Morguard North American Residential Real Estate Investment Trust

TSX:MRG.UN

Earnings Call Transcript

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Morguard North American Residential REIT First Quarter 2021 Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, April 29, 2021. I would now like to turn the conference over to Mr. Rai Sahi. Please go ahead.

[Kuldip Rai Sahi, Chairman & CEO]

Thank you. Thank you very much. Chris, I'm going to pass it on to you, you can introduce everybody.

[Christopher A. Newman, Chief Financial Officer]

Okay. Thank you, Rai, and with me as well is Beverley Flynn, Paul Miatello, Angela Sahi, Patrick Stewart, and John Talano. So 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 first quarter of 2021 with total assets amounting to $3.1 billion, unchanged compared to December 31, 2020. The REIT finished the first quarter with approximately $19.8 million of cash on hand and $96.1 million available under its $100 million revolving credit facility with Morguard Corporation. The REIT completed the first quarter with $1.2 billion of long-term debt obligation, and as at March 31, 2021 the REIT's overall weighted average term to maturity was 4.6 years, a decrease from 4.8 years at December 31st, and having a weighted average interest rate of 3.45%.The REIT's debt-to-gross book value ratio improved to 42.1% as at March 31, 2021, from 42.8% at December 31, 2020. The REIT's IFRS net asset value at March 31, 2021, of $27.50 per unit compared to the current market price of approximately $15.50 reflects a compelling entry point for investors.Turning to the statement of income. Net income was $27.4 million for the 3 months ended March 31, 2021, compared to $97.2 million over the same period in 2020. The $69.8 million decrease in net income was primarily due to a decrease in the fair value gain on the Class B LP Units of $81.3 million due to a fair value gain of $6.5 million recorded during Q1 2021 compared to a fair value gain of $87.8 million recorded in Q1 2020. And a decrease in foreign exchange gain of $1.8 million which was also partially offset by a higher fair value gain on real estate properties of $17 million.IFRS net operating income of $15.2 million for the 3 months ended March 31, 2021, a decrease of $2.1 million or 12.2% compared to 2020. And on a same property proportionate basis, NOI in Canada decreased by $1.1 million or 7.6%. NOI in the U.S. decreased by USD 0.8 million or 5.2%. And the change in foreign exchange decreased NOI by $1.5 million. The decrease in NOI in Canada and the U.S. was impacted by higher vacancy. Interest expense increased by $2 million for the 3 months ended March 31, 2021, compared to 2020, primarily due to a non-cash decrease in the fair value gain on convertible debenture conversion option.The REIT's first quarter performance has translated into basic FFO of $15.6 million, a decrease of $2.5 million or 13.7% when compared to 2020. And on a per unit basis, FFO was $0.28 per unit for the 3 months ended March 31, 2021, a decrease of $0.04 compared to $0.32 per unit in 2020. The decrease in FFO per unit was due to the following. A decrease on a same property proportionate basis due to a decrease in NOI primarily from increased vacancy, and was partially offset by a decrease in trust expense that had a $0.02 per unit negative impact, and as well the change in foreign exchange rate had a $0.02 per unit negative impact. The REIT's FFO payout ratio was 53% for the 3 months ended March 31, 2021, a very conservative level, which allows for a significant cash retention. Operationally, the REIT's average monthly rent in Canada increased to $1,509 or a 4.3% increase compared to 2020 reflecting the quality of our Canadian portfolio. During the quarter, the Canadian portfolio turned over 2.1% of total suites in Canada and achieved 15.7% AMR growth on suite turnover. While in the U.S., same property AMR increased by 0.7% compared to 2020, having an average monthly rent of USD 1,429 at the end of March 2021.The REIT's occupancy in Canada finished the first quarter of 2021 at 93.6% compared to 98.8% a year earlier. The occupancy decreased in Canada due to continued lower leasing traffic, lower immigration levels, as well as 2 properties impacted by university closures. Same property occupancy in the U.S. of 95.1% at March 31, 2021, was slightly lower compared to 95.4% at March 31, 2020.During the first quarter of 2021, the REIT's total CapEx amounted to $5.7 million that included exterior building and revenue-enhancing in-suite improvements. Overall, in order to preserve liquidity, the REIT scaled back most of its revenue-enhancing CapEx and continued to focus on maintenance CapEx. And as at April 27, 2021, the REIT collected 98.4% of first quarter rental revenue and approximately 95.4% of April 2021 rental revenue, which is materially in line with historical rates.I'll now turn the call back over to the moderator, who will open the line for questions.

