Analyst commentsFrom Canaccord:
Slow leasing activity weighs on results, but valuation remains compelling
Slate Office reported quarterly results that were below our estimates and reflectedthe relatively soft leasing environment for office space currently. To this end, the REIT reported declines in most key operating and financial metrics, including cash flow perunit, SPNOI, and occupancy. However, with a re-opening of the economy and a portfolio located in less densely populated areas, we believe there is reason for optimism that leasing activity will pick-up, which we anticipate beginning in H2/21.
Overall, we acknowledge the current headwinds weighing on office fundamentals and Slate Office in particular. However, we also highlight that private market valuations, based on recent comparable transactions, have remained relatively strong and lend support to the REIT’s asset values. Currently, the REIT’s units are trading at a 50% discount to its IFRS NAV and an 18% discount to our NAV estimate; therefore, we do not see much downside from current levels, presenting an attractive risk-reward proposition.
FFO per diluted unit of $0.13. For Q4/20, Slate Office reported core-FFO per dilutedunit of $0.13, down 27.7% Y/Y, and below our estimate of $0.16 and consensus of $0.17. The Y/Y decline was driven primarily by a 9.6% decline in SPNOI ($2.3 million or $0.03 per unit) due to vacancies at two of Slate Office’s Atlantic Canada properties, lower parking revenue, and continued weak performance from the REIT’s New Brunswick hotel. Additionally, a write-off of $0.7 million ($0.01 per unit) of unamortized financing costs also contributed to the decrease in Q4/20.
SPNOI down 9.6% Y/Y. For Q4/20, Slate Office reported a 9.6% Y/Y drop in SPNOI. During the quarter, same-property performance was primarily impacted by twovacancies (previously known) in the REIT’s Atlantic Canada portfolio, which led to a Y/Y decline in same-property NOI of $1.4 million as well as lower parking revenues ($0.9 million). Continued soft performance at the REIT’s hotel asset in New Brunswick amid the pandemic also weighed on SPNOI, contributing to a $0.4 million Y/Y decline.
Spreads on lease renewals turn negative and occupancy declines. While new leases were signed at rental rates, on average, 4.0% above expiring rents, spreads onrenewals were -2.6%. Management noted that negative leasing spreads on renewals during Q4/20 was largely attributable to a lease renewal with a law firm tenant in Atlantic Canada, for which previous rental rates were above current market rent. In addition, Slate Office reported occupancy of 84.2% to close the quarter, down 120 bpsQ/Q and 290 bps Y/Y, respectively.
Valuation and recommendation. Following Q4/20 results, our NAV estimate of $5.25 per unit is unchanged and remains well below the REIT’s IFRS NAV of $8.57. Slate Office currently trades at a 7.5% implied cap rate, or an 18.0% discount to our NAV estimate. This compares to the weighted-average 7.7% discount to NAV for its Canadian office REIT peers. On a cash flow multiples basis, Slate Office is currently trading at 7.8x 2021E AFFO. This compares to a weighted-average 17.5x 2021E AFFO for its Canadian office REIT peers. Our target price is unchanged at $4.75, which is based on a ~10 discount to our NAV estimate. We continue to rate Slate Office a BUY.