© 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.
Ladies and gentlemen, thank you for standing by, and welcome to the Slate Office REIT Fourth Quarter 2019 Financial Results Conference Call. [Operator Instructions]Please be advised that today's conference is being recorded.[Operator Instructions] I would now like to turn the conference over to Braden Lyons, Investor Relations. Please go ahead.
Thank you, operator, and good morning, everyone. Welcome to the fourth quarter 2019 conference call for Slate Office REIT. I'm joined this morning by Scott Antoniak, Chief Executive Officer; Michael Sheehan, Chief Financial Officer; and Steve Hodgson, Chief Operating Officer.Before getting started, I'd like to remind participants that our discussion today may contain forward-looking statements, and therefore, we 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 Office REIT's website to access all of the REIT's financial disclosure, including our Q4 2019 investor update, which is available now. I will now hand the call over to Scott Antoniak.
Thank you, Braden. Good morning, everyone, and thank you for joining the call. Slate Office REIT remains focused on owning and operating a portfolio of well-located quality office assets that deliver meaningful total returns to unitholders through an attractive monthly yield and growth in net asset value.Throughout 2019, the REIT completed a number of initiatives that enhanced our operating performance and positioned us for growth, both organically and through acquisitions. These initiatives will allow the REIT to continue to build value for unitholders in 2020 and beyond. This morning, I would like to discuss the measures that we believe will continue to drive value creation for the REIT.First, the operating performance of Slate Office REIT continues to be strong. During the fourth quarter, the team completed over 190,000 square feet of leasing. On a year-to-date basis, we completed 719,226 square feet of leasing at attractive leasing spreads of 18.8%, highlighting the strong demand across our core leasing markets. As a result of this strong leasing, occupancy in the quarter increased 80 basis points to 87.1%. With in-place rents across the portfolio at a 12% discount to market on average, the REIT is well positioned to generate organic growth going forward.The REIT's IFRS net asset value increased to $8.99 per unit at December 31, 2019, an increase of $0.45 or 5.3% year-over-year. When combined with the monthly distribution, the REIT has provided unitholders with an attractive total return of 10.7% in 2019.During 2019, the REIT completed 5 transactions as part of our previously announced capital recycling program. These transactions generated $171 million of net proceeds, which enhanced the REIT's liquidity and ability to acquire new assets, reinvest in our existing portfolio and reduce leverage. These transactions, along with the disposition of 4211 Yonge Street, will complete at an average levered internal rate return in excess of 22% and at a $55 million premium-to-acquisition cost, proving our ability to generate compelling returns for unitholders.At the beginning of 2019, we set out to reduce the overall loan-to-value ratio of the REIT. During the year, the REIT's loan-to-value ratio declined by 440 basis points to 58.7%. We expect this trend to continue naturally through debt amortization and value creation within the portfolio until we reach our target ratio of 55%.With the completion of the capital recycling program and a strengthening balance sheet, we believe the REIT is well positioned for growth as we head into 2020. The REIT has a significant acquisition pipeline in the United States and Canada, and we expect to deploy capital into new opportunities that will strengthen the quality of the REIT's portfolio and create incremental value for unitholders.Lastly, the REIT has received Board approval for further unit repurchases of up to $10 million under our normal course issuer bid. We believe that allocating a portion of our available liquidity to repurchase the units will increase unitholder value and as such repurchases constitute a prudent use of the REIT's resources.In summary, we continue to believe that Slate Office REIT presents a compelling total return investment opportunity for unitholders. With strong organic growth driven by leasing and market rental rate upside, consistent operating performance and a strengthening balance sheet, Slate Office REIT is very well positioned for the future. In addition to our existing portfolio of quality assets, we have a robust pipeline of accretive acquisition opportunities and available liquidity to acquire new assets that will continue to drive value creation for unitholders.There continues to be no better time to invest in Slate Office REIT and we remain excited for our future. We look forward to continuing to execute on our strategy, and we thank you for your continued support. I'll now open the call for questions.
[Operator Instructions] Your first question comes from Brad Sturges with IA Securities.
