Morguard North American Residential Real Estate Investment Trust

TSX:MRG.UN

Q2-2025 Earnings Call

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Morguard North American Residential REIT 2025 Second Quarter Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, July 31, 2025. I would now like to turn the conference over to Paul Miatello. Please go ahead.

[Paul Miatello, executive]

Thank you very much, and good afternoon, everybody, and thank you for joining us for the REIT's Q2 Results Conference Call. I'll just do a quick roll call before we get going. With us today, we have Angela Sahi, Executive Vice President; John Talano, Senior Vice President; Ruth Grabel, Assistant Vice President; and our Chief Financial Officer, Chris Newman.

And so just with those quick introductions, I'll turn it over to Chris for some prepared comments, and then we'll open it up for Q&A. Chris?

[Christopher Newman, executive]

All right. 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 second quarter of 2025 with total assets amounting to $4.5 billion. This was lower compared to $4.6 billion as at December 31, 2024, mainly due to a decrease in the U.S. dollar exchange rate. The REIT finished the second quarter with approximately $66 million of cash on hand and $92.5 million advanced to Morguard Corporation.

During 2025, the REIT continued to be active under its NCIB, repurchasing approximately 1.2 million units at an average unit price of [ $17.25 ]. The REIT's IFRS net asset value per unit at June 30, 2025 is $43.66, making the NCIB plan an appealing use of capital.

As at June 30, 2025, the REIT's mortgage payable had an overall weighted average term to maturity of 5.1 years, a decrease from 5.2 years at December 31, 2024. And the weighted average interest rate increased to 3.9% from 3.88% at December 31, 2024. The REIT's debt to gross book value ratio was 39.5% at June 30, 2025, a slight decrease compared to 39.7% at December 31, 2024.

Turning to the statement of income. Net income was $30.1 million for the 3 months ended June 30, 2025, compared to $50.6 million in 2024. The $20.5 million decrease in net income was primarily due to an increase in fair value loss on the Class B LP units of $23.6 million. IFRS net operating income was $56.9 million for the 3 months ended June 30, 2025, an increase of $2.2 million or 4.1% compared to 2024.

And on a proportionate basis, proportionate NOI for the 3 months ended June 30, 2025 increased by 4.2% compared to 2024 and comprised of the following: NOI in Canada increased by $0.4 million or 2.5%, mainly due to AMR growth, partially offset by an increase in operating expenses and higher vacancy. NOI in the U.S. increased by USD 0.9 million or 4%, mainly due to AMR growth, lower vacancy and an increase in ancillary revenue, partially offset by an increase in operating expenses. And the change in foreign exchange rate increased proportionate NOI by $0.7 million.

Interest expense increased by $3.4 million for the 3 months ended June 30, 2025, compared to 2024, primarily due to an increase in interest on mortgages of $2.1 million from higher principal and interest rates on the completion of the REIT's refinancings and an increase in noncash fair value loss on the convertible debentures conversion option.

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 second quarter performance translated into basic FFO of $24.8 million, an increase of $2.1 million or 9.2% when compared to 2024. And on a per unit basis, FFO for the 3 months ended June 30, 2025 increased by $0.06 to $0.47 per unit compared to $0.41 per unit in 2024 due to the following: on a proportionate basis, in local currency, an increase in NOI and interest income partly offset an increase in interest expense and trust expense had a net $0.01 per unit positive impact.

The change in foreign exchange rate had a $0.02 per unit positive impact. The decrease in current income tax incurred on the REIT's U.S. subsidiaries had a $0.01 per unit positive impact, and the impact from units repurchased under the REIT's NCIB had a $0.02 per unit positive impact. The REIT's FFO payout ratio of 40.3% for the 3 months ended June 30, 2025 represents a very conservative level, which allows for significant cash retention.

Operationally, the REIT's average monthly rent in Canada increased to $1,821 at June 30, 2025, a 5.3% increase compared to 2024, reflecting the quality of our Canadian portfolio. And during the year, the Canadian portfolio turned over approximately 4.4% of its suites and achieved AMR growth on suite turnover of 16%.

Occupancy in Canada finished the second quarter of 2025 at 95.2% compared to 98% at June 30, 2024, and was lower primarily due to increased competition from existing as well as newly built apartment rentals entering the market. Management believes market conditions will remain strong and stable as housing demand continues to outdistance supply.

