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Ladies and gentlemen, thank you for standing by, and welcome to the Slate Office REIT Fourth Quarter 2020 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker, Braden Lyons, Investor Relations. Thank you. Please go ahead, sir.
Thank you, operator, and good morning, everyone. Welcome to the Q4 2020 conference call for Slate Office REIT. I'm joined this morning by Steve Hodgson, Chief Executive Officer; Michael Sheehan, Chief Financial Officer; and Lindsay Stiles, Chief Operating 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 Q4 2020 investor update, which is available now. I will now hand over the call to Steve Hodgson.
Thank you, Braden, and thank you to everyone for joining the call. I would like to highlight 3 key takeaways from 2020. One, we have demonstrated the durability of the REIT's income. Two, the REIT's IFRS net asset value is well supported by private market transactions and external appraisals. And three, our strategy and platform is scalable and set up for both internal and external growth. On the durability of our income, cash rent collections ranged from 96% to 98% each month since April. We attribute this industry-leading results to the composition of our tenant base, which is 60% government and credit rated tenants. The REIT had an average distribution yield of 10% in 2020, and which was well covered with a payout ratio of 67.6%. We completed 688,000 square feet of leasing in 2020, which is only 4% less than our leasing volumes in 2019 prior to the pandemic. Leasing spreads were 15.2% above expiring or in-place building rents, demonstrating we are still growing rents in this environment. Looking forward, we see new leasing activity picking up, and we have less than 5% of the portfolio due for renewal in 2021. Our weighted average lease term is 5.4 years, and all of these points speak to our income durability now and into the future. With respect to valuations, there is a disconnect between public and private office real estate values. We are trading at an approximately 50% discount to our net asset value. We strongly believe in our net asset value, and this is supported by recent comparable transactions in our markets. In addition, 74% of the portfolio has been externally appraised since March 31, 2020, which further validates our net asset value. We are optimistic that the disconnect between public and private valuations in the office sector will narrow as people return to the office and the sentiment improves. And finally, our strategy and platform is transferable to new and existing markets. We have a best-in-class team, and with the strength and reach of Slate Asset Management, we have a tremendous opportunity to grow. Growth is critical for the REIT's long-term success, as it will further diversify and stabilize our portfolio, attract more institutional investors, reduce our cost of capital, and further strengthen our balance sheet. We are looking forward to increased economic activity in 2021, which will have a direct and positive impact on the demand for office space. On behalf of the Slate Office REIT team, we thank you for your continued support, and I will now hand it over for Q&A.
[Operator Instructions] Your first question comes from the line of Jenny Ma with BMO Capital Markets.
So, Steve, I know in past calls, you had mentioned that you expect occupancy to improve throughout 2021 as you're going through some transitions with your tenants. But given the pace of the vaccine rollout in Canada and sort of the commentary on when there will be a true return to the office, does that shift your thinking in terms of the lease-up of the portfolio?
No, it doesn't. I'm going to let Lindsay answer the question.
Sure, Hi, Jenny. We feel quite good about our reaching volume in 2020, Jenny. As Steve mentioned, in a rather unexpected and challenging year, we were able to complete 688,000 square feet of leasing, so just 4% less than what we completed in 2019, pre pandemic. One of the interesting data points we saw in Q4 was the rebound of Atlantic Canada. We really attribute that to the success of the travel restrictions that were implemented there. We completed 120,000 square feet of leasing in Atlantic Canada in the quarter. We started to see activity pick up in Q1 in some of the other markets we operate in. And we expect that to continue throughout the balance of the year, as the vaccine rolls out and people return to the office.
Great. And congratulations on your promotion, Lindsay. So I guess when we think about occupancy, is it a fair expectation that Q4 '20 was a trough then? Or do you expect some of the velocity to come back maybe Q2, Q3 of this year?
