Morguard North American Residential Real Estate Investment Trust

TSX:MRG.UN

Good afternoon, ladies and gentlemen, and welcome to the Morguard North American Residential REIT 2025 First Quarter Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, May 1, 2025.

I would now like to turn the conference over to Mr. Paul Miatello. Please go ahead.

Thank you very much, and good afternoon, everybody, and welcome to the REIT's First Quarter Conference Call, results call, where we're going to review our first quarter results. So just by way of a quick roll call, we've got Angela Sahi here, SVP of Canadian Operations, we got Ruth Grabel, Assistant Vice President, Canadian Operations; and we've got John Talano, Senior Vice President, U.S. Operations. And of course, with us is also Chris Newman, our Chief Financial Officer.

And at this point, I'll turn it over to Chris for some comments, and then we'll open it for Q&A session.

Okay. Thank you, Paul. As is customary, I'll provide comments on the REIT's financial performance.

In terms of our financial position, the REIT completed the first quarter of 2025 with total assets amounting to $4.7 billion, higher compared to $4.6 billion as at December 31, 2024, mainly due to a fair value increase on the REIT's income-producing properties. REIT finished the first quarter with approximately $49 million of cash on hand and $122 million advanced to Morguard Corporation.

During the quarter, the REIT completed the refinancing of a property located in Kitchener, Ontario, providing gross mortgage proceeds of $79.4 million at an interest rate of 4.02%, and for a term of 10 years. The maturing mortgage had a balance at maturity of $30.8 million, resulting in net proceeds of $48.6 million before financing costs.

During the first quarter of 2025, the REIT continued to be active under its NCIB, repurchasing approximately 585,000 units at an average unit price of $17.34. The REIT's IFRS net asset value per unit at March 31, 2025, is $43.84, making the NCIB plan and appealing use of capital. As at March 31, 2025, the REIT's mortgages payable had an overall weighted average term to maturity of 5.3 years, an increase from 5.2 years at December 31, 2024, and the weighted average interest rate increased to 3.91% from 3.88% at December 31, 2024. The REIT's debt to gross book value ratio was 39.9% at March 31, 2025, a slight increase compared to 39.7% at December 31, 2024.

Turning to the statement of income. Net income was $38.3 million for the 3 months ended March 31, 2025, compared to $24.8 million in 2024. The $13.5 million increase in net income was primarily due to the following noncash items. A decrease in fair value loss on Class B LP units of $16.7 million, a decrease in deferred income tax of $2.2 million, which was partially offset by a lower fair value gain on real estate properties of $4.2 million. IFRS net operating income was $20.8 million for the 3 months ended March 31, 2025, an increase of $0.2 million, or 1.1%, compared to 2024.

And on a proportionate basis, proportionate NOI for the 3 months ended March 31, 2025, increased by 4.8% compared to 2024 and was comprised of the following: NOI in Canada increased by $0.4 million, or 2.8%, mainly due to AMR growth, partially offset by an increase in operating expenses and a higher vacancy. NOI in the U.S. decreased by USD 0.1 million, or 0.5%, from an increase in operating expenses, partly offset by AMR growth and an increase in ancillary revenue, and the change in foreign exchange rate increased proportionate NOI by $1.8 million.

Interest expense increased by $2.9 million for the 3 months ended March 31, 2025, compared to '24, primarily due to an increase on interest on mortgages of $2.7 million from higher principal and interest rates on the completion of the REIT's refinancing. Partially offsetting the additional interest on mortgages was an increase in other income, of $1.6 million, primarily from interest income earned on excess cash held, or advanced to Morguard Corporation on the credit facility.

The REIT's first quarter performance translated into basic FFO of $23.2 million, an increase of $0.7 million, or 3% when compared to 2024. And on a per unit basis, FFO for the 3 months ended March 31, 2025 increased by $0.03 to $0.44 per unit compared to $0.41 per unit in 2024 due to the following.

On a proportionate basis, in local currency, an increase in interest income and an increase in NOI offset an increase in interest expense and trust expense, having a net nil per unit impact, and this included a $0.01 per unit negative impact relating to the vacancy from offline units being renovated at a property located in Florida. The change in foreign exchange rate had a $0.02 per unit positive impact, and the impact from units repurchased under the REIT's NCIB had a $0.01 per unit positive impact.

