Earnings Call: Q2 2021

Jul 29, 2021

Earnings release

Afternoon, ladies and gentlemen, and welcome to the Morgare North American Residential REIT Second Quarter 2021 Results Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is recorded on Thursday, July 29, 2021. I would now like to turn the conference over to Mr. Ray Sahi. Please go ahead. Thank you very much, Chris. Why don't you go ahead and introduce everybody with all of you. Thank you, Ray. With us as well is Paul Michelangelo, Angelo Stein and John Talano and also Patrick Stewart. 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 Q2 of 2021 with total assets amounting to $3,100,000,000 unchanged compared to December 31, 2020. The REIT finished the Q2 of 2021 with approximately $18,100,000 of cash on hand and $97,800,000 available under $100,000,000 revolving credit facility with Morgant Corporation. We completed the Q2 of 2021 with $1,200,000,000 of long term debt obligations. And as at June 30, 2021, the REIT's overall weighted average Term to maturity was 4.3 years, a decrease from 4.8 years at December 31, 2020, having a weighted average interest rate of 3.45 The REIT's debt to gross book value ratio improved to 41.4% at June 30, 2021, down compared to 42.8 percent at December 31, 2020. The REIT's IFRS net asset value at $28 per unit As of June 30, 2021, compared to the current market price of approximately $17.50 reflects a compelling entry point for investors. Turning to the statement of income. Net income was $20,300,000 for the 3 months ended June 30, 2021, compared to $19,300,000 over the same period in 2020. The $1,000,000 increase in net income was primarily due to a higher fair value gain on real estate $3,900,000 IFRS net operating income was $37,400,000 for the 3 months ended June 30, 2021, a decrease of $3,900,000 or 9.4 percent compared to 2020. The change in foreign exchange rate amounts to $3,000,000 of the overall $3,900,000 bearing q2 2020. On a same property proportionate basis, NOI in Canada decreased by $1,200,000 or 8.7 percent, mainly due to higher vacancy. NOI in the U. S. Decreased by US0.1 million dollars or 0.9 percent as higher operating expenses nearly offset an increase in revenue resulting from higher AMR and lower vacancy. And the change in foreign exchange Interest expense decreased by $1,100,000 for the 3 months ended June 30, 2021 compared to 2020, primarily due to the change in FX as the strengthening of the Canadian dollar decreased interest expense on U. S. Mortgages. REIT's 2nd quarter performance has translated into basic FFO of $16,100,000 a decrease of $3,200,000 or 15.5 percent when compared to 2020. And on a per unit basis, FFO was $0.29 per unit for the 3 months ended June 30, 2021, A decrease of $0.05 compared to the $0.34 per unit in 2020. The decrease in FFO per unit was due to the following: A change in the foreign exchange rate on a same property proportionate basis had a $0.03 per unit negative impact and in local currency, had a $0.015 per unit negative impact. The remainder of the variance to last year was due to non recurring other income recorded during the Q2 of 2020, which had a $0.015 per unit negative impact. The REIT's FFO payout ratio was 61% for the 3 months ended June 30, 2021, very conservative level, which allows for significant cash retention. Operationally, the REIT's average monthly rent in Canada increased to $15.20 or a 4.5% increase compared to 2020, reflecting the quality of our Canadian portfolio. During the year, the Canadian portfolio turned over 5.2 total suites in Canada and achieved 14.2% AMR growth on suite turnover. While in the U. S, same property AMR increased by 0.8% compared to 2020, having an average monthly rent of US1436 dollars at the end of June 2021. The REITs occupancy in Canada finished the Q2 of 2021 at 91.8% compared to 97.5% a year earlier. Occupancy decreased in Canada due to continued lower leasing traffic, lower immigration levels as well as 2 properties impacted by university closures. In addition, occupancy at the REIT GTA Properties have experienced a 4 or 5 basis point decline as management's focus has been on existing rent levels as we believe the higher vacancy will recover as the economy reopens and the number of Canadians fully vaccinated increase. Same property occupancy in the U. S. Of 96.8 percent at June 30, 2021, higher compared to 93.6 percent at June 30, 2020, and reached optimum levels as most of the REIT's U. S. Submarkets have rebounded from previous COVID-nineteen restrictions and as the U. S. Economy has recovered. During the 6 months ended June 30, 2021, the REIT's total CapEx amounted to $11,900,000 That included exterior building and revenue enhancing in suite improvements. Overall, in order to preserve liquidity, the REIT scaled back most of its revenue And lastly, at July 27, 2021, the REIT collected 98 point 7% of 2nd quarter rental revenue and approximately 95.6% of July 2021 rental revenue, which is materially in line with historical collection rates. I'll now turn it back over to the moderator, who will open up the line for questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session. You will hear from Mr. Tom Pram acknowledging your request and your questions will be pulled in the order that they are received. Liam, please go ahead. Hi, good afternoon. The first one for me, just in general, with regards to overall operating expenses in the U. S, Can you comment on the increase in repair and maintenance expenses? What should we be expecting on that front for the rest of 2021? Yes. No problem, John, can you take care of that question? Sure. Well, there were 2 things going on that occurred. 