I guess, just starting off with your commentary at the end in terms of value -- and related to the stock price relative to, I guess, your book value is even approved to execute on the NCIB, again, but also would Slate Asset Management, SLAM, consider increasing its investment in SOT given the deep value currently at this trading price?
No plans to do that at the present time, Brad. We're happy with the investment that we have in Slate Office REIT.
Okay. In terms of organic growth expectations this year, what are the expectations for the REIT? And what would that -- what would be the bigger driver of that in terms of growth this year?
Yes. So if you look at our weighted average lease term, it's approximately 5.6 years. So that basically means that you're turning over your portfolio about 1/5 every year. We believe that our rents are about 12% discounted to markets currently. So that would give you an increase year-over-year of 1.5% to 2% organically. Furthermore, with the initiatives we've completed in 2019, we have available liquidity to purchase up to $150 million in assets this year. So that will further contribute to the growth in 2020 and beyond.
But -- I guess, for this year, what's your expectations for occupancy within the forecast if you're assuming, let's say, 1.5% to 2%?
Brad, it's Steve. So we increased occupancy by 80 basis points in Q4. We've completed a significant amount of leasing to date in 2020. Our anticipation of occupancy by year-end is approaching 90%.
That's including expected vacancies?
Correct. Just to comment quickly because I'm sure the question will come up on expected vacancies. So 129,000 square feet coming back in Q2 of 2020 in Atlantic Canada. Atlantic Canada, we've made significant progress on leasing. 70% of the leasing we did in Q4 '19 was in the Atlantic region. Most notably, we completed a 15,000 square foot deal at Maritime Centre with the province of Nova Scotia. And we did a new deal in St. John's, Newfoundland, at Fortis Place for 13,000 square feet. In addition, the vacancy that's coming back in St. John's is well below market rents.
Okay. So when we look at the expectations for occupancy trending towards 90% by the end of the year, what's your view of what that occupancy would be in Atlantic Canada? And where's the growth really coming from? Is that outside Atlantic Canada?
The growth will be coming from Atlantic Canada and the lease-up of some of our vacancy in Toronto, including 2599 Speakman, where subsequent to quarter end, we completed a 40,000 square foot new deal with PWGSC to bring that building to 50% committed occupancy.
And finally, leasing spread expectations for this year. I think in the MD&A, you highlighted that the rents are well below -- the in-place rents are well below estimated market rents, so where do you see that ending up this year?
Yes, it's difficult to predict because the spreads that we do are both renewals that may not be in the year -- for the year and renewals in the year, of course, too. So it will really depend on any of that leasing that we do in advance of expiry. But as Mike noted, our portfolio is still 12% below market rent. So we expect not necessarily every quarter to achieve the $13.4 million that we achieved this quarter, but somewhere in that range.
Your next question comes from Jonathan Kelcher with TD Securities.
Just following up on Brad's last question there. So the 24% mark-to-market, I'm sure that's a sticker shock to many of the tenants. Like would you expect to incur turnover -- tenant turnover to get to those market rents?
Apologies, the 20 -- can you clarify what the 24% refers to?
Page 19 of the MD&A, it says the in-place rent of the 2020 maturities is approximately 24% below market rent.
Right. I don't think we anticipate -- I mean that's in our forecast. We've made assumptions around tenants that will be vacating and tenants that have a high renewal probability. So that's all embedded in the weighted average calculation that we've done.
So the -- so you think you can get 24% on the 8% that turns this year -- or matures, sorry?
Yes.
Okay. And generally speaking, how -- like how do you guys think about that? Like pushing as much market rent as you can versus, obviously, some tenants will move.
Yes. I mean we generally don't lose a tenant over deal structure. It's primarily because of other objectives that the tenant has, such as in St. John's, where Exxon elected to own its own real estate. So I would say that we push as far as the market allows us to.
The strategy, right, Jonathan, of actually buying assets at a low-cost base that have [ that ] relationship between market rent and in-place rent, that's an important part of every single thing that we do. So that's why we've seen that consistently over kind of our 5-year period, and we expect more of that to continue going forward. So that's really kind of our bread and butter on the leasing side of acquisition, right, like to buy buildings that have that dynamic in place.
