Slate Grocery REIT T.SGR.UN

RE:RE:Scotia comments after conference

[incomedreamer11]

Distribution Yield 10%+, Although Comes With A Higher Payout Ratio

OUR TAKE: Neutral. Post in line Q1 results, our target is decreased to $9.00 ($-0.50) as we slightly revised our 2025 FFO estimate but kept our target 11.5x AFFO multiple unchanged. Our NAVPU of $9.50 is also unchanged. It was yet another active quarter for SGR on the leasing front and rental spreads (details below). Fundamentals remain attractive for grocery anchored open air centers due to strong leasing demand and muted new supply. That said, we still think there’s more work to be done on the balance sheet as SGR’s ~55% of total debt is due in 2024 & 2025 (Exhibit 7), and leverage remains elevated at 56% (Exhibit 8).

We continue to think that management is committed to maintain the distribution in the near-term; as such, we don’t expect a cut anytime soon. SGR’s distribution yield is high at 10.8% (highest in our coverage), albeit with a higher 2024E payout ratio of 108% (Exhibit 1).

SGR is trading at an 8.4% implied cap and 10.0x 2024E AFFO multiple (Exhibit 2) vs US peer Brixmor at 8.0% and ~15.0x multiple. In the context of higher leverage and external management structure, SGR’s valuation looks reasonable. Maintain SP rating.

KEY POINTS

In-line quarter: FFOPU came in at $0.269, in line with Scotia’s estimate of $0.269 and slightly below consensus estimate of $0.274. FFOPU increased by 3.5% y/y in Q1(-3% in Q4). SP NOI growth was +1.1% y/y in Q1 (-1.2% y/y in Q4). Including the impact of completed redevelopments, SP NOI growth was +2.5% y/y. Quiet on acq/disp. front this quarter after completing $425M of acquisitions in 2022 and $56M of dispositions (mostly in Q4/22). IFRS cap rate was unchanged at 7.20% this quarter vs Scotia cap rate of 7.85% (+10bp q/q). IFRS NAV remains well-above current trading price at $14.01 (up 0.3% q/q).

Active on leasing, spreads remain resilient: Another quarter with healthy leasing volume as SGR completed 771k sf of leasing – new leasing spread of 30.9% and renewals at 6.6% above expiring rent (Exhibit 4 for breakdown). Rental spreads have remained positive (and in some cases accelerated) since COVID re-opening. Focus remains on 2024 lease expirations – SGR has ~7% (1.1M sf) of leases coming due in 2024, including 3.6% small-shop leases (Exhibit 6). Portfolio occupancy slightly down 30bp at 94.4%; anchor occupancy at 98.3%. Small-shop occupancy increased 30bp q/q to 90.8% – Exhibit 5.

Muted FFO per unit growth in 2025 due to higher interest expense assumptions: We increased our cost of debt assumption on renewals by 25bp to 6.0% p.a., which decreased our 2025E FFOPU estimate by 1.8%. 2025 will be an important year for SGR as 33% of total debt is coming due. We expect +2.2% y/y FFOPU growth in 2024E and +0.1% in 2025E.