TSX:SOT.DB - Post by User
Post by
hawk35on Nov 06, 2018 6:09pm
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Post# 28933865
TD Waterhouse Downgrade This Afternoon
TD Waterhouse Downgrade This AfternoonSlate Office REIT
(SOT.UN-T) C$7.66
Downgrading to HOLD on Lower Forecast
TD Investment Conclusion
Slate reported an in line Q3, highlighted by another quarter of y/y low-double digit
SPNOI growth. With market rents ~9% above in-place rents, and occupancy trending
positively, we believe that Slate can deliver low-single digit SPNOI growth over
our forecast period. However, we note that the $250-$350mm capital recycling/
leverage reduction program will likely weigh on near-term earnings. Our target
price decreases to $8.00, from $8.50, on the back of lower estimates. Coupled
with a 99% payout ratio on 2019F AFFO and a 64% leverage ratio (D/GBV),
both representing the highest in our coverage universe, as well as its external
management structure and limited trading liquidity, we believe the REIT's units are
fairly valued at the current price. We are lowering our recommendation to HOLD
from Buy.
Leverage Remains High.
At 63.8%, Slate has the highest D/GBV in our coverage
universe. In addition, ~50% of its debt is floating rate, although management is taking
steps to increase the fixed rate portion of debt (through floating to fixed swaps). Of the
43% of debt maturing through 2020, 53% is credit facilities while the balance are
mortgage maturities. Management believes that it can renew its credit facilities on
similar terms and expects to be able to up-finance some mortgage maturities. We have
forecast D/GBV of 57.0% in Q4/20. Management is targeting leverage of 55% over the
medium-term.
Key Risks to Target Price
Key risks to our target price include local real estate markets; competitive supply;
demand swings; general economic conditions; operating cost pressures; environmental
matters; interest rate fluctuations; potential distribution cut; inability to maintain
occupancy levels; and the loss of key management personnel. In addition, there could
be potential conflicts of interest with the external manager, Slate Asset Management.