American buyers acquire Slate Grocery REIT days after announcement of distribution cut

Slate Grocery REIT, a Canadian-listed company that owns grocery-anchored retail centres in the United States, capped a volatile bout of trading with news of its acquisition by two American buyers.

On Monday, Slate announced its sale to Brixmor Property Group Inc., a publicly listed company, and Everview Partners, L.P., which is privately owned. Together, the buyers are paying US$13 in cash per unit, amounting to an equity value close to US$800-million. (Slate Grocery trades in U.S. dollars on the Toronto Stock Exchange.)

The sale itself wasn’t necessarily a surprise, because Slate launched a strategic review in May. However, the timing caught investors and analysts off guard.

Five days before the sale news, on Sept. 23, the REIT announced it would stop paying its distribution, and gave little explanation as to why. In a statement, Slate Grocery said an independent special committee of board directors approved the decision, and that the REIT was making the change to enhance its “financial and strategic flexibility.”

Over the next two days, Slate Grocery’s units slumped 30 per cent, closing on Friday at US$7.56 apiece.

On Monday morning, the REIT announced it was being acquired for US$13 per unit in cash – a 20 per cent premium to where the REIT was trading before the distribution cut was announced.

“We are surprised and disappointed with what happened last week,” Scotia Capital analyst Himanshu Gupta wrote in a note to clients. “The suspension of distributions led to a 30 per cent decline in the unit price over Thursday and Friday, and we suspect a number of retail investors may have incurred losses as a result.”

Any investors who sold their units on Thursday and Friday as the price plummeted would have missed out on the big gain from Monday’s sale announcement.

“Notably,” Mr. Gupta added, “the company’s press release cited the need for increased financial flexibility as the primary reason for suspending distributions. We find this rationale somewhat difficult to reconcile with the subsequent privatization announcement just days later.”

Slate did not return a request for comment on the timing of the acquisition.

Grocery-anchored retail has been a solid sector of the commercial real estate market – unlike office buildings – because its main tenants, grocery stores, have repeat customers. Open air retail centres also haven’t seen foot traffic drop like enclosed malls.

In the takeover, most of Slate Grocery’s retail centres will be purchased jointly by Brixmor and Everview, but Brixmor is also solely purchasing 23 assets. These include retail centres in Florida, Georgia, North Carolina, South Carolina and New Hampshire, with anchor tenants such as Publix, Kroger, Aldi and Walmart Neighborhood Market.

As part of the takeover, Brixmor and Everview have agreed to pay US$50-million to Slate Asset Management to terminate Slate’s external management contract.

Instead of employing a team that makes investment decisions in-house, Slate Grocery pays an affiliated company, Slate Asset Management, to help with corporate services such as financial advice. This structure, known as external management, used to be common in the REIT industry, but lost its lustre over the last two decades.