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Good afternoon. And welcome to the Morguard North American Residential REIT’s Second Quarter Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]
Note that this conference is being recorded on Thursday, July 27, 2023. I would now like to turn the conference over to Paul Miatello, Senior Vice President. Please go ahead.
Hi. Thank you, and good afternoon, everybody. And thanks for joining us on our second quarter results conference call. I will just do a quick introduction of everybody that’s joined us from management today. So we have Rai Sahi, Chairman and Chief Executive Officer; Beverley Flynn, Senior Vice President, General Counsel; Angela Sahi, Senior Vice President in charge of Canadian Operations; and John Talano, Senior Vice President in charge of the U.S. Operations. We have also got, of course, Chris Newman, our Chief Financial Officer.
And I will turn it over to Chris for some initial comments before we go to a Q&A. Chris?
Thank you, Paul. As is customary, I will provide some comments on the REIT’s financial performance and financial position. In terms of our financial position, the REIT completed the second quarter of 2023 with total assets amounting to $4.1 billion, higher compared to $3.9 billion as at December 31, 2022, mainly from acquisitions completed during the first quarter and from a fair value increase on the REIT income producing properties as rent growth continues to drive higher values in both the U.S. and Canadian portfolios.
REIT finished the second quarter with approximately $40 million of cash on hand and $100 million available under the REIT’s revolving credit facility with Morguard Corporation.
During the quarter, the REIT completed the refinancing of two U.S. residential properties at an interest rate of 5.06% for terms of 10 years, providing additional net proceeds of US$20.9 million. And during the quarter, the REIT completed a CMHC financing at a property located in Toronto at an interest rate of 4.18% for a term of 10 years, providing additional net proceeds of $36.6 million.
The REIT completed the second quarter with $1.5 billion of long-term debt obligations, and as at June 30, 2023, the REIT’s overall weighted average term to maturity was 5.2 years, increased from 4.9 years at December 31, 2022 and the weighted average interest rate increased to 3.65% from 3.5% at December 31, 2022. The REIT’s debt-to-gross book value ratio was 38.4% at June 30, 2023, an increase compared to 38% since December 31, 2022.
Subsequent to quarter end, the REIT entered into binding agreements for the refinancing of two U.S. residential properties at an interest rate of 5.66% for terms of eight years, providing additional net proceeds of US$12.2 million. Once closed, the REIT’s next scheduled mortgage maturities in July of 2024.
Turning to the statement of income. Net income was $87.5 million for the second quarter, compared to the $166 million in the second quarter of 2022. The $79 million decrease in net income was primarily due to the following non-cash items; a lower fair value gain on real estate properties of $46.5 million relative to the gain recorded during 2022; a lower fair value gain on Class B of LP units of $46.2 million, which was partially offset by a decrease in deferred income taxes of $13.7 million; IFRS net operating income of $53.5 million for the second quarter of 2023, an increase of $11 million or 26% compared to 2022; the change in foreign exchange rate increased NOI by $3.4 million of the overall variance last year.
And on a same-property proportionate basis, NOI in Canada increased by $2.2 million or 16%, mainly due to AMR growth and lower vacancy. NOI in the U.S. increased by US$1.1 million or 6.4%, as an increase in revenue from AMR growth and ancillary income where it was partly offset by higher vacancy and an increase in operating expenses and the change in foreign exchange increased same-property proportionate NOI by $1.5 million.
Interest expense increased by $6 million for the second quarter of 2023 compared to 2022, primarily due to an increase in interest on mortgages of $2.9 million, mainly resulting from higher principal and interest rates on the completion of the REIT’s re-financings and the net impact of acquisitions and dispositions, as well as a lower non-cash fair value gain of $3 million on the convertible debentures conversion option.
The REIT’s second quarter performance translated into basic FFO of $23.7 million, an increase of $3.9 million or 19.6% compared to 2022, and on a per unit basis, FFO was $0.42 per unit for the three months ended June 30, 2023, an increase of $0.07, compared to $0.35 per unit in 2022. The increase in FFO per unit was due to the following; on a same-property proportionate basis in local currency, an increase in NOI, partially offset by an increase in interest expense and trust expenses at a $0.03 per unit positive impact.
In addition, the change in foreign exchange rate had a $0.02 per unit positive impact, and the impact of acquisitions and a disposition of properties had a $0.03 per unit positive impact and a decrease in other income, primarily from a decrease in interest income earned on the Morguard facility at a $0.01 per unit negative impact. The REIT’s FFO payout ratio continued to decline to 42.5% for the quarter ended June 30, 2023, a very conservative level, which allows for significant cash retention.
Operationally, the REIT’s average monthly rent in Canada increased to $1,631 at June 30, 2023, a 4.2% increase compared to 2022, reflecting the quality of our Canadian portfolio. During the second quarter, the Canadian portfolio turned over 4.8% of total suites and achieved AMR growth on suite turnover of 22.8%.
