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In the real estate sector, capital-intensive companies, particularly in real estate investment trusts (REITs), have faced challenges over the past three years due to higher interest rates and rising debt costs. These factors have led to a pullback in stock performance, but they have also resulted in increased dividend yields, making some stocks appealing for income-focused strategies.
Slate Grocery Overview
Slate Grocery (TSX:SGR), with a market capitalization of approximately $828 million, operates as a REIT focused on grocery-anchored properties. This investment model allows Slate Grocery to generate recurring income, providing resilience across various market cycles. The company currently pays shareholders an annual dividend of $1.17 per share, translating to a forward yield of 8.4%. The REIT's portfolio includes over US$2.4 billion in total assets, primarily located in the U.S., featuring strong credit tenants that contribute to durable cash flows and potential capital appreciation over the long term.
Recent Performance and Growth
As of the end of the second quarter (Q2) of 2024, Slate Grocery owned 116 properties across 23 states, covering 15.2 million square feet. Approximately 95% of these properties are leased to grocery-anchored tenants, which enhances the company's resilience during economic downturns. In the June quarter, Slate Grocery completed over 700,000 square feet of leasing, achieving attractive rental rate increases that contributed to rising net operating income.
The company reported that over 80,000 square feet of new deals were finalized at 28% above the average in-place rent. Furthermore, renewals completed without options saw increases of 12.8% compared to expiring rents. These strong leasing spreads over the past year resulted in a net operating income growth of 3.5% year over year.
Notably, Slate Grocery's average in-place rent stands at US$12.56 per square foot, significantly below the market average of US$23.38. This disparity provides the REIT with the potential for continued rent increases and sustained net operating income growth.
Financial Health and Dividend Sustainability
Slate Grocery maintains a focus on managing its balance sheet to navigate the current interest rate environment effectively. Over 90% of its total debt is fixed, with an average interest rate of 4.5%, which helps mitigate the impact of rising rates.
In terms of dividend sustainability, Slate Grocery has shown resilience compared to other Canadian companies that have reduced their dividends due to unsustainable payout ratios. Over the last 12 months, the REIT’s funds from operations increased by 5.8% to US$17.47 million, or US$0.29 per share, resulting in a sustainable payout ratio of 74.2%. This healthy ratio allows for debt reduction and lower interest expenses.
Additionally, Slate Grocery has reduced its long-term debt from US$1.05 billion in 2022 to US$868 million in 2023, further lowering it to US$594 million over the past year. The REIT benefits from low vacancy rates in the industry, combined with under-market rents, creating potential for net operating income growth across its portfolio.
