CIBC comments on resultOur Conclusion
Q4 was marked by robust leasing spreads (a continuation of Q3), while SP growth was slightly negative, offset by completed redevelopments. Supply demand dynamics are likely to provide continued tailwinds for groceryanchored centers and will, in our view, continue to underpin attractive rent growth, particularly as Slate achieved its highest occupancy level in about a decade. SGR units have slightly underperformed peers YTD, which we believe reflects greater focus on its relatively higher leverage and payout ratio, over otherwise stable fundamentals.
Key Points Q4/23 Results:
FFO per unit was $0.27, in line with our estimate and slightly below consensus of $0.28. SPNOI for the quarter decreased 1.2%, reflecting an increase in property operating expenses as well as timing of insurance expenditures incurred in the prior year, partially offset by increases in rental rates. Including the impact of completed redevelopments, SPNOI remained relatively flat.
Leasing Progress:
The REIT completed ~477k sq. ft. of lease renewals at an ~11% spread, and ~161k sq. ft. of new leasing at a robust ~31% spread. Grocery store fundamentals remain strong given the expectation that consumers will continue to prioritize spending on groceries while limiting spending on discretionary purchases. For 2024, expiries represent ~12% of occupied GLA, at an average in-place rent of ~$11.91/sq. ft. The total portfolio weighted-average lease term is 4.7 years. Leasing momentum drove a 150 bps occupancy increase Y/Y to 94.7%, the REIT’s highest level in nearly a decade. Larger, well-capitalized grocers reflect a meaningful portion of Slate’s tenant mix (Kroger at ~6% of rent, Walmart at 5%) and have greater ability to absorb rent increases.
Debt Details:
SGR reported debt/GBV of 52%, an increase of 220 bps Y/Y. The REIT has ~95% of its debt fixed with an average interest rate of 4.4%. During the quarter, the REIT amended a ~$138MM interest rate swap to remove its existing cancellation option, thus locking in the maturity date of July 2027.
Value-add Platform:
During 2023, ~$5.2MM worth of redevelopment projects were completed,
expected to produce an annual ~$1.4MM of incremental NOI. These projects were completed at an anticipated yield on cost of 27.0%. Cap Rate Tracking: IFRS cap rate was 7.20% (vs. our 7.50% estimate), up ~20 bps from last quarter, and up ~40 bps YTD.
Price Target (Base Case): US$9.75 Our 12- to 18-month price target is $9.75/unit, which is a ~10% discount to our NAV estimate to account for the externalized management structure and equates to 8.7x 2025E FFO.
Upside Scenario: US$12.00 Our upside case reflects our NAV estimate with higher NOI growth of +2.5%, a lower discount to NAV, and a 25 bps decrease in the cap rate.
Downside Scenario: US$6.50 Our downside case reflects a 20% discount to NAV with a decline in NOI of 2.5% and a 50 bps increase in the cap rate, owing to unexpected vacancies, primarily in non-grocery.