Yes. No, I get that. It's just 25% is a big number, and I'd expect not all tenants would just take that 25% increase.
Yes, it's skewed by a couple of larger deals in Atlantic Canada, where you'd have, say, a government tenant rolling over at a rent that was set 10 or 15 years ago. And they're pretty -- they're already -- the denominator on that calculation is not a large number. We're not talking 20 net deals, we're talking $10 net deals. So the increase on a nominal dollar basis is less.
Okay. Fair enough. Turning to acquisitions. I think you said in the MD&A, there's -- you guys are underwriting about $3 billion worth of deals right now. Is that -- so U.S. Sun Belt, would that go like all across the Arizona and, I don't know, Texas and states like that?
Yes, it's been -- it could, Jonathan, would be the short answer or the longer answer. I mean Southeast, specifically, we spent a lot of time there over the last 12 months. We continue to like Chicago. We think the experience we've had there is very good. That 1 million square feet bought on a pieces where it was underoccupied has been borne out with 84% of the acquisition is now pushing 90% on an occupancy basis with some more leasing to go there. So we really continue to like Chicago. And then the other markets would be Southeast. I think as I said in a letter, Florida, specifically, from a tax perspective and not to be dismissive of this, climate actually does matter, cost of living. There's 900 people a day immigrating into Florida, either from other parts of the U.S. or around the world. So that's a strong growth market, we think, with very positive demographics going forward. So that's where we've spent the bulk of our time. But other markets where we can find those kind of demographics and dynamics, we'd look at as well.
Okay. And then how do you look at accretion on acquisitions? Because the cost of capital is -- you guys don't have a very favorable cost of equity right now. How would -- how do you think of that?
We have existing liquidity to purchase up to $150 million in assets currently. So we'd be able to do that without accessing the markets. And so we'd be looking to do that. And in terms of capital allocation questions, we're always looking to whether we reinvest in our current portfolio of assets, which we've done in the past and have generated outsized returns by doing versus acquiring new or in this situation right now is potentially being active on our NCIB.
And I'd add, Jonathan, like -- I think the simple way that we are looking at this now to a certain extent. I mean, as you know, we disposed of 4211 to a user at a sub-4% cap rate. A lot of that $3 billion pipeline that we're currently underwriting and looking at in these markets in the U.S., the cap rates would be -- would start with a 7, so that's a pretty good arm that we would take. And we have a similar building quality, tenant credit profile, lease term, et cetera, to what we have now with that upside that we continue to look for in the competitive cost base. So I think that's a pretty good trade. And part of our job is to be opportunistic for unitholders and look around and find these deals. So if we can trade out kind of full value plus into new opportunities where we can see those returns over the longer term, we'll do that.
Your next question comes from Chris Couprie with CIBC.
Just turning back to the questions regarding the acquisitions. Are you looking at more kind of one-off acquisitions à la what you did in Chicago? Or are you looking more at portfolios?
We would evaluate both types of opportunities, Chris, in both markets, right? And then again, it's never been that we're kind of exiting Canada, if you will, for the U.S., so we continue to look here and in markets in the U.S. for either individual asset, portfolio asset opportunities.
And then within Canada, are you just looking at GTA? Or are there other markets that you're considering?
No, we're looking at all markets all the time. We think -- as with the 4211, we think the GTA is obviously in high demand right now, and that's impacted on the pricing. But yes, we look at all markets across Canada and the United States.
So just maybe where in Canada right now are you seeing an opportunity that kind of fits your profile?
It would be GTA, potentially Ottawa. We've looked in Montreal, et cetera. We're happy with our existing asset base in Atlantic Canada. We think there's great value in Calgary, but not necessarily for a vehicle with the structure that pays out a monthly distribution, but we think -- as a long-term play, there's value in there, but it wouldn't be for the rebut. Yes, so I think probably Ontario and maybe Montreal would be the simple answer.
