Slate Office REIT defaults on debt, complicating the troubled property owner’s restructuring plans

Slate Office REIT has defaulted on $158-million worth of debt, complicating management’s restructuring plan that involved selling off properties to generate cash for debt repayment.

To deal with its $1.175-billion debt load, including mortgages, the company announced plans last year to sell 40 per cent of its assets.

Although Slate owned office properties in Canada and the United States, it derived the bulk of its operating income from the Greater Toronto Area and Atlantic Canada.

Rental demand for its properties has not returned to prepandemic levels, and interest rates remain elevated in order to combat inflation.

While many real estate owners are wrestling with the same trends, Slate has felt them acutely because it operates in the office sector, which has the highest vacancy rates within commercial real estate. While the office vacancy rate in Canada is currently 18.4 per cent, according to consultancy CBRE, Slate’s rate is higher because it owns a number of Class B real estate assets, meaning they are not in prime downtown cores and are more likely to be located in suburban areas. The company’s first-quarter occupancy rate was 77.7 per cent.

As well, Slate has a sizable exposure to variable-rate mortgages, which means its interest costs continue to eat up cash flow. The Bank of Canada has only just started cutting its benchmark rate, and the U.S. Federal Reserve keeps putting off its own cuts. Slate’s weighted average interest rate on its mortgages is 6.3 per cent annually.

To save cash, Slate cut its monthly distribution by 70 per cent in early 2023, and later halted it altogether in addition to putting assets up for sale.

However, the company could not move quickly enough and on Tuesday Slate announced that it will not make cash interest payments on three series of convertible debentures, which are a form of debt.

In a statement, State said it “continues to make progress on its previously announced portfolio realignment plan” and that it is working with its senior lenders to “determine a mutually acceptable path forward” with regard to the debt owned to them.

“Notwithstanding those ongoing discussions, its senior lenders have provided notices of default, which currently restrict the REIT from making further payments of accrued interest in respect of its outstanding debentures,” Slate said in its statement.

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Canadian office property owners of all stripes have been wrestling with rising vacancies over the past few years. True North Commercial REIT, which predominantly operates in Ottawa and the Greater Toronto Area and also owns Class B properties, has halted its distribution altogether and chosen instead to buy back its shares to help close their discount to the REIT’s net asset value.

Even Allied Properties REIT, which owns historic properties in downtown cores in Montreal and Toronto and has historically traded at a premium valuation within the sector, is seeing lower demand for its office space.

However, Slate’s publicly traded units have been battered and are now down 94 per cent over the past five years because investors have worried that a debt restructuring could wipe out their equity value. Slate did not return a request for comment.