Good morning, ladies and gentlemen, and welcome to the Slate Grocery REIT Third Quarter 2023 Financial Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we'll conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Tuesday, November 7th, 2023. I would now like to turn the conference over to Paul Wolanski, the Senior Vice President of National Sales and Investor Relations. Please go ahead.
Thank you, operator, and good morning, everyone. Welcome to the Q3 2023 conference call for Slate Grocery REIT. I'm joined this morning by Blair Welch, Chief Executive Officer; Joe Pleckaitis, Chief Financial Officer; Connor O'Brien, Managing Director; Allen Gordon, Senior Vice President; and Braden Lyons, Vice President. 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 2023 investor update, which is available now. I will now hand over the call to Blair Welch for opening remarks.
Thanks, Paul, and hello, everyone. I'm pleased to share our team's positive third quarter results, which highlight our portfolio's continued strong leasing fundamentals and rental spreads, driving occupancy and income growth. We have completed over 690,000 sq ft of total leasing in the quarter. New deals were done at a 18.4% above comparable average in-place rent. Non-option renewal spreads were similarly strong at 14.8% above expiring rents. Our leasing momentum continues to support occupancy gains. We're up 90 basis points from the start of the year, bringing occupancy to over 94% at the close of the quarter. Our same property NOI continues to trend positively, increasing by 2% on a trailing 12-month basis after adjusting for completed redevelopments. In today's elevated interest rate environment, the REIT remains well positioned.
The majority of the REIT's debt is fixed at a weighted average interest rate of 4.2%. Notably, there remains a positive leverage between our current cost of financing and the REIT's Q3 2023 IFRS value at a 7 cap. Further, at $12.37 per sq ft, the REIT's average in-place rent is well below market, providing significant runway for continued NOI growth and stability of cash flow. Despite the REIT's strong fundamentals and operational performance, the REIT's units are trading at a discount to net asset value, which we believe, we believe provides an attractive entry point for investors. The REIT's unit price at the close of the quarter indicates an implied cap rate of 8.5%, which represents a 41% discount to NAV.
The REIT's NAV has been externally validated by private funds investment of $180 million into the REIT at NAV last year. We believe our below-market in-place rents will continue to drive attractive renewal spreads, and new leasing will support strong NOI growth. Supply-demand dynamics in the grocery-anchored sector remains favorable, providing landlords with leverage to increase rents. Resilient consumer spending on essential goods and services is driving robust foot traffic for grocery-anchored centers. We believe in the value of our grocery-anchored real estate and are confident that our portfolio is positioned for continued stable growth. On behalf of the Slate Grocery team and the board, I'd like to thank the investor community for their continued confidence and support. I will now hand it over for questions.
Thank you. We'll now begin the question-and-answer session. Should you wish to ask a question, please press star, followed by two. If you'd like to withdraw your question, please press star, followed by two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment for your first question. Okay, and your first question comes from Sairam Srinivas. Please go ahead.
Thank you, operator. Good morning, guys, and,
Hey, Sai.
Just looking back at, you know, the leasing numbers coming from this quarter, obviously, leasing spreads look very strong. Blair, looking ahead in the next 12 months, how do you see these leasing spreads evolving, and how do you see that reflecting into your SP NOI numbers?
Yeah, I mean, thanks for joining, Sai. I think we're very confident in the fundamentals of the real estate, and I think we've always been very selective on what we buy because we try to buy cheap in-place rents. And so that provides durability to cash flow, and the team's done a really good job of executing leases that, you know, provide that growth. Going forward, given our average in-place rents, you know, in the mid-$12, which is half of market, as quoted by Green Street, we still see our rents and that growth gonna happen. We do not see a change in that. You know, in addition to that, we were strategic through the lockdowns in COVID and bought some, what we'll call, underperforming portfolios, we thought. So we were able to buy those cheap in-place rents at a lower occupancy.
So that NOI that the team is doing a good job with, is coming on, so our forward-looking NOI looks pretty good. And, and I don't see that changing in the short term, just because of the supply demand fundamentals in the market. So we're, we're feeling pretty confident, and the operationally, this real estate is, is really stable right now, really good.
That's good to hear, Blair. And just looking at, you know, the leasing environment, do you see any investments required in terms of leasing incentives or any of those things kind of play out in the market?
... You know, I would say, I think you're asking, like, what's on the investing environment and the lending environment. I would say, generally, in real estate, there's not a lot of capital, and everyone's fighting for it. In the grocery-anchored space, you know, I think lenders and investors like the stability and the durability of the cash flow. It's an essential good. And if you look historically through decades, the occupancy's been stable, the cash flow has been stable. And so, lenders and participants in real estate need to invest in the asset class, and I think the grocery-anchored real estate is an asset class that they like, perhaps more now than others from a stability standpoint. But the transaction market's pretty subdued. And when we've seen M&A across spaces, it's paper for paper, not cash.
