Morguard North American Residential Real Estate Investment Trust
TSX:MRG.UN
Earnings Call Analysis
Q4-2023 Analysis
Morguard North American Residential Real Estate Investment Trust
In the journey through 2023, the REIT has fortified its financial stability, escalating its total assets from $3.9 billion to $4.1 billion, attributable to strategic property acquisitions and an uptick in fair value. The year closed with a cash reserve of approximately $18 million, and available credit facilities summed up to a robust $102.6 million.
Strategic moves in the REIT's narrative include the full acquisition of Fenestra at Rockville Town Square and Xavier residential property, cumulatively elevating its core asset holdings to significant value. Financial maneuvers included issuing $56 million of 6% convertible debentures and deftly refinancing properties to optimize net proceeds and manage interest expenses effectively.
A testament to shrewd capital management was the purchase of over 1.4 million units under its NCIB, reflecting the firm's commitment to delivering value to its shareholders against a backdrop where net asset value per unit stands at a compelling $38.34.
Ambitious refinancing kept the company poised with $1.4 billion in long-term debt obligations, with a slight uptick in debt to gross book value ratio over the year. Despite an $11.5 million increase in interest expense, a prudent approach towards leverage has been maintained.
The resale narrative became slightly grimmer in 2023, with net income sliding by $54.3 million due to lower fair value gains and increased interest expenses. Nevertheless, net operating income (NOI) painted a brighter picture, showcasing a surge of 19.2% emanating from wise operational strides. The calculated funds from operations (FFO) followed suit, setting a crescendo with an 11% year-over-year increase.
Underpinning the REIT's operational prowess was a 5.4% hike in the average monthly rent within Canada, with a significant portion of suite turnover fetching impressive rent growth. Even as turnover rates dipped, REIT is positioning itself for similar growth trends moving into 2024. The occupancy rates remained strong, with Canadian properties almost fully tenanted, and an anticipatory stance towards stable occupancies through the seasonal cycles.
Investments totaling $44.3 million channeled towards capital expenditures have been catalysts enhancing revenuability, encompassing in-suite improvements, energy initiatives, and comprehensive renovations, all converging towards enriching asset value.
Expanding its horizon, the REIT remains vigilant in its acquisition appetite, careful not to stray too far from its existing geographical footprint. The pièce de résistance of the strategy narrative lies in balancing stabilized property buys with tactical value-add possibilities, echoing through their capital recycling initiatives.
While the U.S. market lures with better yields, the Canadian landscape is not to be sidestepped, with Canada showcasing an appealing confluence of strong fundamentals and attractive cap rates for potential acquisitions. The REIT projects a balanced allocation between selective share buybacks and strategic asset acquisitions, all within a context of a fortified balance sheet prepped for the latter half of the year.
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Good afternoon, ladies and gentlemen, and welcome to the Morguard North American Residential Real Estate Investment Trust Fourth Quarter Conference Call.
[Operator Instructions]
This call is being recorded on Thursday, February 15, 2024. I would now like to turn the conference over to Paul Miatello, Senior Vice President. Please go ahead.
Thank you, and good afternoon, everybody, and thanks for joining us for the REIT's fourth quarter conference call. I'll just do a quick roll call of everybody that's with us today. So we have Chris Newman, Chief Financial Officer; Angela Sahi, Senior Vice President in charge of Canadian Operations; and John Talano, Senior Vice President in charge of U.S. operations. And so with those quick introductions, I'll turn it over to Chris, our CFO, for a quick recap on the year of 2023 and Q4. Chris, over to you.
Thank you, Paul. As is customary, I'll provide comments on the REIT's financial position and performance. In terms of our financial position, the REIT completed the fourth quarter of 2023 with total assets amounting to $4.1 billion, higher compared to $3.9 billion as at December 31, 2022 resulting from acquisitions completed during the first quarter and from a fair value increase on the REIT's income-producing properties. The REIT finished the year with approximately $18 million of cash on hand and $2.6 million advance to Morguard Corporation under its $100 million revolving credit facility, providing the REIT with a total of $102.6 million of availability under that facility.
The following is a brief summary of the REIT's notable achievements throughout 2023. During the first quarter, the REIT acquired the remaining 50% interest in Fenestra at Rockville Town Square, a residential property located in Rockville, Maryland, comprising 492 suites for a purchase price of USD 71.5 million, including closing costs and assumed a mortgage payable of USD 34 million. Together with the acquisition of the retail asset, Rockville Town Square in 2022, the consolidation of ownership of this unique mixed-use asset creates operational efficiencies and the opportunity to enhance our long-term vision within the immediate submarket.
REIT acquired Xavier, a residential property located in Chicago, Illinois, comprising 240 suites to end the first quarter of 2023. The acquisition totaling USD 83.8 million including closing costs, elevates the REIT's core asset holdings to a significant $0.9 billion in value. Also during the first quarter, the REIT issued $56 million of 6% convertible debentures and fully repaid the maturing $85.5 million of 4.5% convertible debentures. The REIT completed the refinancing of 4 U.S. properties and 1 Canadian property, providing gross mortgage proceeds of $187.3 million at a weighted average interest rate of 4.86%, having a weighted average term of 9.6 years.
