Good afternoon, ladies and gentlemen, and welcome to the Morguard North American Residential REIT third quarter 2021 results conference call. At this time, note that all lines are in a listen only mode, but following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. Also note that this call is being recorded on Thursday, October 28, 2021. I would like to turn the conference over to Mr. Rai Sahi.
Thank you. I'm going to pass it down to Angela. Do you want to introduce the rest of people?
We have Beverley Flynn here, myself, Chris Newman in person, and then on the phone we've got Paul Miatello and John Talano.
Okay. Thanks, Angela. As is customary, I will provide comments on the REIT's financial position and performance. In terms of our financial position, the REIT completed the third quarter of 2021 with total assets amounting to CAD 3.3 billion compared to CAD 3.1 billion in December 2020. The increase is mainly due to a fair value increase on the REIT's income producing properties. The REIT finished the third quarter of 2021 with approximately CAD 20.5 million of cash on hand and CAD 84.6 million available under its CAD 100 million revolving credit facility with Morguard Corporation. The REIT completed the third quarter of 2021 with CAD 1.2 billion of long-term debt obligations.
As at September 30, 2021, the REIT's overall weighted average term to maturity was 4.1 years, a decrease from 4.8 years at December 31, 2020, and having a weighted average interest rate of 3.45%. The REIT's debt to gross book value ratio improved to 40.2% at September 30, 2021, down compared to 42.8% at December 31, 2020. The REIT's IFRS net asset value of CAD 29.80 per unit as of September 30, 2021, compared to the current market price at a little over CAD 18, reflects a compelling entry point for investors. Turning to the statement of income.
Net income was CAD 86.7 million for the three months ended September 30, 2021, compared to CAD 53.5 million over the same period in 2020. The CAD 33.2 million increase in net income was primarily due to a higher fair value gain on real estate properties of CAD 55 million-CAD 55.2 million relative to the gain recorded during 2020, and was partially offset by an increase in deferred income tax expense of CAD 19.6 million and an increase in fair value loss on Class B LP units of CAD 6.5 million. IFRS net operating income was CAD 37.1 million for the three months ended September 30, 2021, a decrease of CAD 1.7 million or 4.3% compared to 2020.
The change in foreign exchange rate amounts to CAD 1.4 million of the overall CAD 1.7 million variance to Q3 2020. On a same-property basis, NOI in Canada decreased by CAD 0.3 million or 2.4%, mainly due to higher vacancy, partially offset by growth in AMR. NOI in the US increased by $0.1 million or 0.7% as an increase in revenue from AMR growth and lower vacancy was partially offset by higher operating expenses. The change in foreign exchange decreased NOI by CAD 1.1 million. Interest expense decreased by CAD 0.5 million for the three months ended September 30, 2021 compared to 2020, primarily due to the change in foreign exchange as the strengthening of the Canadian dollar decreased interest expense on US mortgages.
The REIT's third quarter performance has translated into basic FFO of CAD 16.2 million, an increase of 0.1 million or 0.4% when compared to 2020. On a per unit basis, FFO was CAD 0.29 per unit for the three months ended September 30, 2021, unchanged compared to Q3 2020. As the following items offset each other, a change in foreign exchange rate had a CAD 0.01 per unit negative impact and a decrease in other expense, which was largely a result of a non-recurring write-off during 2020, had a CAD 0.01 per unit positive impact. The REIT's FFO payout ratio of 60.9% for the three months ended September 30, 2021 is a very conservative level, which allows for significant cash retention.
Operationally, the REIT's average monthly rent in Canada increased to CAD 1,530 or 3.3% compared to 2020, reflecting the quality of our Canadian portfolio. During the year, the Canadian portfolio turned over 10.6% of total suites in Canada and achieved 11.3% AMR growth on suite turnover. In the US, same property AMR increased by 4.1% compared to 2020, having an average monthly rent of $1,486 at the end of September 2021. REIT's occupancy in Canada finished third quarter of 2021 at 92.7% compared to 96.4% a year earlier. Occupancy decreased in Canada due to the impact of past stay-at-home restrictions, which disrupted normal leasing patterns.
