BMO analyst updateBreaking Acquisition and Leasing Records
Bottom Line:
Slate Grocery REIT reported a solid Q3/21 highlighted by record new leasing volume as well as the close of a US$390 portfolio acquisition in September - the largest transaction ever completed by the REIT. Consistent with the improvement in operating results reported by other REITs so far this earnings season, Slate Grocery posted improvement in its operating and financial metrics in Q3/21 as it recovers from the pandemic impact. Our investment thesis for Slate Grocery REIT is unchanged, and we maintain our US $11.00 target price and Market Perform rating.
Key Points
Solid quarter in line with BMO/above consensus. Q3/21 FFO/diluted unit was US $0.28, +1% from US$0.27 reported in Q3/20, in line with BMO's estimate of US$0.28 and a beat vs. consensus of US$0.26.
What's notable/new this Q? Slate Grocery closed on September 22 a US$390M portfolio acquisition (7.8% cap rate), which is composed of 25 grocery-anchored properties. See our note A Big Boost From Accretive Portfolio Acquisition (August 9, 2021) for a detailed analysis of the transaction. Including a few smaller acquisitions, Slate Grocery acquired US$414M of assets in Q3/21, bringing its YTD total acquisitions to just under US$470M. IFRS fair value of the portfolio has increased to US$1.9B in Q3/21, up from US$1.3B y/y. Looking forward, management does not expect to repeat this quantum of acquisitions in 2022, however, suggested a target in the US$200M range is reasonable.
SPNOI shifts positive in Q3/21. SPNOI for Q3/21 was positive for the first time since Q3/20, at +2.1% y/y from renewals/new leasing at positive rent spreads, partially offset by temporary vacancies. Including completed redevelopments, SPNOI was +3.7%.
New leasing volume hit record high. Slate Grocery reported a record for new leasing volume of 229,290sf (about 20% over the previous peak value), and at a record new leasing spread of +20.5%. Combined with renewals, leasing volume totalled 425,821sf at an average spread of +10.2%. Occupancy for Q3/21 was 93.5%, the highest value since Q3/20. Occupancy has incrementally improved every quarter since the start of the pandemic.
Redevelopment a strong point. Yields on completed redevelopments have been strong, with a weighted average yield on cost of 14.0% YTD. There are currently four properties being redeveloped for a total cost of US$22.7M and estimated average yield of 9.1%. Management has indicated that it is comfortable in the US$25-35M range for its redevelopment pipeline moving forward.