CIBC commentsSLATE GROCERY REIT Continues To Scale Up
Our Conclusion
Slate Grocery continues to execute on its original strategy of growing the portfolio by acquiring assets at wide cap rate-to-financing-rate spreads. Emphasis on acquiring assets with below-market rents should translate into organic growth, which is above what Slate has historically achieved. Solid leasing spreads imply that tenants, both anchors and small-shop, are able and willing to pay higher rents. SGR units have outperformed against a deteriorating macroeconomic background (or expectations of one), reflecting, in our view, the safety offered by the wholly grocery-anchored portfolio. We maintain our Neutral rating as we see higher relative returns elsewhere in the sector.
Key Points
Q2/22 Results: FFO per unit was $0.26, close to our estimate of $0.27. SPNOI was +1.4%, reflecting strong leasing, offset by temporary vacancies. Including redevelopments, SPNOI grew by 1.5%.
Leasing Progress: The REIT completed ~396k sq. ft. of lease renewals at a 5.9% spread, and ~44k sq. ft. of new leasing at a 26.6% spread. Grocery store fundamentals continue to remain strong given the expectation that consumers will prioritize spending on groceries while limiting spending on discretionary purchases. For 2022, remaining expiries represent 2.6% of occupied GLA, with the majority attributed to non-anchor tenants. Overall occupancy was 93.4%. Slate has not observed softening in non-anchor tenant demand or their ability to absorb rent increases, as the higher rents still represent a discount vs. other alternatives (i.e., malls). Larger, well-capitalized grocers reflect a meaningful portion of Slate’s tenant mix (Kroger at ~8% of rent, Walmart at 6%) and have greater ability to absorb rent increases.
Scaling Up In The Sunbelt: SGR acquired a significant US$425MM grocery-anchored portfolio at a 6.9% cap rate (in line with our cap rate). SGR concurrently formed a JV with a fund managed by Slate Asset Management. The fund invested $180MM in the REIT’s assets, which went towards purchasing the portfolio. The remaining balance was funded through a US$275MM term loan and $18.6MM of equity issued under the ATM. SGR also amended pricing on its credit facility (~20bps improvement).
Cap Rate Tracking: Operating through a period of high inflation and rising interest rates, we find it constructive to evaluate how cap rates have changed. IFRS cap rate was 6.82% (vs. our 7% estimate), down ~16bps from last quarter, and down 28bps over the past six months.
Investment Thesis
The REIT's strategy is focused on acquiring grocery-anchored real estate across major U.S. metro markets, given the subsector is essential to local communities and is relied upon to fulfill daily needs. We view Slate's portfolio as defensive given the groceryanchor concentration, which shields the REIT from broader retailer bankruptcies.
Price Target
(Base Case): US$12.00 Our 12- to 18-month price target is $12.00/unit, which is in line with our NAV estimate and equates to 11.1x 2022E FFO.
Upside Scenario: US$14.50 Our upside case reflects our NAV estimate with higher NOI growth of +2.5% and a 25 bps decrease in the cap rate.
Downside Scenario: US$7.00 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.