Good afternoon, ladies and gentlemen, and welcome to the Morguard North American Residential REIT second quarter 2021 results conference call. At this time, all lines are in listen-only mode. Following this presentation we will conduct a question-and-answer session. If at anytime you require assistance, please press star zero for the operator. This call is being recorded on Thursday, July 29th, 2021. I would now like to turn the conference over to Rai Sahi. Please go ahead.
Thank you very much, Chris. Why don't you go ahead and introduce everybody we've got?
Thank you, Rai. With us as well is Paul Miatello, Angela Sahi, and John Talano, and also Patrick Seward. 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 2021 with total assets amounting to CAD 3.1 billion, unchanged compared to December 31st, 2020. The REIT finished the second quarter of 2021 with approximately CAD 18.1 million of cash on hand at CAD 97.8 million available under its CAD 100 million revolving credit facility with Morguard Corporation. The REIT completed the second quarter of 2021 with CAD 1.2 billion of long-term debt obligations, and as at June 30th, 2021, the REIT's overall weighted average terms of maturity was 4.3 years, a decrease from 4.8 years at December 31st, 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 30th, 2021, down compared to 42.8% at December 31st, 2020. The REIT's IFRS net asset value at CAD 28 per unit as at June 30th, 2021, compared to the current market price of approximately CAD 17.50, reflects a compelling entry point for investors. Turning to the statement of income, net income was CAD 20.3 million for the three months ended June 30th, 2021, compared to CAD 19.3 million over the same period in 2020. The CAD 1 million increase in net income was primarily due to a higher fair value gain on real estate properties of CAD 9.4 million relative to the gain recorded during 2020, an increase in deferred tax expense of CAD 4.6 million, and a decrease in NOI of CAD 3.9 million.
IFRS net operating income was CAD 37.4 million for the three months ended June 30th, 2021, a decrease of CAD 3.9 million or 9.4% compared to 2020. The change in foreign exchange rate amounts to CAD 3 million of the overall CAD 3.9 million variance to Q2 2020. On a same-property proportionate basis, NOI in Canada decreased by CAD 1.2 million, or 8.7%, mainly due to higher vacancy. NOI in the U.S. decreased by $0.1 million, or 0.9%, as higher operating expenses nearly offset an increase in revenue resulting from higher AMR and lower vacancy. The change in foreign exchange decreased NOI by CAD 2.6 million. Interest expense decreased by CAD 1.1 million for the three months ended June 30th, 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 second quarter performance has translated into basic FFO of CAD 16.1 million, a decrease of CAD 3.2 million, or 16.5% when compared to 2020. On a per unit basis, FFO was CAD 0.29 per unit for the three months ended June 30th, 2021, a decrease of CAD 0.05 compared to the CAD 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 CAD 0.03 per unit negative impact. In local currency, a decrease in NOI from increased vacancy, partly offset by a decrease in interest expense and trust expenses, had a CAD 0.005 per unit negative impact.
The remainder of the variance to last year was due to non-recurring other income recorded during the second quarter of 2020, which had a CAD 0.015 per unit negative impact. The REIT's FFO payout ratio was 61% for the three months ended June 30th, 2021, a very conservative level, which allows for significant cash retention. Operationally, the REIT's average monthly rent in Canada increased to CAD 1,520, 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% of 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 $1,436 at the end of June 2021.
The REIT's occupancy in Canada finished the second quarter 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 two properties impacted by university closures. In addition, occupancy at the REIT's GTA properties have experienced a 4 to 5 basis point decline as management's focus has been on maintaining 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. was 96.8% at June 30th, 2021, higher compared to 93.6% at June 30th, 2020, and reached optimum levels as most of the REIT's U.S. sub-markets have rebounded from previous COVID-19 restrictions and as the U.S. economy has recovered. During the six months ended June 30th, 2021, the REIT's total CapEx amounted to CAD 11.9 million.
That included exterior building and revenue-enhancing in-suite improvements. Overall, in order to preserve liquidity, the REIT scaled back most of its revenue-enhancing CapEx and continued to focus on maintenance CapEx. Lastly, at July 27th, 2021, the REIT collected 98.7% of second 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. Should you have any question, please press star followed by one on your touchtone phone. You'll hear a three-tone prompt acknowledging your request and requests will be popped in the order they are received. Should you wish to decline from the following process, please press star followed by two. To use your speaker phone please lift your handset before pressing any keys. To Your first question comes from Lyan Chen with iA Capital Markets. Lyan, please go ahead.
Hi, good afternoon. My 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?
Yeah, no problem. John, can you take care of that question?
Sure. There were two things going on that occurred. One is through the pandemic, we slowed what we were doing inside the residence units. We were only doing emergency work orders. When things opened up, we also were getting back into our residence units and making those repairs. 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. That was a bump in our make-ready and turn cost for maintenance as well. Those things have already happened. Fortunately, we've seen our occupancy go higher now than to our pre-pandemic levels. We're at a point now where we don't really have anything to lease. 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. Thanks. Last one from me. Just 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. 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. Chicago still has a significant amount of supply, but our rates were lower, specifically at The Marquee, where we're having significant occupancy issues. As that leased up, that building now is also 99% leased. We have aggressively pushed our rents as well. 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.
No, that's perfect. No, that's it for me. I'll turn it back. Thank you.
Thank you. Your next question comes from Lorne Kalmar with TD. Lorne, please go ahead.
Thanks. Good afternoon, everybody. Just wondering on the CAD 110 million of financing proceeds, what's sort of the intended or some of the uses that you guys have discussed? Can you maybe give a little more color, that'd be great.
