TORONTO--(BUSINESS WIRE)--Slate Office REIT (TSX: SOT.UN) (the "REIT") reported today financial results for the three months ended March 31, 2019. Senior management is hosting a conference call at 9:00 a.m. ET on Monday, May 6, 2019 to discuss the results and ongoing business initiatives of the REIT. The dial-in details can be found below.
“The REIT has undergone a transformative quarter highlighted by the strategic joint venture with a global private equity partner which resulted in a 19% IRR for our unitholders and reinforces the net asset value of the REIT,” said Scott Antoniak, Chief Executive Officer of Slate Office REIT. “As a result of this partnership, we have repositioned the balance sheet to provide the REIT with liquidity to maximize unitholder value going forward. Part of this liquidity will be used to repurchase up to 10% of the REIT's units which continue to trade at a material discount to net asset value.”
For the CEO’s letter to unitholders for the quarter, please follow the link here.
First Quarter 2019 Highlights
- Improved same property NOI: Same property net operating income (“NOI”) was $19.3 million for the first quarter of 2019, an increase of $0.9 million or 4.9% compared to the same period in 2018.
- Strong leasing, continued occupancy gains and positive leasing spreads: The REIT completed a total of 254,409 square feet of leasing in the first quarter, comprised of 157,788 square feet of renewals and 96,621 square feet of new lease deals, increasing occupancy to 87.7% compared to 87.6% at December 31, 2018. Leasing spreads in the quarter were 18.5% above expiring or in-place building rents.
- Update on U.S. Portfolio: The REIT continues to see strong tenant demand at its two properties in Chicago, Illinois; 20 South Clark (purchased in February 2018) and 120 South LaSalle (purchased in August 2018), completing 44,837 square feet of leasing in the first quarter of 2019.
- Core-FFO and AFFO for the quarter: Core funds from operations (“Core-FFO”) was $14.2 million or $0.19 per unit, an increase of $2.3 million and consistent on a per unit basis compared to the same period in 2018. Adjusted funds from operations (“AFFO”) was $11.8 million or $0.16 per unit for the three months ended March 31, 2019, an increase of $1.7 million and consistent on a per unit basis compared to the same period in 2018.
- Unit repurchases under Normal Course Issuer Bid (“NCIB”): During the first quarter the REIT repurchased for cancellation 648,905 units under its NCIB for a total cost of $4.0 million. Subsequent to quarter end, the REIT repurchased an additional 303,697 units for an aggregate investment of $5.8 million. The REIT intends to continue to repurchase units, up to 10% of the total outstanding units.
- Completion of Joint Venture Arrangement: On April 12, 2019, the REIT completed its sale of a 25% interest in six office properties located in the Greater Toronto Area to an investment fund advised by Wafra Inc. ("Wafra"), a sophisticated global private equity and alternative asset investor. The sale price for the 25% interest was $131.8 million, implying a 100% value of $527.2 million or $269 per square foot. This pricing represents a levered internal rate of return of 19% over the hold period for the buildings. On closing, the REIT repaid approximately $70 million in debt, including the short-term bridge financing related to the acquisition of 120 South LaSalle. In conjunction with the sale, the REIT received incremental debt on five of the six properties, resulting in $30.4 million of additional proceeds to the REIT at its share and extends the maturities by 1.5 years. This refinancing increased the amount of fixed rate debt by $100.9 million. The REIT’s pro forma fixed rate debt is approximately 78% after giving affect to interest rate swaps executed subsequent to March 31, 2019.
Current Unit Price Continues to Represent a Compelling Investment Opportunity
The current price for the REIT’s units continues to reflect a substantial discount to the REIT’s IFRS net asset value per unit of $8.49 at March 31, 2019. As previously communicated, management continues to believe that there is a substantive basis to support a net asset value of $8.49 per unit, including:
- Wafra's investment provides a market value for $527.2 million of the REIT’s assets: The price received from a large sophisticated global investor for six properties in the Greater Toronto Area provides validation for the net asset value of 28% of the REIT’s portfolio. Further, the REIT received appraisals for each property that were consistent with the REIT’s transaction price.
- Recent acquisitions in the United States: The REIT’s acquisition of its two U.S. assets in Chicago, Illinois each occurred in 2018, and accordingly, represent recent market trading prices. Management continues to observe multiple comparable sales in the Chicago market at pricing parameters in excess of the REIT’s acquisition metrics.