As the administration of vaccinations continues to progress across the country and as restrictions are lifted, we continue to see increased leasing activity and number of suites leased. In addition, occupancy in the GTA was impacted by lower immigration levels, the increased number of suites on the market from existing and new supply, and the previous province-wide stay-at-home order. Same property occupancy in the US of 96.4% at September 30, 2021 was higher compared to 93.3% at September 30, 2020, and maintained optimum levels as most of the REIT's US submarkets are outperforming pre-pandemic levels.
The redeveloped property, 1643 Building, is located in New Orleans, Louisiana. The REIT's stabilized occupancy is currently 90.4% occupied and 98.2% leased. The repositioned asset further improves the overall quality of the portfolio having an AMR of $1,822. During the nine months ended September 30, 2021, the REIT total CapEx amounted to CAD 19.3 million. That included exterior building and revenue enhancing in-suite improvements, and we continue to ensure we maintain the structural and overall safety of our properties. Lastly, as at October 26, 2021, the REIT collected 98.4% of third quarter rental revenue and approximately 95% of October 2021 rental revenue, which is materially in line with historical collection rates.
I will now turn the call back to the moderator who will open up the line for questions.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchtone phone. You will then hear a three-tone prompt acknowledging your request. If you would like to withdraw your question, simply press star followed by two. If you're using a speakerphone, we do ask that you please lift your handset before pressing any keys. Please go ahead and press star one now if you do have a question. Your first question will be from Lorne Kalmar at TD Securities.
Thanks. Good afternoon, everyone. Just first on the US portfolio, it looked like top line revenue was pretty solid, backed by some good rent growth and occupancy. But the margins seem to be kind of at the low end of the historical range for the portfolio. Could you maybe give us a little more color on that and sort of what your expectations are for 2022?
Yeah, no problem. I'll turn that over to john, who's our VP Operations in the US.
Sure. Yes, we are raising rents actually significantly. It was last quarter when we started aggressively. We have taken some expense hits. Biggest is property taxes, which we saw a bit of a big increase this quarter. That and insurance are our two major drivers. We do have some inflationary issues with salaries as well as you know access to materials. We think those are temporary, of course. We've been working really hard to adjust rents with you know with these costs going up.
You know, anecdotally, our asking rents really across the portfolio today, if we exclude our urban markets, really Chicago and DC, if we exclude those, our asking rent, this is not AMR, but what we're asking today is actually 34% higher than what it was pre-pandemic. That hasn't caught up, but because we are very full, we are able to, you know, increase those rents, and we are pushing AMR wherever we can. We're catching up, and we believe a lot of it will normalize. It's really just those big property tax hits that we're managing to now.
Would it be fair to say that as you guys start getting these rents, the margin we should see some margin expansion? Obviously, I know you guys don't control the property tax side of things.
Yeah. We're working at it. We're getting those rents, and our occupancies even going into winter are stronger than they've ever been. You know, it's so far working out well.
Okay. Maybe turning to the Canadian side. I know you guys, it looked like occupancy ticked up quarter-over-quarter, which is good to see. Specifically at the two buildings at Ottawa and Edmonton that have, I think, I believe a lot of student or cater to the student population. What sort of leasing activity have you guys seen there?
This is Angela. Over the summer, that picked up quite a bit. We were, I think in August and September, we had, like, 60 leases at each of those properties. We had a significant level of activity. However, both locations, the universities there are not fully open yet, so there's just a couple of faculties. They're hoping in January we'll have some more restrictions lifted, and in which case we should pick up some more leasing activity there.
Okay. Maybe more broadly, are you guys starting to see things rebound in a meaningful way across on the Canadian side?
We are. As restrictions are opened up, we literally see immediate response with leasing activity. Even now, as immigration has just recently started to open up, we're getting a lot of feedback from young professionals from abroad and, you know, the IT groups and things like that, which is great. As offices opened up, we're seeing people wanting to go back into some of those core areas like in Ottawa, for example, and even Edmonton, just to have some face-to-face interaction with employers. That's key. We're hoping for some more of a positive outlook for next quarter.
