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Good day. Thank you for standing by, and welcome to Slate Office REIT Third Quarter 2021 Financial Results Conference Call. [Operator Instructions] Please be advised that the day conference is being recorded. [Operator Instructions]I would now like to hand the conference over to your speaker today, Ms. Jennifer Pyper from Investor Relations. Ma'am, please go ahead.
Thank you, operator, and good morning, everyone. Welcome to the Q3 2021 Conference Call for Slate Office REIT. I am joined this morning by Steve Hodgson, Chief Executive Officer; Lindsay Stiles, Chief Operating Officer; and Michael Sheehan, Chief Financial Officer. Before getting started, I would like to remind participants that our discussion today may contain forward-looking statements, and therefore, we ask you to review the disclaimers regarding forward-looking statements as well as non-IFRS measures, both of which can be found in management's discussion and analysis. You can visit Slate Office REIT's website to access all of the REIT's financial disclosure, including our Q3 2021 investor update, which is available now. I will now hand over the call to Michael Sheehan for opening remarks.
Thank you, Jennifer, and thanks to all participants for joining the call this morning. We're very pleased with our third quarter results. Slate Office REIT continues to offer investors a durable cash flow and distribution, a trading discount to a well-supported net asset value and a scalable platform that is positioned for growth. As we continue to put the pandemic behind us, the REIT's results are trending positively. This is our fourth consecutive quarter per unit FFO and AFFO growth. Leasing volumes in 2021 are up 12% compared to the same period in 2020 and our rental rate spreads are a positive 7.7% year-to-date. We expect rental income to trend upwards through the balance of the year and in 2022. We also executed on some key dispositions and refinancings that effectively raise capital at or above our net asset value and created additional liquidity to support accretive growth. We continue to evaluate a large pipeline of transformative acquisition opportunities in Canada, the United States and Europe with the support of the Slate Asset Management's global team and relationships. As the economic landscape continues to strengthen, we are well positioned for both internal and external growth. On behalf of the team, we thank you for your continued support. I will now hand it over for questions.
[Operator Instructions] And the first question comes from the line of Lorne Kalmar from TD Securities.
Maybe just on the leasing front. St. John's you guys had to do some more leasing at below strategic leasing at below market rates. What's kind of landscape out there? When do you guys think you can get occupancy kind of back trending upwards? And has there been any sort of bump in activity because of the recovery in oil prices?
Yes. Great question. So as you noted, we've completed 17 -- over 17,000 square feet of leasing in St. John's. Excluding the new deals completed there, rental rate spreads were 5% in the quarter and 11.9% year-to-date. We're seeing a lot of increased activity from small growing companies, high-growth companies and specifically in the technology and mining sectors. So a lot of continued momentum. We expect that to carry on throughout the balance of this year and into next year. And what we're seeing is as a result of this activity, a lot of positive market chatter, and we're confident that trend that will carry on into next year. Speaking to Atlantic Canada as a whole, as we've messaged throughout the year, it's really been a leading indicator for us, due to the travel restriction activity and market fundamentals rebounded a lot faster than some of the other markets sort of late last year and early this year. And we've completed 240,000 square feet in Atlanta Canada year-to-date. So certainly expect that to carry on and occupancy to follow as momentum continues.
Yes. And Lauren, your question around oil and gas. What we're seeing is the momentum similar to what we're seeing in Alberta and other areas of Slate. It hasn't translated yet into a need for more office space. We're just seeing renewed projects like the White Rose project in Hibernia, [ Next Day ], et cetera. But again, it hasn't translated yet into a need for more office space, but we expect it will, but it will be a bit longer recovery, and that's why we've sort of employed this strategy to diversify our tenant base.
Okay. And I guess -- so following on that, do you think you guys will have to keep giving up big incentives to fill up space there to kind of keep pursuing strategic tenants? Or is that sort of in the rearview mirror?
I think that would probably continue for the balance of this year, but then in 2022, revert to more conventional lease structures.
Okay. And then kind of -- there was last quarter some lease termination income at the West Metro Centre, and I think we were able to defer with their trend. Any progress on that front?
Just in terms of backfilling the space?
Yes, yes.
