Morguard Real Estate Investment Trust

TSX:MRT.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 Andrew Tamlin. Please go ahead.

[Andrew Tamlin, executive]

Thank you, and good afternoon, everyone. My name is Andrew Tamlin, Chief Financial Officer of Morguard REIT. Welcome to the Morguard REIT Second Quarter 2025 Earnings Conference Call. I am joined this afternoon by John Ginis, Vice President of Retail Asset Management; Tom Johnston, Senior Vice President of Western Asset Management; along with Rick Clermont, Assistant Vice President of Asset Management, Eastern Canada. Thank you all for taking the time to join the call.

Before we jump into the call, I would like to point out that our comments will mostly refer to the second quarter 2025 MD&A and financial statements, which have been posted to our website. I refer you specifically to the cautionary language at the front of the MD&A, which would also apply to any comments that we make on this call.

Our second quarter results were consistent with the same trends that we saw in the first quarter and were also very consistent with expectations for the quarter. We have known for some time that 2025 was going to be a tough year due to the market rent resets at Penn West Plaza in Calgary, the impact of which will continue throughout the year. Further to that, we have seen some pockets of softness in the enclosed mall segment from some tenant failures, but we are also seeing some strong same-asset results from our strip segment, which are largely grocery-anchored. A decline in interest expense from lower variable interest rates has also impacted the results.

Our total net operating income for the second quarter declined from $31.8 million in 2024 to $25.7 million in 2025. Approximately $4.7 million of the $6 million difference is due to the Penn West Plaza lease reset. A $431,000 decline in lease cancellation fees has also had an impact on the NOI for this quarter. The decline in income from Penn West Plaza is due to the expiration of the Obsidian head lease on February 1, 2025. This has resulted in a reset of rents for both Penn West Plaza tenants and subtenants to current market rate. Effectively, this building has transitioned from a single tenant building to a multi-tenant building.

However, further, we are pleased that the resulting occupancy of Penn West Plaza is now at 80% immediately after this transition. Significant inducements of opening free rent and free operating costs to secure tenancies are also impacting Penn West Plaza results for 2025 and in particular, the first 3 quarters of the year. Our estimate is that there will be a downturn of approximately $15 million in net operating income for this asset in 2025, with some bounce back to this number in 2026 after these inducements burn off and other lease commitments kick in. As I mentioned, we are pleased with the 80% occupancy of this building after coming off many years where the office market in Calgary has struggled.

Moving on, on February -- on Friday, March 7, 2025, the Bay filed for creditor protection under the Company's Creditors Arrangement Act, or CCAA. The Trust had 2 Bay locations comprising a total of 290,000 square feet of GLA, one at Cambridge Center in Cambridge and one at St. Laurent in Ottawa. The Trust's annualized gross rent earned from the Bay leases was approximately $1.5 million. The Bay has disclaimed specific leases in its portfolio, while other leases remain subject to the monetization process, which is currently ongoing.

As at June 30, 2025, the Trust's lease with the Bay at Cambridge has been disclaimed. The remaining lease at St. Laurent is subject to a bid by Ruby Liu Commercial Investment Corporation. Rents on the St. Laurent lease is still being paid while this process is ongoing. Notwithstanding the temporary softness in the enclosed mall segment, there are still lots of positives in this sector. We are seeing positive rental growth on lease renewals, and there remains lots of good conversations involving well-known national brands. It still remains quite expensive to construct new retail space and hence, a lot of retailers are looking at existing space rather than building new space.

With the exception of one location, our community strip centers are essentially full at 99%. Sales and traffic numbers at our enclosed malls also continued to be strong. The trust interest expense declined almost $1.3 million for the quarter due primarily to a decline in short-term variable interest rates on a year-over-year basis. Total interest expense is down over $2 million for the 6-month period.

Turning to financing and liquidity. The trust is $72 million in liquidity at the end of the quarter, which is down slightly from $81 million in liquidity at the end of 2024. I also noted that our parent, Morguard Corporation has advised the trust of its intention to receive its distribution and units rather than cash for 2025. As mentioned in previous quarters, the trust opening -- operating capital reserve increased from $25 million annually to $35 million in 2025 to account for both higher repair costs as well as leasing costs. This represents $8.750 million per quarter. Actual spending this quarter was approximately $7.6 million, which represented mainly repair capital projects. Total spending for the 6 months approximates a $17.5 million reserve.

So far this year, the Trust has renewed or extended 4 mortgages totaling $80 million, lowering the interest rate from an average of 6.4% on these 4 mortgages to an average of 5% on renewal. The Trust is approximately 18% of its debt is variable at the end og the quarter, which has increased slightly from 15% at the end of the year. The Trust continues to focus on paying down debt, which has declined by more than $100 million since the end of 2020.

Looking at our accounting for real estate properties during the quarter, we had $11 million in fair value losses due primarily due to some minor changes across all asset classes segment portfolio. Our overall occupancy level at 85.9% at June 30, 2025, decreased from 91.2% at December 31, 2024, due to the increased vacancy at Penn West Plaza and also from the -- sorry, due to the increased vacancy at Penn West Plaza from the expiration of the Obsidian head lease in addition to the disclaimed Bay lease at Cambridge this past quarter.

