In a significant move to navigate through a period marked by higher leverage and interest rates, Slate Office REIT (SOT-UN-T) shareholders have voted to temporarily lift a key financial restriction. During a special meeting on Monday, 67% of the REIT’s unitholders favoured the resolution to remove the debt ceiling of 65% of the trust’s gross book value, while 31% opposed it.
Strategic Shifts in Response to Market Pressures
The decision to waive the debt ceiling until December 31, 2025, marks a strategic shift for Slate Office REIT. This move is part of the REIT’s broader Portfolio Alignment Plan, which aims to divest about 40% of its portfolio (measured by gross leasable area) over the next year. The plan was necessitated as the debt-to-gross-book-value ratio of the REIT climbed from 61.9% in Q3 2022 to 65.6% as of Q3 2023, primarily due to lower property values in the office sector and elevated interest rates over the past 18 months.
Negotiations and Board Restructuring
G2S2 Capital, Slate Office REIT’s largest shareholder, controlling almost 19% of its shares, played a pivotal role in the outcome of the vote. The private Canadian investment firm, controlled by the Armoyan family, negotiated the time limit on the removal of the debt ceiling and also reached an agreement to reduce the size of the REIT’s board from eight to six members, to be proposed at the upcoming annual general meeting.
Financials and Future Outlook
Slate Office REIT reported total assets of $1.822 billion in its Q3 financials, a slight decrease from $1.869 billion in the same period of 2022. Its total debt rose to $1.19 billion, up from $1.15 billion in 2022. The REIT also reported a net loss of $34.73 million, a significant downturn from a profit of $18.36 million a year earlier. Rental revenue in Q3 remained stable at just over $51 million, while Net Operating Income (NOI) dropped to $26 million from $26.86 million in Q3 2022. Portfolio occupancy also declined to 78.6% from 81.1%.
Looking Ahead
Interim CEO Brady Welch, commenting on the overall strategy, emphasized the focus on high-quality assets with strong occupancy, tenants, and cash flow in economically favourable markets. The Portfolio Alignment Plan aims to enhance the REIT’s balance sheet and liquidity and improve portfolio composition, resulting in a more focused and resilient entity.
In line with these strategic changes, Slate has suspended its distributions to retain additional cash, estimated at about $10.2 million annually. This decision underscores the REIT’s commitment to navigating the challenging economic landscape and repositioning itself for future stability and growth.
