Slate Office REIT Reports Third Quarter 2018 Results

November 05, 2018 09:53 PM Eastern Standard Time

TORONTO--(BUSINESS WIRE)--Slate Office REIT (TSX: SOT.UN) (the "REIT") announced today its financial results for the three months ended September 30, 2018. Senior management is hosting a conference call at 9:00 a.m. ET on Tuesday, November 6, 2018 to discuss the results and ongoing business initiatives of the REIT. The dial-in details can be found below.

“In the third quarter, the REIT continued to execute on its capital recycling program,” said Scott Antoniak, the REIT’s Chief Executive Officer. “The acquisition of 120 South LaSalle is one of the many ways the REIT is enhancing its portfolio via acquisition or investment, now owning over 1.0 million square feet of office space in Chicago’s downtown office market. By strategically recycling capital into new opportunities, the REIT is well positioned to continue to provide unitholders with meaningful total returns.”

For the CEO's letter to unitholders for the quarter, please follow the link here.

Third Quarter 2018 Highlights

The REIT completed 258,248 square feet of leasing, comprised of 118,135 square feet of renewals and 140,113 square feet of new lease deals.
Leasing spreads in the quarter were 6.0% above expiring or in-place rents.
Occupancy at September 30, 2018 increased to 87.1% from 86.8% at June 30, 2018.
The weighted average lease term was 5.7 years at September 30, 2018 compared to 5.5 years at June 30, 2018.
Same-property net operating income (“NOI”) was up 13.0% in the third quarter of 2018 compared to the same period in the prior year.
The REIT completed three new leases totaling 46,797 square feet at the Sheridan Exchange during the quarter in addition to a new 5,797 square foot lease executed subsequent to the third quarter, re-stabilizing this property after the loss of a significant tenant in 2017.
Net operating income was $26.0 million, an increase of $7.0 million compared to Q3 2017.
Rental revenue was $54.5 million, an increase of $13.3 million compared to Q3 2017.
Core funds from operations ("Core FFO") was $15.7 million or $0.21 per unit, an increase of $2.7 million compared to Q3 2017.
Adjusted funds from operations ("AFFO") was $12.8 million or $0.17 per unit, an increase of $2.1 million and consistent on a per unit basis compared to Q3 2017.

Capital Recycling

On July 13, 2018, the REIT disposed of 135 Queens Plate Drive in Etobicoke, ON for $16.7 million. The sale price represents a levered IRR of 19.7% and was approximately 10% in excess of the REIT’s December 31, 2017 IFRS fair value.
On August 30, 2018, the REIT completed the previously announced acquisition of 120 South LaSalle Street in Chicago, IL for U.S.$155.5 million (U.S.$237 per square foot). Since acquisition, the REIT secured 6,964 square feet of new lease deals at the property, which commence subsequent to the third quarter.
On September 28, 2018, the REIT disposed of 139 Water Street and the Water Street properties in St. John's, NL for $17.3 million. The sale price was approximately 40% in excess of the REIT's December 31, 2017 IFRS fair value.

Summary of Q3 2018 Results


	Three months ended September 30,
(thousands of dollars, except per unit amounts)	2018			2017			Change %
Rental revenue	$	54,499		$	41,208		32.3	%
Net operating income ("NOI")	25,999			19,040			36.5	%
Net income	17,697			23,607			(25.0	)%

Same-property NOI	21,084			18,666			13.0	%

Weighted average diluted number of trust units (000s)	75,203			62,231			20.8	%
Funds from operations ("FFO")	15,071			12,372			21.8	%
FFO per unit	0.20			0.20			—	%
FFO payout ratio	93.5		%	94.2		%	(0.7	)%
Core FFO	15,659			12,923			21.2	%
Core FFO per unit	0.21			0.21			—	%
Core FFO payout ratio	90.0		%	90.2		%	(0.2	)%
AFFO	12,755			10,663			19.6	%
AFFO per unit	0.17			0.17			—	%
AFFO payout ratio	110.4		%	109.3		%	1.1	%

