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Good morning, ladies and gentlemen, and welcome to the Slate Retail REIT First Quarter 2018 Financial Results Conference Call. As a reminder, this call is being recorded today, May 2, 2018, at 9 A.M. Eastern Time. Your host for today's call is Madeline Sarracini, Investor Relations. Please proceed, Ms. Sarracini.
Thank you, operator, and good morning, everyone. Welcome to the First Quarter 2018 Conference Call for Slate Retail REIT. I'm joined today by Robert Armstrong, Chief Financial Officer; and Greg Stevenson, Chief Executive Officer.Before getting started, I'd like to remind participants that our discussion today may contain forward-looking statements and therefore 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's website to access all of the REIT's financial disclosure, including our Q1 2018 investor update, which is available now.With that, we will open the lines for Q&A.
[Operator Instructions] Your first question comes from Sumayya Hussain with CIBC.
So just firstly on your IFRS NAV and the fair value loss in the quarter, what markets does that relate to and does that reflect the Southeastern leases being amended?
Yes, most of it's the Southeastern Grocers' lease, leases being amended just for the change in the cash flows primarily at 6 of the properties. From there, there is a couple properties within the 86 of 2 to 3, where we made adjustments as well, but for the most part, most of the profits across the portfolio are steady state compared to December 31.
Okay. And on the completed redevelopments at Buckeye and County Line, once they are completed and stabilized, do you guys have a sense of what the market cap rate would be on those assets?
Yes, I think, we're going to look to dispose of both of those assets. We haven't gone out to market yet to see what those are. But I would say that they are on our books at the price that we believe that they will be sold out. I think it's TBD on cap rates at this point in time.
Your next question comes from Himanshu Gupta with GMP Securities.
Just a general question to start with, how do you get a sense of retailer performance in your centers? I mean do you [ drag ] their sales volume, operating margins. Basically trying to know what visibility do you have on bad debts and overall exposure risk?
Sorry, Himanshu, was that on foot traffic and sales?
Yes, I mean, I'm just trying to get a sense of what visibility do you have in terms of exposure, any tenants on your watch list. I mean, do you [ drag ] their sales volume, operating margins?
I'll start and let Bobby jump in it, we get sales reports for most of our anchors across the portfolio. So we see how they're doing on a year-over-year basis. 2017 sales, sort of, are coming in now and from March to May, we start to get those year-over-year and across the portfolio from a sales perspective, they're up in the sort of mid-single-digits range with probably 30% of the portfolio left to come in. So I think that's, obviously, a positive indicator for us. I think the big thing, the asset that we have, it's the relationships that the team has built with our grocery anchors and our other tenants across the portfolio, I think we view this as a service business, not necessarily as landlord/tenant. And I think the conversations that we're constantly having with all of our tenants. As of late and going back into the past, we feel very confident both the traffic, sales volumes and desirability of our centers and I think that the leasing activity that we've been doing over the last few quarters sort of highlights all that.
Yes, maybe the few points I'd add on are, one, I do want to highlight the fact that sales are increasing across our centers and most of the grocers and we think that's an extremely positive thing, it maybe isn't picked up in today's media environment but they're probably as healthy as ever from a sales perspective. And then just to specifically respond to your bad debts question, we haven't seen any change in the activity in any meaningful levels. It still tends to be very, very healthy. It's not something that we're really worried about in any way. But I also think that looking at the health of the portfolio overall on a same-property basis, we're up year-over-year and we're continuing to do leasing and there is continuing to be demand for the space through our conversations on the leasing front. So notwithstanding the general retail environment, the grocery-anchored environment and especially in our practical experience tended to be very strong.
And I think our retention ratio this quarter and going back into the past, it's some of the highest in the space relative to our peers and I think that highlights exactly what Bobby alluded to.
Yes, that’s helpful. And then on capital allocation, there are a fair bit of store closures expected in 2018 and 2019. So how do you prioritize between share buyback and debt reduction? I mean, how much are you prepared to delever the balance sheet?
I'll let Bobby jump in. Just on the share buybacks, I think that at the value that we see there, where we can buy a fractional interest in a portfolio of 86 assets that we know very well, obviously, at a price that we think is attractive, we're going to keep doing that. I think Bobby and I talk about the leverage thing a lot and I don't think we're looking to delever necessarily. It's more that when we sell assets, we want to make sure that we pay down debt so that our leverage doesn't increase.
