Slate Grocery REIT (SGRUN) Earnings Call Transcript & Summary

Good morning, and welcome to the Annual Meeting of Unitholders of Slate Grocery REIT. My name is Andrea Stephen. I'm the Chair of the Board of Trustees of Slate Grocery REIT. I have on the line Mr. David Dunn, Chief Executive Officer of the REIT; and Mr. Andrew Agatep, the Chief Financial Officer of REIT. For those of you who are unitholders, thank you for joining us today. We also welcome all other guests in attendance. We decided to hold this Annual Meeting of Unitholders in an all-virtual format out of an abundance of caution to proactively deal with the public health impact of the COVID-19 outbreak and to mitigate the risks to the health and safety of our communities, our unitholders, our employees and other stakeholders. Our main objective is to ensure that all unitholders have the same opportunities to participate and vote regardless of their geographic location and that everyone stays safe. The remainder of our Board of Trustees, Marc Rouleau, Tom Farley, Pat Flatley, Colum Bastable, Blair Welch and Brady Welch are all attending this meeting electronically. Welcome, trustees. Thank you for joining us. Since the meeting is being held virtually, we want to outline a few logistical items regarding the conduct of the meeting. Questions can be submitted by any meeting attendee using the instant messaging service of the virtual interface. When asking a question, please indicate your name, which entity you represent, if any, And if applicable, confirm that you're a registered unitholder or a duly appointed proxy holder. For each question we answer, we will summarize the question to the extent necessary. We will attempt to address all questions during the question period at the end of the meeting, provided that some questions may be addressed during the formal part of the meeting, including questions regarding the procedural matters or directly related to the motions before the meeting. For the purposes of the meeting today, voting on all matters will be conducted by electronic ballot. Registered unitholders and duly appointed proxy holders will be able to vote on each business item during and shortly after the presentation of all business items. When the voting polls are open, you will receive a message on the virtual interface, requesting you register your votes. If you've already submitted your vote by proxy and do not wish to change your vote, you do not need to vote again. I would now like to begin the formal part of the meeting. To expedite the formal part of the meeting, I will move and second all motions. I will act as Chair of the meeting, and with permission, will appoint Ramsey Ali, the General Counsel and Corporate Secretary of the REIT, who is also joining virtually to act as Secretary of the meeting. As well I have appointed TSX Trust Company acting through its representatives, Christopher de Lima and Rebecca Prentice, as scrutineers. The meeting will now come to order. Notice and time of the meeting -- notice and time and place of the meeting has been provided to each unitholder entitled to vote and to each trustee and to the REIT's auditors. The notice calling this meeting requires that unitholders, intending to vote by proxy, must have deposited their proxies with TSX Trust Company prior to May 7, 2021, at 11:30 a.m. The proxies so deposited are now in the custody of the scrutineers. For the meeting, a quorum of unitholders is present if there are 2 or more individuals present in person or represented by proxy, holding or representing by proxy in aggregate at least 25% of the total number of outstanding units entitled to be cast at the meeting. I have received the preliminary report on attendance from the scrutineer and have determined that a quorum is present. I adopt this report and, as notice of the meeting has been given as required, I declare this meeting to be regularly called and properly constituted for the transaction of business. The scrutineers' report will be kept with the records of this meeting. On behalf of the Board, I thank those unitholders who have chosen to attend the meeting virtually today. I also thank those who submitted their proxies in advance. There are 2 matters set out in the notice of meetings to be voted on by the unitholders. They are: one, the election of the trustees; and two, the reappointment of the auditors. Voting today will be conducted by electronic ballot. The balloting will be open to registered holders and appointed proxy holders who have properly logged in with their control numbers or user names during and shortly after the presentation of all business items. I will now