Slate Grocery REIT (SGR.UN) has reported strong growth in 2023, achieving a record 2.9 million square feet of total leasing and a significant increase in occupancy to 94.7%, the highest in nearly a decade. The company expects further growth in net operating income (NOI) from leasing in the coming year and has demonstrated confidence in its unit value by purchasing 1.2 million Class A units. With a strategic approach to managing its balance sheet and capitalizing on the resilient grocery-anchored sector, Slate Grocery REIT is positioned to leverage market conditions for continued expansion.
Key Takeaways
- Slate Grocery REIT has experienced record leasing activity and occupancy rates, with a 94.7% occupancy, the highest in nearly ten years.
- The REIT expects further growth in NOI from leasing activities in the upcoming year.
- The company has prudently managed its debt, with the majority being fixed at a weighted average interest rate of 4.4%.
- Tenant demand in the grocery-anchored sector is increasing with limited new supply, indicating resilience in this market segment.
- Slate Grocery REIT's unit price at year-end shows a 33.5% discount to net asset value, suggesting a compelling investment opportunity.
- The company has repurchased 1.2 million Class A units, reflecting confidence in the value of its units.
Company Outlook
- Continued growth in NOI is anticipated due to leasing activities.
- The REIT is well-positioned to take advantage of acquisition opportunities in the grocery-anchored real estate market.
- Slate Grocery REIT expects an increase in motivated sellers in the coming year.
Bearish Highlights
- The bid-ask spread for grocery assets remains wide due to current market conditions, though it is narrower than other asset classes.
Bullish Highlights
- The grocery-anchored sector is showing increased tenant demand and resilience.
- Slate Grocery is strategically purchasing units below market rents to drive NOI growth.
Misses
- The payout ratio has increased due to leasing and development activities.
Q&A Highlights
- Lenders remain comfortable lending to grocery-anchored real estate, with financing often secured through CMBS or regional banks.
- Slate Grocery is using its capital and bank facilities to capitalize on buying opportunities.
- The payout ratio is expected to decrease in the future with projected income growth and operating efficiencies.
In summary, Slate Grocery REIT has presented a strong performance in 2023, with record leasing activity and a promising outlook for the coming year. The company's strategic financial management and proactive approach to market opportunities underscore its resilience in a competitive sector.
InvestingPro Insights
Slate Grocery REIT's robust performance and strategic unit repurchases align with a broader industry trend observed in companies like SRRTF, where management's confidence in their business is reflected in share buybacks. According to InvestingPro Tips, SRRTF's management has been aggressively buying back shares, a sign that could be interpreted as a bullish indicator for the company's future prospects.
In terms of financial health and valuation, SRRTF offers a mixed picture. The company trades at a high earnings multiple with a P/E Ratio of 21.26, which suggests that investors are willing to pay a premium for its earnings potential. However, it's worth noting that the adjusted P/E Ratio for the last twelve months as of Q4 2023 stands at a lower 12.45, indicating a more favorable valuation when taking into account certain adjustments. This could be relevant for investors considering Slate Grocery REIT's current discount to net asset value.
SRRTF's dividend yield stands at an attractive 9.86%, rewarding shareholders significantly. This could be of interest to investors seeking income-generating investments, especially in a sector like grocery-anchored real estate, known for its resilience.
For those interested in a deeper analysis, there are additional InvestingPro Tips available, providing a more comprehensive look at SRRTF's financial metrics and market predictions. To explore these insights and equip yourself with a detailed investment strategy, consider using the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription at InvestingPro. Currently, there are 9 more tips listed on InvestingPro that could further inform your investment decisions.
Full transcript - Slate Grocery REIT Unit (SRRTF) Q4 2023:
Operator: Good morning ladies and gentlemen and welcome to the Slate Grocery REIT Fourth Quarter 2023 Financial Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. [Operator Instructions] Also note that this call is being recorded on Wednesday, February 14th, 2024. And I would like to turn the conference over to Jennifer Pyper Investor Relations. Please go ahead.
Jennifer Pyper: Thank you, operator and good morning everyone. Welcome to the Q4 2023 Conference Call for Slate Grocery REIT. I'm joined this morning by Blair Welch, Chief Executive Officer; Joe Pleckaitis, Chief Financial Officer; Allen Gordon, Senior Vice President; and Braden Lyons, Vice President. Before getting started, I would like to remind participants that our discussion today may contain forward-looking statements and therefore, we ask you to review the disclaimers regarding forward-looking statements as well as non-IFRS measures, both of which can be found in management's discussion and analysis. You can visit Slate Grocery REIT's website to access all of the REIT's financial disclosure including our Q4 2023 investor update, which is available now. I will now hand over the call to Blair for opening remarks.
