Slate Office REIT Reports Third Quarter 2022 Results

TORONTO--(BUSINESS WIRE)--Slate Office REIT (TSX: SOT.UN) (the "REIT"), an owner and operator of high-quality workplace real estate, reported today financial results for the three and nine months ended September 30, 2022.

"Our transaction activity during and just after the third quarter further enhances the stability of the REIT's portfolio and highlights the REIT's ability to source attractive opportunities globally," said Steve Hodgson, Chief Executive Officer of Slate Office REIT. "At the same time, we recognize that broader market headwinds continue to weigh on the valuations of publicly-traded REITs, creating a divergence between asset values and unit price. Our objective has always been to create long-term value for our unitholders, and we look forward to identifying additional opportunities to unlock the value in our portfolio through the Board's ongoing strategic review."

For the CEO's letter to unitholders for the quarter, please follow the link here.

Highlights

• Tactical transaction activity advanced the REIT's repositioning strategy to align its portfolio with high-quality, modern assets with strong credit tenants, long lease terms, and cash flow yield
  • On September 23, 2022, the REIT strategically disposed of an older, higher risk property at 95-105 Moatfield Drive in Toronto, Ontario at a 12.0% premium to purchase price and a 5.0% premium to the REIT's June 30, 2022 IFRS value
  • After quarter end, the REIT announced the acquisition of a higher-yielding, newer office property in Chicago, Illinois anchored by a 10-year lease with Pfizer, Inc. at an attractive 8.4% capitalization rate or $100 per square foot, with significant upside on occupancy
• Strong operational performance further enhanced the resiliency of the REIT's portfolio
  • The REIT completed 109,060 square feet of total leasing in the quarter at a weighted average rental rate spread of 11.9%
  • Same property net operating income in the third quarter of 2022 increased by $0.5 million or 2.1% over the prior quarter
  • The weighted average lease term in the REIT's portfolio is 5.6 years and 65.1% of tenants are government or high-quality credit tenants
• Financial stability continues to contribute to the REIT's well-covered distribution yield
  • The REIT provided investors a distribution yield of 9.2% in the third quarter, which was well covered with an AFFO payout ratio of 75.9%
  • After quarter end, the REIT amended and extended its credit facility at the same rate spread and with modifications that preserve liquidity
  • After quarter end, the REIT launched and closed a $45.0 million convertible debenture offering that was used to fund the accretive Chicago acquisition, strengthen the REIT's balance sheet, and proactively pay down secured mortgage debt
• After period end, the REIT announced that it has launched a comprehensive review of strategic alternatives with a focus on maximizing value for unitholders
  • After period end, the REIT commenced the repurchase of units under the normal course issuer bid ("NCIB") it renewed in June; under the NCIB, the REIT may purchase up to 6,252,619 units, subject to certain restrictions

Summary of Q3 2022 Results

	Three months ended September 30,
(thousands of dollars, except per unit amounts)		2022			2021	Change %
Rental revenue	$	50,959		$	43,636	16.8%
Net operating income ("NOI")	$	26,860		$	23,012	16.7%
Net income	$	18,357		$	8,657	112.0%
Same-property NOI	$	21,912		$	20,955	4.6%
Weighted average diluted number of trust units (000s)		85,658			73,283	16.9%
FFO	$	10,299		$	11,092	(7.1)%
FFO per unit	$	0.12		$	0.15	(20.0)%
FFO payout ratio		82.9%			65.8%	17.1%
Core-FFO	$	11,146		$	11,888	(6.2)%
Core-FFO per unit	$	0.13		$	0.16	(18.8)%
Core-FFO payout ratio		76.6%			61.4%	15.2%
AFFO	$	11,253		$	11,041	1.9%
AFFO per unit	$	0.13		$	0.15	(13.3)%
AFFO payout ratio		75.9%			66.1%	9.8%
	September 30, 2022			December 31, 2021		Change %
Total assets	$	1,955,525		$	1,808,907	8.1%
Total debt	$	1,137,914		$	1,045,542	8.8%
Portfolio occupancy		81.9%			83.8%	(1.9)%
Loan-to-value ratio		58.4%			59.7%	(1.3)%
Net debt to adjusted EBITDA 1	12.1x			12.6x		(0.5)x
Interest coverage ratio 1	2.0x			2.0x		—x
1 EBITDA is calculated using trailing twelve month actuals, as calculated below.

