Slate Grocery REIT T.SGR.UN

CIBC comments after conference

[incomedreamer11]

Our Conclusion

Management expects supply-demand dynamics to remain favourable as tenant demand remains strong with leading grocery tenants continuing to invest capital in new and existing stores. With healthy underlying demand for well located assets, SGR continues to capture healthy lifts on renewals. We highlight in-place rent of $12.49 per sq. ft., well below the estimated market rent of $23.21 per sq. ft., implying potential upside over the long term. SGR units have underperformed peers year-to-date, which we believe reflects greater focus on its relatively higher leverage and payout ratio, over otherwise stable fundamentals. Units are now yielding ~11%, a level that may garner increased investor appetite. The payout ratio remains relatively elevated at ~95%; however, we expect an improvement from NOI growth. On model adjustments, our NAV estimate declines to $10.50, and our price target to $9.50 (from $9.75), accordingly.

Key Points

Q1/24 Results: FFO per unit was $0.27, in line with our estimate and consensus. SPNOI for the quarter increased 1.1%, reflecting an increase in rental rates from re-leasing and new leasing activities, partially offset by temporary vacancies. Including the impact of completed redevelopments, SPNOI increased 2.5%.

Leasing Progress: The REIT completed ~673k sq. ft. of lease renewals at a ~7% spread, and ~98k sq. ft. of new leasing at a robust ~31% spread. Grocery store fundamentals remain strong given the expectation that consumers will continue to prioritize spending on groceries while limiting spending on discretionary purchases, backed by strong demand from larger grocers for space. For the remainder of 2024, expiries represent ~7% of occupied GLA, at an average in-place rent of ~$12.86/sq. ft. The total portfolio weighted average lease term is 4.8 years. Leasing momentum remained strong, but occupancy slipped sequentially to 94.4%, slightly below the REIT’s highest level in nearly a decade (94.7%). The occupancy slip is primarily related to East Little Creek, a property that is currently under review for redevelopment.

Debt Details: SGR reported debt/GBV of 52%, an increase of 110 bps Y/Y. The REIT has ~94% of its debt fixed with an average interest rate of 4.45%. During the quarter, the REIT exercised a six-month extension option for its $300MM revolver.

Value-add Platform: The REIT has classified a 66k sq. ft. single-tenant shopping centre for redevelopment. The property was previously occupied by Kroger and the REIT is currently exploring activities that include demolition and redevelopment as it is currently in discussions with potential retail users.

Cap Rate Tracking: IFRS cap rate was 7.20% (vs. our 7.50% estimate), unchanged from last quarter, and up ~30 bps from the year-ago period. 

Price Target (Base Case): US$9.50 Our 12- to 18-month price target is $9.50/unit, which is a ~10% discount to our NAV estimate to account for the externalized management structure and equates to 8.5x 2025E FFO.

Upside Scenario: US$11.75 Our upside case reflects our NAV estimate with higher NOI growth of +2.5%, a lower discount to NAV, and a 25 bps decrease in the cap rate.

Downside Scenario: US$6.00 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.

[apainter]

Thank you, really appreciated