Slate Grocery REIT (SGRUN) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Annual Meeting of Unitholders of Slate Retail. My name is David Dunn, and I'm Chief Executive Officer of the REIT. With me today is Mr. Andrew Agatep, Chief Financial Officer. I'd like to start by acknowledging the extraordinary circumstances being faced by communities around the world as a result of the COVID-19 pandemic. As a results of the crisis, we are conducting today's meeting remotely. This format has provided all unitholders the opportunity to vote their units in advance of the meeting and allows those present in person at the meeting today to vote on the applicable resolution. Our Board of Trustees: Tom Farley, Samuel Altman, Patrick Flatley, Colum Bastable, Andrea Stephen, Blair Welch and Brady Welch are all attending this meeting remotely. Welcome trustees, and thank you for joining us. [Operator Instructions] We will endeavor to answer your questions once the formal part of the meeting is over. Please submit your questions in advance, if possible. You will not be able to vote at today's meeting unless you have already submitted a valid proxy in advance of the proxy set-up time as set out in the circular. With your permission, I'd like to begin the formal part of this meeting. I will act as Chairman of the meeting and with permission, I will appoint Ramsey Ali, General Counsel and Corporate Secretary of the REIT, who's here with me in person to act as Secretary of the Meeting. As well, I've appointed TSX Trust Company acting through its representatives, Christopher de Lima and Rebecca Prentice as Scrutineers. The meeting will now come to order. Notice of the time and place of the meeting has been provided to each unitholder entitled to vote and to each trustees and to the REIT's auditors. The notice of calling this meeting requires that unitholders intending to vote by proxy must have deposited their proxies to the TSX Trust Company prior to May 11, 2020, at 2:30 p.m. Proxies so deposited are now in the custody of the Scrutineer. I've received a Scrutineer's report, which shows a total of 74 unitholders are either present in person at the meeting or represented by proxy and represent, in the aggregate, 15,408,659 units or roughly 37% of the outstanding units which are entitled to be voted at the meeting. Scrutineer has also confirmed the attendance, and I can confirm that a quorum is present. Scrutineer's report will be kept in the records of this meeting. Notice of the Meeting was given as required, and a quorum being present, I declare that the meeting has been called and is properly constituted for the transaction of business. In order to have the meeting proceed officially, I have asked Ramsey Ali and Erisa Vieira to move and second motions that are to be called pursuant to the Notice of Meeting as they are in attendance and I've confirmed their identities. There are 2 matters set out in the Notice of Meeting to be voted on by unitholders. They are: one, the election of trustees; and two, the appointment of the auditors. Each matter will be voted on by a show of hands, pursuant to which every person present in the meeting today shall be entitled to vote. The votes of all unitholders through deposited proxies with management representatives will be cast per the instructions of unitholders by the persons designated on proxies or where no notice is specified for the resolution to be dealt with at today's meeting. First item of business concerning the 2019 consolidated financial statements. The management information circular of this meeting dated March 24, 2020, contains instructions to request a copy of the consolidated financial statements in accordance with the applicable securities laws. Copies of these materials are available on the REIT's website and on SEDAR. On behalf of the REIT, I now place before the meeting the consolidated financial statements and report of the auditors for the year ended December 31, 2019. The next item of business is the election of trustees. Trustees have set out the size of the Board at present, thus, each trustee is to be elected to hold office for a term of 1 year, commencing at the close of this meeting of unitholders and ending at the close of the next Annual Meeting of Unitholders or until their successors are duly elected or appointed. Details of both the individuals being nominated are found in the Management Information Circular for the meeting, dated March 24, 2020. In the proxy forms and voting instruction forms, unitholders were asked to vote individually for each of the nominees. I understand that Ramsey Ali has a motion to make in this regard. So Ramsey, please present the nominations.

Mr. Chairman, I nominate Samuel Altman, Colum Bastable, Thomas Farley, Patrick Flatley, Andrea Stephen, Blair Welch and Brady Welch to serve as trustees of the REIT for a term of 1 year beginning today and ending at the close of the next Annual Meeting of Unitholders or until their successors are duly elected or appointed.

The REIT's declaration of trust requires a nomination of trustees by unitholders be received at least 30 days in advance of the meeting in order to be valid. As no nominations were received from unitholders prior to the deadline, the nominations are closed. I will now entertain a motion, respecting the election of trustees. So Ramsey Ali, please present this motion.

Mr. Chairman, I move that Samuel Altman, Colum Bastable, Thomas Farley, Patrick Flatley, Andrea Stephen, Blair Welch and Brady Welch be elected trustees of the REIT to hold office until the close of the next Annual Meeting of Unitholders or until their successors are duly elected or appointed.