Okay, great. And then with respect to the -- your leverage -- it's come down a bit, the 55% being your kind of midterm target. How -- if you executed that $150 million of liquidity, where would you see leverage going? Or where are you comfortable taking it in the near term to get these transactions over the line?
Well, as Mike said, Chris, and I think -- first of all, we're committed to the 55% number as a goal for Slate Office REIT. I think we're confident that we can execute on the acquisitions that we've outlined and continue that LTV trajectory in 2020. We have available liquidity to do up to $150 million worth of acquisition. We think we can keep that driving towards that 55% number. There's 150 to 250 basis points of just natural amortization that ticks down on an annual basis, so it comes down that way. And we think there are a number of value-creating initiatives within the existing portfolio, be it Maritime Centre in Chicago such that, that haven't been fully realized yet. So the denominator of the overall portfolio we still see will be increasing as we get closer to completion on Maritime Centre and finish up the leasing in Chicago. So we think there's a natural downward trend in it, and we're confident that we can do both.
Okay, great. And then with respect to 2599, you mentioned the lease that got signed subsequent to year-end, what about traffic outside of that? How is just that overall lease-up going now that this one's been signed?
Yes. So the remaining vacancy is 60,000 square feet on the second floor of that building. Tour traffic has been strong, particularly as of recent. And I think having completed some lease deals of that building make it more attractive to tenants.
Your next question comes from Brendon Abrams with Canaccord.
Maybe just from a capital allocation perspective, how are you guys thinking about balancing that external growth through acquisitions that you've talked about so far on the call versus, obviously, the significant discount between the unit price and your IFRS book value?
Yes. I mean we've completed a number of initiatives through 2019 that provide us with the liquidity to go in and acquire new assets, and we want to grow the REIT. To your point, there is a discount between our NAV and the trading price, and that's why we have the approval from the Board to go and be active on the NCIB. Our investment in our current portfolio also will likely not be dissimilar to what it has been in the past. Through doing that, we've been able to generate outsized returns for unitholders. And so we'll continue to do that in the future.
Okay. I guess, just the question being that, presumably, $1 spent on an acquisition is being done in and around fair value versus your unit price at a significant discount to fair value?
Yes. Exactly. Again, the intention here is to grow the REIT. So we're obviously aware of the discount. And again, we'll be active on the NCIB. But longer and midterm, we do like to see the REIT growing.
Right. Okay. If you could just remind us again for the 4211 sale, out of the $63 million gross proceeds, what was the net amount that would have been applied to debt repayment?
It was approximately $20 million to the REIT.
For our 75% interest.
Okay. And then just last question for me. Steve, I think you referenced it earlier in the call, just in terms of the leasing in Atlantic Canada. Can you just provide an update on, I guess, the two, I guess, more significant spaces, the Irving Oil, and I guess, the Imperial Oil coming up?
Yes. So at Irving Oil in Saint John, New Brunswick, we have completed a 6,000 square foot lease there. We have some significant prospects, one that is in the sort of 30,000 to 40,000 square foot range, which would be a significant -- a large tenant for that market. So things are actually going quite well in Saint John, New Brunswick. And if the pipeline gets approved, that will be another catalyst for that market. In Newfoundland, as I mentioned, we completed a new lease at Fortis Place for 13,000 square feet, which essentially stabilizes that building from an occupancy perspective. The 2 larger vacancies that we're going to experience have requested overhaul. So we probably will not see them vacate until the end of Q2. And we're actively touring that space and prospecting.
Okay. And how do the, I guess, proposed rents compared to be in place of the previous rents? And what would kind of TIs on a per square foot basis be?
So Exxon is paying somewhere between 5% and 15% below market rents. And CNLOPB, that TD place, they're on a gross rent structure, and they're about 45% below where we see market rents, even in today's market in St. John's. So we do see some significant upside on the rent rate growth. With respect to -- sorry, what was your other question?
Just in terms of...