Yes, that's right. The choice to do the buybacks has completely been a capital allocation decision. We think at the price that we're able to buy back at does make sense and has benefit to unitholders. But the one thing I would say is that we've done $4.5 million on the buybacks, I think that's aggressive and we were quite lucky to do that volume over the last few months. But it has taken us 2 months just to do $4.5 million. So I think it's going to be when we stretch to make the NCIB have a meaningful impact on leverage across the portfolio on top of the $1.5 billion of assets. So we'll likely take on debt to do that, but we think it's positive. But it's probably at the margins from a LTV perspective.
Got it. And then on tenant improvements. Tenant improvements is tracking almost $2 million in quarter 1. Do you see that increasing even further, given all the store closures and changes in tenant mix? How do we see that number on a full year basis?
We report actuals. As you may or may not know, but it's worth stating because I know that if that's not consistent across the board in [ REIT land ] and so that will bump around for us a little bit. I think that the good news is that our increasing capital to your point is because of TIs and leasing commissions, so it's a capital that comes with a return. It's not an increase in maintenance CapEx. We've budgeted a number for the year on a quarterly basis that will be lower than the quarter, i.e., we think that it will move around from quarter to quarter, but it won't be sort of as high as it is this quarter or every quarter if that makes any sense. So we don't expect it to increase due to store closures or anything like that.
Sure. And then finally on same-property NOI growth trends, looks like you expect a ramp up in the second half of the year. So can you quantify the ABR, I mean the leases, which were signed earlier but the rent is yet to commence?
Yes, we've done a lot of leasing, as you can see sort of in the last 2 quarters and I think that will continue because the team is just doing a wonderful job, being proactive, getting in front of the lease expirations, and like I said, I think we spend a lot of time communicating with our tenants, both the grocers and our shop space tenants. I think it's just really timing of lease commencement. So high level, it's -- you sign a new lease, for example, and there is anywhere between a 3-month to 9-month build-out period depending on size of the space and tenant use, and so it's really just having that period expire or run off before the rent starts to be paid. But like Bobby and I have said the last 2 quarters, because of that timing a lot of the leases that we have signed in Q4 and Q1, and actually, some in Q3 as well will be sort of coming into the results in Q3 or Q4 of this year.
And probably just one final question, a general question on the demand for open-air centers in the private market. So some of your peer group are mentioning about increasing capital formation, do you agree with this? Do you see demand for single assets? And then is there any demand emerging for portfolios as well?
I don't think the demand has changed. I think we've always been the view that for a grocery-anchored open-air centers, strip center, neighborhood center, it's called a few different things, it's always been there in our view. We think that there is private buckets of capital that are local, regional buyers. There are 1031 buyers out there, which are buyers that are looking to defer capital gains tax by taking sales proceeds of an existing asset and putting in a light kind asset within 180 days. We think that there is institutional buyers, there is some smaller to mid-cap REIT buyers. So for one-off assets, nothing has really changed. I think where pricing has softened a little bit on the capital formation side is when you start to look at larger portfolios in the hundreds of millions of dollars that's still yet to be seen. I think I would echo some of the other REITs' comments in the U.S., which is on a risk-adjusted basis the valuation levels that we're seeing and I think it's becoming more obvious to people that retail is not dead and strip center retail, i.e., everyday convenience retail, is still not only doing just fine but increasing demand while there is a lack of supply. Fundamentals are strong. I think that capital formation for larger portfolios will start to recognize all of these things over time, but it's certainly not yet obvious in the higher dollar amounts today.
Your next question comes from Stephane Boire with Echelon Wealth Partners.
I was wondering what do you expect in terms of rents for current redevelopment and repositioning projects underway and how would that compare to the market rents?
The rents that we've been achieving are all laid out in the MD&A sort of on Pages 10 and 11. So we think that spreads on renewals will continue to be anywhere between 5% to 10% on shop space, which we define as spaces less than 10,000 square feet. We don't see any trend down or trend up. I think that will remain pretty consistent. If you look at our expiry profile, we've got sort of a $10-ish rent on a weighted average basis expiring contractually for effectively the next 5 years. So we think we see that growth continue into the future for some time. On new leases, again, as you can see in our MD&A that we lay out, and it goes back 4 quarters, we've been doing spreads on leases, which is again weighted average across the portfolio about $10.5, we've been closer to $12.5, $14, so anywhere between 25% to 50% above in-place rents. And I think that will be sort of similar to what we see going forward. So we see sort of no change than what you'd see in our MD&A today going forward. I think that's driven by the fact that you've got a multi-decade low and new supply in the strip center space. I think that, again, our team has done an excellent job from a leasing perspective, developing those relationships -- we talk about this a lot. We're bringing capital to capital-starved markets, where our TIs and leasing commissions go a really long way, and, I think, again going back to the comment on the team is, we're bringing in a sophisticated team of institutional real-estate ownership to markets where that doesn't really exist.
