One of the highest-yielding stocks on the TSX is Slate Grocery REIT (TSX: SGR.UN), a grocery-anchored real estate investment trust (REIT). It pays shareholders an annual dividend of $1.14 per share, translating to a forward yield of 8.4%.
Slate Grocery has invested heavily in grocery-anchored real estate properties in the United States. It entered this sector just after the financial crisis, when it identified opportunities to acquire properties at depressed valuations.
Despite the growth of e-commerce and a weak economy, the vast majority of Americas rely on their neighbourhood shopping centres for daily needs, making Slate Grocery a top investment choice for income-seeking investors.
Is Slate Grocery stock a buy right now?
Slate Grocery REIT owns and operates $2.4 billion of real estate infrastructure assets in major metro markets south of the border. Its resilient portfolio and strong credit tenants provide the company with durable cash flows and the potential for capital appreciation over time. Slate Grocery owns 117 properties in 24 states in the U.S., spanning a total of 15.3 million square feet.
Despite an inflationary environment in 2022, consumer spending at food and beverage stores in March 2023 increased by 5% year over year. Comparatively, spending on furniture, electronics, gasoline, and clothing fell in this period.
Additionally, the availability of neighborhood retail spaces is at historic lows while construction costs remain elevated. This increases the cost of relocation for tenants resulting in higher stickiness and retention rates. These factors are driving leasing activity and rental growth for Slate Grocery, which, in turn, should bolster cash flows and earnings.
In its shareholder letter, Slate Grocery stated, “The weighted average rent across our portfolio is well below market at $12.24 per square foot. Our portfolio is poised to grow organically through steady increases to our below-market rents. This growth will, in turn, drive sustained valuation increases for our business.”
What’s next for Slate Grocery stock price?
Slate Grocery completed 590,000 square feet of leasing activity in the first quarter (Q1) at a 10% spread to average in-place rents. Its new leasing in the March quarter resulted in a 50-basis point occupancy gain to end Q1 with an occupancy rate of 93.7%.
Slate Grocery’s historical leasing spreads have consistently outpaced inflation. Moreover, 5.2 million square feet of leases which is 34% of the gross leasing area, expire in the next three years, which provides it with significant near-term upside. Around 96% of tenants are on net leases offering Slate Grocery with protection against rising operating expenses.
The company’s rental revenue in Q1 increased to $50.78 million compared to $38.96 million in the year-ago quarter. Its net operating income rose from $32 million to $39 million in this period.
Analysts tracking the TSX stock expect sales to rise by 23% to $291.4 million in 2023, while adjusted earnings are forecast at $1.3 per share. So, Slate Grocery stock is priced at 10 times forward earnings, which is quite cheap.
Bay Street expects Slate Grocery stock to surge over 11% in the next 12 months. After accounting for dividends, total returns may be closer to 20%.
