Good afternoon, ladies and gentlemen, and welcome to the Morguard North American Residential Real Estate Investment Trust third quarter 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 assistance, please press star zero for the operator. This call is being recorded on Thursday, October 31st, 2019. I would now like to turn the conference over to Rai Sahi, President and CEO. Please go ahead.
Thank you. Paul, do you want to go ahead and introduce everybody?
Yeah. Thanks, everybody, for joining us today for our Q3 conference call. With us in the room here, in addition to Mr. Sahi, you have myself, Paul Miatello, Senior Vice President of the REIT. You've got Angela Sahi, Senior Vice President in charge of Canadian operations. We've got on the phone, we've got John Talano, Senior Vice President in charge of U.S. operations. We have Chris Newman, Chief Financial Officer. I think to begin, we'll turn it over to Chris for some opening remarks.
Okay. Thank you, Paul. As is customary, I'll provide some comments on the REIT's financial position and performance, and then I'll open up the floor to questions. In terms of our financial position, the REIT completed the third quarter of 2019 with total assets amounting to CAD 3.1 billion, compared to CAD 3 billion in December 2018. The REIT finished the third quarter of 2019 with CAD 20.4 million of cash on hand and CAD 77.7 million advanced to Morguard Corporation under its CAD 100 million revolving credit facility. The increase in liquidity is largely due to CAD 99.6 million of net proceeds received from the completed unit offering in late August. The REIT completed the third quarter of 2019 with CAD 1.1 billion of long-term debt obligations. There was no refinancing activity during the quarter.
On October 1st, the REIT completed the refinancing of three Texas properties in the amount of CAD 109.3 million at a weighted average interest rate of 3.24%, and for terms of 10 years, resulting in additional mortgage proceeds of CAD 7.7 million. The maturing loans had a weighted average interest rate of 3.21%. As at September 30th, 2019, the REIT's overall weighted average term to maturity was 5.1 years, a decrease from 5.8 years at December 31st, 2018. The REIT's weighted average interest rate was 3.49%, no change compared to December 31st, 2018. The REIT continues to make progress in reducing its overall leverage. The REIT's debt to gross book value ratio improved to 44% at September 30th, 2019 from 47.9% at December 31st, 2018.
MRG had an IFRS net asset value at a little over CAD 26 per unit at September 30th, 2019, compared to the current market price of about CAD 19.20, still reflecting a compelling entry point for investors. Turning to the income statement, net loss of CAD 1.4 million for the three months ended September 30th, 2019, compared to a net income of CAD 25 million in 2018. This change was primarily due to non-cash items, mainly from higher fair value loss on the Class B LP units and a decrease in fair value gain on real estate properties, and an increase in interest expense, partially offset by an increase in foreign exchange gains and other income. Net operating income of CAD 38 million for the three months ended September 30th, 2019, decreased by CAD 0.2 million or 0.4% compared to 2018.
Same property proportionate NOI in Canada increased by CAD 0.4 million or 3.4%, and in the U.S. increased by $0.1 million U.S. or 0.5% compared to 2018. Interest expense increased by CAD 1.2 million for the three months ended September 30th, 2019, compared to 2018. Excluding non-cash fair value adjustments, interest expense decreased by CAD 0.4 million, primarily due to the disposal of five Louisiana properties during the first half of 2019. The REIT's third quarter performance has translated into basic FFO increasing by CAD 0.6 million or 4.1% to CAD 16.1 million compared to CAD 15.5 million in 2018. On a per unit basis, FFO was CAD 0.31 per unit for the three months ended September 30th, 2019, compared to CAD 0.30 per unit in 2018. The disposal of the five Louisiana properties had a CAD 0.01 negative impact on FFO.
In addition, the issuance of units during the third quarter of 2019 had a negative impact of CAD 0.005 per unit for the three months ended September 30th, 2019. The impact includes the dilution of additional units of the offering offset by approximately one month of interest income earned on proceeds advanced on the Morguard facility. The REIT's FFO payout ratio was 55.6% for the three months ended September 30th, 2019, a very conservative level, which allows for significant cash retention. In addition, the REIT announced an increase in annual cash distributions of CAD 0.02 per unit, an increase of 2.94%. This will bring the distributions to CAD 0.70 per unit on an annualized basis from the current level of CAD 0.68 per unit.