							September 30,
	2018			2017			Change %
Total assets	$	1,874,600		$	1,353,127		38.5	%
Total debt	1,194,428			793,765			50.5	%
Portfolio occupancy ⁽¹⁾	87.1		%	85.9		%	1.2	%
Loan to value ratio	63.8		%	58.7		%	5.1	%
Net debt to adjusted EBITDA leverage ⁽²⁾	13.6		x	12.2		x	1.4	x
Interest coverage ratio ⁽²⁾	2.4		x	2.8		x	(0.4	x)
^{(1) Including redevelopment properties.}
^{(2) EBITDA is calculated using trailing twelve month actuals, as calculated below.}

Conference Call and Webcast

Senior management will host a live conference call at 9:00 a.m. ET on Tuesday, November 6, 2018 to discuss the results and ongoing business initiatives of the REIT.

The conference call can be accessed by dialing (647) 427-2311 or 1 (866) 521-4909. Additionally, the conference call will be available via simultaneous audio found at http://www.snwebcastcenter.com/webcast/slate/2018/1106. A replay will be accessible until November 20, 2018 via the REIT's website or by dialing (416) 621-4642 or 1 (800) 585-8367 (access code 9766088) approximately two hours after the live event.

About Slate Office REIT (TSX: SOT.UN)

Slate Office REIT is an open-ended real estate investment trust. The REIT's portfolio currently comprises 43 strategic and well-located real estate assets located primarily across Canada's major population centres including two downtown assets in Chicago, Illinois. The REIT is focused on maximizing value through internal organic rental and occupancy growth and strategic acquisitions. Visit slateofficereit.com to learn more.

About Slate Asset Management L.P.

Slate Asset Management L.P. is a leading real estate investment platform with over $6.0 billion in assets under management. Slate is a value-oriented manager and a significant sponsor of all of its private and publicly-traded investment vehicles, which are tailored to the unique goals and objectives of its investors. The firm's careful and selective investment approach creates long-term value with an emphasis on capital preservation and outsized returns. Slate is supported by exceptional people, flexible capital and a proven ability to originate and execute on a wide range of compelling investment opportunities. Visit slateam.com to learn more.

Supplemental Information

All interested parties can access Slate Office REIT's Supplemental Information online at slateofficereit.com in the Investors section. These materials are also available on Sedar or upon request at ir@slateam.com or (416) 644-4264.

Forward Looking Statements

Certain statements herein may be forward-looking statements within the meaning of applicable securities laws. These statements reflect management’s expectations regarding objectives, plans, goals, strategies, future growth, results of operations, performance and business prospects and opportunities of the REIT including expectations for the current financial year, and include, but are not limited to, statements with respect to management’s beliefs, plans, estimates and intentions, and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. Statements that contain words such as “could”, “should”, “would”, “anticipate”, “expect”, “believe”, “plan”, “intend”, “will”, “may”, “might” and similar expressions or statements relating to matters that are not historical facts constitute forward-looking statements.

These forward-looking statements are not guarantees of future events or performance and, by their nature, are based on the REIT’s current estimates and assumptions, which are subject to significant risks and uncertainties. Forward-looking statements contained herein are made as the date hereof and accordingly are subject to change after such date. The REIT does not undertake to update any forward-looking statements that are contained herein except as expressly required by applicable securities laws.

Non-IFRS Measures

We disclose a number of financial measures in this news release that are not measures used under IFRS, including NOI, same-property NOI, FFO, FFO payout ratio, Core-FFO, Core-FFO payout ratio, AFFO, AFFO payout ratio, adjusted EBITDA, net debt to adjusted EBITDA and the interest coverage ratio, in addition to certain measures on a per unit basis.

