Slate Grocery REIT: Finding Tenant Quality And An 8% Dividend Yield

Summary

  • Pre-pandemic, retailers competing with e-commerce and struggling under too much debt were the cautionary names in the realm of shopping center and mall investment.
  • Last week, Bed Bath & Beyond released a list identifying properties in the first round of what will be more than 150 store closures.
  • Kroger Company is at the opposite end of the tenant quality spectrum, and in this article, we identify KR’s roster of publicly traded retail REIT landlords.
  • Slate Grocery REIT is from Canada, but its properties are all in the USA.
  • Looking for more investing ideas like this one? Get them exclusively at Portfolio Income Solutions. Learn More »

Kroger Supermarket. The Kroger Co. is One of the World"s Largest Grocery Retailers I

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A few weeks back, we discussed the operational weaknesses at Bed Bath & Beyond (BBBY) and identified which REITs might have exposure to BBBY's announcement that they would soon close up to 150 stores. Last week BBBY investor relations posted a list of the first 56 locations to be closed and public REITs were among the property owners. Prior to the pandemic, it seemed a month did not go by without a major national retailer announcing a bankruptcy or restructuring. Identifying the risk of exposure to tenant weakness was just a routine part of the retail real estate due diligence process.

When the Kroger Co. (KR) reported strong Q2 22 results and raised guidance in their September 9 earnings release, I thought the same exercise might help us get some exposure to strength. Grocers drive weekly foot traffic and make the address more valuable to every other tenant in the shopping center. This is what we found.

Kroger Company Landlords

Your neighborhood grocer might not carry the Kroger name, but with all these logos, they are likely nearby.

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The Kroger Company

Our scan of retail REIT property owners reveals that Kroger has relationships across the sector.

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S&P Capital IQ

The above table carries names that are familiar to REIT investors. Agree Realty (ADC), Brixmor Property Group (BRX), Federal Realty (FRT), Kimco Realty (KIM), Phillips Edison & Company (PECO), and Regency Centers (REG) all have meaningful exposure to the Kroger Company. Lesser-known Slate Grocery REIT (OTC:SRRTF, SGR.U), however, has the most relative exposure with KR leasing 11.20% of SRRTF's rentable square feet.

Oh, Canada

Slate Grocery REIT is an externally managed, Toronto based REIT that owns 110 US grocery anchored shopping centers. It enjoys a compromised existence of two Toronto exchange listed equities and one US OTC foreign ordinary; SGR.UN is traded on the Toronto stock exchange in Canadian dollars, SGR.U is traded on the Toronto exchange in US dollars, SRRTF is the foreign ordinary traded on the OTC in US dollars and this foreign ordinary structure is how we have owned it, traded it, valued it, and receive dividends.

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S&P Capital IQ

This cross-currency pricing structure is further confused by the reporting agencies, but Slate Grocery simplifies it by reporting its operations in US dollars and paying its monthly dividend in US dollars. Our observations will be referenced only in US$.

The Proposition

While we had traded Slate Grocery, we didn't become really interested until late 2020 when they were identified in a broken property transaction with Armada Hoffer (AHH), a REIT with which we have long been intimate. AHH had negotiated the sale of a small portfolio of grocery anchored shopping centers to SRRTF and then COVID hit. In the newly uncertain environment, SRRTF backed out of the trade; needing to create liquidity, AHH agreed to the sale at a 20%+ discount. AHH gained the desired liquidity; SRRTF made a bargain acquisition. We were intrigued.

Since that time, SRRTF has coordinated a number of other seemingly advantaged acquisitions. Their assembled portfolio is a geographic mis-mash but may be evolving to status as an attractive asset to cash flush acquirers of grocery anchored retail.

S&P Capital IQ

S&P Capital IQ

The portfolio is unspectacular, but the metrics have wiggle room to realize value in a whole company sale.

If you consider peer valuations like KIM at 13.3x FFO, PECO at 14.4x FFO, and REG at 14.9x FFO, Slate Grocery trades at a material discount. SRRTF currently trades at 10.2X 2022 consensus FFO/Share, so a buyout at 13x would be a win-win for both buyer and seller in today's fragile market. The heavy Kroger Company imprimatur helps as well.

If an acquirer is targeting grocery anchored retail, SRRTF is a bargain portfolio. Consider STOR's latest news in the net lease market.

Pluses and Minuses

Not only does SRRTF trade at a 10% discount to consensus NAV, but its $0.864 (annualized) monthly dividend translates to an 8.01% dividend yield as measured against its $10.78 share price (nearly twice the peer set's average yield). Detracting from that fat yield, most custodians consider SRRTF a Canadian entity and will subject your dividend to foreign tax withholding.

Like other small cap, US assets-but Canada based foreign ordinaries, SRRTF suffers in a lack of trading volume. If you need liquidity, this issue is not for you.

At today's pricing, Slate Grocery is a high dividend yield available at a discount to NAV. I own a little in hope that it will become a premium price acquisition.

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This article was written by

Ross Bowler profile picture
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2nd Market Capital Advisory specializes in the analysis and trading of real estate securities.  Through a selective process and consideration of market dynamics, we aim to construct portfolios for rising streams of dividend income and capital appreciation. I am an investment advisor representative of 2nd Market Capital Advisory Corporation, a Wisconsin registered investment advisor along with fellow SA contributors Simon Bowler and Dane Bowler.

Full Disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person. Please see our SA Disclosure Statement for our Full Disclaimer.

Disclosure: I/we have a beneficial long position in the shares of SRRTF, AHH either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: All articles are published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person.
The information offered is impersonal and not tailored to the investment needs of any specific person. Readers should verify all claims and do their own due diligence before investing in any securities, including those mentioned in the article. NEVER make an investment decision based solely on the information provided in our articles.
It should not be assumed that any of the securities transactions or holdings discussed were profitable or will prove to be profitable. Past performance does not guarantee future results. Investing in publicly held securities is speculative and involves risk, including the possible loss of principal. Historical returns should not be used as the primary basis for investment decisions.
Commentary may contain forward-looking statements which are by definition uncertain. Actual results may differ materially from our forecasts or estimations, and 2MCAC and its affiliates cannot be held liable for the use of and reliance upon the opinions, estimates, forecasts, and findings in this article.
S&P Global Market Intelligence LLC. Contains copyrighted material distributed under license from S&P
2nd Market Capital Advisory Corporation (2MCAC) is a Wisconsin registered investment advisor. Ross Bowler is an investment advisor representative of 2nd Market Capital Advisory Corporation.

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