Mr. Chairman, I second the motion.

Thank you, Ramsey and Erisa. All those present in person at the meeting today in favor, signify by raising your hand. [Voting]

Withheld, if any, of those present in the meeting in-person today. [Voting]

I declare that the motion is carried and that each of Samuel Altman, Colum Bastable, Thomas Farley, Patrick Flatley, Andrea Stephen, Blair Welch and Brady Welch have been duly elected as trustees of the REIT to hold office until the close of the next Annual Meeting of Unitholders or until their successors are duly elected or appointed. The next item of business is the appointment of the auditors and the authorization of the trustees to set their remuneration. I believe that Ramsey Ali has a motion in this regard.

Mr. Chairman, I move that Deloitte LLP be and they are hereby appointed as auditors of the REIT to hold office until the close of the next Annual Meeting of Unitholders, and the Board of Trustees be and is hereby authorized to fix their remuneration.

Mr. Chairman, I second the motion.

Thank you. All who are present in person at the meeting today in favor, signify by raising your hand. [Voting]

Withheld, if any, of those present in person at the meeting today. [Voting]

I declare the motion carried and Deloitte LLP are hereby appointed auditors of the REIT to hold office until the close of the next Annual Meeting of Unitholders and the Board of Trustees be authorized fix their remuneration. If there's no further business to be brought before the meeting, I would ask that Ramsey Ali for his motion to terminate the meeting.

Mr. Chairman, I move that this meeting be terminated.

Any seconder?

Mr. Chairman, I second the motion.

Thank you, Ramsey and Erisa. All those present in person at the meeting today in favor, signify by raising your hand. [Voting]

Opposed, if any, of those present in person at the meeting today? [Voting]

