CIBC comments after conferenceTough Situation Gets Tougher
Following a deterioration in its financial condition, SOT has suspended its portfolio realignment plan and is exploring recapitalization alternatives. On October 24, SOT was granted a 60-day extension from the TSX regarding its delisting review, as the REIT provided sufficient evidence of its plans to restructure the majority of its debt. This follows an initial 120-day review. We continue to question the REIT’s ability to continue as a going concern.
Key Points Recapitalization Exploration:
The REIT has sought the assistance of professional restructuring advisors and initiated a process to seek a restructuring of the majority of its debt. The potential plan includes evaluating the conversion of debentures into equity, amending covenants and extending maturities, and raising additional equity capital through a rights offering. Although currently in discussions with its lenders and related parties, the REIT has yet to reach any agreement with respect to the plan.
Balance Sheet Updates:
Leverage remained at the higher end of the REIT universe at ~83%, an increase from ~74% last quarter. A revaluation of the portfolio has resulted in a $175.4MM fair value loss, reflecting third-party appraisals and asset sales. IFRS NAV has declined by $4.08/unit year to date, and $2.08/unit sequentially, reflecting the write-down. Liquidity was ~$10MM at quarter-end, which reflects the cash balance as the REIT’s revolving credit facility is contractually due on demand.
Debt Troubles Continue:
SOT has breached financial leverage, debt service coverage and minimum unitholders’ equity covenants for the revolver and certain mortgages. As of quarter-end, ~$859MM of loans are considered in default and are due on demand.
Q3/24 Results:
FFO of $0.05 was in line with consensus and our estimate of $0.05 and decreased ~29% Y/Y. The decrease was driven by higher interest costs from refinancings and higher floating rate debt. Headline SP-NOI decreased 4.0% Y/Y, reflecting a decrease in NOI from the hotel asset, and from certain vacancies at three of SOT’s U.S. properties. This was partially offset by termination income from an Ireland property, and positive leasing activity at two Atlantic properties. Occupancy was 79.0%.
Leasing Activity: Slate leased ~73k sq. ft. in Q3, comprising new deals at 5.6% higher rents vs. in-place, and renewals at 1.5% above expiring.
Disposition Update: The REIT completed the previously announced sale of 570 Queen Street in Fredericton, NB for $5.2MM. Subsequently, the REIT sold 114 Garry Street and the Woodbine & Steeles Corporate Centre for ~$14.3MM and ~$39.0MM, respectively.
After seeing limited success through its Portfolio Realignment Plan, SOT has suspended the plan, leading to a significant reduction in assets classified as held-for-sale.
Price Target (Base Case): C$0.00 Our price target of $0.00 reflects what we view as minimal residual equity value net of outstanding debt.
Upside Scenario: C$0.60 Our upside scenario of $0.60 reflects a valuation slightly ahead of our NAV estimate and indicates the possibility that the REIT is able to address its debt obligations.
Downside Scenario: C$0.00 Our downside scenario is $0 and assumes the REIT is no longer a going concern. Scenario Analysi