Slate Grocery REIT (SRRTF) CEO David Dunn on Q3 2020 Results - Earnings Call Transcript
Slate Grocery REIT (OTC:SRRTF) Q3 2020 Results Conference Call October 28, 2020 9:00 AM ET
Company Participants
Braden Lyons - Investor Relations
David Dunn - Chief Executive Officer
Andrew Agatep - Chief Financial Officer
Conference Call Participants
Fred Blondeau - IA Securities
Himanshu Gupta - Scotiabank
Pammi Bir - RBC Capital Markets
Jenny Ma - BMO Capital Markets
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Slate Grocery REIT Third Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions].
I would like to now hand the conference over to your speaker today, Braden Lyons, Investor Relations. Please go ahead, sir.
Braden Lyons
Thank you, operator. And good morning, everyone. Welcome to the Q3 2020 conference call for Slate Grocery REIT. I'm joined today by David Dunn, Chief Executive 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, you need to review the disclaimers regarding forward-looking statements as well as non-IFRS measures, both of which can be found in Management's Discussion and Analysis. You can visit Slate Grocery REIT's website to access all of the REIT's financial disclosure including our Q3 2020 investor update, which is now available.
I will hand over the call to David Dunn for opening remarks.
David Dunn
Thank you, Braden, and thank you to all the participants for joining the call this morning. In a world that has been dominated by uncertainty since the onset of the COVID-19 pandemic, we continue to be pleased but not surprised by the strength and resilience of the Slate Grocery REIT portfolio. We assembled our portfolio of grocery-anchored assets to generate significant and durable cash flow in all market conditions. This defensive portfolio has been further proven out over these last seven months.
As of September 30th, all 76 of our assets have remained open during the pandemic, 64% of our tenants have been deemed essential by the government and 99.4% of our tenants are currently open and operating. Slate Grocery REIT had led the strip center sector in terms of cash rent collections since the beginning of the pandemic, and that has continued in the third quarter, with the recollecting on average 95% of contractual rent in cash.
We agreed to an aggregate of 1.3 million of rent deferrals. We've received that expected repayments to-date, and even have some tenants paying deferred rents ahead of schedule. We also agreed to approximately $170,000 of rent abatements. In exchange, the REIT secured benefits in excess of 3.1 million in the form of increased rents and term, as well as other non-monetary benefits.
Now a few comments on the third quarter in which we achieved the results. Our team completed more than 196,000 square feet of new leasing in the quarter that will generate 2.1 million of base rental revenue. This is the strongest quarterly new leasing performance since the REIT's inception in 2014, a significant achievement in the best of times, let alone during a pandemic. We also completed over 235,000 square feet of renewals, resulting in over 431,000 square feet of total leasing at weighted average rental spread of 13.1%.
A large portion of the quarter’s leasing volumes were attributed to high credit grocery tenants, including Publix, ALDI and Hy-Vee. We believe these deals highlights desirability of our assets, while also adding to our portfolio in terms of rent growth and grocery credits. Our record new leasing activity more than offset vacancies within the quarter and occupancy rose 35 basis points on a quarter-over-quarter basis to 92.5%.We have 306,000 square feet of gross leasable area expiring in the next three quarters, representing 3.1% of our portfolio. This is well below the portfolio's typical run rate in terms of lease maturities, and we are confident that we can continue to increase portfolio occupancy.
Same-property net operating income grew by 0.5% on a year-over-year basis in the third quarter. We expect same-property NOI growth to be positive for calendar year 2020. Looking forward, there are significant contractual rent commitments that have not yet been captured in our financial reporting. These amounts total 2.9 million in annual base rent, which will primarily be recognized in 2021, with the remaining to hit our books in 2022.
We're pleased with the outcome of our disposition program which began in January 2019. We disposed of over $243 million of assets since then at a weighted average cap of 7.15%. We redeployed a portion of the proceeds into our 7 asset portfolio acquisition at a weighted average cap rate of 8.7% achieving a yield spread of 155 basis points. While disposition program is substantially complete, we'll continue to be opportunistic in disposing of select assets to recycled capital into accretive investment opportunities that will further high-grade our portfolio and add value for unitholders.
2020 has proven -- 2020 has set us all with a unique set of challenges on both personal and professional level. However, throughout this period, I've been constantly reminded the passion and commitment that our team brings to the office each and every day. I could not be more impressed by or thankful for our team's efforts throughout this challenging period, which have been instrumental to our business’ strong performance.
On behalf of the entire Slate Grocery REIT team, we wish you and yours good health and we thank you for your continued support.
I'll now hand it over for Q&A.
