Slate Retail REIT Reports Second Quarter 2020 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 and highlights for the three and six months ended June 30, 2020.

"Amidst turmoil, we were pleased to see our defensible strategy prevail this quarter with solid operating results, including one of our best leasing performances since inception in 2014," said David Dunn, Chief Executive Officer. "Both our portfolio of grocery-anchored properties and our team have performed exceptionally well since the onset of the COVID-19 pandemic and we are poised to use our strong balance sheet to take advantage of compelling opportunities to build on the quality of the portfolio headed into the back half of the year.”

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

Highlights

• Completed 464,326 square feet of lease renewals and 54,365 square feet of new leasing at a 2.3% weighted average rental spread.
• The REIT completed the acquisition of seven properties for an aggregate purchase price of $90.1 million ($144 per square foot), at a weighted average capitalization rate of 8.7%. These acquisitions contributed 623,766 square feet to the REIT's portfolio. This transaction was initially announced on March 10, 2020 for a purchase price of $106.5 million. It was subsequently announced on April 9, 2020 that the deal was unlikely to proceed, but the agreement of purchase and sale was amended and reinstated and the transaction has now been completed.
• The REIT has substantially completed its disposition pipeline. For the three month period ended June 30, 2020, the REIT has disposed of two properties for $47.0 million at a weighted average cap rate of 6.9% on trailing twelve-month NOI. The REIT will seek to reinvest net proceeds into new accretive investment opportunities that will strengthen the quality of the REIT’s portfolio and drive growth in NOI.
• Occupancy decreased by 0.6% during the quarter to 92.2% due to 51,189 square feet of lease expiries and the disposition of two properties which had a weighted average occupancy rate of 94.2%, partially offset by 54,365 square feet of new leasing. Lease expirations during the quarter were primarily due to the grocery anchor tenant at Battleground Village Square vacating at expiry. Management has an active leasing strategy in-place for this anchor box.
• The weighted average tenant retention rate for the second quarter was 92.5%. Since the beginning of 2016, the weighted average retention rate has been 91.9%.
• Rental revenue for the three month period ended June 30, 2020 was $30.3 million, which represents a $5.8 million decrease over the same period in the prior year. The decrease is primarily due to the disposition of 13 properties and five outparcels at certain properties from June 30, 2019, partially offset by the acquisition of seven properties during the quarter and rental rate growth from re-leasing at rates above in-place rents and new leasing.
• Net income for the three month period ended June 30, 2020 was $6.9 million, which is a $1.0 million increase from the same quarter of the prior year. The increase is attributed to the change in fair value of properties, partially offset by the aforementioned decreases in revenue.
• NOI for the three month period ended June 30, 2020 decreased by $0.1 million from the first quarter of 2020 to $22.2 million. This is primarily due to the aforementioned dispositions, partially offset by uplifts in rental rates from new leasing typically above in-place rent.
• Same-property NOI for the trailing twelve month period ended June 30, 2020 (comprised of 61 properties) decreased by 0.5% over the same period in the prior year. Same-property NOI for the three month period ended June 30, 2020 (comprised of 63 properties) decreased by 2.1% over the comparative period. Adjusting for termination fees, same-property NOI for the trailing twelve month period and three month period increased by 0.8% and 0.8%, respectively. Including the impact of the completion of the REIT's redevelopment projects completed in 2019, same-property NOI decreased by 0.2% for the trailing twelve month period ended June 30, 2020.
• Funds from operations ("FFO") per unit was $0.26 for the quarter, which represented a $0.05 decrease from the same period in the prior year, primarily due to lost contribution in rental revenue from the aforementioned dispositions over the comparative period and changes in non-cash straight-line rent, partially offset by decreases in cash interest paid.
• Adjusted funds from operations ("AFFO") per unit was $0.21 for the quarter, a $0.03 decrease from the comparative period. Decreases in AFFO were due to the aforementioned decreases in FFO, partially offset by decreases in leasing costs and tenant improvement spend.

Planned Name Change to Slate Grocery REIT

Slate Retail REIT announced today that it intends to change its name to Slate Grocery REIT, subject to receiving TSX approval. The name change has been in the works for some time and reflects the REIT's continued focus on investing in high quality grocery-anchored assets to help tenants achieve efficiency in last mile logistics while providing long-term value to its unitholders.

“Slate Retail REIT is unique in that our portfolio is 100% grocery-anchored,” said David Dunn, Chief Executive Officer of the REIT. “We own the critical infrastructure that communities continue to rely upon for their daily needs. Slate Grocery REIT better reflects our business and investment thesis, which have always been and will continue to be centered around investing in high quality, grocery-anchored assets in major markets across the United States.”

Board of Trustees Update

Slate Retail REIT announced today the retirement of Sam Altman from the Board of Trustees (the “Board”). “We are extremely grateful for Sam’s contributions to the REIT since he first became a trustee in 2014,” said Tom Farley, Chairman of the Board of Trustees. “On behalf of our Board, I would like to thank Sam for his valuable service and wish him well in his future endeavours.”

