Earnings Call: Q1 2020

May 1, 2020

Earnings release

Afternoon, ladies and gentlemen, and welcome to the Marquardt North American Residential Real Estate Investment Trust Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Friday, May 1, 2020. I would now like to turn the conference over to Paul Miatello. Please go ahead. Thank you very much and welcome everybody and thank you for joining our Q1 results conference call. With me on again, I'm Paul Nietoos, Senior Vice President of The REIT. With us on the call today, we have Ray Saughey, Chairman and CEO of The REIT Chris Newman, Chief Financial Officer Angela Saughey, Vice President in Charge of Canadian Operations and John Tuano, Vice President in Charge of U. S. Operations. On behalf of all the management team, we hope everybody is safe and well, both of you, your families and your colleagues and continue to be so. So with that brief introduction, I'll now turn it over to Chris Newman, our Chief Financial Officer for a brief overview on the Q1 results. Chris? Thank you, Paul. As is customary, I'll provide a comment 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-nineteen pandemic. In terms of our financial position, we recompleted the Q1 of 2020 with total assets amounting to 3,200,000,000 dollars compared to $3,000,000,000 in December 2019. The increase is mainly due to the appreciation of U. S. Dollars since year end. The REIT finished the Q1 of 2020 with $20,800,000 of cash on hand and $1,600,000 advanced to Morbid Corporation under its $100,000,000 revolving credit facility. The REIT completed the Q1 of 2020 with $1,400,000,000 of long term debt obligations. And at March 31, 2020, the REIT's overall weighted average term to maturity was 5 point 4 years, a decrease from 5.6 years at December 31, 2019. Our weighted average interest rate increased slightly to 3.49 percent from 3.48% at December 31, 2019. And the REIT's debt to cost of value ratio improved slightly to 44% at March 31, 2020 from 44.1% at December 31, 2019. DAREIT's IFRS net asset value at just over $27 per unit as at March 31, 2020, compared to the current market price a little over $14 reflecting a compelling entry point for investors. Turning to the statement of income. Net income was $97,200,000 for the 3 months ended March 31, 2020 compared to $3,700,000 over the same period in 2019. The increase was primarily due to an increase in the fair value on Class B LP units of 108,500,000 dollars caused by a $5.10 unit price decrease resulting from the impact the global health crisis has had on our stock warrants during the Q1 of 2020. This was partially offset by a lower fair value gain on real estate properties relative to the gain recorded during Q1 2019. Net operating income was $17,300,000 for the 3 months ended March 31, 2020, an increase of $500,000 or 2.7 percent compared to 2019, comprising of an increase in same property NOI of $800,000 partially offset by a net decrease from acquisitions and disposals of $300,000 Same property proportionate NOI in Canada increased by $1,100,000 or 8 point 7 percent and in the U. S. Increased by $0.4 million or 2.7 percent compared to 2019. Canadian same property proportionate NOI benefited from a property tax refund of $500,000 dollars and excluding this refund, same property proportion NOI in Canada increased by 2.9%. Interest expense decreased by 5,200,000 for the 3 months ended March 31, 2020 compared to 2019, primarily due to a non cash decrease in the fair value on the convertible debentures conversion option. REIT's 1st quarter performance has translated into basic FFO of 18,100,000 dollars an increase of $2,900,000 or 18.8 percent compared to 2019. On a per unit basis, FFO was $0.32 per unit for the 3 months ended March 31, 2020, an increase of $0.02 or 6.7 percent compared to the $0.30 per unit in 2019. The increase in FFO was due to the following: an increase in same property NOI, partially offset by higher trust expense, had a $0.02 per unit positive impact. The successful property tax appeal had a $0.01 per unit positive impact and the issuance of units on August 28, 2019, which includes the dilution from additional units offset by interest income earned on proceeds advanced to the Morguard facility, net of the partial use of proceeds on December 9, 2019 to acquire the Marquis Block 37 had a $0.01 per unit negative impact. The REIT's FFO payout ratio was 54.3% for the period ended March 31, 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 $14.47 or 4.6 percent, reflecting the quality of our Canadian portfolio compared to 2019. During the Q1, the Canadian portfolio turned over 2.2 percent of total suites in Canada and achieved 19.2% AMR growth on suite turnover. While in the U. S, same property average monthly rents increased by 3.4%, having an average monthly rent of US13.54 dollars at the end of the Q1 of 2020 compared to 2019. The REIT continues to report strong occupancy, while Canada with Canada finishing the Q1 of 2020 at 98.8% compared to 99.3% a year earlier, and same property occupancy in the U. S. Improved to 95.8% at March 31, 2020 compared to 95.3% at March 31, 2019. During the quarter, the REIT total CapEx amounted to 6,100,000 that included common area projects, exterior building and revenue enhancing in suite improvements. In addition, the REIT spent 1,700,000 of development capital at 1643 Josephine Street in New Orleans. Management expects to complete container renovations and to commence initial lease up towards the end of Q2 of next year. Providing an operational and liquidity update. During March 2020, the outbreak of COVID-nineteen has resulted in government enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self imposed self imposed quarantine periods and social distancing have caused an economic slowdown and material disruption of business. Government has reacted with interventions intended to stabilize economic conditions. The duration and impact of the COVID-nineteen outbreak is unknown at this time. It is not possible to reliably estimate the length and severity of these developments and the impact on the REIT's financial performance and financial position. The REIT recognizes the impact of COVID-nineteen 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 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 at circumstances demand. We are actively monitoring the ongoing developments with regards to COVID-nineteen and are committed to ensuring a healthy and safe environment, adjusting our service model as