The following is an illustration of the construction of the REIT’s net asset value at March 31, 2019:
| (amounts in C$ millions, except per unit amounts) | Total | |||||
| GTA JV Portfolio | $ | 527.2 | ||||
| Recent U.S. acquisitions | 328.7 | |||||
| Other properties(1) | 992.0 | |||||
| Debt and working capital | (1,213.5 | ) | ||||
| Net asset value | $ | 634.4 | ||||
| Net asset value per unit | $ | 8.49 | ||||
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(1) Valuation is equal to a 6.4% capitalization rate at March 31, 2019 on next twelve months expected net operating income. Properties have an in-place occupancy of 87.1% at March 31, 2019. |
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This gap between the prevailing trading price and net asset value has created a compelling investment opportunity to purchase units of the REIT. Specifically, the prevailing market price implies an 8.4% capitalization rate for the 'other properties' in the table above on next twelve months expected net operating income, which is inconsistent with current valuation metrics for comparable properties.
Continued Unit Repurchases
As a result of the gap between the prevailing trading price and net asset value, management is committed to repurchase up to 10% of the REIT’s units outstanding through its NCIB. This will reduce the number of outstanding REIT units, which is accretive to net asset value and per unit metrics for unitholders. Management is extremely pleased with the REIT’s portfolio of assets and operating results to date. As such, management believes that the repurchase of units affirms the attractiveness of the portfolio and is the most prudent use of capital at the present time.
Suspension of Distribution Reinvestment Plan
Consistent with the plan to continue unit repurchases, the REIT's Board of Trustees have elected to suspend the REIT’s distribution reinvestment plan (“DRIP”) until further notice. Commencing with the May distribution to be paid on June 17, 2019, unitholders who elected to participate in the DRIP will receive the declared cash distributions on the distribution payment date. The suspension of the DRIP is intended to preserve value and eliminate dilution for the REIT’s unitholders.
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Summary of Q1 2019 Results |
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| Three months ended March 31, | |||||||||||||||
| (thousands of dollars, except per unit amounts) | 2019 | 2018 | Change % | ||||||||||||
| Rental revenue | $ | 57,200 | $ | 44,289 | 29.2 | % | |||||||||
| Net operating income ("NOI") | 27,043 | 20,112 | 34.5 | % | |||||||||||
| Net income | 5,919 | 7,904 | (25.1 | )% | |||||||||||
| Same-property NOI | 19,299 | 18,400 | 4.9 | % | |||||||||||
| Weighted average diluted number of trust units (000s) | 75,247 | 62,874 | 19.7 | % | |||||||||||
| Funds from operations ("FFO") | 13,543 | 11,292 | 19.9 | % | |||||||||||
| FFO per unit | 0.18 | 0.18 | — | % | |||||||||||
| FFO payout ratio | 87.8 | % | 110.4 | % | (22.6 | )% | |||||||||
| Core FFO | 14,150 | 11,862 | 19.3 | % | |||||||||||
| Core FFO per unit | 0.19 | 0.19 | — | % | |||||||||||
| Core FFO payout ratio | 84.0 | % | 105.1 | % | (21.1 | )% | |||||||||
| AFFO | 11,766 | 10,108 | 16.4 | % | |||||||||||
| AFFO per unit | 0.16 | 0.16 | — | % | |||||||||||
| AFFO payout ratio | 101.1 | % | 123.4 | % | (22.3 | )% | |||||||||
| March 31, | December 31, | ||||||||||||||
| 2019 | 2018 | Change % | |||||||||||||
| Total assets | $ | 1,875,906 | $ | 1,866,729 | 0.5 | % | |||||||||
| Total debt | 1,181,621 | 1,175,826 | 0.5 | % | |||||||||||
| Portfolio occupancy (1) | 87.7 | % | 87.6 | % | 0.1 | % | |||||||||
| Loan to value ratio | 63.1 | % | 63.1 | % | — | % | |||||||||
| Net debt to adjusted EBITDA leverage (2) | 11.2x | 12.0x | -0.8x | ||||||||||||
| Interest coverage ratio (2) | 2.3x | 2.2x | 0.1x | ||||||||||||
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(1) Including redevelopment properties. |
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(2) EBITDA is calculated using trailing twelve month actuals, as calculated below. |
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CONFERENCE CALL AND PRESENTATION DETAILS
Senior management will host a live conference call at 9:00 a.m. ET on Monday, May 6, 2019 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/2019/0506. A replay will be accessible until May 20, 2019 via the REIT's website or by dialing (416) 621-4642 or 1 (800) 585-8367 (access code 2992905) 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 41 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 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, IFRS net asset value, 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, 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 and comprehensive income adjusted for certain items including leasing costs amortized to revenue, change in fair value of properties, change in fair vale of financial instruments, disposition costs, depreciation of hotel asset, 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.
