Slate Grocery REIT (the "REIT") has shown a robust performance in the first quarter of 2024, marked by significant leasing activity and rental growth. The company reported completing over 770,000 square feet of leasing, with new deals signed at rates substantially higher than the average. Occupancy rates have been strong, and the REIT has positioned itself for further growth in the grocery-anchored real estate sector.
Key Takeaways
- Slate Grocery REIT completed 770,000 square feet of leasing in Q1 2024.
- New leases were signed at 31% above the average rent, with non-option renewals at 15% above expiring rents.
- Occupancy reached 94.4%, contributing to a same property NOI increase of 2.5% year-over-year.
- The REIT's average in-place rent of $12.49 per square foot is significantly below the market average, indicating potential for growth.
- Debt financing is secure with a $300 million revolver and over 94% of debt fixed at a 4.4% interest rate.
- Slate Grocery REIT anticipates continued NOI growth, driven by higher occupancy and rental rates.
Company Outlook
- The REIT expects leasing efforts to impact NOI growth in the latter half of 2024, estimating an increase of 2.5% or more.
- Slate Grocery REIT is focusing on a redevelopment project and filling acquired properties with national tenants.
- Executives are confident in the grocery-anchored real estate sector's growth prospects and the REIT's strategy to enhance unitholder value.
Bearish Highlights
- The overall real estate transaction market has seen a decline, though opportunities remain within the grocery sector.
Bullish Highlights
- The REIT has attracted an institutional investor at NAV 18 months prior and continues to believe in the strength of its NAV and positive leverage.
- A strategic approach to adding value for unitholders is being maintained, with a focus on leveraging the current market conditions.
Misses
- There were no specific misses reported during the earnings call.
Q&A Highlights
- The management team discussed their satisfaction with the current lender interest and the stability of their interest rates.
- They reiterated their commitment to avoiding decisions that could dilute the value for existing unitholders.
- The REIT's focus on value creation for shareholders was emphasized, with an eye on new deals to bolster their portfolio.
In summary, Slate Grocery REIT has demonstrated a strong performance in the first quarter of 2024, with significant leasing activities and a strategic approach to growth. The company's current position below market average rent suggests room for future rental increases contributing to NOI growth. The REIT's management remains optimistic about the grocery-anchored real estate sector's potential and is committed to delivering long-term growth and value for its unitholders.
InvestingPro Insights
Slate Grocery REIT's robust performance in the first quarter of 2024 is further illuminated by key metrics and insights from InvestingPro. The company's strategic leasing activities and focus on growth are reflected in the following real-time data:
- The REIT's Market Cap stands at a solid 482.17M USD, indicating a strong market presence.
- A notable P/E Ratio (Adjusted) of 11.21 as of the last twelve months of Q4 2023, suggests that the company is potentially undervalued relative to its earnings.
- The Dividend Yield as of the most recent data is an impressive 10.73%, highlighting the REIT's commitment to returning value to its shareholders.
Coupled with these metrics are InvestingPro Tips that shed light on the REIT's strategic maneuvers and financial health:
1. Management has been actively engaged in share buybacks, a sign of confidence in the company's value and a potential boon for investors seeking capital appreciation.
2. Analysts predict the company will be profitable this year, which aligns with the positive outlook presented by the REIT's executives.
For readers looking to delve deeper into Slate Grocery REIT's financials and strategic positioning, InvestingPro offers a wealth of additional tips. There are 9 more InvestingPro Tips available, which can be accessed through the dedicated link: https://www.investing.com/pro/SRRTF. To enhance your investment analysis, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. This comprehensive tool can provide investors with a more nuanced understanding of the REIT's potential as it continues to navigate the grocery-anchored real estate sector.
Full transcript - Slate Grocery REIT Unt (SRRTF) Q1 2024:
Operator: Good morning, ladies and gentlemen, and welcome to Slate Grocery REIT First Quarter 2024 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] This call is being recorded on Wednesday, May 1, 2024. I would now like to turn the conference over to Shivi Agarwal, Manager, Finance, of Slate Grocery REIT. Please go ahead.
Shivi Agarwal: Thank you, operator, and good morning, everyone. Welcome to the Q1 2024 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 the 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 Q1 2024 investor update, which is now available. I will now hand over the call to Blair Welch for opening remarks.
