Slate Office REIT
TSX:SOT.UN
Earnings Call Analysis
Q4-2023 Analysis
Slate Office REIT
The year 2023 was markedly challenging for the real estate sector, with the office segment being particularly tested. Yet, in the face of these headwinds, the company has been buoyed by a burgeoning interest in high-quality office spaces. This has been evidenced by a notable uptick in leasing activity, as the business has successfully acquired new leases and lease extensions, totaling over 624,000 square feet—marking an 11% climb from the previous year. This momentum carries forward, with an additional 150,000 square feet being snapped up after quarter end. Notably, a significant deal was inked with a major financial technology firm for 107,000 square feet, hinting at a sustained demand for premium office locations.
Alongside encouraging leasing developments, the company has deliberately realigned its portfolio. This strategic move has led to the sale of a non-core asset for $19.2 million, which is part of a broader plan to divest $120 million in assets to both enhance liquidity and shore up the balance sheet. Debt repayment has commenced with $18 million paid off, thanks to the proceeds from these dispositions. This fundamental recalibration aims to ensure long-term stability by streamlining the asset portfolio to focus on core, high-value properties.
The portfolio's future earning potential has been notably bolstered by a recently announced lease that is projected to contribute approximately $3 million to net operating income. While this deal carries concomitant costs, estimated at around $8 to $9 million, the company views this expense as a value-adding investment into its assets. Crucially, the decision to not distribute these funds, but rather reinvest them back into the business, underscores a focused strategy on building a resilient, value-driven portfolio.
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Welcome to the Slate Office REIT Fourth Quarter 2023 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, February 15, 2024. I would now like to turn the conference over to Jennifer Pyper. Please begin.
Thank you, operator, and good morning, everyone. Welcome to the Q4 2023 Conference Call for Slate Office REIT. I'm joined this morning by Brady Welch, Interim Chief Executive Officer; Robert Armstrong, Interim Chief Financial Officer; Evan Meister, Managing Director; Sarah Jane O'Shea, Vice President; Andrew Broad, Vice President and Jeremy Kaupp, Vice President.
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 2023 investor update, which is now available. I will now hand over the call to Brady for opening remarks.
Thank you, Jen, and good morning, everyone. 2023 was a challenging year for much of the real estate industry and our office was no exception. But we believe we are starting to see green shoots in the office sector and accelerating demand from emerging and established companies looking for a high-quality office space. We are very pleased with the leasing activity and interest we are seeing in all markets that we operate in. Our team has done a great job building a strong pipeline of near-term leasing opportunities with large and small users. We are actively touring tenants through our spaces and are in discussions regarding new leases, renewals and extensions. Our team has completed over 624,000 square feet of leasing in the year, which is up almost 11% from 2022. And after quarter end, our team completed an additional 150,000 square feet of new leasing across Ontario and Atlantic Canada at a WALT of over 13 years. This includes the 107,000 square foot deal we announced yesterday with a leading financial technology company in Etobicoke, Ontario. In terms of pipeline, we are in active discussions with 2 users in the GTA for new or expansion leasing totaling over 240,000 square feet, which would add to the REIT's net operating income beginning in late '24 and into '25. And more importantly, only 4.8% of the REIT's portfolio GLA or Gross Leasable Area is set to mature in '24, and renewal negotiations for those spaces are ongoing. This interest momentum in leasing is a contrast to the market sentiment around office.
We are seeing and hearing large users increasingly thinking strategically about where they want to be long term and where they want to commit. We believe this demonstrates the value of leading companies that see that physical spaces are critically important for their operations and their employees where they can train, collaborate and innovate. In addition to our leasing momentum, we've made progress on the REIT's portfolio realignment plan, which is intended to improve the REIT's liquidity, strengthen our balance sheet and improve the REIT's portfolio. In February, we completed the disposition of an asset in Mississauga, Ontario, for a gross purchase price of $19.2 million at our share. We currently have approximately $120 million at share in assets that are under contract for disposition or in various stages of negotiation, representing almost 13% of the REIT's GLA. The REIT has already repaid approximately $18 million of debt using proceeds from the dispositions completed in February, and we remain focused on executing our portfolio realignment plan for further -- to further improve the REIT's liquidity and strengthen our balance sheet. On behalf of Slate Office REIT and the team and the Board, I'd like to thank the investor community for their continued support. And I now hand it over for questions.
[Operator Instructions] Our first question comes from the line of Golden Nguyen-Halfyard of TD Securities.
Just a quick question from my end. Just on asset sales, Nice to see you make some progress post quarter. Looking ahead, are there any specific markets you are targeting for dispositions? And any specific types of assets you guys are also targeting?