While in the U.S., same-property AMR increased by 9% compared to 2022, having an average monthly rent of US$1,784 at the end of June 2023. As the REIT continued its strong performance benefiting from solid market fundamentals across many regions.
The REIT’s occupancy in Canada finished the second quarter of 2023 at 98.4%, compared to 95.2% at June 30, 2022. Rental market conditions remained strong and stable as housing demand continues to outpace supply.
Same-property occupancy in the U.S. of 95.1% at June 30, 2023 was lower compared to 96.4% at June 30, 2022. Management expects leasing activity to maintain stable occupancy levels as we continue through the busy summer leasing season.
During the six months ended June 30, 2023, the REIT’s total CapEx amounted to $14.7 million. That included revenue enhancing in fleet improvements, common area, exterior building projects, mechanical, plumbing and electrical, as well as garage renovations.
At this time, I will turn the call back over to the moderator for any questions.
Thank you. [Operator Instructions] Your first question on line comes from Jonathan Kelcher from TD Cowen.
Thanks. Good afternoon. First question, just on the U.S. markets. I am wondering if any -- you are seeing any of your markets being more impacted by new supply versus any others and one I am particularly looking at is Texas where it looks like the occupancy was down both year-over-year and as well as from Q1.
No problem. John, we will turn it over to you to answer that question on the U.S.
Sure. We have definitely had some turnover in Texas, and I would say, more of that was related to contracts and timing with big -- it’s really a big IT group that is in the Las Colinas area, where the bulk of our apartments are.
And those contracts have since renewed. So we have folks from out of country, really all over the world that go to that area and it’s very high tech. So that did dip, but it’s absolutely come back.
Our immediate markets are more mature than, I would say, a lot of what you see or what you are hearing about is on the outskirts of the loop, and in our case, we are inside that loop where there’s higher barriers of entry and more stability in general.
So we definitely had some higher turnover that we have been dealing with, but it’s certainly not been a struggle by any stretch of the imagination. I would say, it’s getting back to more normal operations, pre-pandemic operations, and certainly, not something -- we are watching it, but it’s not something that we are super concerned about.
Okay. Is that -- obviously, you are talking mostly about Texas there. How has that -- is that kind of a general statement you can make for the majority of the portfolio?
I would say, Texas is one place that we are watching more than most. Chicago has been very good over the summer. We did have a high number of renewals in our downtown markets, but those are absolutely turning quickly, so we have seen some positive results over the last several months.
I am actually in our Colorado market now and we are 100% leased at one of our properties and really still pushing rents. Our renewals just went out for the last or for the next three months and we are pushing 5% to 8%. So that’s absolutely good news.
We have had some turnover, I would say, in Atlanta, not really supply related, more related to COVID eviction restrictions and folks that hadn’t paid for literally years that we weren’t able to move out.
And we are doing that now in North Carolina, as well as in our Atlanta markets. So we have dipped a little bit there, but it’s moving out non-payers for folks that are actually paying rent and we are pushing rents there as well, so still getting increases in those markets.
And I would say, Florida is an opposite market. It slows considerably in the summer. We are still doing very well there in all of our retail assets. So you -- there is pressure in certain parts of the cities.
I would say, again, for our portfolio in Florida, a lot of it is suburban, most of the development, specifically in Fort Lauderdale, there’s been a lot of development in the CBD and the urban markets and that is definitely seeing some pressure now, but that’s just not a problem for us.
Okay. That’s very helpful. And I guess, switching gears and moving to Canada. The uplifts on turnover is based on where you are seeing mark-to-market, is that something, given the low amount of turnover, is that something you can see going on for the next, I guess, even couple of years?
Yeah. I expect that, and Angela, if you want to add some other notes to that. But, yeah, the turnover is so low that just every year, just it creeps up every single year at 5% to 10%. But Angela, anything else to add on that?
Yeah. I mean right now, during the summer months, we are seeing a little bit more turnover just with some students and just in terms of that seasonal leasing activity occurring. So we are seeing more turnover right now. For the next quarter, it should be a little bit higher.
In terms of the rental increase on turnover, that’s pretty significantly up compared to anything even pre pandemic that we have seen. So like Thorncliffe Park is over 40% in terms of uplifts in turnover. In Mississauga, we are achieving close to almost $3 a foot on turnover on some of the units that are above 650 square feet, for example.
So rent uplift on turnover is quite strong and that’s just a factor of integration and just low supply of rental products, especially given the interest rates where they are at in terms of limitations on buying.
Okay. And what about the, like, how aggressive are you being on pushing rents on turnover?
There actually market is being adjusted on a monthly basis at this point. It’s quite aggressive.
Okay. That’s it for me. Thanks. I will turn it back.
Thank you. Your next question on line comes from Dean Wilkinson from CIBC. Please go ahead.
