Slate Office REIT – A Disapointing Pure-Play 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 34 properties (comprised of 33 office properties and 1 non-office property) across Canada’s major population centers and includes two assets in downtown Chicago, Illinois. Its properties span across 6.9 million square feet area. Slate Office’s assets are worth $6.5 billion.

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 (~32% of total 2020 NOI), Ontario (~39%), Western (~6%), and USA (23%). The REIT is managed by Slate Asset Management L.P. which owns 9.5% of it.

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Investment Data

 

Revenue Growth & Market Exposure

The majority of Slate Office REIT’s revenues comprise rent from its portfolio of office properties. Its various components of revenue are property base rent (~53% of 2020 revenues), operating cost recoveries (32%), tax recoveries (16%), hotel (~2%), and straight-line adjustments and other (-3%).

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’s top five tenants are large corporates like CBIC, BELL, SNC-Lavalin, Government of Canada, and Thales. Its weighted average lease term stands at 5.4 years.

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. Slate Office REIT’s rent collections in 2020 ranged from 96% – 98% per month in cash since April 2020. It witnessed organic rental rate growth in its portfolio, with an average rental rate increase of 15.2% on renewals and 15.1% on new deals.

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. It is forecasting a rebound in new office leasing demand in the second half of 2021 with occupancy in the 90% – 92% range from around 84% today.

Distributions

Slate Office REIT slashed its dividend by nearly 50% in 2019. However, its stable cash flow helped it to pay an average 10% distribution to unitholders in 2020 that was well-covered with a 67.6% payout ratio. It also repurchased 113,000 units at a total cost of $0.4 million in the last year.

Slate Office REIT has a proven ability to generate high double-digit returns. A proactive asset management strategy has resulted in strong operating results. 

The REIT’s portfolio of office properties provides diversification, cash flow generation, and the opportunity to grow net asset value on a per unit basis. Its properties are located in geographically diversified markets in Canada and the USA. Moreover, 60% of the REIT’s portfolio is comprised of government and credit-rated tenants granting more stability to cash flows. Additionally, 74% of Slate Office’s portfolio was externally appraised in 2020, which further validates the REIT’s value.

Slate Office should benefit from the strong organic growth driven by leasing and market rental rate upside in the long term. The REIT is characterized by consistent operating performance in FFO and a strong balance sheet.

The management believes that Slate Office REIT has the potential to expand into scalable markets while maintaining an active pipeline in Canada. With a robust pipeline of assets, Slate Office REIT is very well positioned for the future.

Slate Office (SOT.UN) historical yield
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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 many of the best Canadian REITs 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. With a successful vaccination drive and once the coronavirus situation is under control, offices will reopen and Slate Office will bounce back. Well-located, quality office assets should continue to add on to total unitholder returns through NAV growth and attractive monthly yield. 

SOt.UN vs TSX vs SP500
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Slate Office (SOT.UN) historical PE
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