Analysts are buzzing about First Capital REIT's (FCXXF) strong Q1 2024 earnings and their continued progress on the optimization plan. But beneath the surface of rising occupancy rates, impressive lease renewal spreads, and a shrinking debt-to-EBITDA ratio lies a hidden gem – a potential catalyst for explosive growth in 2025.

While the market focuses on the impressive 11% average rent increase on Q1 renewals, a deeper dive reveals a more intriguing story. First Capital meticulously tracks renewal spreads, differentiating between those with fixed increases and those negotiated at market rates. Adam Paul, President and CEO, casually revealed that market rate renewals are typically achieving a 15% increase. While this number might seem like a mere footnote, it's a crucial indicator of the REIT's untapped pricing power.

Consider this: First Capital's portfolio sits at near full occupancy, north of 96%, a level historically considered near its peak. This limited vacancy, coupled with surging demand from a diverse range of retailers seeking to expand, creates an environment ripe for rent escalation. But the true kicker lies in the dynamics of lease renewal negotiations.

As Paul explained, many renewals are governed by "fair market renewal options," triggering arbitration if the two parties fail to agree on market rent. Arbitration, however, relies on comparable leases within a geographically limited trade area. Given the rapid recent rent growth, these comparable leases, often several years old, understate the true market value of First Capital's spaces.

This creates a significant lag in capturing the full extent of achievable rent increases, effectively masking the REIT's true pricing power. While the blended 11% spread is impressive, the 15% achieved on market rate renewals is a more accurate reflection of current market conditions. As more leases come up for renewal in 2024 and 2025, First Capital's ability to bypass arbitration and directly negotiate at market rates will unlock this hidden value, driving significant revenue and FFO growth.

Further fueling this potential explosion is the full realization of cash rent from the newly leased One Bloor East property. While tenants are already in possession, contributing to the occupancy figures, they haven't commenced paying rent, creating a short-term drag on same-property NOI. This drag, however, is temporary. As Neil Downey, CFO, highlighted, these leases will be cash rent paying for most of calendar 2025, injecting a significant and predictable boost to NOI and FFO per unit.

But the real potential for a 2025 surge lies in the confluence of these two factors. The unleashing of First Capital's pricing power through market rate renewals, coinciding with the flood of cash rent from One Bloor East, creates a potent combination poised to catapult the REIT's earnings to new heights.

Hypothesizing the Impact

To illustrate this potential, let's consider a simplified scenario:

Assume First Capital achieves a 15% average rent increase on all expiring leases in 2024 and 2025. Assume the $8-9 million annualized run-rate from One Bloor East translates to approximately $7 million in 2025 (accounting for phasing).

Based on these assumptions, we can estimate the impact on same-property NOI growth:

2024: 15% average rent increase across 8% of GLA, offset by the 70 basis point drag from One Bloor East and the Montreal office lease, could translate to an overall same-property NOI growth rate exceeding 4%. 2025: A similar 15% rent increase combined with the $7 million cash rent injection from One Bloor East could push same-property NOI growth to a staggering 6% or higher.

While this is a simplified scenario, it highlights the powerful synergy of these two underappreciated catalysts. First Capital's strategic focus on grocery-anchored retail, combined with its astute entitlement program and disciplined optimization plan, has positioned it for success. But the hidden gem – the delayed realization of its true pricing power and the cash rent wave from One Bloor East – could be the catalyst for truly mind-blowing growth in 2025.

"Fun Fact: First Capital's Hanna Avenue headquarters is housed in a former streetcar repair facility, a testament to the REIT's commitment to revitalizing urban spaces and creating vibrant community hubs."