Q3 Headlined By Strong Leasing Momentum
Our Conclusion
Sumayya Syed, CFA
Zachary Zervos
Neutral
Grocery-anchored retail fundamentals remain robust, as does consumer spending on necessities, which is a dynamic from which Slate is well positioned to benefit. High construction costs and interest rates have pressured new supply, meaning that <0.5% of new supply has been added to inventory over the past 12 months. With strong underlying demand for well-located assets, and historically low vacancy, renewal lifts remain healthy. Subsequent to the quarter, the REIT addressed its near-term debt maturities, which could help clear up some uncertainty.
Units are yielding ~8.7%, a level that may garner increased investor interest, while the payout ratio is relatively elevated at ~95%. We raise our price target to $10.00, from $9.50, reflecting improved sentiment for the sector following recent rate cuts (and expectations of more).
Key Points
Q3/24 Results: FFO/unit was $0.29, broadly in line with our estimate and consensus of $0.28. SP-NOI for the quarter increased 4.8%, reflecting strong leasing activity at attractive spreads, along with relatively flat operating expenses. Including the impact of completed redevelopments, SP-NOI increased 6.2%.
Leasing Progress: The REIT completed ~727K sq. ft. of lease renewals at a ~5% spread and ~124K sq. ft. of new leasing at a healthy ~25% spread. For Q4/24, expiries represent ~1% of occupied gross leasable area (GLA), at an average in-place rent of ~$14.72/sq. ft. The total portfolio weighted-average lease term is 5.1 years.
Leasing momentum remained strong, and occupancy increased 40 bps sequentially to 94.6%, inching towards the REIT’s highest level in nearly a decade (94.7%). SGR’s average in-place rent is $12.61/sq. ft., providing runway for growth as market rents are ~$23.58/sq. ft.
Debt Details: SGR reported debt/GBV of 52.0%, an increase of 100 bps Y/Y. The REIT had ~95% of its debt fixed as of Q3 with an average interest rate of 4.6%. Subsequent to the quarter, SGR entered into a credit facility agreement for an aggregate amount of $500MM, comprising a $275MM revolving facility and a $225MM term loan facility, at a marginal ~5 bps higher spread on the SOFR. After the refinancing, the weighted-average interest rate will be 4.8%.
Cap Rate Tracking: IFRS cap rate was 7.20% (vs. our 7.50% estimate), unchanged from last quarter and up ~20 bps from the year-ago period.
My Take: A’s the fundamentals improve, this is moving sharply to the reward side on a risk/reward scale. The yield alone outperforms the 10 yr. bond with capital appreciation a strong possibility as interest rates recede. The dropping POR should provide a cushion for any volatility going forward. Please do your own research.