Slate Grocery REIT

TSX:SGR.UN

Q2-2025 Earnings Call

[Operator]

Good morning, ladies and gentlemen, and welcome to the Slate Grocery REIT Second Quarter 2025 Financial Results Call. [Operator Instructions] This call is being recorded on Thursday, August 7, 2025. I would now like to turn the conference over to Shivi Agarwal. Please go ahead.

[Shivi Agarwal, executive]

Thank you, operator, and good morning, everyone. Welcome to the Q2 2025 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 Q2 2025 investor update, which is available now.

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

[Blair Welch, executive]

Thanks, Shivi, and hello, everyone. We are pleased to report strong second quarter financial results for Slate Grocery REIT. Our team continues to achieve strong leasing volumes at double-digit rental spreads, which drove another quarter of healthy net operating income growth for the REIT. The REIT completed over 423,000 square feet of total leasing throughout this quarter. Renewal spreads were completed at 13.8% above expiring rents, and new deals were completed at 28.8% above comparable average in-place rent. Adjusting for completed redevelopments, same-property net operating income increased by $5.7 million or 3.6% on a trailing 12-month basis.

Portfolio occupancy remained stable at 94%. And our portfolio average in-place rent of $12.77 per square foot remains well below the market average of $24, providing significant runway for continued rent increases. The REIT has only $172 million of debt maturing through the end of 2026, at the REIT's proportionate interest, representing 12% of the REIT's total debt outstanding. We continue to see appetite for high-quality grocery-anchored real estate assets in the lending space.

In the second quarter, the REIT refinanced a 4-property portfolio for $39 million and entered into a credit facility totaling $17 million at attractive spreads. And after quarter end, the REIT amended 2 of its existing interest rate swaps, extending the maturity and achieving a blended weighted average interest rate of 5%. Importantly, the REIT's current portfolio valuation continues to provide significant positive leverage and embedded net operating income growth. We continue to believe in the fundamentals of grocery-anchored real estate and have great conviction in the ability of this asset class to perform in today's economic environment.

Elevated construction costs and tight lending conditions continue to limit the pace of new retail development and overall retail availability. And with limited supply and historically low vacancy rates across the sector, grocery-anchored real estate remains highly occupied. This dynamic, coupled with virtually no new supply, creates a favorable environment for landlords to retain existing tenants and achieve increases in rents as leases expire. We believe the positive underlying trends in the grocery-anchored sector, coupled with below market rents across our portfolio will enable the REIT to continue growing revenue and generating long-term value for our unitholders.

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.

[Operator]

[Operator Instructions] And your first question comes from the line of Sairam Srinivas from Cormark Securities.

[Sairam Srinivas, analyst]

Just looking at the leasing spreads over the last couple of quarters, they look really strong. So congratulations on that. How should we be thinking about reflection of that on organic growth over the next 12 months?

[Blair Welch, executive]

Yes. I mean, good question, Sai. I think we feel that those spreads will continue. And I think it's really how the team has strategically purchased assets with low in-place rents. So given that there's no new supply, we are forecasting similar sort of rental spreads. I believe this is our ninth quarter in a row of these kind of numbers, and we see that continuing in the future. And then that goes down into our net operating income. But I can pass it off to Allen and Connor maybe for more details on what you guys think.

[Unknown Executive]

No, I think, I mean, one of the things that is driving that is the limited supply space in the market, as Blair mentioned. And we continue -- like Blair said, continue to forecast those spreads moving forward.

[Sairam Srinivas, analyst]

So when you look at SPNOI specifically, a couple of quarters ago, the numbers are pretty healthy, and I said earlier like 3% to 4%. But I think in the last couple of quarters, they have been trailing down a bit. Is that more of a function of pumping on more stronger quarters? Or is that something to do with the timing of leases coming up?

[Blair Welch, executive]

Yes. It's more just the timing of when leases come on and how much space we renewed or the new leasing and when it comes on. So I mean, we will forecast a similar sort of NOI growth, but it's really just timing of leases coming on. And maybe we have a pretty good pipeline of leasing on the go right now.