Yes, we think it was a trough. Our leasing volumes, as Lindsay mentioned, have been strong relative to even historic years, and being led by Atlantic Canada with the travel restrictions there. We're starting to see things pick up in the GTA as well. We've done a few new deals in the first quarter here that we look forward to reporting on later. Momentum is positive.The Q4 drop in occupancy is really a function of some of those larger tenants in Atlantic Canada that vacated, and the decision to vacate predated COVID. So yes, we do view this as a trough. As we've mentioned in prior calls, the timing of it is unfortunate because we probably would have already re-leased that space by now in a normal environment. But yes, our expectations of re-leasing it are still strong, but just timing pushed out to probably the latter half of 2021.
Okay. And in the MD&A, it was mentioned that there's -- some of the new leasing efforts offset the [ 2 new ] vacancies in St. John's and Toronto. How much of this offset do you estimate?
Yes, I don't have the exact numbers in front of me, Jenny, but ExxonMobil, for example, was a 90,000-square-foot tenant, and the net drop in occupancy was about 62,000 square feet. And Exxon wasn't the only tenant who left as well. So we are mitigating some of the drops in occupancy with new leasing. And because -- looking forward to 2021, as I mentioned in my preamble, we have 4.7% of the portfolio rolling, which is not a lot compared to how we usually start a year, and so we're fortunate of that because we can really, in addition to renewing all those tenants, we can focus our efforts on growing the occupancy.
Okay. And there's about 174,000 square feet of a month-to-month lease that is said it largely consisted of a large single tenant. How much is that large single tenant of that number?
Yes, Jenny, it's just over -- almost 110,000 square feet of that number would be specific to one larger tenant. We've been in discussions with them for quite some time. We're getting pretty close to finalizing something there, and it's just a function of their internal process taking a lot longer than we might see for a smaller tenant.
Yes, it's a government tenant too, Jenny, so it's not unusual to end up in a month-to-month situation, as precarious of a position as it puts the landlord in. It's quite typical when you're dealing with the government tenant, unfortunately. But as Lindsay said, we are at the finish line, and we will message that as soon as that is completed.
Okay. Yes, that's not surprising. Can you comment on the in-place versus the market rent on that specific space?
Just in sensitivity to the negotiations, I'll just say that it is an increase that is consistent with other increases we've seen across the portfolio.
Okay. That's fair. And then turning to the P&L, so there was $700,000 of the accelerated amortization as a result of the deals that you did. Just wanted to confirm that that was basically the bulk of it and that it is onetime in nature.
Yes, that's right. So there's a few facilities, as you're probably aware, that we consolidated in Q4, and so that's exactly right. Those were done earlier than their original maturity date. So exactly that. It's -- that was the total amount, the $700,000, and it certainly wouldn't be expected to recur unless there's any other debt that we do renew on an early term.
Okay. And then, when we look at the Q4 '20 interest expense, excluding that number, $0.7 million, is that a good run rate? Because I think most of the deals are done through September, October, right? So I would assume the interest expense on the new credit facility would be fully picked up in Q4. Is that the case?
Yes, that's right. It's mostly in there. So yes, I would say that's probably a decent run rate.
Your next question comes from the line of Jaz Cumberbatch with TD Securities.
Just Jaz on for Johnathan Kelcher. Just a couple of quick questions. So leasing spreads on renewals turned negative in the quarter. Just wondering if you could give some color there and what you're expecting for renewals in 2021.
Sure. So we're quite pleased with spreads for 2020 -- as Steve mentioned, just over 15%. There was a slight decline, as you noted, in Q4. That's really specific to one transaction, a law firm that we were able to renew in place for 10 years in Atlantic Canada. They were coming off of an above-market rent, so this is really just a function of adjusting them to reflect current market conditions. But we certainly view that as a one-off.As a quarterly exercise, we review the rents in all the markets where we're operating, and that was obviously just completed for Q4. And we're sitting at about 9% -- our in-place rents are sitting at about 9% below market rents. We feel pretty confident in the ability to carry that spread, that positive spread going forward for the balance of the year.
