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Slate Office REIT Reports Second Quarter 2018 Results

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Slate Office REIT (TSX:SOT) (the "REIT") announced today its
financial results for the three months ended June 30, 2018. Senior
management is hosting a conference call at 8:00 a.m. ET on Tuesday,
August 7, 2018 to discuss the results and ongoing business initiatives
of the REIT. The dial-in details can be found below.

"Slate Office REIT achieved solid results in the second quarter,
highlighted by active leasing and positive same-property NOI growth,"
said Scott Antoniak, the REIT's Chief Executive Officer. "Our
exceptional team continues to execute on our strategy of buying well and
providing best-in-class asset management to create value for our
unitholders."

For the CEO's letter to unitholders for the quarter, please follow the
link here.

Second Quarter 2018 Highlights

  • The REIT completed a total of 441,222 square feet of leasing,
    comprised of 345,055 square feet of renewals and 96,167 square feet of
    new lease deals.
  • Leasing spreads in the quarter were 9.2% above expiring or building
    in-place rents and in-place occupancy increased to 86.8% compared to
    85.9% as at Q1 2018.
  • Occupancy at June 30, 2018 was 86.8%, up 90 basis points from the
    first quarter of 2018 and 240 basis points from the second quarter of
    2017.
  • Same-property net operating income ("NOI") was up 11.7% in the second
    quarter of 2018 compared to the same period in the prior year.
  • Same-property NOI was up 6.8% in the second quarter of 2018 compared
    to the first quarter of 2018.
  • The Maritime Centre in Halifax continues to see strong leasing
    demands. During the quarter, the REIT completed a new lease for 52,400
    square feet, with rent commencing in Q2 2019.
  • Net income was $23.6 million, a increase of $20.1 million compared to
    Q2 2017.
  • Rental revenue was $52.1 million, an increase of $15.9 million
    compared to Q2 2017.
  • Adjusted funds from operations ("AFFO") was $12.8 million or $0.17 per
    unit, an increase of $2.7 million and $0.01 per unit compared to Q1
    2018.
  • Core funds from operations ("Core FFO") was $15.4 million or $0.20 per
    unit, an increase of $3.5 million and $0.01 per unit compared to Q1
    2018.

Recycling Capital

  • On August 1, 2018, the REIT agreed to acquire 120 South LaSalle Street
    in Chicago, IL for U.S.$155.5 million (U.S.$237 per square foot). The
    property is a 23-storey, 84% occupied downtown office building with an
    adjacent parking garage, located in the Central Loop of Chicago, with
    a weighted average lease term of 10.4 years. CIBC (AA credit) is the
    anchor tenant and occupies 45% of the building's gross leaseable area.
    The REIT expects the transaction to close in the third quarter of 2018.
  • Subsequent to June 30, 2018, the REIT agreed to dispose of its Water
    Street properties in St. John's Newfoundland for gross proceeds of
    $17.5 million. The disposition price was approximately 40% greater
    than the REIT's March 31, 2018 IFRS book value.
  • The REIT completed the disposition of 135 Queen's Plate in Toronto,
    Ontario for $16.7 million, which was approximately 10% higher than the
    REIT's IFRS book value.
  • The REIT continues to pursue opportunities to dispose of fully valued,
    non-core assets and redeploy proceeds into higher yielding office
    buildings across North America as part of its capital recycling
    initiative.
 

Summary of Q2 2018 Results

   
  Three months ended June 30,
(thousands of dollars, except per unit amounts)   2018   2017  

Change%

Rental revenue $ 52,056   $ 36,230   43.7 %
Net operating income ("NOI") 25,212 17,131 47.2 %
Net income 23,592 3,482 577.5 %
 
Same-property NOI 16,561 14,832 11.7 %
 
Weighted average diluted number of trust units (000s) 75,139 57,781 30.0 %
Funds from operations ("FFO") 14,810 11,405 29.9 %
FFO per unit 0.20 0.20

%

FFO payout ratio 95.1 % 102.2 %

(7.1

)

%

Core FFO 15,389 11,949 28.8 %
Core FFO per unit 0.20 0.21

(4.8

)