The REIT's FFO payout ratio of 43.7% for the 3 months ended March 31, 2025, represents a very conservative level, which allows for significant cash retention. Operationally, the REIT's average monthly rent in Canada increased to $1,801 at March 31, 2025, a 5.8% increase compared to 2024, reflecting the quality of our Canadian portfolio. During the first quarter, the Canadian portfolio turned over approximately 1.7% of its suites and achieved AMR growth on suite turnover of 16.2%. Occupancy in Canada finished the first quarter of 2025 at 96.4% compared to 98.4% at March 31, 2024, and was lower primarily due to increased competition and seasonally slower leasing activity. Management believes market conditions will remain strong and stable and as housing demand continues to outdistance supply.

While in the U.S., AMR increased by 0.4%, compared to 2024, having an average monthly rent of USD 1,887 at the end of the first quarter. Occupancy in the U.S. of 95.6% at March 31 was higher compared to 94% at March 31, 2025, as well as a significant improvement from 93.8% at December 31, 2024, and was predominantly achieved by modest reductions of asking rents and limiting renewal increases over the short-term.

Now that occupancies have stabilized, the REIT can pivot and return to rental growth given strong rental demand. And during the 3 months ended March 31, 2025, the REIT total CapEx amounted to $7.6 million that included revenue-enhancing in-suite and tenant improvements, garage renovations, exterior building projects, common area, energy initiative expenditures as well as mechanical plumbing and electrical projects.

At this time, I'll turn the call back over to the moderator to answer any questions.

[Operator Instructions] Your first question comes from Jonathan Kelcher of TD Cowen.

First question, just probably for John. But on the U.S. portfolio, occupancy is up nicely. I think Chris alluded to AMR being able to push AMR. Like how should we think about the cadence of AMR growth going forward the next few quarters?

Well, we are absolutely moving into our busiest leasing season. So we are in a great spot pushing rent. What's actually driven some of our decrease in rental rates that we were working with is a large portion of our residents are going off month-to-month leases, which are generally expensive and moving to much longer-term. So over the last quarter, 22% of our renewals actually went from month to month to an average term of 12.9 months. So they're definitely hunkering down and taking that best rate that suits them.

And I would say it's the same thing we're hearing in the news. The cost of homeownership and insurance and all those things are expensive and interest rates are high. So folks have chosen to go longer-term with us, that's obviously good news for our rental base and our longer-term prospects with renewals and turnover costs and that sort of thing.

Moving forward, we're definitely pushing rents. I expect it to be more normal, pre-COVID, 3% to 5% range depending on market. But we are full and we're right where we want to be. So we're going to be as aggressive as we can.

Okay. Which markets would you say are stronger versus weaker right now?

While Chicago, I think we talked about last quarter has very little new development going on. So we are really full in those markets. So we expect to see some good numbers there.

I would say Dallas is a little soft. It's not bad, but it definitely has been a little soft comparatively. And North Carolina has been a little soft as well.

Is Dallas just the sort of remnants of supply coming on?

I believe that's part of it. I think we're seeing uncertainty our geopolitical environment. I think our base in Dallas is tech related. So I think their positions, they move in and out pretty regularly. So those are 6-month positions or 12-month positions. So those folks I think, have had a little insecurity in job markets. But our pocket, where the vast majority of our assets are in Las Colinas, which is relatively insulated from the development that's going on in Dallas, which is in the outer loop where we're much more inside the loop. If that makes sense.

Yes. That's helpful. And then just switching to the Canadian portfolio. We see lots of headlines on rental softness in Toronto and declining asking rents and higher incentives. Could you maybe give us an idea of what you're seeing in your portfolio on incentives and asking rents and how the spring leasing season has started out for you?

So this leasing activity has definitely picked up. It was tough winter months, a lot of snow and which prohibited people from looking at units, but showings have definitely increased and so has our leasing. You are right, there has been pressure on market rents. And there is a lot of competition right now, and we've had to offer incentives in order to be competitive.

So we are offering 1 month free rent, just as I said, to compete with the new product who are offering up to 2 months free rent. In regards to our -- but we're still doing quite well, like our AMR has increased by 5.8%. And we anticipate our rental uplift to continue to be between like 15% to 20%.

Okay. That's -- that is -- and then just the one Mississauga property that's got the garage going on. When do you expect that to sort of be done in occupancy to pick back up there?

So we expect that to be done at the end of June. There is some other projects that are coming online on 2 other of our underground -- for underground restoration, but that's not going to take place until like the end of the year. But this particular project will be at the end of June, and we anticipate the lease-up to begin.

Your next question comes from Alexander Leon of Desjardins Capital Markets.

