Slate Grocery REIT SRRTF

Scotia comments

[incomedreamer11]

Making Good Progress on Leasing and Balance Sheet

OUR TAKE: Neutral. Post in line Q2 results, our target is unchanged at $11.00, although we have reduced our NAVPU to $11.00 (-$0.50). Leasing environment has been positive for grocery-anchored open air centers for a few quarters now, and Q2 was another solid quarter for SGR both in terms of leasing volumes and leasing spreads (Exhibit 4 and 5). However, as mentioned earlier, the focus is more on balance sheet and liquidity in this tough credit environment. Currently, 97% of total debt is at a fixed rate and there are no debt maturities in 2023 – this should provide some comfort. However, leverage remains relatively higher at 61% D/Assets (based on Scotia NAV) and even higher at 65% based on EV. SGR is suitable for high-yield income investor with distribution yield of 9% (Exhibit 1), although this comes with a higher AFFO payout ratio of 110% (2023E).

SGR is trading at 7.6% implied cap and 12x 2024E AFFO multiple (Exhibit 2) vs US peer Brixmor at 7.8% and ~15x multiple. In the context of higher leverage and external management structure, SGR valuation looks reasonable. Maintain SP rating.

KEY POINTS

Q2/23 FFOPU was in line; modest growth: FFOPU came in at $0.271 versus Scotia and consensus estimate of $0.272 (excluding one outlier). FFOPU was up 3.3% y/y in Q2 (after down 3.8% in Q1). SP NOI growth was modest at 0.4% y/y in Q2 (largely in line with 0.1% to 1.4% in the last six quarters). Once again, quiet on acquisitions/dispositions front after completing $425M of acquisitions in 2022 and $56M of dispositions (mostly in Q4/22). Interesting to see SGR mention that they continue to actively underwrite attractive buying opportunities. With a lot more focus on balance sheet and tight credit availability, it will be interesting to see how new acquisition activity would be funded in the current environment. IFRS cap rate increased by 3bp at 6.94% this quarter vs Scotia cap rate of 7.40% (up 5bp q/q). IFRS NAV, continues to be well-above current trading price, at $14.24 (up q/q and up y/y).

Leasing environment for grocery-anchored centers looks solid. Portfolio occupancy up 20bp at 93.9%; anchor occupancy largely flat at 99.3%. Small-shop occupancy increased q/q to 89.1% – Exhibit 4. Another quarter with healthy leasing volume – new leasing spread of 24.9% and renewals at 4.7% above expiring rent (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 2024 lease expiries – SGR has ~16% of leases coming due in 2024 including 7.8% small-shop leases Balance sheet and leverage (remains elevated): Debt/GBV (as per SGR portfolio value) in 55% range versus 58% in 2021. No debt maturity remaining in 2023 (post Q4 SGR closed $56M mortgage loan @ 5.5% for 10yr term). 96.6% of total debt is at a fixed rate. So, minimal debt refinancing or floating rate risk in the near-term. NCIB activity: SGR bought back 625k units for 6M @$9.65 per unit – at ~32% discount to IFRS NAV.