On today’s TSX Breakouts report, there are 33 stocks on the positive breakouts list (stocks with positive price momentum), and 14 securities are on the negative breakouts list (stocks with negative price momentum). Of the 33 securities on the positive breakouts list, roughly 20 per cent are real estate investment trusts.
Discussed today is a REIT that jumped nearly 2 per cent on Monday on high volume, but it didn’t quite make it on the positive breakouts list – Slate Grocery REIT SGR-UN-T
Last year, Slate Grocery REIT was the second-best performing security in the S&P/TSX SmallCap real estate sector with a price return (not including the yield) of 4.7 per cent. Year-to-date, the unit price is up nearly 5 per cent. However, analysts have mixed recommendations on the REIT, half with buy-equivalent ratings and half with neutral calls.
A brief outline on Slate Grocery REIT is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The REIT
Toronto-based Slate Grocery REIT owns a portfolio of 121 grocery-anchored properties located in 24 U.S. states, as of Sept. 31, 2022. Its top five tenants based on annual base rent are Kroger, Walmart, Ahold Delhaize, Publix, and Albertsons.
The REIT trades on the Toronto Stock Exchange in both Canadian and U.S. denominated units under the tickers SGR.UN and SGR.U, respectively.
The REIT has undergone a number of changes in recent years. Investors may remember this REIT under its old name, Slate Retail REIT. In 2020, management changed the REIT’s name to better reflect its core operations and focus on grocery-anchored real estate. In addition, Slate Grocery REIT has experienced management changes. In 2020, Greg Stevenson retired from his position as CEO and David Dunn, the chief operating officer at the time, was named as his successor. In 2022, David Dunn stepped down from his role as CEO and was replaced by Blair Welch.
Slate Grocery REIT
Investment thesis
- Defensive REIT.
- Cash flow reliability. Leases for grocery-anchor tenants are typically between five and 10 years in length, while non-anchor tenants have shorter leases, generally between three and five years.
- Fragmented market provides acquisition opportunities. To put this in perspective, on the earnings call, the CEO noted that the top 20 grocers represent 40 per cent of U.S. grocery sales, which is a much different environment from Canada where a few grocers dominate the market.
- Attractive yield of over 7 per cent and a consistent distribution.
Quarterly earnings and outlook
After the market closed on Nov. 2, the REIT reported its third-quarter financial results.
Funds from operations (FFO) per unit came in at 29 US cents, 2 US cents ahead of the consensus estimate and up from 28 US cents reported during the same period last year. Adjusted FFO per unit was 24 US cents, in-line with expectations and up from 23 US cents reported last year.
Same-property net operating income (NOI) increased 0.6 per cent year-over-year. The occupancy rate was stable, 93.1 per cent at quarter-end. The debt-to-gross book value ratio stood at 50.6 per cent as of Sept. 30. The weighted average maturity term for grocery-anchor tenants was 5.2 years and for non-grocery anchor tenants was 4.2 years as of Sept. 30. The unit price steadily increased after reporting these results, rising 7 per cent over the following three trading days.
On the earnings call, chief executive officer Blair Welch provided a positive outlook, “Grocery-anchored real estate has proven its ability to perform through various economic cycles, and we believe the current environment is only providing additional tailwinds for this sector. Surging construction costs and supply chain disruptions are limiting new supply in this market. This limited supply, coupled with strong demand for grocery-anchored space is accelerating rental growth in this sector. Importantly, within our portfolio, average in-place rent is $12.17 per square foot, significantly below our U.S. pure set weighted average. This means we have significant rental rate growth embedded in our portfolio. And we believe through modest increases to our below-market rents, we can unlock this embedded growth and significantly increase our revenue.”
He added, “After quarter end, the REIT completed two strategic dispositions at a total sale price of $19-million, representing a 6.6 per cent cap rate. We expect to recycle the proceeds from those transactions into new opportunities that create value for our unitholders. We have strong conviction in the healthiness of the grocery asset class in our grocery-anchored properties, in large part due to the embedded rent growth potential of our portfolio. And with an attractive source of private funding now available for the REIT, in addition to its public equity sources, we are well-positioned to take advantage of opportunities in a dislocated market.”
Fourth-quarter financial results will be released before the market opens on Wed. Feb. 15 and management will be hosting an earnings call that day at 9 a.m. ET.
The Street is anticipating Slate Grocery REIT to report FFO per unit of 29 US cents and AFFO per unit of 25 US cents.
Returning capital to its unitholders
The company pays its unitholders a monthlydividend of 7.2 US cents per unit or 86.4 US cents per unit yearly, equating to a current annualized yield of over 7 per cent.
Management is committed to maintaining its distribution. The distribution has been maintained at its current level for the past three years. In the third-quarter MD&A (Management’s Discussion and Analysis), it stated, “The REIT strives to maintain an AFFO payout ratio that provides steady and reliable distributions to unitholders. As a result, the REIT is focused on maintaining a policy that provides a high level of certainty that the distribution will be maintained over time.” For the first nine months of 2022, the AFFO payout ratio stood at 95.2 per cent.
Analysts’ recommendations
There are six analysts providing research coverage on the REIT, of which three analysts have buy recommendations and three analysts have neutral recommendations.
The firms providing research coverage on the REIT are: Cormark Securities, iA Capital Markets, Laurentian Bank, Raymond James, RBC Dominion Securities and Scotiabank.
Revised and new recommendations
In January, Cormark’s Sairam Srinivas initiated coverage on the REIT with “buy” recommendation and target price of US$12.50, while Raymond James’ Brad Sturges initiated coverage with a “market perform” recommendation and US$13 target.
In December, Laurentian Bank’s Frederic Blondeau increased his target price by $1 (Canadian) to $17.50.
Financial forecasts
The consensus FFO per unit estimates are US$1.11 for 2022, increasing to US$1.15 in 2023, according to Bloomberg data. The consensus AFFO per unit estimates are 91 US cents in 2022 and 95 US cents the following year.
Earnings estimates have been stable. Four months ago, the consensus FFO per unit estimates were US$1.09 in 2022 and US$1.14 in 2023. The consensus AFFO per unit estimates were 90 US cents in 2022 and 94 US cents in 2023.
Valuation
The REIT is currently trading at a price-to-AFFO multiple of 12.5 times the 2023 consensus estimate, according to Bloomberg.
According to Refinitiv, the average one-year target price is US$12.08, implying the unit price is nearly fully valued.
Insider transaction activity
Over the past year, there has not been any trading activity in the public market reported by insiders.
Chart watch
In 2022, Slate Grocery REIT was the second best performing security in the S&P/TSX SmallCap real estate sector with a price return (not including the yield) of 4.7 per cent. Out of 22 securities in this sector, only two securities delivered positive returns last year – Primaris REIT PMZ-UN-T
This positive price momentum has carried into this year.
On Monday, the unit price rallied nearly 2 per cent on high volume. Year-to-date, the unit price has rallied nearly 5 per cent.
Looking at key resistance and support levels, there is initial overhead resistance around $16. After that, there is a ceiling of resistance around $17, near its record closing high of $17.34 set on March 29, 2022. Looking at the downside, there is initial technical support around $15, close to its 200-day moving average (at $14.78). Failing that, the next support level is around $14.
ESG Risk Rating
According to risk provider Sustainalytics, Slate Grocery REIT has an ESG (environmental, social and governance) risk score of 15.9 as of Dec. 21, 2022. A risk score of between 10 and 20 reflects a “low risk” rating.