Good afternoon, ladies and gentlemen, and welcome to Morguard North American Residential REIT second 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 immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, August 1st, 2019. I would now like to turn the conference over to Paul Miatello. Please go ahead.
Hi, thank you, operator, and thank you everybody for joining us today. I will chair the call for this afternoon, and I'll just introduce the people that are joining me today. I have Chris Newman, Chief Financial Officer of the REIT, Angela Sahi, Senior Vice President, and John Talano, Vice President of U.S. Operations. Rai Sahi is expected to join us. He's just been detained a little bit, we expect him to be here for the Q&A session. With that brief introduction, I will turn it over to Chris Newman to provide some commentary on the quarter.
Okay. Thank you, Paul. As is customary, I'll provide comments on the REIT's financial position and performance, then open up the floor for questions. In terms of our financial position, the REIT completed the second quarter of 2019 with total assets amounting to CAD 3.3 billion, compared to CAD 3 billion in December 2018. During the quarter, the REIT sold a property located in Harahan, Louisiana, comprising 48 suites for net proceeds of CAD 1.6 million after the assumption of mortgages payable, and also acquired a partial non-controlling interest at three of the REIT's properties controlled by the REIT located in Mississauga. The REIT finished the second quarter of 2019 with CAD 24.5 million of cash on hand and CAD 14 million owing to Morguard Corporation under its CAD 100 million revolving credit facility. The REIT completed the second quarter of 2019 with CAD 1.1 billion of long-term debt obligations.
There was no refinancing activity during the second quarter. As at June 30th, 2019, the REIT's overall weighted average term to maturity was 5.3 years, a decrease from 5.8 years at December 31st, 2018. The REIT's weighted average interest rate also decreased to 3.48%, compared to 3.49% at December 31st, 2018. The REIT continues to make progress in reducing its overall leverage. The REIT's debt-to-cost of value improved to 46.1% at June 30th, 2019, from 47.9% at December 31st, 2018. For MRG.UN had an IFRS net asset value of CAD 26.29 per unit as at June 30th, 2019, compared to the current market price just under CAD 20, still reflecting a compelling entry point for investors. Turning to the income statement, net income of CAD 41.9 million for the three months ended June 30th, 2019, increased by CAD 22.2 million compared to CAD 19.7 million in 2018.
The increase was primarily due to an increase in NOI and lower interest expense and non-cash changes, namely from a lower fair value loss on Class B LP units and decrease in deferred income taxes, which was partly offset by lower fair value gain on real estate properties. NOI of CAD 39 million for the three months ended June 30, 2019, increased by CAD 0.7 million or 1.7% compared to 2018. Same property proportionate NOI in Canada increased by CAD 0.2 million or 1.6%. In the U.S. increased by CAD 0.1 million or 0.4% compared to 2018. Interest expense decreased by CAD 0.5 million for the three months ended June 30, 2019, compared to 2018. Excluding non-cash fair value adjustments, interest expense decreased by CAD 0.1 million, primarily due to the disposal of the five Louisiana properties. The REIT's second quarter performance has translated into basic FFO of CAD 15.7 million, in line with 2018.
On a per unit basis, FFO was CAD 0.31 per unit for the three months ended June 30th, 2019, compared to CAD 0.31 per unit in 2018. A change in the foreign exchange rate had a CAD 0.01 per unit positive impact, which was offset by a negative impact of CAD 0.01 per unit from the disposal of the five Louisiana properties. The REIT's FFO payout ratio was 55.1% for the three months ended June 30th, 2019, 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 1,399, reflecting the quality of our Canadian portfolio, and translates into an overall 4% increase in rent levels over 2018. During the six months ended June 30th, 2019, the Canadian portfolio turned over 7.4% of total suites in Canada and achieved 16.7% AMR growth on suite turnovers.
While in the U.S., same property AMR increased by 3%, having an average monthly rent of CAD 1,319 at the end of the second quarter of 2019, compared to CAD 1,280 at the end of Q2 2018. The REIT continues to report strong occupancy, with Canada finishing the second quarter at 98.8% compared to 99.2% a year earlier. Same property occupancy in the U.S. continued to improve over last year as occupancy increased to 95.2% from 94.1% in 2018. During the year, the REIT's total CapEx amounted to CAD 10.5 million. That included a common area project and revenue-enhancing in-suite improvements and energy initiative projects. I'll now turn the call back over to the moderator, who will open the line for questions.
Thank you. Ladies and gentlemen, should you have a question, please press star followed by one on your touch-tone phone. If you're using a speakerphone, please lift your handset before pressing any keys. One moment please, for your first question. Your first question is from Lorne Kalmar from TD Securities. Please go ahead.
Thanks. Good afternoon.
Hi.
Just quickly on the margins in the U.S. portfolio, they were down a little bit year-over-year. Can you give some color on what was going on there?
John, do you want to take that question, please?
Sure. I would say the bulk of it or the largest contributors are increases in property taxes. That's the municipalities marking our assets to market. That I think is the biggest driver of the increases and decreased margin there. We also are in a very tight labor market in the U.S. as well. That has pushed up our personnel costs. Actually, at several of the newer acquisitions this time last year, we were understaffed, so we had several positions that were open, and those are actually filled today, so we are stable. That definitely has increased our overall cost. At the same time, we did go through an aggressive increase in occupancy. Those costs also impacted our expenses this quarter as well. We're in a great position right now. We're in our busiest season, and our occupancies are right where we want them.
We're in good shape.
I guess kind of looking out on the back half of the year, you think margins will kind of hold steady year-over-year, or?
I believe they were. The biggest impact is the property taxes.
Yeah
which we work on and are fighting with the municipalities everywhere we can to keep those down.
Okay. Just kind of touching on something I think you mentioned quickly earlier. How has the leasing been going in the U.S. since the end of Q2?
