2023-11-07 12:05:27 ET
Start Time: 09:00
End Time: 09:20
Slate Grocery REIT (SRRTF)
Q3 2023 Earnings Conference Call
November 07, 2023, 09:00 AM ET
Company Participants
Blair Welch - CEO
Joe Pleckaitis - CFO
Allen Gordon - SVP
Paul Wolanski - SVP, National Sales and IR
Conference Call Participants
Sairam Srinivas - Cormark Securities
Brad Sturges - Raymond James
Gaurav Mathur - Laurentian Bank Securities
Presentation
Operator
Good morning, ladies and gentlemen, and welcome to the Slate Grocery REIT Third Quarter 2023 Financial Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]. This call is being recorded on Tuesday, November 7, 2023.
I would now like to turn the conference over to Paul Wolanski, Senior Vice President, National Sales and Investor Relations. Please go ahead.
Paul Wolanski
Thank you, operator, and good morning, everyone. Welcome to the Q3 2023 conference call for Slate Grocery REIT. I am 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 Q3 2023 investor update, which is available now.
I will now hand over the call to Blair Welch for opening remarks.
Blair Welch
Thanks, Paul, and hello, everyone. I'm pleased to share our team's positive third quarter results, which highlight our portfolio's continued strong leasing fundamentals and rental spreads driving occupancy and income growth. We've completed over 690,000 square feet of total leasing in the quarter. New deals were done at an 18.4% above comparable average in-place rent. Non-option renewal spreads were similarly strong at 14.8% above expiring rents.
Our leasing momentum continues to support occupancy gains. We're up 90 basis points from the start of the year, bringing occupancy to over 94% at the close of the quarter. Our same property NOI continues to trend positively, increasing by 2% on a trailing 12-month basis after adjusting for completed redevelopments.
In today's elevated interest rate environment, the REIT remains well positioned. The majority of the REIT's debt is fixed at a weighted average interest rate of 4.2%. Notably, there remains a positive leverage between our current cost of financing and the REIT's Q3 2023 IFRS value at a 7 cap. Further, at $12.37 per square foot, the REIT's average in-place rent is well below market, providing significant runway for continued NOI growth and stability of cash flow.
Despite the REIT's strong fundamentals and operational performance, the REIT's units are trading at a discount to net asset value, which we believe provides an attractive entry point for investors. The REIT's unit price at the close of the quarter indicates an implied cap rate of 8.5% which represents a 41% discount to NAV. The REIT's NAV has been externally validated by private funds investment of 180 million into the REIT at NAV last year. We believe a below market in-place rent will continue to drive attractive renewal spreads and new leasing will support strong NOI growth.
Supply-demand dynamics in the grocery-anchored sector remains favorable, providing landlords with leverage to increase rents. And resilient consumer spending on essential goods and services is driving robust foot traffic for grocery-anchored centers. We believe the value of our grocery-anchored real estate and are confident that our portfolio is positioned for continued stable growth. On behalf of Slate Grocery's team and the Board, I'd like to thank the investor community for their continued confidence and support.
I will now hand it over for questions.
Question-and-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Okay. And your first question comes from Sairam Srinivas. Please go ahead.
Sairam Srinivas
Thank you, operator. Good morning, guys. Just looking back at the leasing numbers coming from this quarter, obviously leasing spreads look very strong. Blair, looking ahead in the next 12 months, how do you see these leasing spreads evolving? And how do you see that reflecting into your SPR [ph] numbers?
Blair Welch
Yes. Thanks for joining us, Sai. I think we're very confident in the fundamentals of the real estate. And I think we've always been very selective on what we buy because we try to buy cheap in-place rents. And so that provides durability to cash flow. And the team's done a really good job of executing leases that provide that growth. Going forward, given our average in-place rents in the mid $12, which is half of market as quoted by Green Street, we still see our rents and that growth is going to happen. We do not see a change in that. And in addition to that, we were strategic through the lockdowns and COVID and bought some what we'll call underperforming portfolios we thought, so we were able to buy those cheap in-place rents at a lower occupancy. So that NOI that the team is doing a good job which is coming on, so our forward-looking NOI looks pretty good. And I don't see that changing in the short term just because of the supply-demand fundamentals in the market. So we're feeling pretty confident. And operationally, this real estate is really stable right now, really good.
Sairam Srinivas
Thank you, Blair. And just looking at the leasing environment, do you see any investments acquired in terms of leasing incentives or any of those things kind of play out in the market?
Blair Welch
I would say -- I think you're asking like what's like on an investing environment, lending environment? I would say, generally in real estate, there's not a lot of capital, and everyone's fighting for it. In the grocery-anchored space, I think lenders and investors like the stability and the durability of the cash flow. It's an essential good. And if you look historically through decades, the occupancy has been stable. The cash flow has been stable. And so lenders and participants in real estate need to invest in the asset class, and I think that grocery-anchor real estate is an asset class that they like, perhaps more now than others from a stability standpoint. But the transaction market's pretty subdued. And when we've seen M&A across spaces, it's paper for paper, not cash. But I think we feel confident there's cash out there for real estate deals, and we will be opportunistic in the future if we can buy a great grocery-anchor real estate asset that's mispriced because of capital structure. And so we're just keeping our eyes and ears open right now.