Question-and-Answer Session
Operator
[Operator Instructions]. Your first question comes from line of Fred Blondeau from IA Securities. Your line is now open.
Fred Blondeau
Thanks and good morning. A high level question from me. How far off is the 93% cash collection for October versus per call averages?
Andrew Agatep
Hi, there. You got Andrew there. Compared to our historical averages, collections now for Q2 and Q3 have been about 95%. We believe that this is a sector-leading cash collection amongst our peers, something that we're happy to put on our shoulders. So we continue and expect in October as well as in the future as our tenants remain in operation about 99.4% to be exact, that collection figure will continue to trend upwards.
David Dunn
Fred, this is Dave, good morning. I’d just say that it's -- by the time it's all said and done this quarter -- sorry, in the month of October, we expect that, that 93% becomes to 95% or above and there's a bit of a delay in processing cash payments and allocating them to the appropriate period. So I hope that answers your question.
Fred Blondeau
Yes, absolutely. And so I guess from your comments and from your perspective on cash collection, at least for October, it seems so far you haven't been so much affected by so called the second wave of pandemic. Is it fair to say that you are expecting that more in Q1?
David Dunn
Fred, you cut out there. If you don't mind just restating your question, please?
Fred Blondeau
Yes, I was just saying, I mean, it seems like the portfolio continues to perform relatively well in October. So I was just wondering, like, is it fair to say that you expect the portfolio to continue to perform well, despite that second wave of the pandemic?
David Dunn
I think we do. We've trended up significantly in the tenants open for business over the last couple of months. Actually it will go up to 100%. There’s I think literally six tenants that aren't open yet. So, we're aware of what's going on from a health and wellness standpoint in America. The tenants open for business, the majority of our tenants are essentially, regardless of the second wave, they're going to stay open, and their sales will probably be high. So no, I mean, right now we're expecting what we’ve seen in last seven months to continue.
Operator
Your next question comes from the line of Himanshu Gupta from Scotiabank. Your line is now open.
Himanshu Gupta
Just to follow up on the rent collection question. I mean Q2 and Q3 collection are around 95%, 96% levels. What's your visibility on the remaining 4% or 5% that is left? And then any update on the government stimulus programs? As these program runs off, do you think cash collection could be impacted, especially, as Fred mentioned, we are seeing resurgence in the COVID cases now?
David Dunn
Himanshu, thanks for the question. So we're collecting deferred rent repayments ahead of schedule. We actually have tenants, as I alluded to, paying more. We're actually 147% collected on deferrals to-date. That trend, the required collections in the fourth quarter are higher than what we've seen from a deferral standpoint. So obviously, the next few months are important from recovering that deferred rent. But we believe that based on the nature of our tenants that we're going to continue to collect it.
We did an abatement. We agreed to 170,000 of abatements. We think they were strategic and on a case-by-case basis, they make a lot of sense to us. We did tell our tenants we’ll work with them where it made sense and I think we stayed true to that. So hope that answers your question.
Himanshu Gupta
Sure. And maybe on the leasing side now, I'm looking at the small shop occupancy at around 87% level. So where do you see the upside or downside to this number for the next 12 months or so? And especially, what do you think -- what do you see the risk from COVID-sensitive tenants such as restaurants or fitness in the near term?
David Dunn
So all of our tenants are back open. What we're seeing on a macro level with shoppers returning with retail sales, they're all trending higher. But we think that America is going to continue to try to get back to a sense of normalcy. We have strong leasing velocity. We had a record quarter in Q3, we had a strong Q2 and there's velocity there right now. Spreads are strong. I suggested in the past that deals look a little different. Maybe they're shorter in term length. Maybe market rent is [indiscernible] or too low, but there's still velocity. And frankly, it comes down. There's tenants in the market and if you're the desired asset in a given trade area with the right anchor, then you're going to get the lion's share of the opportunity to do deals. And right now, that's what we're seeing with our portfolio.
Himanshu Gupta
And maybe, have you renewed any of the restaurants or fitness leases in the last six months? I know, a fair bit of leasing has been done. There’s a record small shop leasing this quarter. But what kind of tenants you have been renewing and where you are getting all the lion’s share of the tenant growth in that respect?
David Dunn
So we have renewed gyms. The ones that have come up are trying to remain open for business, and they're trying to kind of add a term and stability in our shopping centers. So, as far as restaurants, like we did certain amount of that debt for tenants we didn't think would stick around. We feel like we've addressed those tenants and the other ones that are -- that have solid business, and are good operators, are sticking around. And that is the majority of those tenants in our portfolio.
