Good afternoon, ladies and gentlemen, and welcome to the Morguard North American Residential REIT second quarter 2020 results conference call. At this time, all lines are in listen-only mode. 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. This call is being recorded on Thursday, July 30th, 2020, and I would now like to turn the conference over to Rai. Please go ahead.
Okay. Thank you. Thank you. Beth, I'm going to let you do the introduction. Go ahead.
Good afternoon, welcome to the Morguard North American Residential REIT North American investor call for our second quarter. I think our main comments today will be the Chief Financial Officer, Christopher Newman.
Thank you, Beth. As is customary, I'll provide 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 this COVID-19 pandemic. In terms of our financial position, the REIT completed the second 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 the appreciation of the US dollar since year-end. REIT finished the second quarter of 2020 with approximately CAD 31 million of cash on hand and CAD 10.5 million advanced to Morguard Corporation under its CAD 100 million revolving credit facility.
The REIT completed the second quarter of 2020 with CAD 1.3 billion of long-term debt obligations. During the second quarter, the REIT completed the refinancing of a property located in Mississauga, Ontario, for additional net proceeds of CAD 15.8 million. The new CMHC-insured 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 June 30th, 2020, the REIT's overall weighted average term to maturity of all mortgage debt was 5.3 years, a decrease from 5.6 years at December 31st, 2019. Our weighted average interest rate decreased slightly to 3.46% from 3.48% since December 31st, 2019. The REIT's debt to gross value ratio improved slightly to 43.5% at June 30th, 2020, down from 44.1% at December 31st, 2019.
The REIT's IFRS net asset value at just over CAD 27 per unit at June 30, 2020, compares to the current market price of a little over CAD 15, reflecting a compelling entry point for investors. Turning to the statement of income, net income was CAD 19.3 million for the three months ended June 30, 2020, compared to CAD 41.9 million over the same period in 2019. The decrease was primarily due to the lower fair value gain on real estate properties relative to the gain recorded during Q2 2019, and an increase in fair value loss on the Class B LP units of CAD 19.5 million, caused by a CAD 3.90 unit price decrease resulting from the impact the global health crisis had on the stock market during the first half of 2020.
Net operating income was CAD 41.3 million for the three months ended June 30, 2020, an increase of CAD 2.3 million or 5.8% compared to 2019. The increase is primarily due to an increase in same-property NOI. Same-property proportionate NOI in Canada increased by CAD 0.8 million or 6.2%, and in the U.S. increased by $0.7 million USD or 4.6% compared to 2019. Interest expense increased by CAD 0.9 million for the three months ended June 30, 2020 compared to 2019, primarily due to a non-cash increase in the fair value loss on the convertible debentures conversion option. The REIT's second quarter performance has translated into basic FFO of CAD 19.3 million, an increase of CAD 3.6 million or 23.1% compared to 2019.
On a per unit basis, FFO was CAD 0.34 per unit for the three months ended June 30th, 2020, an increase of CAD 0.03 or 9.7% compared to the CAD 0.31 per unit in 2019. The increase in FFO was due to the following. An increase on a same-property basis largely due to NOI, which was partially offset by higher trust expenses, had a CAD 0.02 per unit positive impact. An increase in other income from the Canada Emergency Wage Subsidy relating to on-site staff retained at the REIT's Canadian properties, which had a CAD 0.015 per unit positive increase. This benefit was provided from eligibility by Morguard and its related party group under common control.
The dilutive impact from the issuance of units on August 28th, 2019, offset by interest income earned on proceeds advanced on the Morguard facility, net of a partial use of proceeds in December 2019 to acquire the Marquee at Block 37, had a CAD 0.015 per unit negative impact. The change in foreign exchange rate had a CAD 0.01 per unit positive impact. Overall, the REIT's FFO payout ratio was 50.9% for the three months ended June 30th, 2020, a very conservative level, which allows for significant cash retention.
Operationally, the REIT had a successful quarter with average monthly rents in Canada increasing to CAD 1,454 or 3.9%, reflecting the quality of our Canadian portfolio compared to 2019. During the second quarter, the Canadian portfolio turned over 4.4% of total suites in Canada and achieved 21.3% AMR growth on suite turnover, while in the U.S., same property AMR increased by 3%, having an average monthly rent of $1,359 at the end of the second quarter of 2020 compared to 2019. The REIT continues to report strong occupancy with Canada finishing the second quarter of 2020 at 97.5% compared to 98.8% a year earlier, and same property occupancy in the U.S. of 94.3% at June 30th, 2020, compared to 95.3% at June 30th, 2019. During the quarter, the REIT's total CapEx amounted to CAD 4.4 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 projects previously committed and health and life safety projects. In addition, the REIT spent CAD 1.6 million as development capital at 1643 Josephine Street in New Orleans. Management expects to complete interior renovations and to commence initial lease-up towards the end of the third quarter of this year. Providing an operational and liquidity update, the REIT recognizes the impact COVID-19 has had 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 March, Morguard initiated its crisis management plan with a team mandated to maintain a safe environment for our residents, employees, and stakeholders, coordinating efforts across our portfolio, standardizing communications, and responding as circumstances demand.
