Slate Office REIT has an agreement to acquire Irish trust Yew Grove REIT Plc, an owner of office, life sciences and light industrial properties, for $254.8 million. Slate calls the all-cash offer a “transformative” moment for its business and plans to use it as a jumping-off point for future Irish and European growth.
“This is a transformational opportunity for Slate Office REIT to acquire a portfolio of modern properties underpinned by exceptional quality tenants,” said Steve Hodgson, Slate Office REIT’s CEO, in the announcement Monday. “The proposed acquisition, upon completion, would improve the REIT’s portfolio metrics and the durability of our cash flows, generating immediate accretion for unitholders.
“With this initial acquisition in Ireland, we would be well-positioned to pursue other attractive growth opportunities across Europe.”
The acquisition remains contingent on a variety of conditions and approvals, the completion of related $130-million unit offerings and a $5.8-million private placement to Slate Office’s manager, Slate Asset Management. The private placement will maintain Slate Asset Management’s interest in the REIT at its current level, approximately 9.5 per cent.
If all the conditions are met, Slate Office REIT (SOT-UN-T) expects the transaction to close in Q1 2022.
Yew Grove and its portfolio
Yew Grove is dual-listed on the Euronext Dublin (Ireland) and London stock exchanges. It owns a “fit-for-purpose portfolio” of 23 office, life sciences and light industrial properties in Ireland.
The offer is for $1.45 per Yew Grove share (based on current exchange rates) and has the approval of the trust’s board of directors. The price is 1.7 per cent above its Nov. 15 close and 3.7 per cent above its weighted 180-day trading average.
Upon close, Slate Office REIT’s portfolio by NOI would be 65 per cent Canadian, 18 per cent U.S. and 17 per cent Ireland.
The properties are located in major markets across Ireland, with 52 per cent of assets in the Dublin region. Life sciences and tech occupiers comprise nearly half of the tenants by net rent and the REIT says 95 per cent of NOI is provided by credit-quality tenants.
Throughout the COVID-19 pandemic, rent collections have averaged approximately 99 per cent. The portfolio is 94.8 per cent occupied, with an 8.9-year weighted average remaining lease term.
Under CEO Jonathan Laredo, Yew Grove had its IPO in 2018 and has been seeking to aggressively grow its portfolio to the half-billion dollar range in the intervening years. However, it has struggled to raise the capital it requires to fund that growth.
Slate plans to grow in Ireland
Slate plans to onboard the existing Yew Grove team to manage the portfolio, taking advantage of its local market knowledge and relationships. This will also position Slate Office REIT to capitalize on a “significant pipeline.”
Slate Asset Management considers Ireland a strong market for potential future growth. It cites the European Commission’s Summer 2021 Economic Forecast, which projects the country’s 2021 GDP growth to be 7.2 per cent, second-highest in the EU.
Ireland is the only English-speaking nation in the EU and, according to Eurostat, has one of the youngest and fastest-growing populations in the region, with 33 per cent under 25 years old.
Dublin has established itself as a top global technology city of the future, driving strong demand for office space. Office fundamentals across broader Ireland remain robust, with positive leasing momentum in Q3 2021.
Industrial fundamentals also remain strong across Ireland, with vacancy rates near all-time lows and limited new construction supporting future rental growth.
“We have developed a deep understanding of the landscape in Europe since entering the market in 2013, having underwritten over €21 billion ($29.9 billion Cdn) of office opportunities in the last few years alone,” said Brady Welch, a Slate trustee and a London-based founding partner of Slate Asset Management, in the announcement.
“These are quality properties in a rapidly growing market with strong real estate fundamentals and we are very pleased to be investing alongside the offering and supporting the proposed acquisition with our established platform in the region.”
Financing the Yew Grove acquisition
Slate Office REIT intends to finance the acquisition in part via $130 million in new equity from a $55-million bought-deal issue of subscription receipts and $75 million of 5.50 per cent extendible convertible unsecured subordinated debentures.
It will also issue $5.8 million worth of units in a private placement to Slate Asset Management and take on $134.4 million of new property debt at an interest rate of $2.65 per cent.
The balance will be funded via its existing financial resources.
Through a cross-currency interest rate swap, the REIT intends to exchange the Canadian-dollar principal and interest payments for the debentures to euros, resulting in an effective interest rate of 3.7 per cent for the debentures.
Slate also intends to continue its capital recycling efforts. In addition to the previously completed disposition of 1 Eva Rd. in Toronto, and 4 Herald Ave. in Corner Brook, N.L., for $37 million, management has earmarked an additional $100 million worth of properties to dispose of in early 2022.
If the entire process goes as planned, Slate Office REIT’s leverage would be approximately 59 per cent, which it will then work to lower to its long-term 55-per-cent target.
Slate Office REIT is an owner and operator of office real estate. The REIT owns interests in and operates a portfolio of 32 assets in Canada’s major population centres and includes two assets in downtown Chicago.
Slate Asset Management is a global alternative investment platform focused on real estate. Its platform spans a range of investment strategies, including opportunistic, value-add, core plus and debt investments.