Stockchase Opinions

Andrew Moffs Slate Office REIT SOT.UN-T DON'T BUY Sep 27, 2023

Disappointing. In Canada, US, and Ireland. Grew with too much leverage and got caught offside. Cut distribution twice. Cashflows under pressure. Small size, high debt profile. Avoid.

$1.330

Stock price when the opinion was issued

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COMMENT
The dividend is safe. He is cautious as to what expect from share price appreciation. They are interest sensitive. So good news baked in with language around interest rates. He thinks there is an increasing probability that interest rates may be cut. This is more of a yield play.
SELL
Cut distribution. High leverage, over 50%, which is too high for a REIT. Prefers to play the urban market and class A, not class B. Fundamentals are not what she's interested in. Leverage needs to come down significantly. Concern is how do they grow?
DON'T BUY

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.

DON'T BUY
Very competent managers, but he doesn't like this REIT because they are externally managed--hit with external management fees. They manage public and private fees; he prefers internally managed REITs.
DON'T BUY
He is not bull on the office space. They have been growing in sub-markets he is not keen on. 37% is in Atlantic Canada and he is not keen on their holdings.
BUY ON WEAKNESS

Unsure on future of office space demand. Management team of company well respected. Does not own stock in company. Well regarded within industry.

DON'T BUY
He's bearish on office REITs, given work-from-home. SOT operates in secondary markets, which can be a good business, but is capital intensive. SOT is doing a fine job, but offices face double-digit vacancies. Money needs to be spend on improving spaces, less to shareholders.
DON'T BUY

Challenged. Office sector is difficult. Secular change of using less office space. Portfolio consists of non-trophy buildings. Struggles to maintain occupancy. Distribution suspended.

DON'T BUY
Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research

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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