Slate Grocery REIT T.SGR.UN

update from Scotia

[incomedreamer11]

High Distribution Yield Supported by Improving Grocery Real Estate Valuation Trends

OUR TAKE: Neutral.

Our target increases to $10.00 (from $9.50) and our SP rating is unchanged. Our NAVPU increases to $9.60 (from $9.15) as we have adjusted our NAV cap rate lower to 7.50% (from 7.60%). We note SGR adjusted its IFRS NAV cap rate to 7.01% in Q1/21 from 7.34% last quarter and as a result the IFRS NAVPU increased to $12.47 (vs $10.95 previously). We continue to think that the current distribution yield of 8.6% is attractive as we expect AFFO payout ratio to normalize to 99% in 2022. This compares to CDN REIT sector average distribution yield of 4.3%.
Lower cap rate is supported by recent M&A announcement in the US shopping center space
A U.S. Sunbelt $5.9B shopping centre portfolio (WRI - KIM merger) traded at an approximate cap rate of high-5% or ~$250 per sf. While we understand that WRI is largely a U.S. Sunbelt shopping centre portfolio (70% of portfolio in Sunbelt) vs SGR a U.S. Midwest and Southeastern secondary locations (~35%-40% of portfolio in Sunbelt), we do observe the wide spread between the two. A 7.0% cap rate for SGR's portfolio (say approximately 100bp spread over WRI implied cap transaction) would imply NAVPU of $11.55.

KEY POINTS 
Sizable $390M portfolio acquisition expected to be closed in Q3/21. In brief, SGR is acquiring a sizable portfolio at 7.8% going-in yield (or $127 per sf) and financed with $105M equity offering and remaining through debt. This transaction is part of a broader $2.3B acquisition by Slate Asset Management (SLAM) of U.S.-listed Annaly Capital Management's (NYSE: NLY) commercial real estate business. The proposed acquisition is expected to closed in Q3/21 and properties are consistent with existing SGR portfolio. As a result, SGR's asset base increases by ~30% to $1.7B and market capitalization increases by ~25% to $0.6B.
We had already incorporated this transaction in our model and, as such, no changes to our AFFOPU estimates. Leverage will increase to 61% (from 57% level) due to assumption of ~$300M debt. U.S. Shopping Center names up ~40% YTD as part of the re-opening trade: SGR up 13% YTD and trading at a 5% premium to NAV. SGR's close peer (BRX) is up 32% YTD and trading at a 4% premium to NAV