Slate Grocery REIT (TSX:SGR.UN) has long established itself as a reliable option for income-seeking investors, thanks to its strategic focus on grocery-anchored retail properties. While retail real estate has faced its share of challenges in recent years, grocery stores remain a cornerstone of essential retail. These are resilient, necessary, and largely immune to e-commerce disruption. Slate Grocery real estate investment trust (REIT) has leaned into this strength, building a robust portfolio of over 14 million square feet across the United States. These properties provide stability and consistency for investors, even in times of economic turbulence, thanks to the ever-present demand for groceries.
Recent moves
Recent performance metrics further reinforce Slate’s credibility. As of the third quarter of 2024, the trust reported solid results that demonstrated its ability to grow revenue and strengthen operations. Slate completed over 850,000 square feet of leasing activity during the quarter, a notable achievement in today’s competitive market. What’s particularly impressive is the leasing spread: new deals were signed at rents 24.8% higher than the average in-place rent. Meanwhile, non-option renewals came in at 14.1% above expiring rents. These figures indicate strong demand for Slate’s properties and highlight management’s ability to create value for unitholders.
At the financial level, Slate Grocery REIT has maintained stability while actively managing its debt profile. Following the third quarter, the trust successfully refinanced $500 million of upcoming debt maturities, thusly securing new facilities that include a $275 million revolving credit line and a $225 million term loan. The terms of these new facilities, including interest rates consistent with the maturing debt, reflect the confidence lenders have in the trust’s portfolio quality and financial strength. By addressing these maturities proactively, Slate has positioned itself to navigate rising interest rate pressures with relative ease, thus ensuring financial flexibility for the future.
Still cheap
One area that has caught investors’ attention is the significant discount at which Slate’s units are trading relative to their net asset value (NAV). As of the most recent quarter, the unit price represented a 24.5% discount to NAV, thus making it an enticing prospect for value-oriented investors. When REITs trade below their NAV, it signals a potential opportunity for investors to acquire a stake in quality real estate assets at a bargain price. This valuation gap may be driven by broader market sentiment or investor caution toward the retail sector. Still, Slate’s ability to consistently deliver stable cash flows and strong leasing spreads suggests that the trust remains fundamentally sound and potentially undervalued.
Looking at the trust’s dividend performance, Slate Grocery REIT continues to offer a forward annual yield exceeding 8%. This makes it an attractive option for income investors seeking higher yields in a market where bonds and traditional income investments may fall short. However, it’s important to note that the REIT’s payout ratio stands at 176%, thus indicating that dividends currently exceed earnings. While the trust generates strong operating cash flow at $66.3 million over the trailing 12 months, investors will want to monitor this metric to ensure dividend sustainability over the long term.
Foolish takeaway
The future outlook for Slate Grocery REIT remains optimistic, driven by the trust’s focus on grocery-anchored retail properties. Unlike many other retail sectors, grocery stores have proven resilient to economic downturns, maintaining consistent foot traffic regardless of market conditions. As inflation pressures continue to weigh on consumer spending habits, essential goods, like groceries, remain a non-negotiable expense.
This dynamic ensures that Slate’s tenants, many of whom are national grocery chains, continue to thrive and fulfill their lease obligations. Furthermore, with the trust’s average in-place rents still below market levels, there is room for further revenue growth as leases come up for renewal.
Slate Grocery REIT’s track record speaks for itself. Its ability to deliver reliable returns, combined with recent operational successes, positions it as a standout choice in the Canadian REIT landscape. While investors should remain mindful of broader market dynamics and interest rate challenges, Slate’s focus on essential retail properties provides stability in an uncertain environment. Whether you’re seeking income, value, or both, Slate Grocery REIT deserves consideration in your investment portfolio.
