TSX:SOT.DB - Post by User
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CanSiamCypon Nov 03, 2022 11:26am
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Post# 35069809
RE:CIBC comment
RE:CIBC commentAmazingly .... no mention of the Armoyan challenge! Or did I miss something?
incomedreamer11 wrote: SLATE OFFICE REIT \
Occupancy Remains The Catalyst For Internal Growth Our Conclusion SOT reported a slight Q3/22 headline miss as portfolio occupancy came in below consensus due to weakness in Ontario (partially due to the Moatfield disposition). Headline FFOPU was below consensus, while AFFOPU met both our estimates and consensus.
A 4.6% SP-NOI print and 11.9% leasing spread were both positive data points. In conjunction with Q3 reporting, we release our inaugural 2024 estimates.
We maintain our $5.00 price target, based on a discount commensurate with the pre-pandemic average to our unchanged forward NAV estimate.
We retain our Neutral rating.
Key Points
Q3/22 Results: Reported FFO of $0.12 missed our $0.15 estimate and $0.14 consensus. AFFO of $0.13 was in line with our $0.13 estimate and similar consensus; AFFO payout ratio was 75.9%. NOI was $26.9MM on ~$51MM of revenues, beating our $25.9MM NOI and $49.5MM revenue estimates; NOI margins of 52.7% slightly exceeded our 52.0% estimate. Headline SP-NOI increased 4.6% Y/Y, bolstered by rent increases and positive leasing activity in Atlantic Canada, as well as increased contribution from the REIT’s hotel asset as travel restrictions continue to ease. Adjusted to exclude lease termination income, SP-NOI increased 2.9% Y/Y. Average rent of $19.19/sq. ft. was above our $18.60/sq. ft. estimate; management estimates that in-place rents are 5.3% lower than market.
Occupancy was 81.9% (down 170 bps Q/Q), led by an 890 bps Y/Y decrease in Ontario.
Leasing: SOT renewed or replaced 109K sq. ft. of maturing leases on its 7.3MM-sq.-ft. portfolio at 11.9% leasing spreads (18.3% on renewals, 7.2% on new leases); the remaining 101K sq. ft. of maturing leases were not renewed/vacated. ~1.3% of the portfolio expires over the rest of 2022, with the REIT estimating the current leasing spread at ~9% (~5.3% across the entire portfolio). In 2023 SOT is set to have lease maturities amounting to 6.9% of total GLA, or ~507K square feet. The REIT currently estimates there is a ~13.5% spread between weighted average in-place rental rates and current market rent on leases maturing in 2023 and -8% for 2024. An additional ~6.7% of leases are set to mature in 2024, at an estimated spread of -8%. With office fundamentals still in flux (in what is arguably a renter’s market), pending the possibility of an anticipated recession, SOT could see additional downward pressure on leasing spreads as would-be lessees choose to remain on the sidelines.
Balance Sheet: Leverage remained on the higher end of the office universe at 58.4%, down 60 bps Q/Q. The portfolio-weighted average interest rate increased ~20 bps Q/Q to 3.9%. Maturities and principal payments to the end of 2022 are ~$154MM, representing 13.4% of total debt; 2023 maturities and payments comprise another ~56%, maturing at a weighted average interest rate of 4.7%. Liquidity was ~$52MM at quarter-end (~$37MM cash and ~$15MM revolver capacity).
Investment Thesis
slate Office REIT’s portfolio of properties has demonstrated stability during the COVID-19 pandemic and we forecast moderate rental rate and occupancy increases for 2023E. While there is growing lease momentum in Ontario, we believe depressed occupancy in the REIT’s Atlantic Canada portfolio presents a challenge to FFO growth and asset valuations should it look to recycle capital by selling properties. Further, relatively high leverage and high-cost equity could hamper Slate Office’s strategy to grow by acquisition. We remain cautious on the outlook in the near term.
Price Target
(Base Case): C$5.00 Our price target of $5.00 reflects a 10% discount to our current NAV estimate, based on a conservative 6.75% assumed cap rate applied to a 2023 NOI estimate that we believe will reflect pandemic occupancy and rate recovery.
Upside Scenario: C$6.75 Our upside scenario of $6.75 reflects a 23% premium to our current NAV estimate with NOI 2.5% above forecast on higher rent growth and 25 bps blended cap rate compression.
Downside Scenario: C$1.65 Our downside scenario of $1.65 assumes a stagflationary environment and reflects a 40% discount to our current NAV estimate with NOI 5.0% below forecast on lower occupancy and 50 bps blended cap rate expansion