Good afternoon, ladies and gentlemen, and welcome to the Morguard North American Residential REIT third quarter 2020 results conference call. 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 the call is being recorded today, Thursday, October 29, 2020. I would like to turn the conference over to your host, Mr. Rai Sahi. Please go ahead, sir.
Thank you. I will pass it on to Chris. Chris, you are up.
Thank you, Rai. Also with us, our management team is Beverley Flynn, Paul Miatello, Angela Sahi, and John Talano in the U.S. I'll start off. As is customary, I'll provide 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 this COVID-19 pandemic. In terms of our financial position, the REIT completed the third quarter of 2020 with total assets amounting to CAD 3.2 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 property and the appreciation of the U.S. dollar since year-end.
The REIT finished the third quarter of 2020 with approximately CAD 35 million of cash on hand and CAD 99.5 million available under its CAD 100 million revolving credit facility with Morguard Corporation. The REIT completed the third quarter of 2020 with CAD 1.1 billion of long-term debt obligations, and as at September 30th, 2020, the REIT's overall weighted average term to maturity was 5.1 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 slightly to 42.8% at September 30th, 2020, down from 44.1% on 31st, 2019. The REIT's IFRS NAV at CAD 27.60 per unit as at September 30th, 2020, compares to the current market price at a little over CAD 14, reflecting a compelling entry point for investors.
Turning to the income statement, net income was CAD 53.5 million for the three months ended September 30, 2020, compared to a net loss of CAD 1.4 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 31.3 million relative to the gain recorded during Q3 2019, and an increase in the fair value gain on Class B LP units of CAD 26.2 million due to a fair value gain of CAD 1.6 million recorded during the third quarter of 2020 compared to a fair value loss of CAD 24.6 million recorded over the same period in 2019. Net operating income was CAD 38.8 million for the three months ended September 30, 2020, an increase of CAD 0.8 million or 2% compared to 2019. The increase is primarily due to higher same property NOI.
Same property proportionate NOI in the U.S. increased by $500,000 or 3.8% compared to 2019. In Canada decreased by CAD 0.4 million or 2.9%. Interest expense decreased by CAD 2.3 million for the three months ended September 30th, 2020, compared to 2019. This primarily reflects an increase in the fair value gain on the convertible debentures conversion option. The REIT's third quarter performance has translated into basic FFO of CAD 16.1 million, consistent when compared to 2019. On a per unit basis, FFO was CAD 0.29 per unit for the three months ended September 30th, 2020, a decrease of CAD 0.02 or 6.5% compared to CAD 0.31 per unit in 2019. The decrease in FFO per unit was due to the following.
A CAD 0.01 per unit dilutive impact from the issuance of units at the end of August 2019, offset by interest income earned on proceeds advanced on the Morguard facility as the proceeds were partially used to acquire Marquee at Block 37 last year. An increase in other expense relating to a non-recurring write-off of unrecoverable insurance premiums from property dispositions had a CAD 0.01 per unit negative impact. The REIT's FFO payout ratio was 61.1% for the three months ended September 30th, 2020, a very conservative level, which allows for significant cash retention. Operationally, the REIT's average monthly rent in Canada increased to CAD 1,481, or 4.5%, reflecting the quality of our Canadian portfolio compared to 2019. During the year, the Canadian portfolio turned over 7.8% of total suites in Canada and achieved 17.9% AMR growth on suite turnover.
While in the U.S., same property AMR increased by 1.9%, having an average monthly rent of $1,366 at the end of the third quarter of 2020 compared to 2019. The REIT continues to report solid occupancy, with Canada finishing the third quarter at 96.4% compared to 99.4% a year earlier. Occupancy slightly decreased in Canada due to continued lower leasing traffic as well as two properties impacted by the closure of universities. Same property occupancy in the U.S. of 94.1% at September 30th, 2020, was slightly lower than compared to 94.4% at September 30th, 2019. During the quarter, the REIT's total CapEx amounted to CAD 4.9 million. That included common area projects, exterior building, and revenue-enhancing in-suite improvements. Overall, in order to preserve liquidity, the REIT has scaled back most of its revenue-enhancing CapEx and continued to focus on end-of-life cycle and health and life safety projects.
In addition, the REIT spent CAD 1.9 million of development capital at 1643 Josephine in New Orleans. The REIT has substantially completed the redevelopment and commenced virtual pre-leasing, with first occupancies taking place at the end of this month. Further to add on the completion of the development, this Class A mid-rise redevelopment property in New Orleans is located in the Garden District neighborhood within close proximity to the Georgian Apartments, offering management a platform for operational synergies. 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. Providing an operational and liquidity update, the REIT recognizes the impact COVID-19 has on many of its tenants in North America and its stakeholders, and is committed in taking measures to protect the health of its employees, tenants, and communities.
