Slate Retail REIT Reports Fourth Quarter 2018 Results

(All amounts are expressed in U.S. dollars unless otherwise stated)

TORONTO--(BUSINESS WIRE)--Slate Retail REIT (TSX: SRT.U) (TSX: SRT.UN) (the "REIT"), an owner of U.S. grocery-anchored real estate, today announced its financial results for the three and twelve months ended December 31, 2018.

“Our strong results in the fourth quarter continue to highlight the durability and attractiveness of the REIT's grocery-anchored portfolio, with a $0.9 million or 4.2% increase in same-property net operating income year-over-year and an occupancy rate of 94.2%. In addition, we executed on over 640,000 square feet of leasing, including several major anchor renewals, driven by an industry leading 95.8% tenant retention ratio. By the end of the fourth quarter, 43% of all 2019 renewals have already been completed.

Moreover, the fourth quarter results contributed to a strong close to the 2018 year highlighted by solid organic growth with total portfolio net operating income up $3.8 million on an annualized basis or 3.8% year-over-year, driven by gains in same-property net operating income and from successfully completing several redevelopment projects with double-digit returns on cost.

Heading into 2019, we are excited about continued growth in net operating income driven by active projects in the portfolio today. In addition, we will capitalize on the opportunity to recycle capital through property sales to fund accretive unit repurchases completed in the fourth quarter of 2018 and through the substantial issuer bid. Property sales will also contribute to reducing our financial leverage toward our longer-term target level of 50% debt to total assets. Anticipated income growth and completion of existing capital projects will contribute to lowering the AFFO payout ratio to our target of 89% in 2019 and set the stage for the sixth consecutive distribution increase in six years.”

For the CEO's letter to unitholders for the quarter, please follow the link here.

Highlights

• Completed 642,773 square feet of leasing in the quarter, comprised of 588,211 square feet of lease renewals at a 4.4% weighted average spread above expiring rent and 54,562 square feet of new leasing, which is a 26.9% premium above the weighted average in-place rent for comparable space.
• Occupancy increased by 0.5% during the year to 94.2%, with a significant portion of the REIT’s leasing activity to still impact future periods.
• The weighted average tenant retention rate for the fourth quarter is 95.8%, an increase of 5.4% compared to the fourth quarter of 2017.
• The REIT approved an increase of its monthly distribution by 1.8% to U.S.$0.07125 per unit, or U.S.$0.855 annually, beginning with its December 2018 distribution. This increase is the fifth consecutive annual distribution increase since the REIT listed its class U units on the Toronto Stock Exchange in 2014.
• The REIT continued to actively repurchase units, with 1.4 million class U units purchased and subsequently canceled under the REIT’s normal course issuer bid (“NCIB”) for a total cost of $12.9 million at an average price of $9.47 during the fourth quarter. For the year ended December 31, 2018, the REIT repurchased 2.2 million units which will result in approximately $1.9 million less distributions on an annualized basis.
• On January 16, 2019, the REIT commenced a substantial issuer bid (the "offer"), pursuant to which the REIT offered to purchase up to 4.2 million class U units at a purchase price of C$12.54 (USD$9.51). On February 20, 2019, the offer announced on January 9, 2019 expired and the REIT has taken up and paid for 0.3 million class U units for an aggregate cost of $3.2 million or C$4.2 million, excluding fees and expenses related to the offer. The class U units purchased for cancellation under the offer approximate 0.8% of the REIT's class U units outstanding at December 31, 2018 and 0.8% of class U units outstanding at February 20, 2019, immediately prior to the expiry of the offer. Upon completion of the offer, 44.1 million class U units remain outstanding.
• Rental revenue was $36.3 million, which is an increase of $1.4 million over the same period in the prior year. The increase is primarily due to rental rate growth from re-leasing at rates above in-place rents and new leasing in addition to net acquisitions.
• Net operating income ("NOI") increased by $0.8 million to $25.4 million compared to the same period in the prior year, primarily due to the aforementioned increases in rental revenue, partially offset by the lost contribution from the sale of two properties and 13 outparcels during the 2018 period.
• Same-property NOI increased by 4.2% (comprised of 77 properties) and increased by 1.7% (comprised of 62 properties) for the three and twelve month periods ended December 31, 2018, respectively. Including the impact of the REIT’s redevelopment projects completed from the fourth quarter of 2017, same-property NOI increased by 4.2% and 2.4% for the three and twelve month periods ended December 31, 2018, respectively. Of the last 10 quarters, the REIT has now had eight quarters of positive same-property NOI growth.
• Funds from operations ("FFO") was $13.5 million or $0.30 per unit, a decrease of $0.03 per unit from the same period in the prior year, primarily due to the $2.0 million increase in cash interest paid as a result of fixing the REIT’s debt through interest rate swaps that fixed the rate on 99.2% of debt, partially offset by aforementioned increases in rental revenue over the prior quarter. On a pro forma basis after taking into account the REIT's repurchases of units in the fourth quarter of 2018 and in early 2019, the REIT's FFO per unit would have been $0.31 for the quarter, and $1.31 for 2018. We expect the full impact of these repurchases to be realized beginning in the second quarter of 2019.
• Adjusted funds from operations ("AFFO") was $9.2 million or $0.20 per unit, representing a $0.04 per unit decrease compared to the same quarter in 2017, mainly due to a $0.6 million increase in leasing and tenant improvement spend to primarily support new leasing over the prior quarter.
• The AFFO payout ratio for the three and twelve month periods ended December 31, 2018 was 102.6% and 99.5%, respectively. Following the completion of the offer, on a pro forma basis as at December 31, 2018, the AFFO payout ratio would be 97.3%.
• Net loss for the quarter was $9.0 million, a decrease of $40.4 million from the same quarter in the prior year. The decrease is due to the decrease in deferred income tax recovery of $27.4 million and the decrease in the change in fair value of properties of $6.3 million, partially offset by the aforementioned increases in revenue of $1.4 million.

