Good afternoon, ladies and gentlemen, and welcome to the Morguard North American Residential REIT Fourth Quarter for year ended December 31st, 2020. At this time, all lines are in this listen only mode. But following the presentations, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for an operator. Also note that this call is being recorded on Thursday, February 18th, 2021. I would like to turn the conference over to your host, Rai 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 31st, 2020. We have with us today, in addition to myself and Rai, Chris Newman, CFO, Angela Sahi, SVP Canadian Operations, John Talano, SVP US Operations, and Paul Miatello, Senior Vice President. Chris?
Okay, thanks Rai and Bev. As is customary, I'll provide some comments on the REIT's financial position and performance. In addition, I'll provide a brief operational and 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-19 pandemic. In terms of our financial position, the REIT completed 2020 with total assets amounting to CAD 3.1 billion, compared to CAD 3 billion 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 fourth quarter, the REIT substantially completed the redevelopment of its Class A mid-rise residential property, 1,643 Josephine, located in New Orleans, Louisiana, and first occupancy took place in late October.
The repositioned 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 CAD 27.3 million of cash on hand and CAD 93.4 million available under its CAD 100 million revolving credit facility with Morguard Corporation. The REIT completed 2020 with CAD 1.2 billion of long-term debt obligations, and during the second quarter of 2020, the REIT completed the refinancing of a property located in Mississauga, Ontario, providing additional mortgage proceeds of CAD 15.8 million. 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 31st, 2020, the REIT's overall weighted average term to maturity was 4.8 years, a decrease from 5.6 years at December 31st, 2019, and the weighted average interest rate decreased slightly to 3.45% from 3.48% since December 31st, 2019. The REIT's debt-to-gross book value ratio improved to 42.8% at December 31st, 2020, down from 44.1% at December 31st, 2019. The REIT's IFRS net asset value of CAD 27.50 per unit as at December 31st, 2020, compared to the current market price of approximately CAD 14.75, reflects a compelling entry point for investors. Turning to the statement of income, net income was CAD 166.8 million for the year ended December 31st, 2020, compared to CAD 80.1 million 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 CAD 16.3 million relative to the gain recorded during 2019. An increase in fair value gain on Class B LP units of CAD 66.8 million. The increase was due to a fair value gain of CAD 43.7 million on the Class B units recorded during 2020 compared to a fair value loss of CAD 23.1 million recorded in 2019. A decrease in deferred income tax expense of CAD 8.5 million and a decrease in equity income of CAD 10 million, mainly due to higher fair value loss on the REIT's equity accounted properties. Net operating income was CAD 135.5 million for the year ended December 31st, 2020, an increase of CAD 2.6 million or 2% compared to 2019.
An increase in foreign exchange contributed CAD 1 million to the NOI increase during the year. On a same property proportion basis, NOI in Canada increased by CAD 1.6 million or 3.1%, and NOI in the U.S. increased by $1 million U.S. or 1.8%. Partially offsetting the increase in NOI was an increase of CAD 0.8 million in bad debt expense during the year. 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 asset class. Interest expense increased by CAD 3.7 million for the year ended December 31st, 2020 compared to 2019, primarily due to a non-cash increase in the fair value gain on the debenture conversion options. The REIT's 2020 performance has translated into basic FFO of CAD 68.9 million, an increase of CAD 4.7 million or 7.4% compared to 2019.
On a per unit basis, FFO was CAD 1.23 per unit for the year ended December 31st, 2020, an increase of CAD 0.01 compared to CAD 1.22 per unit in 2019. The increase in FFO per unit was due to the following: a CAD 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 Morguard facility interest income. A CAD 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 Marquee at Block 37 in December 2019. As well, a CAD 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 31st, 2020, a very conservative level, which allows for significant cash retention. Operationally, the REIT's average monthly rent in Canada increased to CAD 1,500, or a 4.7% increase compared to 2019, reflecting the quality of our Canadian portfolio. During the year, the Canadian portfolio turned over 10.6% 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 $1,428 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 two properties impacted by university closures.
Same property occupancy in the U.S. of 93.6% at December 31st, 2020, was slightly lower compared to 94.5% at December 31st, 2019. During the year, the REIT's total CapEx amounted to CAD 22.1 million. That included common area projects, 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. In addition, during the year, the REIT incurred development costs of CAD 6 million to complete the REIT's development of 1643 Josephine Street in New Orleans. Providing an operational liquidity update, the REIT recognizes the impact COVID-19 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 16th, 2021, the REIT collected 98.7% of fourth quarter rental revenue and approximately 97.5% 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. The REIT is committed to working with residents on a case-by-case basis on rent deferral arrangements as eviction [audio distortion] 0.9% of residential tenants have deferred payment plans.
