. That adds stability to First Capital’s cash flow. The annual dividend rate of $0.85 a share yields 4.4%.
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