1 is Through the pandemic, we slowed what we were doing inside the residents units. So We were only doing emergency work orders. So when things opened up, we also were getting back into our residents' units And making those repairs. So that was a big part of it. That work's all been complete. The other issue is We have had a huge influx in our occupancy, and we had to get those units ready as well. And that was a bump in our make ready and turn costs for maintenance as well. So those things have Already happened. And fortunately, we've seen our occupancy Go higher now than to our pre pandemic levels. So we're at a point now where we don't Really have anything to lease. So those expenses, we expect to go down, especially because our turnover in general has gone down as well over the last year. That's great. And last one for me. Looking at the Illinois market, can you give more color regarding the current dynamic between lower rental rates and higher occupancy? And what's the strategy going forward? Well, we are fully leased in Chicago. I believe all of our buildings are Close to or either at or above 99%. We do our renewals Roughly 90 days in advance. So there was a bit of a lag between when we started getting the rush Back into the city, and that's exactly what it was. Our occupancies increased significantly. And Chicago still has a significant amount of supply, but Our rates were lower specifically at the Marquis where we're having significant occupancy See issued, but as that leased up, that building now is also 99% leased. We have aggressively pushed our rents as well. So upon turnover, and we expect those buildings to be in the 40% range annually, We are getting some significant bumps in rent and clawing that back. That's perfect. That's it for me. I'll turn it back. Thank you. Thank you. Your next question comes from Loren Kalmar with TD. Loren, please go ahead. Thanks. Good afternoon, everybody. Just wondering on the $110,000,000 of our financing proceeds, What's sort of the intended or some of the uses that you guys have discussed? Could you maybe give a little more color? That would be great. Yes. Right now, we're just working on securing the increase in financing proceeds. But I'll turn it over to Ray to speak about, I guess, it ties your question ties to acquisitions potentially. Right now, there's nothing immediate, But Ray, can you elaborate on that? Yes. We're looking more in U. S. We're also looking in Canada, but in Canada, nothing I think that makes sense. And we will continue to look in the U. S. Peter, do you want to add anything? No. I was just saying traditional markets are in play and the U. S. Is very active and we see lots of potential. Okay. And then maybe just kind of following on that, what are you guys seeing in the U. S. From an acquisition cap rate perspective? Have they been holding it? Or have they been taking downwards? COVID had short term from what we see in Toronto, down south, John will have his own views given the operating portfolio. The 3rd party market was showing a wee bit of COVID weakness into the 1st 6 months of the pandemic. That created a bit of uncertainty. There have been a few opportunities, not necessarily at below not necessarily at above market yields, But you're getting better quality assets at slightly lower dollar per pound pricing. But yields are still No, between 3.75 and 4.75 depending where you are and the level of quality and your rent levels. Okay. Fair enough. And then maybe last one for me, switching gears a bit. With the U. S. Above, I'd say, the high end of your target occupancy range, and you guys are expecting to start pushing rents. How do you kind of see that translating in the same property NOI growth over the balance Well, The main increase that we're going to see again, now our renewals go out 90 days in advance. So if you think about it, we're going to be putting out or we have out renewals for October already. Those We have pushed in general between 3% 6% depending on the market. But The big positive impact will be from the full occupancy and Lower turnover that we're expecting through the end of the year. So we had to spend a lot of money getting the units ready and we had A huge influx in Q2, but