Blair Welch: Thank you, Jen and hello everyone. Slate Grocery REIT delivered a strong year of growth in 2023. Our team set a new record of 2.9 million square feet of total leasing in the year of some of our highest annual rental spreads. Of the 635,000 square feet of total leasing we did in the fourth quarter, new deals were done at 31% above comparable average in-place rents. Non-option renewal spreads were similarly strong at almost 16% above expiring rents and our leasing momentum supported healthy occupancy gains. We are up 150 basis points from the start of the year, bringing occupancy to 94.7% at the close of the quarter, our highest level in nearly a decade. After adjusting for completed redevelopments, our same-property NOI increased by $2 million on a trailing 12-month basis and we expect our 2023 leasing to further drive NOI growth in the coming year. We have continued to prudently manage the REIT's balance sheet to mitigate risk in the current interest rate environment. In November, we amended the terms of $137.5 million interest rate swap to look -- to a 2027 maturity and limit the REIT's exposure to floating rate debt. Over 94% of the REIT's debt is fixed at a weighted average interest rate of 4.4%. Our low in-place rents provide additional protection at $12.41 per square foot. We are well below the market average, meaning we have significant runway to increase our rents and in turn grow NOI. The grocery-anchored sector has displayed resilience in the face of broader market turbulence. Tenant demand for grocery-anchored centers continues to accelerate and essential goods and service providers wants to be in a well-located centers and populated markets close to consumers. New supply has remained very limited. The amount of new retail space delivered in Q4 set an all-time quarterly low and we expect elevated interest rates and high construction costs to continue to limit new supply into and throughout 2024. At the same time, our tenants are investing heavily into their stores, demonstrating continued conviction in their physical locations. Together all these factors create a favorable dynamic for landlords, provide -- providing pricing power to increase rental rates. We believe Slate Grocery REIT is uniquely well-positioned to unlock higher rents and grow net operating income over time. In our view, the REIT's current discounted unit price presents a compelling investment opportunity for investors. The REIT unit price at year end indicates an implied cap rate of 7.9% on a trailing 12 month NOI, which represents a 33.5% discount to net asset value. Year to date the REIT has purchased 1.2 million Class A units at a weighted average price of $9.61 per unit. This demonstrates management's belief that the underlying value of the REIT's units are well above current price -- current public market pricing. On behalf of Slate Grocery REIT team and the Board, I'd like to thank the investor community for their continued confidence and support. I would now hand it over for questions.
Operator: Thank you, sir. [Operator Instructions] And your first question will be from Brad Sturges at Raymond James. Please go ahead.
Brad Sturges: Hey good morning.
Blair Welch: Hey Brad.
Brad Sturges: I just want to touch on occupancy. First off, you're approaching the 95% level. I think that's a level that you've talked about in the past of where you expected the trend to. I guess just looking forward where do you think you go from here? It seems like you're getting good momentum on the shop space and seeing for the lease up on that side of things. Just curious your thoughts on occupancy trends.
Blair Welch: Sure. What I think is the leasing strongly to the team's done over the last couple of years, you'll really start to see that net operating income growth in 2024 and 2025. So you'll see that pickup. So that couple of hundred basis points of occupancy gain we'll you'll see it in our income in the next couple of years which is great. As it relates to your question specifically on where do you think occupancy is, the whole market's pretty tight? You know I think we believe there's probably a little bit more we can squeeze out in basis points for occupancy upset. However, you're getting to the point where it's full. But given the market is full. We're going to switch our attention and core continue our attention to really driving face rates and operating efficiencies through the portfolio to keep focused on that NOI growth. We really don't think the strong leasing has flown through our numbers yet, but we're extremely confident for really good NOI growth in the next couple of years.
Brad Sturges: That leads to my next question just on leasing spreads. When we look at your numbers, clearly the spreads that you're achieving I haven't I guess at the higher end of the historical range I guess of the 6% to 10%. Do you have a different target in mind in terms of those leasing spreads going forward given how full the market is from them or how tight is now from a vacancy perspective? And is that range going forward to be going to be higher than that 6% to 10% range?
Blair Welch: We think in 2024 for sure. Or in the near term, rental spreads will continue to be high because they're coming off of such a low base rent at $12.41. It is probably almost half of the Green Street average for the space in the entire United States. So, we feel confident. Simply put, if there's no available space anywhere and our renter that we think there's really good probability and momentum for us to keep those higher rental rate spreads. It's given current market conditions. I mean, as you know Brad, we're always focused on buying cheap rents. And I think we're really going to see that that really play to our favor and growing the net operating income in the next couple of years.
Brad Sturges: Okay. Last question. Obviously, we've seen and you've highlighted some of the retailers focused on reinvesting into their own stores, and you guys highlighted the Walmart (NYSE:WMT) announcement in the fall. Just curious to see or curious to get your thoughts on other discussions you're having with your tenant base today, whether they're approaching you to help fund that, and maybe there's a return that you can generate, or how we should think about sort of that activity in the near term in the context of the current economic environment?
