Earnings Call: Q2 2019

Aug 1, 2019

Earnings release

Good afternoon, ladies and gentlemen, and welcome to the Morguard North American Residential Real Estate Investment Trust Second 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 Thursday, August 1, 2019. I would now like to turn the conference over to Paul Miatello. Please go ahead. Hi, and thank you, operator, and thank you, everybody, for joining us today. I will share the call for this afternoon, and I'll just introduce the people that are joining me today. So I have Chris Newman, Chief Financial Officer of Zvi Andrew Sahi, Senior Vice President and John Tlano, Vice President of U. S. Operations. Ray Stahy is expected to join us. He's just been detained a little bit, so we expect him to be here for the Q and A session. So with that brief introduction, I will turn it over to Chris Newman to provide some commentary on the quarter. Thank you, Paul. As is customary, I'll provide comments on the REIT's financial position and performance and then open up the floor for questions. In terms of our financial position, the REIT completed the 2nd quarter of 2019 with total assets, and that's $3,300,000,000 compared to $3,000,000,000 in December 2018. During the quarter, the REIT sold a property located in Air Hen, Louisiana, comprising 48 suites for net proceeds of $1,600,000 after the assumption of mortgages payable and also acquired a partial non controlling interest rate at 3 of the REIT's control properties controlled by the REIT located in the facility. The REIT finished the Q2 of 2019 with $24,500,000 of cash on hand and $14,000,000 owing to Moerd Corporation under its $100,000,000 revolving credit facility. The REIT completed the Q2 of 2019 with $1,100,000,000 of long term debt obligations. There was no refinancing activity during the Q2. As at June 30, 2019, the REIT's overall weighted average term to maturity was 5.3 years, a decrease from 5.8 years at December 31, 2018. The REIT's weighted average interest rate also decreased to 3.48% compared to 3.49% at December 31, 2018. The REIT continues to make progress in reducing its overall leverage. The REIT's debt to gross book value improved to 46.1% at June 30, 2019 from 47.9% at December 31, 2018. Our MRT had an IFRS net asset value of $26.29 per unit as at June 30, 2019, compared to the current market price just under $20 while reflecting a compelling entry point for investors. Turning to the income statement. Net income of $41,900,000 for the 3 months ended June 30, 2019, increased by $22,200,000 compared to 19 point $7,000,000 in 20 18. The increase was primarily due to an increase in NOI, lower interest expense and non cash changes mainly 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 the balance of the property. NOI of $39,000,000 for the 3 months ended June 30, 2019, increased by $700,000 or 1.7 percent compared to 2018. Same property proportionate NOI in Canada increased by $200,000 or 1.6 percent and in the U. S. Increased by $0.1 million or 0.4% compared to 2018. Interest expense decreased by $500,000 for the 3 months ended June 30, 2019 compared to 2018. And excluding non cash fair value adjustments, interest expense decreased by $100,000 primarily due to the disposal of the five Louisiana properties. The REIT's 2nd quarter performance has translated into basic FFO of $15,700,000 in line with 2018. On a per unit basis, FFO was $0.31 per unit for the 3 months ended June 30, 2019, compared to $0.31 per unit in 2018. The change in the foreign exchange trade had a $0.01 per unit positive impact, which was offset by a negative impact of $0.01 per unit from the disposal of the 5 Louisiana properties. The REIT's FFO payout ratio was 55.1% for the 3 months ended June 30, 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 $13.99 reflecting the quality of our Canadian portfolio and translates into an overall 4% increase in rent levels over 2018. During the 6 months ended June 30, 2019, the Canadian portfolio turned over 7.4% of total suites in Canada and achieved 16.7% AMR growth on suite turnover. While in the U. S, same property AMR increased by 3%, having an average monthly rent of US13.19 dollars at the end of the Q2 of 2019 compared to US12.80 dollars at the end of Q2 2018. The REIT continues to report strong occupancy with Canada finishing in the 2nd 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. And during the year, the total CapEx amounted to $10,500,000 That included common area projects and revenue enhancing and fleet improvements and energy initiative projects. I'll now turn the call back over to the moderator, who will open up the line for questions. Thank Your first question is from Lorne Kalmar from TD Securities. 