Earnings Call: Q4 2020

Feb 18, 2021

Earnings release

Afternoon, ladies and gentlemen, and welcome to the Morguard North American Residential REIT 4th Quarter for Year Ended December 31, 2020. At this time, all lines are in a listen only mode. But following the presentations, we will conduct a question and answer session. Also note that this call is being recorded on Thursday, February 18, 2021. And I would like to turn the conference over to your host, Ray Sahi. Please go ahead, sir. Thank you. Thank you very much. Bev, I'm going to pass it on to you. You introduce everybody. Good afternoon and welcome to the Morguard North American Residential REIT Q4 2020 conference call, highlighting the results for December 31, 2020. We have with us today in addition to myself and Ray, Chris Newman, CFO Angela Sahi, SVP, Canadian Operations John Talano, SVP, U. S. Operations And Paul Miatello, Senior Vice President. Chris? Okay. Thanks, Ray and Beth. So as is customary, I'll provide some comments On the REIT's financial position and performance, in addition, I'll provide a brief operational 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 the COVID-nineteen pandemic. In terms of our financial position, The REIT completed 2020 with total assets amounting to $3,100,000,000 compared to $3,000,000,000 in December 2019. The increase is mainly due to a fair value increase on the REIT's income producing properties, partially offset by the depreciation of the U. S. Dollar since last year. During the Q4, the REIT substantially completed the redevelopment of its Class A mid rise residential property, 1643 Josephine, located in New Orleans, Louisiana, And 1st occupancy took place in late October. The reposition asset further improves 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. The REIT completed 2020 with approximately $27,300,000 of cash on hand $93,400,000 available under its $100,000,000 revolving credit facility with Morvard Corporation. The REIT completed 2020 with $1,200,000,000 of long term debt obligations. And during the Q2 of 2020, the REIT completed Property located in Mississauga, Ontario, providing additional mortgage proceeds of 15,800,000 CMHC loan has a term of 10 years at an interest rate of 2.03%. The maturing mortgage had an interest rate of 4.25%, a considerable interest rate reduction. As at December 31, 2020, the REIT's overall weighted average term to maturity was 4.8 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 percent since December 31, 2019. The REIT's debt to gross book value ratio improved to 42.8 at December 31, 2020, down from 44.1% at December 31, 2019. The REIT's IFRS net asset value of $27.50 per unit as at December 31, 2020 compared to The current market price of approximately $14.75 reflects a compelling entry point for investors. Turning to the statement of income. Net income was $166,800,000 for the year ended December 31, 2020, compared to $80,100,000 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 $16,300,000 relative to the gain recorded during 2019, An increase in fair value gain on Class B LP units of $66,800,000 an increase the increase was due to a fair value gain of 43,700,000 on the Class B units recorded during 2020 compared to a fair value loss of $23,100,000 recorded in 2019. A decrease in deferred income tax expense of $8,500,000 and a decrease in equity income of $10,000,000 mainly due to higher fair value loss on the REIT's equity accounted properties. Net operating income was $135,500,000 for the year ended December 31, 2020, an increase of $2,600,000 or 2% compared to 2019. An increase in foreign exchange contributed $1,000,000 to the NOI increase during the year. On a same property proportionate basis, NOI in Canada increased by $1,600,000 or 3.1 percent and NOI in the U. S. Bad debt expense as a percentage of revenue increased slightly to 0.8% compared to 0.5% in 2019, reflecting the strength in collections within the residential Interest expense decreased by $3,700,000 for the year ended December 31, 2020, compared to 2019, primarily due to a non cash increase in the fair value gain on the conversion option, the venture conversion options. The REIT 2020 performance has translated into basic FFO of $68,900,000 an increase of $4,700,000 or 7.4 percent compared to 2019. And on a per unit basis, FFO was $1.23 per unit for the year ended December 31, 2020, an increase of $0.01 compared to $1.22 per unit in 2019. The increase in FFO per unit was due to the following: $0.045 per unit increase on a same property proportion basis from higher NOI and lower interest expense, partially offset by higher trust expenses and lower more of our facility interest income. A $0.045 per unit Decrease was also due to the dilutive impact from the issuance of units in August 2019, Offset by interest income earned on proceeds advanced on the Morguard facility, net of the partial use of those proceeds and additional FFO generated from the acquisition of Marquis at Block 37 in December 2019, as well as a $0.01 per unit Positive impact from the change in foreign exchange rate. The REIT's FFO payout ratio was 57% for the year ended December 31, 2020, A very conservative level, which allows for significant cash retention. Operationally, the REIT's average monthly rent in Canada increased to $1500 Our 4.7% increase compared to 2019, reflecting the quality of our Canadian portfolio. During the year, the Canadian portfolio turned over 10.6 percent of total suites in Canada and achieved 17.4% AMR growth on suite turnover. While in the U. S. Same property AMR increased by 1.3% compared to 2019, having an average monthly rent of US1428 dollars at the end of 2020? The REIT's occupancy in Canada finished the year at 94.9% compared to 98.8% a year earlier. Occupancy slightly decreased in Canada due to continued lower leasing traffic, lower