[Unknown Executive]

Yes. Right now, we have over 200,000 square foot of leases in the pipeline that are at a letter of intent or lease negotiation stage.

[Unknown Executive]

A lot of times, that NOI growth, too, is tied to the amount of lease roll that's occurring within a particular quarter or a year. We do have a little bit less rollover over the next few quarters, but we expect that to pick up through new leasing and then into larger renewals kind of Q2 and onwards for next year.

[Sairam Srinivas, analyst]

But then how should we be thinking about organic growth for 2025 as such? Would it be in the historic range of 1%, 2% or slightly above that considering the strong leasing?

[Blair Welch, executive]

Well, I would just continue like just do what we've done for the last 9 quarters. It's going to be -- I would -- you kind of have to blend it on an annual basis. I think it's hard to do on a quarterly basis. But I think we will continue with our same leasing spreads. And I think our NOI growth will still be on an annual basis, about that 3% to 4%.

[Operator]

[Operator Instructions] and your next question comes from the line of Tal Woolley from CIBC Capital Management -- Capital Markets, apologies.

[Tal Woolley, analyst]

When you're sort of reading through your numbers, it looks like basically you're seeing decent same-property NOI growth, but that's sort of getting swallowed up by higher financing costs going forward. When you guys look at your numbers internally, when do you sort of see that tide shifting when the incremental growth you're delivering on the NOI side is higher than the pickup in interest costs?

[Blair Welch, executive]

Yes. I mean I'll let Joe answer in more detail. But I think we're kind of at that place now that we just hit our swaps and kind of locked in our interest rate for some time around 5%. We feel pretty comfortable where our interest rate cost is, and we have significant positive leverage from our IFRS cap rate. So I think we're kind of there now. But I wish if I knew where interest rates were going 2 years from now, I wouldn't be on this call. I'd be on the beach somewhere. But I mean, I think we feel pretty good with where we are and going forward. I don't know, Joe, if you have anything...

[Joseph Pleckaitis, executive]

Yes. No, that's exactly right. And I think one of the big things we wanted to address is our 2025 swap maturities. We restructured those post quarter end, which, again, like Blair mentioned, brings our weighted average interest rate to about 5%, trending towards 5.1% by year-end. And what that really does is it locks us in until mid-2027, given we have a pretty small amount of debt rolling next year. So we have a lot of visibility in what our cost of debt is. We're going to continue to focus on our SPNOI growth, and I think you're going to see that starting to trend back up.

[Tal Woolley, analyst]

And like a secured mortgage right now, 5-year term would cost you guys around what?

[Blair Welch, executive]

Go ahead, Joe.

[Joseph Pleckaitis, executive]

I would say it depends again on credit of the tenant location as well. But I would say, as we're going to market, I think things are becoming a lot more competitive with the amount of bids we're receiving. But I would say you're probably in that 160, 175, 180 range. And again, like looking back to how these mortgages are maturing and what we were in place 10 years ago, I think the spreads really haven't -- have remained unchanged. It's really your risk-free rate that's moved on you.

So I would say the landscape is still very competitive from a lender standpoint. They're really looking at this type of product, and they're hungry for it and also very supportive of SGR's portfolio and our business plan.

[Tal Woolley, analyst]

And I guess I don't want to make too many analogies to what we're seeing out of some of the Canadian REITs here versus what's the story in the U.S., but we have seen some of the larger REITs. Historically, when they're negotiating with the grocery anchors, that is some kind of fixed renewal formula or they're not really pressing for the last dollar per square foot on the rent because they want to have a happy anchor and have really started to push the CRU tenants a lot more. When you look at your portfolio, do you think you're sort of getting the most you can out of the anchors or have gotten the most you can out of the anchors? And I guess same thing for the CRU tenants as well.

