The interim chief executive officer at Slate Office REIT SOT-UN-T is determined to get ahead of an expected flood of distressed office building sales.
Earlier this month, Brady Welch put $120-million worth of properties up for sale – roughly 10 per cent of the company’s portfolio. The REIT also sold a two-tower complex in Mississauga for $25.6-million.
Slate, like many commercial real estate owners, is scrambling to pay down debt taken on when interest rates were far lower and office buildings far fuller. The Toronto-based REIT owes lenders a total of $1.2-billion.
“We are trying to be a first mover in those things,” Mr. Welch said on a Feb. 16 conference call. “I’m not trying to say that it’s the most robust market to sell assets. We’re realistic on where we are, but I think we want to be ahead of it and move forward.”
The price of Slate REIT’s units fell by 81 per cent over the past year. In the face of serious headwinds, Mr. Welch has made the tough decision facing many REIT operators. Slate is well down the road on selling office properties in a weak market.
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Other CEOs are determined to gut out the downturn, on expectations of lower rates and an increasing number of employees returning to offices in the not-too-distant future. The executives run REITs that are cutting cash distributions to unit holders, but holding off on property sales.
Get this call right, and the sell-off in REITs over the past year will be viewed as a buying opportunity – a time when units dropped in price, then bounced back. Make the wrong decision, and lenders could end up owning the portfolio, while equity investors get nothing.
Mr. Welch’s background makes his an informed voice. He’s been something of a contrarian as co-founder of the office REIT’s parent, Slate Asset Management, consistently buying properties when others were selling to build a $13-billion portfolio of retail, residential and office properties over two decades. He’s also a veteran distressed real estate investor who spent seven years at New York-based hedge fund Fortress Investment Group.
Slate is in talks with potential buyers of several office buildings and is likely sell one property at a time. Mr. Welch said the company is trying to manage the sales in a “prudent and a functional manner,” adding that “if you did a large transaction, that would be difficult.”
Other office property owners have revealed plans for potentially large transactions. Last week, Edmonton-based Melcor REIT suspended its monthly distributions and started a strategic review of the entire company, overseen by legal adviser DLA Piper (Canada) LLP. Melcor REIT owns 38 properties across Western Canada – with half the portfolio made up of office buildings – and owes lenders $420-million.
“We do see current macro uncertainty and interest rate volatility as factors which introduce some complexity to the execution of potential transactions,” said Tom Callaghan, analyst at RBC Capital Markets, in a report on the REIT, which is controlled by Melcor Developments Ltd.
Market dynamics make it easy for REIT CEOs to do anything possible to avoid selling properties. Buyers will have the upper hand in the commercial real estate market for the foreseeable future. Private equity funds such as Crown Realty Partners, which bought Slate’s buildings in Mississauga, can have their pick of properties and push for bargain prices. Crown Realty raised a $260-million fund in 2021 to invest in office properties, just as the real estate market began to roll over.
Right now, even experienced executives are struggling with the basic question of what an office tower is worth.
“There’s uncertainty in every level of the market,” said Michael Cooper, Dream Office REIT president, in a conference call earlier this month. “It’s a very unusual environment.”
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As first-movers such as Slate Office REIT continue to sell buildings, the rest of the industry – and lenders – will get a sense of property values, and the best path forward.
“The market is starting to move, office buildings are trading,” Mr. Cooper said.
He said once a few more deals get done, “we will have certainty around valuation.”
Has Slate’s Mr. Welch made the right call? Here’s one way to judge the move to sell office buildings in a tough market: Even if he’s made the wrong decision, Mr. Welch is likely to be a survivor.
Editor’s note: A previous version of this article incorrectly referred to DLA Piper (Canada) LLP as an investment bank. It is a law firm. This version has been updated.
Andrew Willis