Ladies and gentlemen, thank you for standing by, and welcome to the Slate Grocery REIT first quarter 2021 financial results c onference 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. I would now like to turn the call over to Braden Lyons, investor relations. Please go ahead.
Thank you, operator, and good morning, everyone. Welcome to the Q1 2021 conference call for Slate Grocery REIT. I'm 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 Q1 2021 investor update, which is available now. I will now hand over the call to David Dunn for opening remarks.
Thank you, Braden, and thank you to all the participants for joining the call this morning. I'd like to focus on three key factors that are positioning Slate Grocery REIT well to continue providing our investors with a strong total return investment. Number one, the durability of our cash flows and our actionable pipeline for continued net operating income growth. Number two, the critical role that the neighborhood grocery stores play in the cost- effective and timely fulfillment of the last mile of food logistics. Number three, the strong macroeconomic tailwinds in the United States. First, on the cash flow durability and growth. Following Slate Grocery REIT's record performance in 2020, including the best annual new and total leasing volumes since inception, our business continues to advance operationally in the first quarter of 2021.
The REIT's occupancy finished Q1 at 93.1%, 90 basis points higher than pre-pandemic levels, representing the fourth consecutive quarter of occupancy gains. We have over $2 million of committed base rents coming online in the next several quarters, which will further increase the REIT's near term cash flow. Our new leasing pipeline is deep. Our team is working on more than 200,000 sq ft of actionable new leases, a testament to the continued desirability of our portfolio and grocery-anchored real estate more broadly. I'd also like to highlight a few of the creative initiatives our team is working on to enhance our existing revenue streams. In January, we entered into an agreement with 5G LLC, who we will partner with to lease out our rooftops to telecom providers.
Businesses like Verizon, AT&T, and Amazon will then install antennas on our rooftops to enhance their 5G infrastructure across the United States. Perhaps the most compelling part of this opportunity is these long-term leases require zero landlord capital. We can execute leases with multiple providers per property. Each deal will contribute $30,000 annually, and we expect the program will produce cash flow in 2022. We are also actively evaluating other opportunities to further drive revenue growth through rooftop solar panels, underutilized common areas, pop-up shops, and seasonal installations. These attractive opportunities are available to us because our assets are both highly visible and well- located within neighborhoods in close proximity to the end consumer. Second on grocery fulfillment. Customer expectations are changing. They're demanding access to their groceries faster than ever before.
For example, Walmart is doing 1.5 million deliveries each and every week from their stores, which is 7 times more than they were doing a year ago. In response, grocers are investing billions into automated fulfillment solutions. These investments are being made at or adjacent to their stores because the last mile is the most expensive component of the supply chain due to the cost of delivery and labor. To be clear, despite an increase in online grocery shopping in the United States from 4% of total grocery sales pre-pandemic to 10% now, the majority of these online sales are still being fulfilled through the neighborhood store to minimize the time and cost associated with the last mile. Additionally, grocers are also investing in technology to incentivize in-store shopping, as this is where margins are the highest.
A few examples of this are automated carts like the KroGO cart, mobile applications that allow customers to scan and pay for their groceries with their smartphone, as well as automated kiosks to support in-store navigation. Collectively, the growing investment in both automated fulfillment and the in-store experience illustrate the integral role the neighborhood store is playing in the future of grocery. They make our tenant relationships stickier and ultimately increase the value of our real estate. Third on macroeconomic growth. In stark contrast to what's currently happening in Canada, life is approaching pre-pandemic norms in the United States. The $5 trillion in government aid for both households and businesses, coupled with an impressively managed vaccine rollout, have combined to increase consumer confidence and spending in the United States, ultimately resulting in three straight quarters of robust economic growth.
The consensus view among economists is GDP growth will pick up further in the second quarter and remain steady in the second half of the year. These supportive macroeconomic tailwinds bode well for our business and provide us with further confidence that demand for our grocery-anchored real estate will continue to be strong in the coming quarters. Finally, our strong operational performance throughout the pandemic enabled us to execute over $530 million of opportunistic and off-market acquisitions since June 2020.
Our most recent acquisition of 25 properties, which we expect will close in early Q3, represents a unique opportunity to purchase $390 million of grocery-anchored real estate in a single transaction and highlights the value of the Slate Asset Management platform. 83% of the acquired portfolio's income is derived from the top 50 MSAs, including 46% from New York City and Dallas, two of the largest markets in America.
We continue to be pleased with the performance of our business in what has been a unique and challenging operating environment. We are fortunate to have a fantastic team at Slate Grocery REIT that brings unwavering passion and commitment every day to add value for both our business and our unitholders. On behalf of the entire Slate Grocery REIT team, we wish you and yours good health, and we thank you for your continued support. I will now hand it over for Q&A.
