Ladies and gentlemen, thank you for standing by, and welcome to the Slate Grocery REIT third quarter 2021 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. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Jennifer Pyper with Investor Relations. Thank you. Please go ahead.
Thank you, operator, and good morning, everyone. Welcome to the Q3 2021 conference call for Slate Grocery REIT. I am joined this morning by David Dunn, Chief Executive Officer, and Andrew Agatep, Chief Financial Officer. Before getting started, I would like to remind participants that our discussion 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 disclosure, including our Q3 2021 investor update, which is available now. I will now hand over the call to David Dunn for opening remarks.
Thank you, Jennifer, and thank you to all the participants for joining the call this morning. Since our inception, Slate Grocery REIT's objective has been to create a superior portfolio of U.S. grocery-anchored assets that provide long-term sustainable income in all market conditions. Our unwavering focus on this objective has propelled our growth and benefited our performance. Today, I'm pleased to share that Slate Grocery REIT has just concluded one of its best and most consequential quarters to date. Strong tailwinds within the grocery-anchored sector, coupled with our team's continued exceptional operating performance, drove record acquisition activity and organic growth in Q3, which has further enhanced the durability of our portfolio and positioned us well for continued growth. Grocery-anchored real estate has proven to be a resilient and defensive asset class through previous economic cycles, and it has re-emphasized its strength over the last 20 months.
U.S. grocery sales have continued to outperform expectations, driven in part by the acceleration of e-commerce in the grocery sector. This growing penetration of online sales relies heavily on local stores, which are located in neighborhoods in close proximity to the end consumer. The reliance on bricks and mortar stores to fulfill not only in-store sales, but also online orders and home delivery, has solidified grocery real estate's critical role in the supply chain. Slate Grocery REIT's investment strategy is to identify high quality assets in major markets across the United States that are anchored by leading national grocers. The REIT's five largest tenants are Walmart, Kroger, Ahold Delhaize, Albertsons, and Publix, all of whom continue to bolster their omni-channel capabilities and produce elevated same-store sales growth compared to pre-pandemic levels. Kroger continues to expand its diverse omni-channel platform with new fulfillment initiatives.
Most recently, the company announced Kroger Delivery Now, a national partnership with Instacart that facilitates grocery deliveries from Kroger stores to customers' doors within 30 minutes. Albertsons, another innovator within the grocery space, recently disclosed that its Drive Up & Go and home delivery capabilities now reach 95% of its customers. This reach is 4x greater when compared to 2019. Albertsons has found that these digital customers spend 3x more than in-store only shoppers. To service this growing customer base, the company has expanded its curbside pickup capabilities. It is testing various methods of automated delivery from its stores and is leveraging artificial intelligence through its partnership with Google to understand their customers' needs on a deeper level. This kind of innovation has driven outsized growth for the REIT's grocery tenants and has made the real estate they occupy even more essential and valuable.
Combined, SGR's five largest grocery tenants have grown same-store sales by an average of 17.5% on a two-year stack basis. The grocers continue to reiterate their investments in omni-channel are critical to their success. Against this backdrop, our team's continued exceptional operating performance drove record quarterly growth and further enhanced the durability of our portfolio. On September 22nd, Slate Grocery REIT closed the transformational acquisition of 25 quality grocery-anchored properties across the U.S. This transaction, coupled with our other acquisition activity in Q3, increased the asset value of SGR's portfolio by approximately $415 million, bringing total assets under management to nearly $1.9 billion across 13.2 million sq ft.
At the same time, we deepened our presence in America's gateway markets, which have strong demographics and contribute meaningfully to the portfolio's income. The REIT's exceptional operating performance continued in the third quarter, underscoring the strength of our team and the value that Slate delivers to unitholders. After completing record annual leasing volumes in 2020, the team set another record in the third quarter, completing 230,000 sq ft of new leasing, which is nearly 20% above the previous high water mark. This new leasing was completed at a spread of 20.5%, which is double the new leasing spread for the portfolio through Q2 of 2021. Our portfolio's occupancy grew for the fifth consecutive quarter, netting out at 93.5% as of September 30th.