%

Core FFO payout ratio 91.5 % 97.5 %

(6.0

)

%

AFFO 12,836 10,694 20.0 %
AFFO per unit 0.17 0.19

(10.5

)

%

AFFO payout ratio   109.7 %   108.9 %   0.8   %
             
June 30,
    2018   2017  

Change%

Total assets $ 1,689,148 $ 1,302,622 29.7 %
Total debt 1,016,926 752,312 35.2 %
Portfolio occupancy (1) 86.8 % 84.4 % 2.4 %
Loan to value ratio 60.2 % 57.8 % 2.4 %
Net debt to adjusted EBITDA leverage 10.3x 10.6x (0.4x)
Interest coverage ratio   2.5x   3.1x   (0.6x)

(1) Including redevelopment properties.

 

Conference Call and Webcast

Senior management will host a live conference call at 8:00 a.m. ET on
Tuesday, August 7, 2018 to discuss the results and ongoing business
initiatives of the REIT.

The conference call can be accessed by dialing (647) 427-2311 or 1 (866)
521-4909. Additionally, the conference call will be available via
simultaneous audio found at http://www.snwebcastcenter.com/webcast/slate/2018/0807.
A replay will be accessible until August 21, 2018 via the REIT's website
or by dialing (416) 621-4642 or 1 (800) 585-8367 (access code 5596777)
approximately two hours after the live event.

About Slate Office REIT (TSX:SOT)

Slate Office REIT is an open-ended real estate investment trust. The
REIT's portfolio currently comprises 44 strategic and well-located real
estate assets located primarily across Canada's major population centres
including one downtown asset in Chicago, Illinois. The REIT is focused
on maximizing value through internal organic rental and occupancy growth
and strategic acquisitions. Visit slateofficereit.com
to learn more.

About Slate Asset Management L.P.

Slate Asset Management L.P. is a leading real estate investment platform
with over $5.5 billion in assets under management. Slate is a
value-oriented manager and a significant sponsor of all of its private
and publicly-traded investment vehicles, which are tailored to the
unique goals and objectives of its investors. The firm's careful and
selective investment approach creates long-term value with an emphasis
on capital preservation and outsized returns. Slate is supported by
exceptional people, flexible capital and a proven ability to originate
and execute on a wide range of compelling investment opportunities.
Visit slateam.com to
learn more.

Supplemental Information

All interested parties can access Slate Office REIT's Supplemental
Information online at slateofficereit.com
in the Investors section. These materials are also available on Sedar or
upon request at ir@slateam.com or
(416) 644-4264.

Forward Looking Statements

Certain statements herein may be forward-looking statements within the
meaning of applicable securities laws. These statements reflect
management's expectations regarding objectives, plans, goals,
strategies, future growth, results of operations, performance and
business prospects and opportunities of the REIT including expectations
for the current financial year, and include, but are not limited to,
statements with respect to management's beliefs, plans, estimates and
intentions, and similar statements concerning anticipated future events,
results, circumstances, performance or expectations that are not
historical facts. Statements that contain words such as "could",
"should", "would", "anticipate", "expect", "believe", "plan", "intend",
"will", "may", "might" and similar expressions or statements relating to
matters that are not historical facts constitute forward-looking
statements.

These forward-looking statements are not guarantees of future events or
performance and, by their nature, are based on the REIT's current
estimates and assumptions, which are subject to significant risks and
uncertainties. Forward-looking statements contained herein are made as
the date hereof and accordingly are subject to change after such date.
The REIT does not undertake to update any forward-looking statements
that are contained herein except as expressly required by applicable
securities laws.

Non-IFRS Measures

We disclose a number of financial measures in this news release that are
not measures used under IFRS, including NOI, same-property NOI, FFO, FFO
payout ratio, Core-FFO, Core-FFO payout ratio, AFFO, AFFO payout ratio,
adjusted EBITDA, net debt to adjusted EBITDA and the interest coverage
ratio, in addition to certain measures on a per unit basis.