take a moment to ask the balloting -- that the balloting be opened to the registered holders and appointed proxy holders. The polls are now open. And at this point, all registered holders and proxy holders who have properly logged in with their control numbers or user names and wish to vote will be able to see on the screen all motions being brought forth at this meeting. The voting will remain open while we address the items of business to be voted on, and you will receive a 15-second warning in advance of the closing of the polls. Once the electronic balloting closes, the voting page will disappear and your votes will automatically be submitted. John Murray, Legal Counsel to the REIT, will confirm for us when the polls have closed. Please register your votes by accessing the voting page and selecting the "for" or "withhold" buttons next to the names of each proposed trustee and next to the resolution with respect to the reappointment of Deloitte LLP as the REIT's auditors. The votes of all unitholders who have deposited their proxies with the management representatives will be cast per the instructions of unitholders by the persons designated on the proxy or where no choice is specified for the resolutions to be dealt with at today's meeting. The first item of business concerns the 2020 consolidated financial statements. The Management Information Circular for this meeting dated March 24, 2021, contains instructions to request a copy of the consolidated financial statements in accordance with 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, 2020. We would be pleased to receive any questions you may have regarding the financial statements during the question period later in the meeting. We will dispense with the reading of the financial statements and the auditor's report thereon. The next item of business is the election of the trustees. The trustees have set the size of the Board at present to 7. Each trustee to be elected to hold office for a term of 1 year, commencing at the close of the meeting -- 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 about the individuals being nominated are found in the Management Information Circular for the meeting dated March 24, 2021. In the proxy forms and voting instruction forms, unitholders were asked to vote individually for each of the nominees. As described in the Management Information Circular made available to unitholders in connection with this meeting, there are 7 nominees, trustees -- for election as trustees. The nominees are: Colum Bastable, Thomas Farley, Patrick Flatley, Marc Rouleau, Andrea Stephen, Blair Welch and Brady Welch. I declare the meeting open for nominations for the election of trustees for the ensuing year or until their successors are elected or appointed. I will now nominate the trustees and second the nominations. I nominate each of the persons whose name appears in the Management Information Circular under the heading Election of Trustees to be a trustee of Slate Grocery REIT until the close of the next Annual Meeting of Unitholders or until their successors are appointed. And I also second the nominations. The REIT's declaration of trust requires that nominations 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 note that as described more fully in the Management Information Circular, the Board has adopted a majority voting policy pursuant to which any nominee who receives a greater number of votes withheld than votes for cast in respect to his or her election by the unitholders will tender his or her resignation from the Board promptly following such meeting. The resignation will be effective upon acceptance by the Board. I should advise the meeting that by virtue of votes already received by proxy, it is clear that all trustees will receive more than enough votes to be elected today. The next item of business is the appointment of auditors and authorization of the trustees to set their remuneration. I will now move and second a resolution appointing the auditors for the current year and authorizing the trustees to fix their remuneration. I move that Deloitte LLP be and they 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, and it is hereby authorized to fix their remuneration. I will also second the motion. I will now move on to closing out the voting process. The polls will remain open for 15 more seconds. As a reminder, if you have not already done so, please register your votes by accessing the voting page and selecting the "for" or "withhold" buttons next to the name of each proposed trustee and next to the resolution with respect to the appointment of Deloitte LLP as the REIT's auditors.