The maturity mortgages associated with the refinance property had a balance of maturity of $106.4 million at a weighted average interest rate of 3.36%, resulting in net additional proceeds of $80.9 million before financing costs. The REIT was active under its NCIB during the year, purchasing over 1.4 million units at an average unit price of $16.43 totaling $23.5 million. The REIT's IFRS net asset value per unit at December 31 is [ $38.34 ], making the NCIB plan an accretive use of capital. The REIT completed the fourth quarter with $1.4 billion of long-term debt obligations. And as at December 31, 2023, the REIT's mortgage payable has a weighted average term to maturity of 4.9 years, consistent compared to December 31, 2022, and the weighted average interest rate increased to 3.72% from 3.5% at December 31, 2022. The REIT's debt to gross book value ratio was 38.7% at December 31, 2023, a slight increase compared to 38% since December 31, 2022.
Net income was $185.3 million for the year ended December 31, 2023, compared to $239.6 million in 2022. The $54.3 million decrease in net income was primarily due to a decrease in fair value gain on real estate properties of $128.4 million, an increase in interest expense of $11.5 million, which were partially offset by a decrease in deferred income taxes of $63.3 million and an increase in NOI of $29 million. IFRS net operating income was $180.2 million for the year ended December 31, 2023, an increase of $29 million or 19.2% compared to 2022. The change in foreign exchange rate increased NOI by $8.2 million of the overall variance last year.
And on the same-property proportionate basis, NOI in Canada increased by $7.1 million or 13% mainly due to AMR growth, lower vacancy and a decrease in utility expense. NOI in the U.S. increased by [ USD 3 million ] or 4.3%, primarily due to an increase in revenue from AMR growth and ancillary revenue as well, partially offset by higher vacancy and an increase in operating expenses. And the change of foreign exchange increased the same property proportion NOI by $4.2 million.
Interest expense increased by $11.5 million for the year ended December 31, 2023, compared to 2022, primarily due to an increase in interest on mortgages of $10 million from higher principal and interest rates on the completion of the REIT's refinancing and the net impact of acquisitions and dispositions as well interest expense increased due to a higher noncash mark-to-market adjustment on mortgages of $0.7 million.
The REIT's 2023 performance translated into basic FFO of $92 million, an increase of $9.1 million or 11% when compared to 2022. And on a per unit basis, FFO was $1.65 per unit for the year ended December 31, 2023, an increase of $0.18 or 12.2% compared to $1.47 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 had an $0.08 per unit positive impact and the change in foreign exchange had a $0.05 per unit positive impact.
The impact of acquisitions net of dispositions of properties had an $0.08 per unit positive impact, demonstrating the success of REIT's capital recycling program, a decrease in other income, primarily from a decrease in interest expense -- interest income on the Morguard facility and the increase in interest earned on the restricted cash held as part of a 1031 exchange at an overall $0.05 per unit negative impact.
And the impact from units repurchased under the REIT's NCIB had a $0.02 per unit positive impact. The REIT's FFO ratio continued to decline to 43.8% for the year ended December 31, 2023, compared to 2022, a very conservative level, which allows for significant cash retention. And operationally, the REIT's average monthly rent in Canada increased to $1,674 at December 31, 2023, a 5.4% increase compared to 2022, reflecting the quality of our Canadian portfolio.
During the year, the Canadian portfolio turned over 11.3% of total suites and achieved AMR growth on REIT's turnover of 23.1%. While in the U.S., same-property AMR increased by 4.2% compared to 2022, having an average monthly rent of USD 1,845 at the end of December 2023, and as the REIT continues its strong performance, benefiting from strong market fundamentals across many regions.
The REIT's occupancy in Canada finished the fourth quarter of 2023 at 98.7% compared to 98.6% at December 31, 2022. Rental market conditions remain strong and stable as housing demand continues to outpace its supply and as an elevated level of immigration and high interest rate environment discourage tenants from homeownership. Same property occupancy in the U.S. of 94.2% at December 31, 2023, was lower compared to 95.3% at December 31, 2022. Management expects occupancies to be stable through the mid-winter months with reduced leasing activity as well as fewer sweet turnovers in the majority of its market.
During the year ended December 31, 2023, the REIT's total CapEx amounted to $44.3 million. That included revenue-enhancing in-suite improvements, common area, exterior building projects, energy initiative expenditures as well as garage renovations. At this time, I'll turn the call back over to the moderator to answer any questions.
[Operator Instructions]
First question comes from Jonathan Kelcher at TD Cowen.
First question, just on the Canadian turnover rates. It fell quite a bit in 2023. Just wonder maybe a little bit of color on that, your expectations for 2024 and maybe related to that, what sort of uplifts you expect to get in 2024 on turnover.
Jon, I'll turn it over to Angela, who can address that question.
So in terms of turnover, it's really the supply and demand dynamics here with especially with the interest rates being high, just the housing shortage, people are not moving. They know anywhere they move, they'll be paying higher rents. If we turn units over, you can see our turnover growth is pretty substantial. So that's a big part of it, the increased immigration. And then I would say trending for 2024, we'll probably see something similar for the first couple of quarters, but then Q3 typically is where we find a lot more of the move-outs in the summer months, that's where we kind of expect things to go.