necessary. During the Q1, the Ontario government, as well as the U. S. Regions where the REIT operates, announced temporary measures to cause addictions. The REIT is committed to working with residents on a case by case basis on rent deferral arrangements. To provide an update, the REIT's occupancy remains stable in Canada and the U. S. Currently, the REIT has collected approximately 95 point 3% of April rental revenue, which is materially in line with historical collection rates. The REIT has implemented a rent deferral program to our residential tenants who are financially constrained due to the impact of COVID-nineteen. In addition, commencing with April's rental payment, the REIT has waived the collection of recent rental increases and late fees for existing tenants and will suspend the collection of further rental increases during this period of crisis. Currently, less than 55 percent of tenants have requested deferral payment plans. The REIT has liquidity of 125,000,000 dollars comprised of $25,000,000 of cash and $100,000,000 available under its revolving credit facility with Morgark Corporation. As well, the REIT expects approximately $15,000,000 of additional CMHC insured refinancing proceeds to be funded in May 2020, representing the REIT's only mortgage scheduled to mature in 2020. In addition, the REIT's $85,500,000 convertible debentures do not mature until March 31, 2023. And the REIT has approximately $42,800,000 of unencumbered assets. The REIT has also narrowed down the scope of its capital expenditure program to ensure the availability of resources, allocating and amounts that enables the REIT to maintain the structural and overall safety of our properties. I will now turn the call back over who will open up the line for questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from Yash Sankpal from Laurentian Bank. Please go ahead. Good afternoon. Hi, Ash. Are you seeing any rental pressure on your new leasing? We can start with if you want to start with John in the U. S. To address that question. Sure. Sure. I would say the difficulty over the last 30 days has really been more about traffic than rates. We are still seeing increases, but they certainly have slowed as our foot traffic has come to a halt. And we're if now on virtual traffic, including virtual tours as well as giving up no contact, so socially distant tours as well. So we've really moved to using all of our leasing tools of the technology base. And Angela, I believe a lot of the similar statements can be said about Exactly. So we're doing exactly the same in Canada. We're using online leasing tools and socially distancing and allowing people to enter the unit kind of separately without employees or staff around. But we are finding a little bit of a slowdown in terms of people wanting to come in. But I think that some of these new this virtual tours and things like that should help. Right. So let's say, where do you think your rent levels will be by year end? Do you think they will be higher than what you have right now or you think there will be a decline based on what you know so far? I think the answer goes, I would say it's still early too early to tell. We have several regions where we can absolutely push rents. In other regions, we have not, and it all depends. It's just a we have got our increases on our renewals temporarily, but we can as far as today goes, we could continue to resume with increases based on today. May is really going to be the telling month in terms of how many folks are having difficulties and that will affect occupancy and rate as well. But so far, it's been strong. Okay. And one last question about your occupancy. Based on what you know now and your basic forecasting, do you think your occupancy will be above or below the current occupancy levels by year end? Well, I think in Canada, it will be relatively stable, maybe a little bit lower just because traffic is not picking up because of the self quarantine. When those businesses open up, we should expect a little bit more traffic in their abilities. And Canada is a little bit easier. And Angela, I think you can probably agree with that. Yes, I agree with that. A little bit more dynamic on the U. S. Side, maybe John can add some insight on the U. S. Side. Yes, I would say, if we give you some perspective, our move outs are actually down 9% when I compare to this time last year, and our renewals are also up 12%. We have a lot more turnover in the U. S. It generally is around 50%. But folks are not moving out as they would. I would suspect that we will see a dip, but based on the information we have today, we're doing really well. Okay. That's it from me. Thank you. Thank you, Ash. Thank you. We do have a question from Loren Telenorff from TD Securities. Please go ahead. Just on the structure of the deferral program, how can you just maybe a little more color on that? Yes, generally speaking, we're deferring April May's rent. We're allowing options for 50% of that and to repay over a time period throughout the duration of the year commencing in August. Okay. And that's for the U. S. And Canada? John, yes, in the U. S. As well, it seems Yes. So it's very similar. Obviously, we get folks to pay everything they can upfront, and then we work towards the shortest period. It's good to know, we only have 100 deferrals to date for the U. S. Specifically. So it is not as significant as some other landlords are seeing. So on a relative basis, it's a very small number. Okay, perfect. And then I know this is obviously very, very early days, but what's the expectation for May collections or to be in line with what you guys achieved in April? Yes, it's highly dependent on the duration of the economic slowdown and material disruption to businesses as well as the various government assistance programs offered to businesses and our tenants. It's hard to say when some of these when the businesses reopen, when that happens, we really can't tell. As of May, it's a little bit too early to comment on it just because it is the 1st May. So really can't speak too much about what has happened in May so far. Okay. On that note, I'll turn it back. Thanks so much. Thank you. Thank you. There are no further questions at this time. You may proceed. Okay. Thank you very much. And on behalf of the entire management team, we wish everybody well. Stay safe and hopefully we commence the road back to normalcy and we hope that you'll join us for the Q2 conference call. In the meantime, stay safe. Thanks everybody.