Home > News > Slate Office REIT Reports Third Quarter 2018 Results
Tuesday, November 6, 2018

Slate Office REIT Reports Third Quarter 2018 Results

TORONTO, ON - Slate Office REIT (TSX: SOT.UN) (the "REIT") announced today its financial results for the three months ended September 30, 2018. Senior management is hosting a conference call at 9:00 a.m. ET on Tuesday, November 6, 2018 to discuss the results and ongoing business initiatives of the REIT. The dial-in details can be found below.

“In the third quarter, the REIT continued to execute on its capital recycling program,” said Scott Antoniak, the REIT’s Chief Executive Officer. “The acquisition of 120 South LaSalle is one of the many ways the REIT is enhancing its portfolio via acquisition or investment, now owning over 1.0 million square feet of office space in Chicago’s downtown office market. By strategically recycling capital into new opportunities, the REIT is well positioned to continue to provide unitholders with meaningful total returns.”

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

Third Quarter 2018 Highlights

  • The REIT completed 258,248 square feet of leasing, comprised of 118,135 square feet of renewals and 140,113 square feet of new lease deals.

  • Leasing spreads in the quarter were 6.0% above expiring or in-place rents.

  • Occupancy at September 30, 2018 increased to 87.1% from 86.8% at June 30, 2018.

  • The weighted average lease term was 5.7 years at September 30, 2018 compared to 5.5 years at June 30, 2018.

  • Same-property net operating income (“NOI”) was up 13.0% in the third quarter of 2018 compared to the same period in the prior year.

  • The REIT completed three new leases totaling 46,797 square feet at the Sheridan Exchange during the quarter in addition to a new 5,797 square foot lease executed subsequent to the third quarter, re-stabilizing this property after the loss of a significant tenant in 2017.

  • Net operating income was $26.0 million, an increase of $7.0 million compared to Q3 2017.

  • Rental revenue was $54.5 million, an increase of $13.3 million compared to Q3 2017.

  • Core funds from operations ("Core FFO") was $15.7 million or $0.21 per unit, an increase of $2.7 million compared to Q3 2017.

  • Adjusted funds from operations ("AFFO") was $12.8 million or $0.17 per unit, an increase of $2.1 million and consistent on a per unit basis compared to Q3 2017.

Capital Recycling

  • On July 13, 2018, the REIT disposed of 135 Queens Plate Drive in Etobicoke, ON for $16.7 million. The sale price represents a levered IRR of 19.7% and was approximately 10% in excess of the REIT’s December 31, 2017 IFRS fair value.

  • On August 30, 2018, the REIT completed the previously announced acquisition of 120 South LaSalle Street in Chicago, IL for U.S.$155.5 million (U.S.$237 per square foot). Since acquisition, the REIT secured 6,964 square feet of new lease deals at the property, which commence subsequent to the third quarter.

  • On September 28, 2018, the REIT disposed of 139 Water Street and the Water Street properties in St. John's, NL for $17.3 million. The sale price was approximately 40% in excess of the REIT's December 31, 2017 IFRS fair value.

Summary of Q3 2018 Results

 

Three months ended September 30,

(thousands of dollars, except per unit amounts)

            2018

            2017

Change %

Rental revenue

$

54,499

 

$

41,208

 

32.3

%

Net operating income ("NOI")

25,999

 

19,040

 

36.5

%

Net income

17,697

 

23,607

 

(25.0

)%

 

 

 

 

Same-property NOI

21,084

 

18,666

 

13.0

%

 

 

 

 

Weighted average diluted number of trust units (000s)

75,203

 

62,231

 

20.8

%

Funds from operations ("FFO")

15,071

 

12,372

 

21.8

%

FFO per unit

0.20

 

0.20

 

%

FFO payout ratio

93.5

%

94.2

%

(0.7

)%

Core FFO

15,659

 

12,923

 

21.2

%

Core FFO per unit

0.21

 

0.21

 

%

Core FFO payout ratio

90.0

%

90.2

%

(0.2

)%

AFFO

12,755

 

10,663

 

19.6

%

AFFO per unit

0.17

 

0.17

 

%

AFFO payout ratio

110.4

%

109.3

%

1.1

%

 

 

 

 

 

 

 

September 30,

 

                 2018

                  2017

Change %

Total assets

$

1,874,600

 

$

1,353,127

 

38.5

%

Total debt

1,194,428

 

793,765

 

50.5

%

Portfolio occupancy (1)

87.1

%

85.9

%

1.2

%

Loan to value ratio

63.8

%

58.7

%

5.1

%

Net debt to adjusted EBITDA leverage (2)

13.6x

12.2x

1.4x

Interest coverage ratio (2)

2.4x

2.8x

(0.4x)

(1) Including redevelopment properties.
(2) EBITDA is calculated using trailing twelve month actuals, as calculated below.

