- Publishes open letter to Slate Office REIT unitholders
expressing its disappointment in management's performance and lack
of accountability
- Highlights various instances of misaligned interests,
unitholder value destruction, and incoherent strategic
direction
- Announces intention to requisition a timely meeting of
unitholders
HALIFAX,
NS, Oct. 20, 2022 /CNW/ - G2S2 Capital
Inc. ("G2S2") releases an open letter to the unitholders of Slate
Office REIT ("SOT", "the REIT") following the recent announcement
regarding a C$45 million convertible
debenture offering. This transaction is unnecessarily dilutive to
all unitholders and represents just one in a long list of
incomprehensive decisions made by the REIT in recent years.
SOT's trustees and management have demonstrated time and again
that unitholder interests are secondary to those of Slate Asset
Management ("SLAM"), the REIT's external manager. Many of the
REIT's questionable decisions only make sense when viewed through
the lens of SLAM fee generation. As the REIT's largest unitholder,
we lost confidence in management to preserve, let alone grow our
capital, and we can no longer remain silent.
"We have tried for months to work constructively with SOT's
management and trustees, but it has become clear that they only
seek to maintain the status quo and continue to line SLAM's pockets
with management fees," said George
Armoyan, Executive Chairman of G2S2. "We are releasing this
letter to appeal directly to our fellow unitholders to push for
change and to hold the trustees and management accountable."
To our fellow unitholders,
G2S2 is a multi-strategy value-oriented investment company
focused on identifying undervalued companies. We seek to engage in
a constructive manner with investee entities, with an intended goal
of improving the business in the best interests of all
stakeholders. G2S2, through a wholly owned subsidiary, beneficially
owns 12,811,700 units of SOT, constituting approximately 15% of the
outstanding units.
Despite G2S2's significant investment in SOT, the trustees and
management of the REIT have for months deflected requests by G2S2
to meaningfully engage regarding the business of the REIT. G2S2 has
provided suggestions to improve the business in the best interests
of the REIT's stakeholders; these have been similarly ignored.
We would like to our draw your attention to several of G2S2's
more pressing concerns regarding SOT:
1 - SLAM: A Clear Misalignment of Interests
We believe that SOT is, primarily, a vehicle for SLAM to
generate a stream of fees at the expense of unitholder capital.
Under the current management agreement, SLAM is incentivized to
scale its portfolio at all costs, rewarding acquisition activity
and gross book value as opposed to equity market value. They
generate more fees by growing, even if that growth is destructive
to unitholder value. This creates a fundamental conflict of
interest with SOT unitholders, as evidenced by a series of
questionable strategic and ill-timed acquisitions. Additionally,
SLAM's management agreement guarantees SLAM trustee nomination
rights, which are held by SLAM insiders, and the so-called
"independent" trustees on the SOT board have failed to effectively
represent unitholder interests. Over 40% of unitholders voted
against management's slate of trustees at the 2022 AGM but even
this strong show of non-confidence seems to have fallen on deaf
ears.
2 – The Market Has Lost Confidence in SOT's Value
SOT trades at nearly a 50% discount to management's stated net
asset value (NAV) and one of the lowest Price/Book ratios in the
sector. This highlights a clear loss of confidence in management
and the board's ability to create value. Management continues to
promote SOT as an attractive investment but takes no meaningful
action to narrow the discount. Despite advice given by G2S2 to
focus on accretive, unitholder-friendly capital allocation efforts
such as unit buybacks, SOT has continued to pursue dilutive
transactions. Again, these transactions benefit SLAM by increasing
the management fees it generates but accomplish nothing to restore
unitholder value.
Example 1: On November 15, 2021,
SOT announced the acquisition of Yew Grove in Ireland, further diluting the unitholders by
raising C$60.8 million in equity at a
significant discount to management's stated NAV. Besides its
dilutive nature, SOT's pivot into non-core geographies and sectors
further obfuscated the true value of the REIT's assets. Given a
poor track record, we have no confidence in SOT's ability to create
value.
Example 2: On October 17, 2022,
SOT announced a bought deal offering of C$45
million of convertible debentures at a conversion price of
$5.50 per trust unit, significantly
below management's stated NAV of $8.71 per trust unit. This comes only days after
SOT disposed of two office properties in Toronto, ON for C$97
million. It is unfathomable how management could view
issuing convertible debentures at nearly a 40% discount to NAV an
acceptable financing solution.
3 - Insignificant Trustee Ownership
We are concerned about the trivial ownership among the
independent trustees. Excluding deferred units, the group of five
so-called "independent" trustees owns among them a mere 77,500
units - less than 0.1% of the REIT's total units. Management
presents SOT as an attractive investment opportunity, a "Valuation
Disconnect" in their own words, but they refuse to invest their own
money to take advantage of this opportunity. If a 50% discount to
their stated NAV doesn't represent a compelling opportunity, we
have to wonder how management and trustees really view the future
prospects of the REIT.
G2S2 believes that SOT unitholders would be better served by
trustees who have conviction in the REIT's ability to create value
and who choose to align themselves with fellow unitholders. This is
how we invest and how we would expect those who oversee our
investments to conduct themselves. SOT deserves to be run by
trustees who are willing to put skin in the game when real
opportunities present themselves.
Conclusion
G2S2 believes in the value of the REIT's assets but recognizes
that change is needed to unlock that value. G2S2 has attempted to
work directly with SOT management and trustees to bring about
positive change, and has been met with indifference, obstinance,
and a clear lack of concern for the value of our investment. G2S2
is not in the habit of letting our investments languish, and we
intend to take decisive action in order to create value for
ourselves and all SOT unitholders. To that end, G2S2 intends to
immediately requisition a special meeting of unitholders to give
unitholders a democratic forum for expressing their views and
concerns, and to elect trustees who will represent the interests of
all unitholders.
Advisors
Bennett Jones LLP is acting as legal counsel to G2S2.
Additional Information
The information contained in this press release does not and is
not meant to constitute a solicitation of a proxy within the
meaning of applicable corporate and securities laws. While G2S2
intends to take additional steps in the future, which include
requisitioning a meeting of unitholders of Slate Office REIT,
soliciting proxies of unitholders, and filing a dissident
information circular, no requisition of a meeting been submitted to
Slate Office REIT, there is currently no record date or meeting
that has been called and unitholders are not being asked to execute
or not execute a proxy with respect to any matter at this time
(including any potential nominees of G2S2).
About G2S2
G2S2 Capital Inc. is a privately held investment holding company
focused on creating value across a variety of businesses with a
long term horizon. G2S2 is incorporated under the laws
of Canada. G2S2 is controlled by George & Simé
Armoyan.
SOURCE G2S2 Capital Inc.