Slate Office REIT Reports Third Quarter 2020 Results

·15-min read

Slate Office REIT (TSX: SOT.UN) (the "REIT"), an owner and operator of North American office real estate, reported today financial results for the three and nine months ended September 30, 2020.

"We are pleased to report strong third quarter results, reinforcing the stability of the REIT’s portfolio and strength of our tenants," said Steve Hodgson, Chief Executive Officer of Slate Office REIT. "Leasing activity continued to exceed expectations, with over 142,000 square feet of leasing completed in the quarter at rates above expiring or in-place building rents."

For the CEO’s letter to unitholders for the quarter, please follow the link here.

Third Quarter 2020 Highlights

  • AFFO and AFFO payout ratio: Adjusted funds from operations ("AFFO") was $11.8 million or $0.16 per unit for the third quarter of 2020. The AFFO payout ratio for the third quarter of 2020 was 62.0%.

  • Same-property NOI: The REIT's same-property net operating income ("NOI") increased $0.2 million or 0.7% for the three months ended September 30, 2020 compared to the prior quarter.

  • Significant refinancing activity: In September and October 2020, the REIT completed $395.7 million and US$161.1 million of debt refinancing, including its revolving credit facilities and certain term loans which enhanced the REIT's liquidity and addressed all 2020 debt maturities and the majority of 2021 debt maturities.

  • Leading cash rent collections: From the onset of the COVID-19 pandemic through to September 2020, the REIT collected a market leading 96% to 98% of rent in cash each month. The residual rent is expected to be substantially collected through short-term deferral programs.

  • Continued leasing activity: The REIT completed a total of 142,881 square feet of leasing, comprised of 92,757 square feet of renewals and 50,124 square feet of new lease deals. Notable leasing included a new lease deal with a law firm for approximately 25,800 square feet and an approximately 65,000 square foot renewal of a major Canadian bank, both at West Metro Corporate Centre in Toronto.

  • Positive leasing spreads: Leasing spreads in the quarter were 3.2% above expiring or in-place building rents. Renewals were in line with expiring rents while new deals were 10.7% above in-place building rents.

  • Office utilization rates: We continue to be encouraged by the number of employees returning to offices across our portfolio compared to our peers that have assets in major market downtown locations.

Summary of Q3 2020 Results

Three months ended September 30,

(thousands of dollars, except per unit amounts)

2020

2019

Change %

Rental revenue

$

45,852

$

52,539

(12.7)%

Net operating income

$

24,040

$

25,435

(5.5)%

Net (loss) income

$

16,221

$

27,195

(40.4)%

Same-property NOI

$

24,088

$

24,213

(0.5)%

Weighted average diluted number of trust units (000s)

73,227

73,283

(0.1)%

Funds from operations ("FFO")

$

13,066

$

14,280

(8.5)%

FFO per unit

$

0.18

$

0.19

(5.3)%

FFO payout ratio

55.9%

51.2%

4.7%

Core FFO

$

13,813

$

14,906

(7.3)%

Core FFO per unit

$

0.19

$

0.20

(5.0)%

Core FFO payout ratio

52.8%

49.0%

3.8%

AFFO

$

11,777

$

12,420

(5.2)%

AFFO per unit

$

0.16

$

0.17

(5.9)%

AFFO payout ratio

62.0%

58.8%

3.2%

September 30, 2020

December 31, 2019

Change %

Total assets

$

1,694,187

$

1,709,964

(0.9)%

Total debt

$

979,004

$

1,001,947

(2.3)%

Portfolio occupancy 1

85.4%

87.1%

(1.7)%

Loan to value ratio

57.8%

58.7%

(0.9)%

Net debt to adjusted EBITDA 2

10.8x

10.1x

0.7x

Interest coverage ratio 2

2.3x

2.2x

0.1x

(1) Including redevelopment properties.
(2) EBITDA is calculated using trailing twelve month actuals, as calculated below.

Conference Call and Presentation Details

Senior management will host a live conference call at 9:00 a.m. ET on Friday, October 30, 2020 to discuss the results and ongoing business initiatives of the REIT.

