Slate Office REIT Reports First Quarter 2018 Results

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Slate Office REIT Reports First Quarter 2018 Results

Wednesday, May 9, 2018

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TORONTO

Slate Office REIT (TSX: SOT.UN) (the "REIT") announced today its financial results for the three months ended March 31, 2018. Senior management is hosting a conference call at 9:00 a.m. ET on Wednesday, May 9, 2018 to discuss the results and ongoing business initiatives of the REIT. The dial-in details can be found below.

“Our strategy remains simple and is transferable across markets,” said Scott Antoniak, the REIT’s Chief Executive Officer. “We acquire well located office assets at a discount to replacement cost, lever the Slate Asset Management L.P. platform to provide best-in-class, hands-on strategic management and create value through increased occupancy, higher rents, extended lease term and reduced risk.”

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

First Quarter 2018 Highlights

  • The REIT completed a total of 225,233 square feet of leasing, comprised of 170,903 square feet of renewals and 54,330 square feet of new lease deals.
  • Leasing spreads in the quarter were 14.0% above expiring or building in-place rents and in-place occupancy increased to 85.9% compared to 85.8% as at Q4 2017.
  • Same property net operating income (“NOI”) was up 5.2% in the first quarter of 2018 compared to the same period in the prior year.
  • The Maritime Centre in Halifax, Nova Scotia continues to see strong leasing demand. After a competitive tender process, the REIT was able to renew the Province of Nova Scotia for 81,300 square feet on a long-term basis.
  • The REIT has completed $296.6 million of off-market acquisitions in the first quarter of 2018 including 20 South Clark, the REIT’s first U.S. acquisition, and the 7 asset portfolio in the Greater Toronto Area and Atlantic Canada.
  • Subsequent to quarter end, the REIT entered into a definitive agreement to dispose of 135 Queen’s Plate in Toronto, Ontario for $16.7 million, which was approximately 10% higher than the REIT's IFRS book value at December 31, 2017.
  • During the quarter, the REIT completed a $103.5 million equity financing and a $28.8 million convertible debenture offering, the proceeds were used, in part, to finance the aforementioned acquisitions.
  • Net income was $7.9 million, a decrease of $0.5 million compared to Q1 2017.
  • Rental revenue was $44.3 million, an increase of $1.9 million compared to Q4 2017.
  • Adjusted funds from operations ("AFFO") was $10.1 million an increase of $0.6 million compared to Q4 2017.
  • Core funds from operations ("Core FFO") was $11.9 million, an increase of $0.1 million compared to Q4 2017.

Summary of Q1 2018 Results

  Three months ended March 31,
(thousands of dollars, except per unit amounts) 2018   2017   Change %
Rental revenue $ 44,289 $ 32,318 37.0 %
Net operating income ("NOI") 20,112 14,175 41.9 %
Net income 7,904 8,442 (6.4) %
 
Same-property NOI 14,961 14,218 5.2 %
 
Weighted average diluted number of trust units (000s) 62,874 46,101 36.4 %
Funds from operations ("FFO") 11,292 9,495 18.9 %
FFO per unit 0.18 0.21 (14.3) %
FFO payout ratio 110.4 % 91.0 % 19.4 %
Core FFO 11,862 10,030 18.3 %
Core FFO per unit 0.19 0.22 (13.6) %
Core FFO payout ratio 105.1 % 86.1 % 19.0 %
AFFO 10,108 8,842 14.3 %
AFFO per unit 0.16 0.19 (15.8) %
AFFO payout ratio 123.4 % 97.7 % 25.7 %
 

December 31,

 

2018 2017 Change %
Total assets $ 1,660,947 $ 1,164,104 42.7 %
Total debt 1,003,951 621,896 61.4 %
Portfolio occupancy (1) 85.9 % 84.0 % 1.9 %
Loan to value ratio 60.5 % 58.3 % 2.2 %
Net debt to adjusted EBITDA leverage

12.4x

10.4x 2.0x
Interest coverage ratio

2.5X

3.0x

(0.5x)

(1) Including redevelopment properties.

Conference Call and Webcast

Senior management will host a live conference call at 9:00 a.m. ET on Wednesday, May 9, 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/2018/0509. A replay will be accessible until May 23, 2018 via the REIT's website or by dialing (416) 621-4642 or 1 (800) 585-8367 (access code 1728818) 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 45 strategic and well-located real estate assets located primarily across Canada's major population centres including one downtown asset 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 $5.5 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, IFRCI 21 property tax adjustments, 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 and adjusting income received from the Data Centre to cash received as opposed to finance income recorded for accounting purposes.
  • 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.

