Recently, Sime Armoyan, a large shareholder of Slate Office REIT (TSE: SOT.UN), has been buying a considerable amount of SOT.UN stock. Could this mean that the company is undervalued and has upside potential ahead? Possibly. Slate Office REITs’ valuation suggests upside potential ahead. However, analysts don’t seem too optimistic, but they still think there is some upside potential. Additionally, the stock has a high 9% dividend yield. Therefore, it seems like it could be a solid investment.
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Offices Can Survive Despite Work-from-Home Trends
Slate Office REIT develops, owns, and manages office real estate in Canada. Although some may argue that office real estate is a dying industry due to work-from-home trends causing many people not to need an office, Slate Office REIT thinks differently.
The company’s website states, “We have a strong conviction in the office sector and believe that physical workspace is an essential enabler of collaboration, culture, and innovation. We also believe there is an opportunity to align our portfolio with tenants and industries that continue to drive strong demand for office space.”
Both sides of the argument make sense. Offices will probably never completely disappear, as they allow employees to communicate better, and some people like working in an office setting.
Also, it’s possible for companies to continue growing despite being in a tough industry — just ask tobacco products retailer Altria (NYSE: MO), whose free cash flow and revenues are near record levels. Therefore, as long as the company knows how to optimize its operations, it should be fine.
Insider Sime Armoyan Buys SOT.UN Stock — Why It Matters
Sime Armoyan’s recent buys are important to note for a few key reasons. First, he is a five-star-rated insider, ranked #169 out of 94,882 insiders on TipRanks, with an average return of 17.7% per transaction and a success rate of 63% (measured on a one-year basis). Therefore, his transactions have been worth following.
Also, his transactions are classified as “Informative Buys,” which hold more weight than “Uninformative Buys.” He’s made many purchases recently, starting four months ago, with the most recent buy taking place yesterday.
Just in the past three months, he has bought over C$13.4 million worth of SOT.UN stock. The recent buys ranged from prices of C$4.45 to C$4.85 per share, with the stock currently trading at C$4.43.
Is Slate Office REIT Stock Undervalued?
It’s quite possible that SOT.UN stock is undervalued, which would justify the insider buying. An important and easy valuation metric to use for Canadian REITs is the price-to-book ratio. Note that this metric isn’t as useful for American REITs due to accounting differences.
Slate Office REIT’s price-to-book ratio is around 0.51x, meaning that it’s trading at a large discount to its net worth. This metric alone gives it almost 100% upside potential before it reaches 1.0x. However, let’s not get too optimistic since its five-year average book value is 0.7x, meaning that it has traded at a discount for a while.
While the company does create some value for shareholders, as its book value per share has grown at a 1.6% CAGR for the past five years, this is nothing to get excited about. Therefore, not much extra upside potential should be expected if the stock does eventually reach its book value.
In addition, here’s what we mentioned in a recent article about a different REIT in a similar situation: “One thing to keep in mind is that its book value may potentially drop in the short term because rising interest rates are causing property values to fall, which somewhat justifies the discount. However, there is that margin of safety, and a drop is likely to be temporary in nature, in our opinion.”
Is Slate Office REITs Dividend Worth It?
As mentioned earlier, Slate Office REIT has a ~9% dividend that is paid monthly. This is worth it for income investors that are looking for consistent monthly returns. However, don’t expect much growth. Its dividend has been flat for the past three years after being cut in 2019.
Nonetheless, its dividend is covered, as the company’s adjusted funds from operations (AFFO) payout ratio was ~74% in Q2.
Is SOT.UN Stock a Buy, Hold, or Sell?
According to analysts, Slate Office REIT stock earns a Hold consensus rating based on four unanimous Hold ratings assigned in the past three months. The average SOT.UN stock price target of C$4.81 implies 8.6% upside potential. Analyst price targets range from a high of C$5.00 to a low of C$4.50.
Conclusion: Slate Office REITs Insider Buying Looks Justified
Slate Office REIT has a few things going for it that make it look like an attractive investment. First, a highly-rated insider has been buying up shares at around current prices. Also, it’s trading for about half of its net worth, implying solid upside potential in that regard. In the meantime, investors would be receiving a high 9% dividend yield. Nonetheless, analysts only expect 8.6% upside potential, but the stock is still worth looking into.