While in the U.S., AMR increased by 0.1% compared to 2024, having an average monthly rent of USD 1,898 at the end of the second quarter. Occupancy in the U.S. of 94.8% at June 30, 2025, was higher compared to 93.3% at June 30, 2024 and was predominantly achieved by modest rent reduction and limiting renewal increases on the -- 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 6 months ended June 30, 2025, the REIT's total CapEx amounted to $22.6 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]

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

[Jonathan Kelcher, analyst]

First, just a quick modeling question, Chris. Like for current taxes, they were down a little bit in the quarter. What's the outlook for the balance of the year and into, I guess, next year as well?

[Christopher Newman, executive]

Yes. So during the end of last year, and we finalized during the second quarter of this year, we did a U.S. cost segregation study, which essentially allowed us to take additional depreciation and really change our path a little bit on the net operating losses.

So we've discussed before using our NOLs in the past, and we've kind of gotten to a point where it became pretty low. So current tax was coming into the books. So because of that cost segregation study, the NOLs have been preserved and we actually generated a little bit more.

So moving forward, I think we disclosed about $40 million of NOLs. So if you look at the historical burn rate, annually, and we can kind of dissect that a little bit offline, but I think that gives us a little more runway before we have exposed to current tax in full.

Now when we are using our NOLs, we are limited to 80% application of them. So 20% of the tax, we -- are not protected by NOLs in the U.S. unless it's the expiring years where we use them all up. So I would say, for the balance of this year, we are, I guess, sheltered from significant current tax. We'll still be using our NOLs.

[Jonathan Kelcher, analyst]

Okay. So Q2 is a pretty clean quarter to think about going forward?

[Christopher Newman, executive]

Yes, take the year-to-date and then kind of look at that as a staple for the rest of the year.

[Jonathan Kelcher, analyst]

Okay. Fair enough. Next on operations in the U.S., John. The AMR started to tick up a little bit in Q2, which is good to see. How does that break down between new lease spreads and renewals? And if there's any big difference between the Sunbelt and the rest of your portfolio on that?

[John Talano, executive]

Well, I would say it is choppy, and it literally depends on the individual property and not the specific market. We are full, right, or effectively full in the U.S. with about 44% turnover. Our goal is to be right around 95%, and we're there, we're 97% leased.

So we are pushing rents, but it is still a little bit uncertain, a little choppy in terms of locations. I think a lot of it relates to the economy and quite frankly, our government. But we are pushing both. I would say, there is still room with our in-place rents. So those are going up a little bit more. But when we're full like this, we try to push for those 3% to 5% increases pretty often.

[Jonathan Kelcher, analyst]

Okay. That's -- so basically, I can think about it as 3% to 5% on both renewals and new leasing, whole portfolio?

[John Talano, executive]

Well, I would say, on new leasings today, that's where we're going -- what we're going for. In the Sunbelt, like last quarter, it was definitely softer. This quarter, we've seen some softness in rent specifically, not occupancy, but rent growth specifically in Maryland, tied to D.C. and turmoil in our government. So again, I think it really depends on the individual property.

But the gains we're seeing now are -- AMR is relatively flat. We're still a little bit behind our goals for the year, and we're still off from our peak rents by almost 1%. So we are -- we will know more next month. We are in our busiest leasing seasons all over the country right now, really churning and burning. But like today, we are shooting for at least those 3% gains, but still had to come back from the peak a little bit.

[Jonathan Kelcher, analyst]

Okay. Fair enough. And then lastly, just on acquisitions. You guys obviously have lots of liquidity. I think last quarter, you said you were pausing or pulling back on looking at U.S. as you're seeing more opportunities in Canada. Maybe give us an update on where you stand on that.

[Paul Miatello, executive]

Yes, Jon, it's Paul here. I'll maybe start and get Angela to follow on with any additional comments.

But yes, I mean, that strategy or that thesis is probably intact for this quarter and maybe for a little bit going forward here. We're still -- the macro picture is still a little uncertain. So we still have lots of conviction in the U.S. still obviously a very core part of the REIT's book of business, but we are sort of tilting the acquisition, looking for assets more to Canada still.

So I think that holds now and probably for the next little while. So we are seeing a decent amount of deal flow in Canada. So we're continuing to kick tires and look at acquisition opportunities kind of across the country in Canada.

