Slate Grocery REIT T.SGR.UN

Scotia comment on results

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Continues to Execute Well

OUR TAKE: Neutral. We raise our target to $11.50 (+$0.50) and our NAVPU estimate to $12.00 (from $10.75) as we have increased our NOI assumptions. SGR was the best-performing REIT in 2022, up 5% vs. the REIT sector down 16%. However, in 2023 “defence” has lagged and therefore SGR has remained largely flat YTD. We think the 7.7% distribution yield should be the key source of total return in 2023. Also, the NAV discount could narrow somewhat (SGR is now trading at a 6.7% discount to our NAV). IFRS NAVPU is $14.65 (largely unchanged from $14.56). We recently visited SGR’s portfolio in Dallas in December – see related note (Two Good Days of Grocery) in which we summarized property tour takeaways. We continue to believe that grocery is a good place to hide in a recession (although likely to underperform in a “risk-on” environment). Also, there is positive leverage available for grocery-anchored retail and therefore limited cap rate movement (so far) in this asset class. SGR’s distribution yield of 7.7% is the third-highest in our coverage universe (only after AHIP and NWH at 8.8% and 8.3% respectively) vs. the REIT sector at 5.0% and implies 2023 AFFO payout ratio of 102% – Exhibit 1.

KEY POINTS

Q4/22 FFOPU slightly below but NOI slightly ahead of expectations: FFOPU came in at $0.273 versus Scotia and consensus estimate of $0.288. FFOPU grew 4.6% y/y in Q4 and 17% in 2022 mainly driven by acquisition activity. SGR has completed $425M of acquisitions in 2022 and $56M of dispositions (mostly in Q4/22). Dispositions were done at 7.0% cap rate vs Scotia cap rate of 7.25% (vs IFRS cap rate of 6.80%). We think it was prudent to do some capital recycling and reduce the debt burden. SP NOI grew 1.0% y/y in Q4/22 and 0.3% y/y in full year 2022 (vs 0.7% in full year 2021). Post Q4, our 2023 FFOPU estimate is largely unchanged and implies a modest 3.7% y/y increase.

Both leasing volumes and leasing spreads continue to impress. Portfolio occupancy steady at 93.2% although anchor occupancy at 99.2% (vs 100% last quarter). Small-shop occupancy increased q/q to 87.9% – Exhibit 4. Another quarter with healthy leasing volume – in full year 2022, new leasing spread of 20.7% and total leasing spread of 9.0% (Exhibit 5). Rental spreads have remained positive (and in some cases accelerated) since COVID re-opening. E-commerce sales have pulled back in the last one year and open air centers have done well. Focus shifts to 2023 lease expiries – SGR has ~9% of leases coming due in 2023 including 5.9% small-shop leases (Exhibit 6).

Balance sheet and leverage (remains elevated): Debt/GBV (as per Scotia) in 55% range versus 59% last year. No debt maturity remaining in 2023 (post Q4 SGR closed $56M mortgage loan. 93% of total debt is at a fixed rate. So, mininal debt refinancing or floating rate risk in the near-term.