© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to Slate Office REIT Second Quarter 2018 Financial Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Madeline Sarracini, Investor Relations. Please go ahead.
Thank you, operator. And good morning, everyone. Welcome to the second 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 of 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 yourself 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 disclosure, including our Q2 2018 investor update, which is available now.I will now hand over the call to Scott Antoniak.
Thanks, Maddy. Good morning, everyone, and thanks for participating in the call. Per usual, I'll take a few minutes to touch on some of the highlights from the quarter before we open up the lines for Q&A.During the second quarter 2018, the team completed over 440,000 square feet of leasing at attractive spreads of 9.2% over expiring rents, resulting in our most active quarter of leasing to date. As we continue to complete a high volume of lease deals, overall, portfolio occupancy has increased by 90 basis points during the quarter to 86.6%, moreover, that is a 240 basis point increase over the same period in 2017.Occupancy will continue to be positively impacted in future periods as a result of the leasing activity completed this quarter.Same property net operating income was up 11.7% compared to the same period in the prior year, the increase in NOI is largely a result of leasing coming on line that was completed over the preceding 12 months. As we mentioned last quarter, we are pleased to see our leasing efforts generate positive NOI growth and drive value creation.Last quarter, we expressed our intention to continue to pursue compelling acquisitions in the U.S. market. We are pleased to announce that subsequent to quarter-end, Slate Office REIT has acquired 120 South LaSalle in Chicago and the adjacent parking garage located in the Central Loop for USD 155.5 million, and is expected to close in the third quarter.120 South LaSalle is a 656,000 square foot building located in close proximity to our 20 South Clark Asset, providing operating, leasing and marketing synergies. 120 South LaSalle is anchored by CIBC, a leading Canadian-based global financial institution, which occupies approximately 45% of the building's gross leasable area. This acquisition exemplifies our commitment to recycling capital to acquire higher-quality assets at pricing, which is not available for comparable assets in certain markets in Canada. We will continue to pursue similar acquisition opportunities going forward.On that note, during the quarter, we completed the previously announced sale of 135 Queens Plate in Etobicoke for $16.7 million, which was approximately 10% higher than our IFRS book value at year-end 2017. Subsequent to the quarter, we also entered into an agreement to sell 139 Water Street, and the adjacent Water Street properties in St. John's, Newfoundland, for $17.5 million. We're very pleased with these results and going forward, we'll look for -- look to strategically dispose of noncore, fully valued assets in Toronto and elsewhere in the portfolio that will allow us to recycle capital for future growth.As we continue to complete our capital recycling plan, we expect our leverage will reduce to levels achieved in the same period of previous years.Thank you for your continued support. And I will now open up the call for Q&A.
[Operator Instructions] Your first question comes from Stephane Boire of Echelon Wealth Partners.
In terms of the G&A expense, which increased a little bit between Q1 and Q2. What should we expect in second half of the year?
Yes, the G&A for the second quarter of 2018 was higher, probably about $150,000, $200,000 for professional fees that were accrued in the quarter. So I think it's a little bit above what our run rate is. Aside from the management fee though, coming up because of additional acquisitions, I think this quarter is couple of hundred thousand bucks too high.
Okay. That's good. And what are your target occupancy rates for both U.S. assets for 2018 and '19?
I think, Stephane, long term, we view the portfolio getting into the low 90s, call it. We think -- we view the economic occupancy is about 92%, and we're looking to get halfway there to about 90% by the end of this year and then all the way there towards the end of next year 2019 and starting into 2020.
Your next question comes from Jonathan Kelcher from TD Securities.
When does 120 South LaSalle close?
31st of August.
Okay. And in terms of recycling capital, have you -- do you have a volume target or a dollar amount that you're looking to sell?
Yes, we do. So it'll be a blend of in situations where we have, we believe in the clustering strategies to one-off assets in markets where we maybe not are inclined to grow, we may look to exit those entirely, and then we'd also consider kind of strategic sell down of percentages of minority interest in assets. And I think the total amount of equity, Jonathan, we'd be looking to raise would be in the range of $100 million to $150 million. So that translates to -- depending on the percentage, it could be between $250 million and $500 million of assets, depending on whether they're wholesales or partial sales.
Okay. And would it be fair, if we're just thinking about modeling this, would it be fair to take your weighted average cap rate on that?
Yes, that's fair.
Okay. And what was the cap rate on 135 Queens Plate?
It's the next quarter. Yes.
Yes. Sorry, I didn't catch that.
6.2%.
Your next question comes from Chris Couprie from CIBC.
Just wanted to touch on the Water Street assets and in terms of what drove the decision to sell these assets, considering the redevelopment potential?
