Anchored by its ~40% exposure to grocery tenants, we expect 2021 to be a stable year
all around for Slate Grocery REIT. There are no upcoming debt maturities (until 2023),
lease expiries are moderate at <5% (all non-anchor tenants), leasing activity completed
in 2020 should result in NOI growth, and there is some liquidity for acquisitions
following the December equity raise. Rent collection was solid at 96% for Q4/20, and
bad debt improved meaningfully q/q. With greater confidence in NOI stability, we are
raising our NAV estimate and target price.
Key Points
An in-line quarter to close out 2020. Reported Q4/20 FFO/diluted unit was US
$0.27, down 7% y/y, and matching BMO's estimate and consensus. The y/y decline
was largely due to Slate Grocery being a net seller of assets in 2020 (US$43.5M),
higher current tax expense (related to dispositions), and temporary dilution from the
December equity issuance. Q4/20 bad debt expense was US$0.23M (0.7% of revenue),
much lower than our estimate of US$0.7M, and materially improved sequentially from
US$0.93M in Q3/20. Notably, Q4/20 bad debt expense returned to pre-pandemic levels.
Q4/20 SPNOI was -0.9% y/y from temporary vacancies, partially offset by renewals/
new leasing at positive rent spreads (+2.7%). FY2020 SPNOI adjusted for lease
termination fees was +0.6% y/y.
What's notable/new this Q? The REIT completed a US$58.3M bought deal in December
(link). Post-quarter end, the proceeds were invested through the acquisition of a
396,471sf, five-property grocery-anchored portfolio for US$54.3M (US$137psf). The offmarket
deal was done at a cap rate in the high-7% range. The portfolio is located in the
Southeastern U.S.
Q4/20 rent collection solid at 96%. Slate Grocery has collected 96% of rent since the
pandemic. As of January 31, Slate Grocery had received US$1.1M under its rent deferral
program, with some tenants repaying deferred rent sooner than agreed upon. The
entire deferral program totaling US$1.3M is expected to be complete by April 2021.
Record leasing volume, in a pandemic year no less. In Q4/20, Slate Grocery leased
480,738sf (93% renewals) at a WA spread of +2.7%. In FY2020, leasing totaled 1.7msf
(78% renewals) at a WA spread of +6.1%. Q4/20 retention was 92.9% (5-year average:
92.1%), demonstrating the resiliency of a grocery-anchored portfolio. As at December
31, 2020, portfolio occupancy was 92.9%, +40 bps q/q and flat y/y.
Our Thesis
Slate Grocery REIT is rated Market Perform. Over the
near term, the COVID-19 pandemic is expected to
have an adverse impact on the global economy. Slate
Grocery's exclusively U.S. portfolio is anchored by
~40% exposure to grocery tenants. We expect Slate
Grocery to trade at a discount to NAV owing to its
external management, and comparatively higher
leverage and payout ratios vs. retail peers.
Upside Scenario $11.50
Our upside scenario unit price is derived from our current
NOI estimate, a 50 bps compression in our cap rate
assumption, and the units trading at par to NAV.
Downside Scenario $5.90
Our downside scenario unit price is derived from a 5%
decrease to our NOI estimate, a 50 bps expansion in our cap
rate assumption, and the units trading at a 20% discount to
NAV.