Slate Grocery REIT

TSX:SGR.UN

Good morning, ladies and gentlemen, and welcome to the Slate Grocery REIT First Quarter 2025 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Tuesday, May 6, 2025.

I would now like to turn the conference over to Ms. Shivi Agarwal, Manager of Finance. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to the Q1 2025 Conference Call for Slate Grocery REIT.

I am 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 discussion and analysis. You can visit Slate Grocery REIT's website to access all of the REIT's financial disclosure, including our Q1 2025 investor update, which is now available.

I will now hand over the call to Blair Welch for opening remarks.

Thank you, Shivi, and hello, everyone.

We are pleased to report positive first quarter results for Slate Grocery REIT. Our team's strong leasing volumes at double-digit rental spreads are continuing to drive healthy net operating income growth for the REIT. Adjusting for completed redevelopments, same-property net operating income increased by $6.8 million or 4.3% on a trailing 12-month basis.

The REIT completed over 220,000 square feet of total leasing throughout the quarter. Notably, renewal spreads reached a new record high of 17% above expiring rents and new deals were completed at over 22% above comparable average in-place rents. Portfolio occupancy remained stable at 94.4% and our portfolio average in-place rent at $12.72 per square foot remains well below the market average of $23.85 per square foot, providing significant runway for continued rent increases. The REIT has only $179 million of debt maturing in 2025, representing less than 13% of the REIT's total debt. After quarter end, the team financed over $17 million of debt at attractive terms. and productive discussions are already underway to address the REIT's remaining 2025 debt maturities. Importantly, the REIT's current portfolio valuation continues to provide significant positive leverage and embedded NOI growth.

We continue to have great conviction in the ability of grocery-anchored real estate to perform in today's economic environment. High construction costs and tight lending conditions continue to limit the pace of new retail development and overall retail availability. And while evolving global trade policies have introduced some economic uncertainty, tariff-driven increases in construction costs only further increase the elevated replacement costs for new retail development.

This ultimately reinforces the value of existing well-located centers and provides a favorable environment for landlords to retain existing tenants and achieve substantial increases in rent. We believe leading grocers are also well positioned to withstand potential impacts of tariffs, given the vast majority of grocery goods are sourced domestically. And grocers are highly sophisticated and agile operators who can effectively manage fluctuations in the cost of their goods.

Grocery-anchored retail remains well positioned, and we believe favorable fundamentals in the grocery-anchored sector, coupled with below market rents in our portfolio, will enable the REITs continue to grow revenue and generate long-term value for our unitholders. On behalf of the Slate Grocery REIT 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.

[Operator Instructions] Your first question comes from the line of Brad Sturges from Raymond James.

Congrats on a pretty strong leasing quarter, still strong momentum in terms of the rent spreads you're achieving. I'm curious if that momentum is continuing on into Q2? And if you've seen any notable change, I guess, in leasing demand in light of some of the macroeconomic uncertainties that have been present over recent weeks.

Brad, I think we continue to see consistent demand for our space. I think that's coupled with the low in-place rents that we have and the high construction costs. We do not see that changing. I think our grocers are very well positioned to weather the tariff storm, whatever that may be and other non-grocery tenants want to be around that activity.

I can pass it over to the team to talk in more detail, if you wish. But we're even seeing -- if you're kind of referring to retail headwinds and some tenant bankruptcies, we're seeing significant activity from other retailers buying leases out of bankruptcy to keep those rents in place. So from a landlord perspective, it creates solid demand. So we don't see that backing off anytime soon and what we've been able to achieve.

Yes. I mean just to add to that, we've had multiple opportunities with -- in regards to the bankruptcy, the spaces that we've received back, we've had a significant opportunity to mark those spaces to market. So we see that as opportunities across the portfolio if and when we receive those spaces back.

I guess in the quarter, the occupancy did dip a bit due to a bankruptcy at Mid-Valley Mall. Just curious if you could comment on the type of tenant and sort of the opportunity for, as you said, capturing the uplift to market rent at that space?

Yes, that was the big lots there at Mid-Valley. But again, going back to my earlier comment, our portfolio is significantly under market rent. And so that's where we're seeing those opportunities as being able to mark those spaces to market. So we see that as another opportunity there.

In most cases, Brad, what we're able to do is significantly increase the rent if we actually get the space back or we did. But we were in an auction, I think, a couple of weeks ago, and Dollar Tree and Burlington picked up 60 leases from landlords in the auction. So like we are trying to get our space back. We're trying to increase that rent. We haven't had a situation where the rent has ever gotten lower. So it's really an interesting time in the market.

