SRRTF - Slate Grocery REIT: Yield Has Reached 10.5% Due To Temporary Headwinds
2024-03-20 17:27:24 ET
Summary
- Slate Grocery REIT has durable FFO generation and potential for growth, with a focus on grocery anchored properties and below-market rents.
- The REIT has high debt but is well-managed, with low overall financial risk and largely repriced debt at market-driven interest rates.
- Despite lagging behind the REIT index and some temporary struggles at the NOI and AFFO end, the 10.5% dividend still seems safe against the backdrop of opportunistic leasing pipeline.
- At a discount of ~40% (in terms of P/FFO) and a dividend yield of 10.5% with improving fundamentals, Slate Grocery REIT is still a clear buy.
In May, 2023, I issued my first bull thesis on Slate Grocery REIT ( OTC:SRRTF ) that was driven by the following three factors:
- Durable FFO generation that is subject to growth potential- SRRTF's focus on grocery anchored properties and considerably below market-level rents warrant the combination of defense and decent organic growth going forward.
- High debt, but well-managed- Even though SRRTF carries a relatively high leverage ratio (of 49%) and a fixed charge coverage ratio of 2.3x, the overall financial risk is still low. For example, there is still a huge margin of safety in the context of the stipulated covenant values - e.g., maximum leverage ratio of 65% and fixed charge coverage ratio of 1.5x. Plus, a notable portion of the currently outstanding debt has been already repriced to more market driven interest rate levels, thus implying that incremental FFO generation could be more than enough to offset any further upticks in the cash interest expense.
- Unjustified discount- SRRTF trades at a Price-to-FFO multiple that is materially below the sector average of 13.2x , which results in a discount that is close to 40%. Considering the underlying fundamentals of Slate, such a valuation gap seems completely unjustified (even though some discount seems reasonable).