Ladies and gentlemen, thank you for standing by and welcome to the Slate Grocery REIT Third Quarter 2020 Financial Results Conference Call. I would like to now hand the conference over to your speaker today, Braden Lyons, Investor Relations. Please go ahead, sir.
Thank you, operator, and good morning, everyone. Welcome to the Q3 2020 conference call for Slate Grocery REIT. I'm joined today 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, you need 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 2020 investor update, which is now available. I will hand over the call to David Dunn for opening remarks.
Thank you, Braden, thank you to all the participants for joining the call this morning. In a world that has been dominated by uncertainty since the onset of the COVID-19 pandemic, we continue to be pleased but not surprised by the strength and resilience of the Slate Grocery REIT portfolio. We assembled our portfolio of grocery-anchored assets to generate significant and durable cash flow in all market conditions, and this defensive nature has been further proven out over these last seven months. As of September 30th, all 76 of our assets have remained open during the pandemic. 64% of our tenants have been deemed essential by the government, and 99.4% of our tenants are currently open and operating.
Slate Grocery REIT has led the strip center sector in terms of cash rent collections since the beginning of the pandemic, and that has continued in the third quarter, with the REIT collecting on average 95% of contractual rent in cash. We agreed to an aggregate of $1.3 million of rent deferrals. We've received that expected repayment to date and even have some tenants paying deferred rents ahead of schedule. We also agreed to approximately $170,000 of rent abatements. In exchange, the REIT secured benefits in excess of $3.1 million in the form of increased rent and term, as well as other non-monetary benefits. A few comments on the third quarter in which we achieved good results. Our team completed more than 196,000 sq ft of new leasing in the quarter that will generate $2.1 million of base rental revenue.
This is the strongest quarterly new leasing performance since the REIT's inception in 2014. A significant achievement in the best of times, let alone during a pandemic. We also completed over 235,000 sq ft of renewals, resulting in over 431,000 sq ft of total leasing at a weighted average rental spread of 13.1%. A large portion of the quarter's leasing volumes were attributed to high credit grocer tenants, including Publix, Aldi, and Hy-Vee. We believe these deals highlight the desirability of our assets while also adding to our portfolio in terms of rent growth and grocer credits. Our record new leasing activity more than offset vacancies within the quarter, and occupancy rose 35 basis points on a quarter-over-quarter basis to 2.5%. We have 306,000 sq ft of gross leasable area expiring in the next three quarters, representing 3.1% of our portfolio.
This is well below the portfolio's typical run rate in terms of lease maturities, and we are confident that we can continue to increase portfolio occupancy. Same property net operating income grew by 0.5% on a year-over-year basis in the third quarter. We expect same property NOI growth to be positive for calendar year 2020. Looking forward, there are significant contractual rent commitments that have not yet been captured in our financial reporting. These amounts total $2.9 million in annual base rent, which will primarily be recognized in 2021, with the remaining to hit our books in 2022. We are pleased with the outcome of our disposition program, which began in January 2019. We disposed of over 200 assets since then at a weighted average cap of 7.15%.
We redeployed a portion of the proceeds into our seven asset portfolio acquisition at a weighted average cap rate of 8.7%, achieving a yield spread of 155 basis points. While our disposition program is substantially complete, we will continue to be opportunistic in disposing of select assets to recycle capital into accretive investment opportunities that will further high grade our portfolio and add value for unit holders. 2020 has blessed us all with a unique set of challenges on both personal and professional levels. However, throughout this period, I've been constantly reminded the passion and commitment that our team brings to the office each and every day. I could not be more impressed by or thankful for our team's efforts throughout this challenging period, which have been instrumental to our business's strong performance.
On behalf of the entire Slate Grocery team, we wish you and yours good health, and we thank you for your continued support. I'll now hand it over for Q&A.
As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A list. Your first question comes from the line of Fred Blondeau from iA Securities. Your line is now open.
Thanks. Good morning. High-level question for me. Re: the 93% cash collection for October versus historical averages.
Hi there. You got Andrew there. Compared to our historical averages, collections now for Q2 and Q3 have been about 95%. We believe that this is sector-leading cash collections amongst our peers, something that we're happy to put on our shoulders. We continue and we expect that October, as well as in the future, as our tenants remain in operation, about 99.4% is the exact collection figure, will continue to trend upwards.