Yes. So we've -- actually, Q3 was our most active quarter since the onset of the pandemic with respect to the GTA portfolio, completed 138,000 square feet of leasing in the quarter. And that included a increased renewal of an existing tenant, 100,000 square foot renewal for 5 years. So we expect that sort of indicative of the conversations we're having with a lot of other tenants. Activity is increasing as market fundamentals improve and people return to the office. Obviously, recovery in Ontario has been a bit slower than elsewhere in the country. But certainly seen a shift with respect to tour activity and interest, and we expect that to carry over into next year.
Okay. And then maybe just last 1 for me. It looks like there's some lease termination down in Chicago. Can you maybe unpack that a little bit for us?
It was a tenant that was effectively acquired by a private equity firm and it had decided to consolidate and downsize their space. So they had an option in their existing lease. And the vacancy on that is June of next
And your next question comes from the line of Brad Sturges from Raymond James.
Just to follow on to the question around leasing. Looking at, I guess, next year's maturities. I think S&C lag [ ones ] in that bucket in the 427-Corridor. Just any update there? And any thoughts around any nonrenewals next year?
So Brad, lease expiry exposure is down to 9.7% for next year. As I mentioned, activity has really picked up in the GTA in Q3, 138,000 square feet of leasing. Certainly, deals are taking longer to complete, just given the pandemic and some companies still working through their requirements short and long term, and I would put FMC in that bucket, obviously, global strategy playing in here. So not a function of local people necessarily being able to make a quick decision. But we've got a great relationship with them. As you know, they occupy over 200,000 square feet at our Speakman Drive properties. So those discussions are ongoing, and we look forward to reporting back once we've completed a deal. The other thing I'd like to mention is rental spreads for the next 12 months of expiries are 14.6% below market. So we see a real opportunity to adjust rental rates going forward and continue to drive our positive spreads.
Okay. And just to go back to the question there on Chicago, what would be the leasing strategy to replace the time there though, given that you have a little bit of opportunity or runway before the vacancy takes place, what would be the opportunity to release that space?
Yes. So the -- as is the case with most termination options, they are required to provide us with 12-month notice. So we're already actively marketing the space with our brokers. Never great to have a tenant terminate, but the termination income more than offsets the cost to re-lease the space. So we're seeing activity pick up in Chicago as well. I would say, in Q3, there's been a substantial increase in tours and paper trading. So we think we're pretty confident we'll be able to backfill that in due course.
And it's likely to be extensions of existing tenants, Brad.
Great. Just maybe a little more of a general question on leasing activity. Like is it -- are more of the discussions you're having is still more on the renewal side? Or are you starting to see more activity and tour activity for new deals?
It's a combination of the 2, Brad. To give you some context, year-to-date activity has been sort of 50% GTA, 40% Atlantic and the balance in Chicago. That will be a combination of new and renewal leasing. I would say renewal conversations have been a little bit easier to have just because you're talking to existing tenants who are familiar with the product. New leasing was a bit slower sort of in early stages of the pandemic where we couldn't get people physically through the buildings. But that's really changed across the entire portfolio as of Q3. We've got active tours happening in all of the markets. So I think we'll see new leasing activity continue to pick up going forward.
Okay. Last question, just you sold Eva Road. Any thoughts around more capital recycling at this time? And what should we expect in terms of reporting that capital into acquisitions.
Yes. So we sold Eva Road at a 2.3% cap rate. We sold 4, Herald in Corner Brook as well for $2.8 million, and that did not have any leverage on it. So in total, we have generated about $23 million, $24 million of equity to redeploy. And I would suggest for modeling purposes that we expect to have new properties online by the beginning in Q1 of next year.
[Operator Instructions] Your next question comes from the line of Jenny Ma from BMO Capital Markets.
Just expanding on the last question, can you give us some views on your acquisition outlook for 2022, maybe in terms of quantum? And if you can go in on any geographic focus as well.
