Slate Office REIT is a purely North American office REIT. It is an open real estate investment fund. The asset portfolio consists of high quality downtown and suburban office properties with a diversified footprint that includes 34 properties (consisting of 33 office properties and 1 non-office property) in major Canada’s population centers and two assets in downtown Chicago, Illinois . Its properties extend over 6.9 million square meters in area. Slate Office’s net worth is $ 6.5 billion.

Slate Office REIT owns a portfolio of quality goods in key office markets where millions of people come to work every day. Its strategy is to own a portfolio of institutional grade assets in major office markets at discounted valuations. Slate Office REIT reports NOI from four geographic locations – Atlantic (~ 32% of total 2020 NOI), Ontario (~ 39%), West (~ 6%), and United States (23%). The REIT is managed by Slate Asset Management LP, which owns 9.5% of it.

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Investment data

Sales growth and market exposure

The majority of Slate Office REIT’s income comes from rents from its portfolio of office properties. The different revenue components are basic rent (~ 53% of 2020 revenue), reimbursement of operating expenses (32%), tax refund (16%), hotel refund (~ 2%) and linear adjustments and other (-3)%).

Instead of focusing on larger cities, Slate Office focuses on downtown and the suburbs of Canada and the United States. It manages high quality assets in target markets with a strong operational history. Occupancy rates and rents in these markets tend to be less volatile. All of these factors have resulted in a lower cost and a stable source of income for Slate Office.

The REIT’s five largest tenants are large corporations such as CBIC, BELL, SNC-Lavalin, the Government of Canada, and Thales. The weighted average rental period is 5.4 years.

The REIT has a proven track record of strong performance and a long history of sourcing attractive deals. It acquires assets at a discount to replacement costs with rents below market prices, then sells them and invests funds in attractive new opportunities. Slate Office REIT’s 2020 rental income has been between 96% and 98% per month in cash since April 2020. The portfolio saw an organic increase in rental rates with an average rental rate increase of 15.2% for renewals and 15.1% for new deals.

Slate Office is in a good position to achieve solid organic growth due to strong leasing demand in its core markets and strategic capital recycling initiatives. The REIT’s strategy of buying assets at a significant discount to their prime and replacement value and maintaining stable operating fundamentals should continue to deliver superior risk-adjusted returns going forward. A recovery in demand for new office rents is forecast for the second half of 2021. The utilization is between 90% and 92% and is around 84% today.

Distributions

Slate Office REIT cut its dividend by nearly 50% in 2019. However, his stable cash flow helped him pay an average dividend of 10% to shareholders in 2020, which was well covered with a payout ratio of 67.6%. In addition, 113,000 units were repurchased last year at a total cost of $ 0.4 million.

Slate Office REIT has a proven record of generating high double-digit returns. A proactive asset management strategy has produced strong operational results.

The REIT’s portfolio of office properties offers diversification, cash flow generation and the ability to increase net asset value per unit. The properties are located in geographically diversified markets in Canada and the United States. In addition, 60% of the REIT portfolio consists of government and creditworthy tenants, which add more stability to cash flows. Additionally, in 2020, 74% of Slate Office’s portfolio was externally valued, further confirming the REIT’s value.

In the long term, Slate Office should benefit from strong organic growth driven upwards by leasing and market rents. The REIT is characterized by a constant operational performance in FFO and a strong balance sheet.

Management believes that Slate Office REIT has the potential to expand into scalable markets while maintaining an active pipeline in Canada. With a robust pipeline of assets, Slate Office REIT is very well positioned for the future.

Historical earnings from Slate Office (SOT.UN)
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Note that REITs pay a distribution, not a dividend. Be aware of the tax differences.

competition

Unlike its peers, Slate Office’s focus on office real estate is a key differentiator. The REIT believes that around 75% of office inventory is often overlooked by large institutional investors, which is an opportunity for it.

Slate Office competes with many of the top Canadian REITs including Crombie REIT, BTB REIT, Dream Hard Asset Alternatives Trust REIT, Automotive REIT, etc. in the diversified REIT segment.

Bottom line

As a leading pure North American REIT office, Slate Office should benefit from strong demand in its core markets. After a successful vaccination campaign and as soon as the coronavirus situation is under control, the offices will reopen and Slate Office will get back on its feet. Well-located, high quality office properties should continue to contribute to overall shareholder returns through growth in net asset value and attractive monthly returns.

SOt.UN against TSX against SP500
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Slate Office (SOT.UN) historical PE
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