UPDATED: First Capital REIT (FCR-UN-T) says it has agreements to dispose of an additional $116 million of properties, including interests in two Greater Toronto Area development sites, an office building and a Greater Vancouver apartment property.

The trust says in its Q4 and year-end 2023 financial report the latest dispositions - combined with the sale of another Toronto development site and a single-tenant Vancouver property earlier in Q4 - mean it has divested $633 million of assets since announcing a portfolio optimization plan just over a year ago.

The activity is part of its strategy to monetize over $1 billion of non-core or lower-yielding properties by the end of 2024. The aim is to “increase short-to medium-term FFO growth while continuing to reduce debt,” FCR states in the report which was released on Tuesday.

"Throughout 2023 we made important and meaningful progress on our optimization plan," president and CEO Adam Paul said Wednesday on the REIT's annual results call with analysts and investors.

"Our investment team had an outstanding year executing this plan . . . in total we are over $630 million of dispositions under the plan at an average yield of under three per cent and an average premium of pre-marked IFRS carrying value equal to 21 per cent."

The properties in the latest round of divestments are:

• First Capital’s 50 per cent interest in the Royal Orchard development site in Thornhill, just north of Toronto, which is slated for three residential towers and 1.6 million square feet of density;
• Circa Residences, containing 68 residential rental suites and above-grade parking garage in Richmond, B.C. First Capital is retaining the retail portion of the building, which it developed in 2013;
• a 41.7 per cent interest in a purpose-built residential development project at 1071 King St. W. in Toronto, (which reduces FCR's interest in the property to 25 per cent) to its partner Woodbourne; and
• 71 King St. W., a five-storey, 45,000-square-foot medical office building in Mississauga. 

Sales to close during next two months

The aggregate sales price of the four properties is a 68 per cent premium to its IFRS carrying values, FCR states in the report. 

"Our collective investment activity continues to demonstrate that we can sell the right assets for FCR at big prices," Paul said, noting the Royal Orchard site was a major contributor to the yields because FCR and its partners have been able to significantly advance the required zoning and approvals for the development.

All of the sales are all-cash purchase agreements and remain subject to closing conditions. Scheduled closing dates range through the end of March 2024.

Also during the quarter, First Capital had previously announced the sales of a 25 per cent interest in its Yonge and Roselawn development site in Toronto to Woodbourne and a single-tenant property at 6455 West Blvd. in Vancouver. First Capital retains a 50 per cent interest in Yonge and Roselawn though Paul said it will consider lowering that if another partner is interested in also investing in the development.

Paul said the REIT is "tracking ahead of targets" for FFO per unit growth and strengthening its debt metrics.

Property value declines lead to net loss

In its financial results, First Capital reports a net loss of $134.1 million, or $0.63 per diluted unit, compared to $160 million or $0.73 per diluted unit for the previous year. The loss was primarily due to a $376.4 million decrease in the fair value of the REIT’s investment properties after a $410.5 million property value decrease in 2022 (on a proportionate basis).

Net asset value per share declined to $21.95 at the end of Q4 2023, compared to $23.48 at the end of 2022. 

Paul, however, noted fundamentals for retail remain strong with "staggering" population growth across Canada (up 5.4 per cent during the past two years) and little new supply of retail in the markets where the REIT it has concentrated its efforts.

"First Capital's properties are located in neighbourhoods within Canada's largest markets, which are precisely the areas that are attracting the majority of this growth," Paul said. "This population increase creates more demand for everything, particularly the necessity-based goods and services that our tenants sell.

"Against that backdrop there has been almost no new supply of grocery anchored centres for several years."

This has led to significant rent increases on lease renewals at First Capital's properties which led to renewal spreads of 13.5 per cent on renewals during Q4. FFO per unit was $0.32. During the past three years, leasing rates have increased by 8.2 per cent, 9.5 per cent and 12.1 per cent in 2023, Paul said.

As of the end of 2023, the average leasing rate at FCR properties was $23.34 per square foot: "This is higher than all of our peers and it's also a record at FCR . . . a record we expect to eclipse this year," Paul said.

"Deep" retail leasing pipeline

Total portfolio occupancy rose to 96.2 per cent at the end of 2023, from 95.8 per cent a year earlier. First Capital has now fully leased the space left vacant by the departure a year ago of Nordstrom Rack from One Bloor East in Toronto, which is again 100 per cent leased.

"Our leasing pipeline remains deep, with many of our tenants pursuing an expansion of their physical footprint. This includes all of our major grocery stores. For instance our largest tenant Loblaws' ambition is to open 40 new stores across their grocery and pharmacy banners," Paul noted.

First Capital reports it held $9.2 billion in assets at the end of Q4, compared to $9.6 billion in assets a year earlier. Properties held for sale were listed as $168 million as of Q4, compared to $188 million a year earlier.

Funds from operations for 2023 were $244 million compared to $263 million in 2022.

Its debt-to-gross-book-value ratio stood at 45 per cent, up one per cent year-over-year, although its net-debt-to-adjusted-EBITDA declined to 9.9 times from 10.2 times at the end of 2022.

EDITOR'S NOTE: This article was updated with quotes, insights and additional information following First Capital REIT's call with investors and analysts on Wednesday afternoon.