Slate Office REIT: An Over 8% Distribution and a More Than 50% Discount

Slate Office REIT (

TSX:SOT.UN, Financial) is a Canada-based unincorporated, open-ended real estate investment trust. The REIT is an owner and operator of office real estate. Its portfolio consists of approximately 32 real estate assets across Canada and includes two assets in downtown Chicago. The REIT’s 61% portfolio is comprised of government or credit-rated tenants. The REIT operates in Canada and the United States. It has also recently acquired properties in Ireland with a stated intention of using it as a beachhead for European expansion.

The following is a summary of Slate Office REIT.

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I think there is an opportunity to invest in Slate Office REIT as it is trading below its net asset value. Canadian REITs follow IFRS accounting rules, so tangible book value reflects the company’s estimation of net asset value (which on Sept. 30, was estimated as $8.84 per unit). While this gap may take several years to close.

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The REIT pays a very good distribution of 8.14%, so investors are getting paid very well to wait. Office REITs are currently an out-of-favor asset class. That is par for the course in value investing. You cannot do well by investing in what is popular. The following chart shows Slate Office’s distribution per share as well as its operating cash flow per share, fund flow from operations per share, free cash flow per share as well as share price over the past three years.

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Slate has 61% of the portfolio rented to government or credit-rated tenants at the weighted average lease term and has long-term, contractual cash flows with a weighted average remaining lease term of 5.3 years. The current occupancy is 83.3%, so there is upside as the economy continues to reopen and employees come back to office work.

Conclusion

Slate Office REIT appears to be a compelling opportunity if the work-from-home trend does not persist. It is likely that competitive forces will eventually compel businesses and employees to start coming back to the office. High-performance teams are difficult to sustain with a remote workforce. You just cannot have the same degree of innovation and teamwork remotely as a co-located team. Slate office is currently selling at a deep discount. In my opinion, Intrepid investors who can hold this scrip for a few years will realize double-digit total returns as pricing power returns to this sector.

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