  • NOI is defined as rental revenue less operating property expenses and
    IFRIC 21 property tax adjustments, prior to straight-line rent and
    other changes. Same-property NOI includes those properties owned by
    the REIT for each of the current period and the relevant comparative
    period.
  • FFO is defined as net income adjusted for certain items including
    leasing costs amortized to revenue, change in fair value of
    properties, change in fair value of financial instruments, disposition
    costs, depreciation of hotel asset, deferred income taxes, IFRIC 21
    property tax adjustments, change in fair value of Class B LP units,
    distributions to Class B LP unitholders and subscription receipts
    equivalent amount.
  • Core-FFO is defined as FFO adjusted for the REIT's share of lease
    payments received for its Data Centre asset, which for IFRS purposes
    is accounted for as a finance lease and removes the impact of mortgage
    discharge fees (if any).
  • AFFO is defined as FFO adjusted for certain items including guaranteed
    income supplements, amortization of deferred transaction costs,
    de-recognition and amortization of mark-to-market adjustments on
    mortgages refinanced or discharged, adjustments for interest rate
    subsidies received, recognition of the REIT's share of lease payments
    received for its Data Centre asset, which for IFRS purposes is
    accounted for as a finance lease, amortization of straight-line rent
    and normalized direct leasing and capital costs.
  • FFO payout ratio, Core-FFO payout ratio and AFFO payout ratio are
    defined as distributions declared divided by FFO, Core-FFO and AFFO,
    respectively.
  • FFO per unit, Core-FFO per unit and AFFO per unit are defined as FFO,
    Core-FFO and AFFO divided by the weighted average diluted number of
    units outstanding, respectively.
  • Adjusted EBITDA is defined as earnings before interest, income taxes,
    IFRCI 21 property tax adjustments, depreciation, fair value gains
    (losses) from both financial instruments and investment properties,
    while also excluding non-recurring items such as transaction costs
    from dispositions, acquisitions or other events and adjusting income
    received from the Data Centre to cash received as opposed to finance
    income recorded for accounting purposes.
  • Net debt to adjusted EBITDA is calculated by dividing the aggregate
    amount of debt outstanding, less cash on hand, by annualized adjusted
    EBITDA.
  • Interest coverage ratio is defined as adjusted EBITDA divided by cash
    interest paid.

We utilize these measures for a variety of reasons, including measuring
performance, managing the business, capital allocation and the
assessment of risk. Descriptions of why these non-IFRS measures are
useful to investors and how management uses each measure are included in
Management's Discussion and Analysis, which readers should read when
evaluating the measures included herein. We believe that providing these
performance measures on a supplemental basis to our IFRS results is
helpful to investors in assessing the overall performance of our
businesses in a manner similar to management. These financial measures
should not be considered as a substitute for similar financial measures
calculated in accordance with IFRS. We caution readers that these
non-IFRS financial measures may differ from the calculations disclosed
by other businesses, and as a result, may not be comparable to similar
measures presented by others.

Calculation and Reconciliation of Non-IFRS Measures

The tables below summarize a calculation of non-IFRS measures based on
IFRS financial information.

The calculation of NOI is as follows:

     
  Three months ended June 30,
    2018   2017
Rental revenue $ 52,056   $ 36,230
Property operating expenses (26,377 ) (18,833 )
IFRIC 21 property tax adjustments (585 )
Straight-line rents and other changes   118     (266 )
NOI   $ 25,212     $ 17,131  
 
The reconciliation of net income to FFO, Core-FFO and AFFO is as
follows:
         

Three months ended June 30,

(thousands of dollars, except per unit amounts)   2018   2017
Net income $ 23,592 $ 3,482
Add (deduct):
Leasing costs amortized to revenue 930 239
Change in fair value of properties (10,535 ) 2,389
Change in fair value of financial instruments (116 ) 3,266
Disposition costs 133
Depreciation of hotel asset 228 191
Deferred income tax recovery 305
IFRIC 21 property tax adjustment(1) (585 )
Change in fair value of Class B LP units (212 )
Distributions to Class B unitholders 991 991

Subscription receipts equivalent amount (1)