But I think we feel confident there's cash out there for real estate deals, and we will be opportunistic in the future if we can buy a great grocery-anchored real estate asset that's mispriced because of capital structure. So we're just keeping our eyes and ears open right now.
Thanks for the call there, Blair. But I was just basically asking you also in terms of, you know, the leasing incentives that go on in terms of getting all, like, filling up all the leases that are coming up.
Yeah, I'll pass it over to the team, but it's been pretty stable on that, on the front for leasing.
Okay.
But look, what are you guys seeing out there on the market? Are incentives, are tenants asking for anything more? Or what kind of color has it just been? They're fighting for our space.
Yeah, I think they're fighting for our space, and one of the reasons that they're fighting for our space is due to the lack of supply in the market and the cost to construct outside of the market as well. So that's where we're favorable.
You know, one thing I'll add aside, just more color, which I think is positive for our durability of cash flow. We're seeing tenants want to go longer with options and try and lock in option bumps to their rents. And I think that's good because I think they're trying to lock into our centers for a long period of time and really control their rental costs. So it's good bumps for us. But I think that shows that the tenants are still think inflation is going to be around for some period of time. So I think it's positive for the REIT, but that's just more color on leasing. You know, like people are trying to lock into space because there's not a lot of space around right now.
Brilliant. That sounds good, guys. Thank you so much for the call. I'll turn it back.
All right, thanks.
Ladies and gentlemen, as a reminder, should you wish to ask a question, please press star followed by one. Your next question comes from Brad Sturges from Raymond James. Brad, please go ahead.
Hey, good morning.
Hey, Brad.
I wanted to get some updated thoughts or comments on the Kroger, Albertsons merger. You know, I guess it would be based on what you know today, but just curious in terms of the planned divestitures as part of the merger. You know, do you know what your exposure could be to that at this point?
Yeah, I mean, you know, we'll be consistent with what we've talked before, in that all of any crossovers that we have, we feel pretty good if they, we don't know what they're doing yet, and we don't think we have exposure. But even if they did, the low in-place rents of our grocer are healthy. And we feel, as we've consistently said, this is a forced sale, and they need to, they don't want to give a competitor a great opportunity at a low rent to kick their butts in sales. Like, it's not like the locations aren't performing. They're being forced to sell these. So from a landlord perspective, we don't think we're going to lose a food store. It's just them managing their, the competition.
You know, when you think of the entire amount of stores that we're talking about for their portfolio, to the market, you know, I think there's 400 stores they're talking about. That's probably, you know, 1% of the inventory or less. And then when you think about the Slate portfolio, you know, we don't see a significant risk, but I'll let the team add more color.
Yeah, I think there's certain headwinds with the FTC to get this deal approved, but I think what they are going to be really focusing on is making sure that any divestitures are going into an entity that is well capitalized and can perform kind of strong grocery sales going forward. They don't want these grocers to go in the hands of an overlevered entity that's going to disappear in a few years. So again, going back to Blair's point, our under-market rents give us a lot of conviction in the stability of these assets. And whatever happens across the portfolio, we're confident in our ability to maintain or grow value going forward.
You know, I think it's important. It's a good question, Brad, but like, food is different than other types of retail. Like, so if you're in a neighborhood and that grocery store sells $100 of food out of that store, for example, and then Kroger and Albertsons need to sell that store, there's still $100 of food demand at that location. That isn't changing. So it's really who's selling that food. So I mean, it's. I think that's how we look at it, and that's how it is. Like, someone's going to buy or want to buy that food sale, because they're being forced to sell it. And we believe that our locations at their cheap rent create a good margin opportunity for any operator.
That's, that's great, Paul. I really appreciate that. Maybe just switching gears, you completed a couple of redevelopment projects in the quarter. Just curious if there's anything else in the pipeline that you're looking at for 2024, and then, if so, kind of what should we be thinking about in terms of modeling for capital spend next year?
Yeah, we've, we've got a few projects that we're, that we're currently looking at. You know, as far as capital spend, you know, we're, we're working our way through that now. So, you know, we, we don't have, you know, the exact numbers on that as of yet, as we're working through potential costs to construct and redevelop, but, but we're working through that now.
... I think, Brad, you've seen, like, what we try and do is when, like, all of our below-the-line costs are cash, we don't use an assumption. So we only do deals when we think it's accretive in how we deal with it. So I would say it will be consistent to what we've done in years past. No big, like, outrageous plans. We'll just do it as the assets require, and it will be kind of what we've done in the last couple of years. Nothing. There's nothing big we're planning on the redevelopment side. It'll just be normal business.
Okay. Last question for me. Just in terms of there's a lot of volatility in the debt markets right now, just, if you had to peg where your debt costs are today, where would be the rough range?
You know, I think we'll be able to do a couple of things. I think we have good protection for the next couple of years with some derivatives, and I think that's healthy. But, you know, we did some financing earlier this year with Life Co, and we're in the mid-5. You know, it bounces around a lot, and we don't know the future. But I would say that we are in positive leverage territory no matter, you know, what it is, which I think makes us unique, definitely in the Canadian REIT universe from a IFRS NAV cap rate. So, you know, and we're also fortunate that whether it's Life Co banks, or other structured finance buyers of paper want the stability of grocery. So we have not heard of any of our lenders kind of backing off out of this space.