[Operator]

[Operator Instructions] Your first question comes from Matt Logan with RBC Capital Markets.

[Matt Logan, Analyst]

Just wondering if you could provide a little bit of commentary on how leasing is progressing so far into April and how the momentum is building through the year.

[Christopher A. Newman, Chief Financial Officer]

Thanks, Matt. I'll turn it over to Angela first to speak to the Canadian portfolio.

[Angela Sahi, Senior VP of Corporate Development & Director]

Yes. So in Canada, even despite the stay-at-home order we are finding that with the spring market historically this is the time we see most of the demand starting. And the last 2 weeks, we have seen much more leasing traffic and prospects signing leases for the summer. And even universities, it seems like there are partial openings expected or anticipated for fall. So people are signing leases for July and August. So overall, we are seeing some positive growth there.

[Christopher A. Newman, Chief Financial Officer]

Thanks. And, John, do you want to add anything in the U.S.?

[John Talano, Vice President of Operations]

Sure. For the U.S., I would say our leasing season started much earlier than typical. We've had some really good activity in all of our markets actually over the last month and a half or so and we are now already at above our occupancy levels pre-pandemic. So it's very good and it's very strong and improving every day right now in the U.S.

[Matt Logan, Analyst]

And, John, would it be fair to say that the incentives are declining as that leasing interest is picking up?

[John Talano, Vice President of Operations]

Yes, definitely. We still had -- well, as an example, we're really only using incentives in Chicago and D.C. and as an example, the Chicago market -- I think I spoke about Marquee on the last call and our assets there. The Chicago market has really exploded with activity. We were in the mid 70s in occupancy at -- in Chicago and the Marquee today is 92% occupied and 98% leased. So in those markets, we are still using some incentives because there is still a large supply of new product coming in in Chicago specifically, but it is at a much reduced pace. And we have nothing left to lease. So from that perspective, we're doing really well.

[Matt Logan, Analyst]

Great news. And maybe this is a question for Chris. Could you remind us how you're calculating the incentives in terms of how they flow through the P&L? Are those just being expensed or amortized in the income statement?

[Christopher A. Newman, Chief Financial Officer]

They're are amortized over the term of the lease, typically 12 months. I was just saying the cash flow statement has the cash incentive listed on there and then included in our financials there is a line in our cash flow support that speak to the amortized portion.

[Matt Logan, Analyst]

Appreciate that. And last one for me, just on the lease-up of Josephine in New Orleans. Can you give us a sense for where that stands today?

[Christopher A. Newman, Chief Financial Officer]

Sure. It was definitely slow in the beginning. I think we reported that we were 12% occupied at the quarter and our goal was 28%. So we were only halfway there. We're already at 21% occupied and 28% leased a month later. So the momentum is definitely improving and we expect that to continue to improve in New Orleans. We have a lot of university traffic from Loyola and Tulane universities and that's absolutely picking up as well.

[Operator]

Your next question comes from Lorne Kalmar with TD Securities.

[Lorne Kalmar, Associate]

Maybe just following on Matt's question. In the U.S., obviously things are opening. It looks like there is a return to normalcy and clearly you guys are posting some good numbers and great to hear that you are above pre-pandemic occupancy-wise. Do you think we get back -- maybe let me rephrase, when do you think we get back seeing positive same property NOI growth in the U.S. portfolio?

[John Talano, Vice President of Operations]

We're very -- we're in a great place right now. I expect that our trends will continue through this next quarter. Obviously, I cannot predict the future nor want to even pretend to with the pandemic, but things are very strong, our expenses we've been able to hold pretty well. But we've also had a lot of activity. So we are going to see an increase in move-in and make-ready expenses. But that is because we're filling up very quickly.

[Lorne Kalmar, Associate]

Yes, so presumably that would be partially offset by the growth in revenue, right?

[John Talano, Vice President of Operations]

Right. Well, we actually held rent trying to do the right thing during the pandemic but we have released those controls and we are definitely pushing rents with our software every day.