I declare the motion carried, and the Annual Meeting of Unitholders of Slate Retail REIT terminated. The formal business of the meeting is over, and I will now proceed with the review of the business of REIT. [Operator Instructions] We will endeavor to answer your questions once I finish providing an update of the REIT's business. I'll pause for a brief moment before we get started. On behalf of the entire Slate Asset Management team, we'd like to wish our investors, partners and their families all the best during this challenging time. And as always, we appreciate your continued support. The format and content of the business update portion of the AGM will certainly have a different feel this year. I will walk through an update of the REIT's operations in the context of the current environment, which will highlight the resiliency of our business, durability of cash flow and the efforts put forward by the entire Slate Retail team. I'll spend a little time at the end of the presentation, touching on some operational matters in the past quarter. As society and the economy begins to focus attention on the future beyond the COVID-19 pandemic. Before we get into that, I wanted to highlight key characteristics of who Slate Retail REIT is and what we do. A pure play, grocery-anchored real estate vehicle designed to produce a consistent yield. Our entire portfolio is located in the United States, 72 assets, across 20 states, comprising 9.5 million feet. Portfolio size has trended down in recent quarters, as we have executed on our disposition pipeline to divest noncore assets, many of which are properties in the lower quartile of our portfolio. The REIT's assets are primarily located in the eastern half of the country in secondary MSAs. We recently restructured the asset management function of our operations to better align our business for the future. We've created a regional team structure in the north and south regions. South region has essentially comprised of Florida, Georgia, North and South Carolina where over 40% of our assets are located. Later, we'll get into a more detailed assessment, the dependence of our portfolio that you can see the top 5 of our grocers, and the top 4 being investment-grade traditional grocers, which comprise 25% of our rentals and over 1/3 of our portfolio's gross leasable area. We'll now transition to a business update in relation to COVID-19 pandemic. As you can well imagine, managing our business through this crisis has consumed virtually all of our attention over the last couple of months. The overarching principle of our approach was to be visible, available and engaged for our tenants. And we did this from the onset of the crisis. Our business strategy during this period can be boiled down to 3 key things: number one, we educated ourselves. We've done a deep and thorough rent rolls to assess the composition of our revenues. Our team reviewed all of our 1,108 tenant leases and risk-adjusted our portfolio relating to their perceived ability to pay rents within the current operating landscape. The REIT then engaged our partners in legal, insurance and property management to understand the many nuances we would encounter in this new environment, force majeure, forbearance and business interruption insurance, and certainly, these off-offices conversations of these things. Number two, we educated our customers. In early March, we reached out to share best practices and ideas for how to operate effectively given the uncertainty of the virus. In late March, in advance of April rent payments, we provided information relating to the various government support grants available to our tenants stemming from the CARES Act, the Paycheck Protection Program for small businesses as well as state-led support initiatives. We provided our tenants with key information and application forms and posted everything to the REIT's website a tenant support page our teams created. Separately, we engaged our grocer partners to ensure they had what they needed from their landlords to remain open and able to continue to provide food to the communities they serve. Number three. We engaged our tenants in constant communications. The REIT received requests for rent relief from 20% of our portfolio. We responded in writing or verbally of those to all of them. Since then, we have continued the dialogue. Our asset management team has spoken to the vast majority of our tenants in our portfolio, and we continue to do so even today. We are working with our tenants to provide rent deferrals to those who need it. And we have been successful in securing rent payments from the tenants who have the ability to pay. It all culminated in our April rent collection. The REIT collected 85% of April rents in cash. The expectation is we'll substantially collect all of April rents by deferment agreements or other customized payment plans. We've been building this resilient defensive portfolio for over a decade. When you layer in the impact of the team, what we call the play difference, which is our hands-on asset management, that roll up your sleeves approach to operating real estate, this is why we secured the rent we did. We're thankful and proud of the effort and dedication shown by the Slate Retail team during this challenging times. We previously referenced our durable portfolio. The majority of our tenants are deemed essential based on the government's definition. These include grocery, pharmacy, medical, financial, gas and pet stores, liquor stores and dollar stores because they sell food and cleaning supplies. Our essential-based tenants comprise 63% of our portfolio. These are the uses that governments will not close. 100% of our shopping centers have remained open during the crisis. Over the last 2 months, average occupancy level for our portfolio have never dropped below 68%, and currently, at least 76% of our tenants are open for business. Composition of our portfolio has an appropriate weighting of natural uses, relatively limited big-box retailers, which creates a solid merchandising dynamic, and as a result, a more resilient cash flow. Merchandising mix is a key differentiator between Slate Retail and our peers in the United States. We are the only REIT in North America that is pure-play grocery anchors. Grocery-anchored strip centers are typically the assets that have the highest weighting of essential-based tenants. Our investment thesis anchored in durability and resiliency of cash flow has been proven out to this challenging market conditions brought upon by the pandemic. Conversely, on the flip side, we often get asked about the composition of the non-grocery, nonessential-based tenancies within our portfolio. We have are stacked up well in this respect. We think this Green Street portfolio assessment of U.S. retail REITs illustrates this nicely. We have amongst the lowest exposure to those being coined COVID-sensitive tenants, they do not make up a significant portion of our portfolio. We have no theater tenancies, very few businesses on the bankruptcy watch list. Most of our soft goods users are at a discount or off-price price. And a significant percentage of our restaurants in our portfolio are tailored pick-up, delivery or drive-through sales in the normal course of business operations, which has obviously served them well. This chart is a great illustration of the REIT's stability. Since the inception of the REIT, we have consistently outperformed U.S. strip center markets in terms of occupancy levels and retention rates. This foundational piece speaks to why we've been able to provide our investors the growing distribution since 2014. At this time, we are pleased to announce our distribution payment for the month of May to be paid to unitholders in mid-June in accordance with standard payment protocol. We constantly assess our capital allocation options