COSTAR ARTICLE SLATE OFFICE DEBT BURDEN Slate Office, a Canadian REIT that also holds U.S. assets, is ready to sell property. But its management doesn't like the pricing it sees in the market.
The Toronto-based REIT, the owner of three office buildings in the Chicago market, cut its stakeholder distribution by 70% last month to give the landlord more flexibility on the balance sheet only to have its unit price tumble 25% and still not recover.
"I think the focus for the board out of the strategic review after reviewing all the assets in great detail and all the different alternatives that we had, was a strong belief by the board that there's a lot of inherent value in the assets and that trying to sell, for example, into this market would be more destructive to value," said Steve Hodgson, who is stepping down as chief executive, in a call with analysts Tuesday to discuss results.
Slate Office, which had been battling for control of its board with activist investor George Armoyan, also said this month Brady Welch would be taking over as CEO on an interim basis. Welch is a founding partner of Slate Asset Management, which controls 9.5% of the REIT.
Armoyan and another trustee were added to the board as part of a compromise with Slate Asset Management following a strategic review that recommended the distribution cut, which added 23.9 million in Canadian dollars of cash annually to the REIT.
Slate Office's recent purchase of a Chicago-area building at 275 N. Field Drive in Lake Forest, Illinois, and its subsequent issuing of CA$45 million in debentures drew the ire of Armoyan's group.
Welch emphasized on the conference call that since 2019, Slate Office REIT has resold $280 million of properties.
"We are buyers and sellers. And when we stabilize an asset, and we figure it's the right time to execute, we will sell," said Welch. "We'll look to sell assets where we feel that we've done our job and it's the right time to sell an asset. So, we always continually do that at Slate, and that's our job. And I think we are pretty good when it comes to operating real estate and figuring out what needs to be done, sell the assets."
For the period ended March 31, Slate had a net income loss of $4,071,000 compared to a gain of $29,044,000 a year earlier. The REIT maintains its net asset value per unit, according to International Financial Reporting Standards or IFRS, was $7.63, down from $8.56 a year ago and well below a unit price which trades just above $2.
"We are starting to see more traction on the new leasing side. But renewals and maintaining tenants at their existing square footage is also a challenge," said Hodgson on the call. "We have pretty good visibility on the balance of this year now on the renewals. And I would say that our goal is to at least maintain occupancy but incrementally improve it by the end of the year."
Brad Sturges, an analyst with Raymond James, said addressing "sizable debt maturity exposure" in the near future is a critical focal point for the REIT.
"We believe a recovery in Slate Office's unit price may be constrained until such time that the REIT meaningfully reduces its significant near-term debt maturity exposure and financial leverage metrics trend closer to long-term target levels once private market activity allows for Slate Office to prudently pursue asset sales at deemed new fair market values," said Sturges in a note.