In late October, the Bank of Canada reduced the policy interest rate by 50 basis points, marking a cumulative reduction of 125 basis points since June 2024. With Canadian inflation remaining within the central bank's target range, interest rates could decline further. This environment enhances the appeal of high-yield passive-income alternatives, making Canadian real estate investment trusts (REITs) particularly attractive for long-term passive-income generation.

First Capital Real Estate Investment Trust (TSX:FCR.UN), a leading Canadian retail REIT, has recently reported double-digit rent growth rates alongside impressive increases in distributable cash flow. The trust could be a valuable addition to a monthly dividend portfolio, rewarding investors with capital gains. Over the past 12 months, the REIT has generated a total return of 51.8%, with its units still trading below fair value. Additionally, it pays a monthly distribution currently yielding 4.8% annually.

First Capital REIT boasts a core portfolio of 138 open-air, grocery-anchored shopping centres across Canada. Its total real estate assets encompass approximately 22.2 million square feet of gross leasable area (GLA), valued at $9.2 billion.

Strong performance: First Capital REIT reports impressive Q3 2024 numbers

In its third quarter (Q3 2024) earnings report, released on Tuesday, First Capital REIT reported net income attributable to unitholders of $172.9 million for the first nine months of this year. This marks a significant turnaround from a $307.9 million loss during the same period last year. The era of substantial fair-value losses on real estate properties seems to be behind the Canadian REIT, positioning its operating portfolio for a brighter future.

The REIT's same-property net operating income (NOI) grew by 3.7% year over year in Q3 2024, excluding bad-debt recoveries and lease termination fees. This figure surpasses management's annual growth target of 3% through 2026.

Notably, First Capital REIT's leasing activity in the past quarter has been impressive, with lease spreads of 12.4%. This solidifies its position as a best-in-class retail REIT, featuring the highest in-place rents and population densities among similar publicly traded retail peers. The average net rental rate for the portfolio reached a new record of $23.85 per square foot, primarily driven by renewal lifts and rent escalations.

The trust's occupancy levels remain robust, increasing by 60 basis points year over year to 96.5%.

Moreover, First Capital's adjusted funds from operations (AFFO), a key measure of recurring distributable cash flow, increased by 17.6% year over year during the first nine months of 2024.

Should you grab this high-yield opportunity?

First Capital REIT has fully reinstated its pre-COVID-19 distribution rate to $0.07 per month, yielding 4.8% annually. The distribution is well-covered, with an AFFO payout rate of 74.1% during the first nine months of 2024—an improvement from 87.5% in the same period last year. The trust's distribution appears secure, backed by recurring cash flow.

With a resilient tenant base, over 90% of the REIT's revenue is derived from retail tenants providing essential products and services. This positioning may allow the trust to maintain stable distributable cash flow even during periods of reduced economic activity.

Given the declining policy interest rates, the REIT could serve as a viable option for long-term monthly passive income streams. However, a recent history of dividend cuts in 2020 may deter some investors. The pandemic-induced lockdowns and subsequent rent defaults had negatively impacted the trust's cash flow, compounded by high debt levels prior to the pandemic.

A strengthening credit risk profile is evident, as First Capital REIT's net debt-to-assets ratio improved to 45.2% from 46.3% a year ago. Additionally, its net debt to adjusted earnings before interest, taxes, depreciation, and amortization multiple has decreased from 10.1 to 9.0, indicating enhanced capacity to service its debt. Overall, the balance sheet is stronger, and the distribution is considerably safer than it was a year ago.

Unlocking capital gains potential: A smart investment move?

First Capital REIT's unit prices have steadily increased, rewarding early investors with a 40% capital gain over the past year. However, units still appear undervalued, trading around $18—more than a 17.3% discount to their most recent net asset value of $21.92 as of September 30. This suggests potential for further capital gains, as the trust's units trade at a significant discount to their fair value.