In providing an update, as at October 27th, 2020, the REIT collected 97.9% of third quarter rental revenue and approximately 95.1% of October rental revenue, which is materially in line with historical collection rates. Management will monitor rent 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 remainder of the year. The REIT is committed to working with residents on a case-by-case basis on rent deferral arrangements as eviction moratoriums are lifted. Currently, 0.9% of residential tenants have deferred payment plans. As of October 27th, 2020, the REIT's occupancy remains stable in Canada and the U.S. as leasing agents work remotely and utilize online technology to continue leasing efforts 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 the U.S. eviction moratorium may have on traffic and turnover levels in the coming months. The REIT has liquidity of CAD 134 million, comprised of CAD 34.5 million of cash on hand and CAD 99.5 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 45.4 million of unencumbered assets. The REIT has 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 our properties. At this point, I'll turn it over back to the monitor, who will open up the line for questions.
Thank you. Ladies and gentlemen, if you do have a question, please press star followed by one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. And should you wish to withdraw your question, simply press star followed by two. And if you're using a speakerphone, we do ask that you please lift the handset before pressing any keys. The Q&A is now open. Please press star one now. And your first question will be from Lorne Kalmar at TD Securities. Please go ahead.
Thanks. Good afternoon, everyone. First question from me, have you guys noticed your garden-style properties in the Sun Belt benefiting from the supposed deurbanization trend that the pandemic has brought about?
I'll let John address that question.
Sure. We definitely have. Our garden-style walk-up in suburban markets are doing very well in general. I would say it depends on the location and the current environment, but we certainly are seeing that. I would say in a couple of our urban properties, we have had a few folks move out to the suburbs, but that has not been material for us.
It'd be fair to say it's a net positive for your guys' portfolio.
Yes, definitely.
Okay. I guess turning to Block 37, or Marquee. I know you guys got a bunch of furnished suites in there. Has there been any discussion around converting those to unfurnished suites?
Absolutely. That was actually set up previous to us taking over management. We do not have the large furnished suites anywhere in the U.S., not at that scale. In this case, at Marquee, we had a sort of a double whammy. One is the student population was significant in that building, so we had lots of foreign students that their schools went virtual. Many of those went home and actually left the country. The corporate suites at Marquee specifically are targeted at the Theater District. It was all theater employees, actors, and that sort of thing, which has been put on hold until December 10th. Again, we expect that to come back very slowly. Our long-term plan is definitely to reduce that number. Those are not our suites.
Those are actually rented out to a third party that actually has given several back as they are coming up. I hope that makes sense.
Yeah, totally. Does that mean with the exception, I guess, the ones that have gotten turned back, any of the ones that are furnished are typically generating rent even if they're empty for you guys?
Yes, they are.
Oh, interesting. Okay. I didn't realize that.
Yeah.
And then maybe-
Yeah. They're leased and they are current, as a matter of fact.
Okay, good. Just the last one from me. I think you guys said there's a little bit under 1% of tenants are on deferrals. Has there been any uptick in deferral requests in the last little while, or has it been steady or trending down? Maybe you guys could give a little bit more color.
In the U.S., it's absolutely gone down. We had a high of 250 of them about two months ago. We're down to 90. The total deferred for an entire portfolio was at a high around 480,000, and it is now under 240,000 today. It's absolutely shrinking. Another thing that's important to mention, too, is we did lose our federal stimulus back in July, and that was something we were very concerned about.
Yeah.
We did not see a significant effect when we lost that. I know that's happening now in Canada. That was not the end of the world. We had the eviction moratorium that was placed on all of our properties by the CDC, which we braced for. It was a little more difficult to get folks to the table to discuss about deferral plans. That too, has not been a significant driver of bad debt in our U.S. business.
Okay, great. That was very helpful. Thank you very much. I'll turn it back.
Thank you. Once again, 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 Yash Sankpal at Laurentian Bank. Please go ahead.
Good afternoon.
Hi, Yash.
What kind of rent discounting or incentives are you seeing in the GTA market?
Okay. I'll turn that over to Angela. She can address that question on the Canadian side.
Sure. We're finding downtown, which doesn't really refer to our portfolio as much, but downtown, there are newer constructions and other buildings offering one to three months rent free, plus move-in bonuses. We're not doing anything kind of even close to that, especially for the REIT portfolio. We're offering some small bonuses here and there where we feel like we need to maybe on a certain unit type or layout in a particular building here and there. We're also offering them in Ottawa and Alberta mostly, where the student populations were are now online. That's kind of the extent of what we're doing.
Okay. Your residents that are moving out, have you been tracking why they are moving out?
Yeah. We have.
Have you noticed any trends?
Yeah. Our major reasons for moving out, according to our termination reports, have been to purchase a new home. Some are just leaving the area, like in going into other localities, and then some are having financial hardships. Those seem to be the three main reasons right now.
In the U.S., we've actually seen a reduction of overall move-outs. Our renewal volume is actually up by 18%. At the same time, hardship reasons for move-outs are up significantly. Overall, folks are definitely staying put. It's an 18% increase for us.
Thank you. Angela, are these percentages, like a reason for % of people buying new homes, or have those percentages changed over the last seven, eight months since the pandemic started?
