Investing in Slate Grocery REIT
Slate Grocery (SGR.UN:CAD and USD ADR SRRTF) is a real estate investment trust specializing in retail space anchored by grocery stores. Holding 117 properties across 24 states, the company maintains an average rent of $12.37/sqft across 15.3 million sqft of space.
Grocery-anchored retail, given its fortuitous positioning, is primed to navigate economic hardships. The ongoing need for grocery shopping ensures steady consumer traffic, consistently benefiting surrounding retail outlets. Slate’s stable property portfolio, geographical diversity, and an impressive 9.7% distribution make it an attractive prospect for defensive income investors.
Assessment of Fair Value
Equating the Estimated Fair Value (EFV) for SGR.UN in Canadian Dollars corresponds to EFY24 Funds From Operations (FFO) multiplied by P/FFO (Price/FFO). This computation yields EFV = E25 FFO X P/FFO = $1.54 X 10.5 = $16.20.
Current Market Conditions
Grocery-anchored retail exhibits resiliency in comparison to the broader sector during economic hardships. Notably, groceries are an essential commodity, with 94% of the demand being fulfilled through physical storefronts, despite the rapid rise of delivery and alternative distribution channels. Furthermore, retail located near grocery anchors experiences a substantial 49% surge in foot traffic.
Amidst the challenging real estate landscape, retail has faced similar headwinds to residential real estate, resulting in heightened demand and elevated prices due to limited new construction. Slate has capitalized on this trend, boasting high occupancy rates, lease renewals, and stability in Adjusted Funds From Operations (AFFO) across varying economic conditions and geographies.
The portfolio is exclusively focused on grocery-anchored retail, with 47% of the leasable area designated for groceries. Of the total leasable space, 69% is essential tenancy – providing goods and services that are inelastic in terms of consumer demand, irrespective of economic conditions. Currently, Slate boasts 94.1% total occupancy and 99.3% grocery occupancy.
Occupancy rates have surged by 90 basis points year over year, reaching heights not seen since before the pandemic.
Strategic Expansion and Lease Dynamics
The company’s portfolio expansion is strategically concentrated in the fast-growing sunbelt, comprising 45% of the total portfolio. Since 2021, Slate has acquired about $900 million in property, aligning with the existing portfolio in terms of financial profile and grocery space. Approximately 43.2% of leases across the entire portfolio expire in 2028 or later, adding significant stability to operations while enabling short-term rent increases.
Moreover, 25% of leasable space is due for renewal in the next three years. This has resulted in a rise in rental spreads, with existing rents averaging $12.37/sqft, new leases at $18.76/sqft, and renewals at $12.95/sqft.
Notably, Slate boasts a favorable risk profile with no single tenant accounting for over 7% of total rent; the top 15 tenants collectively account for 45.5% of leasable space and 35.2% of base rent. All of the top 15 tenants are anchor grocers, mitigating the risk of significant vacancies due to tenant exits.
While the Kroger-Albertsons merger might lead to some former Kroger locations becoming vacant, Slate does not foresee this materially impacting operations, assuming that these locations are sold to other grocery retailers.
Furthermore, the company maintains a total debt of 96.1% fixed-rate debt at a 4.2% interest rate, with a debt coverage ratio (interest to EBITDA) standing at 2.9x. While this ratio is relatively low, Slate anticipates significant net income increases as higher renewal rents boost revenues.