Opinions
Derek Warren
Slate Office REIT
SOT.UN-T
WATCH
Jul 08, 2016
Stock price when the opinion was issued
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A small Canadian office focused REIT in North America managed by the Slate Group. They announced a big distribution cut to re-invest the money into the portfolio. He thinks this is a chronic issue in the space and thinks they did the right thing. From here the downside is relatively protected. The discount to NAV can close in the next two years, but he is not sure what the catalyst would be. He would stay on the sidelines.
It is not looking good, considering more than $900M in debt and cash flow of only $37M in the last 12 months. Interest expenses were $73M, nearly twice cash flow. It does of course have assets, but it is not a seller's market right now, especially in commercial real estate. It sold $41M of assets in the first quarter, but this may not be enough. Some financial covenants were recently waived. Bloomberg default risk is 14.6%. A company sale of course is possible, but otherwise the convertibles might need to be dealt with by issuing stock and causing massive dilution. We would not really expect a turn here.
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He likes the Slate team which are doing a lot of really interesting things across the board. This is more secondary office, suburban office buildings. It will be an interesting vehicle in the future, but we are not there yet, as he expects more pressure of people leaving older buildings in the suburbs and coming towards downtown cores. There will be a rebound at some point, and that is what they are going to profit from. These guys are masters at repositioning, and he is looking for them to dip their toes into Calgary, while it is cheap, and that is when you really want to take advantage of this REIT.