Maybe just sticking with that property in Mississauga, are you able to quantify the impact of that underground garage renovation had on occupancy in either that property or the Mississauga portfolio?

It's difficult to tell, but our move-outs are higher than they were at the same time last year. And the feedback we're getting from a lot of the residents is because of the duration of the underground garage restoration project, this has been like a 3-year program. And so we are finding some tenants are moving out due to that.

Again, what we're seeing now is towards the end. And the building looks good, and we're seeing a lot more traffic come to the building.

Okay. Got it. Maybe sticking with the Ontario portfolio. How much rent incentives or how aggressive are you willing to get on maybe softening rents to drive occupancy in that portfolio? Is that something you're considering? Or are you still trying to keep that AMR growth high?

We're still trying to keep that AMR growth high. We find with that 1 month. I have -- we might offer 2 months free parking, or a -- we call it a signing bonus, little signing bonus just to keep our rates up. Because of rent controls, it's really difficult to recover that rental loss. So -- but right now, we seem to have attracted a lot of people to the building and leasing activity has increased.

Okay. That's good color. And then last one for me. Just wondering if there's been any discussions with respect to potentially executing the early repayment of the convertible debenture if that would be possible?

I think, Alex, something we've looked at. I mean there's obviously a penalty clause that comes with that early repayment. So again, it's something that we're evaluating. Obviously, the REIT is in a good position, whether there is available cash to look at that. But again, we're also thinking about capital allocation in terms of do you pay down debt, do you keep buying back units. And obviously -- we obviously still have a desire to grow and acquire some assets. So we're balancing all 3 of those sort of factors in the decision making.

Okay. And maybe on what you mentioned there, the desire to acquire assets. Is there any changes in the transaction markets that you guys are looking at?

Yes. Maybe I'll start, and then maybe I'll get Angela to comment. But while -- I'll start by saying in the U.S. It's probably a fair characterization to say that we pumped the brakes a little bit in terms of looking at things. And again, it's all related to the administration, what's happening in the economy, what's happening with bond yields or USTs and interest rates. So we're still scanning. We're still underwriting assets in markets we find attractive. But like I said, probably a fair comment to say that we've slowed things down in the U.S. until we get a little more clarity on what's going on.

Maybe Angela, you want to comment on that?

Yes, sure. Yes. I mean we're always looking at both U.S. and Canada. But to Paul's point, I think we are pausing on the U.S. a bit more because we're also finding a lot more opportunity in Canada. And we're seeing that there are sellers that are more willing to put higher quality assets on the market and cap rates have come up a bit. So we are constantly in the process of looking at various communities, I guess, you could call it, in the GTA specifically.

Okay. And with respect to maybe some of the comment on the some of the pressures you guys have seen on the spreads from increased competition from some of the new rentals, would you guys be looking at any new build product?

To acquire, Alex, is that the question?

Yes. That's right.

We would look at acquiring new build, concern -- yes, yes, definitely. There's pressure for us for sure. But one thing we did, we did do a deep dive. We did an analysis of the tenants that are moving out and 70% of those tenants are more than $200 below market, which was an interesting analysis to see. So we hadn't had this kind of movement in the past for the turnover. It typically was people that were at market rents. And so this was interesting to see. And a lot of them, it seems like when we do our surveys of buying homes, they say that's enough money. So there is obviously, for certain price points on homes, there -- it seems to be there's like some opening up of that as well, the ability to purchase.

And we're actually also scanning the market and looking at our competition to see we do have, obviously, much larger units to market. And larger facilities in general with bigger amenity spaces and things like that compared to some of the newer products. And there's really just a few buildings in our kind of Mississauga core area, which we're competing with. And once those are absorbed, we're pretty confident that we'll just revert back to regular occupancy levels.

Your next question comes from Jimmy Shan of RBC Capital Markets.

So just following up on a few comments you guys made. So first on the Angela, I think you mentioned cap rates seem to have bumped up a little bit. Where are cap rates today?

We're seeing like 4.25% to 4.5%, GTA.

And that would be on an asset that has -- I guess, if there is a typical mark-to-market rent opportunity, like how would those be on market rent?

I think that would be on the older products, older existing stock with the mark-to-market opportunity, Jim. Agreed, Angela?

Yes, yes.

Okay. And then on the new product that are competing with your assets. Are they mostly condo rentals that are competing that were you seeing more some of the pressure and...

We're seeing Purpose-built rental.

Purpose-built rental. But would this not be at a much different price point?