Sairam Srinivas
Thanks for the color there, Blair. But I was just basically asking you also in terms of the leasing incentives that go on in terms of filling up all the leases are coming up?
Blair Welch
Yes, I'll pass it over to the team. But it's been pretty stable on the front for leasing. But what are you guys seeing out there in the market? Are incentives with tenants [indiscernible] what's kind of color? Is it just been fighting for our space?
Allen Gordon
Yes, I think they're fighting for our space. And one of the reasons that they're fighting for our space is due to the lack of supply in the market, and the cost to construct outside of the market as well. So that's where we're favorable.
Blair Welch
One thing I'll add, Sai, just more color, which I think is positive for our durability of cash flow. We're seeing tenants want to go longer with options and try and lock in option bumps to their rent. And I think that's good because I think they're trying to lock in to our centers for a long period of time and really control the rental costs. So it's good bumps for us. But I think that shows the tenants still think inflation is going to be around for some period of time. So I think it's positive for the REIT, but that's just --
Sairam Srinivas
That sounds good, guys. Thank you so much for the color. I'll turn it back.
Blair Welch
All right. Thanks.
Operator
[Operator Instructions]. Your next question comes from Brad Sturges from Raymond James. Brad, please go ahead.
Brad Sturges
Hi. Good morning.
Blair Welch
Hi, Brad.
Brad Sturges
I wanted to get some updated thoughts or comments on the Kroger-Albertsons merger. And I guess it would be based on what you know today. But just curious in terms of the planned divestitures as part of the merger, do you know what your exposure could be to that at this point?
Blair Welch
Yes. We'll be consistent with what we've talked before, in that all of -- any crossovers that we have, we feel pretty good. We don't know what they're doing and we don't think we have exposure. But even if they did that, the low in-place rents of our brochure are healthy. And we feel, as we've consistently said, this is a forced sale and they need to -- they don't want to give a competitor a great opportunity at a low rent to kick their butts in sales. It's not like the locations aren't performing. They're being forced to sell these. So from a landlord perspective, we don't think we're going to lose a food store. It's just them managing their competition. And when you think of the entire amount of stores that we're talking about for their portfolio, a, to the market, I think there's 400 stores they're talking about, that's probably 1% of the inventory or less. And then when you think about the Slate portfolio, we don't see a significant risk. But I'll let the team add more color.
Allen Gordon
Yes. I think there's certain headwinds with the SEC to get this deal approved. But I think what they are going to be really focusing on is making sure that any divestitures are going into an entity that is well capitalized and can perform kind of strong brochure sales going forward. They don't want these brochures to go in the hands of an over-levered entity that's going to disappear in a few years. So again, going back to Blair's point, our under market rents give us a lot of conviction in the stability of these assets. And whatever happens across the portfolio, we're confident in our ability to maintain or grow value going forward.
Blair Welch
And I think it's important. It's a good question, Brad, but like food is different than other types of retail. So if you're in a neighborhood and that grocery store sells $100 of food out of that store, for example, and then Kroger and Albertsons need to sell that store, there's still $100 of food demand at that location. That isn't changing. So it's really who's selling that food? So I think that's how we look at it. And that's how it is. Like someone's going to buy or want to buy that food sale because they're being forced to sell it. And we believe that our locations under cheap rent create a good margin opportunity for any operator.
Brad Sturges
That's great color. I really appreciate that. Maybe just switching gears, you completed a couple redevelopment projects in the quarter. Just curious if there's anything else in the pipeline that you're looking at for 2024? And then if so, kind of what should we be thinking about in terms of modeling for capital spend next year?
Blair Welch
Yes, we've got a few projects that we're currently looking at. As far as capital spend, we're working our way through that now. We don't have exact numbers on that as of yet as we're working through potential costs to construct and redevelop. But we're working through that now.
Joe Pleckaitis
I think, Brad, you've seen -- we try and use like all of our below line costs or cash, we don't use an assumption. So we only do deals when we think it's accretive and how we deal with it. So I would say it will be consistent to what we've done in years past. No big outrageous plans. We'll just do it as the assets require, and it will be kind of what we've done in the last couple of years. There's nothing big we're planning on the redevelopment site. It will just be normal business.
Brad Sturges
Okay. Last question for me, just in terms of -- there's a lot of volatility in the debt markets right now. Just [indiscernible] where your debt costs are today, where would be the rough range?