Fred, this is Dave. Good morning. I'd just say that by the time it's all said and done this quarter, sorry, in the month of October, we expect that that 93 becomes 95 or above. There's a bit of a delay in processing cash payments and allocating them to the appropriate period. I hope that answers your question.
Yeah, no, absolutely. I guess from your comment and from your perspective on cash collection, at least for October, it seems like so far, you haven't been too much affected by a so-called second wave of the pandemic. Is that fair to say that back for Q1?
Fred, you cut out there. If you don't mind just restating your question, please.
Yeah, I was just saying, it seems like the portfolio continues to perform relatively well in October. I was just wondering, is it fair to say that you expect the portfolio to continue to perform well despite that second wave of the pandemic?
Yeah, I think we do. We've trended up significantly in the tenants open for business over the last couple of months. We expect it'll go to 100. There's, I think, literally six tenants that aren't open yet. We're aware of what's going on from a health and wellness standpoint in America. Tenants open for business, the majority of our tenants are essential. Regardless of a second wave, they're going to stay open, and their sales will probably pile. No, right now we're expecting what we've seen over the last seven months to continue.
Oh, that's great, Color. Thank you.
Your next question comes from the line of Himanshu Gupta from Scotiabank. Your line is now open.
Thank you. Good morning.
Hey, man.
Just to follow up on the rent collection question. In Q2 and Q3 collection are around 95%, 96% levels. What's your visibility on the remaining 4% or 5% that is left? Then any update on the government stimulus programs? As the program runs off, do you think cash collection could be impacted, especially as Fred mentioned, we are seeing a resurgence in the COVID-19 cases now.
Hey, Himanshu. Thanks for your question. We're collecting our deferred rent repayments ahead of schedule. We actually have tenants, as I alluded to, paying more. We're actually 147% collected on deferrals to date. That trend, the required collections in the fourth quarter are higher than what we've seen from a deferral standpoint. Obviously, the next few months are important from recovering that deferred rent. We believe that based on the nature of our tenants, that we're going to continue to collect it. We did an abatement. We agreed to $170,000 of abatements. We think they were strategic, and on a case-by-case basis, they make a lot of sense to us. We did tell our tenants we'd work with them where it made sense, and I think we've stayed true to that. Hope that answers your question.
Sure. Maybe on the leasing side now, I'm looking at the small shop occupancy at around 87% levels. Where do you see the upside or downside to this number for the next 12 months or so? Especially what do you think, what do you see the risk from COVID-sensitive tenants such as restaurants or fitness in the near term?
All of our tenants are back open. What we're seeing on a macro level with shoppers returning, with retail sales, they're all trending higher. We think that America is going to continue to try to get back to a sense of normalcy. We have strong leasing velocity. We had a record quarter in Q3. We had a strong Q2, and there's velocity there right now. Spreads are strong. I've suggested in the past that deals look a little different. Maybe they're shorter in term length. Maybe market rent is based or two lower, but there's still velocity, and frankly, it comes down. There's tenants in the market, and if you're the desired asset in a given trade area with the right anchor, then you're going to get the lion's share of the opportunities to do deals. Right now, that's what we're seeing with our portfolio.
Yeah. That's fair. Maybe have you renewed any of the restaurant or fitness leases in the last six months? I know a fair bit of leasing has been done. There's a record small shop leasing this quarter. What kind of tenants you have been renewing and where you are getting all the lion's share of the rental growth with that respect?
Yeah. We have renewed gyms. The ones that have come up are trying to remain open for business, and they're trying to add term and stability in our shopping centers. As far as restaurants, we did drop certain amounts of bad debt for tenants we didn't think would stick around. We feel like we've addressed those tenants and yeah, the ones that have solid business and are good operators, they're sticking around, and that is the majority of those tenants in our portfolio.
The way I want to think about it, Himanshu, too, is the way it operates in the U.S. is quite different from what we have here in Canada. Although we do have fitness sort of in our portfolio in the mix, they are up and operating for the most part. The way we see it is our collection, which is hovering around 95%, continues to reflect the tenant. We do expect that number to continue to trend upwards, but we feel comfortable with the mix that we have in our portfolio with inclusive of fitness centers.