I think where we are -- where we were and are, I guess now, Chris, in the cycle, we were approached by someone specific to these assets. They weren't necessarily targeted as part of the dispositions, but the group expressed interest at a price that we viewed to be compelling. We pursue that process. Longer term, I do believe in the future of the Water Street assets. I think that might have been a longer-term horizon than we had necessarily expected when we acquired the portfolio. I think we're very happy with the assets we have in St. John's, so we now have, basically, a fully stabilized portfolio of 4 of the top 5 assets in that market. But with long-term leases in place with really great tenants. So we're thrilled with that portfolio. And the valuation was such that it made sense for us. Given what we're doing in other markets, in terms of the broader recycling initiative, I think this made sense for us at that time, and that what was the motivation.
Great. Any update on Speakman?
On 2599 Speakman?
Yes. Sorry.
Oh. So we're just completing the white boxing of the space, and we're conducting tours. No conditional deals to note.
Okay. And then just when you're looking at your kind of acquisition pipeline, what are you looking at in Canada these days, if anything?
Look, I mean we look at everything in all the markets. So we're not exclusively looking in Chicago, and we're not ignoring Canada. It never was that part of the strategy. I think -- and it speaks to the recycling, it's certain markets, I'd love to use the Greater Toronto Area as a example. If we view those to be aggressively valued, then perhaps we're looking to reduce exposure in a market like that. That said, if we can find compelling acquisitions that fit with what we're trying to do, whether it's through clustering or from a valuation perspective that are compelling, then we'll do those. I wouldn't say there's one isolated market that we're focusing on. As you know, we have nothing out west, it's still a little bit volatile maybe for a distribution paying vehicle. But we look at all the traditional office nodes and markets in Canada, and we're looking in Chicago and other places in the U.S. as well. And part of, I think, the one of the great benefits of this asset management platform is that we have booked people and opportunities in all those markets across North America. So whether it's through relationships through your, let's say, retail REIT experience or other groups of people with insight, we're seeing opportunities in markets all over North America, all the time, and I think that's a big benefit of the platform.
Yes, Chris, maybe I'd just add, we continue to be somewhat market agnostic, as Scott was kind of referring to. What I would say has not changed is we're still looking to properties that we feel we can add value to over the, say, 2- to 3-year horizon. And I think you've kind of seeing that play through in the portfolio. Currently, we haven't had in that, we're getting very good results from that strategy. We've grown 90 -- occupancy 90 basis points over this quarter, and we're really happy with what the team's done from a same-store perspective. And a lot of that's been just the result of buying properties that are below occupancy that we can do some leasing at, and when leases turn, we can take them out to market and get additional NOI from that perspective. So anything, we continue to do that, whether it be in Chicago, or the GTA or Atlantic Canada, we'd be very interested in those opportunities.
Your next question comes from Brendon Abrams from Canaccord Genuity.
As you and your team start to allocate more capital into the U.S., do you have a view on the foreign exchange or perhaps managing the FX?
Yes, we do. We constantly watch it. I think where are right now with, one just with 20 South Clark and then 120 LaSalle, the exposure at this point won't be huge. But we are monitoring, I think we look at it from 2 perspectives. One, we do have natural hedges as far as the debt, we're debt financing the U.S. dollar acquisitions with U.S. dollar debt. So from an equity perspective, I think that helps. Plus we have lots of opportunities for additional acquisitions and opportunities in the U.S. So I think we're not necessarily looking to repatriate some of that capital back to Canada at this point. But I think, going forward, we definitely have plans to put in place, FX strategies to the extent we see volatility. But at this time, with this level of exposure, we predominantly let that float, but that could change.
Okay. And with your recent disposition book done at -- seemed to be in premium side for that book, do you think that's specific to those properties in terms of Water Street and the Etobicoke asset or is that kind of indicative of the appraisals or the lagging of the valuation in the portfolio as a whole?
I don't think it's a lag. And I wouldn't even say it's specific to those 2 properties. I think the stuff we have sold over the last 2 to 3 years, it's almost in all cases been at levels above our IFRS value, which maybe we're being a little bit conservative throughout the portfolio. I don't think necessarily any of those deals are entirely opportunistic as a whole. It's just really -- we've been quite conservative in the way we've underwritten and valued those things. But I think, just given the -- where GTA values are specifically, if we do have, then we do execute on the capital recycling program, I think we'll be quite pleased with where those values come out.
