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OUR TAKE: Neutral. Post largely in line Q3 results, our target is reduced to $9.50 (-$1.50). SGR continues to perform well on the operational front due to a strong leasing environment for grocery-anchored open air centers. However, due to the elevated payout ratio and higher leverage, our target is now based on a small discount to our NAV. Our NAVPU is also reduced to $9.75 (-$1.25) as we use a higher cap rate of 7.65% (+25bp).
SGR’s distribution yield is high at 11.2%, albeit with a higher 2024E payout ratio of 108%. We think management is committed to maintaining the distribution in the near-term; as such, we don’t expect a cut anytime soon. 97% of total debt is at a fixed interest rate and there are no debt maturities remaining in 2023. However, 21% of total debt is due in 2024, and leverage remains elevated at 55% (vs 55% last q). There is more work to be done on the balance sheet.
SGR is trading at an 8.2% implied cap and 9.6x 2024E AFFO multiple (Exhibit 2) vs US peer Brixmor at 8.3% and ~14.1x multiple. In the context of higher leverage and external management structure, SGR’s valuation looks reasonable. Maintain SP rating.
KEY POINTS
Q3/23 FFOPU largely in line: FFOPU came in at $0.270, slightly above Scotia’s estimate of $0.266 and in line with the consensus estimate of $0.276. FFOPU was down 6.2% y/y in Q3 (+3.3% in Q2). SP NOI growth was modest at 2.0% y/y in Q3 (a bit better than 0.1% to 1.4% in the last seven quarters). Once again, quiet on the acquisitions/dispositions front after completing $425M of acquisitions in 2022 and $56M of dispositions (mostly in Q4/22). IFRS cap rate increased by 6bp at 7.00% this quarter vs Scotia cap rate of 7.65% (up 25bp q/q). IFRS NAV continues to be well-above current trading price at $14.25 (flat q/q).
Leasing environment for grocery-anchored centers looks solid. Portfolio occupancy up 20bp at 94.1%; anchor occupancy flat at 99.3%. Small-shop occupancy increased q/q to 89.5% – Exhibit 4. Another quarter with healthy leasing volume – new leasing spread of 16.7% and renewals at 8.7% above expiring rent (Exhibit 5). Rental spreads have remained positive (and in some cases accelerated) since COVID re-opening. E-commerce sales have pulled back in the last one year and open air centers have done well. Focus shifts to 2024 lease expiries – SGR has ~14% of leases coming due in 2024, including 6.1% small-shop leases (Exhibit 6).
Muted FFO per unit growth due to higher interest expenses: After -2.0% y/y FFOPU growth in 2023, we expect +3.5% in 2024 and +0.6% in 2025. Debt/GBV (per SGR portfolio value) of 55% vs. 58% in 2021. Leverage is even higher at 63% as per Scotia NAV. NCIB activity: SGR bought back 372k units for 3.5M @$9.43 per unit – a ~34% discount to IFRS NAV.
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