      926  
FFO (1) $ 14,810 $ 11,405
Finance income on finance lease receivable (946 ) (981 )
Finance lease payments received   1,525     1,525  
Core-FFO (1) $ 15,389 $ 11,949
Amortization of deferred transaction costs 515 382
Amortization of debt mark-to-market adjustments (96 ) (134 )
Amortization of straight-line rent (812 ) (505 )
Interest rate subsidy 108 108
Guaranteed income supplements 300 634
Normalized direct leasing and capital costs   (2,568 )   (1,740 )
AFFO (1)   $ 12,836     $ 10,694  
 
Weighted average number of diluted units outstanding (000s) 75,139 57,781
FFO per unit (1) $ 0.20 $ 0.20
Core-FFO per unit (1) 0.20 0.21
AFFO per unit (1) 0.17 0.19
FFO payout ratio (1) 95.1 % 102.2 %
Core-FFO payout ratio (1) 91.5 % 97.5 %
AFFO payout ratio (1)   109.7 %   108.9 %

(1) Refer to "Non-IFRS measures" section above.

 

The reconciliation of cash flow from operating activities to FFO,
Core-FFO and AFFO is as follows:

     
  Three months ended June 30,
    2018   2017
Cash flow from operating activities $ 12,120   $ 8,161
Add (deduct):
Leasing costs amortized to revenue 930 239
Disposition costs 133
Subscription receipts equivalent amount (1) 926
Working capital items 1,306 937
Straight-line rent and other changes (118 ) 266
Interest and other finance costs (10,094 ) (5,957 )
Interest paid 9,675 5,709
Distributions paid to Class B unitholders   991     991  
FFO(1) $ 14,810 $ 11,405
Finance income on finance lease receivable (946 ) (981 )
Finance lease payments received   1,525     1,525  
Core-FFO(1) $ 15,389 $ 11,949
Amortization of deferred transaction costs 515 382
Amortization of debt mark-to-market adjustments (96 ) (134 )
Amortization of straight-line rent (812 ) (505 )
Interest rate subsidy 108 108
Guaranteed income supplements 300 634
Normalized direct leasing and capital costs   (2,568 )   (1,740 )
AFFO (1)   $ 12,836     $ 10,694  

(1) Refer to "Non-IFRS measures" section above.

 

The calculation of adjusted EBITDA is as follows:

     
  Three months ended June 30,
    2018   2017
Net income $ 23,592   $ 3,482
Finance income and finance lease receivable (946 ) (981 )
Net operating income from the Data Centre 1,525 1,525
Interest income (40 ) (24 )
Interest and finance costs 10,094 6,883
Change in fair value of properties (10,535 ) 2,389
IFRIC 21 property tax adjustment (585 )
Change in fair value of financial instruments (116 ) 3,266
Distributions to Class B shareholders 991 991
Disposition costs 133
Depreciation of hotel asset 228 191
Change in fair value of Class B LP units (212 )
Deferred income tax recovery   305      
Adjusted EBITDA (1)   $ 24,513     $ 17,643  

(1) Refer to "Non-IFRS measures" section above.

 

The calculation of net debt is as follows:

     
  Three months ended June 30,
    2018   2017
Debt, non-current $ 879,069   $ 469,036
Debt, current   137,857     283,276
Debt $ 1,016,926 $ 752,312
Less: cash on hand   5,709     2,282
Net debt   $ 1,011,217     $ 750,030
 

The calculation of net debt to adjusted EBITDA is as follows:

     
  Three months ended June 30,
    2018   2017
Net debt $ 1,011,217   $ 750,030
Adjusted EBITDA (2)   98,052     70,572

Net debt to Adjusted EBITDA (1)

  10.3x   10.6x
(1)  

Refer to "Non-IFRS measures" section above.

(2)

Adjusted EBITDA for the three months is based on actuals
annualized, using the following formula: (Adjusted EBITDA for
period / No. quarters in period x 4).

 

The interest coverage ratio is calculated as follows:

     
  Three months ended June 30,
    2018   2017
Adjusted EBITDA $ 24,513   $ 17,643
Cash interest paid   9,675     5,709
Interest coverage ratio (1)   2.5x   3.1x

(1) Refer to "Non-IFRS measures" section above.

 

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