Morguard North American Residential Real Estate Investment Trust

TSX:MRG.UN

Earnings Call Transcript

[Operator]

Good afternoon, ladies and gentlemen, and welcome to Morguard North American Residential Real Estate Investment Trust first quarter results conference call. [Operator Instructions] This call is being recorded on Thursday, May 2, 2019.I would now like to turn the conference over to Paul Miatello. Please go ahead.

[Paul Miatello, Senior Vice President]

Thank you very much, and thanks, everybody, for joining us on our Q1 2019 Conference Call for Morguard North American Residential REIT. With me today, I have Chris Newman, Chief Financial Officer; Angela Sahi, Senior Vice President; Sanjay Ratejay, Vice President of Operations for Canada; John Talano is on the phone, our Vice President of U.S. Operations; and Rai Sahi, our Chief Executive Officer.So with that, I will turn the call over to Chris Newman to give us a bit of a results update, and then we'll open the floor for questions.

[Christopher A. Newman, Chief Financial Officer]

Great. Thank you, Paul. As is customary, I'll provide comments on the REIT's financial position and performance then open up the floor for questions.In terms of our financial position, the REIT completed the first quarter of 2019 with total assets amounting to $3 billion compared to $3 billion at December 31, 2018. During and subsequent to the first quarter, the REIT sold 5 properties located in Louisiana, comprising 843 suites for net proceeds of $27.5 million after the assumption and repayment mortgages payable; the disposition of the 5 Louisiana properties, having an average age of 40 years; all of the sale of the REIT's Alabama properties in July 2017 and is consistent with the management's strategy to dispose of noncore assets and to focus on opportunities to acquire properties located in urban centers and major suburban markets in Canada and the United States.The REIT finished the first quarter of 2019 with $23 million of cash on hand and $1.6 million owing to Morguard Corporation under its revolving credit facility. The REIT has $100 million credit facility, which can be drawn in either Canadian or U.S. dollars and in which the REIT can use for acquisitions and general corporate purposes.The REIT completed the first quarter of 2019 with $1.1 billion of long-term debt obligations. There was no refinancing activity during the first quarter. As at March 31, 2019, the REIT's overall weighted average terms of maturity was 5.6 years, a decrease from 5.8 years at December 31, 2018. The REIT's weighted average interest rate also decreased to 3.48 compared to 3.49 over the same period.The REIT continued to make progress in reducing its overall leverage. The REIT's debt-to-gross book value ratio improved to 46.5% at March 31, 2019, from 47.9% at December 31, 2018. MRG had an IFRS net asset value of $25.87 per unit as at March 31, 2019, compared to the current market price of about $17.50, still reflecting a compelling entry point for investors.Turning to the income statement. Net income of $3.7 million for the 3 months ended March 31, 2019, decreased by $76.7 million compared to $80.4 million in 2018. The decrease was primarily due to an increase in interest expense and noncash changes mainly from a lower fair value gain on real estate properties, a higher fair value loss on the Class B LP units and a higher foreign exchange loss partially offset by a decrease in deferred income taxes compared to 2018.NOI of $16.8 million for the 3 months ended March 31, 2019, decreased by $0.3 million or 1.6% compared to 2018. Same property proportionate NOI in Canada increased by $0.7 million or 5.9% and in the U.S. increased by USD 0.4 million or 3.1% compared to 2018. Interest expense increased by $2.9 million for the 3 months ended March 31, 2019, compared to 2018. Excluding noncash fair value adjustments, interest expense increased by $0.8 million primarily due to the loss on extinguishment of mortgages payable in connection with the disposal of 4 Louisiana properties of $0.5 million.The REIT's first quarter performance has translated into basic FFO of $15.2 million, an increase of $0.5 million or 3.4% compared to 2018. On a per unit basis, FFO was $0.30 per unit for the 3 months ended March 31, 2019, an increase of $0.01 or 3.4% compared to $0.29 in 2018. The loss on extinguishment of mortgages payable had a $0.01 negative impact, and the change in the foreign exchange rate had a $0.01 positive impact. The REIT's FFO payout ratio is 56.7% for the 3 months ended March 31, 2019, a very conservative level, which allows for a significant cash retention.Operationally, the REIT had a successful quarter with AMR in Canada increasing to $13,083, reflecting the quality of our Canadian portfolio and translates into an overall 3.5% increase in rent levels over 2018. During the quarter, the Canadian portfolio turned over 2.8% of total suites in Canada and achieved 15.4% AMR growth on suites turned over. While in the U.S., same-property AMR increased by 3.1%, having an average monthly rent of USD 1,306 at the end of the third quarter of 2019 compared to USD 1,267 at the end of Q1 2018.The REIT continues to report strong occupancy, with Canada finishing the first quarter of 2019 at 99.3% compared to 99.2% a year earlier. Same-property occupancy in the U.S. continued to improve over last year. Occupancy increased to 95.3% from 92.6% in 2018.I'll now turn the call back over to the moderator who will open up the floor for questions.