The polls are now closed.

I have been advised by the scrutineer that the ballots and proxies deposited for the meeting have now been voted and that each resolution has been carried, with the effect that, one, each of the 7 nominees has been elected as trustee of the REIT until the next Annual Meeting of Unitholders or until their successors are elected or appointed; and two, the appointment of Deloitte LLP as auditors of the REIT has been approved, and the Board of Trustees has been authorized to fix their remuneration. We will file a report setting out the voting results on the SEDAR website. The formal items of business, as set out in the notice of the meeting, have now been dealt with. As there is no further business to come before the meeting, I declare the formal part of the meeting to be concluded. I move that the meeting be terminated, and I second the motion. I declare the resolution carried and the meeting terminated. The formal agenda for this meeting is now completed. I will now turn the meeting over to David Dunn and Andrew Agatep to proceed with the review of the business of the REIT. David?

Thank you, Andrea, and good afternoon, everyone. On behalf of the entire Slate asset management team, I'd like to welcome you to the 2021 Virtual Annual General Meeting for Slate Grocery REIT. Our plan this afternoon is to walk through an operational and strategic update of the REIT's busy and successful previous 15 months to highlight some key portfolio initiatives as well as what we're seeing in the broader grocery-anchored marketplace today. So let's get to it. In the last decade, Slate Grocery REIT has focused on building and managing a high-quality portfolio of grocery-anchored assets with an investment strategy centered around the future of grocery and essential food logistics. We own the critical infrastructure that grocers are using to solve their last mile, which is to get groceries into the hands of their customers in the most timely and cost-effective way possible. The REIT's portfolio was built to thrive in all market conditions and its operational resiliency and cash flow durability have been proven out during the pandemic. Our assets are located in major markets where there's a catalyst for consistent economic and population growth. Approximately 55% of our assets are located in the Southeast and Sun Belt regions of the United States. The REIT has grown meaningfully in recent times, acquiring more than 530 million quality grocery-anchored assets since June of 2020 in major markets. Being active while others were not has allowed us to improve the quality of our portfolio at an attractive cost basis of approximately $131 a square foot. This is a significant discount to current market values for comparable assets in major markets. We offer a compelling value proposition, being the only REIT in North America that is solely focused on owning grocery-anchored properties. Our largest tenants are America's largest and most successful grocers. Nearly 40% of the REIT's revenue comes from grocers and more than 68% from essential tenants. These are the tenants that remained open and thrived during the pandemic. A key part of grocers' future success is being able to keep up with the ever-changing customer shopping habits. Today, customers expect instantaneous access to their groceries, meaning it's imperative that grocers provide the convenience of click-and-collect and delivery from their stores to keep up with these increasing expectations. This is known as providing omnichannel solutions, which is the ability to provide different methods of shopping to customers, be it in a physical store or online. On that note, more than 98% of our grocers provide omnichannel solutions from our properties today. I'll now touch on some themes regarding the future of grocery fulfillment and the central role our assets are playing in its evolution. It will surprise no one that grocers have produced record sales over the last 12 to 15 months. While we expect sales will come off their 2020 highs this year, grocers are still forecasting sales growth of approximately 7% to 8% above 2019 levels. To provide some context relating to our 2 largest tenants, Kroger does $120 billion in annual revenue, and Walmart does $125 billion of revenue on a quarterly basis. These are massive businesses with outstanding credit, and we are pleased to have them as the cornerstone at many of the REIT's properties. The most important and costly segment of the supply chain is the last mile. This is driven by delivery costs and human labor. So to avoid cost run-ups and to preserve margins, grocers are investing heavily in automation at the store level. Customer shopping habits are changing. Online sales as a percentage of total grocery sales have gone from 4% to 10% during the pandemic. Though this sales trajectory is expected to level off to a degree, one element of this trend won't change. The vast majority of these sales are fulfilled through neighborhood stores, given their proximity to the end consumer. As a result, more than 96% of all grocery sales are happening through the bricks-and-mortar store. So why grocery real estate? Because it's essential food logistics. Customers expect their goods to be available instantly. They're buying online and picking up in-store or having their groceries delivered from the store like never before. So grocery operators are investing in automation at the store level to keep up with this surge in demand. Why? Because stores are in communities close to where people live. For example, Walmart is completing 1.5 million online delivery orders every week from their stores. This represents a 7x increase year-over-year, and this statistic does not include BOPUS, buy Online, Pick Up In-Store, is emerging as the most desired form of online grocery fulfillment. The most popular solution to address this surge in online demand is micro-fulfillment, which is a small automated fulfillment center. I'll describe the process. The automated component uses technology in a robotic grid system to pick and package non-perishables and dry goods. The order is then sent down a conveyor belt where a human adds the produce and the perishables. Then the order is either sent to the back of the store, put in a truck and deliver it to the customer's door or it's fulfilled through curbside pickup at the front of the store. Micro-fulfillment centers are located either within the store, bolted onto an existing store, or in some cases, in its own leased premises in the grocery-anchored shopping center. These investments and commitments to neighborhood centers are supportive of Slate Grocery REIT's strategy. They make our tenant relationships stickier and our