Slate Office REIT’s portfolio has been built for just such an occasion as we’re experiencing today, says its new chief executive officer Steve Hodgson.
He told RENX he’s satisfied with Slate Office REIT’s (SOT-UN-T) liquidity position and said the portfolio has continued to perform well through the early stages of the COVID-19 pandemic.
The REIT’s 36 assets, encompassing 6.9 million square feet, are located mainly in Ontario, New Brunswick and Nova Scotia.
“Our investment strategy is to acquire high-quality office assets at a discount to replacement cost, apply best-in-class asset management to enhance property value, then dispose or refinance stabilized assets to crystallize value and reinvest the proceeds into our existing core portfolio and accretive new opportunities,” Hodgson told RENX in an exchange of emails after taking the helm June 3.
He replaced Scott Antoniak, who has taken a new managing director role within Slate Asset Management to originate and execute new private market opportunities.
Hodgson spent more than eight years in different roles with Oxford Properties Group before joining Slate Asset Management in 2014 as vice-president of asset development.
He was most recently Slate Office REIT’s COO. Hodgson’s replacement has yet to be named.
“Since joining Slate, I have focused on asset management and business development, overseeing operations, leasing and capital investment programs, and executing on financing, acquisition and disposition activities,” Hodgson told RENX.
“My intimate knowledge of both our business, and the North American commercial real estate industry more broadly, will be key factors in driving our operational performance and building on the strength of our existing portfolio.”
Slate Office REIT’s portfolio
Sixty-one per cent of the REIT’s income is derived from government and credit-rated tenancies. It has less than two per cent exposure to the energy sector, which has struggled mightily from an ongoing downturn in oil and gas prices, compounded by the effects of the pandemic.
Slate Office REIT’s suburban Greater Toronto Area portfolio is well-positioned to take advantage of increases in demand, according to Hodgson. He believes businesses in the new COVID-19-wary business environment will want to provide employees with more flexibility to work in less densely populated areas and simplified commutes, while also realizing rent savings.
The Atlantic Canada portfolio, with a significant weighting of government tenancies, provides a stable and reliable source of income.
Slate Office REIT entered the downtown Chicago market in 2018 and has increased both occupancy and rents at its two properties there.
Slate Office REIT’s performance
Hodgson was pleased with Slate Office REIT’s performance in 2019, noting it made significant progress on strategic initiatives and strengthened the balance sheet.
The Toronto-based REIT completed five transactions as part of a capital recycling program that brought in net proceeds of $171 million and reduced leverage by 440 basis points.
It completed more than 719,000 square feet of leasing at an average rent increase of 18.8 per cent.
So far in 2020 it has followed up on those stats, completing more than 304,000 square feet of leasing in Q1 at an average rent increase of 28.6 per cent.
Slate Office REIT’s weighted average term to lease maturity is 5.5 years, with in-place rents being 10 per cent below market on average. This provides continued opportunities to increase rents.
Rent collection for April was 97 per cent and one per cent lower in May.
“This speaks to the quality of our tenant base, our team’s active hands-on approach and the stability of the markets we are invested in,” said Hodgson.
Looking ahead, like many other owners and operators of CRE portfolios, Hodgson wants Slate Office REIT positioned to ride out the turmoil and be ready to seize opportunities which arise.
“As the impact of COVID-19 continues to develop, we are focused on capital preservation,” he explained. “Going forward, we will continue to assess all of our capital allocation alternatives together with our board of trustees on a regular basis, with the goal of maximizing value for our unitholders.
“Given the strength of our portfolio and experience of our team, we are well-positioned to capitalize on the attractive opportunities that will inevitably arise post COVID-19.”
Slate Office REIT’s stock price
Slate Office REIT has a market cap of $272.2 million.
Like most other REITs, its stock price plunged in late March before rebounding somewhat. It closed at $4.01 on June 5, down from its 52-week high of $6.40 but up from its 52-week low of $2.50.
“There is currently a considerable disconnect between the price and value of our units, which is largely attributable to the global macroeconomic sell-off that resulted from the emergence of the COVID-19 pandemic,” said Hodgson.
“With our industry-leading cash rent collections, conservative payout ratio and resilient portfolio of quality office assets, we are well-positioned to weather these current challenges.”
Hodgson believes the gap between the prevailing trading price and Slate Office REIT’s net asset value “creates a compelling investment opportunity with the potential for significant upside.”