The REIT is pleased to announce the appointment of Marc Rouleau to the Board of Trustees. “Marc is a seasoned executive with significant experience in public and private sector investments and financial markets,” said Tom Farley, Chairman of the Board of Trustees. “We are excited to have Marc join our Board, Audit and Compensation, Governance and Nomination Committees and look forward to his contributions.”

COVID-19 Update

In response to the pandemic, Slate Asset Management (Canada) L.P. (the “Manager”), as manager of the REIT, has implemented a COVID-19 response plan, with employee and tenant safety as a top priority. This plan is intended to monitor and mitigate the business and health risks posed to the REIT and its stakeholders.

Appropriate operational planning and cost-control measures are in place to manage operational and financial risk. Employees of the Manager are mandated to work from home to the extent possible. The REIT has mandated increased sanitation and health and safety measures at its properties. The REIT continues to monitor direction provided by the World Health Organization, public health authorities and federal and state governments in order to control the spread of COVID-19.

Management has assessed 62% of the REIT’s tenant portfolio comprises essential tenants, including grocery-anchored tenants, medical and personal services, financial institutions, and other essential based services. Rent is typically paid within the first 15 business days of each month.

For the second quarter, the REIT has collected 89% of contractual rent. For the month of July the REIT has collected 91% of rent. The REIT expects to substantially collect outstanding billings through immediate cash collection or deferral programs. The REIT has granted 3.8% of deferral programs as a percentage of contractual rent for the quarter. The REIT continues to assess tenants adversely affected by COVID-19 and will consider deferral programs on a case by case basis. All of the REIT’s centers have remained open throughout the COVID-19 pandemic, with 92% of tenants in operation.

The REIT is well-positioned from a liquidity perspective to endure negative impacts as a result of COVID-19, however, the REIT will continue to evaluate and monitor this as the situation endures.

	Three months ended June 30,
(in thousands of U.S. dollars, except per unit amounts)	2020				2019				Change %
Rental revenue		$	30,255			$	36,016			(16.0)	%
NOI^1		$	22,152			$	25,507			(13.2)	%
Net income^1		$	6,888			$	5,934			16.1	%
Leasing – shop space		38,712				147,754				(73.8)	%
Leasing – anchor / junior anchor		479,979				176,488				172.0	%
Total leasing activity (square feet) ^2		518,691				324,242				60.0	%
Weighted average number of units outstanding ("WA units")		42,208				44,101				(4.3)	%
FFO^1 2		$	11,115			$	13,622			(18.4)	%
FFO per WA units^1 2		$	0.26			$	0.31			(16.1)	%
FFO payout ratio^1 2		81.8		%		69.0		%		12.8	%
AFFO ^1 2		$	9,046			$	10,694			(15.4)	%
AFFO per WA units^1 2		$	0.21			$	0.24			(12.5)	%
AFFO payout ratio^1 2		100.5		%		87.9		%		12.6	%
(in thousands of U.S. dollars)	2020				2019				Change %
Same-property NOI (3 month period, 63 properties)		$	19,985			$	20,418			(2.1)	%
Same-property NOI (12 month period, 61 properties)		$	76,605			$	76,959			(0.5)	%
	As at June 30,
(in thousands of U.S. dollars, except per unit amounts)	2020				2019				Change %
Total assets		$	1,300,866			$	1,375,824			(5.4)	%
Total debt		$	781,002			838,126				(6.8)	%
Net asset value per unit		$	10.55			$	11.04			(4.4)	%
Number of properties ^2		77				83				(7.2)	%
Portfolio occupancy^2		92.2		%		93.3		%		(1.1)	%
Debt / GBV ratio		60.0		%		60.9		%		(0.9)	%
Interest coverage ratio^1		2.52x				2.53x				(0.4)	%
^1 Refer to “Non-IFRS Measures” section below. 2 Includes the REIT's share of its equity accounted property investment.

Conference Call and Webcast

Senior management will host a live conference call at 9:00 am ET on Wednesday, July 29, 2020 to discuss the results and ongoing business initiatives of the REIT.

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/2020/0729. A replay will be accessible until August 12, 2020 via the REIT’s website or by dialing [phone] or 1 [phone] (access code 3557519) 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. $1.3 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 diversified portfolio and quality tenant covenants provide 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

Slate Asset Management is a leading real estate focused alternative investment platform with approximately $6.5 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 demonstrated 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 information herein constitutes “forward-looking information” as defined under Canadian securities laws which reflect management’s expectations regarding objectives, plans, goals, strategies, future growth, results of operations, performance, business prospects and opportunities of the REIT. The words “plans”, “expects”, “does not expect”, “scheduled”, “estimates”, “intends”, “anticipates”, “does not anticipate”, “projects”, “believes”, or variations of such words and phrases or statements to the effect that certain actions, events or results “may”, “will”, “could”, “would”, “might”, “occur”, “be achieved”, or “continue” and similar expressions identify forward-looking statements. Some of the specific forward-looking statements contained herein include, but are not limited to, statements relating to the impact of the COVID-19 pandemic. Such forward-looking statements are qualified in their entirety by the inherent risks and uncertainties surrounding future expectations.