Yes. I think similar to prior quarters, Jenny, we continue to focus on a transformative deal. And using the -- at the end of Q3, we had about $40 million of liquidity. We've since generated more with some refinancing subsequent to the quarter and the disposition subsequent to the quarter. So we'd like to use that liquidity and capacity to help support a larger transformative acquisition. We think transformative growth is important for this particular vehicle because closing the discount on our NAV is not going to happen by sitting still. We need to grow AFFO per unit. We need to attract more institutional investors. We need to be of a larger size to do that and have more liquidity in the stock and be able to access a cheaper cost of capital through things like unsecured debentures, et cetera, that come when you get a certain size and scale. So that's really the strategy. In terms of the market, again, we'll be focused on where we have boots on the ground with Slate Asset Management, so Canada, the U.S. and Europe. I would think -- I would suggest that most of the more actionable deals right now are in Canada and Europe. The U.S. while there is a large volume of pipeline we're reviewing, we're finding that a lot of it is either more on the value-add side, which is not necessarily fitting the investment criteria of the REIT or there's just a large bid-ask spread on other deals still. So I would think it would be our next acquisition would likely be Canada or in Europe.
Okay. So by transformative, is it fair to say that it would be a deal of size, whether it be -- I presume, it would be a portfolio as opposed to a single asset, but is that kind of what you're playing to? And would you be looking to push leverage to achieve that if you do find such a deal?
Yes, I think like we would evaluate the capital structure based on the deal. We've been primarily focused on what is the right real estate transaction for this REIT and what fits our investment criteria. And then the deal will sort of dictate what sort of capital structure we need to employ to make it accretive to investors which include Slate Asset Management. So I don't -- I can't speak to that specifically yet, Jenny.
Okay. So when you look at these deals, are you still squarely focused on office? Or are you open to more sort of office adjacent type of properties and you've got a couple in the portfolio, but what asset class would you be looking at right now?
Yes. Listen, we are still very bullish on office. We've -- what we've seen through the pandemic is that our portfolio has been very resilient, and we've been providing a stable cash flow and distribution to our investors. We think there's some headwinds in office, and there has been some headwinds over the last 24 months. But we're going to come out of that. We're very bullish. We're making a call on that. Now some office will perform than others. We think to Lindsay's earlier point about leasing momentum, it's really in the properties that are the higher quality in our portfolio and high quality can mean the best in each individual market like we have in Atlantic Canada or in the GTA, it could mean the stuff we had in the 427 or Markham or Sheridan Business Park. So we're very bullish on office. We think there are some current thematic things that we would like to further explore around life sciences or more sort of flex office that provides opportunities to have ground level lock-in space because we think those types of themes are here to stay and could be attractive to position and diversify our portfolio.
Okay. Great. Moving to same-store NOI. I'm just wanting to square the outlook and when you think play office might hit an inflection point to positive territory because you've got pretty good leasing activity. But I think in the MD&A, you mentioned there were some properties where you might see some extended vacancy for the next 12 months. So I just want to square all that together and get your views on when you think same-store NOI could turn positive?
Well, if you look quarter-over-quarter and remove the impact of termination income, the same property NOI is up 0.6% if you take out the hotel as well. On a year-over-year basis, if you remove the impact of currency, we're effectively flat. And I think if you're looking forward, there's a couple of leases that we've done that are coming online over the next few quarters. So we're not exactly providing guidance on same property NOI, but I think that we've proven that it is stable over the last 4 quarters and growing as those leases come online.
Okay. Great. That's helpful. And then lastly, on the hotel. Can you comment on how it performed in Q3 with some of the reopenings and lifting of the travel restrictions? How far below potential you think it might be still at this point? And whether or not group bookings have sort of restarted? Or do you expect to contribute going forward?
Yes. Sure. I can touch on that. In Q3, the hotel generated about $600,000 of EBITDA, that was ahead of our expectation. You asked this question last quarter, and the answer was the first half of the year, our NOI was effectively zero, and we expect it to be $500,000 for the balance of the year. So we're currently pacing slightly ahead of that. I hate to give guidance in the hotel space because it is volatile, but I think we're feeling really good about our $0.5 million for the balance of this year. Looking forward to next year, we like to finalize our budgets as late as possible for a hotel property, just given things can change on a day-to-day basis. But what I'm seeing is that the group business is pacing ahead from where bookings would have been same time last year. And we sort of benefit from being in a secondary regional market, where a lot of that group business is association or motor coach and their drive to and regional. So we're not relying on having to cross borders or take flights. And as a result of that, we'll see that group business come back sooner than you might see in a more conventional downtown convention hotel.
Have you had any group bookings so far? Or is it a little too early?
Group bookings. Yes, absolutely. Yes.
And your next question comes from the line of Scott Fromson from CIBC.
Just wondering how the trend in the leasing activity is going in Atlantic Canada.