The conference call can be accessed by dialing (647) 427-2311 or 1 (866) 521-4909. Additionally, the conference call will be available via simultaneous audio found at www.snwebcastcenter.com/webcast/slate/2020/1030. A replay will be accessible until November 13, 2020 via the REIT's website or by dialing (416) 621-4642 or 1 (800) 585-8367 (access code 6925089) approximately two hours after the live event.

About Slate Office REIT (TSX: SOT.UN)

Slate Office REIT is an owner and operator of North American office real estate. The REIT owns interests in and operates a portfolio of 35 strategic and well-located real estate assets across Canada's major population centres and includes two assets in downtown Chicago, Illinois. 60% of the REIT’s portfolio is comprised of government or credit rated tenants. The REIT acquires quality assets at a discount to replacement cost and creates value for unitholders by applying hands-on asset management strategies to grow rental revenue, extend lease term and increase occupancy. Visit slateofficereit.com to learn more.

About Slate Asset Management

Slate Asset Management is a leading real estate focused alternative investment platform with approximately $6.5 billion in assets under management. Slate is a value-oriented manager and a significant sponsor of all of its private and publicly traded investment vehicles, which are tailored to the unique goals and objectives of its investors. The firm's careful and selective investment approach creates long-term value with an emphasis on capital preservation and outsized returns. Slate is supported by exceptional people, flexible capital and a demonstrated ability to originate and execute on a wide range of compelling investment opportunities. Visit slateam.com to learn more.

Supplemental Information

All interested parties can access Slate Office REIT's Supplemental Information online at slateofficereit.com in the Investors section. These materials are also available on SEDAR or upon request at ir@slateam.com or (416) 644-4264.

Forward Looking Statements

Certain information herein constitutes "forward-looking information" as defined under Canadian securities laws which reflect management’s expectations regarding objectives, plans, goals, strategies, future growth, results of operations, performance, business prospects and opportunities of the REIT. The words "plans", "expects", "does not expect", "scheduled", "estimates", "intends", "anticipates", "does not anticipate", "projects", "believes", or variations of such words and phrases or statements to the effect that certain actions, events or results "may", "will", "could", "would", "might", "occur", "be achieved", or "continue" and similar expressions identify forward-looking statements. Some of the specific forward-looking statements contained herein include, but are not limited to, statements relating to the impact of the COVID-19 pandemic. Such forward-looking statements are qualified in their entirety by the inherent risks and uncertainties surrounding future expectations.

Forward-looking statements are necessarily based on a number of estimates and assumptions that, while considered reasonable by management as of the date hereof, are inherently subject to significant business, economic and competitive uncertainties and contingencies. When relying on forward-looking statements to make decisions, the REIT cautions readers not to place undue reliance on these statements, as forward-looking statements involve significant risks and uncertainties and should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not the times at or by which such performance or results will be achieved. A number of factors could cause actual results to differ, possibly materially, from the results discussed in the forward-looking statements. Additional information about risks and uncertainties is contained in the filings of the REIT with securities regulators.

Non-IFRS Measures

We disclose a number of financial measures in this news release that are not measures used under IFRS, including NOI, same-property NOI, FFO, FFO payout ratio, Core-FFO, Core-FFO payout ratio, AFFO, AFFO payout ratio, IFRS net asset value, adjusted EBITDA, net debt to adjusted EBITDA and the interest coverage ratio, in addition to certain measures on a per unit basis.

  • NOI is defined as rental revenue less operating property expenses, prior to straight-line rent and other changes. Same-property NOI includes those properties owned by the REIT for each of the current period and the relevant comparative period.

  • FFO is defined as net income and comprehensive income adjusted for certain items including leasing costs amortized to revenue, change in fair value of properties, change in fair value of financial instruments, transaction costs, depreciation of hotel asset, change in fair value of Class B LP units, distributions to Class B LP unitholders and subscription receipts equivalent amount.

  • Core-FFO is defined as FFO adjusted for the REIT's share of lease payments received for its Data Centre asset, which for IFRS purposes is accounted for as a finance lease and removes the impact of mortgage discharge fees (if any).

  • AFFO is defined as FFO adjusted for certain items including guaranteed income supplements, amortization of deferred transaction costs, de-recognition and amortization of mark-to-market adjustments on mortgages refinanced or discharged, adjustments for interest rate subsidies received, recognition of the REIT's share of lease payments received for its Data Centre asset, which for IFRS purposes is accounted for as a finance lease, amortization of straight-line rent and normalized direct leasing and capital costs.

