Earnings Call: Q3 2019

Oct 31, 2019

Earnings release

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 a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on October 31, 2019. And I would now like to turn the conference over to Ray Saghi, President and CEO. Please go ahead. Thank you. Paul, do you want to go ahead and introduce everybody? Yes. Thanks, everybody, for joining us today for our Q3 conference call. With us in the room here, in addition to Mr. Saadi and myself, Paul Mietalo, Senior Vice President of The Reef. We've got Angela Saadi, Senior Vice President and 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. And so 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 Q3 of 2019 with total assets amounting to $3,100,000,000 compared to $3,000,000,000 in December 2018. The REIT finished the Q3 of 2019 with $20,400,000 of cash on hand and $77,700,000 advanced to Morguard Corporation under its $100,000,000 revolving credit facility. The increase in liquidity is largely due to the $99,600,000 of net proceeds received from the completed unit offering in late August. The REIT completed the Q3 of 2019 with $1,100,000,000 of long term debt obligations. There was no refinancing activity during the quarter. However, on October 1, the REIT completed the refinancing of 3 Texas properties in the amount of $109,300,000 a weighted average interest rate of 3.24 percent and for terms of 10 years, resulting in additional mortgage proceeds of 7,700,000 dollars The maturing loans had a weighted average interest rate of 3.21%. As at September 30, 2019, REIT's overall weighted average term to maturity was 5.1 years, a decrease from 5.8 years at December 31, 2018. The REIT's weighted average interest rate was 3.49 percent, no change compared to December 31, 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 30, 2019 from 47.9% at December 31, 2018. MRG had an IFRS net asset value at a little over $26 per unit at September 30, 2019, compared to the current market price of about $19.20 still reflecting a compelling entry point for investors. And turning to the income statement. Net loss of $1,400,000 for the 3 months ended September 30, 2019, compared to a net income of $25,000,000 in 20 18. This change was primarily due to non cash items, mainly from higher fair value loss on 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 $38,000,000 for the 3 months ended September 30, 2019 decreased by $200,000 or 0.4% compared to 2018. Same property proportionate NOI in Canada increased by $400,000 or 3.4 percent and in the U. S. Increased by $100,000 or 0.5 percent compared to 2018. Interest expense increased by US1.2 million dollars for the 3 months ended September 30, 2019 compared to 2018. And excluding non cash fair value adjustments, interest expense decreased by $400,000 primarily due to the disposal of 5 Louisiana properties during the first half of twenty nineteen. The REIT's 3rd quarter performance has translated into basic FFO increasing by 600,000 dollars or 4.1 percent to $16,100,000 compared to $15,500,000 in 2018. On a per unit basis, FFO was 0 point 3 $1 per unit for the 3 months ended September 30, 2019, compared to $0.30 per unit in 2018. The disposal of the 5 Louisiana properties had a $0.01 negative impact on FFO. In addition, the issuance of units during the Q3 of 2019 had a negative impact of $0.015 per unit for the 3 months ended September 30, 2019. The impact includes the dilution of additional units of the offering offset by approximately 1 month of interest income earned on proceeds events on the Morvard facility. The REIT's FFO payout ratio was 55.6 percent for the 3 months ended September 30, 2019, a very conservative level, which allows for significant cash retention. In addition, the REIT announced an increase in annual cash distributions of $0.02 per unit, an increase of 2.94%. This will bring the distributions to $0.70 per unit on an annualized basis from the current level of $0.68 per unit. Operationally, the REIT had a successful quarter with average monthly rents in Canada increasing to $14.17 reflecting the quality of our Canadian portfolio, which translates into an overall 4.3% increase in rent levels compared to 2018. During the 9 months ended September 30, 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 US13.40 dollars at the end of the Q3 of 2019, compared to US12.92 dollars at the end of the Q3 of 2018. REIT continues to report strong occupancy with Canada finishing the Q3 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 $19,000,000 that included common area projects, revenue enhancing in suite improvements and energy initiative projects. In addition, the REIT incurred $4,600,000 of development costs at 1643 Josephine, which management expects the project to be completed in the first half of twenty twenty. And 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. First question is from Stephan Boire of Echelon Wealth Partners. Please go ahead. Thank you. Good afternoon. Regarding Josephine, we noticed that you postponed the commencement of the lease up until the first half of next year. I was wondering if you could just give us some a little bit of color on that? Sure. Yes. John, could you provide some information? Sure. We had rain delays in New Orleans that dragged it the exterior portion of the project out of it. They were replacing windows as well as replacing siding, a stucco finish. So that held us back there as well. But we have started the interior suite portion of the renovations. And 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. So we're adding to the fulsome renovations inside the units as well. So 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. So that portion was certainly by choice as we saw as opportunistic. Right. And 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. But can you tell us what kind of yield you expect with those modifications? 