Got it. No, thanks for the color. Just staying on the leasing subject on the anchor tenant leasing in Q3, I know you mentioned a couple of grocery tenants as well, like Publix and Aldi. My question was, what kind of CapEx or TIs or leasing costs are you spending on these leases to get the very strong rental spreads? Are these tenants or the grocery tenants looking for shorter duration leases now compared to, let's say, pre-COVID period?
We did three new grocery anchor deals in the quarter, and we renewed another. The renewals typically with grocers are very little, if no TI. We received an option exercise from the grocer I referenced who renewed. As it relates to new deals, these are the deals that reset or reposition your assets. In large part, the tenants take care of the improvements and the costs relating to their boxes, and they'll usually look for a landlord to invest in the common areas, maybe overlay a parking lot or put a roof on or just spruce up the property. I like allocating capital to those deals because the grocer's going to put a new prototype in our center, and then I get to go allocate capital to improving the center, which is going to drive that shop leasing. It's going to make our center desirable.
I think that's a great partnership. I just suggest that it's equitable in terms of capital allocation. These are deals that we would do all the time. We're fortunate that we have the ability to talk to these traditional investment-grade grocers that have capital and want to keep their premises in a first-class manner.
Got it. Maybe just a final question from my side on the disposition this quarter. I think it was Pinewood Plaza with Kroger as the anchor tenant. What was the investment case for the disposition there? In general, in the market, do you think the overall deal flow or the transaction activity has picked up in Q3 compared to Q2, for example?
We sold Pinewood Plaza in Dayton, Ohio. This was the last asset of the first fund we raised in 2010. It's non-core to our strategy going forward. We want to redeploy that capital into major markets that are growing, more in the Southeast and Mid-Atlantic, like the markets where you're seeing us do other deals in the Carolinas, in Florida, and Georgia. It's what we've been talking about on a regular basis in terms of high-grade portfolio, and I think we executed on that very well. As far as activity in the investment community right now, it is down. Some of our capital market partners are saying it's down 80% from 2019, though deals are starting to materialize again. We're looking at it closely. We feel like there are compelling opportunities out there.
In the creative way that we can find deals, I think there's a lot of value out there as well. We hope that we can continue to track that and execute on deals that make sense to us looking ahead.
Awesome. Thank you, guys. Thank you for the color, and I'll turn it back.
Your next question comes from the line of Pammi Bir from RBC Capital Markets. Your line is now open.
Thanks, and good morning. Maybe along the same lines, what was the motivation behind the sale of Roxborough Marketplace? Can you also maybe just provide some color on the cap rate on that transaction?
Morning, Pammi. Thanks for the question. Yeah, Roxborough was a different story. We had simply executed our business plan. We feel like we had created the value that we set out to create when we underwrote the deal, and there was an opportunity to sell the asset. Colorado's not a place where we have a ton of scale. More intriguing opportunities. Again, I reference creating that spread from disposition to acquisition. We feel that there to continue to buy high-quality real estate. It was a sub seven cap.
Got it. That's helpful. Your comments around the acquisition market or what's happening in the investment market overall. Are you seeing any dislocation in pricing which seem inconsistent with how the assets in the grocery-anchored space have performed? Can you just comment, are there perhaps maybe any distressed vendors out there or what that pipeline looks like overall?
Certainly think there's opportunity out there and if so, finding deals creatively, there's definitely a dislocation. We feel like there are more opportunities to create instant value by buying the right transactions. As far as larger challenges from some owners on the horizon, we certainly think that that is going to continue to become a storyline as we look ahead. What we're hearing in the markets is, the next couple of quarters could be very telling from that standpoint. We're hopefully going to be ready to take advantage of that if opportunities present themselves.
Got it. Maybe just one last one. I guess with respect to the balance sheet, how high would to fund acquisitions? Obviously, you have some proceeds to redeploy on the back of a couple of dispositions, any color you can provide there?
Sure. Pammi here. This is Andrew. First, we just want to highlight that with our most recent refinancing that was in the Q1 of 2020, we do have liquidity on our balance sheet. We do have borrowing capacity, about $160 million, which allows us to execute on deals. 60% is the number slightly under where we are at right now, and I think over time, we do want to bring that down. We do feel comfortable with the range, though, I should note, given that we own grocery-anchored real estate. It's proven out during the pandemic as a pretty durable cash flow and our ability to satisfy our obligations. If there is an opportunity that does exist, I think we will execute if we think it provides the right return to our unit holders. We do have the intent over time to bring down our leverage.