Operationally, the REIT had a successful quarter with average monthly rents in Canada increasing to CAD 1,417, reflecting the quality of our Canadian portfolio, which translates into an overall 4.3% increase in rent levels compared to 2018. During the nine months ended September 30th, the Canadian portfolio turned over 11.9% of total suites in Canada and achieved 16.8% AMR growth on suite turnover. While in the U.S., same property AMR increased by 3.7%, having average monthly rent of $1,340 U.S. at the end of the third quarter of 2019, compared to $1,292 U.S. at the end of the third quarter of 2018. The REIT continues to report strong occupancy, with Canada finishing the third quarter of 2019 at 99.4%, compared to 99.5% a year earlier. Same property occupancy in the U.S. continues to improve over last year, as occupancy increased to 94.4% from 93.7% in 2018.
During the year, the REIT's total CapEx amounted to CAD 19 million. That included common area projects, revenue-enhancing in-suite improvements, and energy initiative projects. In addition, the REIT incurred CAD 4.6 million of development costs at 1,643 Josephine, which management expects the project to be completed in the first half of 2020. Now I'd like to turn it back over to moderator for any questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request. Should you wish to decline from the polling process, please press star followed by two. Your first question is from Stéphane Boileau of Echelon Wealth Partners. Please go ahead.
Thank you. Good afternoon.
Hi.
Regarding Josephine, we noticed that you postponed the commencement of the lease up until, well, the first half of next year. I was wondering if you could just give us a little bit of color on that?
Sure, yeah. John, could you provide some information?
Sure. We had rain delays in New Orleans that dragged it, the exterior portion of the project, out a bit. They were replacing windows as well as replacing siding, a stucco finish. That held us back there as well. We have started the interior suite portion of the renovations. On top of that, we actually added some new features in the building, a larger fitness center, club room, those types of things, because the rent growth we're seeing in New Orleans was actually higher than we expected. We're adding to the fulsome renovation inside the units as well. We're doing full cabinet replacements in the kitchens rather than doing door replacements and using some upgraded fixtures and more flooring and that sort of thing. That portion was certainly by choice as we saw as opportunistic.
Right. In that sense, I was going to ask you what kind of yield you expected on that project, but I am assuming that with all these changes, the yield must have been affected, hopefully positively. Can you tell us what kind of yield you expect with those modifications?
I don't actually-
Once fully leased.
What was that?
Once fully leased, sorry to interrupt.
Right. I don't have that in front of me today, but it was definitely accretive, and it was positive compared to what we originally projected.
Okay. In terms of your acquisition strategy, can you tell us what are your target markets at the moment, and what kind of cap rates are you contemplating at the moment?
This is Rai Sahi. I can comment on that. We actually don't target cap rate, depending on what is available in the market at any given time. We are focused on the markets we already in. We're focused in Chicago, Florida, Texas, and Washington. We try to be where we already are.
Okay. Thank you for that. I believe that it was a bit out of the question last year, but at this point in cycle, would you consider selling in Canada, especially in Ontario? What would be the threshold at which you would seriously consider selling?
First of all, the REIT is not necessarily our desire to think of selling just because it's an optimum value. You can't just pick and see that we are going to time and sell something and go buy. Our objective continues to grow the portfolio, and trying to work out if it requires some upgrades and all of that in an existing portfolio. At this stage, we don't have any immediate plans for selling anything.
Okay. It's not really a reallocating the portfolio or diversifying away from Canada or anything. You just want to grow the portfolio.
We like to grow in Canada, too. We're not trying to diversify away from Canada.
Right. Okay.
We just can't find any things to do to grow at this stage. We keep looking at it. Since we are a Canadian-based company, we like to have more in Canada.
Okay. Perfect. Thank you for the answers.
Thank you.
Thank you. Your next question is from Lorne Kalmar from TD. Please go ahead.
Thanks. Maybe just following up on the earlier question about diversifying. What about in Canada? Is there any other cities you guys would consider looking at?
Well, obviously we are in multiple cities. We are in Toronto the most. We are in Ottawa. We are in Northwest. We continue to look at it. We'll see. I don't think we have anything in Vancouver, I think it's too expensive there. Again, as I said earlier, we try to do things where we already are. Which might include Alberta as well, Ottawa, or Toronto.
Okay. Then just on the timing of the acquisitions following the equity offering, when are you hoping to have all those proceeds deployed by?
I think we're working on something that we would hopefully within the next quarter, where we should be able to deploy that.
Okay, great. Not that 17% lifts on turns aren't great in Ontario, but some of the peers have been doing suite renovation programs and getting much higher lifts on turns. Is that something you guys have thought about, maybe in the GTA area specifically?
We're doing work on turns selectively. Some of it, again, for us, it's just case-by-case basis. Like the 17 would be a weighted average of stuff that we're turning and renovating but also stuff that we're just looking at least as quickly as possible.
