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The trust has been particularly affected by work from home culture due to its focus on the office spaces

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Slate Office REIT, whose portfolio includes properties in both Canada and the United States, has defaulted on $158 million of debt despite an ambitious restructuring plan that included selling off significant assets. It appears broader economic trends and sector weaknesses have hindered the company’s efforts.

Last year, Slate announced plans to alleviate the REIT’s $1.175-billion debt burden by selling 40 per cent of its assets. The move was aimed at generating much-needed cash to repay debt.

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However, the demand for office spaces has not rebounded to pre-pandemic levels, and elevated interest rates have further pressured the sector. Slate has been particularly affected due to its focus on the office spaces, which currently have the highest vacancy rates in commercial real estate.

According to Altus Group Ltd., the office vacancy rate in Canada has remained at 17.5 per cent for four consecutive quarters. In contrast, Slate’s REIT reported a first-quarter vacancy rate of 22.3 per cent. Pre-pandemic, Canada’s vacancy rate hovered around two per cent.

Compounding these challenges is Slate’s exposure to variable-rate mortgages. According to CIBC Capital Markets’ notice of defaults, the weighted average interest rate on the REIT’s mortgages stands at 6.3 per cent annually. With the Bank of Canada only just beginning to cut its benchmark rate and the U.S. Federal Reserve delaying cuts of its own, Slate’s debt servicing costs continue to strain its cash flow.

In an effort to save cash, Slate reduced its monthly distribution by 70 per cent in early 2023 and eventually halted it altogether. Additionally, the company put several assets up for sale. Despite these measures, Slate announced on Tuesday that it does not expect to make cash interest payments on three convertible debentures, due June 30 and August 31.

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At the same time, Slate Asset Management, the REIT’s external manager, continues to expand its portfolio with the announcement on June 10 of its acquisition of the World Seafood Center in Oslo, Norway, for approximately NOK$1.3 billion (CAD$167 million). The firm stated in a press release that this aligns with its strategy of focusing on stable, income-producing assets like grocery stores, pharmaceutical facilities, and logistics centres. The status of the deal is still pending.

In a statement, Slate said that it “continues to make progress on its previously announced portfolio realignment plan” and is working with senior lenders to “determine a mutually acceptable path forward.” Nevertheless, senior lenders have issued notices of default, preventing the REIT from making further interest payments on its outstanding debentures.

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The impact on Slate’s publicly traded units has been severe, with a 94 per cent decline over the past five years as investors remain concerned that a debt restructuring could wipe out their equity value. The company did not respond to requests for comment.

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