Ladies and gentlemen, thank you for standing by, and welcome to the Schlage Retail REIT Third Quarter 2019 Financial Results Conference Call. At this time, all participants are in a listen only mode. Please be advised that today's conference is being recorded. After the speakers' presentation, there will be a question and session. I would now like to hand the conference over to your speaker today, Madeleine Clarosini, Investor Relations.
Thank you. Please go ahead.
Thank you, operator, and good morning, everyone. Welcome to the Q3 2019 conference call for SLAIT Retail REIT. I'm joined today by Greg Stevenson, Chief Executive Officer and Robert Armstrong, Chief Financial Officer. Getting started, I'd like to remind participants that our discussion today may contain forward looking statements, and therefore, we ask you to familiarize yourself with the disclaimers regarding forward looking statements as well as non IFRS financial measures, both of which can be found in management's discussion and analysis. You can visit SLAIT Retail REIT's website to access all of the REIT's financial disclosure, including our Q3 2019 investor update, which is available now.
I will now hand over the call to Greg Stevenson for opening remarks.
Thank you, Matti, and thank you to all the participants for joining the call today. We continue to gain momentum and our achievements in the Q3 reflect the team's tremendous efforts and highlight the durability and attractiveness of the REIT's grocery anchored and necessity based real estate portfolio. Solid results this quarter were driven by substantial leasing activity that saw over 680,000 square feet renewed, the highest since inception. This was driven by 7 grocery anchor renewals, another record and our 94.7% tenant retention rate, which highlights the strength and desirability of our grocery anchor portfolio and demonstrates that our properties continue to be highly sought after by tenants in our markets. The new leasing and strong retention ratio drove an occupancy increase of 110 basis points to 94.4% and has resulted in 84% of all 2019 renewals being completed by the end of the Q3.
As a result of these efforts, we achieved a 1.8% increase in trailing 12 months same property net operating income year over year. As a result of the continued growth, we are pleased to announce that the REIT will increase its monthly distribution by 1.1% to US0.072 dollars per unit or $0.864 annually beginning with its December 2019 distribution. This marks the 6th consecutive annual distribution increase since the REIT listed on the TSX in 2014. We continue to execute on our disposition pipeline at attractive prices, having completed 14 dispositions for $81,200,000 on a year to date basis at a weighted average cap rate of 6.4 percent on trailing 12 month net operating income. The progress that we have made on our disposition pipeline has allowed the REIT to reduce total debt by $75,000,000 so far this year.
Following the completion of our targeted disposition pipeline, we will have access funds to recycle capital in to higher growth and higher yielding real estate opportunities that we are actively pursuing. Looking forward, the path to continued growth remains clear with over $1,500,000 of rent from signed leases not yet contributing to net operating income and a $20,500,000 redevelopment pipeline with an estimated yield on cost of 10%. Units of slate retail continue to generate substantial excess yield today above 8.6% and we believe also represents an attractive investment opportunity. To summarize, we are ending the quarter with an occupancy rate of 94.4% driven by our tenant retention ratio of nearly 95%. Over 680,000 square feet of renewals were completed during the quarter, the highest since inception, demonstrating the strength and desirability of our grocery anchored assets.
Slate retail has completed 14 dispositions year to date at a 6.4% cap rate, which compares favorably to where slate retail units are currently trading. All such factors contributed to a strong quarter. We're encouraged by the positive underlying fundamentals in our portfolio that will set the stage for our team to execute on the business plan ahead and deliver stable and growing earnings for our unitholders. I will now pass the call back for Q and A.
Your first question comes from the line of Stephane Boire with Echelon Wealth Partners. Stephane, your line is open.
Thank you. Good morning, everyone. Good morning. Greg, I was just wondering with the in the letter, can you develop a little more on your intention to recycle capital into higher growth and higher yielding real estate opportunities that you mentioned in the letter. And I guess in other words, I'd like to know if deleveraging the balance sheet is still on the priority list and if you would prioritize acquisitions over deleveraging with the proceeds from the asset sale?
I think thanks, Devin. I think we can continue to do both. As it relates to the acquisitions, what we mean is we're selling assets where we've executed on our business plan and we've achieved what we think is sort of stabilized occupancy and where we can then reallocate that capital into properties that we see that have been sort of under managed. There's some vacancy to be leased up, likely higher quality in terms of markets and opportunities, grocers that we're targeting which are larger grocers and we're staying away from the smaller regional ones. So we're also upgrading the portfolio from that perspective as well.
So it's really just taking money and recycling into opportunities that will help drive future NOI growth and earnings growth.
