BMO analyst updateClosing Out a Very Active Year; Q4/21 Results Light
Bottom Line:
Slate Grocery REIT closed out an extremely active 2021 during which it closed on its biggest portfolio acquisition and completed the highest annual volume of new leases in its history. Q4/21 results were light, with cash flow/unit below expectations. Looking forward, we remain constructive on the broad retail outlook, particularly for groceryanchored properties in North America. Reflecting strong investor demand for this asset type, we narrow the applied discount to NAV to 5% (from 10%), and therefore raise our target price to US$12.25 (from US$11.75). Maintain Outperform rating.
Key Points
Reported Q4/21 results below consensus and BMOe. Q4/21 FFO/diluted unit was US $0.26, -2% from US$0.27 in Q4/20, and below consensus/BMOe of US$0.29.
What's notable/new this Q? BMO Capital Markets upgraded Slate Grocery REIT to Outperform in December (note) on the back of our expectation of downward pressure on cap rates for U.S. grocery-anchored retail assets. YTD, SGR.U is among the strongest performers in the Canadian REIT sector and the top performing Canadian-listed retail REIT. On a price return basis, SGR.U is +7.2% YTD, outperforming the S&P/TSX Capped REIT Index's return of -3.8%. We are maintaining our Outperform rating despite the skinnier forecast total return as we expect downward pressure on cap rates to persist.
Achieving record new leasing figures for 2021. For FY2021, new leasing totaled 375,655sf (WA spread: +17.9%) and renewals totaled 679,601sf (WA spread: +2.3%). Q4/21 new leasing was 50,621sf (WA spread: +20.2%), and renewals was 264,031sf (WA spread: +1.5%). Slate Grocery achieved an occupancy gain for the sixth consecutive quarter, reaching 93.6% at year-end 2021. There are six anchor tenants up for renewal in 2022 (390,000sf); management is already engaging in discussions and expecting to renew them all without much capital outlay.
Acquisition guidance for 2022. After a transformational year in which Slate Grocery acquired US$468.5M of properties, management commented they are monitoring an extensive pipeline of $3-4B of deals (both individual properties and portfolios), and ideally would like to do ~$200M of acquisitions annually. On the capital recycling front, Slate Grocery has identified three non-grocery anchored properties in the portfolio that will most likely be sold in next year or two, a potential source of funding.
Redevelopment guidance. Management guidance for 2022 redevelopment spend is down 10-20% from 2021, which totaled US$24.1M. In 2022, there are four projects expected to be completed.