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 Third Quarter 2020 Results Conference Call. [Operator Instructions] Also note that the call is being recorded today, Thursday, October 29, 2020.And I now would like to turn the conference over to your host, Mr. Rai Sahi. Please go ahead, sir.

[Kuldip Rai Sahi, Chairman & CEO]

Thank you. Thank you. I will pass it on to Chris. Chris, you are up.

[Christopher A. Newman, Chief Financial Officer]

Thank you, Rai. Also with us are our management team, is Beverley Flynn, Paul Miatello, Angela Sahi and John Talano in the U.S.So I'll start off 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 division, the REIT completed the third quarter of 2020, with total assets amounting to $3.2 billion compared to $3 billion in December 2019. The increase is mainly due to a fair value increase on the REIT's income-producing properties and the appreciation of the U.S. dollar since year-end. The REIT finished the quarter of the third quarter of 2020 with approximately $35 million of cash on hand and $99.5 million available under its $100 million revolving credit facility with Morguard Corporation.The REIT completed the third quarter of 2020 with $1.1 billion of long-term debt obligations. And as at September 30, 2020, the REIT's overall weighted average term security was 5.1 years, a decrease from 5.6 years at December 31, 2019. And the weighted average interest rate decreased slightly to 3.45% from 3.48% since December 31, 2019.The REIT's debt to gross book value ratio improved slightly to 42.8% at September 30, 2020, down from 44.1% on December 31, 2019. The REIT's IFRS NAV at $27.16 per unit as at September 30, 2020, compares to the current market price at a little over $14, reflecting a compelling entry point for investors.Turning to the income statement. Net income was $53.5 million for the 3 months ended September 30, 2020 compared to a net loss of $1.4 million over the same period in 2019. The increase in net income was primarily due to a higher fair value gain on real estate properties of $31.3 million relative to the gain recorded during Q3 2019. And an increase in the fair value gain on Class B LP units of $26.2 million due to a fair value gain of $1.6 million recorded during the third quarter of 2020 compared to a fair value loss of $24.6 million recorded over the same period in 2019.Net operating income was $38.8 million for the 3 months ended September 30, 2020, an increase of $0.8 million or 2% compared to 2019. The increase is primarily due to higher same-property NOI. Same-property proportionate NOI in the U.S. increased by USD 0.5 million or 3.8% compared to 2019, and in Canada decreased by $0.4 million or 2.9%.Interest expense decreased by $2.3 million for the 3 months ended September 30, 2020 compared to 2019, and this primarily reflects an increase in the fair value gain on the convertible debenture conversion option. The REIT's third quarter performance has translated into basic FFO of $16.1 million, consistent when compared to 2019. And on a per unit basis, FFO was $0.29 per unit for the 3 months ended September 30, 2020, a decrease of $0.02 or 6.5% compared to $0.31 per unit in 2019.The decrease in FFO per unit was due to the following: a $0.01 per unit dilutive impact from the issuance of units at the end of August 2019; offset by interest income earned on proceeds advanced on the Morguard facility as the proceeds were partially used to acquire Marquee at Block 37 last year; as well, an increase in other expense relating to a nonrecurring write-off of unrecoverable insurance premiums from property dispositions had a $0.01 per unit negative impact.The REIT's FFO payout ratio was 61.1% for the 3 months ended September 30, 2020, a very conservative level which allows for significant cash retention. Operationally, the REIT's average monthly rent in Canada increased to $1,481 or 4.5%, reflecting the quality of our Canadian portfolio compared to 2019. During the year, the Canadian portfolio turned over 7.8% of total suites in Canada and achieved 17.9% AMR growth on fleet turnover. While in the U.S., same-property AMR increased by 1.9%, having an average monthly rent of USD 1,366 at the end of the third quarter of 2020 compared to 2019.The REIT continues to report solid occupancy with Canada finishing the third quarter at 96.4% compared to 99.4% a year earlier. Occupancy slightly decreased in Canada due to continued lower leasing traffic as well as 2 properties impacted by the closure of universities. And same-property occupancy in the U.S. of 94.1% at September 30, 2020, was slightly lower than compared to 94.4% at September 30, 2019.During the quarter, the REIT's total CapEx amounted to $4.9 million. That included common area projects, exterior building and revenue-enhancing in-suite improvements. Overall, in order to preserve liquidity, the REIT has scaled back most of its revenue-enhancing CapEx and continue to focus on end-of-life cycle and health and life safety projects.In addition, the REIT spent $1.9 million of development capital at 1643 Josephine in New Orleans. The REIT has substantially completed the redevelopment, and commenced virtual pre-leasing with first occupancies taking place at the end of this month.Further to add on the completion of the development, this Class A mid-rise redevelopment property in New Orleans is located in the Garden District neighborhood within close proximity to The Georgian apartments, offering management a platform for operational synergies. The repositioned asset further improved the overall quality of the REIT's portfolio, and management is pleased with the final product and is confident of the property's long-term success.Providing an operational and liquidity update, the REIT recognizes the impact COVID-19 has 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 providing an update as at October 27, 2020, the REIT collected 97.9% of third quarter rental revenue and approximately 95.1% of October rental revenue, which is materially in line with 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 lifted. Currently, 0.9% of residential tenants have deferred payment plans.As at October 27, 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 efforts following the onset of social distancing guidelines. Generally speaking, current conditions, including social distancing, have reduced leasing traffic. In addition, management will closely monitor any impact the U.S. eviction moratorium may have on traffic and turnover levels in the coming months.The REIT has liquidity of $134 million, comprised of $34.5 million of cash on hand and $99.5 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 $45.4 million of unencumbered assets.The REIT has narrowed down the scope of its capital expenditure program to ensure the availability of resources, allocating an amount that enables the REIT to maintain the structural and overall safety of our properties.At this point, I'll turn it over back to the monitor who will open up the line for questions.

