Ladies and gentlemen, thank you for standing by and welcome to the Slate 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 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, Madeline Saracini, Investor Relations. Thank you. Please go ahead.
Thank you, operator, and good morning, everyone. Welcome to the third quarter 2019 conference call for Slate 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 Slate 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, Maddie, and thank you to all the participants for joining the call today. We continue to gain momentum, and our achievements in the third quarter 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 seven grocery anchor renewals, another record, and our 94.7% tenant retention rate, which highlights the strength and desirability of our grocery-anchored 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 third quarter.
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 continued growth, we are pleased to announce that the REIT will increase its monthly distribution by 1.1% to $0.00072 per unit, or $0.864 annually, beginning with its December 2019 distribution. This marks the sixth 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 $81.2 million on a year-to-date basis at a weighted average cap rate of 6.4% on trailing 12 months net operating income. The progress that we have made on our disposition pipeline has allowed the REIT to reduce total debt by $75 million so far this year.
Following the completion of our targeted disposition pipeline, we will have access funds to recycle capital into higher growth and higher yielding real estate opportunities that we are actively pursuing. Looking forward, the path to continued growth remains clear. With over $1.5 million of rent from signed leases not yet contributing to net operating income and a $20.5 million 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 represent 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 sq ft 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 unit holders. I will now pass the call back for Q&A.
At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. We'll pause for a brief moment to compile the Q&A roster. Your first question comes from the line of Stephane Boire with Echelon Wealth Partners. Stephane, your line is open.
Thank you. Good morning, everyone.
Morning.
Greg, I was just wondering, 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? I guess, in other words, I'd like to know if de-leveraging the balance sheet is still on the priority list, and if you would prioritize acquisitions over de-leveraging with the proceeds from the asset sale?
Thanks, Stephane. 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. We're also upgrading the portfolio from that perspective as well. It's really just taking money and recycling into opportunities that will help drive future NOI growth and earnings growth.
Okay. 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. 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. I think our continued focus will be growth in the Southeast.
Okay. That's good. 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. In terms of same property NOI growth, can you provide some kind of guideline maybe for next year?
Yeah. We think about it as total portfolio NOI growth. 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%-3% total portfolio NOI growth. At the end of the third quarter, 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. One, 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 six to eight quarters. We think we'll hit our targets of 2.5% to 3% in 2018, which is excellent in my view. I think we can do it again next year.
Okay.
Stephane, the other way to think about that too is we're currently below market for in-place rents compared to market, about 7%, 8%.
For the shop space tenants, you're turning those over about every four years. That's at least 2% growth. We think we've got, to Greg's point, a number of good projects on the way. Also for 2020, a lot of those increases already baked in on leasing we've done. We feel pretty confident about where we're going to be for 2020 with continued good results.
Okay. Perfect. Thank you for that. 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 building new centers quite difficult and expensive. That makes us feel very good about the existing portfolio and again, about the leasing environment. We talk a lot about that. We've had a complete lack of supply and rise in construction costs is certainly one of those reasons. From our perspective, we don't expect that to impact any of our projects. So far, we're on time and under budget across all four of our projects. 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 Sumaya Saeed from CIBC. Sumaya, your line is open.
Thanks, morning guys.
Morning.
Morning.
I just wanted to touch on the $90 million 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. We do think by the end of the year and sort of halfway into Q1, we'll be wrapping up the disposition pipeline. 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 $81.5 million out of 6.4% cap rate. Our target for the $175 million-$200 million was a 7.5% cap rate for all of it. You can kind of back into what the remaining cap rate will be.
Okay, thank you. 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?
Yeah. If you back out 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 was really related to property taxes that got brought into Q3, we'd be slightly positive, call it 0.3%, 0.4%.
Yeah, the negative delta is about $80,000. That swung us to the negative 0.2% on, call it almost $23 million of same property NOI. It's a blip and it's minor, and we continue to expect it to trend upwards going forward.
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. Even looking over the last three years, we've had nine of the last 12 quarters of being positive, we've been quite happy with that. I think when we step back and not even just looking at the individual quarter, we're really, really happy, and we think the business is probably been in a better position than it ever has with 94% occupancy. We're continuing to grow. We've got a 90-plus percentage retention rate. For our business and the markets we're in and our tenants, it's as good as it ever really has been.
Yeah. 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 we've got a million and a half dollars on, call it, $98 million of annualized NOI today that's already executed leases. That's happening, in addition to the redevelopment projects. We talked a little bit about it in the letter. We've got NOI coming on from two of them in Q1 and Q2 of 2020. That's even more growth on top of the signed leases that will contribute to NOI growth in 2020. We're feeling pretty optimistic about the business. I think we've been doing a lot of things in the last 12 months to really coil the spring.
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.
Right. Thank you. Just any update on prospects for the refinancing coming up so far?
Yeah. We've been actively talking to lenders for a while. What I would say is the overall tone is positive within the banking network, both on a multitude of lenders, everywhere from traditional banks to LifeCos. The demand for grocery-anchored real estate continues to be high. If anything, there's been a shortage of supply in the market. A number of debt writers are overweight industrial multi-res, and they see the durability in the type of product we have and consistency of the cash flows there. 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.
