cibc - Price Target (12-18 mos.): C$5.25Q2/20 Earnings: Steady - A Positive In This Environment Our Conclusion With 61% of tenants being government or credit rated and only 2% tied to non-essential retail, Slate Office’s commercial real estate portfolio posted modest positive organic growth despite a challenging macro environment. Performance in the REIT’s lone hotel asset was obviously a drag in the quarter given the pandemic. On the leasing front, SOT expects renewal activity to be strong, with moderate expectations on new leasing, which should temper occupancy gains throughout the balance of the year. With the REIT’s disposition program complete, FFOPU appears to be finding a floor from which to grow from. We are getting more positive on SOT, but owing to uncertainty over broader economic trends and above-average leverage, we maintain our Neutral rating.
Key Points Q2/20 Results: SOT reported OFFOPU of $0.18, a penny ahead of our (and consensus) estimate of $0.17. Variance to our forecast was mostly on lower interest expense. COVID-19 Update: SOT reported 96%-97% cash collection in each month of Q2 with residual rents expected to be mostly collected through short-term deferrals. CECRA eligible tenants represent an immaterial $0.1MM of the REIT’s monthly gross rent. As ~85% of the portfolio is in suburban markets or urban locations in secondary markets, utilization rates of the REIT’s buildings are reportedly higher when compared with CBD office. Organic Growth & Leasing: Excluding lease termination income, Y/Y SPNOI for the commercial portfolio grew +1.2%; but was down -2.3% including the hotel asset, which was clearly impacted by COVID-19 related restrictions. Portfolio occupancy was up 30 bps sequentially with solid leasing spreads of +13.9% and only 6.1% of GLA is left to address for 2020. Renewal activity is expected to be strong, however, new leasing may be constrained in the short term by a combination of an uncertain economic environment as well as logistics surrounding touring. Value-add Activity: At redevelopment property 2599 Speakman, the government tenant that took 40.1k sf in Q1/20 agreed to expand by a further 7.1k sf, bringing committed occupancy to ~52% at the property. Discussions to lease the remainder of the property are ongoing.
Balance Sheet: Leverage remains on the high side, though stable sequentially at an LTV of 58.3%. Over time this metric should drift into the low- to mid-50s.
Price Target Calculation Slate Office trades at 5.2x our 2020E FFO, a 45% discount to our $6.75/unit NAV estimate using a 6.7% cap rate (both unchanged), an implied cap rate of ~7.9%, and a distribution yield of ~10.7%. Historically, REITs have traded in a relatively wide range of discounts and premiums to NAV. Our price target is unchanged at $5.25, which reflects a ~22% discount to NAV (at the lower end of historical ranges to reflect uncertainty over forecasts) and equates to 7.3x 2020E FFO.