Yes, I would just add some color there, too. So if you exclude the deal with the law firm that Lindsay mentioned in Newfoundland, it's -- our spread is 4.5%, I believe, so that's a positive sign. But the renewal spreads are also somewhat muted right now because of the dynamic that some of the tenants that we deal with, I mean, it's great that -- it's really great that we were able to do a 10-year renewal with the law firm in Newfoundland right now. That was a huge win for us. But a lot of the renewals that we're doing are short-term in nature. And when you do those short-term deals, it's often not a huge lift on rent. But to counteract that, there's no inducement cost, so I think that's a trend that you're seeing across the whole office sector right now.
Okay. That's helpful. And then, just a second question. Just what markets do you seen the strongest leasing activity? And just a follow-up to that: Is there any activity on the 119,000 space that was vacated here at your 2 Atlantic Canada assets?
Sure. So as mentioned, we've really seen a very significant increase in activity in Atlantic Canada. Again, really speaks to the success of the travel restrictions. We completed 120,000 square feet of leasing there in Q4, so that certainly was the strongest market towards the end of the year. But as Steve mentioned, we've seen activity pick up. We've done a couple of new deals in the GTA so far this quarter, and we expect that to continue in the balance of the portfolio as the vaccine rolls out and people return to the office.As it relates specifically to those -- the larger block you noted in Atlantic Canada, we do think it will take a bit longer than we had originally anticipated to backfill that space due to the current market conditions. But given that things have rebounded so much faster there, we think probably later this year, Q3, Q4 is when we'll start to see better traction on those specific pieces of space.
Okay. That's helpful. And just last question for me: Have there been any requests from tenants to augment their footprint, if that's increasing the size or decreasing the size?
You know, we're in ongoing discussions with all the tenants in the portfolio. There's certainly been a lot of discussion around changing requirements as it relates to potential work-from-home scenarios. What we've seen as a general theme is, people want to get back. To the extent there's been any indication of a small portion of the workforce potentially working from home on a more permanent basis, the conversation has been a need to maintain the existing footprint or potentially grow it in order to accommodate social distancing. So as a general theme, we've certainly had no discussions regarding downsizing, and any of the larger renewal discussions have been around remaining in place or potentially taking on additional space on a -- based on specific tenant requirements and needs.
Your next question comes from the line of Liyan Chen with iA Capital Markets.
Actually, most of my questions were already answered. But I guess if you could just maybe comment on office utilization rates in Q4 compared to Q3?
Sure. So utilization rates, I would say, at this point, so Q4 and carrying into Q1, the general theme, again, has been a more notable rebound in Atlantic Canada. I would say, in that region, we're seeing utilization anywhere from 45% to 50%, and we expect that to pick up as the year progresses. In the other markets we operate in, we're seeing utilization in and around 20% to 30%. And again, we expect that to pick up as the vaccine rolls out.
[Operator Instructions] Your next question comes from the line of Brendon Abrams with Canaccord Genuity.
Maybe just keeping in line with the previous questioning on leasing, for Maritime Centre, big redevelopment project, and I guess maybe your largest asset, it looks like occupancy has been really stable at 83% throughout the year. Just wondering if there's an update there in terms of your projections on that asset and where you think occupancy ultimately stabilizes for that property.
Thanks, Brendon. So, as I think you know, that's been a tremendously successful -- sorry, Brendon -- a tremendously successful project for us. We bought that at just over $100 a square foot. We've increased occupancy from, I believe it was around low 60s to 83%. As you know, rents have grown by 46%. We recently refinanced that building for double the valuation of what we bought it, and that allowed us to finance the redevelopment costs as well. And that's all before the redevelopment is actually complete. And it is very much a construction zone right now, so it is a slightly more difficult environment to lease until that's complete. And quite frankly, strategically, we think once it's complete, we do want some vacancy to be able to drive a new level of rents that we weren't able to achieve predevelopment. So -- and there is some committed leases that aren't yet in the occupancy as well. But we envision taking this from 83% to 95% in the next kind of 12 to 18 months.
