Slate Grocery REIT

Good morning, ladies and gentlemen, and welcome to Slate Grocery Read 4th Quarter 2024 Plain Angel Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a -and-answer session. If anyone has any difficulties hearing the conference, please press star zero for operator assistance at any time. I would now like to turn the conference over to Shibi Agarwal, Manager of Finance. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to the Q4 2024 Conference Call for Slate Grocery Read. I'm joined this morning by Blair Welch, Chief Executive Officer, Joe Plakaitis, Chief Financial Officer, Connor O'Brien, Managing Director, Alan 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 former looking statements as well as non-IFRS measures, both of which can be found in management discussion and analysis. You can visit Slate Grocery Read's website to access all of the REIT's financial disclosure, including our Q4 2024 Investor Update, which is now available. I will now hand over the call to Blair Welch for opening remarks.

Thank you, Shibi, and hello, everyone. We are pleased to report strong fourth quarter and year-end financial results for Slate Grocery Read. Strong leasing activity at high rental spreads over the last several quarters continue to drive net operating income growth for the REIT. Adjusting for completed redevelopments, same property, NOI, increased by $6.7 million, or 4.3 percent, on a trailing 12-month basis. The REIT completed close to 3 million square feet of total leasing throughout the year at double-digit rental spreads. New deals were completed at 28 percent above comparable average in-place rent, and non-option renewals at over 14 percent above expiring rents. Portfolio occupancy remained stable at 94.8 percent, and we expect our pipeline of new leasing opportunities to support a continued positive trend for occupancy in the coming quarters. In the challenging financing environment, our team financed over $630 million of debt throughout the year at an interest rate spread similar to the maturing debt, highlighting the confidence our lenders have in the REIT's business. Despite our strong operational performance, the REIT's units are trading at a discount to net asset value, which we believe presents a compelling investment opportunity. Our track record further validates this opportunity. The REIT has been a top-performing retail REIT stock in Canada and the US on a total return basis over the last several years. We continue to have strong conviction in the fundamentals of grocery-anchored real estate. High construction costs and tight lending conditions continue to limit new retail development. In the fourth quarter, retail construction completions totaled 4 million square feet, marking the lowest quarterly total in more than a decade. The constraints on new supply continue to limit the overall retail availability rate. The resulting competition for limited space and high demand for prime locations continue to give retail landlords pricing power. In our own portfolio, our average in-place rent of $12.65 per square foot remains well below the market average of $23.80, providing significant runway for continued rent increases. Our focus on fundamentals has always underpinned how we invest and manage our real estate, and we believe favorable fundamentals in the sector, coupled with our below-market rents, will enable the REIT to continue growing revenue and generating long-term rents. We are also working to increase our own-term value for our unit holders. On behalf of Slate Grocery 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.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchdown phone. We are acknowledging your request. Questions will be taken in the order received. Should you wish to cancel your request, please press the star followed by the two. If you are using a speakerphone, please lift your handset before pressing any keys. Once again, that is star one should you wish to ask a question. Your first question is from Sairam Srinivas from Cormark Securities. Your line is now open.

Thank you, Albreida. Good morning, guys. I will start with the leasing schedule ahead. Just looking at May 25, we have about 780,000 square feet of users expiring on the non-anchor segment. That forms the majority for the year. What is the outlook there on leasing spreads and how do you see that filling into the year?

I will pass it over to Alan to speak. But we expect given what I said in the opening remarks, there is not a lot of space. So there is significant pricing power for landlords. Alan, what are you seeing? We have had seven straight quarters

of double-digit renewal spreads. We expect that to continue throughout 2025 as well.

That is awesome. When you look at the leasing spreads coming, obviously we are starting to see that slowly coming into NOI as well. So the last couple of quarters, we have seen 5% SPNOI growth coming in. As we slowly roll towards Q2, Q3, and Q3 you will start comping towards a similar year from 2024. Is that something you expect to maintain as we run rate ahead or is that going to normalize over the period of time?

I think as we discussed with you and others, we report our leasing costs and capex on a real cash basis when we expend the dollars. That is unlike a lot of our peers that use estimates. We feel strongly that our NOI will continue to grow with the leasing spreads. There is just a lag to start. But as Alan said, we have had seven consecutive quarters of double-digit leasing spreads. You are seeing that in the NOI growth. We expect that sort of growth to continue.

How should we be thinking about the gap between the leasing happening and the NOI coming in in terms of timing?