Excluding the assets acquired during the third quarter, the portfolio's occupancy is 94.4%, an increase of 120 basis points quarter over quarter and 220 basis points since Q2 2020. Not only do these metrics validate our team's asset management and operational performance, they also underscore the quality and desirability of the REIT's portfolio amongst institutional tenants. Our team's performance this quarter positions us well for continued organic growth and acquisition activity. Firstly, the REIT's contractual base rent commitments, not yet online, now total more than $2.5 million for the next three quarters. Our team has a new leasing pipeline of approximately 150,000 sq ft, which will add incremental NOI growth well into 2023. At the same time, we positioned our portfolio well to weather inflationary environments.
Excluding grocers, more than 70% of the portfolio's almost 1,700 tenants pay base rent increases during their lease term, and approximately 90% have escalations embedded within their renewal options. We also have downside cost protection given our triple net lease structure. Lastly, we remain focused on uncovering accretive external growth opportunities to further enhance the quality and scale of our portfolio. The investment market for grocery-anchored real estate remains liquid and strong, and our team is actively underwriting a deep pipeline of compelling new opportunities that would create additional value for our unitholders. This, combined with our accelerated organic growth, will continue to expand our portfolio size and scale. It's been a pleasure to be part of the exceptional team at Slate as we navigated a truly unique environment to meet both our operational and strategic objectives.
I'd like to sincerely thank our entire team for their unwavering dedication and drive, which underpins our portfolio's strong performance quarter-over-quarter. We have emerged from the pandemic larger, stronger, and poised for further growth and success. On behalf of the entire Slate Grocery team, we thank you for your continued support. I'll now hand it over for Q&A.
Thank you, sir. At this time, ladies and gentlemen, if you would like to ask a question, you may do so by pressing star then one on your telephone keypad. Again, that is star one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Jenny Ma with BMO Capital Markets.
Hi, good morning.
Morning, Jenny.
Congratulations on a strong quarter and the close of the Annaly acquisition. You had mentioned throughout the duration of the transaction that there was some leasing activity that you guys have done prior to close, and it sounded pretty positive. I'm wondering if you could provide an update on how it's been going since then, and if the occupancy rate of the portfolio that you acquired has crept up a bit since we last talked about it.
Hey, good morning, Jenny. Thanks for the question. Yeah, we've been pleased, as I stated last quarter, with the partnership that we entered into with our three JVs. Started back in March when we firmed up the deal. We've worked closely alongside our partners since then. It is true our original underwriting has been exceeded. We're about 75 basis points ahead on occupancy, which is producing about $500,000 or $600,000 of incremental NOI. However, there's still momentum going. The pipeline I referenced of 150,000 sq ft of new leasing doesn't even include the 25 properties that we acquired.
They have momentum in their own right, and we're tracking to be about 150 basis points better on an occupancy basis, which obviously flows through NOI through our hold period, sort of by the middle of our first year of ownership. When you look at the, you know, it was originally accretive to AFFO to about $0.04. Over the hold period, we were gonna add approximately $1.50 to NAV. We expect to outpace those numbers as we, you know, as we take hold of ownership and drive this forward.
Okay, great. Thank you. Could you give us an update on how the acquisition pipeline might look? What's the market looking like? Is there a lot of volume out there? How competitive is it? If you can give us any sort of insight into what you might expect for 2022.
Certainly can. I mean, first of all, we're extremely excited to have closed $414 million worth of assets at $127 sq ft, quality properties in gateway markets. Our focus now is to continue that trend. Quick comment on outlook and sentiment for the market. I'd suggest to you the desirability of stabilized grocery real estate is at an all-time high. It's as strong as ever. The investment market continues to produce transactions that are supportive of increasing values. We're seeing bid lists for marketed deals that are deep and values are regularly surpassing broker guidance.
A couple of examples of what we're seeing. I mean, these are larger transactions, but just last week there was an announcement of Blackstone and Kimco JV-ing a portfolio of six Publix anchored centers, $425 million, five in Miami and one in Atlanta at you know modeled in at a sub-five cap. That's an illustration of the desirability of the property. It also says to me that we need to continue to be creative in finding these deals. That deal happened to be off market, so not all off market deals produce the immediate value creation that we've been successful in doing. We're digging deep.