Yes, like -- if they are not fully valued and/or stabilized or entirely nonstrategic, then we're probably -- those are probably not assets that we would sell. And I think that speaks to the whole kind of philosophy of what we're trying to do, which is to by well and then manage with the best-in-class fashion and create value for these. Whether we're going to keep them over the longer term or recycle them into other opportunities, I think when we have real empirical data points right now that point to that success, whether it's on the leasing side or through the sales, the 2 sales that we completed in the quarter, that speaks to exactly what we're trying to do throughout the portfolio, whether it's in the U.S. or with the existing portfolio of new actions or legacy assets.
Okay. That make sense. And just from a leasing perspective, we're seeing tremendous strength in downtown Toronto office for leasing. Are you seeing that spread out to some of the more kind of suburban nodes your assets are located in?
Yes...
To start drive the environment there.
Yes, I would. I think it's starting to trickle over into that, and I think, we're very cognizant of the type of assets that we bought in the GTA, and I think, we're always big believers in location as most folks are when it comes to real estate. But in terms of infrastructure, on highway, on transit, et cetera, those assets have many of the characteristics that the downtown assets do, so that translates well from a leasing perspective. We're starting to see groups who had focused entirely on downtown leasing starting to make overtures for clients where it makes sense on the leasing side, where they can consider, maybe nontraditional or non-downtown uses. Because there is a material spread in the cost on a gross rent basis for tenants, not everyone needs to be downtown, I know there are significants benefits to that, but not every part of every business needs to be downtown. And the leasing agents are realizing that, probably beyond economic occupancy downtown, that they're going to have to look in other places and in better located suburban assets such as the ones we have in our portfolio, and we're starting to see that trickle through. We're starting to see it in occupancy and also in rent.
Yes, Brendon, I would comment. Our occupancy is up this quarter 90 basis points. And I think if you contrast that to downtown, doing that in the single quarter for downtown is almost impossible because downtown Toronto would be at economic or above economic occupancy. But you're paying for that if you're an owner of downtown Toronto office properties. We're not paying for that in the markets we're at. This is still good real estate, but we've got a team that's continuing to drive value and you're seeing that through the 90 basis points of increased occupancy and our 11% year-over-year same-store NOI growth. And we really think that's a huge opportunity that continues to exist within our portfolio and in the acquisition pipeline.
[Operator Instructions] Your next question comes from Himanshu Gupta from GMP Securities.
So on the leasing activity, healthy leasing spreads, renewal was on at 9%, is there any specific lease or geography which is driving the growth, or is it more broad-based?
Himanshu, I'd say it's broad-based. The deal that we did at Maritime Centre for 52,000 square feet, that was a huge success and continues to be a large spread to both building in-place rents and where the Bell Aliant lease expired at. In addition to that, we're seeing healthy growth in rents on the 427-Corridor, where we're seeing a more supply-constrained market there, and some of the spillover impacts of downtown market being so tight from an occupancy perspective.
Okay. And maybe, just a follow-up. How's the leasing? I mean, how's the actual leasing cost tracking against the amount allocated for normalized leasing cost for AFFO calculation? Are you seeing any elevated leasing expenses for this kind of leasing activity?
No, I think we're tracking to market, Himanshu, and to where we've been in subsequent quarters. Again, where -- one area I point to is some of the Fortis -- former Fortis portfolio had some space that had been occupied by former tenants for a long period of time. So there is some additional cost associated with that from a landlord work perspective, but once that work's done once, once it's done for several years and the next renewals or subsequent deals would be at much higher NERs. So we're quite pleased, and we're beating underwriting on all of our acquisitions over the last 12 months in terms of both rents and leasing costs.
Sure. And maybe just a follow up on the capital recycling. So you've mentioned, to reduce debt in the short term through sale of fully valued and nonstrategic assets. So what assets would you put in this bucket? I mean, these are mostly Atlantic assets -- Atlantic Canada assets? Or more GTA? Or I mean, more of like challenging assets?
No. Himanshu, it's Scott. Not challenging assets. I think it would be a mix if we're -- if we are -- have one-off assets or nonclustered assets in certain markets in Atlantic Canada, those might make sense from a disposition of a 100% of those. And I think, for the GTA in mid, perhaps, some of the stabilized assets in Atlantic Canada, we'd look to sell down a partial interest in those. So we'd like the assets and like to continue to own them and participate in even future upside. But I think it would be more of a partial sale-type decision. And there are certain assets in Central Canada, where if we're not going to be growing in those markets, having a small concentration of assets in ones and twos and places like that, that might be another place we'd look for, depending on where valuations are there. But we -- management and the board review the entire portfolio every quarter as you can imagine, and we look for opportunities where if we can recycle existing assets into new compelling acquisitions with upside, whether that's in the United States or Canada, then we'd be remiss if we weren't doing that. And I think, if we think certain markets are approaching fully valued, and we can recycle that capital, that makes sense from our perspective.
