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 Second Quarter 2020 Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, July 30, 2020. And I would now like to turn the conference over to Rai. Please go ahead.

[Kuldip Rai Sahi, Chairman & CEO]

Okay. Thank you. Thank you. Okay, Bev, I'm going to let you do the introduction. Go ahead.

[Beverley Gail Flynn, Senior VP, General Counsel & Secretary]

Welcome to the Morguard North American Residential REIT's North American investor call for our second quarter. I think our main comments today will be with the Chief Financial Officer, Chris Newman.

[Christopher A. Newman, Chief Financial Officer]

Thank you, Bev. So as is customary, I'll provide comments on the REIT's financial position and performance. In addition, I'll provide a brief operational and liquidity update, as we continue to focus on our essential service of providing safe homes for our tenants and providing a safe work environment for our employees during this COVID-19 pandemic. In terms of our financial position, the REIT completed the second quarter of 2020 with total assets amounted to $3.2 billion compared to $3 billion in December 2019. The increase is mainly due to the appreciation of the U.S. dollar since year-end. The REIT finished the second quarter of 2020 with approximately $31 million of cash on hand and $10.5 million advanced to Morguard Corporation under its $100 million revolving credit facility. The REIT completed the second quarter of 2020 with $1.3 billion of long-term debt obligations. And during the second quarter, the REIT completed the refinancing of a property located in South Ontario for additional net proceeds of $15.8 million. The new CMHC insured loan has a term of 10 years at an interest rate of 2.03% and the maturing mortgage had an interest rate of 4.25%, a considerable interest rate reduction. As at June 30, 2020, the REIT's overall weighted average term to maturity of all of mortgage debt was 5.3 years, a decrease from 5.6 years at December 31, 2019. And our weighted average interest rate decreased slightly to 3.46% from 3.48% since December 31, 2019. The REIT's debt-to-gross book value ratio improved slightly to 43.5% at June 30, 2020, down from 44.1% at December 31, 2019. The REIT's IFRS net asset value at just over $27 per unit at June 30, 2020, compares to the current market price of a little over $15, reflecting a compelling entry point for investors. And turning to the statement of income. Net income was $19.3 million for the 3 months ended June 30, 2020, compared to $41.9 million over the same period in 2019. The decrease was primarily due to a lower fair value gain on real estate properties relative to the gain recorded during Q2 2019 and an increase in fair value loss on the Class B LP Units of $19.5 million, caused by a $3.90 unit price decrease resulting from the impact the global health crisis had on the stock market during the first half of 2020. Net operating income was $41.3 million for the 3 months ended June 30, 2020, an increase of $2.3 million or 5.8% compared to 2019. The increase is primarily due to an increase in same-property NOI. Same-property proportionate NOI in Canada increased by $0.8 million or 6.2% and in the U.S. increased by USD 0.7 million or 4.6% compared to 2019. Interest expense increased by $0.9 million for the 3 months ended June 30, 2020, compared to 2019, primarily due to a noncash increase in the fair value loss on the convertible debentures conversion option. The REIT's second quarter performance has translated into basic FFO of $19.3 million, an increase of $3.6 million or 23.1% compared to 2019. On a per-unit basis, FFO was $0.34 per unit for the 3 months ended June 30, 2020, an increase of $0.03 or 9.7% compared to the $0.31 per unit in 2019. The increase in FFO was due to the following: an increase on a same-property basis largely due to NOI, which was partially offset by higher trust expenses, had a $0.02 per unit positive impact. An increase in other income from the Canada Emergency Wage Subsidy relating to on-site staff retained