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 March 31,
2018   2017
Rental revenue $ 44,289 $ 32,318
Property operating expenses (23,533) (17,693)
IFRIC 21 property tax adjustments (528)
Straight-line rents and other changes (116) (450)
NOI $ 20,112 $ 14,175
 
The reconciliation of net income to FFO, Core-FFO and AFFO is as follows:
 
Three months ended December 31,
(thousands of dollars, except per unit amounts) 2018 2017
Net income $ 7,904 $ 8,442
Add (deduct):
Leasing costs amortized to revenue 408 222
Change in fair value of properties 9,230 (227)
Change in fair value of financial instruments (5,048) (862)
Disposition costs 54
Depreciation of hotel asset 222 189
Deferred income tax recovery (790)
IFRIC 21 property tax adjustment(1) (528)
Change in fair value of Class B LP units (2,748) 740
Distributions to Class B unitholders 991 991
Subscription receipts equivalent amount (1) 1,597
FFO (1) $ 11,292 $ 9,495
Finance income on finance lease receivable (955) (990)
Finance lease payments received 1,525 1,525
Core-FFO (1) $ 11,862 $ 10,030
Amortization of deferred transaction costs 795 331
Amortization of debt mark-to-market adjustments (150) (126)
Amortization of straight-line rent (524) (672)
Interest rate subsidy 108 108
Guaranteed income supplements 40 634
Normalized direct leasing and capital costs (2,023) (1,463)
AFFO (1) $ 10,108 $ 8,842
 
Weighted average number of diluted units outstanding (000s) 62,874 46,101
FFO per unit (1) $ 0.18 $ 0.21
Core-FFO per unit (1) 0.19 0.22
AFFO per unit (1) 0.16 0.19
FFO payout ratio (1) 110.4 % 91.0 %
Core-FFO payout ratio (1) 105.1 % 86.1 %
AFFO payout ratio (1) 123.4 % 97.7 %

(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 March 31,
2018   2017
Cash flow from operating activities $ 7,497 $ 7,846
Add (deduct):
Leasing costs amortized to revenue 408 222
Disposition costs 54
Subscription receipts equivalent amount (1) 1,597
Working capital items 1,274 191
Straight-line rent and other changes 116 450
Interest and other finance costs (8,728 ) (5,210 )
Interest paid 8,083 5,005
Distributions paid to Class B unitholders 991 991
FFO (1) $ 11,292 $ 9,495
Finance income on finance lease receivable (955 ) (990 )
Finance lease payments received 1,525 1,525
Core-FFO (1) $ 11,862 $ 10,030
Amortization of deferred transaction costs 795 331
Amortization of debt mark-to-market adjustments (150 ) (126 )
Amortization of straight-line rent (524 ) (672 )
Interest rate subsidy 108 108
Guaranteed income supplements 40 634
Normalized direct leasing and capital costs (2,023 ) (1,463 )
AFFO (1) $ 10,108 $ 8,842

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

The calculation of adjusted EBITDA is as follows:

Three months ended March 31,
2018   2017
Net income $ 7,904 $ 8,442
Finance income and finance lease receivable (955 ) (990 )
Net operating income from the Data Centre 1,525 1,525
Interest income (37 ) (17 )
Interest and finance costs 10,325 5,210
Change in fair value of properties 9,230 (227 )
IFRIC 21 property tax adjustment (528 )
Change in fair value of financial instruments (5,048 ) (862 )
Distributions to Class B shareholders 991 991
Disposition costs 54
Depreciation of hotel asset 222 189
Change in fair value of Class B LP units (2,748 ) 740
Deferred income tax recovery (790 )
Adjusted EBITDA (1) $ 20,145 $ 15,001

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

The calculation of net debt is as follows:

Three months ended March 31,
2018   2017
Debt, non-current $ 992,034 $ 477,098
Debt, current 11,917 144,798
Debt $ 1,003,951 $ 621,896
Less: cash on hand 3,846 2,504
Net debt $ 1,000,105 $ 619,392

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

Three months ended March 31,

2018       2017
Net debt $ 1,000,105 $ 619,392
Adjusted EBITDA (2) 80,580 60,004
Net debt to Adjusted EBITDA (1)

12.4x

10.4x

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

(2) Adjusted EBITDA for the three months is based on actuals annualized, using the following formula: (Adjusted EBITDA for period / No. quarters in period x 4).

The interest coverage ratio is calculated as follows:

Three months ended March 31,
2018   2017
Adjusted EBITDA $ 20,145 $ 15,001
Cash interest paid 8,083 5,005
Interest coverage ratio (1) 2.5x 3.0x

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

Contact:

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

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