Yes. I think -- yes, the leasing cost -- the leasing cost will be highly dependent on what the tenant is looking for from an existing finish perspective. Both these spaces are built out with perimeter offices, which we do find that a lot of these engineering or exploration companies are looking for. So it's really tenant dependent. But I would suggest that TI packages for 5-year deals would be in the $20 per foot range. And for 10-year deals, $40 to $50.
[Operator Instructions] Your next question comes from Jenny Ma with BMO Capital Markets.
Scott, I just want to boil down the comments you made on the $3 billion of potential acquisitions. First, could you talk to us about the geographic mix between Canadian and U.S. assets in that pipeline? And how it's changed over the course of the past year?
Sure, I can. So I would say, Jenny, at a high level, it's probably 80% U.S. to 20% Canada right now, and that would be consistent over the last year. I said, I would start to have seen the difference about 2 years ago, around about the time we started to look at the Chicago transaction. So I think that's been a consistent theme. Now we like the scale, obviously, overall in the U.S. With that size of pipeline and the REIT the size it is, we don't have to do every single deal we look at. So we can be particularly discriminate in our underwriting, et cetera. So I think 80-20 is a fair number, looking at right now.
And how should we boil down that $3 billion? Because, obviously, you won't have the time or the energy to pursue everything that comes across your desk, so how much of it do you really dig further into? At what point do you start having conversations about potential deals? Just maybe a rough estimate of how all that boils down.
Well, I think that pipeline exists on a rolling basis. So we're constantly evaluating real estate opportunities all around the world, frankly, but in the Canada and the U.S. specifically, the Slate Office REIT. So I think our target of $150 million for 2020 is certainly achievable. And at any given time, a subset of the $3 billion, I'd call, maybe $250 million to $500 million were more actively in-depth underwriting, touring, et cetera. So it's 15% or 20%-ish ratio where we got actually significantly closer to it than just vetting the deals.
Okay. And then -- so given that it's the majority being the U.S., just wondering what the mix is as far as suburban versus downtown, just because the Chicago asset's, obviously, in downtown, the Canada's suburban. What are you seeing in the U.S. market? And I guess, specifically in Florida where you're initially targeting?
It would be a mix of both. It's probably 50-50, Jenny. In some suburban markets, kind of call it non-Miami, Florida. So there's interesting opportunities in Tampa Bay, in Jacksonville and Orlando, and then mix of suburban as well. And I would say, in Canada, I think you just said suburban. It's not a necessarily suburban portfolio, Canada. GTA would probably be more suburban. Certainly, the Atlantic Canada would be urban. So it's a deal-driven, opportunity-driven and return-driven philosophy, so we can find the best opportunities for the reason for unitholders. But be it suburban or urban, the theory was always if we could find the right investment characteristics, we would be flexible in terms of specific location.
Right. Okay. And then you mentioned that the cap rates you're seeing in the U.S. are sort of at least 7% or so, but with comparable quality and term. I'm just wondering what your thoughts on would be with regards to the disconnect between that number and what we see in some markets in Canada? Like what do you think is the opportunity in the U.S. that we're not seeing here?
Well, I think what's happened to Canada, it's nothing new. I think the institutional capital has a very narrow focus up here and that's why you're seeing -- certainly for CBD office, extremely low cap rates and extremely high per square foot pricing. That -- the net that they have cast is a little bit wider now. So the GTA has been the beneficiary of that. And I think with that much capital seeking a specific type of asset, you can see what's happened to pricing. I think that it's a similar dynamic in the U.S., like there's not vastly discounted deals. And I would say, Midtown Manhattan or Silicon Valley or San Francisco or Washington, but in other markets, you could find those opportunities, not just so much what we have done in our growth trajectory in Canada. So I think there's abundance of different opportunities that would shake out the cap rates in that range.
Okay. And with regards to that 7%, would you say that for the stuff you're looking at, it's sort of fairly tight around 7%? Or is there a range?
No, there's a range, but I would use 7% as an average.
There are no further questions. At this time, I'll turn the call back over to Braden Lyons.
Thank you, everyone, for joining the fourth quarter 2019 conference call for Slate Office REIT. Have a great day.
This concludes today's conference call. You may now disconnect.