As at February 16th, 2021, i n Canada and in the U.S. w ith the exception of a few directly impacted by university and local business closures remain stable as leasing agents and util— online technology to continue leasing [audio distortion] 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, as well as the extension of the U.S. eviction moratorium may have on traffic and turnover [audio distortion].
The REIT has liquidity of CAD 120.7 million, comprised of approximately CAD 27.3 million in cash and CAD 93.4 million available under its revolving credit facility with Morguard Corporation. In addition, the REIT has no significant debt maturities until the third quarter of 2021, and the REIT has approximately CAD 45.3 million 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. At this point, I'll now turn it back over to the moderator, who will open up the line for questions.
Thank you.
Thank you.
Ladies and gentlemen, if you do have any questions, please press star one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. Should you wish to withdraw your question, simply press star followed by two. We do ask that you please lift the handset if you're using a speakerphone before pressing any keys. Please go ahead and press star one now if you have any questions. Your first question will be from Fred Blondeau at iA Securities. Please go ahead.
Thanks, and good afternoon.
Fred.
Two quick questions from me, I guess for John first. It looks like Chicago is still a 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, Marquee at Block 37, was hit very hard with both the pandemic, but also it was right in the middle of riot, and it had a large number of furnished suites that were focused on the theater district. Obviously, all of that has been closed.
Okay.
We've actually seen a recent uptick. That property dipped down as low as 73% in terms of its occupancy. Today it's actually 79.42%, so it is definitely on an upswing. That's 79% leased. We understood that the market was going to be difficult. Chicago has been virtually closed because of the pandemic. 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. We gave up a little occupancy, knowing that we intended, or will hold rents. 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. Several of our team actually have received two, both shots.
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. We are optimistic and really expect, in Chicago in general, really expect that to explode once the vaccine proliferates more in that region. That could be this summer, but we don't know, so we're not going to predict. I would say we are stable and actually improving today.
Is it fair to say that you do not have a base scenario in terms of your expected occupancy for these properties for the end of 2021?
I can't speculate that now. I think things are—
No, that's fair.
are still a little uncertain. I would absolutely say that we are stable and improving. Our other Chicago assets, Coast at Lakeshore East, is actually 93% occupied and 96% leased. Things are good.
We're really happy with our overall performance. We just have a few assets that have been hit a little harder. We're being strategic about waiting this out and making sure that we maintain the highest level of rents and keeping the properties in their best performance possible later this year into next.
No, that's totally fair. 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 natural gas pricing?
Our hardest hit assets were in Texas, and we've had multiple frozen pipes and leaks. 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. 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. 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 pricing or the lack of availability of heat?
Yep. Well, I mean pricing has increased obviously.
Yeah. Overall, most of our markets are not using natural gas.
Mm-hmm. Okay.
We are in Chicago, and we are in Washington, D.C., but those are long-term contracts that we've been locked in on. I have several years before I have to worry about it.
Got it. We shouldn't expect a hit on Q1 financial performance from that situation, right? Either the vortex or natural gas, correct?
I-
Go ahead.
Yeah, I don't expect material impacts from either.
No, that's great, and 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 a bit 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?
I think we've been very stable. We're actually up a little bit from even our Q4 numbers. Again, I cannot predict anything, and can't speculate what will happen tomorrow in this environment. We've been very pleased. Our portfolio is 95% leased today, and things are going well.
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?
In Canada, I would have a similar comment. It's hard to predict, but we only have a couple of properties that are impacted in the more urban cores, and it's 160 Chapel and Square 104. The rest of the portfolio is actually quite strong and performing well. We're already getting calls about inquiries for university students to start back leasing in August. I think there's definitely a pickup and some optimism there with the vaccine rollout and things going back to normal. Hopefully the stay-at-home orders loosening up in the next few weeks.
Okay. Maybe just following up, I may have just missed it, but when typically do, at least in your guys' experience, the students start doing leasing? When's the high season for that?
July, August, they start kind of moving in.
July, August?
Yeah.
Okay. Yeah, 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, eh? Then on Louisiana development, I think I saw it was about 6% occupied as at year-end. Where's that number now?
11.4% occupied and 12.5% leased. It's been slow, but again, there have been significant restrictions with COVID in New Orleans. We're really pleased with the property. Same story with the universities there as well.
Yeah.
We expect summer will be pretty good.
Okay. 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.
Hmm?
U.S. acquisition.
We're looking at it, but I think that we're not aggressively. We're more trying to manage what we have. Now we're starting to keep looking at it. We'll see whether we want to do anything or not. As usual, we always do that anyway.
Yeah. That was one of those, I thought I knew the answer going into it.
Yeah.
Have you guys seen any change in cap rates in the U.S., or have they been holding 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's been an interest in investments That would typically go after other types of assets interested in multifamily specifically. We're actually seeing some cap rate compression.