Great. Thanks, Andrew. Thanks very much.
Your next question comes from the line of Jenny Ma from BMO Capital Markets. Your line is now open.
Thank you. Good morning. Just wanted to discuss the bad debt expense that went up in Q3 versus Q2. I'm just wondering if the Q3 number is a bit of a catch up for some of the tenants that you may have thought were able to pay in Q2 and decided to go into bad debt in Q3. Further onto that, what is your view of how the bad debt expense will look over the next couple of quarters?
Thanks, Jenny, for the question. Yeah, we've made a business decision this quarter in review of our tenants, which we do on a tenant-by-tenant basis on what's collectible. We took the view that tenants that are in bankruptcy are not going to be collectible. To put that number into context, we feel that that represents 3% of our contractual rent for this quarter, which is low in comparison to our peers. Going forward, we feel that we've addressed the bankruptcies inside our portfolio, and on the flip side, we've seen that we can collect on the 97% and actually 97, 98% in general, on a going forward basis. When we actually think about the spaces themselves, we feel confident that for those tenant boxes, that they continue to be desirable and that there is strong backfill potential.
Our leasing sort of this quarter as well throughout the 2020 year is a testament to this.
Yeah. Jenny, it's Dave. Good morning. We've got activity on these boxes. They're compelling, and that made it a little more palatable to move on. We think there's a better scenario on the horizon from tenant credit as well as possibly some rent growth. The decision we made sort of impacts us in the short. We think it sets us up for a lot of success going forward.
Net between the bankruptcies and I guess a bit of a time lag with some of the new discussions, do you see Q4 bad debt sort of being in the same range or maybe sort of in between Q2 and Q3's number?
Based on what we know now, we do not foresee it being nearly as high. We think we've addressed the quote-unquote, "Pain" in our portfolio, and we're meaningfully higher on a run rate for bad debt per quarter. It's usually in the low $200,000 range.
That's not sort of where I think it's going to be. I just wanted to articulate how much higher it was this quarter, and we think we're going to go back to more normal levels subject to anything unforeseen in the future.
Okay, great. Then with regards to the $3.1 million of benefits that you've mentioned as far as your rent deferrals go, is that the net increase in rent over the duration of the extended term? I just wanted to unpack that number a bit. If you have an average term extension number, that would be great too.
What we did with tenants, again, we looked at tenants that we thought were going to be able to pay us rent in the future. We didn't cut a future deal. We didn't think this tenant was going to be around. In exchange for a short-term break and abatement, if you will, tenants popped options for us. Extended term, we negotiated future benefits. Yeah, it's what you're thinking. What isn't captured in that is we were able also to collect in the moment $190,000 in rent. If you think about the alternative, can't come to a deal, well, you end up having to pursue these tenants legally, which is not what we wanted to do. On measure, we thought that it was the right thing to do in the moment and the right thing to do looking ahead.
What is the average extension that you've been able to get? Are these five-year deals?
Yeah.
Are you going a year at a time?
Yeah, more or less. A tenant option would be five years. We wouldn't have secured term in excess of five years. Call it five years, maybe with a few, would be sort of three or four-year extensions as well.
Okay. The 3.1 is just increases in rent, right? You didn't quantify sort of the intangible benefits and include it in that number?
No, we didn't. Those intangibles could be improved covenants. If there were restrictions, we may have been able to negotiate those. Just digging in, understanding more about tenant sales. Things that over time will help us manage our portfolio better. We were able to make wins there, and we did not quantify that in terms of that $3.1 million.
Okay, great. My last question is just clarification. You mentioned that some of your broker partners mentioned that sales volume or net sales down 80% year-over-year. Is that just for the grocery anchor shopping centers they're referring to?
Broadly on retail. Generally on retail.
Okay. Okay, great. Thank you very much.
Thanks, Jenny.
There are no further questions at this time. I will turn the call back over to the presenters.
Thank you everyone for joining the Q3 2020 conference call for Slate Grocery REIT. Have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.