Firm Capital’s Montreal Sale: A Strategic Pivot in Industrial Real Estate

Firm Capital Property Trust (TSX: FCD.UN) has executed a critical transaction that underscores its shift toward a more diversified and resilient portfolio. The Trust recently closed the sale of its 50% interest in a 159,470-square-foot industrial facility in Montreal for $27.9 million, marking a strategic reallocation of capital to sectors less vulnerable to economic headwinds. This move not only delivers immediate financial benefits but also aligns with broader trends in industrial real estate, where multi-tenant and tenant-diversified assets are gaining prominence.

The Montreal Sale: A Win for Capital Reallocation

The property, originally purchased in 2018 for $11.0 million (at 100% ownership), was sold for $27.9 million in gross proceeds. After closing costs, Firm Capital’s 50% share of net proceeds totaled $13.8 million, with a gain of $8.0 million recognized in Q1/2025. This gain will boost the capital gains portion of distributions by $0.18 per Trust Unit in 2025—nearly doubling the $0.08 per Unit recorded in 2024.

The sale reflects a deliberate strategy to reduce exposure to large single-tenant industrial properties, which carry higher tenant concentration risk. Proceeds will first be used to repay debt on the Trust’s revolving credit facility, then allocated to acquisitions in three key sectors: grocery-anchored retail, multi-tenant industrial, and multi-residential rentals. These sectors are chosen for their resilience against U.S. tariff impacts and their ability to generate stable cash flows through diversified tenant bases.

Q1/2025 Financials: Mixed Signals Amid Strategic Shifts

While the Montreal sale is a positive catalyst, Firm Capital’s Q1/2025 results reveal challenges. Adjusted Funds From Operations (AFFO) fell 3% year-over-year to $4.3 million, with AFFO per Unit dropping 2% to $0.117. The AFFO payout ratio rose to 111%, signaling pressure on cash flows. However, key metrics offer optimism:

• Net Operating Income (NOI) grew 1.5% to $9.4 million, driven by a 1.1% increase in same-property NOI.
• Net Asset Value (NAV) per Unit rose 3% to $7.82, reflecting improved balance sheet health.
• Debt metrics remain conservative, with a 50.8% debt-to-GBV ratio, down from 52% a year ago.

Strategic Reorientation: Why These Sectors Matter

The Trust’s pivot to grocery-anchored retail, multi-tenant industrial, and multi-residential rentals is strategically sound:

1. Grocery-Anchored Retail: These properties benefit from consistent foot traffic and long-term leases with essential retailers. Firm Capital’s portfolio already derives 51% of NOI from this sector, a testament to its stability.
2. Multi-Tenant Industrial: Smaller-bay designs cater to e-commerce and logistics operators, which demand flexibility. This reduces reliance on a single tenant and aligns with rising demand for last-mile infrastructure.
3. Multi-Residential Rentals: With occupancy at 96.1% (down from 99.1% but still robust), this sector offers inflation-resistant cash flows and long-term growth potential.

Risks and Considerations

• Declining AFFO: The 3% AFFO drop underscores execution risks in deploying capital effectively. Future acquisitions must deliver accretive returns to offset this trend.
• Occupancy Pressures: Commercial occupancy fell to 93.4%, and multi-residential occupancy dropped 3% year-over-year. While not yet critical, sustained declines could strain cash flows.
• Debt Maturities: $55.1 million in mortgages come due by 2026. While management claims refinancing is manageable, rising interest rates (the weighted average rate rose to 4.2%) add cost pressure.

Conclusion: A Strategic Move with Mixed Execution

Firm Capital’s sale of its Montreal industrial property is a shrewd step toward portfolio diversification, offering both immediate capital gains and a clearer path to long-term resilience. The strategic focus on grocery-anchored retail and multi-tenant assets is well-timed, capitalizing on sectors insulated from trade volatility. However, the Trust must address execution risks: stabilizing AFFO, mitigating occupancy declines, and managing debt costs will be critical to sustaining its $0.13 annual distribution.

With NAV per Unit up 3% and a conservative leverage profile, the Trust remains positioned to navigate challenges. Investors should monitor how proceeds from the Montreal sale are deployed and whether AFFO can rebound in 2025. For now, this transaction signals a disciplined shift toward a portfolio structure that balances growth and stability—a move that could pay dividends in turbulent markets.