Okay. Just lastly from me, could you guys give the occupancy right now in the U.S. portfolio? Is it up versus quarter end?
Don?
It is slightly, yeah. Today, we're at just under 95%, 94.9. We're right where we were last year in terms of occupancy. The trends are very similar to what we're seeing last year at this time.
Okay, great. That's all for me. I'll turn it back. Thank you.
Thank you. Your next question is from Harry Chernoff of Pathfinder Capital. Please go ahead.
I have a question about benchmarking. When you benchmark your operating performance against your peers, who is that peer group? What other REITs are in that peer group?
Well, I'm not sure that we benchmark in peers. We watch peers. We're focused on our own asset. Each asset is unique in its location. We don't waste a whole lot of time worrying about what the competition is doing. We are focused on the asset that we have. We know the location. We know the market. It is not the policy of this organization to try and worry about what other people are doing. We are aware of what they're doing, so that's not our strategies.
Okay. One second question. As you sell off the older properties like in Louisiana, Alabama, would we expect the proportionate NOI margin to increase or is 53%, 54% the long-term trend?
It's not something we're trying to compare. Those assets that we wanted to sell are sold, we will deploy it, not necessarily where we sold at. It's kind of depending on availability and all of that. We're trying to be efficient, what is sold, it's gone, done. We're just trying to see what is available and where. It will just get deployed. The return is a function of financing and the rate and all of that. There's no one simple thing.
Okay, well, let me ignore the part about selling then. Is 53%-54% proportionate NOI a good estimate for your long-term trend, or will it be going up or down?
That all depends on where we are, whether we're in Florida, whether we're in Toronto, or whether we're in Chicago. Every market is different. We look at each situation, not necessarily worrying what the average is here and there. We deploy it where, as we're looking at availability. It's lot depend on availability. It's each decision made on that basis, not necessarily comparatively to what we sold or what we didn't.
Okay. Thank you.
Thank you, ladies and gentlemen. As a reminder, should you have any questions, please press star followed by one. The next question is from Yash Sankhla from Laurentian Bank. Please go ahead.
Good afternoon.
Hey, Yash.
Just on your distribution increase, I'm wondering what the thought process was behind that, and is it related to your recent asset sale? Do you have to pay out a certain portion of that sale proceeds?
Go ahead, Paul.
Yeah. I'll answer the second part first, I guess. The recent asset sale was obviously in the U.S., was in Louisiana. Our structure is that we're a compliant REIT in Canada, and we're a group of effectively tax-paying entities in the U.S. We don't pay any tax in the U.S. right now because we run at a taxable loss. Any income that would've been generated from those asset sales, we weren't required to pay any tax on it.
Got it. On the acquisition front, I'm sure you're looking and you have your certain criteria. I'm just trying to understand, what particular parameter in your criteria that you find is still not being met in the market when you're looking at different markets and assets? You raised money a few months ago, so I'm just trying to understand what your thought process is there.
Well, this is Resa again. It's not a thought process. As I said earlier, I'll be repeating myself, we have raised a certain amount of capital, and we're going to deploy it depending on where it's available within the market first, or even the market which we may not be in. We don't spend a whole lot of time worrying about comparing with this and that. Each acquisition is based on its own merits, depending on where that might be. As I said earlier, our preference means that we will try to buy where we already are and intensify where it seems to be more coming from U.S. There's not a whole lot more I can add.
Okay. Just on the U.S. market in general, in terms of the leasing environment and new supply, what are you seeing in your markets? I see that incentives have gone up this quarter a bit, so maybe you could add some more color there.
John, can you help with that question?
Sure. We're still seeing some supply from the development cycle in major markets like Chicago and D.C., Dallas as well. We're also seeing that supply for that construction cycle dwindle. Supply has kept up with demand, and we have been able to continue increasing our rates. We see that the supply, the new supply, is certainly coming down in many of these markets. We expect it to continue to improve over time.
Do you think your year-end occupancy for the U.S. portfolio will be around here or be better than what it is now?
I would say we're in the exact position where we were last year. We look to be on track. We turn about 6%. Over the next two months, we'll turn about six and a half, or almost 7% of the portfolio. Obviously, there's many less folks move in the winter months when you're talking about Thanksgiving and the holidays. We should be in a very similar position to where we were at this time last year.
All right. That's it for me. Thank you.
Thank you. There are no further questions. You may proceed.
Thanks everybody for joining us on today's conference call. We look forward to speaking to you next quarter. Thank you.
Ladies and gentlemen, this concludes your call for today. We thank you for participating, and we ask that you please disconnect your lines.