Okay. And then a similar level of uplift in '24 as 2023?
Yes.
Okay. And then just secondly, on the acquisition front, I know you guys have a lot of up financing potential on your mortgage refinancings this year. What are you seeing in terms of acquisitions? Where would you be looking? What type of properties? Maybe give a little bit of color on that.
Yes, Jon, it's Paul here. Yes, I mean, we're continuing to screen the Canadian and U.S. markets, primarily the 1/3 was within our existing footprint. So I don't think we're going to go too further in the field. We're seeing -- with interest rates up in both sides of the border, we're still seeing better opportunities and better yields in the U.S. So that acquisition landscape is probably tilted towards the U.S., but we're continuing to look in both countries.
Would you be looking, Paul, more at stabilized properties or potentially value add?
I mean our -- we're traditionally a buyer of sort of stabilized and we do some value-add programs. So I don't want to make it sound like it's going to be anything too opportunistic. But we will look for, I think, what I refer to as late value add. So we're not looking to buy C properties and move them high up to scale. But we will be looking for some value-add opportunities. And I think our recycling program that we executed on through 2022 and the first part of 2023 sort of demonstrated that.
[Operator Instructions]
Next question comes from Jimmy Shan at RBC Capital Markets.
So just on the U.S. portfolio, I was wondering if you could just talk about what your expectation, what your [indiscernible] is in terms of the [ max breadth ] that you think you're going to get on new and existing leases in '24?
No problem. John, I'll put that one on you, if you can answer.
Sure. I would say we've definitely seen a slowing of our rent growth. We've had some really fantastic growth over the last several years. And we've slowed definitely going into the winter months, especially the holiday seasons and in winter, in our northern properties, but long term, I'm actually excited because I see that the development pipeline has really started to slow. So we expect probably more of the same of what we've been doing in 2023 in the last 2 quarters going into 2024. But beyond that, actually, it's looking quite good.
I think last quarter, you talked about how you don't expect new lease -- new lease rates to go negative. We've seen other REITs support negative new leases. Is that sort of your expectation that, that will happen there?
Well, you're seeing our AMR growth being consistent because generally, we take a conservative approach towards it. We're working on keeping our long-term residents in there. I think some companies were really aggressive with their rents and possibly got too aggressive. But we have a long-term approach. We're trying to keep residents in our apartments for the long haul. So we didn't spike our rents in many of our markets. We took a very conservative approach there. And there's still room in many of them.
There are a few markets that are small. New Orleans right now is dipping a little bit. But again, we only have 150, actually 200-and-some-odd units in that market. And then Tampa has dipped a bit too. But again, I think that's more related to the seasonality, and we look back years past. And of course, it's been very lumpy over the last several years because of COVID and the pandemic and all of that. But we're seeing more normal rent growth now that we saw pre-pandemic, if that makes sense during the winter months. So we're cautiously optimistic that things will continue on.
Okay. Okay. And then, Paul, maybe if I could add a question on the acquisitions and sort of allocation of the portfolio between geographies. If I could push you a little on that one, like you mentioned you are still seeing better yields in the U.S. But as you point out, the fundamentals in Canada seem to be a lot stronger than in certain parts of the U.S. at least. [ Confidence ] is cheaper here. Is there -- are you not thinking about potentially increasing that pie that you have in Canada? And there are -- seems that there are opportunities to buy new assets at pretty good cap rates here as well.
Yes, for sure, Jimmy. As I said earlier, we're definitely taking a hard look in both countries. So we're not ignoring the U.S. And sorry, we're not [indiscernible] in Canada, rather. We are focused on it. And my footprint comment earlier, probably more appliance to the U.S. than Canada. I mean our existing footprint geographically is somewhat narrow and Canada being largely GTA, Southwest Ontario and a little bit in Edmonton. So we are looking outside -- more outside that geographic existing footprint in Canada. So we are looking to major markets across the country. And yes, I mean, we definitely hope to be able to complete something, quite frankly, it's been a while since we bought anything in Canada. So that's not lost on the side. So we'll be looking hard throughout the first half of this year.
Okay. And then sorry. And then just on that, you were active. We did buy some stock in the quarter. How are you thinking about -- how you think about NCIB relative to acquisition?
Yes. I mean, I think there'll be a balance there. I mean, with the discount to net asset value that we're trading, we still look at it as a really good place to allocate some capital. So we'll -- I predict we'll continue buying back even at -- on some level. By the end of this year, you can see from the disclosures, the REIT will be -- the balance sheet will be pretty reloaded. So liquidity is not -- liquidity is not the issue here, right? So we'll be in a fortunate position where we can execute on sort of both parts of the program, right, NCIB and asset acquisitions. So things are -- things are in good shape essentially for the back half of the year.
There are no further questions at this time. Please proceed.
Okay. Well, thank you, everybody, for attending our fourth quarter conference call, and we look forward to speaking to you after Q1. Thanks again.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.