Slate Grocery REIT

some leasing activity that you guys have done prior to close, and it sounded pretty positive. I'm wondering if you could provide an update on how it's been going since then, and if the occupancy rate of the portfolio that you acquired has crept up a bit since we last talked about it.

Hey, good morning, Jenny. Thanks for the question. Yeah, we've been pleased, as I stated last quarter, with the partnership that we entered into with our three JVs. Started back in March when we firmed up the deal, We've worked closely alongside our partners since then. It is true our underwriting, our original underwriting has been exceeded. We're about 75 basis points ahead on occupancy, which is producing about $500,000 or $600,000 of incremental NOI. However, there's still momentum going. The pipeline I referenced of 150,000 square feet of new leasing is It doesn't even include the 25 properties that we acquired. They have momentum in their own right, and we're tracking to be about 150 basis points better on an occupancy basis, which obviously flows through NOI through our hold period sort of by the middle of our first year of ownership. So when you look at the, you know, it was originally accretive to AFFO to about $0.04, and over the whole period we were going to add approximately $1.50 to NAV, we expect to outpace those numbers as we take hold of ownership and drive this forward.

Okay, great. Thank you. Could you give us an update on how the acquisition pipeline might look? What's the market looking like? Is there a lot of volume out there? How competitive is it? And if you can give us any sort of insight into what you might expect for 2022.

Certainly can. So, I mean, first of all, we're extremely excited to have closed $414 million worth of assets at $127 a square foot, quality properties in gateway markets. Our focus now is to continue that trend. Quick comment on outlook and sentiment for the market. I'd suggest to you the desirability of stabilized grocery real estate is at an all-time high. It's as strong as ever. The investment market continues to produce transactions that are supportive of increasing values. We're seeing bid lists for marketed deals that are deep and values are regularly surpassing broker guidance. A couple of examples of what we're seeing, I mean, these are larger transactions, but just last week there was an announcement of Blackstone and Kimco JVing a portfolio of six public anchored centers, 425 million, five in Miami and one in Atlanta, you know, modeled in at a sub-five cap. So that's an illustration of the desirability of the property. It also says to me that we need to be continue to be creative in finding these deals. That deal happened to be off market. So not all off market deals produce the immediate value creation that we've been successful in doing. And we're digging deep, we're using our relationships and our partners in the market. And we're focused on finding incremental quality growth opportunities in 2021, in 2022, pardon me.

Do you care to venture a quantum of what you might expect?

I'd suggest it will be tough to grow to the same extent as we did in 2020, though if we can find an opportunity to do so, we will. We have a board mandate to grow this business. Values are only increasing, so the sooner we can do this, the better. And we're going to some strategy planning with the board in the coming quarter. So I think we'll have our plan set on a target probably in the range of 200 million, but we'll be finalizing that in the coming weeks.

Okay, that's helpful. And then my final question relates to some other redevelopment properties. I mean, you've got a handful. They're fairly small in size, but the yields are quite attractive. Can you talk about whether or not you see more of those opportunities within the portfolio and if any of them would be coming out of the acquired portfolio as well? Is this kind of the volume you want to be working at or do you expect there to be a bit of a ramp up in the development activity?

You're certainly correct. We've had great success within the redevelopment pipeline. We had four assets come online within the last couple of quarters, totaling approximately $15 million of spend, and our yield was a 14. We're on the back half of this program. We have a little less than $20 million outstanding, and the yields are still going to reach double digits. So when I look at the nature of these redevelopments, they all have an anchor repositioning. We're doing deals with Kroger and Publix to do new 15- and 20-year leases with them. These are the types of redevs that we want to continue to find. And yes, we're looking to ramp up the pipeline within reason. We don't want to extend ourselves too much. We like the $25 million to $35 million pipeline, and we're looking to unearth new opportunities you know, as the rest of our sort of $15 or $20 million comes out of ReDev and back online.

Great. Thank you very much. I'll turn it back.

Again, if you would like to ask a question, that is star 1 on your telephone keypad. And you do have a question from the line of Hineshu Gupta with Scotiabank. Thank you and good morning.

Good morning.

So just on the retail environment, I mean, it looks like the leasing volumes have been good. So is it across a broad retail sector or is it just restricted to certain categories or certain regions?

Good morning, Manchu. I mean, we're, you know, 2020 was a record new leasing year for us. Q3 of 2021 was a record. We are doing quality deals. We're in 23 states. Yes, the southeast is producing a slightly higher percentage of these deals, but we're seeing interesting leasing opportunities across the board. This quarter, we did seven deals over 15,000 feet. It was a quarter of bigger leasing transactions, both anchors and junior anchors. The spreads are strong, 20% spreads on our best performance by volume ever. Q1 and Q2 produced 10% spreads, which is extremely healthy. And yes, like we're doing, if you notice, we took our percentage of revenue from essential tenants from 65% to 69% this quarter. So that's an indication of just the type of quality deals we're doing. NERs are strong. So it's a broad brush view in our mind. And as I stated to Jenny's question, our JV partners have similar pipelines. And the last point I'll make is we're spending less to get these deals done. So net effective rents are higher by 5% to 10% than what we've seen in the past.

