Good day, and thank you for standing by. Welcome to the Slate Grocery REIT First Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone keypad. Please be advised that today's conference is being recorded. Without further ado, I would now like to hand the conference over to one of your speakers today, Mr. Paul Wolanski. Please begin.
Thank you, operator, and good morning, everyone. Welcome to the Q1 2022 Conference Call for Slate Grocery REIT. I'm joined this morning by Blair Welch, Chief Executive Officer, and Andrew Agatep, Chief Financial Officer. Before getting started, I would like to remind participants that our discussions today may contain forward-looking statements, and therefore we ask you to review the disclaimers regarding forward-looking statements as well as non-IFRS measures, both of which can be found in management's discussion and analysis. You can visit Slate Grocery REIT's website to access all of the REIT's financial disclosures, including our Q1 2022 investor update, which is available now. I will now hand over the call to Blair Welch for opening remarks.
Thanks, Paul, and good morning, everybody. We began investing in grocery real estate on the heels of the global financial crisis, recognizing that the asset class was uniquely defensive in all market conditions because of the critical role it plays in last mile food logistics. Today, amid inflationary pressures and global supply chain issues, our grocery real estate continues to demonstrate resiliency and strong performance. In the first quarter of 2022, our team continued its operational excellence and enhanced the durability of our portfolio. We completed over 410,000 sq ft of leasing in the quarter, with strong rental spreads of 38.3% for new leasing and 8.9% for renewals.
Demand is strong for our less than 10,000 sq ft spaces, and our asset management team continues to see additional lease-up opportunities that are accretive and will push occupancy up further by the end of the year. We also continue to see positive momentum on our same-property NOI, AFFO, and redevelopment progress, all of which will provide meaningful value for our portfolio in the current year and beyond. With the new macroeconomic pressures emerging, the REIT's portfolio is well positioned to ensure long-term stable income. At the end of Q1, our anchor occupancy is 100%, and our total occupancy is stable at just over 93%. In an inflationary environment, our real estate is even more valuable to grocers and their efforts to service the last mile of food logistics.
With prices rising, consumers are likely to pull back on discretionary purchases and spend more on groceries and other essentials. This is likely to bolster revenue growth for our grocery tenants. Sustaining that level of demand makes logistics more costly for grocers. Our properties, which are located close to the end consumers, help to minimize grocers' last mile logistics costs. With prices rising, it also is becoming more costly for the grocer tenants to relocate, let alone build from the ground up, making our tenancies even stickier. The REIT's cost basis of $145 per sq ft remains highly defensive, providing at least a 53% discount to the average cost for a new build of an estimated $275 per sq ft, and we see that number increasing.
Finally, 97% of our leases are net, meaning our tenants are responsible for utilities, taxes, insurance, all of which we think will see cost increases. This offers protection in an inflationary market and ensures long-term stability of our income. Moving forward, we remain focused on our efforts to grow the REIT organically and through quality acquisitions that are accretive to the portfolio. Our investments team continues to underwrite numerous opportunities in the United States. In March, the REIT established an at-the-market equity program to keep us financially nimble and to fund ongoing development and acquisition activities. Slate Grocery REIT continues to benefit from the insights, deal flow, and resources of Slate Asset Management, which owns and operates over $3 billion of grocery assets worldwide.
In a fragmented market, we are well positioned to capitalize on a range of opportunities, both single asset and grocery portfolios, that will create value for all of our unit holders. On behalf of Slate Grocery and the board, I'd like to thank the investor community for their continued confidence and support. I will now hand it over for questions.
Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Sumayya Syed. Your line is open.
Thanks. Good morning. Just firstly on same-property NOI, and if you could share the outlook on the temporary vacancies you've noted, and when would you expect that same-property NOI trend to improve by?
Yeah. Look, same-property when we look at it this quarter was up slightly, I'd say minus 10 basis points. One thing to think about is on a trailing twelve-month basis, we've seen growth of about 2.5% when we include redevelopment projects that come online. Our occupancy right now is stable at 93.2%, and we think that we're gonna see occupancy gains throughout the rest of the year. Suffice to say, I think our guidance remains consistent, 1%-1.5%, but once we include redevelopment, that number's gonna be higher.