at the REIT's Canadian properties, which had a $0.015 per unit positive increase. This benefit was provided from eligibility by Morguard and its related party group under common control. The dilutive impact from the issuance of units on August 28, 2019, offset by interest income earned on proceeds advanced to the -- on the Morguard facility, net of the partial use of proceeds in December 2019 to acquire the Marquee at Block 37, had a $0.015 per unit negative impact. And the change in foreign exchange rate had a $0.01 per unit positive impact. Overall, the REIT's FFO payout ratio was 50.9% for the 3 months ended June 30, 2020, very conservative level, which allows for significant cash retention. Operationally, the REIT had a successful quarter, with average monthly rents in Canada increasing to $1,454 or 3.9%, reflecting the quality of our Canadian portfolio compared to 2019. During the second quarter, the Canadian portfolio turned over 4.4% of total suites in Canada and achieved 21.3% AMR growth on suite turnover. While in the U.S., same-property AMR increased by 3%, having an average monthly rent of USD 1,359 at the end of the second quarter of 2020 compared to 2019. The REIT continues to report strong occupancy with Canada finishing the second quarter of 2020 at 97.5% compared to 98.8% a year earlier, and same-property occupancy in the U.S. of 94.3% at June 30, 2020, compared to 95.3% at June 30, 2019. During the quarter, the REIT's total CapEx amounted to $4.4 million. That included common area projects, 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 projects previously committed and health and life safety projects. In addition, the REIT spent $1.6 million of development capital at 1643 Josephine Street in New Orleans. Management expects to complete interior renovations and to commence initial lease-up towards the end of the third quarter of this year. Providing an operational and liquidity update. The REIT recognizes the impact COVID-19 has had on many of its tenants in North America and its stakeholders; and is committed in taking measures to protect the health of its employees, tenants and communities. In March, Morguard initiated its crisis management plan with a team mandated to maintain a safe environment for our residents, employees and stakeholders, coordinating efforts across our portfolio, standardizing communications and responding as circumstances demand. To provide an operational update. As at July 28, 2020, the REIT collected approximately 94.6% of July rental revenue, which is comprised of 95.8% in Canada and 93% -- 93.6% in the U.S., which is materially in line with our historical collection rates. Management will monitor rent collections and compassionately follow-up with those accounts in arrears as the impact of the pandemic continues to weigh on the North American economy over the remainder of the year. As well, the REIT is committed to working with residents on a case-by-case basis on rent deferral arrangements as eviction moratoriums are in place. Currently, 0.6% of residential tenants have deferred payment plans. As at July 28, 2020, the REIT's occupancy remains stable in Canada and the U.S. as leasing agents work remotely and utilize online technology to continue leasing activity following the onset of social distancing guidelines. Generally speaking, current conditions, including social distancing has reduced leasing traffic. Management will closely monitor traffic and turnover levels in the coming months as we move through our peak leasing season. The REIT has liquidity of $131 million, comprised of approximately $31 million of cash and $100 million available under its revolving credit facility with Morguard Corporation. In addition, the REIT has no significant debt maturities until the third quarter of 2021 and the REIT has approximately $43.9 million of unencumbered assets. The REIT has also narrowed down the scope of its capital expenditure program to ensure the availability of resources. I will now turn the call back over to the moderator, who will open up the line for questions.