To provide an operational update, as at July 28th, 2020, the REIT collected approximately 94.6% of July rental revenue, which is comprised of 95.8% in Canada and 93.6% in the U.S., which is materially in line with our 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. As well, the REIT is committed to working with residents on a case-by-case basis on rent deferral arrangements as eviction moratoriums are lifted. Currently, 0.6% of residential tenants have deferred payment plans. As at July 28th, 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 activity following the onset of social distancing guidelines.
Generally speaking, current conditions, including social distancing, has reduced leasing traffic. Management will closely monitor traffic and turnover levels in the coming months as we move through our peak leasing season. The REIT has liquidity of CAD 131 million, comprised of approximately CAD 31 million of cash and CAD 100 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 43.9 million of unencumbered assets. REIT has also narrowed down the scope of its capital expenditure program to ensure the availability of resources. I will now turn the call back over to the moderator, who will open up the line for questions.
Thank you very much.
Thanks, Chris.
Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order that they are received. Should you wish to decline from the polling process, please press the star followed by two. If you're using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Lorne Kalmar from TD Securities. Please go ahead.
Thanks. Good afternoon.
Hi.
You guys had pretty good numbers on the rent collections. Were there any pockets where it was weaker or stronger for that matter? Or was it relatively consistent throughout the portfolio?
No, it varies. We have a lot of properties in different regions. There are a few properties that are relatively under the average, and some obviously are doing well. With collections topping 95% to 99%, the variability in there is not significant by property.
Okay. I figured I'd put it out there and see what happens. Do you guys have any idea what % of your tenants are receiving income subsidies through the pandemic?
We wouldn't know that for certain. It depends. Actually.
It'd be pretty small if, I mean, you've collected 97%.
Yeah.
96%.
Okay. Yeah, I was just sort of wondering in the context of if and when these run out, sort of what's the potential impact moving forward?
Well, if it runs out, we're hoping that the economy is back up and the jobs are recreated, and potentially wouldn't need to subsidize more of these tenants.
Okay, great. That's all for me. I'll turn it back. Thanks.
Thank you.
Thank you very much. Your next question comes from Yash Sakpal from Laurentian Bank. Please go ahead.
Good afternoon.
Hi, Yash.
With respect to your U.S. portfolio, based on what you are seeing right now out there, where do you think your occupancy will be in Q4?
John, can I hand that one over to you?
Sure. We have been very stable throughout Q2, and our turnover rate actually was very low across the entire residential portfolio. It was down roughly 20%. Stay-at-home orders stopped people from moving out. We have absolutely picked up in terms of pace. We are in our busy leasing season now, which has absolutely been compressed because of that stay-at-home orders. We are absolutely leasing the units that are turning. Our turnover will be lower than it was in previous years. Even as of today, we're 96% leased and 93% occupied. We're seeing a slight dip now because of that busy summer leasing season. That was in four months now is being compressed to really three or two and a half.
Okay. Maybe, do you happen to know what percentage of your portfolio is student accommodation, roughly?
Pretty small, I think.
Pretty small. There's a couple scattered properties that may rely on some student population. In the U.S., probably the same deal. It's not that significant.
Okay.
Yeah, go ahead.
There are three properties that have students in them. Actually, those were ones that we saw dip in Q2. For example, Briarhill in Georgia had dipped. It is now 97% leased. That has a significant number of students from Emory, and they are having live classes. The Georgian in New Orleans as well, Tulane announced that they are having live classes as well. That one dipped, I think, down to the low eighties, which we see typically in the summer months, but it also is leasing up as well. Those are two big ones. We certainly have students at the Marquee. That did dip, especially in Chicago, because stay-at-home orders were in place. There were protests and riots, and our traffic dipped down to zero. That one is absolutely progressing in a positive direction as well.
Thank you.
In Canada, it's 160 Chapel and Square 104. 160 Chapel in Ottawa. Two of the faculties are now open. They're staying in person, so we're seeing some more activity there.
Okay. Just switching gears, I'm assuming that your acquisition program is currently on hold. What are you seeing out there right now? Are properties being marketed, or is everything on hold?
Well, first of all, I wouldn't agree that it's on hold. It just seems like there's none to trade. We just continue to look at both sides of the border. There's really nothing happening in Canada and not much happening in the U.S. either than Canada.
Okay. Just one last broad question. When I look at your valuation, the valuation MRG is getting right now, and the valuation Northview REIT got in the private market, I wonder why Morguard would not take MRG private along with institutional investors. Maybe you could provide some color on your thought process.
We have no plan of privatizing. I mean, it was created for this purpose. Just because there's a dip in so-called trading value, we don't want to be opportunistic to try to privatize and then take it public again. It's really not something that we spend a whole lot of time on.
That's it for me. Thank you.
Thank you.
Thank you very much. Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by one. Rai, there are no further questions at this time. Please proceed.
Thank you. Thank you very much for attending. We shall speak to you next quarter. Thank you. Stay healthy, guys.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.