Slate Grocery REIT

TSX:SGR.UN

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Slate Retail REIT Fourth Quarter 2019 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Braden Lyons, Investor Relations. Thank you. Please go ahead.

[Braden Lyons, Analyst]

Thank you, operator, and good morning, everyone. Welcome to the Fourth Quarter 2019 Conference Call for Slate Retail REIT. I'm joined today by Greg Stevenson, Chief Executive Officer; David Dunn, Chief Operating Officer; and Andrew Agatep, Chief Financial Officer. Before getting started, I would like to remind participants that our discussion today may contain forward-looking statements, and therefore, we 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 Retail REIT's website to access all of the REIT's financial disclosure, including our Q4 2019 Investor Update, which is available now. I will now hand over the call to David Dunn for opening remarks.

[David Dunn, Chief Operating Officer]

Thank you, Braden, and thank you to all the participants for joining the call this morning. Before we get into Q4 results, I would like to sincerely thank Greg Stevenson for his exceptional leadership and guidance over the last 5 years. Not only did he make a sizable contribution to our portfolio, he also made a significant impact on our team. And for that, we are all very grateful. Greg is retiring from the REIT and leaving us in the best position we've been in since inception. He's laid a solid foundation for the business to excel as we enter this exciting new chapter. Today, we are pleased to introduce Slate Retail REIT 2.0. Our team, our balance sheet and our pipeline are in the best position they have ever been as the REIT enters this next chapter focused on growth. Although we have sacrificed growth over the last 2 years, our disciplined strategy has allowed us to derisk the balance sheet and recycle capital to upgrade the property portfolio. These trade-offs will benefit the business for the next several years. Looking back, the REIT has not raised equity in 3 years as we are focused on operations. Over the same time period, we have achieved average leasing spreads of 11% while maintaining portfolio occupancy of at least 92%. We've repurchased units amounting to over 10% of our market cap, and our Q4 2019 repurchases alone have resulted in annual savings on distributions of $1.6 million. This offsets the distribution increase by a factor of 4. We sold more than $110 million of noncore or stabilized assets at a cap rate of approximately 7%. The REIT has expanded its redevelopment pipeline. We will be investing $23 million of capital with an estimated yield on cost of 12%. Despite selling assets and investing in value-add capital, we've demonstrated increased FFO per unit growth over this time period. We are very excited as we enter 2020. Our strategy has created an increasingly durable portfolio, which allows us to enter the new decade from a position of strength. Now looking forward, we've just refinanced our balance sheet, which has added significantly more term and has created $1.7 million of annual interest savings. We estimate this will equate to approximately $0.04 per unit of FFO growth. We have $210 million of liquidity that can be spent without raising equity. We've been active in our underwriting and have a robust pipeline of acquisition opportunities. We expect to begin deploying capital this year into acquisitions that will be accretive to FFO per unit. In conclusion, with a stronger balance sheet, a higher-quality portfolio and a robust pipeline of growth opportunities, we are poised to execute on our growth strategy and drive significant value for our unitholders going forward. We thank you for your continued support. And I'll now hand it over for Q&A.

[Operator]

[Operator Instructions] Your first question comes from Sumayya Syed with CIBC.

[Sumayya Syed Hussain, Associate]

Firstly, David, congrats on the new role. And just, I guess, sticking to that, what do you see now as the biggest opportunities for Slate? And can you kind of speak to your immediate and longer-term priorities?

[David Dunn, Chief Operating Officer]

Thank you, Sumayya. Appreciate the kind words. Before I get into your question, I would -- I'd just like to say I'm very appreciative and excited about the opportunity to lead this business. I've worked on it for 4 years now, executing our strategy. I believe in it, I believe in the team. And I also look forward to getting know -- getting to know the investment community as we move forward, especially with our new focus on growth. I think I'll just take a minute to express what this leadership change means for 2 reasons. From an operational standpoint, essentially very little changes. The recent management shuffle provides opportunities for our team to grow. We have a really strong team, very capable. Many of them have worked on the business for many years, some since inception. Growing our people internally is the hallmark of the REIT and of SLAM, Slate Asset Management, as a whole. From a strategy standpoint, this is certainly a pivot point for us. We've been executing on our prior strategy, which was to retrench the business and sell noncore and some properties that we've -- that we'd execute on our business plan, and now we're focused on growth and deploying capital accretively and essentially to grow unitholder value in any way that we can going forward.

[Sumayya Syed Hussain, Associate]

Okay. And then in your letter, you also referenced upgrading the portfolio quality. Should we think about that in terms of cap rates or tenant mix or NOI growth? Or what does quality mean to you here in this context?

[David Dunn, Chief Operating Officer]

I mean, essentially, all of the above. We have sold off some of our older stock, some of the GAR properties that no longer fit our strategy. Going forward, we want to do more business with the traditional grocers, the ones that were already highly weighted in. 25% of our portfolio is comprised of the 4 major grocers in the market being Kroger, Walmart, Publix and Ahold Delhaize. We want to look to increasingly stronger markets that we see growth. And we think the market is at a good place to execute our growth strategy.

[Sumayya Syed Hussain, Associate]

Okay. Just noting the retention rate, a bit of a dip in 2019. Where do you expect that number to end up in 2020?

[David Dunn, Chief Operating Officer]

Yes. Essentially, I'd suggest otherwise. Our portfolio occupancy has been stable, and it always has been. It's ranged from 92% to 96% since inception. At 93%, we're right where we want to be, and I think there's opportunities to grow. Going forward, we don't see this deviating very much, if at all.

[Operator]

Your next question comes from Johann Rodrigues with Raymond James.

[Johann Rodrigues, Equity Research Analyst]

David, how do you see same -- inorganic growth or same-property NOI growth kind of trending both in 2020, but longer term kind of on a stabilized basis?