NOI is defined as rental revenue less operating property expenses and IFRIC 21 property tax adjustments, prior to straight-line rent and other changes. Same-property NOI includes those properties owned by the REIT for each of the current period and the relevant comparative period.
FFO is defined as net income adjusted for certain items including leasing costs amortized to revenue, change in fair value of properties, change in fair value of financial instruments, disposition costs, depreciation of hotel asset, deferred income taxes, IFRIC 21 property tax adjustments, change in fair value of Class B LP units, distributions to Class B LP unitholders and subscription receipts equivalent amount.
Core-FFO is defined as FFO adjusted for the REIT's share of lease payments received for its Data Centre asset, which for IFRS purposes is accounted for as a finance lease and removes the impact of mortgage discharge fees (if any).
AFFO is defined as FFO adjusted for certain items including guaranteed income supplements, amortization of deferred transaction costs, de-recognition and amortization of mark-to-market adjustments on mortgages refinanced or discharged, adjustments for interest rate subsidies received, recognition of the REIT's share of lease payments received for its Data Centre asset, which for IFRS purposes is accounted for as a finance lease, amortization of straight-line rent and normalized direct leasing and capital costs.
FFO payout ratio, Core-FFO payout ratio and AFFO payout ratio are defined as distributions declared divided by FFO, Core-FFO and AFFO, respectively.
FFO per unit, Core-FFO per unit and AFFO per unit are defined as FFO, Core-FFO and AFFO divided by the weighted average diluted number of units outstanding, respectively.
Adjusted EBITDA is defined as earnings before interest, income taxes, depreciation, fair value gains (losses) from both financial instruments and investment properties, while also excluding non-recurring items such as transaction costs from dispositions, acquisitions or other events.
Net debt to adjusted EBITDA is calculated by dividing the aggregate amount of debt outstanding, less cash on hand, by annualized adjusted EBITDA.
Interest coverage ratio is defined as adjusted EBITDA divided by cash interest paid.

We utilize these measures for a variety of reasons, including measuring performance, managing the business, capital allocation and the assessment of risk. Descriptions of why these non-IFRS measures are useful to investors and how management uses each measure are included in Management’s Discussion and Analysis, which readers should read when evaluating the measures included herein. We believe that providing these performance measures on a supplemental basis to our IFRS results is helpful to investors in assessing the overall performance of our businesses in a manner similar to management. These financial measures should not be considered as a substitute for similar financial measures calculated in accordance with IFRS. We caution readers that these non-IFRS financial measures may differ from the calculations disclosed by other businesses, and as a result, may not be comparable to similar measures presented by others.

Calculation and Reconciliation of Non-IFRS Measures

The tables below summarize a calculation of non-IFRS measures based on IFRS financial information.

The calculation of NOI is as follows:


	Three months ended September 30,
	2018			2017
Rental revenue	$	54,499		$	41,208
Property operating expenses	(26,825		)	(21,629		)
IFRIC 21 property tax adjustments	(1,151		)	—
Straight-line rents and other changes	(524		)	(539		)
NOI	$	25,999		$	19,040

The reconciliation of net income to FFO, Core-FFO and AFFO is as follows:

	Three months ended September 30,
(thousands of dollars, except per unit amounts)	2018			2017
Net income	$	17,697		$	23,607
Add (deduct):
Leasing costs amortized to revenue	830			384
Change in fair value of properties	(4,058		)	(12,070		)
Change in fair value of financial instruments	(1,784		)	(969		)
Disposition costs	1,272			13
Depreciation of hotel asset	229			204
Deferred income tax recovery	(435		)	—
IFRIC 21 property tax adjustment⁽¹⁾	(1,151		)	—
Change in fair value of Class B LP units	1,480			212
Distributions to Class B unitholders	991			991
FFO ⁽¹⁾	$	15,071		$	12,372
Finance income on finance lease receivable	(937		)	(973		)
Finance lease payments received	1,525			1,524
Core-FFO ⁽¹⁾	$	15,659		$	12,923
Amortization of deferred transaction costs	793			624
Amortization of debt mark-to-market adjustments	(100		)	(151		)
Amortization of straight-line rent	(1,353		)	(923		)
Interest rate subsidy	108			108
Guaranteed income supplements	300			40
Normalized direct leasing and capital costs	(2,652		)	(1,958		)
AFFO ⁽¹⁾	$	12,755		$	10,663