We're using our relationships and our partners in the market, and we're focused on finding incremental quality growth opportunities in 2022, pardon me.
Do you care to venture a quantum of what you might expect?
I'd suggest it will be tough to grow to the same extent as we did in
Okay.
In 2020. Though, if we can find an opportunity to do so, we will. We have a board mandate to grow this business. Values are only increasing, so the sooner we can do this, the better. You know, we're going through some strategy planning with the board in the coming quarter. I think we'll have our plan set on a target probably in the range of $200 million, but we'll be finalizing that in the coming weeks.
Okay, that's helpful. My final question relates to some of the redevelopment properties. I mean, you've got a handful. They're fairly small in size, but the yields are quite attractive. Can you know, talk about whether or not you see more of those opportunities within the portfolio? If any of them would be coming out of the acquired portfolio as well? Like, is this kind of the volume you wanna be looking at or do you expect there to be a bit of a ramp up in the development activity?
You're certainly correct. Our success. We've had great success within the redevelopment pipeline. We had four assets come online within the last couple of quarters, totaling approximately $15 million of spend, and our yield was 14%. We're on the back half of this program. We have a little less than $20 million outstanding, and the yields are still gonna reach double digits. You know, when I look at the nature of these redevelopments, they all have an anchor repositioning. We're doing deals with Kroger and Publix to do new 15 and 20-year leases with them. These are the types of redevs that we want to continue to find. Yes, we're looking to ramp up the pipeline within reason. We don't want to extend ourselves too much.
We like the $25 million-$35 million pipeline, and we're looking to unearth new opportunities, you know, as the rest of our sort of $15 million or $20 million comes back, you know, comes out of redev and back online.
Okay, great. Thank you very much. I'll turn it back.
Again, if you would like to ask a question, that is star one on your telephone keypad. You do have a question from the line of Himanshu Gupta with Scotiabank.
Thank you and good morning.
Good morning.
Just on the retail environment, I mean, looks like the leasing volumes have been good. Is it across a broad retail sector or is it just restricted to certain categories or certain regions?
Good morning, Himanshu. Yeah, I mean, you know, 2020 was a record new leasing year for us. Q3 of 2021 was a record. We are doing quality deals. You know, we're in 23 states. Yes, the Southeast is producing a slightly higher percentage of these deals. But we're seeing interesting leasing opportunities across the board. This quarter we did seven deals over 15,000 f t. It was a quarter of bigger leasing transactions, both anchors and junior anchors. The spreads are strong. 20% spreads on our best per-performance by volume ever. Q1 and Q2 produced 10% spreads, which is extremely healthy. And yes, like we're doing...
If you notice, we took our percentage of revenue from essential tenants from 65% to 69% this quarter. That's an indication of just the type of quality deals we're doing. NERs are strong. It's a broad brush view in our mind. As I stated to Jenny's question, our JV partners have similar pipelines. The last point I'll make is we're spending less to get these deals done. Net effect of rents are higher by 5%-10% than what we've seen in the past.
Thank you. By the way, that was my next question, that, you know, if I look at the new leases, like 200,000 sq ft, 20% rental spread, what kind of incentives or CapEx are you giving there? I mean...
We're spending less. Broadly speaking, we're spending less. We're spending very little, if anything, to retain a tenant to renew them. As it relates to TIs and/or landlords work that you would need to, you know, spend as a partnership when you're dealing with an anchor, it's down on a relative basis. Shop tenants payback periods, we like to see, you know, less than two years for new deals. Many of what we're doing have a one-year payback. Then, yes, larger anchors, we're looking at credit quality first and or junior anchors, credit quality first and foremost, and then we're allocating strategic amount of capital that makes sense for us. Payback periods for our deals are down on a relative basis.
Got it. On similar lines, I mean, if I look at the, you know, the recent anchor renewals, rental spread has been flat on renewal, I would say, for the last two or three quarters. However, new leases, you pick up quite a bit, you know, 20% or 10% +. Why is that, you know, on the anchor renewals?