[David Dunn, Chief Operating Officer]

We look at organic growth from a total portfolio perspective. Guidance in the past has been 2.5% to 3%, and we don't really see that changing going forward. I'll break it out for you on an SPNOI basis, our expectations, our target would be 0.5% to 1%. And I still consider redevelopments within our existing portfolio as organic growth, and we're looking to generate 1% to 2% on that basis going forward, which should roll up to the 2.5% to 3% that we've stated in the past and still see going forward.

[Andrew Agatep, Chief Financial Officer]

I think it's -- Andrew here. I think it's also important to note that out of the 8 of the past 12 quarters, we've reported positive same-property NOI, something which we're really pleased with. If you look at it from a trailing 12-month basis, too, our organic growth historically has been about 0.7%. And when you tack on the redevelopment that we have, that adds another 1%. So well within range of what we've said historically and what we'd expect to be in the future.

[Johann Rodrigues, Equity Research Analyst]

Okay. And then looking at your different buckets for capital allocation, if you had $100 for 2020, how do you see that being allocated between acquisitions, deleveraging, unit buybacks and capital upgrade?

[David Dunn, Chief Operating Officer]

Johann, thanks for the question. I'll answer that one. I mean we're constantly assessing the best way to allocate our capital to achieve the best returns for our investors. We are looking forward to grow. I wouldn't put a percentage or a number on whether we're going to deploy capital more to invest in accretive investment opportunities or within our existing portfolio. We assess those opportunities as they come, and we'll continue to do so. And we think the horizon is broad, and we're excited to spend some cash in the next little while.

[Johann Rodrigues, Equity Research Analyst]

Okay. And what's the -- roughly, what's the volume of assets that you still plan to sell in the near term?

[David Dunn, Chief Operating Officer]

So our disposition program has been underway for about 12 months. To end 2019, we closed $111 million of dispos at a 7% cap. Our prior stated target was $200 million. We think this program might extend into midyear, but we're still tracking along our prior stated guidance.

[Operator]

Your next question comes from Jenny Ma with BMO Capital Markets.

[Jenny Ma, Analyst]

Congrats to David and Andrew on your new roles. So I guess, this is kind of like the question that Johann was asking. Your -- you've got the refi in place and you're talking about a lot of acquisition opportunities and development within the portfolio. I'm just wondering how you think about your leverage target, with it sitting at 60%, to the extent that you have more acquisitions coming your way. Are you willing to push that line a little just to get it done?

[David Dunn, Chief Operating Officer]

Thanks for the question, Jenny. I mean, we continue to use leverage prudently as, we always. We're very pleased with the demand and the support from our lending partners. We're excited about closing this latest round. We were oversubscribed on our debt, which is a nice vote of confidence. We've trended down in leverage over a period of time, and our goal in the near to midterm is to bring it down into the mid-50s. Obviously, that's going to ebb and flow a little bit as we deploy capital and sell assets, but we are tracking to that range. And we expect to get there within the relatively near future. But it's all dependent on the dispo pipeline and our acquisitions as well.

[Jenny Ma, Analyst]

Right. So maybe to that end, if you could talk about the -- what kind of acquisitions you're seeing in the pipeline? Maybe any sort of guidance on potential volume over the next 12 to 24 months?

[David Dunn, Chief Operating Officer]

Certainly. We're excited to see what we see in the pipeline. We have been active in underwriting, even though we've been in a dispo trend of late. We're going to strategically deploy up to $200 million, which is our capacity over the next period of time. I mean our strategy is to continue to look at accretive -- attractive markets, buy accretive deals. Demographics, population and economic growth, strong employment, all of that is a high priority for our strategy. We always want to buy the top 1 to 2 grocers in each MSA. I'd suggest we're going to focus east of the Mississippi going forward. But if opportunities present themselves, we'll take a look at them and assess as they come.

[Jenny Ma, Analyst]

And what kind of cap rates are you seeing for these kinds of deals?

[David Dunn, Chief Operating Officer]

The market is strong. We think it's liquid and there's opportunities out there. Not a lot changes in the sense that we're still looking at 7% to 7.5% cap, but on a deal-by-deal basis. And we'll essentially take them as they come.

[Jenny Ma, Analyst]

Okay. That's helpful. With regards to the new lease at Westminster Plaza. Can you give us a sense of the timing of when that will be cash flowing again?

[David Dunn, Chief Operating Officer]

Yes. I certainly can. I worked on that deal in my old life, so I know it quite well. We are expecting -- I mean, it's subject to permitting and all of that stuff, but we're expecting cash to flow by the end of 2020.

[Jenny Ma, Analyst]

2020. Okay. Great. And then my last question is, is there any update on potential opportunities coming from SLAM's relationship with Goldman Sachs. I know it's still somewhat early days, but I guess it's been about 6 months since it's been announced. So is there anything that you're seeing trickling down to the Slate Retail REIT level?

[David Dunn, Chief Operating Officer]

I mean their impact has been significant on our overall business. We're proud to have partnered with them. We think they are going to help our business holistically move forward on a lot of levels. And honestly, we're just entering this relationship, so yes, I expect there'll be positive influences going forward on all levels. And we'll have more to talk about that in the future. But as of right now, we're digesting it and ramping up and strategizing with them.

[Jenny Ma, Analyst]

Okay. Great. That's all for me. And Greg, if you're on the line, congrats and enjoy your retirement.

[Operator]

There are no further questions at this time. I will now turn the call back over to Braden Lyons for closing remarks.

[Braden Lyons, Analyst]

Thank you, everyone, for joining the fourth quarter 2019 conference call for Slate Retail REIT. Have a great day.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.