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.
It's hard to say with the NOI. We don't know exactly what's going on with taxes, insurance, and a lot of other things like that. It's hard to kind of wrap all together with cap rate compression.
Sure. The last quick one from 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, good afternoon.
Hi, Matt.
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.
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 recover and grow from this point on.
Well, I see it as Rai. I see a little bit of light at the end of the tunnel in a way. Right now everybody's focused on this, it's a issue of health-wise. I think that's what everybody's concerned about. The politicians are concerned, we are concerned. Some of things are unpredictable. All we can hope for, that Although I have a bit of positive view that the multiple vaccines are there. I kind of see there's a light at the end of the tunnel, maybe 12 months, 18 months from now, that things will start getting better. On the other hand, who knows? We didn't predict what happened. It's a cautious approach. These days, manage the assets as well we can. Keep our staff healthy, keep our tenants healthy if we only can.
That's where the most of the focus is. It's less on the opportunities to buy anything at this stage. Notwithstanding, we do always 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 what we can.
It makes total sense to me. When we think about where the REIT's 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 ain't going to do in these days. We just run the business the way we ought to run, and then we're not trying to create situations trying to deal with that. Let's continue to manage as we can. It's kind of day to day almost.
Well, I appreciate the color. I'll turn the call back. Thank you.
Thank you. Once again, ladies and gentlemen, if you do have any questions at this time, please press star followed by one on your touchtone phone. Your next question will be from Yash Sankp al at Laurentian Bank. Please go ahead.
Yeah. Good afternoon.
Go ahead.
Just the Marquee property, given the kind, its suites are fully furnished. What is the breakeven occupancy for that property?
The units are on-
Block 37, right? Marquee?
Yeah, the Marquee.
Yeah. 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. 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. They are current, and they are paying and have had an uptick in their business as well. That was really the bulk of the issue at that property. We inherited those leases from the previous management company. We also had a large foreign student population, and the schools have been closed. When those reopen, we are in a fabulous location that has access to the schools and the theater district that, quite frankly, no one else has. We're very bullish on it.
We're just biding our time to get through the pandemic, and we expect it to do really well once things calm down a bit.
Thanks, John.
Okay. Now this question is for both the U.S. and Canadian portfolios. Are you seeing any new trends emerging in 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. We actually did a little bit of an analysis. I think you asked a similar question last time. In terms of our MRG portfolio, 25% of the people who are leaving are actually purchasing homes, and then 14% are relocating. If you look at Mississauga versus the Toronto, Thorncliffe Park area, in Mississauga, it's mostly purchasing homes and then relocating. For Toronto, it's actually relocating. They're relocating to a more suburban environment if they can, and then purchasing homes because of low rates for financing and things like that.
We are-
Go ahead.
Yeah, 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. Generally, our garden-style apartments are in suburban locations, so those have done very well. We have seen an increase in our winter move-outs, but we've also seen an offsetting balance of new move-ins as well. Those, I believe, were up roughly 10% on both sides. Definitely more people moving around in the middle of winter than we normally have. 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. At the same time, we're backfilling just as quickly.
Okay. This one is for Angela. If we just look at Q4, what was the rent growth you achieved on turnover? I know you give the number for the full year, just wanted to find out what it was for Q4.
Wasn't it 17%?
Yeah. We just closed roughly 17%.
Yeah.
Probably about the same quarter, right?
Yeah. It was about the same.
Okay. How should we model your Canadian occupancy in Q2 2021, given what you know right now?
Your guess is as good as ours, man.
Okay.
We've stopped guessing these days.
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, Rai, how are you doing?
Under the circumstances? Depending on who called me.
Yeah. As good as the rest of us.
I've always had a positive mental attitude. The things I can't control, I stop worrying about it.
You and me both.
I look at the positive side of it. As I said earlier, this shall pass. Particularly with multiple vaccines being here, we got the next year, 18 months, maybe two years. We're in the real estate business, it's a longer-term play. I'm a little bit positive in the sense, if there was no vaccine, I'd be worried about it.
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 can 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, particularly within the [audio distortion] ?
What we do is we do request tenants to let us know. They don't have to. It's not mandated that they need to tell us, but we do because we help them with groceries, garbage removal, those kind of things, because they're not allowed to leave their unit if they're quarantining. We have some idea, and we actually haven't had many incidents at all in our whole portfolio. Very few. That's kind of the comments I can give you on that, because we're not really required by law to obtain that info from them.
No super spreader events or anything like that you're aware of?
No, 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.
Thank you. As a reminder, ladies and gentlemen, if you do have any questions, please press star followed by one. 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. At this time, we do ask that you please disconnect your lines.