[Operator]

[Operator Instructions] And your first question will be from Lorne Kalmar at TD Securities.

[Lorne Kalmar, Associate]

First question for me. Have you guys noticed your garden-style properties in the Sunbelt benefiting from the supposed de-urbanization trend that the pandemic has brought about.

[Christopher A. Newman, Chief Financial Officer]

Well, I'll let John address that question.

[John Talano, Vice President of Operations]

Sure. We definitely have -- our garden-style walk up in suburban markets are doing very well in general. I would say, it depends on the location and the current environment. But we certainly are seeing that. I would say in a couple of our urban properties, we have had a few folks move out to the suburbs. But that has not been material for us.

[Lorne Kalmar, Associate]

So it would be fair to say, so that's positive for your guy's portfolio?

[John Talano, Vice President of Operations]

Yes, definitely.

[Lorne Kalmar, Associate]

Okay. And then I guess, turning to Block 17 -- or Marquee. I know you guys got a bunch of furnished suites in there. Has there been any discussion around converting those to unfurnished suites?

[John Talano, Vice President of Operations]

Absolutely. That was actually set up previous to us taking over management. We do not have the large furnished suite anywhere in the U.S., not at that scale. In this case, at Marquee, we had a sort of a double whammy. One is the student population was significant in that building. So we had lots of foreign students that -- their schools went virtual, so many of those went home and actually back to country. And then -- the corporate suite at Marquee specifically are targeted at the theater district. So it was all theater employees, actors and that sort of thing, which has been put on hold until December 10. But again, we expect that to come back very slowly. So our long-term plan is definitely to reduce that number. Those are not our suites. Those are actually rented out to a third-party that, that actually has given several back as they are coming up. So I hope that makes sense.

[Lorne Kalmar, Associate]

Yes, totally. So does that mean if the -- with the exception, I guess, of ones have gotten turned back. Any of the ones that are furnished are typically generating rent even if they're empty for you guys?

[John Talano, Vice President of Operations]

Yes, they are.

[Lorne Kalmar, Associate]

Interesting. Okay. I didn't know that. And then maybe...

[John Talano, Vice President of Operations]

Yes, they're leased. And they're current, as a matter of fact.