I guess if you get the space back, would that require some CapEx? Are you -- like are you reinvesting in the box to capture that full market uplift or...

Great question. I think one of the reasons we really like the grocery-anchored space, you know the types of assets that we have. The landlord works and tenant inducements are very, very reasonable.

Over the last decade, we've been averaging about 8% of NOI below the line cost, and that includes everything. So that's way different than enclosed malls or other types of high street retail.

In addition, given the tightness of the market, you can be pretty aggressive as a landlord of not having to put much space. Real, real simple, what you'd be asked to do is kind of create the shell box, make sure the air conditioning is working, make sure the facade is okay and any other kind of work over and above just basic landlord stuff is just negotiating the rent.

And your next question comes from the line of Sairam Srinivas from Cormark Securities.

Congrats guys on a good quarter. Maybe just looking at the industry overall over there and opportunities ahead, are you seeing any acquisition opportunities there in the pipeline for you?

I think what we're seeing is pretty interesting right now. We've always looked at our portfolio, specifically grocery-anchored as food distribution, and that hasn't changed.

And in good times and bad, the distribution of food is critical. And even in recessionary times, we've witnessed over the last couple of cycles, whether that's COVID, sales went up, GFC sales were stable, we can go back even more decades that nondiscretionary items, people will actually increase their purchasing of that.

So as it relates to what we're seeing in the industrial space, our grocers are talking to us more globally about talking about their distribution facilities or certain suppliers of food. But I think on the grocery space, it's such a vast market in the U.S. it's fractured. There's still significant demand on the buy side, but I do think there'll be more opportunities.

I'll pass it over to Connor to talk about our pipeline, but it's pretty robust.

Yes. Thanks, Blair. I think the transaction pipeline, as you mentioned, continues to be quite robust. And I think looking back at '23 and '24, transaction volume overall was a little bit down compared to historical norms.

I think there was a lot of optimism going into 2025 and have seen a lot of transactions, notably the ROIC acquisition by Blackstone as well as some other individual properties. In terms of portfolio opportunities, I think there's a lot of optimism related to some more sizable deals getting done this year. I think it's yet to be seen how that will play out, but the liquidity and opportunity for one-offs continues to be quite liquid just given the stability and cash flow nature of grocery-anchored properties.

And maybe just looking at the financing of these opportunities, are you guys seeing any opportunity for coming for the JV partnerships that you could kind of use to target these portfolios?

Yes. I mean I think there's significant interest in acquiring grocery-anchored assets.

As it relates to financing from the debt side, the team did a great job last year of financing a significant amount of debt, and those were done at spreads consistent with 5 or 10 years ago. Like spreads for grocery in our opinion, haven't really grown out. Obviously, the base rate has expanded.

But we have a very attractive in-place interest rate weighted average interest rate and positive leverage. So I think from our standpoint or the REIT standpoint, buying one asset is a binary risk for a lender. When you have a well-capitalized lender like our borrower like Slate Grocery REIT, you get a lot of comfort from the lenders, and we can access financing. And I think there will also be interest from equity partners in the future. I think we're just being cautious, but our pipeline is -- acquisition pipeline is substantial.

And you saw us in COVID or the lockdowns COVID, we were pretty acquisitive on buying what we thought were wide or value deals. And we've the team since added value through those acquisitions, which has added value to the unitholders. And I think we're continuing to look at those types of opportunities.

And maybe my last question is around the financing. There's about, I think, $180 million of debt that remains on maturing for the rest of the year, including the JVs. Can you talk us through the thought process on refinancing that?

And I know you mentioned it's going to be towards the second half of the year, but how are you guys thinking about cost of funding, cost of financing there and the thought process behind doing it later rather than sooner?

This is Joe speaking. Yes, thanks for your question. So in 2025, we have about $179 million of principal coming due, which is about 13% of our total debt stack. So we addressed a lot of our maturities at the end of last year. I would say the interest and appetite from lenders for grocery product is very strong.

And for some of these loans right now, we're in advanced discussions, all very positive. And like Blair mentioned, the spreads that we're seeing right now haven't really changed from 5, 10 years ago. It's really the underlying risk-free rate that's moved. So looking forward to announcing some of those refinancings over the next few quarters, but things are going well from a refinancing standpoint.

[Operator Instructions] There are no further questions at this time. I will now hand the call back to Ms. Shivi Agarwal for any closing remarks.

Thank you, everyone, for joining the Q1 2025 conference call for Slate Grocery REIT. Have a great day.

Thank you. And this concludes today's call. Thank you for participating. You may all disconnect.