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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen, and welcome to the Slate Office REIT First Quarter 2018 Financial Results Conference Call. As a reminder, this call is being recorded today, May 9, 2018, at 9 a.m. Eastern Time.Your host for today's call is Madeline Sarracini, Investor Relations. Please proceed, Ms. Sarracini.
Thank you, operator, and good morning, everyone. Welcome to the First Quarter 2018 Conference Call for Slate Office REIT. I'm joined this morning by Scott Antoniak, Chief Executive Officer; Robert Armstrong, Chief Financial Officer; and Steve Hodgson, Chief Operating Officer for Slate Office REIT.Before getting started, I'd like to remind participants that our discussion today may contain forward-looking statements; and therefore ask you to familiarize yourselves with the disclaimers regarding forward-looking statements as well as non-IFRS financial measures, both of which can be found in management's discussion and analysis. You can visit Slate's website to access all of the REIT's financial disclosures, including our Q1 2018 investor update which is available now.With that, I will now hand over the call to Scott for a brief overview.
Good morning, everyone. Thanks for joining the call. I'll speak a few minutes to touch on some of the quarter highlights before opening up the lines for any questions.So during the first quarter of 2018, same-property net operating income was up 5.2% versus the same period in the prior year, largely a result of the REIT's leasing coming online and our active asset management efforts. We're very pleased to see our leasing efforts translating to positive cash flow and value creation. Continuing on that theme, the team has completed over 200,000 square feet of leasing across the portfolio, with a very attractive leasing spread of 14% over expiring or in-place rents.Execution -- or overall execution continues to be positive. Most notably, the REIT was able to renew the Province of Nova Scotia for 81,300 square feet on a long-term basis at the Maritime Centre in Halifax. Maritime Centre continues to see strong demand, and the planned renovation should continue to drive an increase in head rents and occupancy. As the REIT continued to complete these deals to reduce existing vacancy, in-place occupancy increased to 85.9% this past quarter, and 88.2% when properties under development are excluded from the calculation.Discussed in the past, we are pursuing a measured capital recycling program. In that respect, we're pleased to report we've executed on the disposition of 135 Queens Plate Drive in Etobicoke versus $16.74 million. This transaction was approximately 10% higher than the December 31, 2017, IFRS book value, achieved a 1.9 equity multiple and 19% IRR over the whole period. It's also worth noting that Queens Plate was one of the original [ vending ] assets, and the sale price reflects a 21% premium over the original acquisition cost. We're obviously very happy about this result and expect to continue to look to dispose of noncore and fully valued assets that will allow us to recycle capital into future opportunities.Last, we've received approval from the board to execute on our normal-course issuer bid. We believe that certain of the recent pricing buyback ratings provides meaningful valuation to unitholders. We thank you for your continued support. And I'll now open the call to any questions.
[Operator Instructions] Your first question comes from Jonathan Kelcher with TD Securities.
First off, just on 135 Queens Plate, what was the cap rate on that?
The low 6.
Low 6, okay. And how much did you have on that?
About 10 million allocated through the Wells Fargo facility.
Okay. And would you...
Jonathan -- just, Jonathan, if I can dwell on that a little bit. I think we've talked the last couple quarters around our view of valuations in the Greater Toronto Area portfolio. And we spoke -- we've had obviously appraisals done in terms of financing and things like that, but this is the first, from our perspective, real data point we have. And we're extremely pleased with where the valuation came in, obviously, in relation to the IFRS. I think that will be consisted with how the rest of the GTA assets are valued. So we think this is one realtime data point that we're pointing to. And I think we're very encouraged by the result.
Okay, do you see any other sort of fully valued properties in the GTA that you might look at disposing over the next little bit?
Yes. There are some both noncore and nonstrategic going forward and those that are stabilized, so I think it will be a mix of both those things. There are certain assets in the GTA that would fit that criteria, and others in Atlantic Canada as well. It may take the form of either a wholesale -- or a full disposition, rather, or a partial, but it'd be a mix of the 2 markets and both asset characteristics.
And what would you've considered Queens Plate, like noncore or fully valued?
Both.
Both.
Both. We'd want that.
It is kind of like the lead, the obvious lead, opposite of the recycling program. It made sense. It was from any historical measure fully valued and, I think, in the noncore to us going forward.
Okay. And would it be fair to say, if your stock price stays in and around where it is, you'll use some of the proceeds from that when it closes into your NCIB?
Yes, we think that's fair.
Your next question comes from Himanshu Gupta with GMP Securities.
The target markets you mentioned in the letter being Atlanta, Charlotte and a couple of others, just wondering what cap rates you can buy in these markets. And is the approach to buy just the assets and key random locations? Or is it Class A assets in suburban markets?
So not to be trying, Himanshu, but it'd probably be a mix. And as you know, I mean, whether it's the GTA or Chicago or Charlotte or any of those markets, I think the answer is there's a very wide range in terms of where pricing is. So there are lower-cap-rate and "higher per square foot" assets. I think what I'd stress is that we will roll out the same kind of acquisition discipline that we've used in growing the portfolio in the GTA and Atlantic Canada and now into Chicago. So it will be a mix of suburban and urban depending on where the opportunities are. I think the one thing that we'll be very focused on as we have been historically here is the -- or the value -- or the relationship, rather, between pricing and replacement cost. So I expect that cap rates will be -- that we'll be looking at on a stabilized basis, depending on markets, will be into the 7s, like maybe high 6s and low to mid 7s; and again a mix of suburban and urban; and will be completely opportunity driven. And then as we get to some scale, I imagine we'll roll out the same kind of philosophy here in terms of clustering of assets. So we wouldn't want to have maybe one necessarily in every one of those markets, but if we can get some scale in certain of those markets, I think that will be the longer-term goal.