  • FFO payout ratio, Core-FFO payout ratio and AFFO payout ratio are defined as distributions declared divided by FFO, Core-FFO and AFFO, respectively.

  • FFO per unit, Core-FFO per unit and AFFO per unit are defined as FFO, Core-FFO and AFFO divided by the weighted average diluted number of units outstanding, respectively.

  • IFRS net asset value is defined as the aggregate of the carrying value of the REIT’s equity, Class B LP units and deferred units.

  • Adjusted EBITDA is defined as earnings before interest, income taxes, depreciation, fair value gains (losses) from both financial instruments and investment properties, while also excluding non-recurring items such as transaction costs from dispositions, acquisitions or other events and adjusting income received from the Data Centre to cash received as opposed to finance income recorded for accounting purposes.

  • Net debt to adjusted EBITDA is calculated by dividing the aggregate amount of debt outstanding, less cash on hand, by annualized adjusted EBITDA.

  • Interest coverage ratio is defined as adjusted EBITDA divided by cash interest paid.

We utilize these measures for a variety of reasons, including measuring performance, managing the business, capital allocation and the assessment of risk. Descriptions of why these non-IFRS measures are useful to investors and how management uses each measure are included in Management’s Discussion and Analysis, which readers should read when evaluating the measures included herein. We believe that providing these performance measures on a supplemental basis to our IFRS results is helpful to investors in assessing the overall performance of our businesses in a manner similar to management. These financial measures should not be considered as a substitute for similar financial measures calculated in accordance with IFRS. We caution readers that these non-IFRS financial measures may differ from the calculations disclosed by other businesses, and as a result, may not be comparable to similar measures presented by others.

SOT-FR

Calculation and Reconciliation of Non-IFRS Measures

The tables below summarize a calculation of non-IFRS measures based on IFRS financial information.

The calculation of NOI is as follows:

Three months ended September 30,

2020

2019

Revenue

$

45,852

$

52,539

Property operating expenses

(21,016)

(25,152)

IFRIC 21 property tax adjustment 1

(2,254)

(2,330)

Straight-line rents and other changes

1,458

378

Net operating income

$

24,040

$

25,435

The reconciliation of net income to FFO, Core-FFO and AFFO is as follows:

Three months ended September 30,

(thousands of dollars, except per unit amounts)

2020

2019

Net (loss) income

$

16,221

$

27,195

Add (deduct):

Leasing costs amortized to revenue

1,825

1,366

Change in fair value of properties

(653)

(18,579)

IFRIC 21 property tax adjustment 1

(2,254)

(2,330)

Change in fair value of financial instruments

(2,349)

77

Transaction costs

12

3,116

Depreciation of hotel asset

264

253

Deferred income tax (recovery) expense

223

Change in fair value of Class B LP units

(528)

2,431

Distributions to Class B unitholders

528

528

FFO 2

$

13,066

$

14,280

Finance income on finance lease receivable

(858)

(899)

Finance lease payments received

1,605

1,525

Core-FFO 2

$

13,813

$

14,906

Amortization of deferred transaction costs

695

671

Amortization of debt mark-to-market adjustments

(214)

(60)

Amortization of straight-line rent

(367)

(988)

Interest rate subsidy

108

108

Guaranteed income supplements

289

Normalized direct leasing and capital costs

(2,258)

(2,506)

AFFO 2

$

11,777

$

12,420

Weighted average number of diluted units outstanding (000s)

73,227

73,283

FFO per unit 2

$

0.18

$

0.19

Core-FFO per unit 2

0.19

0.20

AFFO per unit 2

0.16

0.17

FFO payout ratio 2

55.9%

51.2%

Core-FFO payout ratio 2

52.8%

49.0%

AFFO payout ratio 2

62.0%

58.8%

(1) In accordance with IFRIC 21, the REIT recognizes property tax liability and expense on its existing U.S. properties as at January 1 of each year, rather than progressively, i.e. ratably throughout the year. The recognition of property taxes as a result of IFRIC 21 has no impact on NOI, FFO or AFFO.
(2) Refer to "Non-IFRS measures" section above.