Okay. And in terms of acquisitions, can you tell us where you see attractive acquisitions at this point and what kind of cap rate do you see at the moment?
Sure. We continue to like the Southeast, which is where a lot of our acquisitions are recent for lack of better description even though the last one was in August of 2018 in the Southeast. I think we probably all read about the Southeast. You've got job growth, income growth, you've got net migration, you've got low taxes, you've got sort of best in class education, a lot of reasons that people are moving to these places. You've got nice weather.
And you've got an environment where there's been a complete lack of new supply, while all of this growth has been happening, which is great from a leasing perspective for landlords that can bring a team of people to execute and capital to execute on a business plan. So I think our continued focus will be growth in the Southeast.
Okay. Okay. That's good. And I know I've asked that question in the past, and I was wondering if this time you'd be in a better position, I guess, to answer that question. But in terms of same store NOI growth, can you provide some kind of guideline maybe for next year?
Yes. I think when we set out at the end of I mean, we think about it as total portfolio NOI growth. And when we set out what we're super optimistic about where we stand today because when we set out in our letter at the end of 2018, we said we think we can do 2.5% to 3% total portfolio NOI growth. At the end of the Q3, we're at just shy of 2.7%. So we're approaching the top end of our total portfolio NOI guidance.
We think about it from that way for two reasons. 1, we're still not at full capacity in our same property NOI bucket. It leaves out a number of properties as well as 1% to 1.5% of NOI growth will come from redevelopments over the next, we think or call it 6 to 8 quarters. So we think we'll hit our targets of 2.5%, 3% in 2018, which is excellent in my view. I think we can do it again next year.
Okay.
And Stefan, the other way to think about that too is we're currently below market for in place rents compared to market about 7%, 8%. And for the shop space tenants, you're turning those over about every 4 years. So that's at least 2% growth plus we think we've got to Greg's point number of good projects on the way. But also for 2020 a lot of those increases already baked in on leasing we've done. So we feel pretty confident about where we're going to be for 2020 with continued good results.
Okay, okay, perfect. And thank you for that. And on the I guess my last question is on the development projects. I noticed that the estimated yield on cost of most of your development projects fluctuated since Q1. And I was wondering if you expect any impact from the rise in construction costs going forward?
Nothing that will materially change any of those numbers. I think one thing we do like about our business and where we're able to acquire well below replacement cost is that construction costs have come up and continue to rise. There's a shortage of labor and it makes all building new centers quite difficult and expensive. And so that makes us feel very good about the existing portfolio and again about the leasing environment. We talk a lot about that.
You had a complete lack of supply and rising construction costs certainly one of those reasons. From our perspective, we don't expect that to impact any of our projects. And so far, we're on time and under budget across all four of our projects. So we remain confident that that will be the case.
Okay, perfect. Thanks so much for all the details.
Thanks.
Your next question comes from the line of Samaya Saeed from CIBC. Samaya, your line is open.
Thanks. Good morning, guys.
Good morning.
I
just wanted to touch on the $90,000,000 of assets under contract and if you can give any indication on the timing and valuation there?
Timing is going to be Q4 and some will trickle into Q1. But we are we do think by the end of the year and sort of halfway into Q1, we'll be wrapping up the disposition pipeline. And as we've talked about in the past, it's going extremely well and we're hitting in some cases exceeding our targets. We sold $81,500,000 at a 6.4 percent cap rate. Our target for the $175,000,000 to $200,000,000 was a 7.5% cap rate for all of it.
So you can kind of back into what the remaining cap rate will be.
Okay. Thank you. And just to touch on organic growth, excluding I guess the termination fee and the higher cost this quarter. Any sense of what that number would have been this quarter? Yes.
If you back up the termination income and just the pure difference, it's a decrease of 0.2%. If you take out some of the timing we had, which is really related to property taxes that got brought into Q3, we'd be slightly positive, call it 0.3%, 0.4%.
Yes. The negative delta is about $80,000 that swung us to the negative 0.2% on call it almost $23,000,000 of same property NOI. So it's a blip and it's minor and we continue to expect it to trend upwards going forward.
Yes, because we're still quite happy. Quarter to quarter, it's a little bit of a snapshot in time, but over the course of the year, we've continued to grow NOI and the same property growth. And even looking over the last 3 years, we've had 9 in the last 12 quarters of being positive. So we've been quite happy with that. But I think when we kind of step back and not even just looking at the individual quarter, really, really happy and we think the business is probably being in a better position than ever has with 94% occupancy, we're continuing to grow.