We know in other spaces they are. But I think we're still in positive leverage, but we still have some time and some years to kind of... It's not gonna be an abrupt shift to a market. Like, not all our debt will shift tomorrow into the new market norm, even though it'll still be positive leverage. And I think our NOI growth will offset that, so we're feeling pretty good right now.
Okay, thanks. I'll turn it back.
Thanks.
Your next question comes from Gaurav Mathur from Laurentian Bank Securities. Please go ahead.
Thank you, and good morning, everyone. Now, there's been plenty of activity at the tenant level, you know, with bankruptcies in the sector, the stalled Albertsons-Kroger merger, and protests among pharmacy workers at CVS and Walgreens. You know, my question is, do you see any sort of upcoming material tenant distress in the portfolio as we're looking at the next 12-18 months?
Hey, good morning, Gaurav. Good to hear from you. You know, I think that, I'll go into detail to your question, but at a high level, our biggest mitigant to that is our low in-place rents. At $12.37, like, we are below all of our peers, and we're below market. So I mean, that's a huge opportunity to make sure the tenants stay sticky.
Mm-hmm.
At our, at our locations. As it relates to, you know, what's happening in retail, we, we've done some analysis, and of all the bankruptcies in retail, I think on all the peer universe, we're significantly lower on tenant exposure to the bankruptcies of late, whether that's Bed Bath & Beyond, Olympia Sports, Party City, Crystal [inaudable] All that, even Rite Aid. So we, we have very limited exposure to that, and I'll go back to it. Even when that is the case, the in-place rents, we have demand to lease that stuff back up. So I think our biggest defense is our in-place rent, and, and we're mostly focused on essential tenants.
As it relates to, you know, Blair, speaking to Gaurav, higher, like, in the future, you know, obviously, everyone's talking about real estate debt, and it's over-levered, but I think in the market, there's also a lot of leveraged loans. That market is $4.5 trillion, last time I checked, and that's grown from $2 trillion since 2020. So I do believe there are many tenants in the greater real estate world that might face margin squeeze. But when we do analysis of our portfolio, the credits of our tenants are pretty strong. And, you know, we do not feel that our tenants are going to be impacted as much because they've used as they've cleaned up their balance sheets, when I'm thinking of the grocers or the other nationals.
Yes, the pharmacies are dealing with some labor issue, but they're still healthy and people need it. It's an essential good, and we have a cheap rent. So we do look at it. I think I am concerned outside of grocery, you know, looking forward to the stress on credits for tenants. I don't think people are paying enough attention to that. But as we look at Slate Grocery, we feel we're pretty insulated because we do do that analysis, and our rents are the biggest mitigant of the risk.
Okay, great. Well, thank you for the color on that. Just switching gears here. You know, when you're thinking about capital allocation now in this environment and looking at 2024, just given where the units are currently trading, how are you thinking about the NCIB versus sort of distributions and then acquisition activity, as, you know, we're closer to interest rate normalization?
Yeah, I mean, you know, we're obviously biased, but we think our units are unreasonably cheap. We have been using our NCIB, but, you know, we aren't gonna change our consistent strategy of working with the board and the team of allocating capital, whether that's NCIB, whether that's redevelopment, or whether that's buying outside acquisitions. We judge what's the right return and what's the best return for the unitholders, and we've always done that. So, you know, I think we'll look in the next year, and we'll just continue that. But we feel strongly that given our strong operating fundamentals, that where we currently trade on the in Toronto and Canada is totally disconnected to what actually is happening in the United States. I think the team has done a good job.
Like, last year, we sold 18% of the company at NAV, and I believe in our NAV. I think our NAV, compared to most of our Canadian peers, is we can show what that is, and it's positive leverage on a on in-place, or if you're good in mark-to-market financing. We have below-market rents, strong rental growth. So I think it's a compelling investment right now, but you know, we'll continue to work to come talk to you and come talk to our investors and others to kind of show that. But we're confident in our real estate and what we have.
Okay, great. And then just last question. You know, from a distribution perspective, how should we think of the payout ratio going forward, given that it's been increasing through the year?
Yeah, well, I think that it's been increasing for a couple reasons. One, redevelopment and, you know, some costs, but we feel that the durability of our cash flow and the NOI growth, we feel that our cash flow is durable, and it covers. So I mean, we think that the fundamental part of our business is we have low in-place rents and our NOI is gonna grow. So we feel that over time, our payout ratio will go down, and we're comfortable with that.
Fantastic. Thank you for the color, Blair. I'll turn it back to the operator.
Thanks, Gaurav.
There are no further questions at this time. I'll turn it back to Paul for closing remarks.
Thank you, everyone, for joining the Q3 2023 conference call for Slate Grocery REIT. Have a great day.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.