[Blair Welch, executive]

Yes. I think comparing it to some of the Canadian grocery-anchored REITs, it's different because they're negotiating with themselves on the other side, which makes it challenging, I would think. But I think the U.S. market has 40,000 grocery stores and the largest owner would have less than 400. So it's highly fractured. I think we do -- given the size of our portfolio and our experience in the space, I think we do get the right rent from the grocers on increase, but where we really see increased kind of leasing momentum is on the shop space.

So I think we do get the right rent and growth from the anchors. The anchors really don't have many places to go. It's very expensive for them to go to a new site. So I think we are pushing that rent as much as we can. It's similar to Canada, but I think it's a little bit different than what happens up here. Also, I think why we love the U.S. grocery space so much, our in-place rents compared to Canadian in-place rents are much lower. And we also are strong believers in the U.S. economy long term. So we feel there's huge growth there.

[Operator]

[Operator Instructions] And your next question comes from the line of Brad Sturges from Raymond James.

[Bradley Sturges, analyst]

Just on -- I guess going on the strength of the market and sort of following on Tal's lines of questioning, just given the wide gap between in-place rents and market and the lack of supply, is there potentially some room to push on the contractual rent increases that you would see annually within the portfolio? And how should we think about where that lies today on average?

[Blair Welch, executive]

Yes. I mean I think if you look at our last 9 quarters of rental spreads, I think we're doing a pretty good job of pushing. And I would say that what we do right now, given the market backdrop is we are asking for rent escalations wherever we can. That's -- we are pushing as much as we can. We're trying to get those lifts. I mean that's exactly what we're doing. And I think it's shown like over the last 9 quarters, what we're getting. I mean I don't think we're saying all of our rents are going to go to $24 if that's market. But we are saying that at $12.70, there's significant room for growth, and it's a very defensive portfolio, and we can show that cash flow growth. So we're confident. We talked to, I think, Sai's question earlier, we see this kind of same sort of rental spreads and growth happening for the next several quarters, if not more, just because of that.

[Unknown Executive]

And what provides that kind of immediate mark-to-market opportunity is sometimes the option structures of these grocer leases. The grocers are very sophisticated. And when these properties are originally developed, they often have option periods for 30-plus years. So as those option terms roll off, our ability to capture much larger rental spreads on the grocers do exist.

[Bradley Sturges, analyst]

And would there typically be a contractual rent increase or escalator within the CRU shop leases? Or is that more a function just on the anchor space at this point?

[Unknown Executive]

On all of the CRU spaces, we target annual rent escalations as well as if there are any options, target as large of option lifts as possible.

[Bradley Sturges, analyst]

Okay. And the occupancy might bounce around a bit just timing on leases, but where do you think you trend on an occupancy perspective over the next couple of quarters?

[Blair Welch, executive]

I think it's going to be like 94% to 95% bumping around. I mean if we were full, we're not going to get the same sort of rental churn. So we kind of -- we're going to be around this 94% to 95%. But I wouldn't say that as a risk, we think it's more of the opportunity. We want as much space back as we possibly can because we can push rents.

[Bradley Sturges, analyst]

Last question, just looking at the private market in terms of transaction activity and recent valuations, just any comments of what you're seeing in the market today and what that means for valuation for Slate Grocery?

[Blair Welch, executive]

Yes. I would say that -- I mean, it's the United States, so there's always deals that happen. But I would say, in general, in real estate, transaction volume has been muted for all the reasons you know. But I would say that there's keen interest in buying stable U.S. dollar cash flow, and I think grocery-anchored real estate provides that. So there's a lot of investor interest in it. But it's hard to get scale.

And I think our team has done a really good job of buying onesie, twosie, and we're also look at portfolios. And I think it's really the relationship with the grocers that's critical from an operation perspective, and our team has done a good job there as well. So like we're out there. It's been muted, but there are deals to do, and we're always looking to grow.

[Operator]

[Operator Instructions] And as there are no further questions, I will return the call to Shivi Agarwal. You may proceed.

[Shivi Agarwal, executive]

Thank you, everyone, for joining the Q2 2025 conference call for Slate Grocery REIT. Have a great day.

[Operator]

This now concludes today's conference call. Thank you all for attending. You may now disconnect.