we're going to be able to enjoy that over the next several months. So would it be fair to say you guys think you can get back to positive same property NRI growth in the U. S. Excluding the currency impact In Q3, I'm sorry, I should say. I think we're very close. I don't want to predict what will happen. I feel like we're we are getting very close. Things look very good. But we're still cautiously optimistic, let's put it that way. Fair enough. Okay. I'll turn it back. Thank you. Thank you. Your next question comes from Matt Logan with RBC. Matt, Perhaps just following up on a couple of Lauren's questions. When you guys say you're cautiously optimistic, where would the caution be across the portfolio? And maybe where would the optimism be? Maybe, John, we can start with you on the U. S. Side. Sure. Again, the optimism comes from the influx of or I guess our Lux of or I guess our increases in occupancy. We have never enjoyed That we have today, really in my 20 plus years, I have 12 properties now that are literally 100% leased, which I've never seen before. So That is all very good news. At the same time, we have a housing shortage across the U. S. So single family home prices are skyrocketing and that is making a lot of what would be Homeowners sell their homes to, REIT those profits. Those folks too have moved into our apartment communities. So I expect that to continue to be a positive impact. And From a risk profile, we are definitely dealing with the delta variant in the southern states. At the same time, that is a non vaccinated individual issue. And I personally don't believe that, that will affect the economy over time, But you never know. And with that buried out there and the possibility of others, We're just being cautiously optimistic. Given the occupancy levels of 98 Do you think you'll start to push harder on rent going into the back half of the year? We already have. Now we're at 96% We're close to 99% leased, but those are very strong numbers for us. And We use a revenue management software that will automatically push those rents As we reached those higher occupancies. So they're there and we're pushing Between 3% 6%, but It's something we haven't seen before and it happened so quickly. We just want to be careful. Given that the U. S. Recovery seems to be leading what's going on in Canada, What read throughs can we take away for the Canadian assets? And maybe taking a step back, When do we think we can get back to pre pandemic levels of NOI in both Canada and the U. S? Angela, can you assist with that? Sure. So I think we're actually with the recent openings in Ontario, we're actually seeing some positive traffic, and we have A bunch of move in scheduled for August, September, October. We currently have 156 suites that have been leased in the portfolio, so we're And about 160 move out. So we're catching up actually at this point. And our occupancy still remains strong at Certain properties like Margaret Place is almost 100% occupied, Rouge Valley is almost 100% occupied, Meadowvale Gardens is 96%, 97%, Downsview Park is 100. We're noticing, obviously, the U. S. Is the President, but we also have other properties in our portfolio outside of MRG downtown, and we're noticing I have the influx of the foreign students coming back. So one of our properties downtown was in a similar situation to 160 Chapel and Square 104, where They're also student based, but we're 90% occupied there within 2 weeks. So we're seeing a lot of positive activity. And I think as long as So things remain open and if the economy picks up and immigration picks up, we'll have a lot more units leased up in the next couple of quarters. Excellent. Well, I really appreciate the commentary. I will turn the call back. Thank you. Thank you. Your next question comes from Dean Wilkinson with CIBC. Dean, please go ahead. Thanks. Good afternoon, everyone. Hi. Hey, Ray. This might be a question for Angela maybe, and it's similar to what Magit When you look at those Canadian portfolio occupancy levels, would it be fair to say that you may have held back on Some of the leasing because the mark to market opportunity is a lot bigger than, say, what you see in the U. S. Where you've actually kind of Hit sort of the optimal occupancy levels across the portfolio? Well, we've held rent. So if that's Kind of what you're asking in terms of Yes. We haven't yes, we've taken like we will run specials on certain units just to get traffic in, So we've held the rent. So could we have leased more if we were to reduce rents? Sure. But the idea is because we're rent controlled in Ontario, we just we did hold our rents. And we're seeing actually the downtown property I'm talking about, we're actually able to increase rents above pre COVID market on some of our units. So It's actually a good thing that we did hold the rents. That's where I was going with the question thinking that there's an equivalent kind of mark to market opportunity