The positive performance of the United States’ retail real estate sector during the third quarter of 2023 could persist well into 2024. Shopping centre vacancy rates dropped to a record low of 5.4% by September last year. U.S. retail real estate stocks should do well in 2024 if improvements in retail property economics persist into the new year. Passive-income-oriented Canadian investors could play the upside opportunity and buy a rebounded Slate Grocery Real Estate Investment Trust (TSX:SGR.UN) before its 9.6% distribution yield goes away.
Slate Grocery REIT owns a portfolio of 117 grocery-anchored retail properties in the United States comprising 15.3 million square feet of gross leasable area (GLA). Since its inception in 2014, the REIT has established a history of consistent annual distribution raises, which subsisted until a turbulent 2020. Its astute management team has everything in place to execute for excellence during the trust’s tenth anniversary this year.
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Why Slate Grocery REIT is well positioned for a robust 2024
Slate Grocery REIT’s growing portfolio of open-air shopping centres could see strong leasing activity and increasing rental rates this year. Although portfolio occupancy levels creeped up to 94.1% by September last year and management completed leases at a 10.9% spread to average in-place rents, investors may expect better operating results this year.
The trust’s average in-place rental rates were far below average market rents going into 2024. The REIT’s average in-place rent of US$12.37 per square foot in September was only 55% of average market rents of US$22.52. Management has wide room to negotiate for better rates on new leases this year.
And there’s a long list of expiring leases to work through in 2024.
About 13.6% of the REIT’s leases (measured by GLA) will expire this year. The average in-place rent on expiring leases is US$12.09 per square foot, while the trust signed new leases at average rates 55% higher during the third quarter of 2023.
Rent growth, net operating income, and distributable cash flow could grow considerably in 2024 and beyond if management replicates its recent leasing performance.
Market analysts bullish on U.S. retail real estate performance
In a recent US retail market outlook report, real estate investment and management consultant firm CBRE Group believes U.S. retail real estate fundamentals should remain strong in 2024, mainly due to limited new-construction inventory additions over the past several years.
The group projects a vacancy rate as low as 4.6% by year end, a significant improvement from 5.4% estimated for the third quarter of 2023.
Should you buy Slate Grocery REIT today?
Dividend investors can buy Slate Grocery REIT’s units for passive income and potential capital gains in 2024. The trust could be a top monthly dividend stock producing a juicy 9.6% distribution yield for Canadian investors.
What’s more, in an investor presentation published early November, the REIT’s management argued that the trust’s units traded at a 41% discount to net asset value (NAV). Units bottomed out that month and generated a 23% capital gain since the first of November. Current positive momentum could be a new investor’s friend.
Some considerations for a Hold or Sell on trust units
Although Slate Grocery REIT locked in 97.2% of its debt at a fixed interest rate of 4.3%, high leverage is still a significant discount factor. The trust had a Debt-to-Gross-Book-Value ratio of 51% by September last year. That said, the REIT endured debt ratios north of 61% reported for the fourth quarter of 2018. Current debt levels are still manageable.
One significant cause for concern is the trust’s payout ratio, which hovers too close to unsustainable levels for some investors’ comfort. The REIT paid out 99.6% of its Adjusted Funds from Operations (AFFO) during the third quarter of 2023. It essentially paid out all its recurring distributable cash flow. Any potential mishaps in leasing activity this year could render the high yield payout unsustainable.
That said, the trust once endured bloated AFFO payout rates of 102.6% seen during the fourth quarter of 2018. Investors sceptical of the trust’s ability to sustain its current monthly distribution may wish to avoid the pain of distribution cuts.
However, as highlighted earlier, 2024 could be a breakout year for Slate Grocery REIT if the trust successfully re-leases available space at near market rates this year.
