Slate Office REIT (TSX: SOT.UN) cut its cash distribution by almost a half from CAD$0.75 to CAD$0.40 per unit. This frees up CAD$26 million of capital annually.
Initially, Slate Office plans to use the capital to reduce its debt levels. This will increase the financial flexibility for future investments.
Quick Business Overview
Slate Office recently generated income from 41 office properties, had a portfolio occupancy of 87.6%, and had a weighted average lease expiry of 5.8 years. These should help the REIT generate stable cash flow over the next 5 years.
The REIT’s recent interest coverage worsened to 2.3x compared to 2.7x at the end of 2017. Additionally, its recent weighted average debt interest rate was 4.3%. The rate had edged higher every quarter since 3.6% from a year ago.
The Dividend is Much Safer Now
Slate Office’s 2019 FFO payout ratio will be much more sustainable at ~64% based on 2018 FFO per unit. The big buffer is needed because 2019’s FFO is estimated to decline due to the reduced interests in 6 Greater Toronto Area assets. The FFO per unit that will be generated during Q2-Q4 will give a sense of the FFO generation power of Slate Office’s assets.
Interested investors can buy Slate Office REIT. It can potentially trade in the CAD$6.80-7.50 range over the next year for 12-24% upside. In the meantime, you can get a yield of almost 6.6%.
Currently, it’s better to wait 3 quarters to get a clearer picture of the REIT’s cash flow generation and its progress on debt reduction before considering a purchase. Alternatively, wait for consolidation in the stock before thinking of buying.
Unfortunately , I have maxed the word limit for this excerpt. But you can learn more about the idea, such as valuation and risks, in the full Seeking Alpha article here: Slate Office REIT: The Dividend Cut Can Be A Blessing In Disguise
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Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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