Blair Welch: Thank you, Shivi, and hello, everyone. Slate Grocery REIT's first quarter results demonstrate the continued strong demand for our high-quality grocery-anchored real estate and the rental growth embedded in our portfolio. Our team completed over 770,000 square feet of total leasing in the quarter. Over 98,000 square feet of new deals were completed at 31% above comparable average in-place rent. Non-option renewals were completed at 15% above expiring rents. And at quarter end, occupancy was 94.4%. Our positive leasing momentum at double-digit leasing spreads continue to translate to income growth for the REIT. Same property NOI increased by $1 million or 2.5% year-over-year. We expect NOI to continue to increase over the coming months as the impact of new leases completed over the last 12 months is realized. At $12.49 per square foot, our average in-place rent is well below the market average of $23.21, meaning we have significant runway to continue increasing our rents and growing our net operating income. Our team also continues to prudently manage the REIT's balance sheet to ensure we remain protected in the current interest rate environment. The REIT exercised a six-month extension option on its $300 million revolver and over 94% of the REIT's total debt remains fixed at a weighted average interest rate of 4.4% and a weighted average remaining term of 3.1 years on the REIT's interest rate swap contracts. This provides us with stability in today's interest rate environment. We continue to have strong conviction in the fundamentals of the broader grocery-anchored real estate sector. Vacancy levels in the neighborhood community and strip center segment continue to hover near record lows and new retail supply remains muted. At the same time, tenant demand for well-located grocery-anchored spaces remains high and grocers continue to see increases in sales and foot traffic. American's leading grocers like Walmart (NYSE:WMT), Kroger (NYSE:KR), Publix and Aldi continue to invest significant capital in both new and existing stores, underscoring the important role of physical stores as a local distribution hub. With in-place rents that are well below market, Slate Grocery REIT is uniquely and well positioned to capitalize on these fundamentals and increased rents over time to deliver long-term growth for our unitholders. On behalf of Slate Grocery REIT team and the Board, I would like to thank the investor community for their continued support and confidence. I will now hand it over for questions.
Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Sairam Srinivas of Cormark Securities. Your line is now open.
Sairam Srinivas: Thank you, operator. Good morning guys.
Blair Welch: Good morning, Sai.
Sairam Srinivas: My first question is on leasing. So when you look at in a non-anchor renewal pads as such, or renewal on new leasing pads and when you compare the kind of tenants you're seeing in the last couple of years, how does that compare to the kind of tenant profile you saw maybe a couple of years ago or pre-pandemic? Has there been any change in the profile over there?
Blair Welch: I'll try and answer the question a little bit, Sai, but if I missed it, please ask again. We're seeing tenant demand from different types of tenants that we would have seen five or 10 years ago in the neighborhood anchored strip center. I think a couple of reasons for that. I think B and C enclosed malls have higher costs and less foot traffic. So tenants that typically weren't located in these types of centers are relocating to centers like ours, grocery-anchored neighborhood strips. So that's creating more tenant demand than we've seen in the last decade. And I think that's because of foot traffic and our cost. But we're also seeing certain pad -- typical pad users come in line or in other words, the cost required to build a pad and therefore the rent they need to pay for that pad is higher than perhaps they want to do. So we're seeing demand from pad users come in line as well. So I think we're seeing tenant demand from all sorts of retail tenants. And I think it's because of the traffic the anchors generate and the low cost of our rents. Does that answer your question, Sai?
Sairam Srinivas: Yes, that's exactly the color I was looking for. And actually -- so the second question I had was on renewal spreads. Obviously, spreads this quarter looked really good, and as I've been looking in the last couple of quarters as well. Can you guide us as to how we should think about option versus non-option renewals?
Blair Welch: Yes. I think we'd like to quote our non-option renewal spreads like our U.S. peers do because I think that when a tenant has control of the space, there is a little bit different of a negotiation. That being said, what we try and quote is you've seen over the past quarters and years, our non-option renewal spreads are quite high. And I think that speaks to the demand that I just talked about earlier. So we -- given the entire market is pretty tight, there is not much vacancy and not much new construction with tenant demand, we anticipate those non-option spreads will continue to be double digit. And I think that's a combination of tenant demand, our team's really good work with tenants that we know and being aggressive and really our strategy of buying low in-place rents. We quoted a lot, and we probably sound like broken records, but at $12.49 in-place rents when the market average is over $23. There's tons of room for growth because we offer quality space at a discount to operators where they can improve their margins.
Sairam Srinivas: That's great, guys. So when you think - when you look ahead for 2024 now, how should we be thinking about the mix between option spreads, those leases with options for renewals versus those that don't have it?
Blair Welch: Yes. I mean, I think if you look at our non-option renewals over the last three quarters, it's been in the mid-teens. So we continue to see double-digit non-option renewal spreads. It gets a little bit choppy when you look at a quarterly basis because certain tenants at certain times in certain market rents roll. But I think if you're thinking double-digit on that, that's how we look at it. And renewals are going to be high single digits. So it's significant rental growth. And I'd just like to point out, we quote those spreads and it's important, but Slate Grocery REIT when we do a lease deal, we pay the cash from a landlord's perspective in tenant inducement leasing commissions and any capital work at signing. And therefore the net operating income derived from that lease comes on in the following quarters. The team did over 3 million square feet of leasing in the last 12 months. And that NOI, you'll now start to see in 2024 and 2025. So we're pretty excited about our NOI growth because we can talk about leasing spreads, but I think our unitholders want to see some cash, and we're looking forward to delivering that to them in the coming years.
Sairam Srinivas: That makes sense there. And probably the last question I had was, so if you think about all the renewals that are coming up this year, what would be the proportion of those renewals that have options in them?
Blair Welch: I think that if they renew, I would say the shop space side, they're all going to renew at market. So you can kind of think about it as like it's a non-option. A lot of them do have options. We're really talking about the difference between the grocers and the shop space in those renewal numbers. So I would say that when we think of all the shop space, assume that they're going to be renewing at the non-option spreads just because they've lost control and we kind of manage our grocers. It's a little bit different because we want to control that anchor. We're still seeing great growth in our grocery rent, to get more in the weeds. Our grocery rent in our portfolio is $9 a foot. So if you add a 5% or 10% lift, you're still under $10. And when you think about what comparable industrial rents would be, say, for their main warehouse, we're inside that. So we think our real estate is extremely valuable for their supply chain.
Braden Lyons: And Sai, I might just add one more piece. For the 2024 expiries, we have about 1.1 million square feet remaining to be renewed. About 50% of that would be grocers and the remaining 50% is kind of shop space. So I think that's kind of that 50:50 to what Blair said is what I would model.
Sairam Srinivas: Awesome. Thanks guys. That's actually really good color. I'll turn it back.
Blair Welch: Thanks, Sai.
Operator: Thank you. Your next question comes from the line of Brad Sturges of Raymond James. Your line is now open.
Brad Sturges: Hi, guys.
Blair Welch: Hi, Brad.
Brad Sturges: Just to go back to the leasing comment there in terms of what you've done so far, obviously you've had a lot of activity that hasn't been effective quite yet in the operating results. When would that start to really take effect? Is that back half of 2024?
Blair Welch: Yes. I think we're starting to see it now. But if we kind of think of 2024, we think we're going to get pretty good NOI growth. And that is for -- non-signed booked, like we can see that, and that's going to be 2.5-ish percent or more. And that will continue into 2025. So I think that if we did all that leasing in 12 months, by the time you kind of pay for all that stuff, that starts coming on six, nine months later, and that's what we're starting to see right now. So it will be muted now, even though it's not bad, but you'll start seeing it in the next two or three quarters for sure.
Brad Sturges: And that 2.5% going into 2025, that doesn't include redevelopment activity, right?
Blair Welch: Well, I mean, yes, but I mean there is not too much. I mean I would say that of cash we spent without any kind of new leasing like stuff, we can kind of look through on what we've already spent. That's how we kind of quote that number. I mean there could be new stuff that could make it better, but that's kind of what we've already booked at 2.5%, everything.
Brad Sturges: In terms of redevelopment, there was one project identified in your disclosures, East Little Creek. Just curious to get a sense of the budget, your timeline and your expected return with the project.
Allen Gordon: Yes. This is Allen, Brad. We're still working through that redevelopment. We've got several national tenants that are interested in that location. So as we continue to work through that, finalize pricing, we'll certainly update that. But there is definitely interest from the city in that redevelopment and multiple - like I said, multiple tenants that we're in discussions with about a potential redevelopment at that site as well.
Blair Welch: I think our development spreads historically have been -- I mean, excuse me, yield on costs have been in the double digit. So I mean that's kind of how we think about cash spent.
Brad Sturges: Yes. Okay. Is there anything else at this point that would be earmarked for redevelopment? Or is this the only project in the near-term we should be thinking about?
Braden Lyons: Hi, Brad. It's Braden. Good morning. So there is something coming online in the next little bit. We acquired a property in New York in 2021 that had a vacant grocer box, about 60,000 square feet. We allocated no value to it at the acquisition. And we're now looking at backfilling that with three national tenants, and we expect that will come online in the next little bit.
Brad Sturges: Great. Just last question. Just on -- just looking at your debt maturities coming up, can you give us a sense of where cost of debt would be today, either from like a secured debt basis or if we're thinking about it through the use of fixed interest rate swaps?
