Slate Grocery REIT SRRTF

Scotia comment on transaction

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Announces $425M Portfolio Acquisition in U.S. Sunbelt; Equity Investment from Institutional Fund

OUR TAKE: Neutral. SGR announced an acquisition of a large grocery-anchored portfolio of 14 properties comprising 2.5M sf of GLA at a total purchase price of $425M at going-in cap rate of 6.9% (implying $174 per sf). Over two-third of acquisition rent is from U.S. Sunbelt markets such as Florida, North Carolina and Georgia. The acquisition will be funded via $180M of equity investment @ $13.01/unit by Slate NA Essential Fund, and remaining through debt financing. Pro forma closing of this transaction, our NAVPU will increase slightly to $11.65 (+$0.10) while our 2023 FFOPU estimate will be reduced slightly by ~3%. The transaction is leverage-neutral at 58% (including JV’s).

We are pleased that the equity issue price of $13.01 = IFRS NAVPU as of Q1/22, which is ~19% higher than current price and 12% higher than Scotia NAVPU. Post this transaction, Slate NA Essential Fund will own 18.4% equity ownership in the REIT. We note that the Fund includes large institutional investors like New Zealand Superannuation Fund, and provides good validation of the SGR portfolio, platform and IFRS valuation. SGR’s distribution yield of ~8% should appeal to income investors.

KEY POINTS

Transaction Details: Acquisition portfolio comprising 2.5M sf with occupancy of 91.5% and WALT of 4.5 years. Tenant roster includes Publix, Ahold Delhaize, Albertson’s, Walmart etc. and is consistent with existing SGR portfolio. Purchase price of 6.9% cap rate or $174 per sf is on the higher side compared to SGR’s last portfolio acquisition of $390M in Sep’21 at 7.80% cap rate or $127/sf. Acquisition cap rate is perhaps supported by high U.S. Sunbelt exposure. We did not get a sense that valuation cap rates for grocery-assets have expanded meaningfully in the current environment.

Transaction Impact: This is a sizable transaction as SGR’s asset base increases 22% to $2.4B. Florida now accounts for 18.5% of total NOI, followed by North Carolina 12.1%, New York 11.5% and Georgia 7.1%. The transaction is slightly accretive to NAV but slightly dilutive to FFOPU as we assumed 5% interest rate on new debt financing. More importantly, portfolio base was grown with the help of private institutional investors as the equity capital markets are larglely shut down. Bringing in large instituional investors through a related Slate-Fund brings validation to the investment strategy.

Valuation: SGR is now trading at 6% discount to Scotia NAV, 16% discount to IFRS NAV (vs CDN REIT sector at 20% discount). SGR’s distribution yield of 7.9% at AFFO payout ratio of 99% in 2022E and 97% in 2023E looks attractive considering defensive cash flows.