Slate Office REIT Reports Third Quarter 2023 Results and Announces Portfolio Realignment Plan

Slate Office REIT (TSX: SOT.UN) (the "REIT"), an owner and operator of high-quality workplace real estate, reported today financial results and highlights for the three and nine months ended September 30, 2023 and announced a Portfolio Realignment Plan that will reposition the REIT’s portfolio for long-term stability and performance and raise liquidity to reduce the REIT’s borrowings.

“We have made steady progress over the last quarter toward shoring up the REIT’s balance sheet, completing over $577 million of refinancings and loan amendments to preserve liquidity and financial flexibility for the REIT,” said Brady Welch, Interim Chief Executive Officer of Slate Office REIT. “We have also maintained stable portfolio occupancy, supported by our positive leasing momentum at longer lease terms. Through the Portfolio Realignment Plan we are introducing this quarter, we believe we can further improve the REIT’s liquidity, strengthen its balance sheet through reduced debt, and improve portfolio composition to position the REIT for long-term stability and performance.”

For the CEO’s letter to unitholders in respect of the quarter, please follow the linkhere.

Highlights

• Completed C$577.6 million of refinancings and loan amendments, representing 47.8% of total debt, to strengthen the REIT’s balance sheet
  • On August 23, 2023, the REIT announced the refinancing of the mortgage loans on two of its Greater Toronto Area assets, collectively totaling approximately C$127.7 million
  • The REIT refinanced an additional C$138.6 million of total debt on two properties located in Mississauga, ON and Chicago, IL
  • The REIT also completed an amendment to the terms of its existing revolving credit facility to provide borrowing base availability, providing the REIT with additional liquidity to execute on its Portfolio Realignment Plan
  • The REIT has only one remaining debt maturity of C$34.0 million in the balance of 2023 on its Gateway Centre property in Toronto, ON, which it expects to refinance in the fourth quarter

• Maintained portfolio occupancy with stable leasing volume at longer lease terms
  • The REIT completed 277,599 square feet of total leasing in the quarter at a Weighted Average Lease Term (“WALT”) of 5.0 years, which reflects an increase over 4.8 years in the prior quarter; new leases were completed at a WALT of 7.3 years, up from 5.7 years last quarter
  • Occupancy remained stable at 78.6%
  • Less than 1.0% of the portfolio’s Gross Leasable Area (“GLA”) remains to be renewed in the fourth quarter of 2023, and only 5.5% of the portfolio’s GLA is in discussion for renewal in 2024
  • The REIT has a strong leasing pipeline with over 200,000 square feet of potential new deals under discussion with major users

• On September 12, 2023, the REIT’s external manager, Slate Asset Management, announced that it increased its ownership interest in the REIT to over 10.0% of the outstanding units reflecting management’s confidence in the REIT’s capital allocation decisions and strategy

Portfolio Realignment Plan

The REIT’s senior management, together with the Board of Trustees (the “Board”), have considered a number of potential strategies to preserve value for unitholders in the current macroeconomic and office environments, while also ensuring the REIT will be in a stronger position when it emerges from this economic cycle. Management and the Board have determined that the best course of action for unitholders is to execute a Portfolio Realignment Plan that will improve the REIT’s liquidity, strengthen its balance sheet through reduced debt, and improve portfolio composition.

The Portfolio Realignment Plan will see the REIT divest assets to reposition its portfolio for long-term stability and performance, as follows:

i. Disposition Assets: Management and the Board have identified non-core assets in certain Canadian markets for strategic disposition with the intention of realizing capital for the repayment of debt and general liquidity for the REIT (such assets being the “Disposition Assets”). These assets comprise approximately 40.0% of the REIT’s total GLA.

ii. Continuing Portfolio: The Continuing Portfolio will be made up of assets that are similar in terms of their quality, occupancy, tenant profile and cash flow and are located in markets with strong economic drivers and stable office demand. Management and the Board believe these assets, when separated from the remainder of the portfolio, will constitute a more focused and resilient REIT with stronger portfolio KPIs and lower funding requirements and thus intends to retain these assets as long-term holdings.

To execute the Portfolio Realignment Plan, the REIT is undertaking a process to divest the Disposition Assets and expects that the process will continue through to 2025. Management and the Board will actively monitor the Disposition Assets, as well as the Continuing Portfolio, and depending on changes in leasing activity or local market conditions, the classification of these assets is subject to change. The proceeds generated from the sale of the Disposition Assets will be used to reduce the REIT’s leverage and actively manage the Continuing Portfolio.