Conference Call and Presentation Details

Senior management will host a live conference call at 9:00 a.m. ET on Wednesday, November 2, 2022 to discuss the results and ongoing business initiatives of the REIT.

The conference call can be accessed by dialing [phone] or 1 [phone]. Additionally, the conference call will be available via simultaneous audio found at https://app.webinar.net/LM6R0wAyBXV. A replay will be accessible until November 16, 2022 via the REIT's website or by dialing [phone] or 1 [phone] (access code 890293#) 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 [e-mail] or [phone].

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, FFO payout ratio, Core-FFO, Core-FFO payout ratio, AFFO, AFFO payout ratio, IFRS net asset value, adjusted EBITDA, net debt to adjusted EBITDA and the interest coverage ratio, in addition to certain measures on a per unit basis.

• NOI is defined as rental revenue less operating property expenses, prior to straight-line rent and other changes. 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 and comprehensive income adjusted for certain items including leasing costs amortized to revenue, change in fair value of properties, change in fair value of financial instruments, transaction costs, depreciation of hotel asset, change in fair value of Class B LP units, distributions to Class B LP unitholders and subscription receipts equivalent amount.
• Core-FFO is defined as FFO adjusted for the REIT's share of lease payments received for its Data Centre asset, which for IFRS purposes is accounted for as a finance lease and removes the impact of mortgage discharge fees (if any).
• AFFO is defined as FFO adjusted for certain items including guaranteed income supplements, amortization of deferred transaction costs, de-recognition and amortization of mark-to-market adjustments on mortgages refinanced or discharged, adjustments for interest rate subsidies received, recognition of the REIT's share of lease payments received for its Data Centre asset, 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 distributions declared 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.
• IFRS net asset value is defined as the aggregate of the carrying value of the REIT's equity, Class B LP units and deferred units.
• 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 and adjusting income received from the Data Centre to cash received as opposed to finance income recorded for accounting purposes.
• Net debt to adjusted EBITDA is calculated by dividing the aggregate amount of debt outstanding, less cash on hand, by annualized adjusted EBITDA.
• Interest coverage ratio is defined as adjusted EBITDA divided by cash interest paid.

We utilize 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

The tables below summarize a calculation of non-IFRS measures based on IFRS financial information.

The calculation of NOI is as follows:

	Three months ended September 30,
(thousands of dollars, except per unit amounts)		2022			2021
Revenue	$	50,959		$	43,636
Property operating expenses		(23,749)			(20,771)
IFRIC 21 property tax adjustment 1		(2,943)			(2,368)
Straight-line rents and other changes		2,593			2,515
Net operating income	$	26,860		$	23,012
The reconciliation of net income to FFO, Core-FFO and AFFO is as follows:
	Three months ended September 30,
(thousands of dollars, except per unit amounts)		2022			2021
Net income	$	18,357		$	8,657
Add (deduct):
Leasing costs amortized to revenue		2,404			2,159
Change in fair value of properties		3,164			(41)
IFRIC 21 property tax adjustment 1		(2,943)			(2,368)
Change in fair value of financial instruments		(11,407)			1,817
Transaction costs		1,218			—
Depreciation of hotel asset		243			257
Deferred income tax expense		320			823
Change in fair value of Class B LP units		(1,585)			(740)
Distributions to Class B unitholders		528			528
Subscription receipts equivalent amount		—			—
FFO 2	$	10,299		$	11,092
Finance income on finance lease receivable		(758)			(809)
Finance lease payments received		1,605			1,605
Core-FFO 2	$	11,146		$	11,888
Amortization of deferred transaction costs		1,374			778
Amortization of debt mark-to-market adjustments		971			(39)
Amortization of straight-line rent		189			356
Interest rate subsidy		—			108
Normalized direct leasing and capital costs		(2,427)			(2,050)
AFFO 2	$	11,253		$	11,041
Weighted average number of diluted units outstanding (000s)		85,658			73,283
FFO per unit 2	$	0.12		$	0.15
Core-FFO per unit 2	$	0.13		$	0.16
AFFO per unit 2	$	0.13		$	0.15
FFO payout ratio 2		82.9%			65.8%
Core-FFO payout ratio 2		76.6%			61.4%
AFFO payout ratio 2		75.9%			66.1%
1 In accordance with IFRIC 21, the REIT recognizes property tax liability and expense on its existing U.S. properties as at January 1 of each year, rather than progressively, i.e. ratably throughout the year. The recognition of property taxes as a result of IFRIC 21 has no impact on NOI, FFO or AFFO.
2 Refer to "Non-IFRS measures" section above.