They're actually not at a much different price point because we were pushing our rents so high that we were close to that price point.

Okay. And then the -- you mentioned there's a couple of hundred dollar rent that the tenants that are leaving of rents that are well below market. I think you attributed that to the fact that they're maybe buying homes...

Yes...

Yes. Could they also be like just leaving the country? Or like are you seeing this sort of population growth decline or non-permanent resident leaving the country. Is that -- are you seeing any sort of evidence of that happening within the portfolio?

For sure. We're seeing that as well. I'll let Ruth to speak to that.

Yes, we are seeing that, but it's a small percentage. It's not very large at all. But there are a few that are leaving because their Visa has come up and not -- don't have their work permits any longer. So we've kind of seen a handful in the Mississauga portfolio.

Yes. And I think immigration in general has impacted the demand whereas last year, there was that demand supply issue, and we did have a large number of, I guess, immigrants that were here between students and just the workforce, and we've seen a decline in that for sure.

Is it your sense that this is going to be like this or may get worse before it gets better?

I think it's probably -- in terms of the immigration piece, it's probably bottomed out. But with the new government, well, with the new Prime Minister, we're hoping that maybe that will loosen back up a bit, and they've been really strict. We've seen it even with our employees and certain people who come on student Visas, that's been converted to work permits. They've been impacted and they've been asked -- the government has been pretty strict on asking people to leave the country. So it's definitely a surprise in the way things have been handled, but we'll hopefully see that could change.

Okay. And then last question for me on the U.S. side. John, you talked about the conversion of month-to-month to longer-term. So was that really tenants trying to time the market bottom -- market rent bottom before they lock in the rates? Is that the dynamic play here?

No, I think more of it is hunkering down. I think the uncertainty in our geopolitical environment is really what's driving it and sort of a realization that homeownership is not an option. So it's cost, right? They see that interest rates aren't coming down. They see insurance rates are not coming down. And we believe that they're just putting off their home buying opportunities for another year.

[Operator Instructions] Your next question comes from Dean Wilkinson of CIBC.

Maybe this question is for John. John, what's the delta between the month-to-month leases and locking in for 12 months across the assets?

Sure. It absolutely changes. We have -- we basically allow our residents to choose their lease term, right? So depending on our exposure, our occupancy, things of that nature, the rates will change. A 12-month lease might not be the least expensive. It could be a 7 month. It could be a 13-month. But there is a big delta between the month-to-month to any term, right? So those are the most expensive. The last quarter, the difference was roughly 30%, on those particular leases.

Okay. Okay. Quite meaningful. Yes. And then I guess the view would be -- go ahead.

And again, that's just for those portion of the renewals, right? So even if the others are pushing up 5%, 6% when you have that 20 percentage, that's significantly less, it has an impact.

Right. And then the view, I guess, is 12 months hence, when that rolls, you're now coming off of the lower base and then you've got much more of a lift in 2026?

Correct. Correct. Well, and again, we're pushing those rents at the 3% to 5% rate. But if someone goes from month-to-month to any term, right, there will be a significant reduction just because we price that month-to-month really high because we don't want people generally to take it.

Got you. And then just maybe coming up closer to home, Angela. The 1,800, I'm surprised that it's actually purpose built that you're running into at that level. I would think that at those levels, it's probably not economic, but who knows what their land basis is.

What would the difference, say, between your in place and a comparable...

1,800 is the AMR, right? Like what we were talking about with the newer market rents when we're renting, we're more like at 2,400. We're at 2,400 and that's what the new product is. But they are on a per square foot basis, they're higher because they're a much smaller units. But on...

That was the second part of the question.

Yes. Yes, that's the issue. Yes. And obviously they had [ laundry ] -- we don't have a laundry in the unit. Yes. Yes. So they're definitely more competitive. They're newer. They've got nicer and beautiful buildings with new amenities, but there's only a couple of them like literally in the neighborhood that would be competing with, but they're almost across the street, so.

Great. And then what would the comparable rent, say, for condo type product? I would imagine that it's probably closer to $3,000 a month?

It's roughly the same $3,000.

Roughly the same.

Between $2,400 and $3,000.

Okay. So that's likely where -- right. That's likely where the pressure comes not from maybe so much your assets. Okay. That's all I had.

There are no further questions at this time. So I will now turn the call over to Mr. Paul Miatello. Please continue.

Thank you, and thanks, everybody, for joining us at our Q1 results conference call, and we look forward to speaking to you in July. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.