Andrew Agatep
And the way I want to think about it, Himanshu, too, is, the way it operates in the U.S. is quite different than what we have here in Canada. So although we do have fitness, sort of in our portfolio, in the mix, they are often operating for the most part. And the way we see it is our collection, which is hovering around 95%, continues to reflect that -- we do expect that number to continue to trend upward. So we feel comfortable with the mix that we have in our portfolio much inclusive of fitness centers.
Himanshu Gupta
And just staying on the leasing subject, on the anchored tenant leasing in Q3, I think you mentioned a couple of grocery tenants as well like Publix and ALDI. My question was, what kind of CapEx to you guys or leasing costs are you spending on these leasing to get the -- very strong rental spreads? And are these tenants -- are the grocery tenants looking for shorter duration leases now compared to let's say pre-COVID period?
David Dunn
So we did three new grocery-anchored deals in the quarter and we renewed another. The renewal typically with groceries are very little, if no [TI]. We received an option exercise from the grocer I reference to, renewed. As it relates to new deal, I mean, there's a true partnership, when you’re -- these are the deals that reset or reposition your assets. So in large part, the tenants take care of the improvements and the costs relating to their boxes. And they'll usually look for a landlord to invest in the common areas, maybe, overlay, a parking lot, or put a roof on or just spruce up the property. So I like allocating capital to those deals, because the grocer is going to put a new prototype in our center and then I get to go allocate capital to improving the center which is going to drive that shop lease and it's going to make our tenant desirable. And I think that's a great partnership. So I’d just suggest that it's equitable in terms of capital allocation. These are deals that we would do all the time. So -- and we're fortunate that we have the ability to talk to the traditional investment grade grocers that have capital and want to keep their premises in a first class manner.
Himanshu Gupta
And then just a final question from my side on the disposition this quarter. I think it was fine with Plaza, with Kroger as the anchored tenant. So what was investment case for the disposition there? And in general, as a market, do you think the overall deal flow or the transaction activity has picked up in Q3 compared to Q2, for example?
David Dunn
We sold time with Plaza in Dayton, Ohio. This was the last asset of the first fund we raised in 2010. It's non-core to our strategy going forward. We want to redeploy that capital into major markets that are growing. More in the Southeast and Mid-Atlantic, like the markets where you're seeing a few other deals in the Carolinas and Florida and Georgia. It's what we've been talking about on a regular basis in terms of high-grade portfolio. And I think we executed on that very well.
As far as activity in the investment community right now, I mean, it is down. Some of our capital markets partners are saying it's down 80% from 2019. Though it is starting to -- deals are starting to materialize again, we're looking at it closely. We feel like there are compelling opportunities out there. And in the creative way that we can find deals, I think there's a lot of value out there as well. So we hope that we can continue to track that and execute on deals that make sense to us looking ahead.
Operator
[Operator Instructions]. Your next question comes from the line as Pammi Bir from RBC Capital Markets. Your line is now open.
Pammi Bir
Maybe along the same lines? What was the motivation behind the sale of Roxborough Marketplace? And can you also maybe just provide some color on the cap rate on that transaction?
David Dunn
Pammi, thanks for the question. So Roxborough was a little bit different story. We had simply executed our business plan. We feel like we had created the value that we set out to create when we underwrote the deal. And there was an opportunity to sell the asset. Colorado is not a place where we have a ton of scale. And we think that there's more intriguing opportunities. Again, I referenced creating that spread from disposition to acquisition. We feel that is there to continue to buy high quality real estate. So it was a sub seven cap.
Pammi Bir
Got it. That's helpful. I guess, your comments around the acquisition, I guess, market or what's happening in the investment market overall, are you seeing any dislocation in pricing? It would seem being consistent with the assets in the grocery-anchored space outperform. But can you just comment, are there perhaps maybe any distressed vendors out there? Or what that pipeline looks like overall?
David Dunn
We certainly think there's opportunity out there. So finding deals creatively, there is definitely a dislocation. We feel like there are more opportunities to create instant value by buying the right transactions. As far as larger challenges from some owners on the horizon, we certainly think that, that is going to continue to become a story line as we look ahead. What we're hearing in the market is the next couple of quarters could be very telling from that standpoint. So we're hopefully going to be ready to take advantage of that as those opportunities present themselves.
Pammi Bir
Maybe just one last one. I guess with respect to the balance sheet, how high would you be willing to perhaps push leverage to fund acquisitions? Obviously, you have some proceeds to redeploy on the back of a couple of dispositions. But any color you can provide there?
