Post by
hawk35 on Nov 23, 2022 1:12pm
RBC Comments on External Management Structure
Getting rid of the external management structure will be very difficult. Below are their comments.
External Management Agreement
Slate Office REIT employs the use of an external management structure whereby asset and property management services (including leasing, construction management, and administrative services) are provided by Slate Management ULC (SMULC) a subsidiary of Slate[1]AM. Slate-AM is a global investment and asset manager with a real estate & infrastructure focus, and 150+ employees in both North America + Europe, along with $13 billion in assets under management (AUM) (as of July 31) across both the private and public sphere. Key provisions of Slate-AM’s management agreement with SOT are summarized in Exhibit 27.
In general, we prefer internalized management structures
On balance, we prefer to see internalized structures given better alignment of interests with unitholders, closer relationships with tenants, and diminished potential for conflicts of interest (vs. external management contracts). That said, we acknowledge that an external structure can provide value, in certain cases, for smaller REITs such as Slate Office. We have examined what we view as the puts and takes of the SOT/Slate-AM agreement below.
Slate-AM platform provides experienced management team, global platform & deep market knowledge
In our view, Slate-AM’s well-regarded reputation, experienced real estate professionals, global scale and market knowledge/expertise are positives, and provide the REIT with access to an opportunity set of investments, and personnel that would otherwise be unavailable to similar small-cap REITs. Slate-AM’s circa 9.5% ownership in the REIT also acts as a partial counterweight against the external manager prioritizing increased fees, for itself, via the expansion of SOT’s asset base (SOT pays an annual base fee calculated as 0.3% of GBV, as well as certain acquisition and financing fees as summarized in Exhibit 27).
Cost wise, the contract is generally in line with comparable external agreements
From a fee perspective, we see the agreement with Slate-AM as generally in line with comparable external arrangements. Exhibit 28 details a summary of terms across a number of external contracts within the REIT sector. From the base management fee (0.30% of GBV), to property management (3.0% of gross revenues), and acquisition fees, Slate Office’s management contract appears generally in line with comparable external arrangements.
On the flip side, we view the contract term as ‘effectively’ perpetual, despite a defined term
SOT’s external contract carries a 10-year initial term expiring on December 28, 2022, with automatic five-year renewal terms thereafter. While the provisions of the agreement do provide a path for SOT to internalize upon reaching a market capitalization of $750 million (post December 28, 2022), subject to independent Trustee, and unitholder approvals, along with a termination fee equal to management fees for the trailing-twelve-months (plus potential severance costs), we view the path to internalization as slightly more nuanced.
This view is rooted in the fact that Slate Office REIT has no employees of its own, and upon termination of the agreement, a 24-month non-solicitation provision of Slate-AM executives would come into force. Thus, the REIT would be left without a senior management team, or underlying staff, systems etc. in areas such as asset management, leasing, property management and construction. SOT would also need to facilitate the buyout of Slate-AM’s units within six-months, at a price not less than 95% of the 20-day VWAP prior to the termination notification. At current market prices, Slate-AM’s stake in SOT is valued at $37 million.
Slate Office REIT: Asset Management Agreement Summary
Term
• Initial 10-year term ending December 28, 2022, automatic 5-year renewals unless and until the management agreement is terminated.
Termination
• The REIT will have the right to terminate the Management agreement upon an 'event of default' by the Manager (bankruptcy, fraud or material uncured breach). No termination fee would be payable in this instance.
• Upon three months notice, the REIT may terminate the agreement at the expiry of the initial term, and thereafter upon expiry of each renewal term subject to i) majority of independent trustees determining services are unsatisfactory, ii) approval from 2/3 of unitholders (excluding any units or special voting units held by the Manager, and iii) a termination fee equal to the fees payable to the manager for the prior 12-month period.
• Any time after December 28, 2022, upon the REIT reaching an equity market cap of $750 million, if independent trustees determine it is in the REIT's best interests to internalize, the agreement can be terminated at a cost of management fees for the trailing 12-months in addition to other termination costs (severance), subject to 2/3 approval from unitholders.
• In the event both Blair & Brady Welch are no longer associated with Slate (loss of key men), the REIT can terminate. This termination right does not apply post the REIT achieving an equity market cap of $750 million.
• The Manager can terminate the agreement, at any time, provided 180 days prior written notice is provided.
Buyout obligation
• Should the REIT terminate the agreement (excluding event of default by the manager, or loss of key men), it must facilitate the disposition of units owned by the Manager and affiliates, within a period of six months, at a price not less than 95% of the 20-day VWAP on the date the Manager received notification of termination.
Non-solicitation
• For a period of 24 months after termination of the management agreement, the REIT is not permitted to solicit any of the Managers employees, other than non-executives who respond to an advertisements availiable to the general public (and the REIT pays any applicable severance costs).
Base management fee
• 0.30% of gross book value vs. peers ranging from 0.25% to 0.40%.
Property management fee
• 3.0% of gross revenues collected and remitted.
Acquisition fee
• Per fiscal year, i) 1.0% on the first $100 million of purchase price ii) 0.75% for the next $100 million, and iii) 0.50% thereafter in excess of $200 million.
Financing fee
• 0.25% of the value of any debt financing payable on transaction completion. Leasing fee
• 5.0% of the base rent for all new leases, and 2.0% of base rent for all renewals and expansions.
Construction fee
• 5.0% of all costs of any construction undertaken by the REIT, including all tenant and building improvements, but excluding and maintenance capital expenditures. No fees for:
• Disposition, incentive fee