In the last three years, capital-intensive companies in sectors such as real estate and energy have trailed the broader markets by a wide margin, primarily due to higher interest rates and the rising cost of debt. However, the pullback has increased the dividend yield for these stocks, making them attractive to income-seeking investors.
Central banks in the U.S. and Canada have recently reduced interest rates, which should act as a tailwind for these companies. One such TSX stock that is part of the real estate market is Slate Grocery (TSX:SGR.UN). Valued at a market cap of $828 million, Slate Grocery pays shareholders an annual dividend of $1.17 per share, indicating a forward yield of 8.4%. Slate Grocery is a real estate investment trust (REIT), which means it owns and operates properties rented out to tenants, allowing it to generate recurring income across market cycles.
With more than US$2.4 billion in total assets, Slate Grocery owns a resilient grocery-anchored portfolio and strong credit tenants, mainly in the U.S., that provide shareholders with durable cash flows and the potential for capital appreciation over the long term.
Let’s see if you should buy this REIT for its lofty dividend yield right now.
Slate Grocery continues to expand
Slate Grocery ended the second quarter (Q2) of 2024 with 116 properties in 23 states south of the border, spanning 15.2 million square feet. Around 95% of these properties are leased out to pure-play grocery-anchored tenants, making the company fairly recession-resistant. In the June quarter, it completed more than 700,000 square feet of total leasing at attractive rental rate increases, which drove net operating income to rise.
It emphasized that more than 80,000 square feet of new deals were completed at 28% above comparable average in-place rent. Moreover, non-options renewals were completed at 12.8% above expiring rents. Strong leasing spreads over the last 12 months have now translated to net operating income growth for the company, which rose by 3.5% year over year.
Notably, Slate Grocery’s average in-place rent is US$12.56 per square foot, which is still below the market average of US$23.38. This difference provides Slate Grocery with the runway for continued rent increases and drive net operating income growth in the future.
Slate Grocery is also focused on managing its balance sheet to ensure the REIT is protected in the current interest rate environment. For instance, over 90% of its total debt is fixed, with an average interest rate of 4.5%.
Is Slate Grocery’s dividend yield sustainable?
A few Canadian companies, such as Algonquin Power & Utilities and Northwest Healthcare, were forced to lower their dividend payouts in recent years due to an unsustainable payout ratio. In the last 12 months, Slate Grocery’s funds from operations rose by 5.8% to US$17.47 million, or US$0.29 per share, which indicates a sustainable payout ratio of 74.2%. This allows the REIT to lower balance sheet debt and interest expenses.
Slate Grocery’s long-term debt has reduced from US$1.05 billion in 2022 to US$868 million in 2023 and US$594 million in the last 12 months.
The REIT is part of an industry that enjoys low vacancy rates, which, combined with under-market rents, provide Slate Grocery with the opportunity to grow net operating income across its portfolio.