We've got a 90 plus percentage retention rate. For our business in the markets we're in and our tenants, it's as good as it ever really has been.
Yes. I think Bobby's point is a good one is that the path to growth isn't very speculative. It's quite clear in that. And we've got $1,500,000 on call it 98 $1,000,000 of annualized NOI today that's already executed leases. So that's happening in addition to the redevelopment projects.
And we talked a little bit about it in the letter. We've got NOI coming on from 2 of them in Q1 and Q2 of 2020. So that's even more growth on top of the signed leases that will contribute to NOI growth in 2020. So we're feeling pretty optimistic about the business. And I think we've been doing a lot of things in the last 12 months to really coil the spring.
And I think that 2020, if you start to think about all the growth we just talked about and then the debt refinancing that we've got coming that will increase term and could likely decrease interest rates that's even further growth to FFO going forward.
Great. Thank you. And then just any update on prospects for the refinancing coming up so far?
Yes, we've been actually talking to lenders for a while. What I would say is the overall tone is positive within the banking network both on multitude of lenders everywhere from traditional banks to Lifeco's. The demand for grocery anchor real estate continues to be high. If anything there's been a shortage of supply in the market. A number of debt providers are overweight industrial multi res and they see the durability and the type of product we have and consistency of the cash flows there.
So I think we'll end up going into 2020 after doing a number of refinancings on our existing platform with excess term, reduced rates and better covenants package. From our perspective, we couldn't ask for better in this environment. And I think the response we've had so far is that, one, the sector from a grocery acre perspective is very financeable and there's quite attractive demand and I think we'll be the beneficiaries of that.
That's great. Thank you.
Your next question comes from the line of Pammi Bir with RBC Capital Markets. Pammi, your line is open.
Thanks and good morning. Just maybe coming back to the comments around acquisitions, can you maybe just provide some context around perhaps the potential timing of putting the capital back to work from dispositions?
Yes. It may be as early as Q4 because we are actively looking at opportunities in the markets that we like and that we discussed earlier. I think I would put a much higher probability on that being deployed in Q1, but probably not much later than that, Pammi.
Okay. And then just from a pricing cap rate standpoint, what are you seeing? And you mentioned that some of these might be not necessarily stable assets. I'm just curious what going in yields we could be looking at?
Yes. I think what we want to do is I'd say lower quality of what we've been selling. And it doesn't mean we don't like it. It's just that it's we've executed and there's really what I mean there is more on really what I mean there is more on probably the grocer side. And what we've learned over the last 7 years is we know who we love in terms of the grocery tenants.
We want to focus on those tenants. So I think it's we can probably buy a center at 7.25 percent to a 7.5 percent that would sit in the top 25% from a quality perspective in our portfolio with some vacancy that we think we can lease and stabilize in the high 7s, low 8s.
Got it. Just maybe coming back to the comments around in place and market rents. The gap certainly seems to have widened, I guess, over the last 3 years, just looking at what you've quoted as market rents. Is that partly a function of, I guess, the Southeast grosser rent reduction last year? And then secondly, how do you see that the spread changing over the next 2 years?
Yes. I think that slide is instructive largely because we get the question how are you going to grow NOI going forward. And we don't think that we're going to go from 10 $99 to $11.80 or $30 or whatever it is in that chart overnight. But what our point is, is that we can do our 5.5% to 6% steps on renewals like we've done for, I don't know, 14 or 15 quarters now, largely as a result of the spread to market. So we're not saying that the spread will close to 0 because that's unless you're acquiring assets at market rents that's hard because you're only rolling over a percentage of your portfolio.
What it really means is that without causing real issues for ourselves in the future, which is having rents that are too high, we can increase our rents and get renewals of 5% to 6% on a weighted average basis and still probably be under market, which is from our perspective a good margin of safety and provides a nice runway for growth. Yes.
I think maybe the commentary I'd add as well is that in a market where rents continue to grow, we've been doing the leasing at spreads that are reflective where market rates are. So we've been market, we because we're getting rental growth in the market, we see that as such a fantastic thing because one, it's baking in future NOI potential growth for us. But 2, it's providing so much certainty around the durability of the income in this portfolio. We're quite happy with both. So one protecting what we have from a downside and that we've got continued growth, but the fact that it's only increased durability of what we're doing in the portfolio that exists today, we think is a fantastic result.
Right. So some of this is, again, partly a function of the churn in renewals, as market rents continue to rise, right?
Yes.
And I think part of it too is back in 2017, we had a number of acquisitions and that's where you can see some of the spread pop was that it was there's an element of portfolio mix there, but the market is definitely moving and we're quite happy with that.