Angela, anything you want to add to that?

[Angela Sahi, executive]

Yes, I was going to say we haven't -- like last couple of years, we haven't seen that many opportunities in Canada, and we are seeing some cap rates softening and so expectations are kind of more in line with something that we would have an appetite for moving forward. So we are looking at opportunities in Canada and finding them to be potentially more accretive than the things that we're seeing in the U.S. currently.

But as Paul mentioned, we're interested in both markets, but it's nice to see that there are transactions and deals happening in Canada now. And so I would say that our likelihood of doing a deal in Canada would be higher than the U.S. today.

[Operator]

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

[Alex Leon, analyst]

I just wanted to start off maybe in the Canadian portfolio. I'm wondering if you can speak to how you're thinking about managing occupancy there? And maybe specifically, if there's a certain point from an occupancy perspective at which you'd be more willing to give up on rate to preserve occupancy?

[Christopher Newman, executive]

Alex, I'll hand it over to Ruth, who can respond.

[Ruth Grabel, executive]

So our leasing activity just recently has picked up. So in respect to lowering rents, we're finding that we do have some units available in Mississauga for the 1-bedroom units. And we're competing with new rental buildings in this particular area. We are -- prefer to offer incentives, and that seems to be working for us, incentives like 1 month free rent, basically because our competition for new builds, they're aggressively offering incentives.

So right now, our occupancy seems to be increasing. There's -- maybe on 1 or 2 units, we'll look at reducing rates in order to increase our occupancy, but not substantially going forward.

[Alex Leon, analyst]

Okay. That's good to hear. Then maybe that kind of a good segue to my next question on the spreads. Last quarter, you guys mentioned like 15% to 20% turnover spreads in Canada. You guys are kind of at the low-ish end of that range right now.

So I'm wondering if that's still maybe the expectation for the rest of the year? And if you guys think maybe you can -- if that's going to kind of stay where it is now in that 16-ish percent range or if you think you can hit the high end of that range?

[Ruth Grabel, executive]

So definitely -- sorry, Angela.

[Angela Sahi, executive]

No, no, go ahead.

[Ruth Grabel, executive]

Yes. So definitely -- go ahead, Angela.

[Angela Sahi, executive]

Sorry, I was going to say, a lot of it depends on which units are turning over. So that turnover spread for the market rate units is going to be a lot lower than the units that have been -- that are substantially below market. .

So that was kind of my only comment. It's kind of dependent. But I would assume historically, we've been trending on the higher end. And so I would say that 16% is likely, although hard to determine which units will turn over.

[Alex Leon, analyst]

And then maybe -- no, that's good. And maybe the last one for me. Just turning over to the U.S. portfolio, there was a little bit of commentary there after Jonathan's question on the same-property AMR growth. So this quarter did tick up quarter-over-quarter. I'm just wondering if you guys think we're at the point now where we've reached an inflection or if it's maybe a little too early to call a trend there?

[John Talano, executive]

I would say it's a little too early. But anecdotally, we're not under any pressure at this point, if that makes sense. So for several quarters in the past, if you remember, looking 2 quarters back or late last year, we were fighting occupancy and a lot more uncertainty.

I would say, we're not normal yet, but a lot more normal pre-pandemic, pre major government changes, and it's starting to feel that normal. I would say, ask me that question next quarter, and I'll give you a more solid answer.

[Operator]

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

[Khing Shan, analyst]

So Chris, maybe just a follow up on the current tax first. You mentioned there's more runway in terms of using the NOL. So for '26, how do we model that? Is it roughly going to be -- I think you had mentioned before, $4 million to $5 million is kind of the tax payable, I believe. Would it be half of that? How do we model?

[Christopher Newman, executive]

It's not an exact science, but we do have 40 -- about USD 41 million of NOLs disclosed in our tax note. We've seen that -- and I'm just using high-level numbers. We've seen that decline by about $20 million a year. So I could probably take a closer look and give you something more specific.

But yes, I have to just determine whether this year, we start eating into at that rate or is it next year. But if you're looking at '26, it looks like we have -- with our existing portfolio, it looks like we have some cushion and runway.

[Khing Shan, analyst]

Okay. Okay. The Canadian operations, I think you've mentioned occupancy is picking up. Do you feel like we've kind of hit bottom here in terms of occupancy and -- or is the supply still going to be putting pressure on -- especially the Mississauga assets?