- IFRS net asset value is defined as the aggregate of the carrying value of the REIT’s equity, Class B LP units and deferred units.
- 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 and adjusting income received from the Data Centre to cash received as opposed to finance income recorded for accounting purposes.
- 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.
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The calculation of NOI is as follows: |
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| Three months ended March 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| Rental revenue | $ | 57,200 | $ | 44,289 | |||||||
| Property operating expenses | (37,604 | ) | (23,533 | ) | |||||||
| IFRIC 21 property tax adjustments | 7,097 | (528 | ) | ||||||||
| Straight-line rents and other changes | 350 | (116 | ) | ||||||||
| NOI | $ | 27,043 | $ | 20,112 | |||||||
| The reconciliation of net income to FFO, Core-FFO and AFFO is as follows: | |||||||||||
| Three months ended March 31, | |||||||||||
| (thousands of dollars, except per unit amounts) | 2019 | 2018 | |||||||||
| Net income | $ | 5,919 | $ | 7,904 | |||||||
| Add (deduct): | |||||||||||
| Leasing costs amortized to revenue | 1,212 | 408 | |||||||||
| Change in fair value of properties | (6,243 | ) | 9,230 | ||||||||
| Change in fair value of financial instruments | 3,334 | (5,048 | ) | ||||||||
| Disposition costs | 349 | 54 | |||||||||
| Depreciation of hotel asset | 239 | 222 | |||||||||
| Deferred income tax recovery | 59 | (790 | ) | ||||||||
| IFRIC 21 property tax adjustment (1) | 7,097 | (528 | ) | ||||||||
| Change in fair value of Class B LP units | 740 | (2,748 | ) | ||||||||
| Distributions to Class B unitholders | 837 | 991 | |||||||||
| FFO (1) | $ | 13,543 | $ | 11,292 | |||||||
| Finance income on finance lease receivable | (918 | ) | (955 | ) | |||||||
| Finance lease payments received | 1,525 | 1,525 | |||||||||
| Core-FFO (1) | $ | 14,150 | $ | 11,862 | |||||||
| Amortization of deferred transaction costs | 854 | 795 | |||||||||
| Amortization of debt mark-to-market adjustments | (97 | ) | (150 | ) | |||||||
| Amortization of straight-line rent | (862 | ) | (524 | ) | |||||||
| Interest rate subsidy | 108 | 108 | |||||||||
| Guaranteed income supplements | 282 | 40 | |||||||||
| Normalized direct leasing and capital costs | (2,669 | ) | (2,023 | ) | |||||||
| AFFO (1) | $ | 11,766 | $ | 10,108 | |||||||
| Weighted average number of diluted units outstanding (000s) | 75,247 | 62,874 | |||||||||
| FFO per unit (1) | $ | 0.18 | $ | 0.18 | |||||||
| Core-FFO per unit (1) | 0.19 | 0.19 | |||||||||
| AFFO per unit (1) | 0.16 | 0.16 | |||||||||
| FFO payout ratio (1) | 87.8 | % | 110.4 | % | |||||||
| Core-FFO payout ratio (1) | 84.0 | % | 105.1 | % | |||||||
| AFFO payout ratio (1) | 101.1 | % | 123.4 | % | |||||||
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(1) Refer to "Non-IFRS measures" section above. |
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The reconciliation of cash flow from operating activities to FFO, Core-FFO and AFFO is as follows: |
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| Three months ended March 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| Cash flow from operating activities | $ | 19,985 | $ | 7,497 | |||||||
| Add (deduct): | |||||||||||
| Leasing costs amortized to revenue | 1,212 | 408 | |||||||||
| Disposition costs | 349 | 54 | |||||||||
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Subscription receipts equivalent amount (1) |
— | 1,597 | |||||||||
| Working capital items | (7,887 | ) | 1,274 | ||||||||
| Straight-line rent and other changes | (350 | ) | 116 | ||||||||
| Interest and other finance costs | (13,454 | ) | (8,728 | ) | |||||||
| Interest paid | 12,697 | 8,083 | |||||||||
| Distributions paid to Class B unitholders | 991 | 991 | |||||||||
| FFO(1) | $ | 13,543 | $ | 11,292 | |||||||
| Finance income on finance lease receivable | (918 | ) | (955 | ) | |||||||
| Finance lease payments received | 1,525 | 1,525 | |||||||||
| Core-FFO(1) | $ | 14,150 | $ | 11,862 | |||||||
| Amortization of deferred transaction costs | 854 | 795 | |||||||||