Right. So you've shortlisted these markets based on your criteria of buying below replacement cost and good markets, okay. And just to follow up on the asset disposition, 135 Queens Plate; just want to get a sense. Did the buyer approach you? Or you were marketing this asset for sale. I mean just want to get a sense how active you were on the capital-recycling front.
Yes, I can answer that question. The buyer -- it was an inbound, but it was an asset that we had slated for disposition later in the year. The buyer, just to give you some color, intends to occupy some of the space and the vacancy in the building. So we felt as though they were not discounting that vacancy, and thus their price reflected that.
Got it. And I mean, given your measured capital recycling program going forward, do you think you can get a better price for a small portfolio compared to these one-offs?
It's possible, Himanshu. I think we've looked at either scenario if we had a cluster of assets that made sense, putting it together. That's possible. I think it'll be a mix of individual asset sales and maybe smaller portfolios. So it's depending on where we see demand.
Okay. And there was a small fair value negative adjustment of $9 million in the quarter. Was it any specific assets or any market?
No. Effectively what that is, is just some transaction costs for the 7-asset portfolio in South Clark just getting put through the P&L. On a run rate basis looking at the portfolio as a whole, we didn't do valuation substantially anywhere in the portfolio aside from Queens Plate, to reflect that sale which was effectively on top of where December 31 was.
Okay. So that's helpful. And just one final question: 2285 Speakman is now being rent. The rent started in the quarter. How much is the rent on per-square-foot basis? Basically I want to compare what SNC was paying, will be paying now versus what they were paying before their revitalization project.
Yes. They were paying about $13.50 prior to redevelopment, and they're stepping between $17 and $19 in their new deal.
Your next question comes from Troy MacLean with BMO Capital Markets.
How much rent was included in Q1 from SNC's 2599 Speakman space?
Just for 2 months. So it would be the square footage they occupied for 2 months...
Okay. And then -- sorry. Go ahead.
At the $13.50 rate that I just cited, yes.
Yes.
And then I know it's early days, but how is leasing proceeding at 20 South Clark?
It's -- well, it's good. We referenced in our MD&A some of the leasing that we have done. We have a known vacancy in Q2 of about 13,000 square feet that we underwrote and didn't pay for. And we've already offset that, and we're net ahead by 3,600 square feet in rents -- at rents that are indicative of the 18% growth that we expected.
And then the Queens Plate was done at a pretty attractive increase over what you paid for it. Would you say you've had a similar move in fair value for what you could sell the property for in Atlantic Canada?
Yes, on some of those properties, I would say. And Scott, feel free to jump in. I mean there's obvious been -- obviously been valuation impacts of some of the larger lease deals that we've done vis-à-vis Johnson Insurance and the long-term extension there; Blue Cross and the long-term extension there; Kings Place in Fredericton, which is one of our larger assets with some of the new leasing we've done; and Maritime Centre. While it's like sort of halfway through its transition, we expect meaningful valuation impact from the rental increases we've achieved there.
Yes, perfect.
[Operator Instructions] Your next question comes from Chris Couprie with CIBC.
Just following up on Speakman. How is leasing going at 2599?
We just received the property back, as you know, from SNC. We're doing some work right now to get it ready for tours. We've had a few tours, but as you can imagine, the space was occupied by SNC for many years and is an older vintage of a product; new ceilings, lightings et cetera required. So there are some landlord's work that we need to do on a speculative basis to make it more attractive to the end user. I'd expect -- if you're trying to model, I would expect it goes in 4 tranches and probably 1 tranche every 6 months. That's kind of our expectation.
Great. And then some on the Cominar assets. Is there any type of operating strategy that you can share with us on are there any value-add opportunities, anything like that?
Yes. So I think it's a similar story to when we acquired the Fortis portfolio in that the properties were under-managed. And some of the major tenants are -- have shorter weighted average lease term, which is an opportunity for us to grow rents and extend and sort of restabilize and derisk those assets. So I think that over the coming quarters you'll see that'd be the general theme on those Cominar assets.
Yes. Because I think the -- Steve's point is correct and that we'll do leasing when we start to do leasing. And I think we've probably got a pretty good momentum already both on South Clark and on the Cominar assets, so even though we're only 1.5 months into that, it will be very positive. But it will probably be until Q4, Q1 of next year until we start to see new leasing come online, but at this point we're really optimistic.
Any known vacancies that you underwrote for Cominar?
Just the Duncan Mill head lease, which is obvious. And we're starting to see an excitement around that property with Slate's ownership, just as we did when we acquired the 427 properties. So we're optimistic that that's going be a good story.
And Chris, just to follow on, on Bobby's point. I think it's just consistent with many of the acquisitions that we've done. I think that there's a -- in addition to being reasonably well-occupied real state in markets that we like, I think there's a story around this around the GTA assets being kind of noncore, if you will, to the vendor of them who embarked on a strategy of no longer owning Ontario. So I think that was reflected maybe in some of the management of them. And I think if you look at simply in Burlington is it's below what market occupancy should be for an asset of that quality in that market. So it will be a mix of that. And Speakman and South Clark, I think ownership infrastructure was complicated. And we can come in and over the longer or near to midterm create value through exploiting some of these opportunities. So it's they're consistent with much of what we've done in the past. So they're good assets with a little bit more of a story than maybe just a playing them on.
There are no further questions at this time. I will turn the call back over to Ms. Sarracini for closing remarks.
Thanks, everyone, for joining the call. Have a great day.
Thank you.
This concludes today's conference call. You may now disconnect.