The reconciliation of cash flow from operating activities to FFO, Core-FFO and AFFO is as follows:

Three months ended September 30,

2020

2019

Cash flow from operating activities

$

17,354

$

19,592

Add (deduct):

Leasing costs amortized to revenue

1,825

1,366

Transaction costs

12

3,116

Working capital items

(4,714)

(9,333)

Straight-line rent and other changes

(1,458)

(378)

Interest and other finance costs

(10,388)

(11,261)

Interest paid

9,907

10,650

Distributions paid to Class B unitholders

528

528

FFO 1

$

13,066

$

14,280

Finance income on finance lease receivable

(858)

(899)

Finance lease payments received

1,605

1,525

Core-FFO 1

$

13,813

$

14,906

Amortization of deferred transaction costs

695

671

Amortization of debt mark-to-market adjustments

(214)

(60)

Amortization of straight-line rent

(367)

(988)

Interest rate subsidy

108

108

Guaranteed income supplements

289

Normalized direct leasing and capital costs

(2,258)

(2,506)

AFFO 1

$

11,777

$

12,420

(1) Refer to "Non-IFRS measures" section above.

The calculation of trailing twelve month adjusted EBITDA is as follows:

Trailing twelve months ended September 30,

2020

2019

Net income

$

26,817

$

70,572

Straight line rent and other changes

5,152

1,179

Interest income

(573)

(531)

Interest and finance costs

41,788

51,822

Change in fair value of properties

(1,337)

(43,131)

IFRIC 21 property tax adjustment 1

(216)

448

Change in fair value of financial instruments

27,081

13,757

Distributions to Class B shareholders

2,112

2,884

Transaction costs

2,393

12,247

Depreciation of hotel asset

1,049

1,007

Change in fair value of Class B LP units

(14,640)

(8,298)

Deferred income tax recovery

765

168

Adjusted EBITDA 2

$

90,391

$

102,124

(1) In accordance with IFRIC 21, the REIT recognizes property tax liability and expense on its existing U.S. properties as at January 1 of each year, rather than progressively, i.e. ratably throughout the year. The recognition of property taxes as a result of IFRIC 21 has no impact on NOI, FFO or AFFO.

(2) Adjusted EBITDA is based on actuals for the twelve months preceding the balance sheet date.

The calculation of net debt is as follows:

September 30, 2020

September 30, 2019

Debt, non-current

$

443,388

$

790,944

Debt, current

535,616

253,353

Debt

$

979,004

$

1,044,297

Less: cash on hand

5,290

6,118

Net debt

$

973,714

$

1,038,179

The calculation of net debt to adjusted EBITDA is as follows:

Trailing twelve months ended September 30,

2020

2019

Debt

$

979,004

$

1,044,297

Less: cash on hand

5,290

6,118

Net debt

$

973,714

$

1,038,179

Adjusted EBITDA 1, 2

90,391

102,124

Net debt to adjusted EBITDA 2

10.8x

10.2x

(1) Adjusted EBITDA is based on actuals for the twelve months preceding the balance sheet date.
(2) Refer to "Non-IFRS measures" section above.

The interest coverage ratio is calculated as follows:

Trailing twelve months ended September 30,

2020

2019

Adjusted EBITDA 1

$

90,391

$

102,124

Interest expense

39,497

48,064

Interest coverage ratio 1

2.3x

2.1x

(1) Refer to "Non-IFRS measures" section above.

The following is the calculation of IFRS net asset value on a total and per unit basis at September 30, 2020 and December 31, 2019:

September 30, 2020

December 31, 2019

Equity

$

610,401

$

627,305

Class B LP units

18,815

30,918

Deferred unit liability

688

742

Deferred tax liability (asset)

92

IFRS net asset value

$

629,904

$

659,057

Diluted number of units outstanding 1

73,244

73,291

IFRS net asset value per unit

$

8.60

$

8.99

(1) Represents the fully diluted number of units outstanding and includes outstanding REIT units, DUP units and Class B LP units.

View source version on businesswire.com: https://www.businesswire.com/news/home/20201029006369/en/

Contacts

Investor Relations
Tel: +1 416 644 4264
E-mail: ir@slateam.com