Ladies and gentlemen, to ask a question, please press star then number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Li Chen with iA Capital Markets. Your line is open.
Hi. Good morning, guys.
Morning.
A couple of quick ones from me. With the latest big acquisitions that's set to close in Q3, like you mentioned, and with pro forma debt to GBV at around 61%, I was just wondering if you can comment as to what we can expect on your pipeline in terms of further acquisitions for the rest of the year, or are you going to focus more on reducing your leverage?
Good morning, Li . Look, we've proven to be prudent capital allocators over what's been a challenging period. We have been able to buy $530 million worth of quality grocery-anchored real estate at a basis well below what we think market is today. That most recent portfolio acquisition was at $127 a sq ft. We think there is value in this form of acquisition, buying it on a portfolio basis off- market. When you contrast that with what we're seeing from a sentiment standpoint with marketed transactions in the marketplace, this real estate's undervalued. We believe our debt to GBV, our LTV comes down once we acquire this and put it on our books and go through our fair value process like we do every quarter.
One thing I wanted to add, just to give context with this deal, is this was something that we were negotiating in the second half of 2020. The sentiment then around COVID-19, the election, and the vaccine rollout, there wasn't many transactions around that time. When we think about it now, that pricing for that deal would be very different from today. Said another way, we acquired going in at a 7.8 cap. We think that there's value taking it inside where we see our cap rate today, which is around 7% for our portfolio.
That's great. Thanks. Just last one from me, just regarding leasing spreads on new leases versus lease renewals. Going forward, do you believe this is the beginning of a return to a more usual trend that you're used to, where the spread on your leases is considerably higher than on renewals?
I certainly do. I'll make a comment on spreads. Coming off four quarters of record leasing, we did 1.7 million feet, which is 20% of our portfolio. There was just less leasing to do this quarter. We believe we're entering an environment now where spreads and rents are going to go up. It's something we're talking about with our team these days. We worked with tenants throughout the pandemic. We limited rent increases to help them through. The tenants we think are viable and will be around for the long haul. We feel the environment is changing now to where we can push spreads. There are good tenants out there. The $5 billion of stimulus that's been injected from the Feds. The vaccine rollout in America is strong, and America is open for business, and tenants are doing well.
We feel like we're entering an environment where we can push spreads and bring them at or above sort of our historical run rate in that respect.
That's great. Thanks. That's it for me. Thanks, guys. I'll turn it back.
Your next question comes from Pammi Bir with RBC Capital Markets. Your line is open.
Thanks. Good morning. Just looking at same-property NOI, it was down a bit. Same-property occupancy was actually up rather meaningfully on a year-over-year basis. Can you just maybe help us understand that disconnect? Secondly, given the committed leasing that's coming online, should we anticipate some better growth through the year?
Hey, Pammi. Thanks for the question. On a trailing 12-month basis, our same-property was positive, both with and without termination fees, 0.9% and 0.2%, respectively. We've been successful with gaining traction in re-tenanting some of the premises that was vacated in 2020. That might be a bit of the disconnect that you're referring to. Our momentum surrounding our portfolio at the moment is extremely strong. Coming off that record leasing, we have $2 million of committed base rent. These are contractual leases that will pay revenue that will be captured in our reporting in the next couple of quarters. When I look beyond that, we have a deep pipeline of new leasing opportunities. Our team has in excess of 200,000 sq ft with quality credit tenants.
On balance, the deals, they look like they're requiring less landlord capital, so net effect of rent will be strong. We think we can execute this new leasing pipeline, the majority of which leases should be signed in the next, call it, four to six months. I'm thinking about filling a further pipeline of NOI growth beyond the $2 million of committed base rent that I just referenced.
Got it. Yeah, I was referring more so to the Q1 year-over-year, not the trailing 12 months in terms of same property NOI. I take it, essentially, your commentary suggesting that given the leasing and the committed space, it sounds like it should be trending positively over the course of the year. Maybe just switching gears, looking at the portfolio right up this quarter, you mentioned stronger demand for grocery- anchored retail that's pushing cap rates lower. You guys have been able to source deals at comparatively better pricing. I'm just curious, was the gain based on transactions that you're seeing in the market, or at least the change in your cap rate assumptions, for any of the color you can share there?
