Seeing it as “a need to have in your portfolio,” iA Capital Markets analyst Gaurav Mathur resumed coverage of Slate Grocery REIT (SGR.UN-T) with a “buy” recommendation on Thursday.
“With inflation and rising rents being top of mind for investors, the REIT is insulated from inflationary pressures as 97 per cent of leases are net leases, thereby passing on cost inflation to the tenant,” he said. “With 5 per cent of floating rate debt, the REIT is well-positioned to manage interest rate risk.”
Following “strong” first-quarter financial results, including funds from operations per diluted unit growth of 13 per cent year-over-year, Mr. Mathur sees the Toronto-based REIT poised to benefit from current economic conditions, which he summarized as “needs squeezing out the wants.”
“In our view, rising costs are forcing shoppers to make tough decisions,” he said. “Based on management feedback from retailers, customers are trading down to cheaper, private-label groceries. The retailers find themselves with rising inventories of clothes, electronics, and other discretionary items which customers are not buying as they channel spending into basic needs and services. The REIT will benefit from this tailwind with 95 per cent of its GLA consisting of properties anchored by grocery stores.”
“The REIT’s properties are key to the distribution of in-store, click-and-collect and home delivery grocery sales. Based on our channel checks, shoppers are engaging in omnichannel across a variety of shopping missions—weekly grocery shopping and midweek top-ups, for example—and they expect similar assortments, pricing, and promotions, among other factors, across channels. In effect, the REIT has built a food logistics network.”
Given Slate’s entire operations and earnings stem from the United States, Mr. Mathur said it isn’t wise for investors to evaluate it versus Canadian-listed peers, which he said “many of whom are looking at retail-plus strategies to drive value.”
“Instead, finding comparable companies in the U.S. retail REIT sector—given factors such as portfolio location, tenant quality, investor appetite, etc.—provides a better understanding to equity investors who are truly comparing similar businesses,” he noted.
“With companies such as Walmart Inc. (WMT-N, Not Rated) and Target Corp. (TGT-N, Not Rated) reporting higher-than-normal expenses, the market has erased $550-billion in market value from consumer discretionary stocks, adding downward pressure on a market already strained by fear of inflation and rising interest rates. In our view, part of the problem lies in the fact that stores are awash in products that consumers do not want. This phenomenon, combined with the fact that the cost of finding new goods to sell and getting them to stores is surging – fuel, labour and other expenses – is a headwind for most retailers. As costs for consumers increase, we believe that spending will be targeted on a narrow range of products, first and foremost being household groceries. From a real estate perspective, not all consumer retail sectors are expected to suffer the same fate. Retailers that sell essential and necessity-based goods–like grocery stores–are expected to not only survive but also thrive in, what we expect to be, a continued challenging retail environment.”
Mr. Mathur set a target price of US$14 for Slate units. The current average is US$12.04.
“The market is providing an attractive entry point to a name with: (1) strong earnings and NAV growth profile, (2) defensive strengths of a grocery-anchored portfolio, (3) value-add initiatives and a strong development pipeline, and (4) an attractive dividend profile (7.3-per-cent yield),” he said.