Blair Welch
I think we'll be able to do a couple of things. I think we have good protection for the next couple of years with some derivatives, and I think that's healthy. But we did some financing earlier this year with Life Cos, and we're in the mid 5. It bounces around a lot. We don't know the future. But I would say that we are in positive leverage territory no matter what it is, which I think makes us unique and definitely in the Canadian REIT universe from IFRS NAV cap rate. And we are also fortunate that whether it's Life Cos banks or other structured finance, buyers of paper want the stability of grocery. So we have not heard of any of our lenders kind of backing off out of this space. We know in other spaces they are. But I think we're still in positive leverage. But we still have some time and some years to kind of -- it's not going to be an abrupt shift to a market, like not all our debt will shift tomorrow to the new market nor even though we'll still be positive leverage, and I think our NOI growth will offset that. So we're feeling pretty good right now.
Brad Sturges
Okay. Thanks. I'll turn it back.
Blair Welch
Thanks.
Operator
Your next question comes from Gaurav Mathur from Laurentian Bank Securities. Please go ahead.
Gaurav Mathur
Thank you and good morning, everyone. Now there's been plenty of activity at the tenant level with bankruptcies in the sector, the stalled Albertsons-Kroger merger, and protests among pharmacy workers at CVS and Walgreens. My question is, do you see any sort of upcoming material tenant distress in the portfolio as we're looking at the next 12 to 18 months?
Joe Pleckaitis
Good morning, Gaurav. Good to hear from you. I think that -- I'll go into detail to your question, but at the high level, our biggest mitigant to that is our low in-place rents. At $12.37, like we are below all of our peers and we're below market. So that's a huge opportunity to make sure the tenant stays sticky at our locations. As it relates to what's happened in retail, we've done some analysis and of all the bankruptcies in retail, I think on all the peer universe, we're significantly lower on tenant exposure to the bankruptcies of late, whether that's Bed Bath & Beyond, Olympia Sports, Party City [indiscernible]. So we have very limited exposure to that. And I'll go back to it. Even when that is the case, the in-place rents, we have demand to stuff back up. So I think our biggest defenses are in-place rent. And we're mostly focused on the central tenants. As it relates to Blair speaking to grow higher in the future, obviously everyone's talking about real estate debt and it's over levered. But I think in the market, there's also a lot of levered loans. That market is 4.5 trillion last time I checked, and that's grown from 2 trillion since 2020. So I do believe there are many tenants in the greater real estate world that might face margin squeeze. But when we do analysis of our portfolio, the credits of our tenants are pretty strong. And we do not feel that our tenants are going to be impact as much because they've used and they've seen their balance sheets when I'm thinking of the groceries with the other nationals. Yes, the pharmacies are dealing with some labor issue, but they're still healthy and people need it. It's an essential good and we have a cheap rent. So we do look at it. I think I am concerned outside of grocery. Looking forward to the stress on credits for tenants. I don't think people are paying enough attention to that. But as we look at Slate Grocery REIT, we feel we're pretty insulated because we do get out an analysis and our rents are the biggest mitigant of the risk.
Gaurav Mathur
Okay, great. Well, thank you for the color on that. Just switching gears here, when you're thinking about capital allocation now in this environment and looking at 2024, just given where the units are currently trading, how you're thinking about the NCIB versus sort of distributions and then acquisition activity, as we're closer to interest rate normalization?
Blair Welch
Yes. We're obviously biased, but we think our units are unreasonably cheap. We have been using our NCIB. But we aren't going to change our consistent strategy of working with the Board and the team of allocating capital, whether that's NCIB, whether that's redevelopment for less buying outside acquisitions. We judge what's the right return, what's the best return for the unitholders and we've always done that. So I think we'll look into next year and we'll just continue that. But we feel strongly that given our strong operating fundamentals that where we currently trade in Toronto and Canada is totally disconnected to what actually has happened in the United States. And I think the team has done a good job. Like last year, we sold 18% of the company at NAV. And I believe in our NAV. I think our NAV compared to most of our Canadian peers is we can show what that is. And it's positive leverage on [indiscernible] mark-to-market financing. We have below market rents, strong rental growth. So I think it's a compelling investment right now. But we'll continue to work to come talk to you and come talk to our investors and others to kind of show that. But we're confident in real estate and what we have.
Gaurav Mathur
Okay, great. And then just last question, from a distribution perspective, how should we think of the payout ratio going forward, given that it's been increasing through the year?
Blair Welch
Yes. Well, I think that it's been increasing for a couple of reasons; one, redevelopment and some costs, but we feel that the durability of our cash will [indiscernible] high growth. We feel that our cash flow is durable and it covers. We think that the fundamental part of our business is we have low in-place rents and our NOI is going to grow. So we feel that over time, our payout ratio will go down. And we're comfortable with that.
Gaurav Mathur
Fantastic. Thank you for the color, Blair. I'll turn it back to the operator.
Blair Welch
Thanks, Gaurav.
Operator
There are no further questions at this time. I'll turn it back to Paul for closing remarks.
Paul Wolanski
Thank you, everyone for joining the Q3 2023 conference call for Slate Grocery REIT. Have a great day.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
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Slate Grocery REIT (SRRTF) Q3 2023 Earnings Call Transcript