	Three months ended December 31,
(in thousands of U.S. dollars, except per unit amounts)	2018		2017		Change %
Rental revenue	$	36,301	$	34,859	4.1	%
NOI	$	25,353	$	24,592	3.1	%
Net (loss) income	$	(9,017)	$	31,421	(128.7	)%
Leasing - shop space	138,505		177,902		(22.1	)%
Leasing - anchor / junior anchor	504,268		224,148		125.0	%
Total leasing activity (square feet)	642,773		402,050		59.9	%
Weighted average number of units outstanding ("WA units")	44,971		46,443		(3.2	)%
FFO^(1)	$	13,536	$	15,406	(12.1	)%
FFO per WA units^(1)	$	0.30	$	0.33	(9.1	)%
FFO payout ratio^(1)	69.7%		62.5%		7.2	%
AFFO^(1)	$	9,201	$	11,360	(19.0	)%
AFFO per WA units^(1)	$	0.20	$	0.24	(16.7	)%
AFFO payout ratio^(1)	102.6%		84.7%		17.9	%
(in thousands of U.S. dollars)	2018		2017		Change %
Same-property NOI (3 month period, 77 properties)	$	22,691	$	21,786	4.2	%
Same-property NOI (12 month period, 62 properties)	$	66,292	$	65,213	1.7	%
	As at December 31,
(in thousands of U.S. dollars, except per unit amounts)	2018		2017		Change %
Total assets	$	1,416,334	$	1,499,519	(5.5	)%
Total debt	$	871,562	$	883,046	(1.3	)%
Net asset value per unit	$	11.61	$	12.78	(9.2	)%
Portfolio occupancy	94.2%		93.7%		0.5	%
Debt / GBV ratio	61.5%		58.9%		2.6	%
Interest coverage ratio^(1)	2.41x		3.05x		(21.0	)%
^(1)Refer to “Non-IFRS Measures” section below.

Conference Call and Webcast

Senior management will host a live conference call at 9:00 a.m. ET on Wednesday, February 27, 2019 to discuss the results and ongoing business initiatives.

The conference call can be accessed by dialing [phone] or 1 [phone]. Additionally, the conference call will be available via simultaneous audio found at www.snwebcastcenter.com/webcast/slate/2019/0227. A replay will be accessible until March 13, 2019 via the REIT’s website or by dialing [phone] or 1 [phone] (access code 3874077) approximately two hours after the live event.

About Slate Retail REIT (TSX: SRT.U / SRT.UN)

Slate Retail REIT is a real estate investment trust focused on U.S. grocery-anchored real estate. The REIT owns and operates approximately U.S. $1.4 billion of assets located across the top 50 U.S. metro markets that are visited regularly by consumers for their everyday needs. The REIT’s conservative payout ratio, together with its diversified portfolio and quality tenant covenants, provides a strong basis to continue to grow unitholder distributions and the flexibility to capitalize on opportunities that drive value appreciation. Visit slateretailreit.com to learn more about the REIT.

About Slate Asset Management L.P.

Slate Asset Management L.P. is a leading real estate investment platform with over $6 billion in assets under management. Slate is a value-oriented manager and a significant sponsor of all of its private and publicly-traded investment vehicles, which are tailored to the unique goals and objectives of its investors. The firm's careful and selective investment approach creates long-term value with an emphasis on capital preservation and outsized returns. Slate is supported by exceptional people, flexible capital and a proven ability to originate and execute on a wide range of compelling investment opportunities. Visit slateam.com to learn more.

Supplemental Information

All interested parties can access Slate Retail’s Supplemental Information online at slateretailreit.com in the Investors section. These materials are also available on SEDAR or upon request to the REIT at [e-mail] or [phone].

Forward Looking Statements

Certain statements herein may be forward-looking statements within the meaning of applicable securities laws. These statements reflect management’s expectations regarding objectives, plans, goals, strategies, future growth, results of operations, performance and business prospects and opportunities of the REIT including expectations for the current financial year, and include, but are not limited to, statements with respect to management’s beliefs, plans, estimates and intentions, and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. Statements that contain words such as “could”, “should”, “would”, “anticipate”, “expect”, “believe”, “plan”, “intend”, “will”, “may”, “might” and similar expressions or statements relating to matters that are not historical facts constitute forward-looking statements.