| Amortization of debt mark-to-market adjustments | (97 | ) | (150 | ) | |||||||
| Amortization of straight-line rent | (862 | ) | (524 | ) | |||||||
| Interest rate subsidy | 108 | 108 | |||||||||
| Guaranteed income supplements | 282 | 40 | |||||||||
| Normalized direct leasing and capital costs | (2,669 | ) | (2,023 | ) | |||||||
| AFFO (1) | $ | 11,766 | $ | 10,108 | |||||||
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(1) Refer to "Non-IFRS measures" section above. |
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The calculation of trailing twelve month adjusted EBITDA is as follows: |
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| Trailing twelve months ended | |||||||||||
| March 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| Net income | $ | 75,152 | $ | 49,167 | |||||||
| Straight line rent and other changes | (217 | ) | (1,036 | ) | |||||||
| Interest income | (339 | ) | (108 | ) | |||||||
| Interest and finance costs | 48,991 | 29,101 | |||||||||
| Change in fair value of properties | (30,761 | ) | (5,669 | ) | |||||||
| Change in fair value of financial instruments | 5,981 | (3,004 | ) | ||||||||
| Distributions to Class B shareholders | 3,810 | 3,964 | |||||||||
| Disposition costs | 2,542 | 200 | |||||||||
| Depreciation of hotel asset | 964 | 832 | |||||||||
| Change in fair value of Class B LP units | (7,981 | ) | (2,220 | ) | |||||||
| Deferred income tax recovery | 128 | (790 | ) | ||||||||
| Adjusted EBITDA (1) | $ | 105,367 | $ | 70,437 | |||||||
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(1) Refer to "Non-IFRS measures" section above. |
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The calculation of net debt is as follows: |
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| March 31, | |||||||||
| 2019 | 2018 | ||||||||
| Debt, non-current | $ | 922,549 | $ | 992,034 | |||||
| Debt, current | 259,072 | 11,917 | |||||||
| Debt | $ | 1,181,621 | $ | 1,003,951 | |||||
| Less: cash on hand | 4,678 | 3,846 | |||||||
| Net debt | $ | 1,176,943 | $ | 1,000,105 | |||||
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The calculation of net debt to adjusted EBITDA is as follows: |
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| Trailing twelve months ended | ||||||||||
| March 31, | ||||||||||
| 2019 | 2018 | |||||||||
| Net debt | $ | 1,176,943 | $ | 1,000,105 | ||||||
| Adjusted EBITDA (2) | 105,367 | 70,437 | ||||||||
| Net debt to Adjusted EBITDA (1) | 11.2x | 14.2x | ||||||||
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(1) Refer to "Non-IFRS measures" section above. |
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(2) Adjusted EBITDA is based on actuals for the twelve months preceding the balance sheet date. |
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The interest coverage ratio is calculated as follows: |
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| Trailing twelve months ended | |||||||||
| March 31, | |||||||||
| 2019 | 2018 | ||||||||
| Adjusted EBITDA | $ | 105,367 | $ | 70,437 | |||||
| Interest expense | 46,329 | 27,378 | |||||||
| Interest coverage ratio (1) | 2.3x | 2.6x | |||||||
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(1) Refer to "Non-IFRS measures" section above. |
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The following is the calculation of IFRS net asset value on a total and per unit basis at March 31, 2019 and December 31, 2018 to the REIT's consolidated financial statements:
| March 31, | December 31, | ||||||||||
| 2019 | 2018 | ||||||||||
| Equity | $ | 602,112 | $ | 611,447 | |||||||
| Class B LP units | 32,292 | 31,552 | |||||||||
| Deferred unit liability | 725 | 636 | |||||||||
| Deferred tax asset | $ | (682 | ) | $ | (757 | ) | |||||
| IFRS net asset value | $ | 634,447 | $ | 642,878 | |||||||
| Diluted number of units outstanding (1) | 74,746 | 75,300 | |||||||||
| IFRS net asset value per unit | $ | 8.49 | $ | 8.54 | |||||||
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(1) Represents the fully diluted number of units outstanding and includes outstanding REIT units, DUP units and Class B LP units. |
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