[Ruth Grabel, executive]

So I think from what I can see, we have a lot of new rental products right now in condominiums, rentals available. So what I can see from our leasing that our activity is improving and that where it was a bit quiet prior months, now we seem to have it picking up.

So as these units become leased, the new rental buildings, that's really improving our occupancy levels and our leasing that's it having occurring. So it's a positive thing. So there's still need for rentals, especially in Ontario and Toronto, where housing pricing continues to be very high.

[Khing Shan, analyst]

Are there any sort of adjacent new purpose-built rental that are going to be delivered over and above what's been delivered so far?

[Ruth Grabel, executive]

So not in the Mississauga areas, not recently. So I did take a look at the units under construction and proposed. So I don't see it in our particular area, where we're competing with our Mississauga City Center building. So there was nothing really on a new rental building where we're now competing with.

[Khing Shan, analyst]

Also, you guys had mentioned about getting some garage work there. And when I was reading the MD&A, it sounded like there was more than 1 building that's been where there's worked. Is that right? Or can you provide some clarification on what's going on?

[Ruth Grabel, executive]

Right. So we are -- completed 2 underground garage projects at 2 buildings. That's being completed at the end of July, and one is at the end of October. And we're starting at 3 other buildings. And one we are -- it's quite -- we're just starting recently. And the other one, we're just -- we'll be finishing off at the end of the year.

[Khing Shan, analyst]

Okay. So presumably, that's going to have a bit of impact as well, those 3 additional ones?

[Ruth Grabel, executive]

Yes, it will have a bit of an impact. And one of the buildings, there is an impact because of the noise level. We do provide quite units. And also, we're not able to provide parking, that becomes a challenge. So there might be some leasing, but it would be temporary, like leasing restrictions temporarily.

[Khing Shan, analyst]

Okay. Okay. And then last question just on acquisitions. I was just curious, Angela, you talked about seeing higher likelihood of doing a deal in Canada. What is in your buy box? Like what are you looking for specifically? What type of assets you're targeting? And what the markets are you looking to enter or expand into?

[Angela Sahi, executive]

I think we -- yes, we would look to enter markets where we currently have some management presence, and that could be other offices as well, right? Like we have a whole commercial team. And so we have satellite offices in and out of West, too. So -- but really, I think GTA, we've never really seen many opportunities in the GTA for -- I would say, for 200, 300 unit-plus buildings. And cap rate seems to be going up a little bit, even closer to 5.

So I would say GTA, but probably properties with less CapEx involved and things where we think that we might find some upside opportunities moving forward with the NOI would probably be the parameters and then obviously, the returns to make sure they fit within the MRG portfolio.

[Operator]

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

[Dean Wilkinson, analyst]

Just one question for me. Specific to the Canadian portfolio. Maybe this is Angela. Have you noticed any discernible change in the duration of the tenants that are moving out? Is it the older ones? Is it the newer ones? Just trying to get a sense of -- has that changed over time? And do you expect it to?

[Angela Sahi, executive]

Yes. So I'll start a little bit, but I can turn over to Ruth, Rick, you might have the exact numbers. I mean, we've been kind of tracking this data the last couple of quarters to understand that exact dynamic. And previously over the years, we haven't seen many of the older kind of market below 50% rent tenants move out at all. But in the more recent I guess, a year or so or 6 months, we are noticing a little bit of that picking up.

And Ruth, you have some of that data, maybe you can kind of just talk to it?

[Ruth Grabel, executive]

So we do have around -- I mean it's really equal to the amount of tenants that are leaving for like older and new. It's not that great. It depends on the building and the unit type. But yes, it's just a range.

[Paul Miatello, executive]

Any sense -- the question was about trends...

[Ruth Grabel, executive]

Yes. There's no -- obviously -- no, there's no obvious discernible trend -- difference in trends from prior years. We have a mix of people who live there over 5 years, 10 years and then there's some move outs from the past year or 2. There's no really discernible trend.

[Operator]

There are no further questions at this time. I would hand over the call to Paul Miatello for closing remarks. Please go ahead.

[Paul Miatello, executive]

Thank you again, everybody, for joining us for the REIT's Q2 results conference call, and we look forward to speaking to you next quarter. Thank you, and have a great day.

[Operator]

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