Pat McKeough recently replied to a member of his Inner Circle asking for an opinion on Slate Office REIT. This trust just doubled its cash flow and revenue with a key acquisition, says Pat.
Q: Can I have your opinion of Slate Office REIT? Thanks.
A: SLATE OFFICE REIT (symbol SOT.UN on Toronto; www.slateofficereit.com) owns 34 office properties. In all, these buildings contain 44 million square feet. Atlantic Canada represents 49% of that leasable area, followed by Ontario (37%) and Western Canada (14%).
The REIT first sold units to the public at $10.00 each on August 27, 2012. Slate changed its name from FAM REIT in March 2015.
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Due to acquisitions of new properties, Slate’s revenue rose 207.4%, from $28.5 million in 2013 to $87.5 million in 2015. Cash flow soared 200.2%, from $7.6 million to $22.9 million. Slate sold new units to help pay for its acquisitions. As a result, cash flow per unit fell 35.4%, from $0.79 in 2013 to $0.51 in 2014. Cash flow then rebounded to $0.82 a unit in 2015.
The biggest of Slate’s recent acquisitions was its October 2015 purchase of Fortis Properties Corp.—the commercial real estate business of Fortis Inc. Its properties—located in Newfoundland and Labrador, New Brunswick and Nova Scotia—include 10 office buildings, one mixed-use office complex and three shopping centres. In all, they comprise 2.8 million square feet of space. Slate paid $304.0 million for the portfolio, which includes Cabot Place and TD Place in St. John’s, Newfoundland.
To help fund the Fortis purchase, the REIT formed a partnership with a Canadian institutional real estate fund. Under the deal, that partner acquired a 90% stake in three of the properties, while Slate took a 10% interest.
On December 31, 2015, the REIT increased its stake in the three properties to 30%. It paid $28.8 million for the additional interest.
As part of Slate’s new focus on office buildings, it sold most of its industrial and retail properties in 2015 for $40.6 million.
In the three months ended March 31, 2016, the purchase of the Fortis properties increased the REIT’s revenue by 95.8%, to $27.6 million from $14.1 million a year earlier. Overall, cash flow jumped 119.8%, to $7.3 million from $3.3 million; cash flow per unit rose 23.5%, to $0.21 from $0.17, on more units outstanding.
The REIT pays monthly distributions of $0.0625 a unit; the annual rate of $0.75 yields a high 9.3%. In the latest quarter, distributions accounted for 90.3% of its cash flow. If you adjust for units issued under its distribution reinvestment plan (DRIP), the payout ratio falls to 85.7%.
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What does your “HOLD” rating mean for Slate Office Reit mean.Yield using to much cash?
Slate’s high exposure to maritimes is a risk. On the other hand, its avoided the meltdown in Alberta.
I still prefer RioCan. It continues to think ahead in terms of its holdings and its concentration on important urban markets in this Country/