As it continues to undertake a recently announced strategic review, Slate Office REIT reported gains in net operating income (NOI) and same-property NOI during Q3 2022.

These, along with a number of recent property transactions, were among the topics discussed during the REIT’s Nov. 2 conference call to present its financial and operational results for the quarter ended Sept. 30.

At the end of Q3, Slate  (SOT-UN-T) owned interests in 53 properties in Canada, the United States and Ireland totalling 7.32 million square feet of gross leasable area and valued at $1.96 billion.

“In the face of sectoral headwinds, including a rapid rise in interest rates not seen in many years, Slate Office REIT continues to demonstrate its resilience, offering unitholders a stable and attractive distribution yield, trading upside to its well-supported net asset value and a best-in-class management platform,” chief executive officer Steve Hodgson said to open the presentation. 

“Our conviction in the office sector remains strong. We know that physical workspace enables collaboration, culture and innovation. At the same time, we understand that in a post-pandemic era, certain tenants and industries will be more significant users of office space than others. 

“As such, we'll continue to position our portfolio to focus on opportunities that align with tenant demand. We believe well-located, high-quality and modern office buildings with growing strong credit tenants will continue to outperform.”

REIT has committed to review operations

G2S2 Capital Inc. issued a news release and an open letter to Slate Office REIT unitholders on Oct. 20 critical of management and trustee decisions in recent years, including a recent $45-million convertible debenture offering.

The release stated a belief that the trust makes the interests of unitholders secondary to those of Slate Asset Management, its external manager. 

Halifax-based G2S2, a private investment holding company, is Slate Office REIT’s largest unitholder.

Slate Office REIT announced a week later it had created a committee of five independent directors, chaired by Tom Farley and Michael Fitzgerald, to oversee the review.

The trust will also retain a financial advisor for the process.

“Notwithstanding the REIT’s attractive assets and longer-term upside, our board of trustees recognizes that market disruptions related to the pandemic and elevated levels of inflation continued to weigh on the valuations of publicly traded REITs, creating a divergence between asset values and unit price,” Hodgson said during the conference call. 

“As a board and management team, it is our responsibility to consider every possible opportunity to surface value for our unitholders. To this end, after quarter end, the board formed a special committee of independent directors to oversee a review of strategic alternatives for the REIT as we continue to navigate a highly volatile macro-economic environment. 

“The strategic review will play a key role in identifying additional ways to maximize value for all unitholders. All of our routine operations and investment activities will carry on as normal during this period and we intend to provide an update once the process is completed.” 

The REIT’s unit price closed at $4.50 on Nov. 2. Its 52-week high is $5.30 while the corresponding low is $4.21. The trust has a market cap of $360.78 million.

Increased NOI and decreasing debt ratio

NOI in the quarter was $26.86 million, a 16.7 per cent increase from a year earlier. Same-property NOI increased by about $500,000 over the prior quarter and $957,000 from a year earlier.

Slate Office REIT’s liquidity was comprised of $37.1 million in cash and $14.61 million in undrawn revolving facilities on Sept. 30. 

The Toronto-headquartered REIT, which also has offices in Chicago and Dublin, had a loan-to-value ratio of 58.4 per cent at the end of the third quarter. That was down from 59 per cent in Q2.

Transaction activity

Slate Office REIT sold a two-tower, 405,407-square-foot property, which Hodgson said had tenant and capital risk, at 95-105 Moatfield Dr. in Toronto to an undisclosed purchaser for $97 million on Sept. 23. That was a 12 per cent premium on the purchase price.

The building at 95 Moatfield is fully leased to Kraft Canada and 88 per cent of 105 Moatfield is leased to Thales Rail Signaling Solutions.

Following the end of Q3, the REIT closed on the acquisition of a newly retrofitted class-A property in Chicago’s Lake Forest area for $27.3 million.

It’s adjacent to a lab building owned by Pfizer and anchored by a 10-year lease with Pfizer in a portion of the building, with significant upside on occupancy of the remainder.

“This is new space to the market,” said Hodgson. “Pfizer previously occupied the entire building.

"It's a beautiful building. It's certainly the best in that immediate area and probably the second-best in the region.”

Retrofit work will be done in the lobby of the two-winged building, which includes conference space and fitness facilities.

Slate is looking to lease the space for triple-net rents of $18 per square foot, with 50-cent annual escalations.

“We expect quite a bit of demand and Pfizer doesn't have any exclusives in their lease preventing us from leasing to any other life science or pharmaceutical companies,” Hodgson noted.

Leasing activity

Slate Office REIT completed 109,060 square feet of leasing in 11 renewal and 12 new deals in the quarter at a weighted average rental rate spread of 11.9 per cent. The results were primarily driven by rental rate uplift in Atlantic Canada and strong demand in Ontario.

Fifteen leases totalling 101,322 square feet were not renewed or were vacated.

“There were three that were over 5,000 square feet and the rest were spread out amongst the portfolio and small in nature,” Hodgson said.

The weighted average in-place rent across the portfolio was $19.19 per square foot, 5.3 per cent below current market rent, providing significant opportunity for the REIT to continue increasing rental income.

The weighted average lease term in Slate Office REIT’s portfolio is 5.6 years, and 65.1 per cent of tenants are government or high-quality credit tenants.

“The new leasing that we did in our portfolio had 9.2 years of average term, so that's clearly a sign that tenants are committing long-term to office space,” said Hodgson. 

The portfolio’s occupancy was 81.9 per cent at the end of Q3, down from 83.6 per cent the previous quarter. 

195 The West Mall and Irish acquisitions

Part of that is attributable to a phased vacancy by SNC-Lavalin at 195 The West Mall in Toronto, which now has 160,709 square feet available on its 11 floors.

Hodgson said the building, in an area where the trust also owns other properties, is receiving plenty of interest from potential tenants.

“SNC vacated at a rent of $16.50 (per square foot),” Hodgson said. “The starting rents that we have in The West Mall now are $18 to $19.”

Slate Office REIT completed the $254.8-million acquisition of the portfolio of office, life science and light industrial properties owned by Yew Grove Office REIT in Ireland in February.

There has been interest in the portfolio’s vacant spaces, according to Hodgson. 

“We've made some changes to the teams in place, as well as the third-party sales teams in place, and we're sort of relaunching it with a marketing campaign more in line with what Slate’s accustomed to elsewhere,” Hodgson explained.

Hodgson expects the REIT’s occupancy to be relatively flat in Q4 because new leasing won't result in occupancy until the new year in order to give tenants time to fit out their space.