The reconciliation of cash flow from operating activities to FFO, Core-FFO and AFFO is as follows:

	Three months ended September 30,
(thousands of dollars)		2022			2021
Cash flow from operating activities	$	11,242		$	12,329
Add (deduct):
Leasing costs amortized to revenue		2,404			2,159
Transaction costs		1,218			—
Working capital items		(155)			(670)
Straight-line rent and other changes		(2,593)			(2,515)
Interest and other finance costs		(14,078)			(10,585)
Interest paid		11,733			9,846
Distributions paid to Class B unitholders		528			528
FFO 1	$	10,299		$	11,092
Finance income on finance lease receivable		(758)			(809)
Finance lease payments received		1,605			1,605
Core-FFO 1	$	11,146		$	11,888
Amortization of deferred transaction costs		1,374			778
Amortization of debt mark-to-market adjustments		971			(39)
Amortization of straight-line rent		189			356
Interest rate subsidy		—			108
Normalized direct leasing and capital costs		(2,427)			(2,050)
AFFO 1	$	11,253		$	11,041
1Refer to "Non-IFRS measures" section above.

The calculation of trailing twelve month adjusted EBITDA is as follows:

	Trailing twelve months ended September 30,
(thousands of dollars)		2022			2021
Net income	$	83,896		$	39,623
Straight-line rent and other changes		8,773			8,070
Interest income		(445)			(505)
Interest and finance costs		51,467			43,952
Change in fair value of properties		(9,314)			(6,685)
IFRIC 21 property tax adjustment 1		611			45
Change in fair value of financial instruments		(51,017)			(15,429)
Distributions to Class B shareholders		2,112			2,112
Transaction costs		1,875			402
Depreciation of hotel asset		981			1,035
Change in fair value of Class B LP units		(4,491)			8,667
Deferred income tax expense		5,412			1,777
Current income tax expense		955			54
Adjusted EBITDA 2	$	90,815		$	83,118
1 In accordance with IFRIC 21, the REIT recognizes property tax liability and expense on its existing U.S. properties as at January 1 of each year, rather than progressively, i.e. ratably throughout the year. The recognition of property taxes as a result of IFRIC 21 has no impact on NOI, FFO or AFFO.
2 Adjusted EBITDA is based on actuals for the twelve months preceding the balance sheet date.

The calculation of net debt is as follows:

(thousands of dollars)	September 30, 2022			September 30, 2021
Debt, non-current	$	768,311		$	818,095
Debt, current		369,603			167,964
Debt	$	1,137,914		$	986,059
Less: cash on hand		37,103			5,323
Net debt	$	1,100,811		$	980,736

The calculation of net debt to adjusted EBITDA is as follows:

	Trailing twelve months ended September 30,
(thousands of dollars)		2022			2021
Debt	$	1,137,914		$	986,059
Less: cash on hand		37,103			5,323
Net debt	$	1,100,811		$	980,736
Adjusted EBITDA 1 2		90,815			83,118
Net debt to adjusted EBITDA 2	12.1x			11.8x
1 Adjusted EBITDA is based on actuals for the twelve months preceding the balance sheet date.
2 Refer to "Non-IFRS measures" section above.

The interest coverage ratio is calculated as follows:

	Trailing twelve months ended September 30,
(thousands of dollars)		2022			2021
Adjusted EBITDA 1	$	90,815		$	83,118
Interest expense		44,472			40,372
Interest coverage ratio 1	2.0x			2.1x
1 Refer to "Non-IFRS measures" section above.

The following is the calculation of IFRS net asset value on a total and per unit basis at September 30, 2022 and December 31, 2021:

(thousands of dollars, except per unit amounts)	September 30, 2022			December 31, 2021
Equity	$	734,903		$	621,967
Class B LP units		22,991			26,426
Deferred unit liability		936			815
Deferred tax liability		7,743			2,750
IFRS net asset value	$	766,573		$	651,958
Diluted number of units outstanding (000s) 1		85,674			73,214
IFRS net asset value per unit	$	8.95		$	8.90
1 Represents the fully diluted number of units outstanding and includes outstanding REIT units, DUP units and Class B LP units.

 

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