These forward-looking statements are not guarantees of future events or performance and, by their nature, are based on the REIT’s current estimates and assumptions, which are subject to significant risks and uncertainties. Forward-looking statements contained herein are made as the date hereof and accordingly are subject to change after such date. The REIT does not undertake to update any forward-looking statements that are contained herein except as expressly required by applicable securities laws.

Non-IFRS Measures

This news release and accompanying financial statements are based on International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”).

We disclose a number of financial measures in this news release that are not measures used under IFRS, including NOI, same-property NOI, FFO, FFO payout ratio, AFFO, AFFO payout ratio, adjusted EBITDA and the interest coverage ratio, in addition to certain measures on a per unit basis.

• NOI is defined as rental revenue less operating expenses, prior to straight-line rent and IFRIC 21, Levies ("IFRIC 21") adjustments. Same-property NOI includes those properties owned by the REIT for each of the current period and the relevant comparative period excluding those properties under development.
• FFO is defined as net income (loss) adjusted for certain items including transaction costs, change in fair value of properties, deferred income taxes, unit expense (income) and IFRIC 21 property tax adjustments.
• AFFO is defined as FFO adjusted for straight-line rental revenue and sustaining capital, leasing costs and tenant improvements.
• FFO payout ratio and AFFO payout ratio are defined as distributions declared divided by FFO and AFFO, respectively.
• FFO per WA unit and AFFO per WA unit are defined as FFO and AFFO divided by the weighted average class U equivalent units outstanding, respectively.
• Adjusted EBITDA is defined as NOI less other expenses.
• Interest coverage ratio is defined as adjusted EBITDA divided by cash interest paid.

We utilize these measures for a variety of reasons, including measuring performance, managing the business, capital allocation and the assessment of risk. Descriptions of why these non-IFRS measures are useful to investors and how management uses each measure are included in Management’s Discussion and Analysis. We believe that providing these performance measures on a supplemental basis to our IFRS results is helpful to investors in assessing the overall performance of our businesses in a manner similar to management. These financial measures should not be considered as a substitute for similar financial measures calculated in accordance with IFRS. We caution readers that these non-IFRS financial measures may differ from the calculations disclosed by other businesses, and as a result, may not be comparable to similar measures presented by others.

Calculation and Reconciliation of Non-IFRS Measures

The table below summarizes a calculation of non-IFRS measures based on IFRS financial information.

Three months ended December 31,
(in thousands of U.S. dollars, except per unit amounts)	2018		2017
Rental revenue	$	36,301	$	34,859
Straight-line rent revenue	(331)		(523)
Property operating expenses	(5,747)		(5,357)
IFRIC 21 property tax adjustment	(4,870)		(4,387)
NOI^(1)	$	25,353	$	24,592
Cash flow from operations	$	9,065	$	13,559
Changes in non-cash working capital items	3,708		1,569
Disposition costs	575		104
Finance charge and mark-to-market adjustments	(401)		(564)
Interest, net and TIF note adjustments	258		215
Capital	(1,397)		(1,485)
Leasing costs	(621)		(390)
Tenant improvements	(1,986)		(1,648)
AFFO^(1)	$	9,201	$	11,360
Net (loss) income	$	(9,017)	$	31,421
Disposition costs	575		104
Change in fair value of properties	33,419		27,150
Deferred income tax recovery	(4,223)		(31,582)
Unit income	(2,348)		(7,300)
IFRIC 21 property tax adjustment	(4,870)		(4,387)
FFO ^(1)	$	13,536	$	15,406
Straight-line rental revenue	(331)		(523)
Capital	(1,397)		(1,485)
Leasing costs	(621)		(390)
Tenant improvements	(1,986)		(1,648)
AFFO^(1)	$	9,201	$	11,360
NOI ^(1)	$	25,353	$	24,592
Other expenses	(2,540)		(1,962)
Cash interest, net	(9,207)		(7,183)
Finance charge and mark-to-market adjustments	(401)		(564)
Capital	(1,397)		(1,485)
Leasing costs	(621)		(390)
Tenant improvements	(1,986)		(1,648)
AFFO^(1)	$	9,201	$	11,360
^(1)Refer to “Non-IFRS Measures” section above.
Three months ended December 31,
(in thousands of U.S. dollars, except per unit amounts)	2018		2017
NOI ^(1)	$	25,353	$	24,592
Other expenses	(2,540)		(1,962)
Adjusted EBITDA^(1)	$	22,813	$	22,630
Cash interest paid	(9,465)		(7,430)
Interest coverage ratio^(1)	2.41x		3.05x
WA units	44,971		46,443
FFO per WA unit^(1)	$	0.30	$	0.33
FFO payout ratio ^(1)	69.7%		62.5%
AFFO per WA unit^(1)	$	0.20	$	0.24
AFFO payout ratio ^(1)	102.6%		84.7%
^(1) Refer to “Non-IFRS Measures” section above.