Thank you. And by the way, that was my next question, that If I look at the new leases, like 200,000 square feet, 20% rental spread, what kind of incentives or tactics are you giving there?

Broadly speaking, we're spending less. We're spending very little, if anything, to retain a tenant, to renew them. And as it relates to to TIs and or landlords' work that you would need to spend as a partnership when you're dealing with an anchor, it's down on a relative basis. Shop tenants, payback periods, we like to see less than two years for new deals. Many of what we're doing have a one-year payback. And then, yes, larger anchors, we're looking at credit quality first or junior anchors, credit quality first and foremost, and then we're allocating strategic amount of capital that makes sense for us. But payback periods for our deals are down on a relative basis.

Got it. And then on the similar lines, I mean, if I look at the, you know, the recent anchor renewals, rental spread has been flat on renewal, I would say, for the last two or three quarters. However, new leases, you pick up quite a bit, you know, 20% or 10% plus. So why is that, you know, on the anchor renewal? Not much spread happening there.

I mean, I look at it a little differently. So we did a lot of volume in renewals this quarter below 10,000 square feet. That spread was 5.5%. And it's been more or less at the mid fives throughout our last four or five quarters. If you look at our stats, our volumes for renewals above 10,000 feet have been low. And frankly, one of them was a grocer where we where they just popped their options. So it just so happened with a smaller data set, we didn't secure a ton of lift on those deals, but that's an anomaly in my mind. The way we are looking at the future of renewals is to continue to see spreads between 5% and 7%. Our team's pushing rents. We took a view of partnership in 2020 with our tenants, We were proactive with doing some leasing to stabilize our, renewal leasing to stabilize our portfolio. And now we're taking a different tact. We're being strategic. The passage of time has created a better leasing environment. And I think we're going to continue to see spreads in the 5% to 7% range for renewals going forward.

Got it. I'm going to tell you, being the small shop tenant, The velocity has improved quite a bit. So that's up front there. And maybe the next question is on the anchor lease expires in 2022. Any thoughts there? Any discussion so far?

I mean, yes. Yes, we have a couple rolling. We're strategic about when we engage these tenants. We know their sales are meaningfully higher than they've been you know as we've discussed in the past the majority of our anchors report sales we see the trends we see the investments they're making within their their bricks and mortar real estate to to take advantage of increasing online sales many of them are are running trucks at the back of our of our shopping centers delivering to customers so we are We expect a successful outcome of the handful of grocery renewals that we have rolling in the next 12 months.

Okay, thank you. Thank you so much.

Your next question is from the line of Lee Chen with IA Capital Markets.

Hi, good morning. First of all, congrats on the strong quarter. Maybe just a follow-up on Jenny's question. In terms of your acquisition pipeline, you mentioned that you're going to focus on gateway markets. Is the focus going to remain mostly within the Sunbelt region and the East Coast? Have you explored further opportunities outside of your core markets out on the West Coast?

Thanks for the question, Lee. We are looking... in major markets and we want to partner with investment grade national grocers that could take us outside of where we have the highest concentration but but we also know that there is a lot of opportunity in the southeast the sunbelt and and the east coast so you know i wouldn't say we would never venture outside of of our sort of our comfort zone or where our portfolio currently is located if there's value Our job is to continue to create value, find accretive acquisitions, and continue to add scale with those top five grocers I mentioned in my opening remarks.

Right. And thanks. And lastly, so recently Amazon, they announced that they're opening larger box stores across the U.S. beyond their pop-up shops. Could that be an opportunity for the REIT to develop new potential partnerships?

Do you mean their grocery banner or do you mean sort of their foray into kind of department stores?

Yeah, department stores, but not sure if it's going to be like those super big ones. So I was just wondering if that could be an opportunity for the REITs and not sure and unclear if they're kind of going to open also those Amazon Go stores and Whole Foods, you know, besides them or within those shops.

Yeah. So I don't see us really ever making a play into sort of enclosed malls and or power centers where these department stores are rumored to be sort of replacing the JCPenney's and the Sears of the world. I believe we will stick to what we're good at and stay focused on strip centers with grocery stores as an anchor, you know, centers that are 100 to 125,000 feet I would love to find a deal with Amazon Fresh. Their concept is 40-ish thousand square feet. It fits nicely within our merchandising and composition of our stores. A little less likely that we do an Amazon Go, just there are a couple of thousand feet. They're usually in dense urban markets, and that isn't really where we see the real value in America. We like to be In major centers just outside of the downtown core, call it 5 to 10 miles in the suburbs, but markets that have more than a million people and where economies are growing and people are moving to.

Great. Thanks for the commentary. Congrats on a strong core. I'll turn it back.

At this time, there are no further questions. I would now like to hand the call back over to Ms. Jennifer Piper.

Thank you, everyone, for joining the Q3 2021 conference call for Slate Grocery Reads. Have a great day.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect at this time.