Slate Office REIT (SOT-UN-T) is selling a 25 per cent interest in six Toronto-area office buildings to New-York based Wafra Inc. for $131.8 million (all figures Cdn). The transaction will help accomplish three key goals for the trust, according to CEO Scott Antoniak.
“In early 2018, we announced our intention to pursue a strategic capital recycling program to strengthen our balance sheet and create liquidity for future investments that are accretive to net asset value,” Antoniak said during Slate’s quarterly financial conference call Monday morning. “We are pleased to announce that we have entered into such an agreement with a fund managed by Wafra.
“They will acquire 25 per cent interest in a portfolio of six office assets in the Greater Toronto Area. The transaction values the six assets at $527 million, and generates net proceeds of approximately $54 million which will be used to reduce outstanding debt and improve the financial flexibility of the REIT.”
The portfolio comprises about 1.86 million square feet of space. It includes two properties in Markham, one in Mississauga and three in the City of Toronto.
Slate also announced it is cutting its annual distribution from 75 cents to 40 cents per share — in a bid to retain more capital to fund expansions and acquisitions.
Shares trade below Slate’s NAV
Creating an implied valuation of $527.2 million, or $269 per square foot, is one of the most significant aspects of the Wafra transaction. Slate considers its current unit price of about $6.70 to be considerably below its own $8.55 valuation based on net asset value.
“Importantly, this transaction provides validation for the net asset value of 28 per cent of the REIT’s portfolio. If you include our recent U.S. acquisitions, almost half of the REIT’s assets have been marked to market over the past 12 months, providing significant confidence in our net asset value estimate,” Antoniak said during the call.
Looking ahead, Antoniak said Slate is considering buying back between $15 and $20 million of its shares this year. That figure could change.
“In our view, this value difference of almost $2 per unit represents a compelling investment opportunity,” he said. “Accordingly, if the pricing disconnect persists, management will consider a buyback of units via the REIT’s normal course issuer bid.”
The pricing of the portfolio sale represents a levered internal rate of return of 19 per cent over the hold period for the buildings, which ranges from two to six years.
Properties in the Wafra transaction
The properties involved are:
* Gateway Centre, 3000-3100 Steeles Ave., East, Markham, 237,958 square feet;
* The Sheridan Exchange, 2655-2695 North Sheridan Way, Mississauga, 159,610 square feet;
* Commerce West, 401-405 The West Mall, Toronto, 412,363 square feet;
* West Metro Corporate Centre, 185-195 The West Mall, Toronto, 618,467 square feet;
* 4211 Yonge St., Toronto, 169,929 square feet;
* and Woodbine & Steeles Corporate Centre, 7030, 7050, 7100 Woodbine Ave., and 55 & 85 Idema Road, Markham, 359,541 square feet.
Slate expects net proceeds of $53.9 million, which will be used to reduce outstanding debt and create liquidity for future investments. The transaction remains subject to customary closing and financing conditions and is expected to close in the first quarter of 2019.
Adjustments to REIT’s debt financing
Slate also has commitments for incremental debt on five of the six properties, leading to $30.4 million of additional proceeds to the REIT and extending the maturities by 1.5 years. This refinancing increases the amount of fixed rate debt by $100.9 million.
“We are also taking advantage of a favourable debt financing environment to reduce risk and enhance the stability of future cash flows by converting more of our debt to longer-term, fixed-rate financing,” Antoniak said.
When completed, these moves will create a loan-to-value ratio of 60 per cent and Slate will have over $70 million of available liquidity. Slate is also arranging long-term, interest rate swaps that will result in approximately 90 per cent of its borrowing being subject to fixed rates.
Antoniak said the REIT wants its debt down to about 55 per cent over the near year or so.
Distribution cut to 40 cents/share
The other significant move announced in its financials is a cut in its annual distribution from 75 cents per unit to 40 cents per unit. That had an immediate effect on the REIT’s share price, which had dropped about 10 per cent in morning trading to just above $6.
“The revision announced this morning to 40 cents annually will allow the REIT to retain incremental annual cash flow of $26 million,” Antoniak explained. “We intend to use this retained capital to reduce financial leverage, in order to create capacity to invest in attractive new opportunities or reinvest in existing portfolios strategies that are accretive to net asset values.
“We still think there is great opportunity within our portfolio, as well as in the investment market both in Canada and in the U.S. so we wanted to make sure we kept some (capital) back because we are focused on total returns and we think we’ve got great ability to grow those returns within our portfolio as it stands today.”
The REIT says the new distribution should provide an annual yield of six per cent based on the most recent price of the REIT units.
Slate also announced:
* 14.5 per cent growth in same-property NOI, driven in part by an 11.1 per cent increase in its leasing rate spread;
* in-place occupancy increased to 87.6 per cent and weighted average lease term increased to 5.8 years, respectively, compared to 87.1 per cent and 5.7 years as at Sept. 30, 2018.
* income growth at its two properties in Chicago; 20 South Clark (purchased in February 2018) and 120 South LaSalle (purchased in August 2018). Slate has increased committed occupancy from 84.2 per cent to 86.4 per cent at 20 South Clark and from 84.3 per cent to 86.7 per cent at 120 South LaSalle.
About Slate and Wafra
Slate Office REIT’s portfolio comprises 41 strategic assets located primarily across Canada’s major population centres, as well as two downtown assets in Chicago. The REIT’s strategy is to maximize value through internal organic rental and occupancy growth and strategic acquisitions.
Wafra is an international investor with about $31 billion in investments and assets. It invests across a number of asset classes, including strategic partnerships, alternative finance, real assets, real estate, liquid markets, and private equity and venture capital.
Based in New York, it has offices in Texas, Kuwait, Luxembourg, Munich and Bermuda.