As at October 31, 2023, approximately two-thirds of the Disposition Assets are either listed for sale, under discussions, or at varying stages of contract negotiation. The remainder of the Disposition Assets will be brought to market in 2024, with consideration for local market conditions. In addition to focusing on the execution of the Portfolio Realignment Plan, the REIT will continue to implement active asset management strategies to preserve the long-term stability and performance of the Continuing Assets.

Management and the Board believe that the Portfolio Realignment Plan will ultimately reconstitute the REIT’s portfolio with assets that have higher cash flow, stronger occupancy, and a higher proportion of government and high-quality credit tenants.

Distribution Suspension

The REIT also announced today that the Board has determined to suspend the REIT's monthly cash distribution. The distribution suspension is expected to provide the REIT with an additional C$10.2 million of cash annually, which will be used for the paydown of debt and the funding of ongoing business operations. The suspension of the REIT’s distribution will be effective beginning with the REIT's distribution that would have otherwise been declared for the month of November 2023 and would have otherwise been payable to unitholders in December 2023. The Board will continue to monitor the REIT’s financial performance, operating environment, and progress with its Portfolio Realignment Plan to determine when it is appropriate to reinstate a regular cash distribution.

Declaration of Trust Amendment

On November 13, 2023, the REIT filed a notice of meeting and record date on SEDAR+ in connection with a proposed special meeting of the REIT (the “Special Meeting”). The Special Meeting is expected to occur on December 29, 2023. The purpose of the Special Meeting is to seek approval from the REIT’s unitholders of a special resolution approving an amendment to the REIT’s Declaration of Trust to remove the restriction in the REIT’s Declaration of Trust, which currently provides that the REIT’s indebtedness cannot exceed 65.0% of gross book value (which is defined as total assets less restricted cash). If the special resolution is passed, the Board intends to adopt operating guidelines, pursuant to which the Board will determine the appropriate financial leverage of the REIT. This proposed change to the Declaration of Trust is intended to provide greater flexibility, while management pursues the Portfolio Realignment Plan and seeks to use the proceeds generated from the Portfolio Realignment Plan to reduce the REIT’s leverage and actively manage the Continuing Portfolio.

Summary of Q3 2023 Results

Conference Call and Presentation Details

Senior management will host a live conference call at 9:00 a.m. ET on Wednesday, November 15, 2023 to discuss the results and ongoing business initiatives of the REIT.

The conference call can be accessed by dialing (416) 764-8658 or 1 (888) 886-7786. Additionally, the conference call will be available via simultaneous audio found at https://viavid.webcasts.com/starthere.jsp?ei=1636214&tp_key=fa2c2e128c. A replay will be accessible until November 29, 2023 via the REIT's website or by dialing (416) 764-8692 or 1 (877) 674-7070 (access code 068482#) approximately two hours after the live event.

About Slate Office REIT (TSX: SOT.UN)

Slate Office REIT is a global owner and operator of high-quality workplace real estate. The REIT owns interests in and operates a portfolio of strategic and well-located real estate assets in North America and Europe. The majority of the REIT’s portfolio is comprised of government and high-quality credit tenants. The REIT acquires quality assets at a discount to replacement cost and creates value for unitholders by applying hands-on asset management strategies to grow rental revenue, extend lease term and increase occupancy. Visit slateofficereit.com to learn more.

About Slate Asset Management

Slate Asset Management is a global alternative investment platform targeting real assets. We focus on fundamentals with the objective of creating long-term value for our investors and partners. Slate's platform has a range of real estate and infrastructure investment strategies, including opportunistic, value add, core plus, and debt investments. We are supported by exceptional people and flexible capital, which enable us to originate and execute on a wide range of compelling investment opportunities. Visit slateam.com to learn more.

Supplemental Information

All interested parties can access Slate Office REIT's Supplemental Information online at slateofficereit.com in the Investors section. These materials are also available on SEDAR or upon request at ir@slateam.com or (416) 644-4264.

Forward Looking Statements

Certain information herein constitutes “forward-looking information” as defined under Canadian securities laws which reflect management’s expectations regarding objectives, plans, goals, strategies, future growth, results of operations, performance, business prospects and opportunities of the REIT. The words “plans”, “expects”, “does not expect”, “scheduled”, “estimates”, “intends”, “anticipates”, “does not anticipate”, “projects”, “believes”, or variations of such words and phrases or statements to the effect that certain actions, events or results “may”, “will”, “could”, “would”, “might”, “occur”, “be achieved”, or “continue” and similar expressions identify forward-looking statements. Some of the specific forward-looking statements contained herein include, but are not limited to, statements relating to the impact of the COVID-19 pandemic. Such forward-looking statements are qualified in their entirety by the inherent risks and uncertainties surrounding future expectations.