immigration levels as well as 2 properties impacted by university closures. Same property occupancy in the U. S. Of 93.6 percent at December 31, 2020 was slightly lower compared to 94.5 percent at December 31, 2019. During the year, the REIT's total CapEx amounted to $22,100,000 That included common area projects, exterior building and revenue enhancing in suite improvements. Overall, in order to preserve liquidity, the REIT Scale back most of its revenue enhancing CapEx and continue to focus on maintenance CapEx. In addition, during the year, the REIT incurred development cost of to complete the REIT's development of 1643 Josephine Street in New Orleans. Providing an operational liquidity update, the REIT recognizes the impact COVID-nineteen has on many of its tenants in North America and its stakeholders and is committed to taking measures to protect the health of its employees, tenants and communities. To provide an update, as at February 16, 2021, the REIT collection We collected 98.7 percent of 4th quarter rental revenue and approximately 97.5 percent of January 2021 rental revenue, which is materially in line with historical collection rates. Management will monitor 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 course of this year. As well, the REIT is committed to working with residents on a basis on rent deferral arrangements as a fixed fixed fixed income currently 0.9% of residential tenants Have deferred payment plans. As of February 16, 2020, in Canada and in the U. S, With the exception of a few directly impacted by university and local business closures remain stable as leasing agents And utilize online technology to continue leasing activity 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 Ontario's current state of emergency The REIT has liquidity of $120,700,000 comprised of approximately $27,300,000 in cash $93,400,000 available under its The REIT has approximately $45,300,000 of unencumbered assets. The REIT has also 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 the properties. So at this point, I'll now turn it back over to the moderator, who will open up the line for Thank You will hear a 3 tone prompt acknowledging your request. And And your first question will be from Fred Blondeau at AI Securities. Please go ahead. Thanks and good afternoon. Two quick questions from me, I guess for John. First, it looks like Chicago So the challenge, could you give us a bit of color on the situation and what would be the action plan from here? John, go ahead. I would say that our Chicago assets Are doing very well in general. Our property, Martia Block 37, Was hit very hard with both the pandemic, but also it was right in the middle of a riot And it had a large number of furnished suites With that we're focused on the theater district, obviously, all of that has been closed. But we've actually seen a recent uptick That property dipped down as low as 73% in terms of its occupancy. But today, it's actually 79.42%. So it is definitely on an upswing. That's 79 Percent leased. So we understood that the market was going to be difficult. Chicago Has been virtually closed because of the pandemic, but We did not want to discount rents or give significant concessions away Because it is a beautiful Class A, actually the highest end building in our portfolio. So we gave up a little occupancy knowing that We intended or will hold rents. So we are seeing an increase in traffic significantly over the last Several weeks. Several of our staff, actually our entire staff have gotten their vaccinations At all three of our buildings in Chicago, which we're very excited about. So several of our team actually Have received 2 both shots. So things are beginning to open up and We have definitely been stable for the last several months. I would say the low Was really Q2, but we are optimistic and really expect in Chicago in general, Really expect that to explode once the vaccine proliferates more in that region. So that could be that could be the summer, but we don't know. So we're not going to predict, But I would say we are stable and actually improving today. So is it fair to say that you do not have a base scenario in In terms of your expected occupancy for these properties for the end of 2021? I don't I can't speculate that now. I think things Are still a little uncertain, but I would absolutely say that we are stable and improving. So Our other Chicago assets, Coast at Lakeshore East is actually 93% occupied and 96% leased. So things are good. And we're really happy with our overall performance. We just have a few assets That has been hit a little harder, but we're being strategic about waiting this out and making sure that We maintain the highest level of Rent and keeping the properties in their best performance possible later this year into next. That's totally fair. And second question in terms of your overall U. S. Portfolio, could you give us a sense Of your expectations on potential financial impact, if any, from the vortex that we're seeing And from what we're seeing in terms of the nat gas pricing? Our hardest hit assets were in Texas, and we've had multiple frozen pipes and leaks. But our teams have been on-site. Actually, several of the folks lost power at home. They literally moved into The corporate suites that we have in Texas and we've actively repaired Everything as of today, but it's still very cold. We expect that it will warm up towards the end of the week. It's possible that we will have some insurance claims there, but I don't think it's likely they're going to hit the deductible. So we will manage those internally. That's really immaterial to overall performance. In terms of the gas pricing, Is that what you're asking about the natural gas price or the last availability of heat? Yes. Well, I mean, pricing has increased obviously. Yes. Overall, most