Yeah, definitely. We also have lower turnover than last year, but our turnover was so specific before in Mississauga, and now we're finding that is definitely the hardships, I guess, are the situation in Mississauga. Downtown or the Toronto portfolio seems to be buying homes outside of the inner suburbs .
Right. How is your acquisition pipeline looking at this point? Do you think you can do any acquisitions by year-end in the U.S. or Canada?
I could answer that. Well, we continue to look at it mostly in the U.S., I think. There's not much available in Canada. We are always out there looking at the market we particularly in. We'll see. We're looking at a few things, but we haven't done anything yet.
Right. One last question. Based on what you are seeing on the ground, is it fair to assume that your occupancy would not change much by year-end?
We can hand it back over to Angela and John, who can specifically speak to the regions that they're operating under. John, do you want to start? Sure. I would say from the beginning of COVID, our trend has been slightly negative, very slowly, for the entire time. We were in a great position to begin with. We were right at 95%-96% occupancy at many of our properties, which is where I want to be so that we have the ability to raise rents. That trend was absolutely negative until really about two weeks ago. We did stabilize, and we have seen an uptick, though it's a few bps. It's very minor. I would say it's stable. In the markets where it's cold and in our northern markets, things will definitely slow down. Those will probably dip slightly.
The vast majority of the portfolio, I think, is going to be in very good shape.
For us in Ontario, we're under rent control, so we want to be careful as to how much we're going to reduce our rent. We're actually tolerating some vacancy. We're okay with some vacancy. We're hoping that once there is a solution to COVID, things will subside and kind of go back to normal for now. We're just going to revisit it month to month. We're finding there is more activity though with move-ins, which is a good thing, and our leasing teams are making big efforts that they didn't have to make previously because things were just rented kind of back to back. That's been an issue with COVID, where you can't show the units. We're working around those things. We're doing virtual videos, and our teams are working hard. It seems like there is an uptick with leasing.
It's looking more positive.
Thank you. Angela, one follow-up. Operationally, what is your biggest worry at this point?
I guess the leasing is probably the biggest worry right now in terms of residential is doing pretty well, right? Compared to a lot of the other sectors. Collections are quite strong. Our teams are doing well in this environment, and we're keeping the tenants safe. We haven't had really many issues come up in terms of COVID-19, which has been great. The teams are working together kind of across the country. We're working closely with John's team as well to see what happens in the States, and we're kind of watching that and following suit where we need to. That's been a really great part of it, where we could just work together remotely and be connected.
I think the biggest thing for residential is going to be the vacancy right now and just trying to lease units with everything changing so much with immigration and students, mostly, I would say. People just returning back to a normal work life rather than working from home. I think all that will hopefully bring everything back to normal and back to regular vacancy levels.
Okay. Thank you. That's it for me.
Thanks, Yash.
Thank you. Next question will be from Fred Blondeau at iA Securities. Please go ahead.
Thanks. Good afternoon. Sorry, I may have missed this. I was a bit surprised to read that you were seeing improvements in Chicago. I was wondering if you could expand on that.
John, do you want to.
In Chicago, we have three U.S. assets in Chicago. Two of them are performing very well. I guess there's two that the REIT is involved with. Coast is doing very well. Our occupancy has gone up. Over the last several years at that property, we have pushed our expiring leases out into the spring and summertime, which has allowed us to really enjoy some high occupancies over the winter. That property is in very good shape. The Marquee, if you missed it, had a significant number of corporate leases that were all tied to the theater district. That property definitely has struggled with occupancy. As Angela mentioned, we're okay with the occupancy. We'd rather not offer huge concessions at that property because the quality of the asset is excellent. We want to maintain that high level at that building and that high rate.
There is a large supply in Chicago, and there are very significant concessions that other landlords are offering, whether it's one month free up to three months free on some of the new buildings. It's absolutely competitive. The way that we've managed our lease terminations has actually really helped us. We just haven't had a chance to do that at the Marquee yet. It takes several years to change those expiries.
No, that's fair. Does that mean that we should expect even more improvements in Q4 and Q1?
In Chicago, I would say no. That's one of the colder areas where I think we will dip rather than seeing our occupancies increase.
Okay.
I would say Coast will be very stable. We don't have any expiries over the winter. I think it's a very limited number.
The Marquee will definitely continue to dip, but we'll get through it. It's a really wonderful property. It just got hit by both the students and the corporate leases. Once this is over with, it'll pop right back up, and we'll be fine.
That's great because when you read your MD&A, that it comes across as it was a bit more positive, but that's in line with what I thought. Thanks very much for the call. I appreciate it.
Thanks, Fred.
Thank you. As a reminder, ladies and gentlemen, if you do have any questions, please press star followed by one on your touchtone phone.
Okay.
At this time, we have no further questions registered. Please proceed.
Thank you. Thank you very much.
Yep. Thank you. Thanks for joining. We will see you next quarter.
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.