Forward-looking statements are necessarily based on a number of estimates and assumptions that, while considered reasonable by management as of the date hereof, are inherently subject to significant business, economic and competitive uncertainties and contingencies. When relying on forward-looking statements to make decisions, the REIT cautions readers not to place undue reliance on these statements, as forward-looking statements involve significant risks and uncertainties, and should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not the times at or by which such performance or results will be achieved. A number of factors could cause actual results to differ, possibly materially, from the results discussed in the forward-looking statements. Additional information about risks and uncertainties is contained in the filings of the REIT with securities regulators.

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, IFRIC 21, Levies ("IFRIC 21") property tax adjustments and adjustments for equity investment. 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, change in fair value of financial instruments, deferred income taxes, unit expense (income), adjustments for equity investment 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.
• Net asset value is defined as the aggregate of the carrying value of the REIT's equity, deferred income taxes and exchangeable units of subsidiaries.

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.

SRT-FR

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 June 30,
(in thousands of U.S. dollars, except per unit amounts)		2020		2019
Rental revenue		$	30,255	$	36,016
Straight-line rent revenue		(237)		(415)
Property operating expenses		(3,972)		(5,323)
IFRIC 21 property tax adjustment		(3,994)		(4,763)
Adjustments for equity investment		100		(8)
NOI^1 2		$	22,152	$	25,507
Cash flow from operations		$	10,942	$	17,730
Changes in non-cash working capital items		(3,275)		(4,981)
Disposition costs		972		852
Finance charge and mark-to-market adjustments		(386)		(401)
Interest, net and TIF note adjustments		38		47
Adjustments for equity investment		(116)		(40)
Taxes on dispositions		2,703		—
Capital		(488)		(485)
Leasing costs		(304)		(437)
Tenant improvements		(1,040)		(1,591)
AFFO^1 2		$	9,046	$	10,694
Net income^1 2		$	6,888	$	5,934
Change in fair value of financial instruments		—		987
Disposition costs		972		852
Change in fair value of properties		809		7,521
Deferred income tax expense		312		2,694
Adjustments for equity investment		438		87
Unit expense		2,987		310
Taxes on dispositions		2,703		—
IFRIC 21 property tax adjustment		(3,994)		(4,763)
FFO^1 2		$	11,115	$	13,622
Straight-line rental revenue		(237)		(415)
Capital		(488)		(485)
Leasing costs		(304)		(437)
Tenant improvements		(1,040)		(1,591)
AFFO^1 2		$	9,046	$	10,694
NOI^1 2		$	22,152	$	25,507
Other expenses		(2,919)		(2,899)
Cash interest, net		(7,603)		(8,895)
Finance charge and mark-to-market adjustments		(386)		(401)
Adjustments for equity investment		(216)		(32)
Current income tax expense		(150)		(73)
Capital		(488)		(485)
Leasing costs		(304)		(437)
Tenant improvements		(1,040)		(1,591)
AFFO^1 2		$	9,046	$	10,694
^1 Refer to “Non-IFRS Measures” section above. 2 Includes the REIT's share of its equity accounted property investment.

	Three months ended June 30,
(in thousands of U.S. dollars, except per unit amounts)		2020			2019
Net income ^2		$	6,888		$	5,934
Interest expense and other financing costs, net		7,989			9,296
Change in fair value of financial instruments		—			987
Disposition costs		972			852
Change in fair value of properties		809			7,521
Deferred income tax expense		312			2,694
Current income tax expense		2,853			73
Unit expense		2,987			310
Adjustments for equity investment		654			119
Straight-line rent revenue		(237)			(415)
IFRIC 21 property tax adjustment		(3,994)			(4,763)
Adjusted EBITDA^1 2		$	19,233		$	22,608
NOI^1 2		$	22,152		$	25,507
Other expenses		(2,919)			(2,899)
Adjusted EBITDA^1 2		$	19,233		$	22,608
Cash interest paid		(7,641)			(8,942)
Interest coverage ratio^1 2		2.52x			2.53x
WA units		42,208			44,101
FFO per WA unit^1 2		$	0.26		$	0.31
FFO payout ratio ^1 2		81.8		%	69.0		%
AFFO per WA unit^1 2		$	0.21		$	0.24
AFFO payout ratio ^1 2		100.5		%	87.9		%
^1 Refer to “Non-IFRS Measures” section above. ^2 Includes the REIT's share of its equity accounted property investment.