I certainly can. I think desirability sentiment for grocery real estate continues to increase, and as a result, so are values. There's two reasons for that that we see, and as I referenced, just the visibility and resiliency and durability of the cash flow we've seen through the pandemic. Assets with a high percentage of grocery revenue and essential tenant revenue, such as our portfolio, where more than 67% of revenue comes from essential tenants, is commanding a ton of interest. When you layer on the capital markets understanding how grocers are going to deal with the surge in online shopping through their stores, automating micro-fulfillment, it's creating a strong tailwind. During the pandemic, there were limited trades to support value increases, but that's changed now. The floodgates are open.
Whether you're looking at one-off deals in a given market that we operate in, or nationally in terms of M&A activity that we've seen, all supportive of strong values. I'll make one final point as well. This isn't only a North American dynamic. We're seeing it globally. Our team at Slate Asset Management is in the process of refinancing its grocery business in Germany. They're seeing extremely strong demand. A large number of debt partners are coming to the table, and it's producing very strong values as well. We see this more broadly from a global standpoint. Capital is flowing into the last mile of essential logistics all over the world.
Got it. Just thinking about the $390 million acquisition that you still have to close and your comments on, I guess it being negotiated in the back half of last year. Is there a possibility you may actually, when you bring it on, book a gain based on what it might actually be worth once the transaction closes?
I think that's a fair assumption. Once we close, we'll go through the typical process, our fair value, rigorous discussion, going through NOI, leasing assumptions, cap rates that are supportive of the values. Look, I'll come back to that comment. We bought this portfolio for $127 a foot. Half of the portfolio is located in Dallas MSA and New York. That's not an entry point that you see very often into these, the number 1 and number 4 markets in America. It's fair to assume that there'll be some gains booked once we close this deal, but time will tell, and we'll go through the process likely in Q3.
Okay, just last one from me. Just on the rooftop antennas, as you roll out that program, I guess, possibly next year, what's your sense of the potential scope of that opportunity over the next, call it, one to two years?
I'm optimistic that it will produce some meaningful NOI growth and obviously NAV growth. Telco budgets were just approved in March of this year. The team internally that's running this process thinks there'll be a strong take-up. It will take a bit of time. That's why I'm a little cautious on guiding towards when NOI will flow. I want to make it clear. There are a half dozen telecom providers, some traditional, some non-traditional, such as Google and Facebook. We can do multiple antennas on each roof. You can produce $30,000 a year times two, times three, times four, depending on your number of service providers. You can do the math.
If we can get a take-up of 10% or 15% in the first year, get a multiple of two or three providers, I think it can produce hundreds of thousands of dollars of income for zero capital. It's just a matter of exactly when that happens. What we're doing now with ancillary revenue is we're being smarter. We're partnering with people who can take this portfolio-wide. We've tried ancillary revenue in the past with our team. It's hard to talk multi-market with these folks. We think we've found the right partner. They're excited, and they think it will produce some returns. We're just going to have to be a little bit patient.
Thanks very much. I'll turn it back.
Your next question comes from Himanshu Gupta with Scotiabank. Your line is open.
Thank you and good morning. Just on rent collection, how is it trending in the month of April and May so far? With vaccination rollout much ahead in the U.S., are you starting to see an uptick in rent collection, as we get to reopening and as we see more vaccination rollout?
Hey, Himanshu, it's Andrew. Collections continue to trend positively around 96%. We're seeing even a slight uptick in collections since the start of pandemic. We're averaging now around 97%. It's very close to pre-pandemic levels. Just to give context, our operations in the U.S. is very different from what we're seeing in Canada. Most of our tenants, practically 99%, close to 100%, have been open since August. Another way to think about that is with our deferral program. Strategically, we entered into $1.3 million of deferrals in early Q2 of last year. We are now 96% through that program. We have close to $42,000, which is a drop in the bucket of what we need to collect on in the remaining, let's say, two quarters. I would say the sentiments in U.S. and operations, it's different.
It's performing well, and we expect cash collections to continue 96%+.
Got it. Maybe, can you comment on the leasing environment, specifically with respect to the small shop tenants? I mean, what are you seeing there over the next 6-12 months as the stimulus program winds down or slows down? Do you see any impact on your tenants? Any big leasings coming to you in the near term?
Hey, Himanshu, nice to hear from you today. Generally speaking, in the market, tenant activity is strong. We're seeing it in all different tenant uses and classes. Two key themes are coming through right now. It's number one, essential tenants who have performed well during the pandemic. They're taking advantage of opportunities to add scale and presence in growth markets and in the right asset. There are availabilities coming up for lease just by virtue of the turnover through the pandemic. We're seeing tenants such as do-it-yourself, tool companies, pet shops, medical tenants, et cetera, taking advantage. We did two deals with essential tenants this quarter to backfill a recently vacated Junior Box. The next trend is unique, and I think it speaks to just the rebound of the U.S. economy.