of our markets Are not using natural gas. We are Chicago and we are in Washington, D. C, but those are long term contracts that we've been locked in on. So I have several years before I ask you about it. So we shouldn't expect a hit on Q1 financial performance from that situation, right? Either the vortex or nat gas, correct? Go ahead. Yes, I don't expect a material impacts from either. That's great. Thank you. Thank you. Next question will be from Lorne Kalmar at TD. Please go ahead. Thanks very much. Maybe just following on Fred's Question, but maybe more broadly about the U. S. In terms of occupancy, do you guys think you've kind of hit trough right now? Or is there a little bit of room to go? No, I think we've been very stable. We're actually up a little bit from even our Q4 numbers. So again, I cannot predict anything and Can't speculate what will happen tomorrow in this environment, but we've been very pleased. Our Portfolio is 95% leased today and things are going well. And then what about in Canada? You guys think You're close to trough there? Or is there still a little bit of room to go down as well? So, Ken and I also have a similar comment. Like, it's Hard to predict, but we only have a couple of properties that are impacted in the more urban course and it's 160 Chapel and Square 104. The rest of the portfolio is actually quite strong and Performing well, so and we're already getting calls about inquiries for universities, university students or faculty thing in August. So I think there's definitely a pick And some optimism there with the vaccine rollout and things going back to normal with hopefully the stay at home orders Listening up in the next few weeks. Okay. And then maybe just following up, I may have just missed it, but when typically do at least in your guys' The students start doing leasing, when is the high season for that? Like July, August, they start July, August. Yes. Okay. Yes, I guess just when you think you're starting to get through the pandemic, you get the crazy weather down in the States, it's never a dull moment. And then on Louisiana development, I think I saw it was about 6% occupied at year end. Where is that number now? 11.4% occupied and 12.5% leased. So it's been slow, but again, There have been significant restrictions with COVID in New Orleans, but we're really pleased with the property and Same story with the universities there as well. Yes. Summer will be pretty good. Okay. And I know this question always gets asked, so I won't even bother asking about Canada, but have you guys been seeing anything on the acquisition front in the U. S? What was the question again? U. S. Acquisition. Well, we're looking at it, but I think they were not aggressively more trying to manage what we have. But now we're standing to keep looking at it and we'll see whether we want to do anything or not. As usual, we always do that anyway. Yes. I think that was one of those. I think I thought I knew the answer going into it. Have you guys seen any change in cap rates in the U. S? Or have they been holding them pretty steady? They are actually going down currently. I just got off the phone with some of our brokerage partners. It's been highly competitive and there have been there's been an interest in investments From other that would typically go after other types of assets interested in multifamily specifically. So, we're actually seeing some cap rates, correct? So, would it be fair to assume that there may be some fair value gains coming down the pipe in the U. S. Portfolio? I wouldn't want to predict anything on that. Fair enough. I have to say about the We don't know exactly what's going on with taxes, insurance and a lot of other things like bad debt. So it's hard to kind of wrap altogether with cap rate compression. Sure. And then last quick one for me. Have you guys given any thoughts to reinstating or rather doing a distribution increase? Well, we look at that every year. So when the time comes, we will. I think I'm more on the conservative side right now, Trying to conserve cash as opposed to distribute more. Fair enough. All right. Thank you guys so much. 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. Just maybe taking a bit of a bird's eye view, wondering if you could talk about your top three priorities For 2021 and where you really plan to spend your time? Well, I think it's Simply the same as what we're doing right now is managing what we have, making sure we are taking a conservative approach With debt and focusing on our rents and our properties and our tenants and our staff to make sure we can No, recover and grow from this plan. I see, as Ray, I see a little bit of light of the end of time line that way. Right now, everybody is focused on this, what happens So it's an issue of Health wise, I think that's where everybody is concerned about the politicians are concerned, we are concerned. And Some of things are unpredictable. So all we can hope that unless Although I have a bit of positive view that the multiple vaccines are there. So I Kind of see there the light at the end of the tunnel, maybe 12 months, 18 months from now that things will start getting better. So On the other hand, who knows, we didn't predict what happened. So it's not a so it's a cautious approach These days manage the assets as well as we can and keep our staff healthy, keep our tenants healthy, whatever we can. So That's where most of the focus is, is less the opportunities to buy anything at this stage. Notwithstanding, we Yes, I'll just continue to look at it. But I think it is more focused on the senior management to Keep our staff healthy, keep our tenant healthy and monitor and see whatever we can. Makes total sense to me. And when we think about where the REITs units are trading, would you consider making any strategic or structural