[Kuldip Rai Sahi, Chairman & CEO]

Thanks, Chris.

[Operator]

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

[Lorne Kalmar, Associate]

On -- so you guys had pretty good numbers on the rent collections. Were there any pockets where it was weaker or stronger for that matter? Or was it relatively consistent throughout the portfolio?

[Christopher A. Newman, Chief Financial Officer]

No. It varies. We have a lot of properties in different regions. So there are a few properties that are relatively under the average and some, obviously, are doing well. With collections topping 95% to 99%, the variability in there is not significant by property.

[Lorne Kalmar, Associate]

Okay. And then this, I figure I'd put it out there and see what happens. Do you guys have any idea what percentage of your tenants are receiving income subsidies through the pandemic?

[Christopher A. Newman, Chief Financial Officer]

We wouldn't know that for certain. It depends -- actually we...

[Kuldip Rai Sahi, Chairman & CEO]

It would be pretty small, if any. We collected 97% -- or 96%.

[Lorne Kalmar, Associate]

Yes. I was just sort of wondering in the context of if these -- if and when these run out, sort of, what's the potential impact moving forward?

[Christopher A. Newman, Chief Financial Officer]

Well, if it runs out, we're hoping that the economy is back up and the jobs are recreated and that shouldn't -- potentially wouldn't need the subsidy any more of these tenants.

[Operator]

Your next question comes from Yash Sankpal from Laurentian Bank.

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

With respect to your U.S. portfolio, based on what you are seeing right now out there, where do you think your occupancy will be in Q4?

[Christopher A. Newman, Chief Financial Officer]

So John, can I hand that one over to you?

[John Talano, Vice President of Operations]

Sure. So we have been very stable throughout Q2, and our turnover rate actually was very low across the entire residential portfolio. It was down roughly 20%. Again, stay-at-home orders stopped people from moving out. We have absolutely picked up in terms of pace. We are in our busy leasing season now, which has absolutely been compressed because of that stay-at-home orders. But we are absolutely leasing the units that are turning. Our turnover will be lower than it was in previous years. But even as of today, we're 96% leased and 93% occupied. Again, we're seeing a slight dip now because of that busy summer leasing season. Again, that was in 4 months, now is being compressed to really 3 or 2.5.

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

Okay. And maybe do you happen to know what percentage of your portfolio is student accommodation, roughly?

[Kuldip Rai Sahi, Chairman & CEO]

Pretty small, I think.

[Christopher A. Newman, Chief Financial Officer]

Pretty small. There's a couple of scattered properties that may rely on some student population. And in the U.S., probably the same deal. It's not that significant.

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

Okay. Yes -- go ahead.

[John Talano, Vice President of Operations]

There are 3 properties that have students in them. And actually, those were ones that we saw dips in Q2. For example, Briar Hill in Georgia had dipped, it's now 97% leased. That has a significant number of students from Emory, and they are having live classes. The Georgian in New Orleans as well, Tulane announced that they're having live classes as well. So that one dipped, I think, down to the low 80s, which we see typically in the summer months, but it also is leasing up as well. So those are 2 big ones. We certainly have students at the Marquee. That did dip, especially in Chicago because stay-at-home orders were in place, then there were protests and riots and our traffic dipped down to 0. But that one is absolutely progressing in a positive direction as well.

[Beverley Gail Flynn, Senior VP, General Counsel & Secretary]

In Canada, it's 160 Chapel and Square 104. And 160 Chapel in Ottawa, there are -- 2 of the faculties are now open. They're saying in-person. So we're seeing some more activity there.

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

Okay. Just switching gears a bit. I'm assuming that your acquisition program is currently on hold. But what are you seeing out there right now? Are properties being marketed? Or is everything on hold?

[Kuldip Rai Sahi, Chairman & CEO]

Well, first of all, I wouldn't agree that it's on hold. It just seems like there is nothing trading. We just continue to look at both sides of the border, but there's really nothing happening in Canada of any material and not much happening in the U.S. either.

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

Okay. And just one last broad question. When I look at your valuation, the valuation MRG is getting right now and the valuation Northview have got in the private market. I wonder why Morguard would not take MRG private along with institutional investors. Maybe you could provide some color on your thought process?

[Kuldip Rai Sahi, Chairman & CEO]

We have no plan of privatizing the REIT. It was graded for these purposes. So just because there's a dip in so-called trading value, it's -- we don't have the opportunity to try and privatize and take it public again. So it's really not something that we spend a whole lot of time on that.

[Operator]

[Operator Instructions] Rai, there are no further questions at this time. Please proceed.

[Kuldip Rai Sahi, Chairman & CEO]

Thank you. Thank you very much for attending, and we shall speak to you next quarter. Thank you. Stay healthy guys.

[Operator]

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