Investors looking for non-residential real estate assets in large secondary markets are paying close attention to a pair of trusts behind Slate Asset Management LP, each with a different territory and strategy.
Slate Retail REIT invests in, owns and operates 66 properties, anchored by grocery stores such as Kroger and discounter Wal-Mart, mostly in smaller U.S. cities such as Cleveland and Littleton, Ohio, as well as Bowling Green and Norfolk, Va.
Slate Office REIT, formerly FAM REIT, is focused on "non-trophy" downtown and suburban office space in Canada. It has 34 properties in cities such as Winnipeg, Mississauga and St. John's.
Each real estate investment trust has new management in place as of 2015, looking to expand their portfolios by gobbling up "overlooked" assets in their specific markets. Both REITs have beaten the S&P/TSX composite index over the past year, but Slate Retail has been the better performer amid stronger U.S. economic growth.
Slate Retail shares are up 14 per cent over the past year and outperformed the TSX by more than 20 per cent. Investors like its 7.5-per-cent distribution yield, and aggressive acquisition strategy.
"The REIT has more than doubled its portfolio in less than two years … a trend we expect to continue," National Bank Financial analyst Endri Leno said in a note. He said the U.S. retail property market is highly fragmented, with only about 5 per cent of retail centres currently owned by the top 25 landlords.
"The pricing gap between secondary versus primary markets has widened, suggesting relative undervaluation in secondary markets," said Mr. Leno, who has an "outperform" rating on the REIT, which is similar to "buy."
John Stephenson, president and chief executive officer of Stephenson & Co., has been buying Slate Retail units since last fall, as part of his U.S. investment focus.
"The grocery angle is very appealing," said Mr. Stephenson. "It's very stable … From an investment perspective, it's hard to shoot holes in it."
While higher interest rates are a risk for REITs, Mr. Stephenson said he doesn't see a dramatic rise in the near future that will hurt Slate Retail's growth plans south of the border.
Slate Retail CEO Greg Stevenson said competition for assets is lower in the secondary markets where they're focused, which can mean more value and selection for acquisitions.
"While we thought that over time the gap between core and secondary markets would tighten, it has actually become wider," Mr. Stevenson said in an interview. "We think the opportunity today is larger than it has ever been … We are bringing capital to markets and investment opportunities, where capital today continues to be scarce."
Its sister REIT, Slate Office, has seen more modest growth, outperforming the TSX by about 5 per cent over the past year, amid a sluggish Canadian economy. The stock has fallen by about 8 per cent over the past year, but is up 12 per cent over the past two months.
The REIT has been expanding, including through the acquisition of 14 commercial properties from Fortis Properties Corp. in May, 2015. It has also lowered its adjusted funds from operations (AFFO) payout ratio to 95.9 per cent for the year ended Dec. 31, from 124.3 per cent a year earlier, which has provided comfort to investors that its distribution, currently yielding 10 per cent, is covered.
BMO Nesbitt Burns analyst Troy MacLean recently initiated coverage of Slate Office with a "market perform" rating (similar to hold). He has a $7.75 target, which is about 3 per cent above its current price of $7.50.
He expects the REIT to benefit from higher rents in many markets, when leases are renewed, and more stable occupancy in the future. Its diversification is also a bonus for investors.
"We think [Slate Office's] geographic footprint (limited Alberta exposure, overweight Eastern Canada) and relatively low in-place rents provide downside protection in a relatively weak Canadian office market," Mr. MacLean said in note.
Slate Office CEO Scott Antoniak said the company is "market agnostic" when looking for acquisitions across Canada to build its portfolio, but has a focus on underperforming properties that can be spruced up and support rental increases over time.
"We think there will be a substantial amount of available supply – from an acquisition perspective – over the next 12 to 24 months, and we're uniquely positioned to capitalize on it," Mr. Antoniak said in an interview.