CIBC commentsSLATE OFFICE REIT European Expansion: A Look At The Proposed Yew Grove Deal
Our Conclusion We are resuming coverage of Slate Office and providing an illustrative financial analysis of the REIT’s €1.017 per share firm offer to acquire 100% of Yew Grove REIT PLC (YEW-LN), a publicly-traded Irish-based REIT, for a total deal value of €177MM (~C$255MM).
Should the acquisition close, we would expect YEW to function as a beachhead for Slate Office to make further acquisitions in Europe. At this point, we are not updating our estimates. Pro forma the expected closing in Q1/22, we could see the acquisition adding ~3% to FFOPU, ~4% to AFFOPU and ~4% to NAVPU, all based on our current 2023 estimates; post-closing, we could see leverage rising ~2 pts to ~60% (see tables herein).
Slate Office remains Neutral-rated with a $6.00 price target.
Key Points YEW owns a ~920K sq. ft. GLA portfolio consisting of 15 office properties (~60% of GLA) and six light industrial properties (~40% of GLA) located across Ireland (see graphic herein). As per YEW’s strategy, assets are all located outside the Dublin central business district. The portfolio has ~95% occupancy and ~4.5-year WALT to lease break. The tenant base is of high quality: ~97% are credit-rated, government or foreign-direct-investment companies, including OptumHealth (a UnitedHealth company), Electricity Supply Board (state-owned), 3M KCI, Teleflex, Aldi, Nestl, Whirlpool and International Fund Services (a State Street company).
Slate Office intends to finance the transaction using: 1) the conversion of $55MM issuance of subscription receipts (11.2MM @ $4.90); 2) the $75MM issue of extendible convertible debentures (5.5% of 2026, if extended upon acquisition closing, $6.50/unit conversion); 3) a $5.8MM unit private placement to Slate Asset Management (to maintain ~9.5% effective interest in the REIT); 4) $134MM property-level debt; and 5) existing liquidity. Separately, Slate Office management has earmarked ~$100MM of properties for disposal in early 2022.
The transaction will be effected by way of a scheme of arrangement. The YEW shareholder vote is scheduled for December 23, 2021, and requires 75% approval of voting shares representing at least one-third of the shares.
The Irish High Court will hold a hearing to sanction the scheme as soon as practicable following shareholder approval (expected in Q1/22)