[Operator]

[Operator Instructions] Your first question is from Lorne Kalmar from TD.

[Lorne Kalmar, Associate]

Just quickly on the dispositions, were they in line with IFRS?

[Christopher A. Newman, Chief Financial Officer]

Yes, they were in line with IFRS. Yes.

[Lorne Kalmar, Associate]

Okay. And then on the New Orleans development, what yield are you guys targeting on that?

[Christopher A. Newman, Chief Financial Officer]

We're early in sort of that redevelopment. So I mean we'd be targeting something north of 7.5. But again, we're still sort of early in terms of peeling back walls and things like that. So -- but the target's about 7.5.

[Lorne Kalmar, Associate]

Okay. Fair enough. I guess you'll never know what you're going to find behind the walls. And then I guess now with the U.S. portfolio margin stabilized at over 95% occupied, are you guys looking to resume acquisition activity in the U.S. at least?

[Kuldip Rai Sahi, Chairman & CEO]

Well -- this is Rai Sahi. Well, we're obviously always looking to have an acquisition, but we're watching to see what happens. There's nothing that we are in a position to report at this stage. But we are looking mostly in the U.S. We always look in Canada, but there's nothing ever available really.

[Lorne Kalmar, Associate]

Fair enough. And then just lastly, again, I guess with now the occupancy in U.S. stabilized, do you guys think you can start pushing rent a little more aggressively?

[Kuldip Rai Sahi, Chairman & CEO]

Is John on the line?

[Christopher A. Newman, Chief Financial Officer]

John's on the line.

[John Talano, Vice President of Operations]

Yes, I'm here. Yes, I would say absolutely we already have. We were really focused on occupancy using our revenue management system over the winter to really push that up, so we're in a great place now. And the intent is to push rents as we're going into spring for sure.

[Operator]

[Operator Instructions] Your next question is from Yash Sankpal from Laurentian Bank.

[Yashwant Sankpal, Analyst of Real Estate Investment Trust]

Just on your U.S. portfolio, where do you expect your U.S. occupancy to end by year-end?

[Kuldip Rai Sahi, Chairman & CEO]

John, do you want to answer that?

[John Talano, Vice President of Operations]

Sure. We're at about our optimum level today, so we're shooting for the 95%, 96% range. We do have a lot of turnover over the summer months. But again, that's usually our opportunity to push some rents as well. But we're about at our optimum levels.

[Yashwant Sankpal, Analyst of Real Estate Investment Trust]

All right. And you used -- your margin in the U.S. portfolio was down year-over-year. So I was wondering what would the margin be if those one-time items were not there. And how should we model your margins going forward?

[Kuldip Rai Sahi, Chairman & CEO]

John, do you want to answer that?

[John Talano, Vice President of Operations]

Yes, I'll take that, too. I would say that we had some significant acquisitions with Coast and Fenestra that when you look back, were not fully stabilized at that point in 2018. So we were short on staff and had other expenses that actually were lower in general at that point. Our expenses in Q1 2019 were actually pushed up a little bit with some utilities from the polar vortex in our northern cities as well. So I believe they will stabilize a little bit and move 1 point, 1.5 points, but they're not going to move too much.

[Yashwant Sankpal, Analyst of Real Estate Investment Trust]

Got it. Okay. And so you sold your -- part of your Louisiana portfolio. Are you planning to sell the entire thing there?

[John Talano, Vice President of Operations]

No. I mean as far as the rest, we've only got a couple of properties left in Louisiana, and we're happy with what we have now. So that part of the disposition program is done.

[Yashwant Sankpal, Analyst of Real Estate Investment Trust]

And how do you plan to replenish that income? Is there anything imminent that you guys plan to do or...

[John Talano, Vice President of Operations]

Like Rai said a couple of minutes ago, we're looking -- we're kicking tires, but there's nothing to report on at the current time, but we are definitely looking to replace that income, yes.

[Operator]

[Operator Instructions] There are no further questions at this time. Please proceed.

[Paul Miatello, Senior Vice President]

Okay. Thanks, again everybody, for joining us on the conference call. We look forward to speaking next quarter. Thank you.

[Operator]

Ladies and gentlemen, this concludes your conference call today. We thank you for your participating and ask that you please disconnect your lines.