As the price of debt-burdened Slate Office REIT’s SOT-UN-T publicly traded units approach zero, a behind-the-scenes war is breaking out on its board of trustees between its managers and activist investor George Armoyan.
Chief executive officer Brady Welch and his brother Blair, the principals of the REIT’s external manager, Slate Asset Management, have sent letters to their fellow trustees accusing Mr. Armoyan, who is also a trustee, of inappropriately bidding for the trust’s assets and pushing it to the brink of insolvency with demands for more control – allegations he denies.
Mr. Armoyan, who owns 20 per cent of Slate Office REIT, says the company has badly underperformed its peers over the past decade while the Welches’ company has collected $132-million in management fees. “During its tenure as manager of the REIT, Slate Asset Management has overseen the destruction of over $700-million in unitholder value,” Mr. Armoyan said in an e-mail to The Globe and Mail.
The Welches declined to comment for this article.
The dispute involving three of the trust’s six-member board comes at a life-or-death time for the company. Slate Office REIT has more than $1.1-billion in debt and a market capitalization of about $25-million. The trust has been attempting a turnaround by selling off properties, but it defaulted on $158-million worth of its debt in June.
Mr. Armoyan is a Nova Scotia investor with a taste for distressed situations and no fear of challenging management. In October, 2022, he revealed that his investment vehicle, G2S2 Capital Inc., had acquired 15.8 per cent of the trust and held $7.1-million in debt that was convertible into more units. That was greater than the Welches’ ownership of nearly 10 per cent of the trust. Mr. Armoyan requested a special meeting of unitholders to remove five Slate Office REIT trustees, including the Welch brothers, and elect a slate of four new members, including himself.
Slate Office REIT and the Welch brothers came to what seemed an uneasy peace with Mr. Armoyan. They signed a settlement agreement that placed Mr. Armoyan and another trustee on the board in February, 2023.
But Slate Office REIT – which owns 54 buildings, mostly office properties, in Canada, the United States and Ireland – was already facing declining rental revenue amid the COVID-19 economy. The end of ultralow interest rates then increased the REIT’s borrowing costs. The dividend-adjusted unit price of $4.18 when Mr. Armoyan joined the board sank to a low of 21 cents in June and closed Thursday at 33 cents. That has left his initial investment of roughly $50-million in units worth about $4-million today.
In a five-page letter to the trustees sent July 15 and reviewed by The Globe, the Welches say Slate Office REIT “is at present in the zone of insolvency,” and they blame Mr. Armoyan for pushing it closer to the brink.
In a response to The Globe, Mr. Armoyan says most of the statements in the letter “are false.” Mr. Armoyan wrote a letter to his fellow trustees in reply to the Welches, but he declined to provide it to The Globe, citing “a duty of confidentiality to the REIT.”
In their letter, the Welches say the Slate Office REIT board had a meeting in November, 2023, to consider removing a limitation in its Declaration of Trust – akin to its corporate bylaws – on the trust’s debt levels. The goal was to ensure the trust “could better execute its portfolio realignment plan.”
At the same time, the Welches say, Slate Office REIT was also “negotiating a material lease with a significant new tenant” that wanted the REIT to have a “financial backstop” to guarantee its lease commitments. The Welches’ Slate Asset Management offered to provide it, they say, but Mr. Armoyan opposed Slate doing so and “insisted” that his G2S2 Capital “could provide more favourable terms,” the Welches say.
The Welches say Mr. Armoyan then “demanded” changes to the settlement agreement that put him on the board. The Welches say he wanted to be able to initiate a proxy contest, acquire additional securities of Slate Office REIT and reduce the board’s size from eight to six, thereby increasing the relative influence of his allies.
Slate Office REIT agreed to those requests, the Welches say, and after the 2024 unitholders meeting, the REIT now has six trustees – the Welches, Mr. Armoyan, two of his nominees and an independent chair.
But, the Welches allege, Mr. Armoyan’s G2S2 has not yet provided a letter of credit to backstop the tenant obligations. They say he has “repeatedly insisted on new terms or concessions not bargained for.”
Slate Office REIT “now finds itself in default of its obligations to a major new tenant, at risk of losing that new tenant and facing consequential defaults to its lenders,” the Welches say. They also say the REIT’s lenders “are now demanding additional terms” and have insisted on installing a law firm and financial adviser “to examine Slate Office Trust’s financial affairs.”
Mr. Armoyan, the Welches allege in the letter, “has pushed Slate Office REIT to the brink of insolvency at the same time that he has been misusing his insider status to try to acquire SOT’s assets at discounted valuations.”
The Welches contend Mr. Armoyan has voted against third party offers for Slate Office Trust assets as a trustee, with one of his companies then submitting “a marginally higher bid” for the same assets. The Welches also allege a company called ATN Group bid for Slate Office Trust assets without Mr. Armoyan disclosing to the board that he controlled ATN Group.
Among proposals made by the Welches to the board, they ask for an “independent committee” of the two of them plus chair Sam Altman “to manage all dealings with Mr. Armoyan or his companies” and ask that Mr. Armoyan and all companies in which he has an interest bid for the REIT’s assets “on the same terms as other bidders.”
Mr. Armoyan declined to respond directly to the Welches’ specific claims, but said the REIT continues to pay its management fees to Slate Asset Management even though the units are down 96.5 per cent during their tenure and “the REIT has been forced to slash distributions to unitholders and is unable to pay interest on its publicly traded debentures.”
According to Slate Office REIT’s management information circular, Slate Asset Management receives a base management fee of 0.3 per cent of the gross book value of the REIT’s assets; a property management fee of 3 per cent of gross revenues; and leasing fees of 5 per cent of the base rent for all new leases and 2 per cent of rent for all renewals. Slate Asset Management also collects fees for construction activity and financings. Fees totalled $20.7-million in 2022 and $13.7-million in 2023.
Slate Office REIT is unable to terminate the management deal with Slate Asset Management “without significant financial penalties,” Mr. Armoyan said. “I have no other ancillary interests or contractual relationships with the REIT; unlike Slate Asset Management, I do not collect millions of dollars per year in management fees. My financial interests are entirely aligned with other unitholders and restoring value to unitholders.”