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. And in terms of your acquisition strategy, can you tell us what are your target markets at the moment? And what kind of cap rates you contemplating at the moment? This is Ray Song. 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 market we are again. We're focused in Chicago, Florida, Texas and Washington, wherever the product we try to be where we already are. Okay, okay. And thank you for that. And I believe that it was a bit out of the question last year, but at this point in the cycle, would you consider selling in Canada, especially in Ontario? Or what would be the threshold at which you would seriously consider selling? Well, first of all, the need is not that's not necessarily our desire to think of selling just because it's optimum value. And 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 to selling anything. Okay, okay. So it's not really a reallocating portfolio or diversifying away from diversify 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. We try to find any plants to grow at this stage. So we keep looking at it. So that is not our since we are a Canadian based company, we'd like to have more in Canada. Okay, perfect. Thank you for the answers. Thank you. Thank you. Your next question is from Lorne Talmar 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. So we continue to look at it. So we'll see. I don't think we have anything in Vancouver. I think it's too expensive there. So again, as I said earlier, try to do things where we already are, so which might include Alberta as well, Ottawa, North Carolina. Okay. And 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 when we should be able to deploy that. Okay, great. And then in 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 but selectively. I mean, some of it and again, it's just for us, it's just case by case basis. So like the 17,000,000,000 weighted average of stuff that we're turning and renovating and but also stuff that we're just looking at least as quickly as possible. Okay. And then just lastly for me, could you guys give the occupancy right now in the U. S. Portfolio? Is it up versus quarter end or John? It is slightly yes, we're today, we're at just under 95%, 94.9%. So we're right where we were last year in terms of occupancy, and 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 Pathfinders. 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 again peers. We watch peers. We're focused on our own asset. Each asset is unique in its location. So 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 roll out 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? Again, it's not something we're trying to compare. Those assets that we wanted to sell sold and we will deploy it, not necessarily where we sold that. It's kind of depending on availability and all of that. It's not that we're trying to be efficient. What is sold, it's gone and done. So 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 no one simple thing. Okay. Well, let me ignore the part about selling then. Is 53% to 54% proportion NOI a good estimate for your long term trend? Or is that will it be going up or down? That all depends on where we are, whether we are in Florida, whether we are in Toronto or whether we're in Chicago, every market is different. So we look at each situation, not necessarily worrying what the average is here and there. We deploy where as we're looking at availability, there's a lot of demand on availability. So it's each decision made on that basis, not necessarily comparatively to what we sold or what we did. Okay. Thank you. Thank you. And the next question is from Yash Sanktel from Laurentian Bank. Please go ahead. Good afternoon. Just on your distribution increase, I'm wondering what the thought process was behind that? And is it related to your recent asset sale? Like do you have to pay out a certain portion of that sale proceeds? Go ahead, Pavan. Yes. So I'll answer the second part first, I guess. The recent asset sale was obviously in the U. S. Was in Louisiana. So 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. So we don't pay any tax in the U. S. Right now because we run at a taxable loss. So any income that would have been generated from those asset sales, we weren't required to any tax on it. Got it. And 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 because you raised money a few months ago. So I'm just trying to understand what your thought process is there. Well, this is Ray Sohin, Yin. It's not a thought process. As I said earlier, I'll be repeating myself. We have with you a certain amount of capital and we're going to deploy it depending on where it's available within the market, the first or even the market which we may not be in. So we don't kind of 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. So it's really not a as I said earlier, our preference for me is that we will try to buy where we are in an intensivior. And it seems to me it's more coming from U. S. And so you there's not a whole lot more I can add. Okay. And 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 DC, Dallas as well. But we're also seeing that supply for that construction cycle dwindle. So we have been able to our supply has kept up with demand, and we have been able to continue increasing our rates. But we see that the supply, the new supply is certainly coming down in many of these markets. So we expect it to continue to improve over time. And 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. And if we look to be on track, we turn about 6% over the next 2 months, we'll turn about 6.5% or almost 7% of the portfolio. And obviously, there's many less folks move in the winter months when you're talking about Thanksgiving and the holidays. So 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.