We're seeing restaurateurs, both big and small, take advantage of second-generation restaurant infrastructure that's been recently vacated. You can save USD 100 a foot if you find a second-gen restaurant. I think they're making a move now because of the government stimulus. People are going out for dinner more. People are spending this money at their discretion. OpenTable came out last week and said their seated dining, based on their data, has returned to pre-pandemic levels. Retail spending was 9.8% up quarter-over-quarter last quarter. People are getting out and spending, and I think entrepreneurs and quick-serve restaurants of the national variety are taking advantage. We're seeing strong leasing velocity across the spectrum.
Got it. That's helpful. Maybe last question on valuation. Obviously, you registered your IFRS cap rates down to 7%. My question is, how is the appetite for portfolio transactions in the market today? I mean, in the past, over the few years, we have seen private local capital being available for one-off assets. Is it the appetite returning for portfolio transactions as well?
I think it's fair to say, yes, there's an appetite for portfolio transactions. We were able to do three of them in the last nine or 10 months. All of them were off-market and of the opportunistic variety. We're probably not going to see screening deals like we have seen, especially the $90 million acquisition we made last year. I think the cat's out of the bag in that respect. What I'll say is when you do creative deals, it attracts other market participants who want to do creative deals. We're getting inbounds from a variety of our peers in the U.S. that want to do business with Slate Grocery REIT and Slate Asset Management. We continue to be active, looking at opportunities. As I said earlier, we're going to allocate capital as prudently as possible.
If I can get a double-digit return on spending money organically to grow, maybe my redevelopment pipeline or to lease up space in our portfolio, we'll look at that, as well as we'll look at future growth opportunities via acquisition if they're compelling.
Got it. Thank you. Very helpful. I'll turn it back.
Again, to ask a question, please press star and then number one on your telephone keypad. Your next question comes from Sumayya Syed with CIBC. Your line is open.
Thanks. Good morning. Just some more follow-up on the fair value discussion, and I guess potential moves post the quarter. David, do you see your cap rates moving even lower and specifically reflecting the recent large M&A transaction?
At this point in time, we're happy with where our cap rates are. They've come in commensurate with market demand and values over the last six months. With that said, we feel there's a lot of leasing we're doing. There's a lot of improvement of our merchandising within our shopping centers with credit tenants. And when we continue to execute on our leasing strategy, we re-tenant some of the vacancies that we're tracking to. I referenced 200,000 sq ft of quality new leasing opportunities. I would expect that cap rates could potentially continue to come in. Again, we're only 4+ months into 2021. Investment activity is strong. There's definitely a catch-up coming from sort of the muted activity in 2020. All that we've seen so far is they're supportive of the fact that our portfolio was undervalued in the past, and it's coming back in line.
Overall, the market is strong, and we plan on continuing to take advantage of the opportunities while we can.
Right. In the pending portfolio acquisition, is there any low-hanging fruit you could address in the near term as you work the assets towards stabilization? What do you expect for overall timelines to get that portfolio fully stabilized?
I think there is. I think there is a lot of opportunity. We've been meeting with our joint venture partners over the last couple of weeks, getting to know them, integrating sort of our approach and our data with theirs. They are saying the same things that I am saying on this call about velocity of leasing and quality of tenants. The portfolio we bought was only 90% occupied. We did not underwrite any material occupancy gains until year three. I can tell you that in aggregate, our three JV partners have about 150,000 sq ft of leases they're working on right now. They'll likely be signed in and around when we close, and all of that would be considered "gravy" to our underwriting.
When we looked at approximately 4% accretion at underwriting, we still have to get these deals done, obviously, but we have some reason to be optimistic that we can exceed that as we get in and work shoulder to shoulder with our new partners to take it to the next level.
Okay. Three years could be on the conservative side?
I think that so.
Okay. You also spoke about, I guess, the evolution of micro-fulfillment centers. Are any of your tenants exploring incorporating this model in any of your assets?
That's a great question. The answer is yes. The ones that are leading the charge are Walmart and Kroger, and Ahold Delhaize. That's Food Lion Banner and Giant Banner. The CEO of Walmart came out in February as part of their Investor Day and said they're going to spend about $15 billion to start scaling. They call it local fulfillment, could be otherwise known as micro-fulfillment. They're going to start in Bentonville, close to their head office, and in their major markets, gateways, and then move towards us. What I'll note, Sumayya, is already today, 98% of our anchors are providing omni-channel solutions regardless of this automation. They are providing delivery service from their stores and click and collect, obviously from their stores. It's already there. They'll just add a bit more of a technological enhancement in time.
Yeah, we think it's coming to our assets in time as well.
Great. Thank you.