as if it was a But then it's obviously that much bigger because anything greater than 0 is infinitely higher. So That does answer that. That's it for me. Thanks everyone. Thanks. Thank you. Your next question comes from Yash Shankhwal with Laurentian Bank. Yash, please go ahead. Yes. Good afternoon. I just want to talk About the tenants that are rushing back in your U. S. Buildings, are these the same folks that used To rent your buildings or has the profile of the tenants changed? I would say In the most for the most part, it is the same type of tenant. Where we gained Or let's say where we had our largest vacancies in downtown Chicago and in DC, Those are generally folks that left the city because either schools were closed Or, they're young professionals that all the amenities downtown became useless. They didn't have access to them. So those folks moved out to the suburbs or back home. And quite frankly, I think a lot of our tenants We're done with living in their parents' basement, and that's why we saw the explosion of activity. I actually toured many of our well, all of our assets in Chicago and D. C. Recently. And the cities are vibrant. People are out. It's a very normal situation and environment. And that's what brought the people back. So I think with anywhere in the cities that We're closed down there. There's an absolute pent up demand for those amenities that Folks haven't had access to in a year. Right. Okay. Where is your Canadian occupancy at this point? Angela, can you answer to that? We're basically just where we are at Q2. It hasn't really gone up Much because most of the move ins for the last few weeks have been for August, September October. So if you're kind of wondering For this quarter, not yet is what I would say. It's going to be flat from Q2 Currently, today, but as we get more leases, hopefully, that should improve over the next quarter. So you have lease Suites, but they're not occupied. Is that what you're saying? Exactly. Okay. And in terms of student leasing, at this point, is it at the same level that As in the past or is it lower than Yes. So in Edmonton, the universities have announced openings. So we seem Leasing pretty strongly over there. We've had 20 leases already for August and another 20 for September and similar in Ottawa, but Ottawa seems to be a little bit mixed in terms of which faculty is open and which isn't. They're a little bit cautious, I guess, in their opening. So it will all depend like I know from downtown, the U of T campus is open. So that's why we've seen a huge influx So we're there. So it will all depend on the announcements that are made and how many students can come back. And are foreign students booking in the business? Yes, foreign Okay. And Chris, Based on your cash flow statement, your tenant incentives have doubled this quarter as compared to Q1. So just wondering where Those incentives are being applied either in the U. S. Or in Canada, just maybe some color there? Yes. They've gone up just in general just because leasing activity has gone up during the quarter, especially in the U. S. It's not a very large number From a bigger picture, I believe, maybe Angela and John could touch upon is the use of concessions. I don't think it's widely used and it's probably a few units They've been on the market for a little longer than normal. But I believe, John, can we start with you? I think it's predominantly U. S, just On the concessions, right? So yes, I would say in Chicago, as we're releasing up, we're competing with Significant number of new builds. So those properties are generally offering not just 1 month, but 2 months free in the lease ups. So we were competing with that as we were leasing up, and that's where we were using most of our concessions in Chicago. But Virtually all of those are now done. Right. John, what do you think is your optimum? I think in the past you have said 95%. Do you think you would like to maintain that level? Or do you think this elevated level Could be maintained for some time. Well, yes, we are actually looking at it very closely. You're talking about Between 95% and 96%. We do have lower turnover and it's a turnover cost that can be significant When you're turning over these units. So we're trying to balance that out. We absolutely do not I want to push folks out and increase our overall turnover. But at the same time, we are bringing those folks up That are well below market significantly. So our RentMax Software that we use could bring people up between 6% 8% if they're that far behind market. And our market rates are increasing. And today, even in Chicago and D. C, they are above the pre Pandemic levels. Now that's not our AMR, obviously, but those are our asking rents. So those are coming up very quickly as well. Okay. That's good color. Thank you. Thank you. There are no further questions at this time. You may proceed. Okay. Thank you very much, everyone. Thank you. Thank