Okay. And on another subject, regarding the property -- properties affected by Southeastern Grocers, were there any discussions in regard to any lease extension?
Yes, there was, it was a mix across sort of the 10 assets that we have, but we received lease extensions at some as well as capital investment commitments from Southeastern Grocers following bankruptcy across the board. So to Bobby's earlier comment and Sumayya's question, well, a large majority of the valuation changes within the REIT in both Q4 and Q1 were as a result of Southeastern Grocers, we do think that Southeastern comes out a better company. They're going to reduce debt. They are going to have more money to put into operations. They're going to close their underperforming stores. So we do think that there is possibility in the future as this becomes more clearer to the market and to us, although we're believers, and there may be upside in those valuations in the future.
So basically if they successfully restructure, they would have to provide upgrades or to improve the properties, in which they are located right?
That's correct.
And as a point of clarification, there is -- the rents don't adjust either until they have exited as well.
Right. Okay. And actually on that same subject, it looks like you minimize your risk, and you've got an option on improvement but if I remember correctly, the market conditions for the affected properties remain relatively solid, is that correct?
Yes, that's right. It's similar to Kroger in the Northeast or even I think a lot of the Kmart locations that you see in that, we've picked off a few to be opportunistic. Southeastern Grocers is the oldest grocer in the State of Florida and they've been there for 100 years and as a result they've got a lot of the best real estate in the markets, and that location advantage goes a long way, and I think that from an OpCo perspective, meaning at sort of the store level, fundamentals at the stores that we've seen both from an acquisition perspective and the ones we've owned, we've underwritten a lot of these over the last 6 years. They're still very solid, so we couldn't agree more, I think that the fundamentals are fine and the ParentCo maybe sort of a OpCo/PropCo thing where they are really just over in debt at the company, but our view is that the real-estate fundamentals and the sales at their stores, because their locations are so good, are still quite strong.
I think while the Southeastern event was unfortunate; I think the way we kind of look at it is, it's a positive reflection of what we are trying to do, which is buying good real estate that people [ understand ], not to be confirmed but we believe that we're the only landlord in the U.S. under Southeastern that had 10 or more stores without a single store closure and I think that reflects about the way we've been buying, our acquisition discipline. That was the biggest that we had in 2017, and so far in 2018 as far as store closures are concerned, and we've been relatively immune across the board. In 2017, we only had 5 shop tenants in the entire portfolio of, I think, 1,500 tenants that were affected, and in those 5 we re-leased at a 10% spread up. So I think it's been the type of real estate as well as the way we've been buying in the markets we are buying in. We've been very fortunate, but I think it's been -- this is part of the strategy and we don't see any problems going forward either.
Okay, that's good. Okay. And also on another subject, I was wondering if you could expand a bit more on the retention rate for the quarter. I know you mentioned, it was one of the best among your peers, but I was wondering if you could give some color on the fact that it decreased over the quarter and just in general?
Yes, there's not a ton to read into it, it's just this number will bump around a lot on a 90-day period. But overall, again, I think that the close to 90% retention ratio that we saw in 2017, this quarter was down to 85.5%, we expect it to be closer to 90% for 2018, and sort of jump back up going forward, but it will bump around quarterly nothing really material to read into, I think it's just -- it will fluctuate.
Okay. Perfect. And the last one, I was wondering what's your view on the same-property NOI for 2018, again you mentioned a little bit that it would improve near the end of this year, but do you have any guidance for the year?
No guidance, but I think that similar comment is that the 90-day period we don't focus too much on because it jumps around a lot and we had free rent at one center alone, moved it from a positive to a negative figure. So it just goes to show you how sensitive it is, today it's small changes being 67-ish percent of the total portfolio. I think the Q1 letter does a good job of highlighting our views on same-property NOI and sort of what we think, how we think about the total portfolio and the different buckets within that portfolio and going forward. Bobby, you want to…
Yes. I wouldn't want to provide a new guidance, but we do think it will move positive. We've been happy with what we've done over the last 2 years in that regard regardless. The thing I'd point out though is, it is a little bit what we have estimates and I think it's a little bit hard to predict, just because of the timing of the free rent, but also the timing of when properties come into same-store based on our acquisition dates, we're skewed a little bit, so it's not entirely representative, I think it is a decent representation. But I think over the course of the year, we're really happy with how we've been progressing so far.
Your next question comes from Troy MacLean with BMO Capital Markets.