Sure. And maybe just one final question. Can you talk about the Chicago market in general? I mean, what is the market vacancy? And what are the market cap rates? And why do you like the market?
So I'll start and see if you can jump in, if you'd like. I think since -- I'd start with, Himanshu, it's an enormous market. So it's about 250 million square feet between downtown and suburban. It's roughly evenly split depending upon what you count, so call it, between 110 and 135 in downtown and suburban. Even within the downtown market, there are specific nodes, there are 4 or 5 nodes within that. These 2 assets that we've acquired are within the Central Loop. So I would say that the vacancy there, historically, is in the 10% to 15% range. I think it's about 12% or 13% right now. So the assets we've acquired are about -- at plus or minus at market. Within the node, I would suggest in both cases, we look specifically at the histories of these assets, and I took the view that their stabilized occupancy would be at the top end of the market, so more in the 90% to 92% or the kind of 8% to 10% vacancy. I think, whether management are just focused on those assets historically, we think there's an opportunity there for us. Like we have done in other markets, whether it's in Greater Toronto area or at Atlantic Canada. We're buying good, income-producing assets that have a story and have upside in them. So we think that's the case for these 2 assets. And I think Chicago has had a fairly strong run the last 2 to 3 years, I don't think we'd see any signs of that abating from an overall leasing perspective. There has been a bit of a move in certain suburban markets to downtown. You hit -- you hear the kind of the marquee transactions, like McDonald's and Wilson's Sporting Goods and things like that are coming to downtown, which is good for us owning those assets. But it won't be as it has been here, it will not be at the absolute exclusion of suburban. So we look at both of those markets. I think, again, like Toronto or any other major urban center in North America, near the airport, on transit, on the major highways, those are all the things we look to if we did look at the suburban assets. But I think that there's still good economic activity in and around Chicago, so we would expect to see continued success on the leasing side. And we really like these assets and the story that they both have, and the fact that they're in close proximity to one another. I think it's all good and all consistent with the way we run our business up here, and look to continue to do that down there.
Himanshu, I would add, when we look at the markets, we see this as a point of contrast. And with this whole capital recycling strategy, I think it's been fairly simple from our perspective in that, if we can sell a property like Queens Plate at a 6.2% cap rate that is fully valued in a node that -- it continues to be a little difficult. And we can take that down and put that in a Chicago downtown asset that will stabilize at an above 8% yield. We think that's a great trade. We'll continue to do that trade all day. And this capital recycling strategy is to allow us to do that in a bigger way going forward.
And Himanshu, Rob, makes a good point and I didn't answer the entire question. I think, we would think there's a bit of work to do to get our 2 assets stabilized. But those assets in those locations on a stabilized basis are up probably -- ours will be in the 8s, because we bought them really well, but I think those markets right now or those assets right now, the market cap rate for those is probably in the 6s. So that's still a 250 basis point premium to downtown Toronto for assets that had many of the same characteristics, whether from a tenant lease term or locational, access to subways and things like that. So we think, from that perspective, it's a compelling trade out of the GTA and into downtown Chicago.
Your next question comes from Matt Kornack from National Bank Financial.
Just a quick follow up on that point. What would be the going in initial yield on the recent Chicago trade?
They both were kind of high 5s, like 5.8% and 5.78% or 5.68%, something like that. And then stabilizing somewhere between 7.5% and 8.5%.
And similar occupancy profiles at least going in or, is there higher occupancy on the new asset?
No. They're similar, mid-80s. I think 84.1% and 84.5% or something like that, yes.
And then just from a timing standpoint, with regards to the acquisition versus dispositions, will leverage tick up into sort of the low 60% range and then come down over the balance of the year, or what is the timing? And from a financing standpoint, what are you looking for there? Is it a conventional mortgage or will you be doing it on a term loan or a credit facility?
Yes. I think, for -- in both cases, there's 2 parts to that question. So on the leverage, yes, it absolutely will tick up as we execute in the capital recycling plan, but we'll look to repay and bring that down. For the U.S. assets, the financing and debt strategy has been to do shorter term, either a demand or 2-year terms with a view that we would stabilize those over the 2 years and look to put on higher LTV financing and redeploy that capital after 1.5 or 2 years after we'd completed our leasing and gotten those assets stabilized.
I have no further questions in queue. I turn the call back over to Madeline Sarracini for closing remarks.
Thanks, everyone, for joining the second quarter 2018 conference call for Slate Office REIT. Have a great day.
This will conclude today's conference call. You may now disconnect.