As I previously mentioned in past quarters, we were now embarking on a strategic merchandising program for St. Laurent, which will see the addition of 2 new nationally recognized brand names being added to the tenant roster along with expansion plans for other tenants on the existing rent roll. The current budgeted capital commitment is $6.4 million and includes tenants such as Sephora and H&M, which are all expected to open in the next few months. We are anticipating some future phasing beyond this spend as we look to ensure a stable and sustainable and traffic-generating mix of tenants to this asset.

Management has had continued ongoing discussions with the provincial government tenant at Petroleum Plaza in Edmonton, which came up for renewal at the end of 2020 and is still an overhaul. While we recently have had some better back-and-forth discussions, this is still going slowly. And at this point, there is still no resolution to report. Wrapping up, we recognize that 2025 will be a tough year, but we are expecting the downturn to be limited. We are especially pleased that the leasing efforts of Penn West Plaza to be able to have our most impactful office asset with an occupancy of 80% in this tough marketplace.

Also, we continue to believe that there are strong fundamentals in the retail leasing environment. We are looking forward to continued positive leasing conversations for all of our assets. Most of our enclosed malls remain dominant in their geographical area and our strip malls, which are largely grocery-anchored, have performed well. Beyond our retail assets, we have high-quality office buildings in Canada's largest markets with a high degree of government office tenants. We continue to be positive about our business and the objective of building value for our unitholders. We look forward to continuing to execute our strategy, and thank you for your continued support. We will now open the floor to questions.

[Operator]

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

[Jonathan Kelcher, analyst]

First question, just starting on the Bay, I guess for the Cambridge property where it was disclaimed, was there any NOI or any rent in there in the second quarter at all? Like when did that -- when did they stop paying?

[Andrew Tamlin, executive]

So that was disclaimed at the beginning of June. So there would have been a small piece that -- where we would not have received rent, which will be pretty material.

[Jonathan Kelcher, analyst]

Material or immaterial?

[Andrew Tamlin, executive]

Pretty immaterial.

[Jonathan Kelcher, analyst]

Okay. And I guess it's like a month or a couple of months, it's not a lot of time but like any beginnings of plans for that space? Thoughts on it?

[John Ginis, executive]

Jonathan, John Ginis here. I'll answer your question. Two-level space, an older format store we're still in the preliminary valuation component of what we do with the real estate. We've identified some temporary options to prop occupancy that will carry us to a short term, but nothing to report as of yet.

[Jonathan Kelcher, analyst]

Okay. And you don't have to give -- is there anything like with that space vacant, do you have to give any breaks to other tenants?

[John Ginis, executive]

So cotenancy is limited here. Fortunate for us, we have well-established relationships with a lot of our retailers across the portfolio, particularly ones here at Cambridge Center. So far, we are mitigating the risk profile associated with co-tenancy. So we're not in a position whereby we're bleeding with respect to rent concessions that have to be awarded.

[Jonathan Kelcher, analyst]

Okay. That's good. And I guess, switching gears over to office. We're seeing more return to office mandates because I guess there's a lot -- they're a little bit -- at least a little bit more positive sentiment towards office. Are you guys starting to see a pickup in demand on that front?

[Andrew Tamlin, executive]

Rick, do you want to -- do you mind giving some color on kind of what we're seeing in Ontario with respect to the office market?

[Richard Clermont, executive]

Yes, sure. It's Rick Clermont. Yes, there's been definitely an increase just recently with the return to office. I think that most of the banks have announced more people coming back to work by the end of the year, basically kind of October, November, same thing with the government trying to get people back a few more days a week. So there's a bit more momentum in that sense. But yes, that's kind of where we're at. So there is more interest, especially from the banks.

[Jonathan Kelcher, analyst]

Okay. So you're seeing more inquiries for your space?

[Richard Clermont, executive]

Slowly, but yes.

[Jonathan Kelcher, analyst]

Okay. And then lastly for me, just on the 2026 convert. I know it's the end of the year, but what are your thoughts on that right now?

[Andrew Tamlin, executive]

It's still a little bit too early to comment on that, Jonathan. We've been putting some thought to it. But at this point, we're not really prepared to comment on it. Our track record has been just to roll it forward. But beyond that, it's still a little bit too early.

[Jonathan Kelcher, analyst]

Okay. Fair enough. And then I guess just sticking with the balance sheet. On the balance of your mortgage maturities this year and in the next year, it looks like you're plus or minus 50% loan to value on those properties. Are there -- how should I think about that going forward? Like opportunities for up financing? Is there any risk of needing to pay down one or more of those mortgages as they mature or to sort of renew as is?

[Andrew Tamlin, executive]

I think we'll see the majority of them renew as is. There's not any that we're particularly worried about. There may be some small opportunities for up financing, and we'll be reviewing those with the lenders, but there's nothing -- there's really nothing on that we're overly worried about.

[Operator]

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

[Andrew Tamlin, executive]

Thank you, everybody, for your attention and listening in to the call, and we look forward to talking to you at the third quarter call. Thank you, and have a good weekend.

[Operator]

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