Weighted average number of diluted units outstanding(000s)	75,203			62,231
FFO per unit ⁽¹⁾	$	0.20		$	0.20
Core-FFO per unit ⁽¹⁾	0.21			0.21
AFFO per unit ⁽¹⁾	0.17			0.17
FFO payout ratio ⁽¹⁾	93.5		%	94.2		%
Core-FFO payout ratio ⁽¹⁾	90.0		%	90.2		%
AFFO payout ratio ⁽¹⁾	110.4		%	109.3		%
^{(1) Refer to "Non-IFRS measures" section above.}

The reconciliation of cash flow from operating activities to FFO, Core-FFO and AFFO is as follows:


	Three months ended September 30,
	2018			2017
Cash flow from operating activities	$	15,360		$	5,924
Add (deduct):
Leasing costs amortized to revenue	830			384
Disposition costs	1,272			13
Working capital items	(3,212		)	4,994
Straight-line rent and other changes	524			539
Interest and other finance costs	(11,492		)	(7,042		)
Interest paid	10,798			6,569
Distributions paid to Class B unitholders	991			991
FFO⁽¹⁾	$	15,071		$	12,372
Finance income on finance lease receivable	(937		)	(973		)
Finance lease payments received	1,525			1,524
Core-FFO⁽¹⁾	$	15,659		$	12,923
Amortization of deferred transaction costs	793			624
Amortization of debt mark-to-market adjustments	(100		)	(151		)
Amortization of straight-line rent	(1,353		)	(923		)
Interest rate subsidy	108			108
Guaranteed income supplements	300			40
Normalized direct leasing and capital costs	(2,652		)	(1,958		)
AFFO ⁽¹⁾	$	12,755		$	10,663
^{(1) Refer to "Non-IFRS measures" section above.}

The calculation of trailing twelve month adjusted EBITDA is as follows:


	Trailing twelve months ended
	September 30,
	2018			2017
Net income	$	63,367		$	50,102
Straight line rent and other changes	(637		)	(1,880		)
Interest income	(172		)	(77		)
Interest and finance costs	37,688			23,352
Change in fair value of properties	(10,581		)	(10,930		)
Change in fair value of financial instruments	(7,201		)	(129		)
Distributions to Class B shareholders	3,964			3,964
Disposition costs	1,326			247
Depreciation of hotel asset	894			746
Change in fair value of Class B LP units	(740		)	(2,008		)
Deferred income tax recovery	(920		)	—
Adjusted EBITDA ⁽¹⁾	$	86,988		$	63,387
^{(1) Refer to "Non-IFRS measures" section above.}

The calculation of net debt is as follows:


	Three months ended September 30,
	2018		2017
Debt, non-current	$	1,002,763	$	599,509
Debt, current	191,665		194,256
Debt	$	1,194,428	$	793,765
Less: cash on hand	7,903		20,787
Net debt	$	1,186,525	$	772,978

The calculation of net debt to adjusted EBITDA is as follows:


	Trailing twelve months ended
	September 30,
	2018		2017
Net debt	$	1,186,525	$	772,978
Adjusted EBITDA ⁽²⁾	86,988		63,387
Net debt to Adjusted EBITDA ⁽¹⁾	13.6x		12.2x
^{(1) Refer to "Non-IFRS measures" section above.}
^{(2) Adjusted EBITDA is based on actuals for the twelve months preceding the balance sheet date.}

The interest coverage ratio is calculated as follows:


	Trailing twelve months ended
	September 30,
	2018		2017
Adjusted EBITDA	$	86,988	$	63,387
Cash interest paid	35,574		22,249
Interest coverage ratio ⁽¹⁾	2.4x		2.8x
^{(1) Refer to "Non-IFRS measures" section above.}

Contacts

Slate Office REIT
Investor Relations
+1 416 644 4264
ir@slateam.com

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