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Slate Office REIT unveils major Portfolio Alignment Plan

Trust to sell about 40% of assets, suspends distributions, seeks higher debt ceiling

Slate Office REIT logoAmid rising debt commitments, Slate Office REIT (SOT.UN-T) has announced plans to sell assets which represent about 40 per cent of its gross leasable area, suspend distributions and amend its declaration of trust to raise the ceiling on its allowable debt.

Slate calls the initiative its Portfolio Alignment Plan. It notes about two-thirds of the assets it plans to sell are already either listed for sale, under discussions, or at varying stages of contract negotiation. Other assets will be added to the sale list in 2024, the Tuesday-evening announcement in its Q3 2023 financial report release states.

"The team and the board are focused on improving the REIT’s liquidity and strengthening our balance sheet. We have made positive strides toward that objective in the last few months," Brady Welch, interim chief executive officer, said during Slate Office REIT’s Q3 2023 financials call with investors and analysts Wednesday morning.

“This plan will see the REIT divest non-core assets in certain Canadian markets that are not strategic for the REIT in the long term. Proceeds from the sales of these assets will go towards repayment of the debt and general liquidity of the REIT’s business operations. We refinanced or amended over $577 million of debt, which is nearly half of the REIT’s current debt stack.

“Looking ahead we want to own high quality assets with strong occupancy, tenants and cash flow in markets with economic tailwinds and stable office demand. We believe the Portfolio Alignment Plan that we are introducing will not only improve the REIT’s balance sheet and liquidity, but also enhance the portfolio composition resulting in a more focused and resilient REIT."

Divestments to continue for about two years

Divesting the “non-core assets” is expected to continue through 2025.

Slate’s continuing portfolio is to comprise “assets that are similar in terms of their quality, occupancy, tenant profile and cash flow and are located in markets with strong economic drivers and stable office demand,” the announcement states.

Proceeds from the asset sales will be used to reduce the REIT’s leverage and actively manage the continuing portfolio.

Slate has not set a target for its debt reduction, Welch said during the call, but it wants to get to a level where its bankers are comfortable.

“We don’t have a specific target other than to say less than it is now," he commented. "We’d love to get down to where the 60 per cent level would be in the current market.” 

He also said that at the moment, the trust is not considering unit buybacks to boost share prices.

“The sole and primary goal is reduction of leverage and increasing liquidity for the REIT.”

Two other significant moves

Slate Office REIT is undertaking two other significant moves, however.

First, the REIT also announced a suspension of the monthly cash distribution, which is expected to provide the REIT with an additional $10.2 million of cash annually. 

The suspension is effective as of the November 2023 distribution, which would have been payable to unitholders in December. 

Slate’s management has also called for a special meeting on Dec. 29 to seek approval from unitholders to amend its declaration of trust to remove the restriction which caps the REIT’s indebtedness at 65 per cent of gross book value.

“The thought process . . . was, obviously given where we repriced our portfolio this quarter, the loan-to-value is over that threshold," chief financial officer Robert Armstrong said during the analyst call. "We’re appreciative of our banking syndicate working with us very constructively to move forward on that point.

"But what we have communicated broadly to them and what we have communicated to the market is we want to, our first goal is to execute on our disposition and portfolio realignment plan, for the purpose of raising capital to repay debt and we are hoping that that reduces leverage to a more appropriate level that’s acceptable and continues to have the support of our banking partners.”

If passed, the board intends to adopt new operating guidelines to determine the appropriate financial leverage of the REIT.

Slate’s Q3 2023 financials

Slate reported total assets of $1.822 billion in its quarterly financials, down slightly from $1.869 billion in the same period of 2022.

Its total debt rose to $1.19 billion, from $1.15 billion in 2022. 

Slate’s loan-to-value ratio increased significantly from 61.9 per cent in Q3 2022 to 65.6 per cent at the end of the current period.

It reported a net loss of $34.73 million, down from a profit of $18.36 million a year earlier.

Rental revenue was just over $51 million for the current period, almost identical to the year-earlier period. NOI was $26 million, down from $26.86 million in Q3 2022.

Portfolio occupancy was at 78.6 per cent, down from 81.1 per cent.

“The underlying portfolio, we’ve actually been very, very pleased with the performance of that in this market," Welch said. "Obviously there is a lot of negativity around office, but what we are seeing for our portfolio is we’ve got occupancy stabilized, we’ve got a great pipeline of potential new tenants which is fantastic, what continues to be a little bit of a headwind is the interest rate environment at its current elevated levels and the general investment market.”

It has been a tumultuous year for Slate, which has undergone a strategic review, dealt with and settled a dispute with activist investors led by G2S2 Capital - the REIT's largest investor – and announced the departure of former CEO Steve Hodgson.

The activist investor dispute was settled with the addition of two new board members, while Welch stepped in to take over as interim CEO. George Armoyan, executive chairman G2S2 Capital, and former RBC Capital Markets executive Jean-Charles Angers were the two board appointees. 

EDITOR'S NOTE: This article was updated with additional detail, insights and quotes following Slate's Q3 financials call with investors and analysts Wednesday morning.

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