Today’s victim is Slate Office REIT (TSX: SOT.UN). I’ve written about them in the past.
I actually managed to find something using SEDAR “Plus” (let’s save my analysis of this for another post) and fetched out their declaration of trust. Via their Annual Information Form, here is the following snippet:
the REIT shall not incur or assume any indebtedness if, after giving effect to the incurrence or assumption of such indebtedness, the total indebtedness of the REIT would be more than 65% of GBV (including convertible debentures);
(FYI – GBV = Gross Book Value)
Let’s do some math.
In June 30, 2023 their assets were 1.826 billion. Their total debt was $1.166 billion. That’s about 64%.
So they’re hitting up against a debt wall.
This gross book value will surely decline as all REITs mark their books as a function of the government treasury bond rate – as the risk-free rate rises (and has it ever!) your asset values will decline.
Very shortly, Slate is going to be debt-locked unless if they take efforts to reduce their GBV. This can only come in the form of an equity offering (not going to happen when your units are trading at $1.52 a pop and a total market cap of $120 million), an extremely dilutive preferred share offering (George Armoyan to the rescue), or selling real estate assets.
The problem with selling your real estate assets is that you’re only likely to be able to sell in short notice the assets that are actually worth something, compared to the rest of the sub-par garbage you have in your (pun intended) asset slate. Not only that, but selling such assets might trigger the need to value your other assets accordingly (i.e. the cap ratio you were assuming on your books isn’t what you’re getting when you sell the asset!) which would then cause the GBV to debt ratio to increase even further.
In other words, CCAA could be in the cards here. I’m glad I walked away from this one. Twice!