with our Board on a regular basis, and we'll continue to work with them to allocate capital prudently as we move forward. We're also closely tracking the local and global economic impact of the pandemic, and that impact has been severe. The latest unemployment numbers in America, namely that more than 20.5 million Americans have lost their jobs in the month of April, bringing unemployment to 14.7% is difficult to comprehend. However, there have been a few positive stories within the bleak broader picture. Several groceries and essential businesses are hiring and hiring a lot, and many of them are tenant-secured portfolios. Our biggest tenants have reported significant growth in sales this year. As reported in the first quarter of 2020, Publix sales are up 15% for the first 3 months of the year. Ahold Delhaize reported 14% increase in sales and increased in total online sales 37% on a year-over-year basis. [ Graham's ] CEO, a brands dealer, was quoted as saying, "Q1 was unlike any quarter seen before." The company also announced they are accelerating further rollout of their portfolio of digital and omnichannel sales capabilities. Finance business mindsets are the ones we want to continue to partner and do more business with. Kroger and Walmart reported 30% and 20% lift in sales in March 2020 compared to a year ago. Stock prices for Kroger and Walmart have outperformed the S&P 500 by 24% and 16%, respectively, in the first quarter of 2020. And the single biggest company currently hiring is [indiscernible], who are looking to add over 500,000 employees in the near future. I think this is an appropriate segue into addressing one of the key topics the grocery real estate over the last few years, the last mile logistics. Amazon came to the realization that they needed bricks and mortar infrastructure in the neighborhood to solve their last mile logistics challenges when they purchased Whole Foods a few years ago. They're currently doubling down in this respect as they begin to roll out their Amazon grocery concept nationwide. Online services, such as click-and-collect curbside pickup and grocery delivery was slowly growing in popularity before the pandemic and has exploded recently. And these purchases are not being funneled through regional distribution centers. They are being fulfilled through the local grocery stores. CEO for U.K. based [ Supermarket Guy ] and Tesco in response to a question about increased online sales was recently quoted as saying, "We pick around 90% of online orders from our stores." The grocer has had to adjust store hours and hire additional employees to keep up with demand. We believe that currently, in America, all online grocery orders are serviced through the local store in partnership with the likes of InstaPay, PPOS and others. Walmart handles deliveries themselves, introduced Express Delivery on April 30. It's a new service to keep up with increased demand that delivers from the store to customers' doors in less than 2 hours. The grocery boxes located within the REIT strip center assets are warehouse facilities. They range primarily from 30,000 to 60,000 square feet with 20-foot-plus clear heights, stock level doors and parking. The REIT's weighted average rent for an anchor Box is approximately $8 per square foot. These rents are cheaper than the average rents for an industrial property in most markets. The only difference for Slate Retail REIT's assets are located in communities close to where people live. I'll now move on to a brief operational update. In the first quarter of 2020 and subsequent to March 31, the REIT completed $107 million of dispositions at a weighted average cap rate of 7.4%. We were successful in maintaining pre-crisis pricing, did not discount any assets during pandemic. The REIT's total distribution proceeds since the beginning of 2019, $218 million, at a cap rate of 7.2%. Being successful in improving the overall quality of our portfolio by disposing of lower quality assets and assets where executed our business plan, the disposition program is substantially complete. In February 2020, the REIT announced the refinancing of $858 million of total debt. This includes a 10-year life of term loan secured by a pool of 8 assets at an interest rate of 3.48%, a deal we were able to close in the heart of the crisis. The overall debt restructuring creates $1.7 million of annual interest savings equal to $0.04 per unit. The REIT has no debt maturities until 2023. Disposition programs and refinancing solidifies the REIT's balance sheet and creates flexibility for the future. We are actively tracking on a state-by-state basis the reopening of America. Many of the states where the REIT has a sizable presence have already begun their Phase 3 opening process. By and large, this means opening nonessential businesses with curbside pickup and access to actual stores or restaurant on a limited capacity basis and where -- as well as outdoor dining wherever available. Governments are making adjustments to these protocols and directs these constantly at the buyer level, at least. This is creating some cautious optimism for our tenants in the communities in which we own assets. We are hopeful the global healing continues, and we can all begin to put the crisis behind us so we can focus on the future. Highlighted by our market-leading rent collections and the strength and commitment of our teams, we feel Slate Retail's investment approach of constructing grocery-anchored portfolio capable of generating durable and resilient cash flow has been proven out. REIT is well positioned as we begin to think about the future and the ability to look at opportunities as they become available. Our acquisition strategy will be effective in a post-pandemic environment. The strategy is to purchase well located, quality real estate assets, partnering with top grocers in growth markets and MSAs where people want their business, where we can use Slate Retail REIT's knowledge and expertise to drive growth and value for our unitholders. That concludes the REIT's business update, and we can now open it up for questions. Thank you very much.

We have received a question. Mr. Dunn, are you seeing any attractive opportunities in markets currently? When do you expect the opposite question?

Thanks for the question. Given the current environment and the uncertainty, we're not currently looking at acquisitions for the time being. However, I can tell you that we're actively keeping an eye on the marketplace, and we feel it there will be a number of opportunities going forward. We're excited about our position, our balance sheet and the opportunity to take advantage of them as we move on.

We have another question relating to the government support. Can you speak to the government's support available to your tenants and if they are making the interest?

Well, as I stated in the onset of my presentation, our team has been actively discussing all things with tenants primarily where they can see support, and how they can apply. Certainly, we are partners with them, and we've demonstrated that over time, especially recently. There have been approximately 165 tenants that have applied for support, which is about 20% of our portfolio, and 6% have secured support. And we're seeing this, obviously, both in communications with our tenants as well as it's translating to higher cash collections in May.

Those were all the questions I received up to this point. Thank you.

No further questions? If there are no further questions, I'd like to close by acknowledging the efforts and accomplishments of the REIT and its teams during these extraordinary times. We look forward to continuing to deliver on our objective of generating solid returns for unitholders, enhancing the value of our assets and growing our platform of properties. We thank you very much for your time. Take care.