[Lorne Kalmar, Associate]

Okay. Good. And then just the last one from me. I think you guys said there's a little bit under 1% of tenants are on deferrals. Has there been any uptick in deferral requests in the last little while? Or has it been steady? Or trending down? Maybe you guys could give a little bit more color.

[John Talano, Vice President of Operations]

In the U.S., it's absolutely gone down. So we are -- we had a high of 250,000 of them, about 2 months ago. We're down to 90,000. The total deferred for an entire portfolio was, at a tie, around 480,000, and it is now under 240,000 today. So it's absolutely shrinking.Another thing is -- that's important to mention, too, is we did lose our federal stimulus back in July, and that was something we were very concerned about. And we did not see a significant effect when we lost that. I know that's about -- that's happening now in Canada. So that was not the end of the world. And then also, we had the eviction moratorium that was placed on all of our properties by the CDC, which we braced for. And it was a little more difficult to get folks to the table to discuss about deferral plans. But that, too, has not been a significant driver of bad debt in our U.S. business.

[Operator]

[Operator Instructions] And your next question will be from Yash Sankpal at Laurentian Bank.

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

What kind of rent discounting or incentives are you seeing in the GTA market.

[Christopher A. Newman, Chief Financial Officer]

Okay. So I'll turn it over to Angela. She can address that question on the Canadian side.

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

Sure. So we're finding downtown, which doesn't really refer to our portfolio as much. But downtown, there are newer constructions and other buildings offering 1 to 3 months rent-free plus move-in bonuses. So we're not doing anything kind of even close to that, especially for the REIT portfolio. We're offering some small bonuses here and there where we feel like we need to maybe on a certain type -- a unit type or a layout and a particular building here and there. And then we're also offering them in Ottawa and Alberta mostly where the student populations were now online. So that's kind of the extent of what we're doing.

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

Okay. And your residents that are moving out, have you been tracking why they are moving out? Have you noticed any trends?

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

Yes, [ we're being asked to -- ] yes. So our major reasons for moving out, according to our termination reports, have been to purchase a new home. And then some are just leaving the area like in going into other localities. And then some are having financial hardships. So those seem to be the 3 main reasons right now.

[John Talano, Vice President of Operations]

In the U.S., we've actually seen a reduction of overall move-outs. So our renewal volume's actually up by 18%. At the same time, hardship reasons for move-out are up significantly. But overall, folks are definitely staying put. It's an 18% increase for us.

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

And Angela, are these percentages, like a reason for percentage of people buying new homes? Or have those percentages changed over the last 7, 8 months since the pandemic started?

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

Yes, definitely. I mean we also have lower turnover than last year. But that's -- I mean, our turnover was so specific before in Mississauga. And now we're finding that, that is definitely -- the hardships, I guess, are the situation in Mississauga. And then downtown or the Toronto portfolio seems to be buying homes outside of the -- into suburbs.

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

Right. How is your acquisition pipeline looking at this point. Do you think you can do any acquisitions by year-end in the U.S. or Canada?

[Kuldip Rai Sahi, Chairman & CEO]

I can answer that. Well, we're -- we continue to look at I think, mostly in the U.S., actually. There is not much available in Canada. And we're always out there looking at the market we're particularly in, and so we'll see -- we're looking at a few things but we haven't done anything yet.

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

Right. And one last question. Based on what you are seeing on the ground, is it fair to assume that your occupancy would not change much by year-end?

[Christopher A. Newman, Chief Financial Officer]

It's very -- so we can hand it back over to Angela and John who can specifically speak to the regions that they're operating under. John, do you want to start?

[John Talano, Vice President of Operations]

Sure. I would say from the beginning of COVID, our trend has been slightly negative very slowly for the entire time. And we were in a great position to begin with. We were right at 95%, 96% occupancy at many of our properties, which is where I want to be so that we have the ability to raise rents. But that trend was absolutely negative until really about 2 weeks ago. We did stabilize, and we have seen an uptick, though it's a few bps. It's very minor. I would say it's stable. In the markets where it's cold and in our northern market, things will definitely slow down. So those will probably dip slightly. But the vast majority of the portfolio, I think, is going to be in very good shape.