assets more valuable. We are also seeing grocers invest in technology to enhance and improve the in-store shopping experience where profitability is the highest. Following are some examples we are seeing within grocers' store networks. Automated carts. Kroger and Amazon have introduced carts that allow customers to scan, bag and check out their groceries within the confines of the cart, thus allowing -- thus, pardon me, avoiding the customer checkout line altogether. Apps, which allow a customer to scan and pay for their groceries from their smartphones. More robust self-checkouts to provide customers with increased convenience and control of their shopping lives. Digital price tags on shelves to simplify price checking and integrate customers' shopping lists with their digital lives. Albertsons recently announced a multiyear partnership with Google to use artificial intelligence to provide better service and improve interactions with their customers. Grocers are willing to consider all options to keep customers coming into stores, because it's the cheapest way to put groceries into the hands of their customers. We'll now move on to a brief operational and strategic business update. Slate Grocery REIT had a record year operationally in 2020. Our team completed 1.7 million square feet of total leasing. This represents 40% more volume than annual averages from 2015 through 2019. For additional context, 1.7 million square feet represents almost 20% of the portfolio's gross leasable area, certainly an impressive performance during a pandemic. Our portfolio saw occupancy gains in each of the last 4 quarters and has gained 90 basis points since the start of the pandemic, demonstrating the continued strong demand for our grocery-anchored assets. Cash rent collections totaled 97% for all of 2020 and 96% for Q1 2021. Additionally, we agreed to defer $1.3 million of rent last year. This represents less than 1% of build rents. To date, we've collected 97% of total deferred rents in cash and expect the repayment program will be complete before the end of the second quarter. We like what we're seeing in the marketplace today. In addition to having $2 million of committed base rent coming online in the next 12 months, our team has a deep pipeline of new and exciting lease opportunities in excess of 200,000 square feet. We expect to execute the majority of these leases within the next 6 months, creating a longer pipeline of NOI growth into 2022 and beyond. Not only did we navigate our business extremely well operationally through the pandemic. We also advanced several strategic objectives as well. We made the decision in the middle of last year to rebrand our business to Slate Grocery REIT to align our name with our business strategy and to remove any confusion about who we are and what we do. We were successful in completing multiple debt refinancings last year with strong support from our debt partners. We started 2020 with an $858 million restructuring of our revolving credit facility and new term loan and ending with $169 million Lifeco loan in January of this year. The $1 billion of total refinancings allowed us to term out our maturities to a weighted average of 5.5 years and lock in our cost of debt at approximately 4%. On top of that, we issued approximately CAD 200 million of equity. These achievements affected the restructuring of our capital stack, which provided ample liquidity to weather the pandemic, and more importantly, to take advantage of the compelling growth opportunities in the market, which is exactly what we did. Since June of 2020, the REIT has purchased more than $530 million of quality grocery-anchored real estate on an opportunistic basis at off-market pricing. The assets purchased are good quality anchored by leading grocers and were acquired at a compelling cap rate of 8%. We're really excited about our most recent acquisition of 25 properties, a deal we expect will close in early Q3 of this year. It's the REIT's largest transaction to date, and it generates immediate cash flow accretion for our unitholders. The transaction also materially increases our exposure to America's largest metropolitan statistical areas, with 83% of the income derived from the top 50 MSAs, including 46% from New York and Dallas, which are the #1 and #4 markets in America. What is intriguing about our latest deal is we will assume the seller's position as the majority interest holder in 3 joint venture partnerships, our new partners are currently seeing robust new leasing pipelines, which is likely to enhance our return profile, allowing for an outperformance of our underwriting expectations. So what does all of this mean for SGR? When you look at the landscape of investment opportunities, Slate Grocery REIT is undervalued at current pricing levels. With one of the lowest AFFO multiples among our retail and industrial peers and the highest distribution yield, we offer a compelling investment opportunity in today's marketplace. Not only do we provide an attractive distribution yield, but we are also committed to growing our net asset value per unit. These 2 factors combine to make Slate Grocery REIT a unique total return investment opportunity. Another comparison I'd like to draw is an investment in Slate Grocery REIT relative to an investment in the bonds of our major tenants, the ones who account for large percentages of the portfolio's revenue. Investing in SGR offers investors exposure to America's largest and most creditworthy grocers who have proven to be highly durable regardless of economic conditions. But relative to grocer bonds, SGR provides investors with a 500 basis point of additional yield as well as equity upside through continued net asset value growth. To us, this is a compelling investment opportunity. In closing, I'd like to reiterate Slate Grocery REIT's key messages. Number one, we own the grocery-anchored real estate that facilitates the last mile of food logistics, which has proven its ability to perform in the most challenging conditions over the last 15 months. Number two, we had an excellent operating performance in 2020 with record annual leasing volumes and occupancy gains. And number three, we are continuing to execute on our growth plan to create further value for our unitholders, having executed over $530 million of quality grocery-anchored acquisitions since June of 2020. We're extremely proud of how our portfolio has performed through what has been a historically challenging period. And we look forward to what we are certain is a bright future for Slate Grocery REIT. I'd like to thank you all for your time today and your continued support. I'll now hand it back to Andrea for questions. Thank you very much.

