Slate Grocery REIT

Thank you, operator, and good morning, everyone. Welcome to the Q4 2022 conference call for Slate Grocery REIT.

I'm joined this morning by Blair Welch, Chief Executive Officer; Andrew Agatep, Chief Financial Officer; Connor O'Brien, Managing Director; Allen Gordon, Senior Vice President; 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 disclosures, including our Q4 2022 investor update, which is now available. I will now hand over the call to Blair Welch for opening remarks.

Thank you, Paul. Our Q4 results show that in a year defined by widespread market volatility, Slate Grocery REIT has maintained steady growth and strong performance, highlighting yet again the effectiveness of our grocery-anchored portfolio.

Heading into 2023, market fundamentals in the grocery-anchored sector are favorable. High construction costs and retail conversions and redevelopments are keeping inventory levels low.

This dynamic is creating tailwinds for our portfolio, accelerating leasing demand and rental growth. Importantly, our average in-place rent in the portfolio is $12.22 per square foot which is significantly below market rents and the per square foot rent required for new construction.

This means that we have significant rental growth embedded in our portfolio. By steadily increasing our rents, we believe that we can unlock this growth and significantly increase our revenue and the overall value of our real estate.

Our team's operational performance this past year underscores this growth potential embedded in the portfolio. We completed a record 1.8 million square feet of total leasing in 2022.

The new leasing was completed at a 20.7% above average in-place rent and total leasing was completed at a 9% spread to in place. We have a further $2.7 million of contractual base rent coming online, two-thirds of which we expect to occur in the first half of 2023.

Our grocery-anchored retention rate in the year was 100% and our 93.2% portfolio occupancy presents runway for continued growth. We completed over $424 million of acquisitions in 2022 at a defensive basis with upside on our rents and occupancy, providing runway for organic growth and value creation.

We also sold four nonstrategic properties and one outparcel with plans to recycle these proceeds into new accretive opportunities. Lastly, the REIT completed $25 million in redevelopment projects, adding $3.4 million to our NOI, which represents a 13% return on investment.

The REIT share price finished the year on a strong note, gaining 17% in the fourth quarter and providing a total all-in return of 12.5% in 2022. Heading into 2023, the REIT is well capitalized with a strong balance sheet, meaning we can be flexible and act quickly to capture attractive opportunities.

Our partnership with Slate North American Essential Fund validates the REIT's net asset value, and provides the REIT with access to nimble capital. We also refinanced $608 million of the REIT's credit facility in 2022 at improved terms.

And at year-end, 92.9% of the REIT's debt portfolio is fixed, with no debt maturing in 2023. We have strong conviction in grocery-anchored real estate, and we continue to evaluate new investment opportunities to acquire well-located real estate anchored by high-performing grocers.

We are well positioned for growth, and we will continue to allocate capital strategically in ways that are accretive to the REIT. On behalf of the Slate Grocery REIT team and the Board, I would like to thank the investor community for their continued confidence and support.

I will now hand it over for questions.

Thank you, operator. Good morning, Blair.

Good morning, Paul. Thank you for the comments earlier.

My first question is primarily on the dispositions. I know you indicated about recycling this year.

Any color on the pipeline as well as can you give us a little bit more color on the assets that were sold in November last year?

Yes, sure. I mean, I'll pass it over to Connor.

Good morning. Thanks for calling in.

I think what we try and do is when we see an asset that's noncore to our strategy or we think we've already maximized value, we look to sell them. I think it's going to be strategic and minimal.

We're not out selling a bunch of assets, but we try and add value to the portfolio, but I'll let Connor describe the stuff we sold.

Yes. So of the four assets, two of which were assets that were kind of non-grocery anchored where when we acquired the property, there was a grocery anchor in place.

And I think those two dispositions really show the value of buying at a low per square foot basis with low in-place rents as it gives you flexibility if tenants typically expire and move out. So both of those scenarios, we acquired approximately 7 years ago, and we're able to get a mid-teen total return despite the grocer leaving.

We were able to replace those single-digit rents with kind of mid-teen rents with some modest capital, and execute and dispose of those assets at attractive values. The other two?

One was a grocer-anchored asset, a high-performing grocer. However, there were gross leases in place.

In an inflationary environment, we didn't like the gross lease nature. We were able to do an off-market deal with a local buyer at a very attractive valuation.

So we took the opportunity to dispose of that, and we'll recycle that into other attractive grocery-anchored assets. The final property we disposed of was part of the 13-property portfolio acquired last year.

It did not have a grocery-anchored component to it. So it was viewed as nonstrategic.

And we're actually able to dispose of that at just under $2 million higher than our internal allocation for that property at acquisition. So a great result in short order, just speaking to the attractiveness of the acquisition -- portfolio acquisition we made in July of 2022.

In terms of the pipeline, I think we have a very robust pipeline of both, individual property opportunities as well as portfolios. I think the grocery-anchored space today is an attractive place to be.

Cost of financing is roughly 5.5%, and you're able to use positive leverage with kind of spreads of north of 100 basis points. So as we look forward into 2023, we're going to be looking for high-performing grocers in markets with positive demographic trends and under market rents, and I think there'll be lots of opportunities to deploy capital into these strategies.

Thanks for the color Connor, nice hearing from you. Just on that, I think it's a good segue to my next question, and that's primarily on acquisitions.

Are you seeing this high-rate environment put any pressure on some of the markets you might want to target? And are you seeing opportunities come up in those markets?