You are going to love this answer, but it depends. I think there is a difference between leasing timing on a renewal. There is a difference in leasing timing for a larger tenant to a smaller tenant. But I would say it is anywhere from 30 days to 12 months. But I think it gets blended. I think the last quarter we did over 90 leases again. I think there is a lot of leasing that gets done. So it really just depends. How we performed in the last seven quarters, we expect to continue those sort of numbers.

That makes sense, Claire. Maybe just shifting gears towards transaction activity. I think this is probably the third or fourth year now for the North American Real Estate Fund investing in the REACH assets. However, thinking about growth from that perspective and how the fund thinking, considering the vacancy in the market and what you have said so far in terms of fundamentals, how is the transaction outlook in there?

Yeah, well, I will talk specifically about that and I will pass it off to Connor to really comment on what we are seeing in the market from a pipeline perspective. You know, I think the team showed that we can refinance $630 million of debt in the market. I would say a lot of our peers or other real estate asset classes have not been able to do that. I think even given our FRS cap rate to current market pricing, we have positive leverage and we are achieving kind of mid single digit NOI growth. So the fundamentals are strong and again, I will let Connor talk about the pipeline. As it relates to private investors, as you know, we are significant grocery owners in Europe as well. I would say private institutional investors are very interested in owning US assets that generate US dollars given the current situation. So we would anticipate more interest in the space, but you know, people are still trying to figure out what that looks like, but there is demand from investors for US dollar investments and slate grocery is one of those things.

In terms of the transaction pipeline, we have had a muted transaction environment over the last 24 months, but expect that to pick up in 2025. CBRE is forecasting about 10 billion of open air retail transactions this year, so if that comes to fruition, we will certainly see an uptick in 2025. From Slate's perspective, we are going to continue to remain disciplined and selective with the acquisitions we will target and we are going to look towards acquiring strong performing grocers at positive leverage day one with under market rents that we can grow and lie over time.

That makes sense, guys. Thank you for the call. I'll turn it back.

Thanks, Cy.

Thank you. Once again, that is star one. Should you wish to ask a question? And your next question is from Brad Sturges from Raymond James. Your line is now open.

Good morning, guys. Good morning, Brad. Just maybe to follow on the question around transaction and potential for capital deployment through acquisitions, based on where the balance sheet is today and kind of post all the refinancing activity, how do you think about your capacity to pursue acquisitions at the moment? Where would you be comfortable pushing leverage in the short term if you saw an interesting opportunity? What kind of guidance would you give around capacity at the moment?

Yeah, I think we will be selective and I think we really more focus on can we buy cheap in place rents, as Connor said, to grow in a while over the long term. And I think we showed that during COVID and right after on buying some larger deals at low occupancy and the teams done a great job of executing the strategy and this really created a lot of income growth through the entire read. So you know we are creative at Slate Asset Management. We recognize that we have a discount from where we trade. So we talk to the board all the time about capital allocation. We are currently underwriting literally billions of grocery deals and retail deals in the US, but we will be thoughtful and disciplined on how we do that. Do I think there is going to be some deals to do this year? Yes, but we are sensitive and making sure we do the right deals for the unit holders that create long term value. And you know that's we think about that all the time and be careful, but we want to buy good real estate and we think we can.

Okay, makes sense. Maybe just going back to leasing and you talked about the momentum you are seeing on the new leasing front that could translate into positive elements to occupancy. You are running kind of at 95% occupied now. Do you see more upside on occupancy here today or do you think you are running at stabilized levels?

Yeah, I mean I will pass it off to Alan and Connor, but do I think it could go up a bit? Yes, but do I think long term averages are like 94 to 96 or whatever that is? Yes, it is going to bounce around there, but it is a pretty tight market. I think we could have some uptick in occupancy, but really the growth is going to come from moving our in place market rents to closer to market. So that is how we look at the business. We think it is a very defensive play because of how cheap our rents are, but I think occupancy is in the range of market norms. Could we see more? Yeah, but then you are probably going to see it go to 94 as tenants role or whatever. So I would say it is in that zone, Brad, but we are going to see more growth from growing the rents.

In terms of your lease expiry schedule, is there anything notable that you are expecting to get back in terms of space, in terms of non-renewals or nothing material at this point?

No, Brad, I would not say anything material. Already in 2024, we addressed our gross renewals, which was eight, and we have four grocers renewing, and 2025, of which we have already started preliminary discussions with all of them.

Okay. Last question, just on the current tax expense, it came in a little bit higher than expected. Looking for maybe guidance for 2025 on that line,

Adam. Yeah, hey Brad, this is Joe. The current income tax, we had a bit of movement there, this is just due to our finalizing our state tax filings for the year. But I would say throughout the year for last year, you would use that as a proxy movement forward. Okay, sounds good.