Forward-looking statements are necessarily based on a number of estimates and assumptions that, while considered reasonable by management as of the date hereof, are inherently subject to significant business, economic and competitive uncertainties and contingencies. When relying on forward-looking statements to make decisions, the REIT cautions readers not to place undue reliance on these statements, as forward-looking statements involve significant risks and uncertainties and should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not the times at or by which such performance or results will be achieved. A number of factors could cause actual results to differ, possibly materially, from the results discussed in the forward-looking statements. Additional information about risks and uncertainties is contained in the filings of the REIT with securities regulators.

Non-IFRS Measures

We disclose a number of financial measures in this news release that are not measures used under IFRS, including NOI, same property NOI, FFO, Core-FFO, AFFO, FFO payout ratio, Core-FFO payout ratio, AFFO payout ratio, NAV, adjusted EBITDA, net debt to adjusted EBITDA ratio, interest coverage ratio, debt service coverage ratio and LTV ratio, in addition to certain measures on a fully-diluted per unit basis.

• NOI is defined as rental revenue, excluding non-cash straight-line rent and leasing costs amortized to revenue, less property operating costs prior to International Financial Reporting Interpretations Committee 21, Levies ("IFRIC 21") adjustments. Rental revenue for purposes of measuring NOI excludes revenue recorded as a result of determining rent on a straight-line basis and the amortization of leasing costs in revenue for IFRS. Same-property NOI includes those properties owned by the REIT for each of the current period and the relevant comparative period.

• FFO is defined as net income adjusted for certain items including transaction costs, change in fair value of properties, change in fair value of financial instruments, change in fair value of Class B LP units, deferred income taxes, distributions to Class B unitholders, depreciation and IFRIC 21 property tax adjustments.

• Core-FFO is defined as FFO adjusted for the REIT's share of lease payments received for a data centre in Winnipeg, Manitoba (the "Data Centre"), which for IFRS purposes is accounted for as a finance lease.

• AFFO is defined as FFO adjusted for amortization of deferred transaction costs; de-recognition and amortization of mark-to-market ("MTM") adjustments on mortgages refinanced or discharged; adjustments for interest rate subsidies received; recognition of the REIT's share of lease payments received for the Data Centre, which for IFRS purposes, is accounted for as a finance lease; amortization of straight-line rent; and normalized direct leasing and capital costs.

• FFO payout ratio, Core-FFO payout ratio and AFFO payout ratio are defined as aggregate distributions made in respect of units of the REIT and Class B LP units divided by FFO, Core-FFO and AFFO, respectively.

• FFO per unit, Core-FFO per unit and AFFO per unit are defined as FFO, Core-FFO and AFFO divided by the weighted average diluted number of units outstanding, respectively.

• NAV is defined as the aggregate of the carrying value of the REIT's equity, Class B LP units, deferred units, and deferred tax liability.

• Adjusted EBITDA is defined as earnings before interest, income taxes, depreciation, fair value gains (losses) from both financial instruments and investment properties, while also excluding non-recurring items such as transaction costs from dispositions, acquisitions or other events.

• Net debt to adjusted EBITDA is defined as the aggregate amount of debt outstanding, less cash on hand, divided by the trailing twelve month adjusted EBITDA.

• Interest coverage ratio is defined as adjusted EBITDA divided by the REIT's interest expense for the period.

• Debt service coverage ratio is defined as adjusted EBITDA divided by the debt service requirements for the period, whereby the debt service requirements reflects amortizing principal repayments and interest expensed during the period. Payments related to defeasance, prepayment penalties, or payments upon discharge of a mortgage are excluded from the calculation.

• LTV ratio is defined as total indebtedness divided by total assets less restricted cash.

We use these measures for a variety of reasons, including measuring performance, managing the business, capital allocation and the assessment of risk. Descriptions of why these non-IFRS measures are useful to investors and how management uses each measure are included in Management’s Discussion and Analysis, which readers should read when evaluating the measures included herein. We believe that providing these performance measures on a supplemental basis to our IFRS results is helpful to investors in assessing the overall performance of our businesses in a manner similar to management. These financial measures should not be considered as a substitute for similar financial measures calculated in accordance with IFRS. We caution readers that these non-IFRS financial measures may differ from the calculations disclosed by other businesses, and as a result, may not be comparable to similar measures presented by others.

SOT-FR

Calculation and Reconciliation of Non-IFRS Measures

View source version on businesswire.com: https://www.businesswire.com/news/home/20231114188976/en/