Okay. Thanks very much.
Your next question comes from the line of Jenny Ma with BMO Capital Markets. Jenny, your line is open.
Thanks. Good morning.
Good morning, Jenny.
Question about the high leasing activity. Was that really just a function of timing or did you pull some forward from 2020? And I'm wondering if that would mean that the leasing volume may decline for 2020 notwithstanding that it sets you up quite well for the year going forward?
Yes. A lot of it was pulled forward on the renewal side and we renewed 7 anchors this quarter. I think only 2 of which were contractually up through renewal. So we did 5 in advance. And I think on the growth side, a lot of the growth comes from the shop space tenants anyways.
Our anchor tenants in large part have set options that sometimes there's steps, sometimes it's flat. So I don't think it impacts our growth going forward just due to the nature that it's the grocery anchor tenants that drove a lot of the leasing. I think what it does do is we got a lot of questions on the grocery sector and what are tenants doing. I think it helps us reaffirm the message to folks who aren't as close to it as we are that the grocery anchored rents are $5, 6, dollars 7 which are cheaper than most industrial rents in the markets that we're in. And the grocers as they continue to want to service last mile distribution, home delivery and click and collect that they're very willing to have these conversations with us in advance of their upcoming expiries.
Okay. And then switching gears to the redevelopment pipeline. You added Wedgwood this quarter and it's the biggest one that you guys have undertaken at $15,000,000 Just wondering if you could expand, looking at the yield, it's relatively low at 6%. So wondering if there's potential upside further down the road, and how that sort of squares against the valuation of that property specifically given that your portfolio cap rate is sitting at 7.5?
Yes. We think there's upside to that number, both driven by the NOI side and then the cost of $15,000,000 coming down. We're still in the early stages, but we have started moving tenants and vacating tenants in advance. So we've included it in the list. I think the other thing that that yield on cost calculation doesn't pick up is how we think about it from an IRR perspective, which is in the future.
If we've got a brand new Publix amongst all the other things that we're doing with the 20 year lease, we think relative to our cost basis in the asset, we'll have meaningful cap rate compression. So the IRR is accretive to the 6% yield on cost that we're showing today.
So when you think about where the property sits now, like how close is it to the 7.5% portfolio average on valuation?
Say, I'm not sure I follow the question.
So I guess so you're thinking the 6.5% will start moving up. I'm just wondering if currently does the asset have a cap rate that's well below the 7.5 portfolio average or is it kind of sitting in that range?
It's 50 basis points below, just to be very exact.
That's helpful. Thank you.
Most of
my questions have been answered, so I'll turn it back. Thank you.
Great. Thanks, Jenny.
And your next question comes from the line of Stephen Boucher with Echelon Wealth Partners. Stephen, your line is open.
Yes. Thanks again. I just wanted to quickly follow-up on the acquisition and disposition. Just wondering, could you from a modeling standpoint, can you just quantify, I guess, both amounts or offer for next year?
Like the level of acquisition and disposition activity for 2019 2020?
Well, mostly for 2020, yes.
I see. Dispositions will be done sort of halfway through Q1 and that will be again somewhere on the rounding out the full year $175,000,000 $200,000,000 number. So maybe $50,000,000 in the Q1 give or take. And then acquisitions, I think it's TBD. But if it's $100,000,000 and we've sold $200,000,000 of dispositions that I think is sort of making sense to us today.
But it is TBD. I mean there's lots of interesting things in retail grocery anchored retail today. And I think as we stated in the press release, I think that the market continues to misunderstand the asset class. And I think that we're getting smarter with every passing day at it. And there are some interesting opportunities out there that could move that number around.
So I don't want to get too specific because it could change.
Right. But maybe just to follow-up on Pammi's question earlier, the acquisition that you have currently is under analysis, I would say, can you quantify that one?
It's not just one. I mean, we're looking at several things like across nationally across the U. S.
Yes. I'd say that our current pipeline is probably $300,000,000 $400,000,000 deep of stuff we're looking at. I think as far as the way we would approach this is we don't necessarily have a target that we need to deploy X $1,000,000 I think we the way we're operating is that we have a view that where we can create value and see a good return that meets our thresholds. We can find opportunities
This concludes our question and answer session. I will now turn the call back over to Madelyn Saracini, Investor Relations for closing remarks.
Thank you everyone for joining the Q3 2019 conference call for SLAIT Retail REIT. Have a great day.
This concludes our conference call. Thank you for participating. You may now disconnect.