TD ANALYST LOOKS LIKE ALL ANALYSTS ARE PUSHING AGAINST SLAM WITHOUT ACTUALLY SAYING IT ARMOYAN AS HE SHOULD USE THIS AGAINST SLAM TO GET IMMEDIATE CHANGES ....IF ANALYSTS SIDED WITH SLAM THEY WOULD HAVE SAID THE CAP RAISE WAS GOOD IDEA...
Event Resuming coverage following completion of 7.50% $45mm convertible unsecured debenture. Impact: NEUTRAL Offering. The converts carry a 7.50% interest rate (200bps higher than the November 2021 convert issuance) with a conversion price of $5.50 and December 31, 2027 maturity. Proceeds will be directed towards funding Slate's Chicago office property acquisition (discussed below) and reducing the revolver. Acquisition. Slate announced an agreement to acquire an ~198k sf Class A office property in suburban Chicago (275 Northfield Drive, Lake Forest), for US$19.8mm or US$100/sf, representing an 8.4% cap rate (link). The property is currently anchored by a long-term lease to Pfizer (10-year lease term), with an additional ~65k sf in available leasable space. The acquisition price represents ~1.5% of Q2/22 asset value. While we view it positively on a standalone basis (good price, good tenant/ term, and potential upside), we would prefer to see Slate upgrade its portfolio through capital recycling versus raising dilutive capital (we estimate ~2% NAV dilution from the convert). Strategic Review. On October 20, G2S2 Capital, which currently owns ~16% of outstanding units and $7.1mm of the convert issue, issued an open letter following the REIT's convert offering. G2S2 expressed disappointment in the issuance, stating it was unnecessarily dilutive to unitholders, and was seeking support from unitholders to elect a new Board of Trustees (link). G2S2 highlighted issues including failure to represent all unitholders' interest, unit price underperformance, and insignificant Trustee ownership. Slate responded to the letter (link), noting several discussions with George Armoyan (Executive Chairman at G2S2), who had also expressed interest in acquiring some of the REIT's assets located in Atlantic Canada. Another meeting with Mr. Armoyan and the Board was scheduled for October 21. On October 25, Slate announced a strategic review that is to be led by a special committee of the board made up of its five independent trustees. TD Investment Conclusion Although SOT's valuation appears attractive on both an absolute and relative basis versus its larger-cap office peers and smaller-cap REIT peers, we believe the units will be range-bound until Slate can demonstrate sustained improvements in operating metrics (occupancy, SPNOI) and earnings growth. We are maintaining our HOLD rating and $4.75 target price.