Conference Call and Webcast
Senior management will host a live conference call at 9:00 a.m. ET on Tuesday, November 6, 2018 to discuss the results and ongoing business initiatives of the REIT.

The conference call can be accessed by dialing (647) 427-2311 or 1 (866) 521-4909. Additionally, the conference call will be available via simultaneous audio found at http://www.snwebcastcenter.com/webcast/slate/2018/1106. A replay will be accessible until November 20, 2018 via the REIT's website or by dialing (416) 621-4642 or 1 (800) 585-8367 (access code 9766088) approximately two hours after the live event.

About Slate Office REIT (TSX: SOT.UN)
Slate Office REIT is an open-ended real estate investment trust. The REIT's portfolio currently comprises 43 strategic and well-located real estate assets located primarily across Canada's major population centres including two downtown assets in Chicago, Illinois. The REIT is focused on maximizing value through internal organic rental and occupancy growth and strategic acquisitions. Visit slateofficereit.com to learn more.

About Slate Asset Management L.P.
Slate Asset Management L.P. is a leading real estate investment platform with over $6.0 billion in assets under management. Slate is a value-oriented manager and a significant sponsor of all of its private and publicly-traded investment vehicles, which are tailored to the unique goals and objectives of its investors. The firm's careful and selective investment approach creates long-term value with an emphasis on capital preservation and outsized returns. Slate is supported by exceptional people, flexible capital and a proven ability 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 statements herein may be forward-looking statements within the meaning of applicable securities laws. These statements reflect management’s expectations regarding objectives, plans, goals, strategies, future growth, results of operations, performance and business prospects and opportunities of the REIT including expectations for the current financial year, and include, but are not limited to, statements with respect to management’s beliefs, plans, estimates and intentions, and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. Statements that contain words such as “could”, “should”, “would”, “anticipate”, “expect”, “believe”, “plan”, “intend”, “will”, “may”, “might” and similar expressions or statements relating to matters that are not historical facts constitute forward-looking statements.

These forward-looking statements are not guarantees of future events or performance and, by their nature, are based on the REIT’s current estimates and assumptions, which are subject to significant risks and uncertainties. Forward-looking statements contained herein are made as the date hereof and accordingly are subject to change after such date. The REIT does not undertake to update any forward-looking statements that are contained herein except as expressly required by applicable securities laws.

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, 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 and IFRIC 21 property tax adjustments, 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 adjusted for certain items including leasing costs amortized to revenue, change in fair value of properties, change in fair value of financial instruments, disposition costs, depreciation of hotel asset, deferred income taxes, IFRIC 21 property tax adjustments, 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.

  • 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 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.
 
For Further Information
Investor Relations
Tel: +1 416 644 4264
Slate Office REIT
E-mail: ir@slateam.com

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,

 

                    2018

                     2017

Rental revenue

$

54,499

 

$

41,208

 

Property operating expenses

(26,825

)

(21,629

)

IFRIC 21 property tax adjustments

(1,151

)

 

Straight-line rents and other changes

(524

)

(539

)

NOI

$

25,999

 

$

19,040

 

 

 

 

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)

                     2018

                     2017

Net income

$

17,697

 

$

23,607

 

Add (deduct):

 

 

Leasing costs amortized to revenue

830

 

384

 

Change in fair value of properties

(4,058

)

(12,070

)

Change in fair value of financial instruments

(1,784

)

(969

)

Disposition costs

1,272

 

13

 

Depreciation of hotel asset

229

 

204

 

Deferred income tax recovery

(435

)

 

IFRIC 21 property tax adjustment(1)

(1,151

)

 

Change in fair value of Class B LP units

1,480

 

212

 

Distributions to Class B unitholders

991

 

991

 

FFO (1)

$

15,071

 

$

12,372

 

Finance income on finance lease receivable

(937

)

(973

)

Finance lease payments received

1,525

 

1,524

 

Core-FFO (1)

$

15,659

 

$

12,923

 

Amortization of deferred transaction costs

793

 

624

 

Amortization of debt mark-to-market adjustments

(100

)

(151

)

Amortization of straight-line rent

(1,353

)

(923

)

Interest rate subsidy

108

 

108

 

Guaranteed income supplements

300

 

40

 

Normalized direct leasing and capital costs

(2,652

)

(1,958

)

AFFO (1)

$

12,755

 

$

10,663

 

 

 

 

Weighted average number of diluted units outstanding (000s)

75,203

 

62,231

 

FFO per unit (1)

$

0.20

 

$

0.20

 

Core-FFO per unit (1)

0.21

 

0.21

 

AFFO per unit (1)

0.17

 

0.17

 

FFO payout ratio (1)

93.5

%

94.2

%

Core-FFO payout ratio (1)

90.0

%

90.2

%

AFFO payout ratio (1)

110.4

%

109.3

%

(1)  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,

 

                    2018

                        2017

Cash flow from operating activities

$

15,360

 

$

5,924

 

Add (deduct):

 

 

Leasing costs amortized to revenue

830

 

384

 

Disposition costs

1,272

 

13

 

Working capital items

(3,212

)

4,994

 

Straight-line rent and other changes

524

 

539

 

Interest and other finance costs

(11,492

)

(7,042

)

Interest paid

10,798

 

6,569

 

Distributions paid to Class B unitholders

991

 

991

 

FFO(1)

$

15,071

 

$

12,372

 

Finance income on finance lease receivable

(937

)

(973

)

Finance lease payments received

1,525

 

1,524

 

Core-FFO(1)

$

15,659

 

$

12,923

 

Amortization of deferred transaction costs

793

 

624

 

Amortization of debt mark-to-market adjustments

(100

)

(151

)

Amortization of straight-line rent

(1,353

)

(923

)

Interest rate subsidy

108

 

108

 

Guaranteed income supplements

300

 

40

 

Normalized direct leasing and capital costs

(2,652

)

(1,958

)

AFFO (1)

$

12,755

 

$

10,663

 

(1) Refer to "Non-IFRS measures" section above.
 

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

 

Trailing twelve months ended

 

September 30,

 

                        2018

                       2017

Net income

$

63,367

 

$

50,102

 

Straight line rent and other changes

(637

)

(1,880

)

Interest income

(172

)

(77

)

Interest and finance costs

37,688

 

23,352

 

Change in fair value of properties

(10,581

)

(10,930

)

Change in fair value of financial instruments

(7,201

)

(129

)

Distributions to Class B shareholders

3,964

 

3,964

 

Disposition costs

1,326

 

247

 

Depreciation of hotel asset

894

 

746

 

Change in fair value of Class B LP units

(740

)

(2,008

)

Deferred income tax recovery

(920

)

 

Adjusted EBITDA (1)

$

86,988

 

$

63,387

 

(1)  Refer to "Non-IFRS measures" section above.
 

The calculation of net debt is as follows:

 

Three months ended September 30,

 

                       2018

                         2017

Debt, non-current

$

1,002,763

 

$

599,509

 

Debt, current

191,665

 

194,256

 

Debt

$

1,194,428

 

$

793,765

 

Less: cash on hand

7,903

 

20,787

 

Net debt

$

1,186,525

 

$

772,978

 

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

 

Trailing twelve months ended

 

September 30,

 

                      2018

                     2017

Net debt

$

1,186,525

 

$

772,978

 

Adjusted EBITDA (2)

86,988

 

63,387

 

Net debt to Adjusted EBITDA (1)

13.6x

12.2x

(1)  Refer to "Non-IFRS measures" section above.
(2)  Adjusted EBITDA is based on actuals for the twelve months preceding the balance sheet date.

The interest coverage ratio is calculated as follows:

 

Trailing twelve months ended

 

September 30,

 

                       2018

                        2017

Adjusted EBITDA

$

86,988

 

$

63,387

 

Cash interest paid

35,574

 

22,249

 

Interest coverage ratio (1)

2.4x

2.8x

(1)  Refer to "Non-IFRS measures" section above.