Yes. I'll let Connor get into the color.

At a high level, we see -- the U.S. grocery business is highly fractured.

There's approximately 40,000 grocery stores in the U.S. And the biggest portfolio, we think, is probably 500 assets.

So a lot of them are owned by single owners, partnerships, and they might be coming under pressure because how they finance or where they financed it in the last 5 to 10 years. So we are hearing about one-off opportunities, and we're also hearing about portfolios of grocery like we've executed in the last couple of years that might be in mixed or diverse portfolios that they can sell the grocery for cash.

So I think we will be strategic and we are optimistic on -- that's the high macro level, but I'll let Connor get into some more of the specific micro detail.

Yes. We're constantly evaluating opportunities in today's market.

And what we're seeing is the private buyer continues to be successful in a lot of marketing processes. But I think that goes back to how Slate differentiates ourselves.

If you look back kind of since COVID, we've completed almost $1 billion of acquisitions. However, most of those have been kind of not necessarily just a marketed one-off opportunity, those were creative transactions.

So I think that speaks to kind of the Slate platform, and being creative and looking to structure deals that we can buy at, say, a portfolio discount or provide a seller, a creative solution and get attractive pricing. But at the same time, I still think in this environment, we will also be able to be successful in one-off opportunities going forward.

That's great. Thanks for the color Blair and Connor.

I'll turn it back.

Thanks.

Thank you, and good morning, Blair.

Hi, good morning, Gaurav.

So just firstly, as 2023 rolls forward, is there a pecking order in your capital allocation decision between acquisitions, development and the NCIB?

Excellent question, and we talk about this internally and with our Board continuously. And it's really about what's the best return to the unitholders.

And we have extreme confidence in our existing portfolio and the embedded growth in our rents as we've discussed. The team has done some great I would say, redevelopment which was really adding on development or to existing sites and that can get us low teens, mid-teen returns.

And then we look at new buys. And I think our job is to continually allocate to the opportunities that we think provide the best return.

Like if we're getting mid-teens or high teens and something, maybe we should allocate that or compare it to something else. And I think it's fluid, Gaurav, but I know we're well capitalized.

We have liquidity, and we'll do what we think with the Board is the right way to get total return to the unitholder.

Okay, great. And just on the recent dispositions once more.

Has the depth of the buyer pool changed over, say, the last couple of quarters? And are you seeing sort of more private buyers going after the onesie-twosie assets for the lack of a better word, versus larger portfolio deals?

So I think from a financing standpoint, large groups will probably be able to finance these type of assets at around 5.5% and maybe private buyers a little bit wider than that. That being said, private buyers in some situations will buy all cash, and we'll be in 1031 exchange opportunities and we'll be kind of very different than your typical institutional real estate investor.

So yes, that's changing price. However, the private buyer is a lot harder to track as you may have an individual in a particular market that will just, for lack of a better term, overpay for a marketed asset that we view slightly different.

And I think to add to Connor's comment, in 2022 or the middle and back half of 2022, it wasn't a cost of financing issue for doing M&A or big deals, it was actually the availability to get the cash. And in 2023, what we're seeing is there is availability.

So all the lenders, the usual suspects are out lending again, but it is the cost, and therefore, the cost needs to flow through your model, and it's changing the price. Lenders are being more selective on who they lend to, and they don't like taking binary risk on a onesie-twosie unless they're with a group that can show diversification and balance sheet strength.

So I think Slate Grocery is in a good position. And as my comments were before, a lot of grocery on the onesie-twosies were financed CMBS.

Based on what we see last week in the U.S., the first two CMBS deals were priced, because it was kind of quiet for a while as you well know. And they were actually five-year deals with different types of asset classes instead of 10.

So we're seeing kind of a quantum shift in the market. I guess that means is like they're being risked off, and I think it is selective.

We are well financing. The team did a great job financing some debt already.

So we are -- we can get the financing, but it is thinning out who else is buying for sure.

Okay. Great color.

And just lastly, on new and existing leases, especially across the non-anchor segment, do you guys have any concerns in the tenant mix as we head into a recession?

No, I don't think so because what we're seeing is -- and I'll let Allen and the team jump in a little bit more. And I'll just highlight like our committed occupancy is the 93% number, but are actually in-place occupancy is 91%.

And that really was strategic because we bought these portfolios that we thought were under managed. And we think we have a couple percentage points of occupancy in our back pocket, and we're excited.

But the demand we're seeing is from all over the place. We're seeing it from enclosed malls tenants come.

We're seeing from pad users that can afford to be in pad rents, so they're going in line. So I think what's happening is almost -- it's almost like, wow, this is unbelievably strong for us, because we're seeing demand from users that we wouldn't usually see.

So I think we're being strategic on who we want to deal with, how we want them in and like what we're willing to pay. But I'll let Allen talk more, give you some more color on the specific tenant demand we're seeing.

Yes. And I'd say further to that, Blair.

You have the limited new supply coming to the market due to the high cost of construction. And with our low in-place rents, we certainly see a very strong and have a very strong tenant demand right now, resulting in favorable conditions to continue to drive that growth.

So we're very bullish on that.

Okay. Great.

Thank you so much for the color. Gentlemen, I appreciate it.

And I'll turn it back to the operator.

Thanks Gaurav.

Thank you, everyone, for joining the Q4 2022 conference call for Slate Grocery REIT. Have a great day.