It has been a busy couple of weeks at Slate Office REIT (SOT-UN-T), with the announcements of two new trustees to reach a settlement with a group of unhappy shareholders, and the release of its Q4 and 2022 financial and operating results.

George Armoyan, executive chairman of privately held investment holding company G2S2 Capital Inc., and Jean-Charles Angers, the managing director of RBC Capital Markets Real Estate Group in Quebec from 2003 to 2022, have been appointed to the board effective immediately. 

Halifax-based G2S2 is the real estate investment trust’s largest unitholder, owning 15.56 per cent of its outstanding units.

Slate Asset Management, the REIT’s external manager, is the second-largest unitholder with 9.54 per cent of the outstanding units. Both organizations now have representation on the board.

G2S2 issued a public letter last October that criticized how management was operating the Toronto-headquartered REIT, claiming it had made shareholder interests secondary to those of Slate Asset Management.

Slate continues its strategic review

Shortly thereafter, Slate Office REIT announced it had created a special committee to conduct a comprehensive review of strategic alternatives to evaluate a range of options for the future of the business. 

The review is ongoing and the plan is to bring the two new board members up to speed on its progress. There’s no timeline for when it will conclude.

“We are very pleased to have reached this agreement with G2S2 and welcome Mr. Armoyan and Mr. Angers to the board of trustees,” Monty Baker, interim chair of the board, said in a media release.

“By finding common ground, we have avoided the distraction of a prolonged proxy contest and the REIT has gained two new independent trustees who bring significant experience and expertise to the board.

"This is a positive development for the REIT and its unitholders as we move forward in the spirit of collaboration.”

2022 and the outlook for 2023

Slate Office REIT owns interests in and operates a portfolio of more than 50 real estate assets in North America and Europe. 

“Despite headwinds challenging the broader office market, the REIT successfully executed a number of high-impact transactions throughout 2022 that have meaningfully advanced the quality of our real estate and the performance of our portfolio,” chief executive officer Steve Hodgson said to open the Feb. 22 conference call to discuss the Q4 and 2022 year-end results.

“While the sector is facing a number of macroeconomic challenges, this environment can create unique opportunities to capitalize on historic market dislocations and Slate Office REIT is well-positioned to take advantage of these opportunities.”

Hodgson conceded market disruptions and elevated levels of inflation continue to weigh on the valuations of publicly traded REITs, creating a divergence between asset values and unit price.

Slate Office REIT had a market cap of $358 million when its share price closed at $4.43 on Feb. 23, between its 52-week high of $5.30 and its respective low of $4.21.

2022 transactions

Slate Office REIT completed $378.7 million worth of transactions in 2022.

This includes the acquisition of: Yew Grove REIT plc, a portfolio of 23 properties in Ireland anchored by government, technology and life sciences tenants; and a modern office property in Chicago anchored by a 10-year lease with Pfizer, which occupied two-thirds of the building.

“From a management team level, we are not currently contemplating any new acquisitions,” said Hodgson.

“We would like to continue to advance our repositioning of the portfolio towards higher-quality, better tenants, longer-term lease deals, and better cash-yielding assets that have less below the line capital costs.

"But the strategy and the way forward will be determined through the strategic review.”

The trust also sold an older, higher-risk, two-tower, 405,407-square-foot office property at 95-105 Moatfield Dr. in Toronto for $97 million. That was a 12 per cent premium on the purchase price.

The REIT completed 563,290 square feet of total leasing in 2022 at a weighted average rental rate spread of 15.1 per cent, up from 6.5 per cent in 2021.

Operating and financial results

Slate Office REIT ended the year with $1.87 billion in assets, total debt of $1.15 billion (a 61.9 per cent loan-to-value ratio, up 2.2 per cent year-over-year) and portfolio occupancy of 81.1 per cent.

The occupancy rate was 83.8 per cent a year earlier and some of the difference can be attributed to SNC-Lavalin leaving 44,000 square feet behind as part of a phased vacancy at 195 The West Mall in Toronto.

Hodgson said the office building needs to be bifurcated to accommodate multiple tenants and the trust is also making aesthetic improvements. There’s been strong tenant interest in the property, he added.

For the year, Slate reported a $16.6 million loss, after showing a $46.6 million profit in 2021. Slate reported a decline of almost $88 million in the fair value of its investment properties during the year.

Net operating income (NOI) rose by 21.2 per cent year-over-year in Q4 2022. There was an increase in same property NOI of $500,000 and a net increase of $3.8 million from the previously mentioned acquisitions and dispositions. 

The NOI is supported by an average weighted lease term of 5.6 years, with government or high-quality credit tenants making up 66.3 per cent of the portfolio.

Slate Office REIT strengthened its balance sheet by refinancing more than $600 million of senior debt capacity over the year.