changes to the business Such as an SIB or perhaps narrowing the geographic focus through some asset sales? No. We've never done that in good days and I didn't want to do in these days. So we just run the business the way we ought to run And then we are not trying to create situations trying to deal with that. So Let's continue to manage as we can and it's kind of day to day almost. I appreciate the color. I'll turn the call back. Thank you. Thank you. And your next question will be from Yash Shingpal at Laurentian Bank. Please go ahead. Good afternoon. Just the Marke property, given the kind its So it's fully furnished. What is the breakeven occupancy for that property? The units are on Block 37, right? Marquis. Yes. The Marquis. Yes. Yes. Go ahead, John. We do not have a large number of furnished suites. Those were corporate suites, that were leased out To a third party that furnished them. So we just had a regular unfurnished agreement with that company. They are actually seeing much more activity and Have maintained all of the leases that they do have today. So they are current and they are paying And have had an uptick in their business As well, but that was really the bulk of the issue at that property. So We inherited those leases from the previous management company. And then We also had a large foreign student population, and the schools have been closed. So when those reopen, we are in a fabulous location that has access To the schools in the theater district that quite frankly no one else has. So we're very bullish on it. We're just fighting our time to get through the pandemic and we expect it to do really well Once things calm down a bit. Thanks, John. Okay. And now this question is for both the U. S. And Canadian portfolios. Are you seeing any new trends emerging your portfolio over the last two quarters? What kind of new trend? In terms of your tenants leaving for a certain reason or anything I can comment on the Canadian side a little bit. So we actually did a little bit of analysis. I think you asked a similar question last time. So in terms of our MRG portfolio, 25% of the people who are leaving are actually purchasing homes and then 14% are relocating. And then if you look at Mississauga versus the like Toronto In this is all that it's mostly purchasing homes and then relocating and then for Toronto it's actually relocating. So they're relocating to this a more suburban environment If they can and then purchasing homes because of low rates for financing and things like that. So And we are Go ahead. Yes. In the U. S, I would say it's similar. In the South, we are not Seeing as many folks purchasing homes, we did see that in Washington, D. C. And Chicago In our portfolio, but generally, our garden style apartments Are in suburban locations, so those have done very well. We have seen an increase In our winter move out, but we've also seen an offsetting balance of New move ins as well. So those, I believe, were up roughly 10% on both sides. So definitely more people moving around in the middle of winter than we normally have. And We know that is due to the pandemic, either folks moving out to go home or moving closer to home Or job relocations or job losses, but at the same time, we're backfilling just as quickly. Okay. And this one is for Angela. If we just look at Q4, what was the Of rent growth you achieved on turnover. I know you gave the number for the full year, but just wanted to find out what it was for Q4? 17%? Yes, we just closed probably 17%. Yes. Probably 18% or right? Yes, it was about the same. Okay. And how should we model your Canadian occupancy for like in Q2 2021, Given what you know right now? Your guess is good as ours, man. We don't we've stopped guessing this. Okay. That's it for me. Thank you. Thank you. Thanks. Thank you. Next question will be from Dean Wilkinson at CIBC. Please go ahead. Thanks. Hi, everybody. Hi, Dean. I guess my first question is, Ray, how are you doing? Under the circumstances, depending on who called me. Yes, as good as the rest of us. I've always have a positive mental attitude. The thing that I can't control, I stop worrying about it. I look at the positive side of it As I said earlier, this shall pass. So Particularly with multiple vaccines being here, we've got the next The year or 18 months, maybe 2 years of and we're on the real estate business, it's a longer term play. So I'm a little bit positive in the sense. If there was no vaccine, I'd be worried about it. So You and I both, I guess, As I'm getting older, I'm sharing your optimism about all things. Maybe for Angela, and I don't know if you could answer this Question. We're starting to see a bit more prevalence of sort of new variants and outbreaks. And I believe there was a Condo building in Peel where they actually went around and tested everybody. Do you have a way to track, and it might be invasive, The incidence of positive COVID cases within the buildings, We do request tenants to let us know. They don't have to, that it's not mandated They need to tell us, but we do because we help them with groceries, garbage removal, those kind of things, so they're not allowed to leave their unit if they're quarantining. So we have some idea, and we actually haven't had Many incidents at all in our whole portfolio, very few. So that's kind of the comments I can on that because we're not really required by law to obtain that info from them. So no super spreader events or anything like that that you're aware of? Nothing like that. Nothing at all like that. Not at all. Great. Let's hope it stays that way. Thanks everybody. Thank you. Thank you. And at this time, we have no further questions. Please proceed. Thank you very much. Thank you for attending and we shall talk to you next quarter. Thank you. Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending.