Earnings call: Slate Grocery REIT reports strong Q2 growth, eyes future

Slate Grocery REIT (the “REIT”) has announced a robust second quarter in 2024, marked by significant leasing activities and net operating income growth. The REIT’s management team, during their earnings call on August 8, 2024, highlighted over 700,000 square feet of leasing at increased rental rates, leading to a $1.4 million, or 3.5%, year-over-year increase in same-property net operating income. Despite these strong fundamentals, the REIT’s unit price traded at a substantial discount to net asset value, which management views as a compelling investment opportunity.

Key Takeaways

• Slate Grocery REIT completed over 700,000 square feet of leasing, with new deals at 28% above the average in-place rent.
• Non-option renewals were completed at a 12.8% increase over expiring rents.
• Same-property net operating income rose by $1.4 million or 3.5% year-over-year.
• The REIT’s unit price is at a 42.8% discount to net asset value, presenting an investment opportunity according to management.
• Management reports a strong demand from lenders for grocery-anchored real estate, indicating a positive outlook for future refinancing.

Company Outlook

• The REIT’s average in-place rent of $12.56 per square foot is well below the market average, suggesting room for continued rent increases.
• Management is actively managing near-term debt maturities and reports productive lender conversations.
• The REIT has over 94% of its total debt fixed at a weighted average interest rate of 4.5%.

Bearish Highlights

• The REIT unit continues to trade at a discount to net asset value, despite strong performance indicators.

Bullish Highlights

• Slate Grocery REIT has outperformed peers, remaining a top quartile performer compared to U.S. and Canadian retail REITs.
• The sector benefits from low new supply and high construction costs, which are expected to sustain landlords’ pricing power.
• Grocery sales have grown nearly 2% year-over-year as of June 2024, supporting the sector’s stable performance.

Misses

• There were no specific misses discussed during the call.

Q&A Highlights

• CEO Blair Welch confirmed that the strong net operating income growth is a result of past leasing activities and is expected to continue in the upcoming quarters.
• In regards to refinancing, management is optimistic about securing favorable rates and has been in active discussions with various lenders.
• The REIT has derivatives in place to maintain a low interest rate for nearly three years, mitigating the impact of rising base rates.

Slate Grocery REIT’s second quarter results demonstrate a solid performance with strategic management of leasing and finances. The management’s positive outlook, underpinned by a strong sector and effective balance sheet management, suggests a continued trajectory of growth for the REIT.

InvestingPro Insights

Slate Grocery REIT’s performance in the second quarter of 2024 has shown promising signs of growth and stability in the real estate sector. In line with the strong results reported, InvestingPro data and tips provide further insights into the company’s financial health and investment potential.

InvestingPro Data indicates that the REIT has a market capitalization of $517.53 million, reflecting its size and significance in the market. The company’s price-to-earnings (P/E) ratio stands at a competitive 13.14, suggesting that the stock may be reasonably valued relative to its earnings. Notably, the adjusted P/E ratio for the last twelve months as of Q2 2024 is even lower at 10.47, which could indicate an attractive entry point for investors considering the company’s earnings potential.

Moreover, Slate Grocery REIT offers a generous dividend yield of 10.04%, a substantial return for income-focused investors. This is particularly noteworthy in the current economic environment where reliable income streams are highly valued.

InvestingPro Tips highlight that management has been proactively buying back shares, a move that can signal confidence in the company’s future and often results in an increase in the value of remaining shares. Additionally, analysts predict profitability for the year, which aligns with the REIT’s reported net operating income growth and the positive sector trends.

For readers interested in a deeper analysis, there are 8 additional InvestingPro Tips available on the platform, which can provide more nuanced guidance for making informed investment decisions in relation to Slate Grocery REIT.

These insights from InvestingPro suggest that Slate Grocery REIT not only has strong fundamentals but also offers potential for both growth and income, making it a compelling consideration for investors looking at the real estate sector.

Full transcript – Slate Grocery REIT Unit (SRRTF) Q2 2024:

Operator: Good morning, ladies and gentlemen, and welcome to the Slate Grocery REIT Q2 2024 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, August 8, 2024. And I would now like to turn the conference over to Shivi Agarwal, Manager of Finance. Please go ahead.

Shivi Agarwal: Thank you, operator, and good morning, everyone. Welcome to the Q2 2024 Conference Call for Slate Grocery REIT. I am joined this morning by Blair Welch, Chief Executive Officer; Joe Pleckaitis, Chief Financial Officer; Connor O’Brien, Managing Director; Allen Gordon, Senior Vice President; and Braden Lyons, Vice President. Before I get 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 Q2 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. We are pleased to report a strong second quarter of growth for Slate Grocery REIT. Our team completed over 700,000 square feet of total leasing in the quarter at attractive rental rate increases that drove healthy net operating income growth. Over 80,000 square feet of new deals were completed at 28% above comparable average in-place rent. And non-option renewals were completed at 12.8% above expiring rents. The impact of several consecutive quarters of strong leasing at high spreads is now materializing in net operating income growth. Same property net operating income increased by $1.4 million or 3.5% year-over-year this quarter. Our average in-place rent of $12.56 per square foot remains well below market average of $23.38, providing runway for continued rent increases to drive net operating income growth. We continue to prudently manage our balance sheet to ensure the REIT remains protected in the current interest rate environment. Over 94% of the REIT’s total debt remains fixed with a weighted average interest rate of 4.5%, and we are actively managing near-term debt maturities with productive lender conversations ongoing. Despite our strong position, the REIT unit continued to trade at a discount to net asset value, which we believe presents a compelling investment opportunity. In June, the REIT closed the sale of a stabilized non-grocery anchored property at a premium to IFRS book value, further validating our net asset value. At the end of June 30, the REIT unit price represents a 42.8% discount to net asset value. Even so, the REIT remains a top quartile performer compared to U.S. and Canadian retail REIT peers. We believe fundamentals in the grocery-anchored real estate sector point to continued stable performance. Over the past 5 years, retail has experienced the lowest amount of new supply amongst other property types, including office, apartment and industrial. And today, high construction costs and elevated interest rates are continuing to keep new retail supply near record lows. Availability in the neighborhood community and strip center segment also remains at a 15-year low, giving landlords pricing power to increase rental rates. And grocery sales remain healthy, growing nearly 2% year-over-year at June 2024, the highest rate in the last 3 months. This backdrop, coupled with our well below market rents, positions Slate Grocery REIT to continue growing revenue and increasing value for all unitholders. On behalf of the Slate Grocery 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.

Operator: [Operator Instructions] And your first question comes from Sairam Srinivas with Cormark Securities.

Sairam Srinivas: Just looking at the organic growth numbers, [indiscernible] growth this quarter seemed pretty strong. And if you look at a couple of quarters ago, it surely seems like it’s ramping up now. Would you say this would probably be the sign of the historical investments you’ve been doing in the leases? And should we see this as a run rate going forward?

Blair Welch: Yes, good question. As we’ve been discussing on the previous several quarters, all the strong leasing we’ve done and how we report as we do the leasing and the lease will come on in future quarters. And what we’re seeing now is the leasing, for example, we did 6 months ago, now that’s all the — for example, we’d be paying right now and online. So we would continue to see for the next several quarters this sort of net operating income growth because of the leasing we’ve done in the past. So that’s really what’s going on.

Sairam Srinivas: That’s awesome. And just jumping on to financing. I know there’s a bunch of maturities coming out this year and then next year. Can you give us some color in terms of how the REIT is actually looking at these maturities and your strategy around refinancing those?

Blair Welch: Yes. We’ve been actively contacting all of our lenders. We’re quite pleased to report there’s activity on the bank side, on the LifeCo side, on the CMBS side for grocery-anchored real estate. We hope to be announcing here in the next quarter some of our finalized plans for refinancing. But we’ve been working on it and unlike other types of real estate, there is active demand from lenders to lend to grocery-anchored. So we do not foresee significant changes or issues with our capital stock, and we’re pretty pleased about it. But we’ve been working on it for a while because you know how the market is but I think we’re going to be pleasantly surprised with how we can execute it.

Sairam Srinivas: That’s amazing. Good to hear there. Maybe on the refinancing, maybe is it too early? Are you able to kind of give a hint around what the rates look like on refinancing?

Blair Welch: Sorry. So what it looks like? Sorry, sorry, what we’re seeing?

Sairam Srinivas: The rates on refinancing, I mean, if you can probably give a hint of where that — where the REIT to coming in?

Blair Welch: Yes. I mean I would say just in general, what we’re seeing for grocery-anchored spreads haven’t changed significantly, say, from if you were going to do this 5 years ago. What has changed is obviously the base rate. So the cost of financing is up, but not because of the risk premium that lenders apply. It’s just the underlying base rate. But the REIT does have derivatives in place for just under the next 3 years to keep our interest rate low. So I think that, that, coupled with not the increase in spreads and in theory, perhaps some reduction in the base rates. We feel in our models, we’re being conservative, and I think we hope to outperform. But the risk spreads for grocery-anchored real estate financing have not changed, which we’re pleased about.

Operator: [Operator Instructions] And there are no further questions at this time. I would now like to turn the call back over to Shivi Agarwal.

Shivi Agarwal: Thank you, everyone, for joining the Q2 2024 conference call for Slate Grocery REIT. Have a great day.

Operator: Thank you, ladies and gentlemen. This call has now concluded. You may now disconnect.

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