Okay. Then just lastly, I mean, I think the Canadian portfolio is typically 97% plus occupied. When do you guys think you get back to that? Because there's no doubt you will.
That's really difficult to predict. I think a lot of it depends on everything going back to normal, right? Like, I think things have been pretty quiet kind of in the downtown cores, in the malls, in the offices. I think the US had a much quicker rebound because the restrictions lifted faster. That would be kind of a direct correlation. As we open up our economy, I think that we'll bounce back to that, back to that pre-COVID level of occupancy.
Okay, great. Thanks for the color, everyone. I'll turn it back.
Thanks.
Thank you. Next question will be from Matt Logan at RBC. Please go ahead.
Thank you and good afternoon. Apologies for the background noise here. Wondering if you could provide a little bit of color on your cap rates. We've seen fairly material moves downward in the markets, but have seen very little movement in the REITs cap rates. Any commentary on what your expectations are going forward would be great.
Yeah, maybe we can start, John, maybe a little bit of color on the US on the cap rates, and I can speak quickly to Canada. You know, there's obviously still, you know, the impression of cap rate pressure and of compression. We're continuing looking at the markets in Canada to see if there's a trade that our internal valuations department will consider if there's any further compression needed. In the US, a little more dynamic. I think John can add some value there.
From an acquisition perspective, it is certainly very frothy if you are a seller in virtually all our markets. We have seen a little more compression even from last quarter, and it has not really blown up. I think there's a demand for housing. In general, the single-family home market has been so strong, and there has been a frenzy for so many months. It's pushed folks to sell their homes, which has made those home buyers actually become renters, and they're renting with us. You know, that just has really pushed up the markets and is even affecting cap rates for new acquisitions as well.
Yeah, good color. In terms of your overall NOI, you mentioned that the rents were materially above pre-pandemic levels, excluding some of the urban assets. If we just kinda think about the NOI, would the portfolio be operating above pre-pandemic levels on average in the US today?
John, maybe you could speak. I think we're pre-pandemic. I believe in the US, we're more or less if you kind of flip back to our NOIs prior to, you know, 2020, I think we've regained any ground lost. That's because of the sharp recovery. In Canada, we're still tracking and trending up to where we reached our highs in Canada, and that's obviously because of our, you know, 98%-99% occupancy in the past. It is, it really continues upon the vacancy and the recovery.
Yeah, I would say, too, in our markets, you know, I mentioned the urban markets. Our occupancies dropped significantly, I would say worse than what you guys have seen in Canada. In Chicago specifically, that's a big market for us. There was a significant amount of supply on top of that. Our peers were really dropping rates, offering huge concessions, and you know, occupancies were still falling. Rents came down. I think we were down roughly 12% from pre-pandemic levels. What happened was it rebounded so fast we couldn't keep up. Our rents have rebounded very quickly. We have to have renewal rates out there 120 days ahead of time.
that, you know, didn't allow us to push rents again on our renewals, and that's why there was a lag there. I think we're in Chicago specifically, roughly about 6%, so below where we were. Our asking rents are well above that today.
A great color. Maybe one last question for me on the Canadian portfolio. Where would you say, like the leasing demand or the occupancy has trended after the quarter? When we think about January and students potentially coming back, could you see an extended leasing season this year?
Yeah, I think definitely. I think if the students come back in January, and also as I mentioned, as immigration picks up and as the offices require more in-person person-to-person activity, we could see a bigger recovery for next quarter.
Okay. Well, I appreciate the commentary. I'll turn the call back. Thank you.
Thank you. Next question will be from Yash Sankpal at Laurentian Bank. Please go ahead.
Hi. Good afternoon.
Hi.
Just on the US portfolio, the 34% number, you know, 34% above the pre-pandemic level. John, I mean, I understand the speed of the demand was very fast and everything, but how much more room do you think is there in this, you know, this rent inflation?
Again, these are our asking rents on the units that are available today, and we're 96%-97% occupied across the portfolio. We are absolutely getting them. You know, our trends are still good. You know, it is a concern, but there's a lot of runway because, you know, that number is basically what we're asking this month, right? You're talking about a very small percentage of the portfolio that is getting that rate. But it provides us a lot of room for our existing residents upon renewal.