Okay. Yes, that's helpful. And maybe as it relates to the suburban GTA portfolio, just curious in terms of conversations with either prospective tenants or brokers. Are prospective tenants primarily from within the existing suburban regions? Or are you getting any kind of inquiries from companies in the downtown looking to relocate to the suburb? Just wondering, at a high level, if there's any trends there.
I would say, since we've owned the assets in the suburbs, specifically the GTA West, so the 427 assets and the other properties for the West towards Mississauga, Oakville, there's always been some inquiries on a regular basis from tenants who maybe are located downtown or Liberty Village. And I think that's really a function of price points and trying to evaluate how much savings they would be to move out of the core.I think it's too early to comment on whether or not there's a significant trend with groups who are currently downtown looking to relocate to the suburbs. But certainly, it is something we've seen over the last couple of years. And with vacancy rates climbing downtown and people potentially using transit less, we do expect, with our availability of parking, people who live in the suburbs benefiting from a shorter commute. We do think that there certainly could be a trend to see some of those larger downtown groups start considering that option and potentially relocate, but we don't really have the data point to support that just yet.
Yes, I think the trend you're talking about, I think is the spoke and hub model. It's too early to say, but I am comforted in that some of the larger tenants, banks, et cetera, that have space in the suburbs as well as downtown, the utilization rates of their space in the suburbs has been much higher. And I think they've, in a situation like this, the ability for them to spread their people out and have critical infrastructure in locations that are in a less dense environment has been beneficial. We renewed on a long-term basis, 65,000 square feet with a major bank on the 427 in 2020, so I think it's only going to serve to benefit our assets and where they're located.
Right. Okay. That's helpful. And then maybe just last question for me before I turn it over on capital allocation and maybe some of your comments regarding growth of the REIT and how it's critical to the long-term success. Just wondering, where is the current unit price and the discount to NAV that you referenced, how you would plan on kind of balancing the growth of the REIT with maybe any dilution to NAV or your comfort level in terms of increasing leverage. Just maybe talk about some of the ways you can pursue a growth strategy, while at the same time, preserving, I guess, the NAV per unit.
Yes. So, I mean, there's a lot to unpack there. The public markets are mispricing office assets relative to where they're trading in the private market. We have a number of comps in Toronto, in Chicago, less so in Atlantic Canada, just that's just the nature of that market. But they're all supportive of values that are consistent with our book values and our NAV.In addition, like I mentioned, 74% of our portfolio is externally appraised, and most of which was for financing purposes. So lenders are actually landing off the values that we have on our books, which further validates our NAV, so we feel strongly about our NAV. We're hopeful that the markets will start to recognize that as well, and that as the sentiment shifts from one that's panicked about people working from home to one that the media is talking about people returning to the office and the vaccine being rolled out, we hope that's a positive catalyst for the office sector and for our stock, in particular, to get us trading at an appropriate level where we can grow. Having said that, we're not just waiting for that to happen because we can't control the unit price. And we think long term, growth is a key priority for this REIT because of the reasons I mentioned, and stability in cost of capital, and institutional ownership, and liquidity in the stock, and all those things that will help us be a more sustainable long-term business. And we're looking at ways to be creative, to grow. It will be more kind of structured deals. We have liquidity right now. What was our ending liquidity, Mike, at the end of the year?
Almost $55 million.
$55 million. So we're not necessarily looking to deploy that for a single-asset transaction, because I'd like to keep some dry powder to help us facilitate a larger transaction that will do more for those sort of nonmonetary attributes of -- that we'll benefit from with growth.
At this time, there are no further questions. I would like to turn the call back over to Braden Lyons for any closing remarks.
Thank you, everyone, for joining the Q4 2020 conference call for Slate Office REIT. Have a great day.
Ladies and gentlemen, that does conclude today's conference. Thank you for participating. You may now disconnect.