Yeah.
not much spread happening there?
I mean, I look at it a little differently. We did a lot of volume in renewals this quarter, below 10,000 sq ft. That spread was 5.5%. It's been more or less at the mid fives throughout our last four or five quarters, if you look at our stats. Our volumes for renewals above 10,000 ft have been low, and frankly, one of them was a grocer where they just popped their option. It just so happened with a smaller data set, we didn't secure a ton of lift on those deals, but that's an anomaly in my mind. The way we are looking at the future of renewals is to continue to see spreads between 5%-7%. Our team's pushing rents.
We took a view of partnership in 2020 with our tenants. We were proactive with doing some leasing to stabilize our renewal leasing to stabilize our portfolio. Now we're taking a different tack. We're being strategic. The passage of time has created a better leasing environment, and I think we're gonna continue to see spreads in the 5%-7% range for renewals going forward.
Got it. I mean, clearly, I think the small shop tenant leasing velocity has improved quite a bit. That's that one there. Maybe the next question is on the anchor lease expires in 2022. Any thoughts there? Any discussions so far?
I mean, yes. Yes, we have a couple rolling. We're strategic about when we engage these tenants. We know their sales are meaningfully higher than they've been. You know, as we've discussed in the past, the majority of our anchors report sales. We see the trends, we see the investments they're making within their bricks and mortar real estate to take advantage of increasing online sales. Many of them are running trucks at the back of our shopping centers delivering to customers. We expect a successful outcome of the handful of grocery renewals that we have rolling in the next 12 months.
Got it. Okay, thank you. Thank you so much, and I'll turn it back.
Your next question is from the line of Li Chen with iA Capital Markets.
Hi, good morning. First of all, congrats on the strong quarter. Maybe just a follow-up on, you know, Jenny's question. In terms of your acquisition pipeline, you mentioned that you're gonna focus on gateway markets. Is the focus going to remain mostly within, you know, the Sun Belt region and the East Coast? Have you explored further opportunities outside of your core markets out on the West Coast?
Thanks for the question, Li. We are looking in major markets, and we wanna partner with investment-grade national grocers. That could take us outside of where we have the highest concentration, but we also know that there is a lot of opportunity in the Southeast, the Sun Belt, and the East Coast. You know, I wouldn't say we would never venture outside of our sort of comfort zone or where our portfolio currently is located if there's value. Our job is to continue to create value, find accretive acquisitions and continue to add scale with those top five grocers I mentioned in my opening remarks.
Mm-hmm. Right. Thanks. Lastly, recently, Amazon, you know, they announced that they're opening larger box stores across the U.S. beyond their pop-up shops. Could that be an opportunity for the REIT to develop a new potential partnership?
Do you mean their grocery banner or do you mean sort of their foray into kind of department stores?
Yeah, department stores, but not sure if it's gonna be like those super big ones. I was just wondering if that could be an opportunity for the REITs. Unclear if they're kind of going to, you know, open also those Amazon Go stores and Whole Foods, you know, besides them or within those shops.
I don't see us really ever making a play into sort of enclosed malls and/or power centers where these department stores are rumored to be sort of replacing the JCPenney's and the Sears of the world. I believe we will stick to what we're good at and stay focused on strip centers with grocery stores as an anchor. You know, centers that are 100,000 ft-125,000 ft. I would love to find a deal with Amazon Fresh. Their concept is 40,000-ish sq ft. It fits nicely within our merchandising and composition of our stores. Little less likely that we do an Amazon Go, just they're a couple thousand feet.
They're usually in dense urban markets, and that isn't really where we see the real value in in America. We like to be in major centers just outside of the downtown core, call it 5 mi-10 mi, in the suburbs, but markets that have more than 1 million people and where economies are growing and people are moving to.
Great. Thanks for the commentary. Congrats on a strong quarter. I'll turn it back.
At this time, there are no further questions. I would now like to hand the call back over to Ms. Jennifer Pyper.
Thank you everyone for joining the Q3 2021 conference call for Slate Grocery REIT. Have a great day.
Ladies and gentlemen, this does conclude today's conference call. You may now disconnect at this time.