Yes. Thanks for the question. I think part of our realignment plan is really focused on markets and assets that we want to own long term. And so the assets that are in the market are assets that we've executed on our business plan, determined that they are not core assets for us long term. And I think there's no -- nothing that we haven't disclosed publicly that is going to change those thoughts and ideas. I think we're opportunistic. We'll look at situations where if we believe it's the right time to sell an asset for a value that we believe is compelling for the REIT in terms of where we're going in terms of that realignment plan, we'll consider. But I would say we're actually quite pleased and optimistic with the interest of stuff and negotiations that we have in the market right now.
Great. And just 1 last question from my end. Turning over to renewals. You have too many maturities this year, but are there any larger nonrenewals you're aware of? And I guess, how do you see occupancy trending this year?
Yes. Great question. So that's why I tried to highlight that, is that we have limited lease rollover in the next 12 months. And our pipeline and activity of active discussions we have with new leasing and renewals is probably over 700,000 square feet. So I anticipate that our occupancy will increase. That's the one thing we control in a real estate industry today with a lot of uncertainty. And I think on the ground, the message is that actually tenants are looking to commit to space, whether it's a new hybrid model of operating, they still need the space. They need to have people in the office where they can collaborate and deal, whether it's 3 days, 4 days or 5 days a week. They are committing and looking long term. And that is very encouraging for us as an office operator. And that's why we want to make sure that we own assets in the right markets where people want to live and work and be in those locations. That's what we're really focused long term.
[Operator Instructions] The next question in the queue is from the line of Tom Callaghan at RBC.
Maybe just a quick follow-up on the line of question there with respect to leasing. Maybe if you could just give some color on the deal announced yesterday at the West Mall, what the rents look like? And what's the time line in terms of getting them in there and paying?
Yes. No, what we are so pleased to announce that deal. The team worked really hard. I think it shows 2 things. One, we've got real estate that is attractive for, I think, best-in-class users. And then two, we have it in the right location where people want to be and where their employees want to be. So that lease, I think, is reflective of those 2 things. And it's a forward lease. So over the next kind of 12 to 14 months, we will be basically committing to that space, doing the turnover in concert with the tenant so that they will occupy by 2025. And I think for us, it's more momentum than anything, just showing that people are committing to our space and that we've got product where they want to actually be and operate in. And that's like a headquarter space. And I think they're coming from the space in the same market and they're relocating to an area which gives them more presence. And that's -- I think all of those things is a combination of like even though -- like you take a look at our occupancy and everything, you need to be patient and wait for the right deals. This is probably the largest deal in that node in the last 4 years.
And Tom, couple things to add from my perspective is that I think it's important in 2025, we'll start to add about $3 million of net operating income at the location. So a really significant lease. There are substantial pending costs, probably around $8 million, $9 million, but it's a really fantastic economic deal for us. I'm really happy to please that the team got that done.
And actually, that's a great point. It gets to like, listen, we're not making distributions, but that's why because we can go do a deal like this and reinvest it in the collateral that adds a lot of value, right? And I think that's very, very important that we have been, I think, prudent and making sure we maintain the cash that's generated from the business to reinvest it to add value to the portfolio. And this deal is a perfect example of that.
Great. That's good color, guys. Maybe just switching gears to the transaction side of things. You guys made some headway there. But I'm just curious, from your perspective, like how would you characterize the market today in conversations with buyers or potential buyers? And I guess really what I'm getting at is everyone's aware of kind of interest rates and all the headwinds. But how are those conversations comparing to, say, 3 or 6 months ago when this was sort of starting to get underway? Are they more optimistic about the market, the same? I'm just curious any thoughts there.
Yes, I think I'll start it off and I'll turn it over to Evan. But listen, it is -- in commercial real estate, not the most, I would say, normal market. And I think everyone knows that. I think what we're trying to do is identify properties that are noncore for us long term and then be able to sell those to move on so that we can like take and recycle that capital into markets and assets that we believe in long term. So I think we're trying to be a first mover in those things. I'm not trying to say that it's the most robust market to sell assets. I think we're realistic on where we are. But I think we want to be ahead of it and move forward. And with all that backdrop, though, we are kind of, I would say, happy and pleased with the interest of the assets we have in the market and the discussions we're having with potential buyers. And I think we -- and we're trying to do -- I think if you did a large transaction, that would be difficult. I think we're doing it in a prudent and in a functional manner of how we're going about our disposition plan. So with that, I'll turn it over to Evan for any color.
I think the only thing that I would add is there has been a slight uptick in activity as the calendar turns into the New Year. And I still think that we have good real estate that's on the market. And so there are buyers, as Brady said, in those smaller snack brackets that do have interest and see value in those assets long term.
Thank you. And there are currently no further questions in the queue at this time. So I'll hand the floor back to Jennifer for the closing comments.
Thank you, everyone, for joining the Q4 2023 conference call for Slate Office REIT. Have a great day.
This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.