Blair Welch: Yes. I'll let Joe correct me, as he usually does, because I mean this is his thing. But we have swaps in place for the next several years. So we'll keep our effective rate of interest down kind of where it is between here and below 5, which is good. As it relates to, I think, a bit of your question is what's the market like, we have been extremely pleased with lender comment, lender interest in grocery-anchored retail. And I think the reason is when you look on a debt yield basis or rental growth basis, grocery-anchored retail is different than many types of real estate right now because we're talking NOI growth -- NOI erosion. So that has been -- we do not anticipate significant spread increases from where risk spreads were two, three, four years ago, what the difference is obviously the risk-free or the underlying rate. But we do not see spread increases. So for the next couple years, our swaps will protect us from the cost of debt, and we think our NOI growth over that period will offset any kind of interest rate increases because of the risk-free rate in years three, four and five. Joe, how did that?
Joe Pleckaitis: Great.
Brad Sturges: I think he took your spotlight there, Joe. That's helpful. I'll turn it back. Thanks.
Operator: We don't have any further questions at this time. Shivi, you may continue. We have one question again from the line of Pammi Bir of RBC Capital Markets. Your line is now open.
Pammi Bir: Thanks. Good morning. Maybe trying to sneak one in here. Just on the commentary around same-property NOI growth, it sounds like the outlook is stronger than what it's been for a little while. And I'm wondering just how much of that is actually going to be coming from the rent growth that you talked about on the renewal spreads versus occupancy pickup. And I'm just curious if you have any comments on the occupancy outlook. It sounds like it's been pretty firm or pretty constructive. So I just wanted to get some thoughts there.
Blair Welch: Yes. I'll let the team chime in, but thanks, Pammi. Good morning. I think that there is going to -- it's going to be a bit of both. I think that the team did a really good job of increasing occupancy, both - we bought some assets several years ago that we thought were underperforming, and we did it strategically. The team then went to work and we started to increase the occupancy and that money was spent in the last 12-ish months or so. So NOI growth will be a combination that you're seeing in 2024 of kind of leasing to increase the occupancy. Now that being said, the markets also tightened. So I would say, when you look in the future, the NOI growth will be just because of the difference between $12.49 and $23. But right now, I would say it's a combination of the work the team did to increase the occupancy because we were strategic in buying the vacancy. So we're kind of seeing that come up, but even though everyone in real estate wants their assets to be 100% full, that's kind of an impossibility with multi-tenant real estate. So I think the market is approaching stabilized occupancy. I don't know what the technical term would be. So you're just going to see that all in rental growth now.
Pammi Bir: Great. Just on the - maybe switching gears and looking at from a capital standpoint, what can you sort of share with maybe what you're seeing in the transaction side of things, anything of interest at this stage? And also just thinking of, of course, where you are relative to your - where your cost of capital is certainly with the discount to NAV. So I'm just curious how you're thinking about where to put money to work.
Blair Welch: Yes. So I would say like all real estate transactions have been -- are down. But that being said, there's 40,000 grocery stores in the United States, and it's a somewhat granular asset. So if the average deal size is $20 million to $25 million, we still see transactions because of, say, 1031 exchange buyers or locals, but it's not what it was. So I would say that there are transactions, but not like it was - it's not as bad as other asset classes, but it's muted, but that - it still creates liquidity for us. As it relates to our cost of capital, 18 months ago, we brought in an institutional investor at NAV, and we believe in our NAV where our IFRS cap rate is just north of 7. So we have positive leverage if you mark-to-market our whole debt, even when you think of our 4.5% debt now. I mean it's a huge spread. And we have the cheapest rents of all of our peers. So we believe in our NAV. We think it's fair and so we don't trade like that. At Slate, we always are in the market looking at opportunities. And the pipeline in the U.S. for grocery is massive, but we're not going to do anything foolish to dilute our existing unitholders. We're a large unitholder. We believe in our performance and focused on that, and we always talk to the Board about allocating capital. And I think, just to say again, we thought it was a great idea to show our investor base that you bring in someone at your NAV because we weren't trading there. And I think there is -- I think that was a great deal for the company. We'll continue to try and add value and create value for our unitholders. But we're not going to do anything foolish because of where we trade. We think it's a great idea to buy the stock right now because our performance is excellent and the market is good. But we're always in the market looking at new deals just so we can always be able to do creative things.
Pammi Bir: Got it. Thanks very much. That's helpful, Blair. I will turn it back.
Blair Welch: Thanks, Pammi.
Operator: Thank you. We don't have any further questions at this time. Shivi, please continue.
Shivi Agarwal: Thank you, everyone, for joining the Q1 2024 conference call for Slate Grocery. Have a great day.
Operator: This concludes today's conference.
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