[Lorne Kalmar, Associate]

Okay. And with things sort of starting to reopen in the States and I don't think there's much bad debts in Canada, is the expectation -- not that they're a material amount, but that they'll continue to trend downwards?

[John Talano, Vice President of Operations]

Yes. I think we're going to have a group of folks that have been deferring rent and working with the eviction moratorium and simply just holding off on paying rent. We've seen when areas for evictions open up, folks react quickly and pay off a lot of their debts almost immediately. So we think a big chunk of what's out there is actually going to be paid off immediately and quite frankly the remaining amount is immaterial.

[Lorne Kalmar, Associate]

Okay. And in the States, what would you say are the strongest markets, those ones that have kind of started to fully reopen, the Floridas of the world and whatnot?

[Christopher A. Newman, Chief Financial Officer]

Florida has been strong throughout the pandemic. They're all performing very well at this point, but we saw the most -- I mean you could see where the most rent growth is and that's where we're -- that's where we've been the strongest. But certainly, Florida, Texas, and even Georgia have all performed.

[Lorne Kalmar, Associate]

Okay. And then maybe just lastly for me. With things appearing to stabilize and a little more visibility, do you guys think you'll start looking at acquisitions. I know north of the border is a little tough, but in the U.S.?

[Kuldip Rai Sahi, Chairman & CEO]

Well, this is Rai Sahi. We are looking at acquisitions and if you were to come and look, we are looking in the U.S. mostly, we looked at some in Canada, but not much. So we're looking at some of the market in the U.S., including the possible development of new product as [ the numbers work ].

[Lorne Kalmar, Associate]

Okay. Are there any new markets you guys would like to get into or you're comfortable where you guys are?

[Kuldip Rai Sahi, Chairman & CEO]

Well, that depends on opportunity. We are looking at new markets but whether we would do anything or not, only time will tell.

[Operator]

We have a following question from Yash Sankpal with Laurentian Bank.

[Yashwant Sankpal, VP & Equity Research Analyst of REIT]

Just want to understand the Canadian market a little bit -- your Canadian portfolio a little bit better. I see that your rent growth on turnover is quite impressive. It's a small base, but still 15% growth -- 16% is not like small number but you saw a sequential drop in occupancy. So just want to understand what is happening, who are you losing your tenants to and who are the new guys coming in? Like any color there would be great.

[Angela Sahi, Senior VP of Corporate Development & Director]

Sure. So there is actually some positive spin on it because we're actually losing people that are below market. They are actually going into new homes in the Mississauga portfolio. And so those units are coming to market at this point. So it's -- and we do have a little bit more turnover compared to last year, but not significant. And then so obviously there is growth from just that transition from old rent to new rents. And then we are still applying for above-guideline applications. Although there is a 0% guideline increase, we do have those ongoing as well. So we're holding our rent, so, at pre-COVID market rates right now and so that's why we're okay with the temporary vacancy in the portfolio.

[Yashwant Sankpal, VP & Equity Research Analyst of REIT]

And based on what kind of leasing happening right now, where do you think you'll be by end of, say, September?

[Angela Sahi, Senior VP of Corporate Development & Director]

That's really hard to predict. I think it's going to be -- we're hoping for a comparable effect as the U.S., like we're hoping for a bounce-back once the vaccine gets rolled out. So I'm hoping by September we'll be back to normal, but it's hard to predict.

[Yashwant Sankpal, VP & Equity Research Analyst of REIT]

Okay. And just, Rai, you mentioned about development projects. Are these -- all these projects be in the U.S. or are you looking at any Canadian opportunities?

[Kuldip Rai Sahi, Chairman & CEO]

We are looking at both side, mostly in the U.S. It is tough to make the economics work these days in GTA with the cost. Because of the condo market now, it's pretty tough to make the numbers work on a new project.

[Operator]

[Operator Instructions] There are no further questions.

[Kuldip Rai Sahi, Chairman & CEO]

Thank you very much.

[Operator]

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

[John Talano, Vice President of Operations]

Thank you.

[Christopher A. Newman, Chief Financial Officer]

Thank you. Bye now.

[Angela Sahi, Senior VP of Corporate Development & Director]

Bye.