Thanks. Good afternoon, everyone. Just with the post-quarter debt financing on the U.S. properties, you are sitting on $55-ish million of cash. Maybe I guess the question for Rai is, when you look at that money, where -- how would you prioritize that spend? Is it paying down further debt, is it buying another asset or would you look at buying back units, like, what’s your preference with sort of that, let’s call it, a war chest?
Paul, do you want to handle that?
Yeah. Sure. I mean, I think, notwithstanding good results, I mean, I think, we are still sort of in a phase especially when you look globally some of the things going on around the world, we are preserving a little bit of cash. So acquisitions could happen, Dean, but I would say, we are probably being pretty careful about things at this point.
We have been active on the NCIB. We will continue to be active. Debt reduction isn’t a big priority right now, but it is something that we are considering. So maybe just coming back to your question, it’s probably more NCIB and then after that it’s a split between acquisitions and debt.
Yeah. I guess the NCIB is the clearest and easiest path of accretion. When you look at potential asset acquisitions, are you finding U.S. looks better over Canada in terms of cap rates and financing or does sort of that large mark-to-market opportunity that exist in Canada make perhaps some of those potential acquisitions more attractive?
Yeah. I think we are still very actively looking both sides of the border, single-story limited availability in Canada and rates -- interest rates are obviously bouncing around. So there’s still some pricing discovery that, I would say, is ongoing in the U.S., which is making it more and more difficult to find accretive acquisitions in the U.S.
Got it. Okay. That’s it for me. Thanks.
Thanks.
Thank you. [Operator Instructions] Our next question on line comes from Jimmy Shan from RBC. Please go ahead.
Thank you. Just a follow-up on the investment market. I wondered if you could provide a little bit more color on kind of what are you seeing in terms of asset pricing for the assets that are still trading and kind of the level of interest that you are seeing on -- if you are out there bidding on assets both Canada and U.S. and if there’s any particular difference that you are seeing between the two markets?
John, do you want to talk a little bit about what you are seeing in the U.S. from the investment side?
Sure. Well, I think, we have experienced it. What I have found in the markets where we have acquired, most recently in Chicago is that, there are owners out there that need to sell, whether it’s to refinance another property or some other purpose and the demand there.
I think pricing is still strong. I think we believe that things might come down a hair more as time goes on, if interest rates still stay where they are. But there hasn’t been nearly as much activity as there was six months ago, 12 months ago. It certainly has slowed significantly and I think a lot of people are in wait-and-see mode.
We are in a very good position where we could acquire, where we are looking for opportunistic assets and situations, and when we find them, we talk about them internally. There hasn’t been any that have made great sense in the last few months, but we are looking consistently and mainly in our existing markets to further our clustering strategy.
Yeah. And I guess, I would add to that on the Canadian side and I will start, but if Angela has anything, she can she can jump in. But we are seeing trades on cap rates that are moving up, and obviously, that adjustment has happened. There’s big variations in quality of the assets, I would say, but again, limited trade is still kind of the issue in Canada. I don’t know if, Angela, do you want to add anything on the investment market?
Yeah. No. I agree with you. I think that cap rates have come up a bit given where interest rates are and -- but it depends region to region, obviously, Calgary, Edmonton and GTA are going to have different numbers, but we will continue to look at everything that comes across, which there isn’t that much trading these days, it seems like.
Yeah. And on Canada, so when you say cap rates are up a bit, have the values actually come down or is it that the NOI to or at least the potential to reach market at some point, the underwritten NOI has also gone up to price per door, it looks about the same. How do you think about that?
Yeah. I would say, price per door is kind of level. I mean, obviously, I think, underwritten -- underwriting or underwritten income and cash flow in the assets is, obviously, on the way up as well kind of across the markets. We are seeing kind of strong markets across the country.
Okay. And then just on the U.S. portfolio, what are you getting in terms of rate growth on new leases versus renewal in the quarter or going into the summer here?
John, do you want to take that?
Yeah. I would say, it depends on the regions. We have had a lot of turnover in Chicago. We had a lot of new leases come up in that particular region. So those have been relatively flat. We have seen increases of 1% to 3%.
We still have some room, though, between our existing leases and end markets. So we are pushing those where we can. So that -- I would say, on average will be 3% to 5% and then in other markets, as I mentioned earlier on the call, we just did our renewal in Colorado and those are at 5% to 8%.
So we are still seeing really good numbers. It is not what it was like last year. Our rate of increase has definitely slowed, but I would say, it’s normalizing, it’s where -- we are going back to our historical increases. But at the same time, we are really focused on turnover. So we are working hard to keep our turnover low because those costs have gone up as well.
So we are trying to find that balance to get the increases where we can, but maintain those good residents and that high level of consistency and community throughout the portfolio. So it’s been good. It certainly is not what we have seen over the last several years, but we are doing well through it.
Okay. Thanks, guys.
And there are no further questions at this time. Please proceed with closing remarks.
Okay. Thanks everybody for joining us and we look forward to speaking to you next quarter. Thank you.
Thank you, ladies and gentlemen. This concludes your conference. Please disconnect your lines.