First Capital REIT: Dividend Resilience Amid Rising Rates?

Investors in real estate investment trusts (REITs) face a critical question: Can dividend payouts withstand the dual pressures of rising interest rates and a shifting real estate market? For First Capital REIT (FCR.UN), the answer appears to hinge on a blend of operational discipline, defensive asset exposure, and a carefully managed balance sheet. Let’s dissect the sustainability of its current $0.0742 CAD monthly dividend—equivalent to an annualized $0.89 per unit—amid today’s macroeconomic headwinds.

Dividend Consistency: A Rocky Road to Stability

First Capital’s dividend history reveals both turbulence and resilience. After a 66.5% cut in late 2019 and a 50% reduction in early 2021, the REIT stabilized payouts at $0.0720 CAD monthly by 2022. The May 2025 increase to $0.0742 CAD marks a 3% rise, signaling renewed confidence. Yet, this stability is fragile:

Key Metrics to Watch:
- Occupancy Rates: At 96.9% as of Q1 2025—matching a record high—the REIT benefits from demand for grocery-anchored centers, which outperform discretionary retail.
- Rental Growth: Lease renewal spreads hit 13.6% in Q1, with average net rents rising to $24.23/sq. ft., a record.
- FFO Stability: Operating funds from operations (FFO) per unit held steady at $0.32, supporting the payout ratio of 69%, a conservative level by sector standards.

Why Rising Rates Haven’t Broken the Dividend (Yet)

The Federal Reserve’s aggressive rate hikes have tested REITs, but First Capital’s strategy has mitigated risks:
1. Debt Management: Net debt/Adjusted EBITDA improved to 8.9x as of March 2025, down from 9.9x in 2023. The goal is to reduce this to low-8x by 2026, which would align with industry benchmarks.
2. Liquidity Cushion: With $0.8 billion in liquidity (cash + credit facilities), the REIT can weather refinancing challenges or tenant defaults.
3. Defensive Asset Class: Grocery-anchored retail—its core portfolio—has proven recession-resistant, with stable occupancy even as broader retail sectors falter.

The Risks: A Balancing Act

While First Capital’s dividend appears sustainable, three risks could disrupt the narrative:

1. Tenant Defaults in a Weakening Economy

Despite strong occupancy, a prolonged economic slowdown could pressure smaller tenants. However, the REIT’s focus on necessity retail and anchor tenants like Loblaws and Metro reduces this risk.

2. Rising Cap Rates

If rates continue climbing, cap rates—the discount rate applied to future cash flows—could rise further. This would depress property values, squeezing FFO. First Capital’s flat NAV per unit ($22.06 vs. 2024) suggests this risk is already priced in, but a significant cap rate expansion could test resilience.

3. Leverage vs. Growth Ambitions

The REIT’s $750 million disposition target and focus on high-return developments (e.g., Toronto’s Avenue and Lawrence Assembly) require capital. Balancing debt reduction with growth could strain the balance sheet if returns underperform.

Is the Dividend a Signal of Undervaluation or Vulnerability?

At a yield of 4.1% (vs. the Canadian REIT sector average of 3.8%), First Capital’s dividend reflects both opportunity and caution:

• The Bull Case: The REIT’s defensive assets, stable occupancy, and improving leverage position it to outperform in a slowing economy. A “Strong Buy” technical rating and 96.9% occupancy suggest the dividend is secure.
• The Bear Case: Flat NAV, rising cap rates, and a leverage ratio still above peers ($8.9x vs. sector average ~6x) imply limited upside.

Final Verdict: A Compelling Long-Term Bet

While risks exist, First Capital’s dividend increase signals management’s confidence in its ability to navigate rate hikes and economic uncertainty. The grocery-anchored portfolio and conservative payout ratio (69%) provide a buffer against shocks, making this a viable income play for long-term investors.

Act Now if You Believe:
- Grocery retail remains recession-resistant.
- First Capital can reduce leverage to target levels by 2026.
- Rising rates will stabilize, halting cap rate expansion.

Investors seeking steady income in a volatile market should consider FCR.UN—a dividend stalwart in a sector where many are faltering.