Post by
incomedreamer11 on Aug 03, 2023 9:53am
CIBC comments
Our Conclusion
SOT reported a Q2/23 headline miss against an evolving backdrop of a difficult (to say the least) operating environment, elevated leverage and increasing interest rates, all of which seem to be perhaps more enduring than originally estimated. Operational results fell short of expectations, with the headline shortfall attributable to increased interest costs, lost NOI contribution from asset sales, and a 150 bps reduction in occupancy. Additional vacancies across the majority of the portfolio resulted in a -3.5% SP-NOI print. A 12.1% leasing spread (albeit with a substantial increase in associated leasing costs) and progress on the unitholder value preservation plan, which remains crucial for the preservation of cash flows, are both positive steps in the right direction.
We lower our forward NAV estimate to $3.75 (on an unchanged 6.75% cap rate) and, accordingly, maintain our discount to NAV and decrease our price target to $2.00 (from $2.50). SOT remains Neutral rated.
Key Points Q2/23 Results:
Headline Core FFOPU of $0.08 fell short of consensus of $0.10 and decreased ~48% Y/Y. AFFO/unit of $0.07 was in line with consensus and represented a payout ratio of ~42% (based on the recently downwardly revised distribution). The decrease was driven by higher interest and finance costs, elevated G&A expenses (due to bad debt allowances of ~$1MM related to an expected credit loss on a vendor takeback loan), and a decrease in NOI contribution.
Headline SP-NOI decreased 3.5% Y/Y, primarily on the back of certain vacancies at a number of the REIT’s properties; management has indicated that several buildings have significantly below normalized occupancy levels and it expects them to remain that way for the majority of the next 12 months. Sequentially, SP-NOI decreased 1.6%.
Occupancy was 79.1% (down 150 bps Q/Q), driven by a 70 bps decrease in Atlantic Canada. Balance Sheet: Leverage remained at the higher end of the REIT universe at 64%, an increase of 210 bps compared to December 31, 2022. It is worth noting that the aforementioned indebtedness ratio is predicated on the REIT’s IFRS NAV of $7.20/unit. Consensus NAV estimates in the high-$3/unit range would imply leverage closer to the mid-70% range. Liquidity was ~$36MM at quarter-end, comprising ~$19MM in cash and ~$17MM in undrawn revolving facilities.
Leadership Transition: Subsequent to quarter-end, the REIT announced that Robert Armstrong, Partner and Chief Operating Officer of Slate Asset Management, will assume the role of Chief Financial Officer of Slate Office REIT, replacing Charles Peach effective August 17, 2023.