So year-to-date, Scott, we've completed just less than -- so 247,000 square feet of leasing in Atlantic Canada specifically. We -- as we've mentioned, we've done some strategic deals with high-growth companies in St. John's. That's resulted in 17,500 square feet of leasing year-to-date in that particular market. So that's one instance of where there are some challenging fundamentals, and we're being creative to increase occupancy in the short term. And absolutely expect those tenants to grow with us long term and adjust to more traditional lease structure sort of next year and as we carry forward with leasing efforts. I mentioned Maritime Center, specifically in Halifax. We are nearing completion of our redevelopment project there. So really excited about that. It's resulted in a significant amount of leasing activity recently. That's both existing tenants looking to expand and other tenants looking to get space in the building. It's just really become kind of a center. It will be the best building in downtown Halifax. We will be launching a new F&B offering. We've converted the old food court into additional parking that was needed. So we're really sort of checking all the boxes for what tenants are looking for. So very excited about activity there. And then our Chain Lake properties also in Halifax. We've done a significant amount of leasing to date, I believe, occupancy is just less than 90% at this point. So really, really pleased with what we're seeing there.
And Lindsay, how's St. John's looking?
So, St. John's, as I mentioned, we've had leasing tactic to increase occupancy in the short term. We have quality office product there. We've got -- we've actually engaged a new leasing broker there who's been excellent to partner with very well connected in the market, and we're confident we'll continue to drive occupancy there. As Steve mentioned earlier, there are challenges there with oil and gas. It's certainly not as strong as some of the other markets where we own real estate, but we are being creative. We're getting in front of any groups that are looking for space. And we'll continue to chip away at that vacancy. It may take a little bit longer, just given the pandemic carrying over, but we expect sort of towards the end of next year to have really strong results.
And Lindsay, could you just touch on St. John, New Brunswick because I think that's what Scott was referring to.
Sure. Yes. Just with respect to like leasing. So we completed, as you may recall, last quarter, we completed a 100,000 square foot renewal with the province. And that was really important for us in terms of occupancy long-term, excellent spreads for that deal and just illustrates their commitment long term. So our partnership with them has been great. We continue to work with them on unique requirements they have, where we may be able to lease other space within the portfolio. Brunswick Square specifically, we're looking at some interesting ways to convert some of our retail space there to a more traditional sort of storage and office type uses just given quite frankly, retail has been hit hard by COVID. We've done some new leasing there. We'll continue to chip away at it. But that market will be a bit slower to recover.
[Operator Instructions] And your next question comes from the line of Chris Kout of Canaccord.
Just wondering if you could provide us with an update on sublease activity and maybe how that's trended over the past few quarters?
Sure. So sub-lease activity across the portfolio. As you may know, Chris, 85% of our portfolio is located in suburban and secondary markets. So although a lot of the headlines, for example, with respect to downtown Toronto are commenting on increased sublet space availability. We haven't seen that carry over into the markets where we're located. Utilization rates have increased a lot faster in our markets. People are much more comfortable coming back to the office when they can drive instead of taking public transit and walk up the stairs instead of taking elevators. So our portfolio has been quite resilient with respect to sublease space availability. And to the extent we saw it in the GTA suburban market as an example. It's really come offline in Q3 as tenants formalize their return to the office strategies and have realized that they're quite likely going to meet the space they have, although the configuration may change as a result of the pandemic and different uses of this space, a lot of them expect to need that space going forward. So it hasn't really impacted us as it has some other landlords that had a significant amount of supply in downtown cores.
And Chris, probably what you'll hear from our peers that do have assets in downtown cores, is that sublease availability is significantly down from where it was earlier in the pandemic. It's a result of a few things. Some tenants have just taken their space off the sublease market because it was just the reason it was on there was more of an accounting thing than a business requirement. And then second, I love the -- some of the sublease space has been taken by new tenants. And then those tenants have left behind space that is available from a direct landlord. So I think starting to -- I think it's a positive sign to see that shed off first before we start to see more net -- positive net absorption in downtown Toronto.
And we have reached the end of our Q&A session. I would like to turn it back to Ms. Jennifer Pyper for closing remarks.
Thank you, everyone, for joining the Q3 2021 conference call for Slate Office REIT. Have a great day.
Thank you. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.