I will turn it back. Thank you. Thanks, Brad.

Thank you. Your next question

is from Pammy Bear from RBC Capital Market. Your line is now open.

Thanks, good morning. Just coming back to the comments around acquisitions and being thoughtful in terms of how you allocate capital, what is the thinking around perhaps recycling out of some assets into higher quality assets, given the strength in the market?

Hey, morning, Pammy. All of our assets are high quality. Come on. No, I think the team has consistently shown that we have been, we've always been doing dispositions and we have cycled out of assets that are non-grocery that we would have bought in portfolios to get at grocery. We've cycled out of assets where we think we can't grow rents anymore and we've done our business plan. So we've continually done that and I think you'll see that happen again this year. So has that ranged, and you guys can correct me, has it ranged from like 30 to 100 million a year over the last couple years of what we kind of trade? And we do reinvest that capital and how we do that either through redevelopment of assets to add to net operating income, that will continue, Pammy. But we feel our portfolio is in really good shape and it is a high quality grocery anchored portfolio because we've been kind of doing that strategy for the last several years.

Okay, and is there anything currently listed for sale at the moment or not yet?

Nothing currently listed. We do have a couple assets that we've kind of earmarked as part of 2025 dispositions. These are kind of non-strategic, non-grocery anchored assets with a debt maturity towards year end. So we will look to kind of strategically sell those and maximize proceeds and currently are in the preliminary discussions with trying to start those processes.

Got it. Just one last one for me in terms of the interest costs. This quarter, was there anything -time-ish, whether it had to do with any of the refinancing that was done in October? Just curious as to whether there were some charges that would not sort of carry forward.

Yeah, hey, Bobby, this is Joe. That's exactly right. So on the refis, we had some existing financing charges on those mortgages get fully written off. So we did have some doubling of financing charges this quarter. So you'll see that come down slightly moving forward.

And sorry, Joe, what was, do you have a rough estimate of what that figure was, the charges that were, I guess, doubling up?

Yeah, so that was about $150,000 this quarter.

Okay,

thanks very

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

Thank you. Your next question is from Samaya Sayed from

CIBC. Your line is open.

Thanks. Good morning. Just the one from me, there was a note on the MD&A about bad debt being higher year on year on specific tenant bankruptcies. Just looking for any more color there if it was a specific category and what does your watch list look like at this point in time?

I'll pass it to the team. Good morning, Samaya. Good to hear from you. I think I would like the guys to talk about how opportunistic we've been on bankruptcies and how we see it as an opportunity. So it's a moment in time. So I think that's a really important story to that.

Yeah, I think because we focus on undermarket rents, these bankruptcy process really create opportunity on the upside, may have a short-term hit in cash flows, but the ability to mark these rents to market through new leasing certainly occurs. We saw that through the Big Lots bankruptcy process towards the end of last year. We opportunistically acquired one of those locations and have advanced discussions with multiple tenants for that particular space. More recently, you've seen Party City go through the bankruptcy auction process. That was extremely well received by the retail tenant community. Our two locations, one we opportunistically acquired and are in advanced discussions with a particular tenant on releasing that space in the short-term and the other Party City location was acquired by another tenant, which will lead to no downtime and that tenant kind of taking that space immediately. So a great outcome, but realistically these bankruptcy proceedings are really an opportunity in the medium to long-term.

So just to make it clear for everyone because it's a great question and Connor's answer is excellent. The market's so tight, retailers are buying the leases from bankrupt retailers. We actually have bought some ourselves to get our own space back to mark the rents to market, but we have had competition from other retailers to buy the leases so there's no downtime to us. That's kind of how tight the market is. So there is some bad debt expense and I'm happy to have Joe talk about it, but it's really a moment in time type thing.

Yeah and just to add, you know we assessed our allowance on a tenant by tenant basis quarterly, so many times this will also fluctuate based on conversations with tenants or announcements of bankruptcies in the news, but I would say this often adds in flows. You have some higher quarters and some softer quarters thereafter, but when you look at bad debt as a percentage of revenue, I think we're half a percent. So from a collection standpoint, we're still very strong.

Okay thanks for the colors. It sounds like not to expect a material notable impact on occupancy, but there remains upside from higher rents on the space you guys described.

Yeah that's correct.

Okay thank you. I'll turn it back.

Thank you. There are no further questions

at this time. I will now hand the call back to JP Overwall for the closing remarks.

Thank you everyone for joining the Q4 2024 conference call for Slate Grocery Read. Have a great day.

Thank you ladies and gentlemen. The conference has now ended. Thank you all for joining. You may all disconnect your lines.