Today’s victim is Slate Office REIT (TSX: SOT.UN). I’ve written about them in the past.
I actually managed to find something using SEDAR “Plus” (let’s save my analysis of this for another post) and fetched out their declaration of trust. Via their Annual Information Form, here is the following snippet:
the REIT shall not incur or assume any indebtedness if, after giving effect to the incurrence or assumption of such indebtedness, the total indebtedness of the REIT would be more than 65% of GBV (including convertible debentures);
(FYI – GBV = Gross Book Value)
Let’s do some math.
In June 30, 2023 their assets were 1.826 billion. Their total debt was $1.166 billion. That’s about 64%.
So they’re hitting up against a debt wall.
This gross book value will surely decline as all REITs mark their books as a function of the government treasury bond rate – as the risk-free rate rises (and has it ever!) your asset values will decline.
Very shortly, Slate is going to be debt-locked unless if they take efforts to reduce their GBV. This can only come in the form of an equity offering (not going to happen when your units are trading at $1.52 a pop and a total market cap of $120 million), an extremely dilutive preferred share offering (George Armoyan to the rescue), or selling real estate assets.
The problem with selling your real estate assets is that you’re only likely to be able to sell in short notice the assets that are actually worth something, compared to the rest of the sub-par garbage you have in your (pun intended) asset slate. Not only that, but selling such assets might trigger the need to value your other assets accordingly (i.e. the cap ratio you were assuming on your books isn’t what you’re getting when you sell the asset!) which would then cause the GBV to debt ratio to increase even further.
In other words, CCAA could be in the cards here. I’m glad I walked away from this one. Twice!
Please do write a scathing post of the new SEDAR plus. For individual investors used to the old SEDAR, SEDAR plus is a total disaster. It is impossible to generate anything like the old easily browsable new filings. Gone are the days of quickly reviewing all filings of an issuer. How hard would it be to keep the old interface for individuals?
Speaking of George, he now owns over 10% of Morguard REIT, meaning him and Rai Sahi might be taking another RE entity private (ala Temple). Question Sacha, do the convertible debentures get a vote on a proposed acquisition? With the conversion price at $7.80, I can’t imagine many debenture holders convert. If they don’t get a vote, there are not many units outstanding to prevent a takeover by the parent, and Morguard REIT could be coming to an end soon
While I haven’t read the indenture directly most of them typically have a change of control provision that gives the holder a 30 day option to require the company to buy back the debentures at 100 or 101 on the dollar. But certainly not a vote on any proposals.
Slate Asset Management is getting in the game, disclosing it bought 82k units in the past three days. A higher unit price makes the recapitalization cheaper to execute!
Perhaps this is worthy of a separate post, but Slate reported their quarter. Suspending the distribution entirely, and pleading with unitholders (with a threat of CCAA no doubt) to allow the 65% debt covenant to be lifted and reassuringly “If the special resolution is passed, the Board intends to adopt operating guidelines, pursuant to which the Board will determine the appropriate financial leverage of the REIT.”
And don’t forget the firesale, err, Portfolio Realignment Plan!