Just on the same-property NOI discussion, you mentioned it going up in the last half of the year. Does that include the settlement with Southeastern Grocers?
No.
Yes. And I think that's why we're shying away from guidance because the timing of their emergence is still a bit uncertain, it's progressing really well. They've stayed current during bankruptcy, which is quite frankly unheard of, and I think it speaks to how solid the underlying business is, and how all this has been going. I think we're shying away from providing guidance just because we don't know what the timing it would be.
And then just you mentioned in your comments that you really haven't seen a trend in market rents, but I was kind of curious if you've seen like your renewals –- newer renewal leasing negotiations getting tougher with tenants, like are there any new terms they want like shorter lease terms or more tenant improvements. Is there any kind of comment you can have there?
No, I think it still remains the same, the grocers have a cheaper cost of capital. So it's usually their dollars going into anything in their space, which is great. Our capital, as it relates to getting lease extension with the grocers are still targeted toward new roofs or parking lots. On the shop space side, again, I think you have your regional tenants, which are a little more sophisticated. But again, we think we've got some of the better centers and there's not a lot of better options. So we think we're in a pretty good position there. So nothing has changed. And then on the shop space side, I think again when we -- at acquisition, we really target centers where there's rents that are below market, which goes a long way because it's not like we're asking our tenants to go from market to above market, all we are really asking tenants to do is take their rents below market, up towards market, either at or slightly below market or even slightly above market. So that's the big part of our acquisition strategy, to make those conversations a lot easier.
And Troy, just a look back on the Southeastern piece, we will depend partly in the timing of when Southeastern exits from the restructuring because that's when the lease amendments will be effective. We provided guidance within the MD&A, I think if they [ disposed ], would be just over $0.3 million, assuming that there is an impact for about half of the year. So I think it's important just to represent that $0.3 million and what I'd expect NOI to be, say, approximately $50 million for the back half of 2018. We really don't think it's a huge impact over the portfolio, but as Greg kind of properly pointed out, a couple of hundred thousand bucks here and there on a 90-day period for 2/3 of our portfolio on same property can skew things.
Fair enough. And then just finally on Springboro Plaza, I know you're working on the due diligence, but has Kroger agreed to take over the Kmart or to expand its current store?
They haven't yet, no.
Is that dependent on your due diligence or is the project waiting on them to agree to expand the store?
It's waiting on them right now. So I think they're just -- they're running all of their sales projections and numbers that they do similar to what they've done in Hocking Valley and some of the other marketplaces that we've built for them. And I think we're going to have some clarity soon but they are a big company and they move slower than Slate Retail REIT unfortunately, but I think it's all positive. They just renewed for 5 years recently, so they're committed to the site in one way or another.
Are they taking longer to determine whether to do the store expansions [ versus ] the first couple of projects you did last year?
I would say last year it was similar, but they're definitely taking longer than we expected probably 2 years ago, which we don't view as a bad thing. But I think that they are probably being a bit more thoughtful with their capital and I would argue they are spending more capital on e-Commerce initiatives and on their employees' training programs, et cetera. All good news, but I think it's just slowed down their capital allocation process as it relates to real estate. We remain confident that Springboro is, again, a place they want to, and will spend money. I think to your point, it's just going to be a bit slower as a result of the environment than it may have been 2 years ago.
[Operator Instructions] Your next question comes from Michael Smith with RBC Capital Market.
Greg, you mentioned earlier that your markets are capital starved. I mean, I realize there's lots of money flowing into coastal markets and big cities. But maybe could you just give us a little color at to why your markets are capital starved?
I think it's -- and I've been reading them and you guys probably have as well and it's not just in Q1, it's sort of been the last several quarters. The REITs in the U.S., that would be our peers that own centers in our markets, they are exiting, they're selling assets and it's really just it's 2 things that I think it's an opportunity for us is. Either selling, which we were buying from in the past, our cost of capital is too expensive today to do that. I would say that from an operational perspective as they're selling, they are not focused there and then it's sort of the same comment on the capital side because they're exiting, they're just not spending money. I mean, it's not a place that they are allocating capital there, to your point they are allocating capital to their 6 to 10 top markets. They're allocating capital to redevelopment projects where because they can't acquire accretively in these core markets, because prices have become so expensive and elevated, they are developing, trying to develop accretively. So that effectively just capital flows going into core product, into redevelopment and sort of out of the secondary market strategy.
There are no further questions at this time. I will now turn the call back over to the presenters.
Thanks, everyone, for joining the call. Have a great day.
This concludes today's conference call. You may now disconnect.