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

So for us in Ontario, we're under rent control, so we want to be careful as to how much we're going to reduce our rent. So we're actually tolerating some vacancy. We're okay with some vacancy. We're hoping that once there is a solution to COVID things will subside and kind of go back to normal for now, but we're just going to revisit it month to month. We're finding there is more activity, though, with move in, so -- which is a good thing, and our leasing teams are making big efforts that they didn't have to make previously because things were just rented kind of back to back. So that's been an issue with COVID where you can't show the units. So we're working around those things. We're doing virtual videos. And our teams are working hard. So it seems like there is an uptick with leasing. So it's looking more positive.

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

And Angela, one follow-up. What is your -- operationally, what is your biggest worry at this point.

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

I guess the leasing is probably the biggest worry right now in terms of -- residential is doing pretty well, right, compared to a lot of the other sectors. Collections are quite strong. So our teams are doing well in this environment, and we're keeping the tenant safe. We haven't had really many issues come up in terms of COVID, which has been great. And the teams are working together kind of across the country. And we're working closely with John's team as well to see what happens in the States, and we're kind of watching that and following suit where we need to. So that's been really a great part of it where we could just work together remotely and be connected. But I think the biggest thing for residential is going to be the vacancy right now and just trying to lease units with everything changing so much in the -- with immigration and students, mostly, I would say. And then people just returning back to a normal work life rather than working from home. I think all of that will hopefully bring everything back to normal and back to regular vacancy levels.

[Operator]

Next question will be from Fred Blondeau at IA Securities.

[Frederic Blondeau, Research Analyst]

Sorry, I missed -- I may have missed this, but I was a bit surprised to read that you were seeing improvements in Chicago. I was wondering if you could expand on that.

[Christopher A. Newman, Chief Financial Officer]

John, do you want tot take that?

[John Talano, Vice President of Operations]

Yes. In Chicago -- well, we have 3 U.S. assets in Chicago. Two of them are performing very well. One, both -- well, I guess there's 2 that the REIT is involved with. Coast is doing very well. Our occupancy has gone up. Over the last several years at that property, we have pushed our expiring leases out into the spring and summertime, which has allowed us to really enjoy some high occupancies over the winter. So that property is in very good shape. The Marquee, if you missed it, had a significant number of corporate leases that were all tied to the theater district. So that property definitely has struggled with occupancy. But as Angela mentioned, we're okay with the occupancy. We'd rather not offer huge concessions at that property because the quality of the asset is excellent. So we want to maintain that high level at that building and that high rate.There is a large supply in Chicago. And there are very significant concessions that other landlords are offering, whether it's 1-month free up to 3 months free on some of the new buildings, so it's absolutely competitive. But the way that we've managed our lease terminations has actually really helped us. We just haven't had a chance to do that at the Marquee yet. It takes several years to change those expiries.

[Frederic Blondeau, Research Analyst]

No, that's fair. So does that mean that we should expect even more improvements in Q4 and Q1?

[John Talano, Vice President of Operations]

In Chicago, I would say, no. That's one of the colder areas where I would -- I think we will dip rather than seeing our occupancies increase. I would say Coast will be very stable. We don't have any expiries over the winter. I think it's limited -- it's a very limited number. The Marquee will definitely continue to dip. But we'll get through it. And it's a really wonderful property. It just got hit by both the students and the corporate leases. But once this is over with, it'll pop right back up and we'll be fine.

[Frederic Blondeau, Research Analyst]

Okay. That's great. Because when we read your MD&A, that -- it comes across as it was a little bit more positive, but that's in line with what I thought. Appreciate it.

[John Talano, Vice President of Operations]

Thanks, [ Roy ] (sic) [ Fred ].

[Operator]

[Operator Instructions] And at this time, we have no further questions registered. Please proceed.

[Kuldip Rai Sahi, Chairman & CEO]

Thank you. Thank you very much.

[Christopher A. Newman, Chief Financial Officer]

Yes. Thank you. Thanks for joining. We'll all see you next quarter.

[Operator]

Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.