Thank you, David. I will now open the floor for any questions. Again, I ask that all attendees who would like to ask a question, use the instant messaging feature of the virtual interface to do so. We will answer as many questions as time permits. We'll now give the attendees a moment to type their questions. For each question we answer, we will summarize the question to the extent necessary.

Thank you, Andrea. I will now read out the questions. First, can you speak further about the details of your recent portfolio acquisition and if you're still on track to close the transaction?

Thank you very much for the question. First of all, to address the timing of close, yes, we're working diligently through our -- to our consents and other elements of closing, and we're hoping and planning to still close this deal, barring any unforeseen situations, in Q3 of this year. Yes. I mean the way I look at this Annaly transaction is it's the culmination of a series of quality transactions that the REIT has successfully completed. They're very similar characteristics in the sense that they've both been -- all 3 of them, pardon me, have been off-market transactions creatively sourced with compelling yields. As it relates to this transformative $390 million deal, we're extremely excited. It's something that -- it's a deal that significantly increases the size and scale of our portfolio with one transaction. It also materially increases the presence for Slate Grocery REIT in major markets. 83% of the income comes from the top 50 MSAs, but most interestingly, 46% of the portfolio's income comes from the New York City and Dallas MSAs, which are the #1 and #4 in America. Similar to our other acquisitions, a high concentration of grocery and essential income: 39% from grocery, 74% from essential tenants. We get to add Albertsons, which is the leading national grocer to our top 5 tenant list. Albertsons has proven recently to be at the cutting edge of using technology to fulfill automation and scale their automation network to deal with the surge in online grocery. And finally, this whole portfolio was purchased at $127 a square foot. This is a low basis, a well-below replacement cost, and it's immediately accretive to cash flow and will provide upwards of $1.50 of accretion to our NAV over our whole period.

Thank you. The next question is, should we be concerned about the safety of the distribution, given the spike in this quarter's payout ratio?

Thank you for the question. So the way I look at this is there is not a lot to be concerned about. Our business is extremely strong. Our core business performed as we expected in Q1. We did see a temporary increase in our payout ratio, primarily driven by 2 factors. The first is just onetime transaction costs associated with the $169 million Lifeco deal we completed. The second is just timing. We've raised equity. We raised $200 million of equity in the last couple of months. And there's a bit of a drag on when we did the raise relative to when the NOI coming out of our acquisitions will be hitting our books. So what we see in the track record of our payout ratio is strong. We expect it to trend before the end of this year into the mid-80s. And a couple of quarters following that, it should be in the low to mid-80s, which we feel is a comfortable place to be. This is driven primarily from organic and -- organic growth in our core business and accretive acquisition. So frankly, we're really comfortable with where we sit today.

Thanks. And the final question is, can you please elaborate on the decreased portfolio cap rates over the last number of quarters?

So cap rates have been trending downward. They've been compressing for some time, and this is anchored in the desirability and the sentiment for grocery-anchored real estate in today's marketplace. Sentiment is up, frankly, both in North America and in Europe. It's driven by the visibility and the durability of the cash flow that these types of assets produce. A high percentage of revenue comes from grocers and essential tenants in grocery-anchored real estate. And the second factor is the capital markets now understand how grocers are planning to utilize, to scale automation to deal with changing customer shopping habits. What we've seen since the beginning of this year is the floodgates have really opened in terms of investment activity in the marketplace, both on a one-off and 2-off basis as well as major M&A transactions that we're seeing, obviously, the one between Weingarten and Kimco this year. They're very supportive of increasing values. I think I'll finish with one point. I alluded to this not only being an American or North American phenomenon. We're seeing capital move into essential food logistics globally, as evidenced by Slate Asset Management has a private equity grocery business in Germany, they're in the middle of refinancing certain elements of their debt. They're seeing strong demand from debt partners, which is translating to extremely strong value. So no matter where you look across the globe, the market understands the resiliency of this type of product. And we're pleased to have our portfolio cap rate come to an approximate 7% cap, which is producing strong values today.

At this time, we have no further questions. I'll pass it back to Andrea Stephen.

Okay. Thanks, Braden, and thanks, David. I'd like to close by acknowledging the efforts and accomplishments of the REIT's team during these extraordinary times. We look forward to continuing to deliver on our objectives of generating solid returns to unitholders, enhancing the value of our assets and growing our platform of properties. Thank you all for attending.