A Pure-Play Office REIT

SOT.UN - Slate Office REIT

Slate Office REIT is a pure-play North American office REIT. It is an open-ended real estate investment trust. Its asset portfolio consists of high-quality downtown and suburban office properties with a diversified footprint, comprising of 39 properties (36 office properties and 3 non-office properties) spanning 7.5 million square feet. These properties are located in geographically diversified markets in Canada and the USA.

Slate Office REIT owns a portfolio of quality assets in major office markets, where millions of people come to work every day. Its strategy is to own an institutional-quality portfolio of assets in major office markets at discounted valuations. Slate Office REIT reports NOI from four geographic locations – Atlantic (~35% of total 2019 NOI), Ontario (~40%), Western (~7%) and USA (18%). The REIT is managed by Slate Asset Management L.P. which owns 9.5% of it.

Investment Data

Revenue Growth & Market Exposure

The majority of Slate Office REIT’s revenues comprise of rent from its portfolio of office properties. Its various components of revenue are property base rent (~50% of revenues), operating cost recoveries (32%), tax recoveries (15%), hotel (4%) and straight-line adjustments and others (-1%). Rather than focusing on larger cities, Slate Office focuses on downtown and suburban areas of Canada and the U.S. It manages high-quality assets located in target markets with strong operating histories. Occupancy and rents in these markets tend to be less volatile. All these factors have resulted in a lower cost of acquisition and a stable income stream for Slate Office.

The REIT has a proven track record of strong performance and a history of sourcing attractive deals. It acquires assets at a discount to the replacement cost with below market in-place rents and then sells them and reinvests funds into new attractive opportunities. In the most recent quarter, Slate Office completed 149,226 square feet of leasing at an average rent increase of 23%. Its weighted average lease term stands at 5.5 years and over 60% of the REIT’s income is generated by government and investment-grade tenants. As a part of its ongoing capital recycling program, the REIT disposed of a 25% interest in six office properties in the Greater Toronto Area.

Slate Office is in a good position to deliver solid organic growth as a result of strong leasing demand in its core markets and strategic capital recycling initiatives. The REIT’s strategy to purchase assets at a significant discount to peak and replacement value and retaining stable operating fundamentals should continue to create superior risk-adjusted returns in the future.

Distributions

Slate Office REIT recently announced the suspension of its reinvestment plan in order to preserve value and eliminate dilution for the REIT’s unitholders. The REIT sports an annual yield of 6.75% and a current AFFO payout ratio of 60.4%. The management is committed to repurchasing up to 10% of the REIT’s units outstanding through its NCIB. In 2018, the REIT created $0.82 of value per unit and returned $0.75 to its unitholders in the form of a distribution which was equivalent to a 9.6% total return on a per unit basis. Its current annual distribution stands at $0.40 per unit.

A proactive asset management strategy has resulted in strong operating results. The REIT undertook a strategic capital recycling program at the beginning of 2018 and is delivering well on that. It registered its sixth consecutive quarter of same property net operating income growth. An 11.4% discount to market rent on average should continue to drive earnings growth. Slate Office’s portfolio of office properties provides diversification, cash flow generation and the opportunity to grow net asset value on a per unit basis.

Slate Office is in a good position to benefit from the strong organic growth driven by leasing and market rental rate upside. The REIT is characterized by consistent operating performance in FFO. The management believes that Slate Office REIT is well positioned to expand into scalable markets while maintaining an active pipeline in Canada. With a potential acquisition pipeline in excess of $1 billion, Slate Office REIT is very well positioned for the future.

Note that REITs pay a distribution and not a dividend. Be aware of the tax differences.

Competition

Unlike its peers, Slate Office’s focus on office properties acts as a key differentiator. The REIT believes that about 75% of office inventory is often overlooked by large institutional investors, which acts as an opportunity for it. Slate Office competes with Crombie REIT, BTB REIT, Dream Hard Asset Alternatives Trust REIT, Automotive REIT, etc. in the diversified REIT segment.

Bottom Line

As a leading pure-play North American office REIT, Slate Office should gain from the strong demand in its core markets. Well-located, quality office assets should continue to add on to total unitholder returns through NAV growth and attractive monthly yield. The management’s guidance to maintain a conservative AFFO payout ratio, selective disposal of non-strategic assets and recycle capital should help the REIT grow its distribution in the near future.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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