Okay. I wanted to ask about the $275 per foot cost to build. I'm just wondering if that's a national average number or it's specific to the market Slate is in, and sort of if you can share how that number has trended or changed over the last year or so.
Yeah. I would say it's definitely market specific, and I would say that's on the lowest end of any market that we're in at Slate Asset Management or Slate Grocery for the United States. I mean, we see across the board, construction costs have probably gone up 20%-30%. The problem is now if you're gonna try and do new build, try and get steel and concrete in certain markets, you can't even get it. We see continued pressure on costs, and we also see, you know, factoring in land costs that aren't in that number. Hard costs have gone up, making our real estate extremely valuable and defensive for our tenants.
If you think of our weighted average in-place rent and the yield on cost to develop something new, when we quote a $275 cost, and I'm sure that's not land, you would need to achieve high-teen rents across the board or $20 rents to make that make sense. We just don't see that. You know, we see our rents at a significant discount to that. We have a lot of room to grow, and it's just difficult to quote a per sq ft number in any market. We like to use the lowest number of the markets we're in.
Okay. That's fair. Just lastly from me, in your letter to shareholders where you kind of noticed the increasing importance of grocers being close to customers, so is that something you're also seeing coming across in your negotiations with your anchors, and were you able to push a little bit more rent, or has that dynamic not really changed?
Well, I think if you think of, you know, where does industrial end and retail begin, I think Amazon's results kind of speak to how valuable our Walmart and Kroger are because Amazon's having a significant problem delivering food. I think that if you look at our portfolio with 100% anchor occupancy, I would say that's a pretty good just kinda tell of how valuable our real estate is to them. It's always been that way. Grocery-anchored real estate and neighborhood centers have performed in the low 90s% occupancy for the last several decades. We have been able to increase rents, as, you know, noted from our leasing spreads for new and renewal.
I think we'll continue to see that happen because for the grocer in food logistics, we estimate 45% of their costs are transportation, and we also estimate 25% of their costs are labor. When you see self-checkout, what they're really doing is decreasing their labor cost to increase their margin. If we can help them on their rent cost increase their margin, they love staying in these locations because it's where all the houses are. The last mile logistics, and you can read all the Amazon reports, is the most expensive mile. You need to get the product to the consumer as close as you possibly can, and that's costing more and more money. We think that makes our real estate more and more valuable.
Okay. Definitely some encouraging trends. That's all for me. Thank you.
Thanks.
Again, everyone, if you would like to ask a question, just press star one on your telephone keypad. Again, that would be star followed by number one on your telephone keypad. Your next question comes from the line of Jenny Ma. Your line is open.
Hi. Thanks and good morning.
Morning, Jenny.
I wanted to ask about the new ATM that you've put in. It looks like the issuance that you've done recently has been near, you know, where your stock topped out at. I'm just wondering if you can give us some more color on the parameters on how you're gonna be using the ATM in terms of, you know, what kind of unit price would you be looking for to be issuing. Is it something that you'll be using that's tied to specific projects like development or specific one-off acquisition? Or is it something that you would tap opportunistically to sort of build up your equity and reduce the leverage over time, assuming the unit price allows for it?
Yeah. I mean, it's a very good question. I think in a rising interest rate environment, people are gonna have to pay way more attention to cost of capital, 'cause debt's more expensive, and it's just not gonna be easy for most folks. We love the fact that we still are in great positive leverage territory on new buys and continue to grow. As it relates to the ATM, we'll be more opportunistic. You know, whenever you can raise equity through the ATM program, which has less costs associated with it as you know, you know, at or above our posted NAV, we think that makes good sense. We'll use it opportunistically, you know, going forward, you know, because it is really a cost of capital gain.
Okay. Can you remind me, are there any limitations to using it, kind of like, you know, daily limitations on an NCIB, or is it really as much as the market could absorb?