Braden Lyons: Yes. So, hey, Brad, it's Braden. So a couple of interesting anecdotes from Walmart last year Q4 2023, they came out saying they're going to invest in a multiple billion dollars across 1,400 stores, probably $6 [ph] million investment across their entire retrofit portfolio and our stores are in that portfolio as well. I would add. And then I said earlier this year, they're going to be opening 150 new stores over the next three or four years, which is the first time they've opened new stores in three or four years. So that's what we're seeing from Walmart. They're the most public about it, I would say of our tenants, but we had conversations with others like Publix and Kroger (NYSE:KR) about similar type of investments in their stores. We're seeing them -- it's investments in their stores across omni-channel, across new service offerings inside the stores, new exterior improvements, et cetera. And I think the overwhelming fact is those are within their own four walls, so that's grocery refunded. If they ask us for capital, there needs to be a return on that. And that's kind of the way that conversation goes.
Blair Welch: So to be clear in the Walmart case, there's zero dollars required from Slate Grocery REIT, and what Braden saying is when they do ask for something, then we get something in return. And I would say those development yields would be double digits. But right now the announcements are that they do it all themselves. This is why we love the business, because it's all below the line costs are very thin. And I think it shows their commitment to the store. Moreover, in the last several years, I believe, 100% of our grocers have invested in improving their stores for omni-channel distribution at no ask for Slate Grocery REIT. So they're all doing it.
Brad Sturges: Got it. And with Walmart, there's no change in the box size at this point. They're just making changes to the format or modernizing the format within that existing box?
Braden Lyons: Yes. It's primarily like within the existing box, Brad, they might retrofit what's an existing pharmacy and instead have that be like an omni-channel portion of the store with cold storage, robotics, et cetera, for curbside Click & Collect, which is kind of emerging as the more favored method of omni-channel fulfillment for consumers. But they might expand by a very small amount. But yes, it's primary it's not like a massive expansion.
Blair Welch: But remember, if they expand outside the existing box terms, they have to come talk to us, and that's an ask. And therefore, we would then get those development returns.
Brad Sturges: Yes. Makes sense. All right. Thanks a lot.
Blair Welch: Yes. Thanks, Brad.
Operator: [Operator Instructions] And your next question will be from Gaurav Mathur at Laurentian Bank (TSX:LB) Securities. Please go ahead.
Gaurav Mathur: Thank you, and good morning everyone.
Blair Welch: Good morning, Gaurav.
Gaurav Mathur: First question. Yeah, you know we've seen a lot of chatter around real estate debt and the market being over over-leveraged, especially in the state and grocery-anchored being sort of a safe haven for most investors. Are you sort of seeing opportunities now come up opportunistically that you would look to engage on from an acquisition standpoint over the next 12 months?
Blair Welch: Yeah. I would say that, I'm starting, I mean to answer your first question lenders are still very comfortable lending to grocery-anchored real estate. And but I think the difference in the market is, if the average grocery stores plus or minus $25 million in value it's pretty granular. Those individual purchases, if they're done by privates many of them were financed through CMBS or regional banks. So that has been different in the US. So I think they have to go to other sources. I think that's really good for a company like Slate Grocery rate that has the capital to go financed through bank facilities and the like. And we are seeing you know people need to sell assets real estate assets, because just the overall market they need and they can sell grocery. So we are seeing some -- some opportunity, but I think we'll see more starting this year. And I mean, there is always activity, but I think we'll see more motivated sellers. In certain cases, we are starting to see that, it hasn't really happened. But I think it's almost related to other parts of people's portfolios. Our ownership and they can sell grocery because there's a market and it can still be financed.
Gaurav Mathur: And just back to have more motivated sellers a point, does that mean that the bid-ask spread for these assets continues to narrow?
Blair Welch: I would say like, the bid-ask spread for office is massive and you kind of go down like, there is a pretty good bid ask spread in grocery, but it's much tighter than other asset classes. I think I think you can probably be it's not like a 10 cap, but I mean, I think you're going to get good things in sevens and the depending on what the situation is like that's kind of what it is. But I think you got to take a step back and really focus on the rents, if we can buy something and be at half of what we think market rents is that's great NOI growth. So it's all relative I think that it's whether your rents are at market and what is that cap rate? It's still wide because of the way the market is. And we think there's good compelling buying opportunities but we're being very selective.
Gaurav Mathur: Okay. Okay fantastic. And just last question, we've seen the payout ratio trend upwards. I'm just wondering, if you have a view to where you see that going to for 2024?
Blair Welch: Yes. I think as you know, we do all of all of our TI's and cap capital redevelopment flows right below the line. So it's actual cash and we've done a lot of leasing and development. We get good returns. So it has it has crept up. And for other reasons as you know we think given our NOI growth that we have that we forecast over the next couple of years that is going to go down. And I think we will continue to focus on -- on the payout ratio but I think our income growth will help offset that. I think some operating efficiencies will help offset that. But I think it's crept up because we have so much leasing and development that it's elevated because of how we do it which is unlike some other of our peers.
Gaurav Mathur: Right. Okay. Thank you for that. I'll turn back to the operator.
Blair Welch: Thanks a lot.
Operator: Thank you. And at this time, Ms. Pyper, it appears we have no other questions. Right, please proceed.
Jennifer Pyper: Thank you everyone for joining the Q4 2023 Conference Call for Slate Grocery. We have a great day.
Operator: Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and then we ask that you please disconnect your lines.
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