I think the response we've had so far is that, one, the sector from a grocery-anchored 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 Buhr with RBC Capital Markets. Pammi, your line is open.
Thanks, 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?
Yeah. 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. Just from a pricing cap rate standpoint, what are you seeing, 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.
I think what we want to do is, I say lower quality of what we've been selling, and it doesn't mean we don't like it. It's just that we've executed and there's less growth. What we want to do with the capital is move upstream and sort of high grade our portfolio. Really what I mean there is more on probably the grocer side. What we've learned over the last seven years is we know who we love in terms of the grocery tenants. We want to focus on those tenants. I think we can probably buy a center at seven and a quarter to a seven and a half 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 sevens, low eights.
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 three years, just looking at what you've quoted as market rents. Is that partly a function of, I guess, the Southeast grocer rent reduction last year? Secondly, how do you see the spread changing over the next two years?
Yeah, I think that slide is instructive largely because we get the question, how are you going to grow NOI going forward? We don't think that we're going to go from 1,099 to 1,180 or 30 or whatever it is in that chart overnight. What our point 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. We're not saying that the spread will close to zero, because unless you're acquiring assets at market rents, that's hard because you're only rolling over a percentage of your portfolio every year.
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%-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.
I think that 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 of where market rates are, so we've been quite happy with that. To the extent that the market rates keep chasing away from us 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. Two, it's providing so much certainty around the durability of the income in this portfolio. We're quite happy with both. One, protecting what we have from a downside in 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. Some of this is, again, partly a function of the churn in renewals as market rents continue to rise, right?
Yes.
Yes.
Right. Okay.
Part of it too, is that back in 2017, we had a number of acquisitions, and that's where you can see some of the spread pop, was that there's an element of portfolio mix there, but the market's definitely moving and we're quite happy with that.
Okay. Thanks very much.
As a reminder, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from the line of Jenny Ma with BMO Capital Markets. Jenny, your line is open.
Thanks. Good morning.
Morning, Jenny.
Question about the high leasing activity. Was that really just a function of timing, or did you pull some forward from 2020? 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.
Yeah, a lot of it was pulled forward on the renewal side, and we renewed seven anchors this quarter. I think only two of which were contractually up for renewal. We did five in advance. I think on the growth side, a lot of the growth comes from the shop space tenants anyway. Our anchor tenants, in large part, have set options that sometimes there's steps, sometimes it's flat. 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 get 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, $7, which are cheaper than most industrial rents in the markets that we're in. The grocers, as they continue to want to service last mile distribution, and home delivery, and click and collect, that they're very willing to have these conversations with us in advance of their upcoming expires.
Okay. Then switching gears to the redevelopment pipeline. You added Wedgewood this quarter, and it's the biggest one that you guys have undertaken at $15 million. Just wondering if you could expand. Looking at the yield, it's relatively low at 6%. Wondering if there's potential upside further down the road. How that sort of squares against the valuation of that property specifically, given that your portfolio cap rate is sitting at 7.5%.
Yeah. We think there's upside to that number, both driven by the NOI side and then the cost of $15 million coming down. We're still in the early stages, but we have started moving tenants and vacating tenants in advance. 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. The IRR is accretive to the 6% yield on cost that we're showing today.
When you think about where the property sits now, how close is it to the 7.5 portfolio average on valuation?
I'm not sure I follow the question.
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.
Okay.
Just to be very exact.
That's helpful. Thank you.
Yeah.
Both of my questions have been answered, so I'll turn it back. Thank you.
Great. Thanks, Jenny.
Your next question comes from the line of Stephane Boire with Echelon Wealth Partners. Stephane, your line is open.
Yes. Thanks again. I just wanted to quickly follow up on the acquisition and disposition. Just wondering, from a modeling standpoint, can you just quantify, I guess, both amounts for next year?
Like the level of acquisition and disposition activity for 2019 and 2020?
Well, mostly for 2020. Yeah.
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 million-$200 million number.
Maybe $50 million in the first quarter, give or take. Acquisitions, I think it's TBD. If it's $100 million and we've sold $200 million of dispositions, that I think is sort of making sense to us today. It is TBD. There's lots of interesting things in 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.
I think that we're getting smarter with every passing day at it, and there's some interesting opportunities out there that could move that number around. I don't want to get too specific because it could change.
Right. 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. We're looking at several things nationally across the U.S.
Yeah, I'd say our current pipeline's probably $300 million, $400 million 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 million dollars. I think the way we're operating is that we have a view where we can create value and see a good return that meets our thresholds.
To the extent we can find opportunities and remain disciplined in the markets we are in, we'll be buyers to the extent we can for as much as we can.
Okay. Perfect. Thank you so much.
This concludes our question and answer session. I will now turn the call back over to Madeline Saracini, investor relations, for closing remarks.
Thank you everyone for joining the third quarter 2019 conference call for Slate Retail REIT. Have a great day.
This concludes our conference call. Thank you for participating. You may now disconnect.