Yeah. Right now, we're just working on securing the increase in financing proceeds. I'll turn it over to Rai to speak about, I guess your question ties to acquisitions potentially. Right now, there's nothing immediate, but Rai can elaborate on that.
We're looking more to the U.S. Well, we're also looking in Canada, but in Canada, nothing seems to make sense. We will continue to look in the U.S. Patrick, do you want to add anything?
No, as I said, the traditional markets are in play, and the U.S. is very active, and we see lots of potential.
Okay, 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 in or have they been ticking downwards?
From what we see in Toronto, down south, John will have his own views given the operating portfolio. The third-party market was showing a wee bit of COVID weakness into the first six months of the pandemic. That created a bit of uncertainty. There's been a few opportunities, not necessarily at above market yields, but you're getting better quality assets at slightly lower dollar per pound pricing. Yields are still between three and three-quarters and four and three-quarters, depending where you are and the level of quality and your rent levels.
Okay, fair enough. Maybe last one from 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 rent. How do you see that translating into same-property NOI growth over the balance of the year?
John Talano?
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% and 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.
Would it be fair to say you guys think you can get back to positive same-property NOI growth in the U.S., excluding the currency impact, in Q3? Sorry, I should say.
I think we're very close. I don't want to predict what will happen. I feel like we are getting very close. Things look very good. 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, please go ahead.
Thank you, and good afternoon. Perhaps just following up on a couple of Lorne'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. The optimism comes from the influx of or I guess our increases in occupancy. We have never enjoyed the occupancies that we have today, really in my 20+ years. I have 12 properties now that are literally 100% leased, which I've never seen before. 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 reap those profits.
Those folks too have moved into our apartment communities. I expect that to continue to be a positive impact. 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. You never know. With that variant 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 rents going into the back half of the year?
We already have. Now we're at 96% occupied. We're close to 99% leased. Those are very strong numbers for us, and we use a revenue management software that will automatically push those rents as we reach those higher occupancies. They're there, and we're pushing between 3% and 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? 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 answer that?
Sure. I think we're actually with the recent openings in Ontario. We're actually seeing some positive traffic. We have a bunch of move-ins scheduled for August, September, October. We currently have 156 suites that have been leased in the portfolio, so we're in about 160 move-out. We're catching up actually at this point. 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 a precedent, but we also have other properties in our portfolio outside of MRG downtown, and we're noticing a heavy influx of the foreign students coming back.
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 two weeks. We're seeing a lot of positive activity, and I think as long as things remain open and 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. Afternoon, everyone.
Hi.
Hey, Rai. This might be a question for Angela , maybe. It's similar to what Matt Logan asked. 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. If that's kind of what you're asking.
Yeah
Yeah. We'll run specials on certain units just to get traffic in, but we've held rent. Could we have leased more if we were to reduce rent? Sure. The idea is because we're rent controlled in Ontario, we did hold our rents. 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. 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 low. It's obviously that much bigger because anything greater than zero is infinitely higher. That does answer that. That's it for me. Thanks, everyone.
Thanks.
Thank you. Your next question comes from Yashwant Sankpal with Laurentian Bank. Yash, please go ahead.
Yeah. Good afternoon.
Hi, Yash.
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 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 D.C., those are generally folks that left the city because either the schools were closed or they're young professionals that all the amenities downtown became useless. They didn't have access to them.
Those folks moved out to the suburbs or back home, and quite frankly, I think a lot of our tenants were 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. I think with anywhere in the cities that were closed down, there is an absolute pent-up demand for those amenities that folks haven't had access to in 1 year.
Right. Okay. Where is your Canadian occupancy at this point?
Angela, can you answer 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, and October. If you're kind of wondering, it has gone up significantly for this quarter, not yet, is what I would say. It's going to be flat from Q2 currently today. As we get more leases, hopefully that should improve over the next quarter.
You have lease suites, but they're not occupied. Is that what you're saying?
Exactly.
Okay. In terms of student leasing, at this point, is it at the same level as in the past, or is it lower than?
In Edmonton, the universities have announced openings, so we seem to be leasing pretty strongly over there. We've had 20 leases already for August and another 20 for September, and similar in Ottawa. 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. It'll all depend. I know from downtown, the University of Toronto campus is open. That's why we've seen a huge influx over there. It will all depend on the announcements that are made and how many students can come back.
Are foreign students booking in as well?
Yeah. Foreign students that we're talking about that are coming back.
Okay. Chris, based on your cash flow statement, your tenant incentives have doubled this quarter as compared to Q1. Just wondering where those incentives are being applied. Are they in the U.S. or in Canada? Just maybe some color there.
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 John, 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 that are been on the market for a little longer than normal. I believe, John, can we start with you? I think it's predominantly U.S., just on the concessions, right?
Yes, I would say in Chicago, as we were leasing up, we are competing with a significant number of new builds. Those properties are generally offering not just one month, but two months free in the lease-ups. We were competing with that as we were leasing up. That is where we were using most of our concessions in Chicago. 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, yeah, 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. We're trying to balance that out. We absolutely do not want to push folks out and increase our overall turnover. At the same time, we are bringing those folks up that are well below market, significantly.
Our LandlordMax software that we use could bring people up, between 6% and 8% if they're that far behind market. Our market rates are increasing. 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. Those are coming up very quickly as well.
Okay, that's good color. Thank you.
Thank you. Ladies and gentlemen, as a final reminder, should you have any questions, please press star one. There are no further questions at this time. You may proceed.
Great. Thank you very much, everyone.
Talk to you next quarter. Thank you.
Bye.
Thank you.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.