It's not just us, but when the competitor next door has that rate that is 30% higher, you know, the resident sees that they have a good deal, even if their rents, you know, go up 8% or 10%, and they'll stay. There's certainly some significant runway there, and it will absolutely normalize. It's just we are grabbing it as we can so that, you know, we can keep up with some of the expenses that we're seeing. It's necessary, so we're doing it.
I know this is very basic question, but how long do you think this demand will continue there? What do you think will normalize this demand, in other words?
Well, I would say a lot of it relates to the single-family home frenzy that we saw over the summer. It has absolutely relaxed. You know, the folks that sold their homes have to rent. You know, this will continue on for a good six months to a year. But it also ties to the single-family home demand and the lack of supply. And it's not just lack of supply, it's a lack of not of supply of homes, but it's a lack of supply of everything. You know, construction materials, appliances, all of those things have made a huge impact on all of those markets. I don't see that normalizing in the immediate term.
You know, those supply chains and all those issues I think will exist for 12 months to two years. You know, I can't predict that.
Okay. That's good, Philip. Where do you think your occupancy will end by year-end?
Even with our rent growth, we have not seen the normal turnover that we would expect in the winter months. You know, in our northern markets, Chicago, DC, traffic absolutely does slow in the winter. Our leasing activity slows in the winter. We still had move-outs. This year is different because we filled up over the summer, a lot of those folks, you know, just moved into our buildings. They just started jobs. They're back, you know, in the cities, enjoying all the amenities that are now open again. We're seeing some reduced turnover.
I believe in those markets because our rents are low. We're gonna take a little bit of a different tack and accept a little vacancy, keeping our rents high over the winter months. Because we believe that the demand in the summer or spring and summer will also be strong. We're pretty bullish.
Okay. Chris, this one is for you. Have you locked the rate? I'm assuming you have locked the rate, but what is the rate you locked at on the?
I think.
core mortgages?
We're close. We'll provide an update shortly. We're moving through the process, and we're close to having a commitment for and rate locking.
Okay. That's it for me. Thank you.
Thank you.
Thank you. Next question will be from Mike Shamek, investor. Please go ahead, Mike.
Hi, my name is Mike Shamek. I'm a private investor at Colton Chairs, and I had a fairly simple question, which should be simple, but kind of confused about. I was wondering what the net asset value per share is, and I couldn't find it in MD&A. Maybe I missed it. When I search online, I get like five different numbers from all kinds of different sources, and it seems to be an area of confusion amongst the investor community. I want to ask what it was and also suggest that you start putting it in your MD&A so that everybody knows. Thank you.
Sure. Thank you. No problem. Thank you, Mike. We will definitely consider publishing that. It's CAD 29.80. Feel free to email me after if you have any questions on the math behind that. Yeah, that's it, and we'll think about publishing that number.
Yeah, if you could put in the MD&A, that'd be great, along with the math of how you arrive at that number, because I see five different numbers from different sources. I think that there will be quite a reaction from a lot of different people who are confused about it. Yeah, thank you very much.
Thank you.
Bye-bye.
Thank you. As a reminder, ladies and gentlemen, if you do have a question, please press star followed by one on your touch-tone phone. Your next question will be from Dean Wilkinson at CIBC. Please go ahead.
Thanks. Afternoon, everybody. John, how much can you push rent down in the US on renewal before you start to get some pushback yourself?
It absolutely depends on the market.
Mm-hmm.
Through our revenue management software, in general, we're going between 8%-10% right now.
Okay.
We're not seeing a whole lot of pushback.
All right. If you've got a 34% differential to pre-pandemic marks, that would suggest there's 3-4 years of runway on those kind of renewal rates then, correct?
Yeah, yeah, correct. We're again getting it while we can to absorb some of the additional expenses that we're dealing with. It's pretty consistent with our peers. We're all in the same boat.
Perfect. Words to live by, get it while you can. I think Ray told me that once. That's it for me. Thanks, guys.
Thank you.
Thank you. At this time, we have no further questions. Please proceed.
Oh, yeah. Thank you everyone, for joining the third quarter call. We'll see you next time.
Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your lines.