Yeah, it's more limited to what the market would take on an average daily trading volume sort of thing. Obviously the program itself is capped at $150 million over a 24-month period. It's more based on volume on trading that day.
Okay, great. Turning to acquisition opportunities. You stated that Slate Grocery remains focused on that front. I know a lot has changed in the market outlook in the very, you know, recent past. Just wondering if you can give us an update on what you're seeing in terms of volume and pricing and whether or not you've seen any slowdown in the market in so far as grocery-anchored retail properties?
Yeah. I'll start it then I'll pass it over to Conor to kind of give you some more specific color. You know, I think as you know, the grocery-anchored space in the United States is highly fractured with under 40,000 assets. Most asset size is of a size that's been done through private people that have used, you know, one-off asset financing such as CMBS or commercial mortgage-backed securitization. That market has blown out a little bit, and lenders are taking a pause on financing one-off assets. However, companies that have the wherewithal and the expertise to make accretive acquisitions right now and can still access the debt capital markets or debt markets such as Slate Grocery, we believe with the use of prudent leverage, the buying opportunity is pretty interesting right now.
Because there's not as many privates at the moment, and they will always come back because it is the United States, they are just not as active. We think we can buy at a great basis with conservative leverage to catch the rental growth that we think we'll pick up in the next couple of years. Conor, why don't you give what you're seeing in the U.S.?
Yeah. Certainly think there's no shortage of opportunities and as Blair alluded to, the private buyer has kind of maybe taken a step back that was really pushing pricing towards the end of last year and the beginning of this year. So certainly with that, less competition on one-off deals and maybe some portfolio deals, we're excited about what the market presents. I think from a Slate perspective, we wanna stick to the fundamentals, continue to acquire under market rents at a significant discount to replacement cost to set ourselves up for future revenue growth over time.
Okay. That's great color on the buyer side, but what about the seller side? I mean, are they bringing stock to market? And what are their pricing expectations? Has that shifted at all?
No. I mean, I think that they are bringing stuff to market, and things have shifted somewhat. You know, I think we can still buy in a very accretive way. There's no shortage of product in the U.S. to go buy. I think some of the sellers, you know, are still very motivated to sell, and in a thinner buyer pool.
Mm-hmm.
You know, there's still more opportunities because there's less buyers. There's tons of sellers, there's tons of product. We have a pipeline in the $ billions like we always do. You know, we can be selective. I think it's about buying, as Conor said, low in-place rents at a cheap price per sq ft, and that's what we've always done, and I think that will be extremely valuable in an inflationary environment.
Okay. Are you still targeting sort of cap rates in the seven handle range or have they come down a bit? Like, where's the sweet spot for you in terms of?
Well, I think that it's interesting. You know, if you look at some of the larger portfolio deals that have been done in the last 12 months in the U.S., you know, whether it's the Donahue Schriber deal or, you know, some other deals, I would say those cap rates have been in the fives. We think there's. You know, cap rates, and I know, Jenny, I've talked to you about this. Cap rates are kind of out of context if you don't know what rents you're capping. I think if I would rather buy something with a low in-place rent in the high sixes knowing that I'm going to reset it in uwo years at, you know, a way different rent because I'm really then buying a stabilized rent two years from now at an eight or nine cap.
That's what we are talking about. I think that we are very fundamental real estate people and I think that there are still great acquisitions to buy in the high sixes with positive leverage because you're gonna be able to reset those rents that are below market in the short term.
Okay. That's very helpful. My last question is, so Blair, I noticed the title you dropped from interim on the CEO. I'm just wondering if you read into that, as you taking on a permanent position or if that's a chair that you're still looking to fill with someone else.
Yeah. You know, I think we'll come out with some more information on that within the next, you know, 45-60 days.
Okay. Great. Thank you very much.
Yep.
Presenters, there are no further questions over the phone. Let me turn the call line one moment.
Thank you everyone for joining the Q1 202 Co onference call for Slate Grocery REIT. Have a great day.
This concludes today's conference call. You may now disconnect.