Andrew Agatep
Pammi, it's Andrew. Yes. First, we just want to highlight that with our most recent refinancing, that was in Q1 of 2020, we do have liquidity on our balance sheet. We do have about -- borrowing capacity about $160 million, which allows us to execute on deals. 60% is the number slightly under what we are at right now. And I think over time, we do want to bring that down. We do feel comfortable with the range, though, I should note given that we own grocery-anchored real estate, it’s proven out during the pandemic as a pretty durable cash flow and our ability to satisfy our obligations. So if there is an opportunity that does exist, I think we will execute. We think it provides the right return to our unitholders. But we do have the intent over time to bring down our leverage.
Operator
Your next question comes from line of Jenny Ma from BMO Capital Markets. Your line is now open.
Jenny Ma
Just wanted to discuss the bad debt expense that went up in Q3 versus Q2. I'm just wondering if the Q3 number is a bit of a catch-up for some of the tenants that you may have thought were able to pay in Q2 and decided to go into that in Q3. And then further on to that, what is your view of how the bad debt expense will look over the next couple of quarters?
Andrew Agatep
Thanks, Jenny, for the question. Yes, we've made a business decision this quarter in review of our tenants, once we do on a tenant by tenant on what collectable. And we took the view that tenants that are in bankruptcy are not going to be collectible. To put that number on to that, we feel that, that represents a 3% of our contractual rent for this quarter, which is low in comparison to our peers.
Going forward, we feel that we've addressed the bankruptcies inside our portfolio. And on the flip side, we've seen that we can collect on the 97% and actually 97%, 98% in general on a going forward basis. When we actually think about the spaces themselves, we feel confident that, for those tenant boxes that they continue to be desirable, and that there is strong backfall potential. Our leasing sort of this quarter as well throughout the 2020 year is a testament to this.
David Dunn
Jenny, it’s Dave. We've got activity on these boxes. They are compelling. And that made it a little more palatable to move on. We think there's a better scenario on the horizon from tenant credit, as well as possibly some rent growth. So the decision we made sort of impacts us in the short, I think it sets us up for a lot of success going forward.
Jenny Ma
So net-net between the bankruptcies and I guess at a bit of a time lag with some of the new discussions, do you see Q4 bad debt sort of being in the same range or maybe sort of in between Q2 and Q3's number?
Andrew Agatep
We certainly don't -- based on what we know now, we do not foresee it being nearly as high. We think we've addressed the “pain” in a portfolio and we're meaningfully higher on a run rate for bad debt for a quarter. It's usually in the low 200,000 range. And that's not sort of where I think it's going to be, I just wanted to articulate how much higher it was this quarter, and we think we're going to go back to more normal level subject to anything unforeseen in the future.
Jenny Ma
And then with regards to the $3.1 million of benefits that you've mentioned, as far as your rent deferrals go, is that the net increase in rent over the duration of the extended term? I just wanted to unpack that number a bit. And if you have an average term extension number, that would be great, too.
Andrew Agatep
What we did with tenants -- and again, we looked at tenants that we thought were going to be able to pay us rent in the future. We didn't cut a future deal. We didn't think this tenant was going to be around. So in exchange for short-term breaks and abatement, if you will, tenants popped options for us, they extended term, we negotiated future benefits. So yes, it's what you're thinking. What isn’t captured in that is, we were able also to collect in the moment $190,000 in rent. As you think about the alternative and come to a deal, well then you end up having to pursue these tenants legally, which is not what we wanted to do. So on measure, we thought that it was the right thing to do in the moment and the right thing to do looking ahead.
Jenny Ma
And what is the average extension that you've been able to get? Are these five-year deals or going a year at a time?
Andrew Agatep
Yes, more or less the tenant option would be five years. We wouldn't have secured term in excess of five years. So call it five years, maybe with a few would be three or four years extensions as well.
Jenny Ma
Okay. And so the $3.1 million is just increases in rents, right? You didn't quantify sort of the intangible benefits included in that number?
Andrew Agatep
No, we didn't. And those intangibles could be improved covenants. If there were restrictions, we may have been able to negotiate those, just digging in understanding more of a tenant sale. I think that over time will help us manage our portfolio better. So we were able to make wins there. And we did not quantify that in terms of that $3.1 million.
Jenny Ma
And then my last question is just a clarification. You mentioned that some of your broker partners mentioned that sales volume or invested volume is down 80% year-over-year. Is that just for the grocery-anchored shopping centers they were referring to?
Andrew Agatep
Generally on retail.
Operator
There are no further questions at this time. I will turn the call back over to presenters.
Braden Lyons
Thank you everyone for joining the Q3 2020 conference call for Slate Grocery REIT. Have a great day.
Operator
Ladies and gentlemen. This concludes today's conference call. Thanks for participating. You may now disconnect.