It has been going very well. Our U.S. portfolio is actually 98% leased today, so we're in great shape. Again, it's our busiest season, and we do have some high turnover during these months. With a lot less to lease this year over last, we're in a great spot.
Okay. Just turning to the mortgages coming due. I think there's about $100 million U.S. mortgages coming due this year. What kind of rates are you guys seeing on those?
Currently, we're negotiating right now. We're currently looking at around between 3.25 % and 3.5%, 3.35%-ish, as of today's U.S. dollar.
Okay. Just lastly, obviously you guys did a little bit of acquisitions this quarter. What are the expectations kind of looking forward to the back half of the year and 2020?
Listen, this is where it's happening. We continue to look at it, and there's nothing I think we expect to close in this quarter, but we'll see. We'll see what happens.
Okay, great. That's all for me. I'll turn it back.
Thank you.
Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star followed by one. Your next question is from Vikram Ranad, who's a private investor. Please go ahead.
Hi, good afternoon. I just have two quick questions regarding the U.S. dollar, I mean Canadian dollar volatility going forward. I wanted to understand what is your strategy and the outlook on the U.S. dollar volatility and how it will affect your earnings going forward, and what are the methods or mechanisms you've put in place to offset that or to safeguard yourselves from that? Thank you.
In terms of U.S. dollar to Canadian dollar, we've been pretty transparent on that since the IPO back in 2012, where our position is that we don't implement any hedging programs. We are sort of naked and exposed to that volatility. Having said that, anything we buy in the U.S., we're obviously putting a U.S. dollar mortgage against that. We're exposed to the extent of our equity, but our internal policy historically and currently has been not to implement any hedging program.
Okay. When the 3% impact, for example, the rent for an extent cash flow basis, if there's any cash flows from cross-border between the currencies then?
Some cash flow comes across the border. We retain a fair amount of cash in the U.S. for capital expenditures and for future acquisition opportunities. To say it all comes back isn't quite an accurate representation. In terms of reporting, the fluctuation quarter to quarter historically has had a pretty small impact on reported FFO, and I don't know if Chris has the number for this quarter, but it's typically less than CAD 0.03 FFO per quarter, and it's usually more like CAD 0.01-CAD 0.02. Obviously, that could be up or down, depending on how the Canadian dollar is strengthening or weakening, obviously. It's usually and historically a very muted impact, like I said, in the range of CAD 0.01-CAD 0.02 per quarter FFO.
All right. Thank you so much.
Thank you. Your next question is from Yash Sankpal from Laurentian Bank. Please go ahead.
Good afternoon.
Hello, Yash.
About your New Orleans redevelopment project, based on the trends that you are seeing currently, how long do you think it will take you to lease that property? Up to 95%, I think.
Yeah, John, do you want to take that one as well?
Sure. The property is currently under construction, and we did uncover some structural and some waterproofing issues that we have been addressing. That, as we've been replacing the windows, has delayed us a bit. We expect to start leasing up towards the end of the year, but that is a relatively small property. It's only 114 units. The lease-up itself should take less than 12 months.
Okay. All right. Maybe you could give some color around incentives and new supply in your major markets in the U.S.
Sure. The places where we're seeing the most supply are really in Chicago and in Washington, D.C., and South Florida. The majority of our South Florida assets are outside of the areas where most of that new supply is coming from. There's very little impact there. In Chicago, specifically, we worked very aggressively over the winter months to maintain very high occupancies. In the past, we would dip down significantly, even in the high 80s, over the winter months, just because no one's moving, and that steady supply has kept coming in. This year, we maintained a 94%-95% average. The number of incentives have been reduced significantly. Those properties today are also doing very well in terms of occupancies.
In D.C., specifically in Rockville, we had significant supply that was coming online directly near our assets, and we had struggled with incentives there and occupancies as well. We have worked through that as well, and our lease percentage there has bumped up to, I believe it's 97% today. We're doing very well there. The most significant supply really has been in Chicago, but we are close to being over the hump there, and the development pipelines have definitely slowed in all markets, actually, in Chicago and South Florida, as well as in D.C.
All right. Thank you for that color. This question is for Rai. You guys have been pretty quiet in terms of acquisitions. Just trying to understand whether you guys are not seeing the kind of products you like, or what is holding you guys back?
Well, we're just watching the market. We keep looking at it. We're in the market. There's definitely not much available in Canada, and we looked at a few things, but doesn't compare with other quality of assets. U.S., we're looking at a bunch of things. Something might happen. At this stage, we're comfortable in staying where we are.
Okay. Just one last question about your Canadian portfolio. Can you comment about the spread between your in-place rents versus the market rents you're seeing?
I'm not sure there is a
Well, sorry, this is Angela. We're pushing rents as much as we can on turnover. For example, for the quarter, it's almost 18% is where we can push the rents on turnover. As you know, as you're aware, in Canada, the occupancy is quite strong as it is, and it's hard to turn over the units.
Have you guys looked at how far the market rent is? Because your turnover rate has come down materially, so you won't be able to capture all of that. Just wondering if you guys did that analysis.
No, listen, we are always doing the analysis and all that. Sometimes become a bit of speculation, depending on the turnover. We know that. Basically, in Canada, we are in two pockets. We're in Mississauga, and we're in the east side. Yeah.
Yeah, John.
We've been consistently achieving 15%-20% on our turnover. We can see that in the near future.
All right. That's it for me. Thank you.
Thank you.
Thank you. There are no further questions at this time. Please proceed.
I want to say thank you to everybody for attending the Q2 annual conference call today. We look forward to speaking to you on Q3. Thank you very much.
Ladies and gentlemen, this concludes your conference call today. We thank you for participating and ask that you please disconnect your lines.