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. So that's the municipalities marking our assets to market. And that, I think, is the biggest driver of the increases and decreased margin there. We also are in a very, very tight labor market in the U. S. As well. So 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, but that definitely has increased our overall cost. At the same time, we did go through an aggressive increase in occupancy. So those costs also impacted our expenses this quarter as well. But we're in a great position right now. We're in our busiest season and our occupancies are right where we want them. So we're in good shape. So I guess kind of looking out on the back half of the year, you think margins will kind of hold steady year over year? I believe they were. Again, the biggest impact is the property taxes, which we work on and are fighting with the municipalities everywhere we can to keep those down. Okay. And 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. But with a lot less to lease this year over last, we're in a great spot. Great. And then just turning to the mortgages coming due. I think there's about $100,000,000 mortgages coming due this year. What kind of rates are you guys seeing on those? Currently, so we're negotiating right now. We're currently looking at around between 3.25% and 3.5%, 3.35% ish as of today's USP. Okay. And then just lastly, obviously, you guys did a little bit of acquisitions this quarter. Any what are the expectations kind of looking forward to the back half of the year in 2020? Listen, this is very sorry. We continue to look at it, and we are and there's nothing I think we expect to close in this quarter, but we'll see what happens. Your next question is from Vikram Ranad, who is a private investor. Please go ahead. Hi, good afternoon. I just had two quick questions regarding the U. S. Dollar and Canadian dollar volatility going forward. I wanted to understand what is your strategy and the outlook on the U. S. Dollar volatility and how will that affect your earnings going forward? And what are the methods of net leverage we put in place to offset that or to say quite a bit less than that? Thank you. In terms of U. S. Dollar to Canadian dollar, I mean, we've been pretty transparent on that since the IPO back in 2012. So our position is that we don't implement any hedging program. So we are sort of naked and exposed to that volatility. But having said that, anything we buy in the U. S, we're obviously putting a U. S. Dollar mortgage against that. So we're exposed to extent of our equity, but our internal policy historically and currently has been not to implement any hedging program. Okay. And then look to how that impacts, for example, the dividend payout on a cash flow basis, fairly cash flows from cost flow and between mutual currencies, right? I mean, some cash flow comes across the border. I mean, 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. And in terms of reporting, I mean, 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 $0.03 assets ROE per quarter, and it's usually more like $0.01 to $0.02 That's obviously, that could be up or down depending on how Canadian dollar is strengthening or weakening obviously. But it's usually and historically a very muted impact, like I said, in the range of $0.01 to $0.02 per quarter FFO. All right. Thank you so much. Thank you. Your next question is from Iyas Sankpal from Laurentian Bank. About your New Orleans redevelopment project, so based on the trends that you are seeing currently, how long do you think it will take you to lease that property? Like up to 95% today? Yes. 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. So the lease up itself should take less than 12 months. Okay. All right. And maybe you could give us 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. So there's very little impact there. In Chicago, specifically, we worked very aggressively over the winter months to maintain very high occupancies. So in the past, we would dip down significantly even in the high 80s over the winter months just because no one is moving and that steady supply has kept coming in. But this year, we maintained a 94% to 95% average. So the number of incentives have been reduced significantly. Those properties today are also doing very well in terms of occupancies. In DC, specifically in Rockville, we had significant supply that was coming online directly near our assets. And we had struggled with incentives there in occupancies as well. But we have worked through that as well, and our lease percentage there has bumped up to, I believe it's 97% today. So we're doing very well there. The most significant supply really is it 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. And this question is for Ray. You guys have been pretty quiet in terms of acquisitions. So just trying to understand whether you guys are not seeing the kind of products you like? Or like 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 there's not much available in Canada. We looked at a few things that doesn't not compare with other quality of assets. And U. S, it's just we're looking a bunch of things, something might happen for this stage. So we're comfortable in the same way, yes. Okay. And just one last question about your Canadian portfolio. Can you comment about the spread between your in place French versus the market French you're seeing? I'm not sure there is a Sorry, this is Angela. We're pushing rents as much as we can on turnover. So for example, for the quarter, it's like almost 18% is where we can push the rents on turnover. But as you know, as you're aware, in Canada, the the occupancy is quite strong as it is, and it's hard to turn over the unit. But 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, but just wondering if you guys did that analysis. No, listen, we are always doing the analysis and all that. So sometimes it becomes a bit of speculation depending on the turnover, fortunately not. Basically, in Canada, we have 2 targets in Mississauga and we have new sites. And we've been consistently achieving 50% to 20% on our turnover. So that we can see that in the near future. All right. That's it from me. Thank you. Thank you. Thank you. There are no further questions at this time. Please proceed. I wanted to say thank you to everybody for attending the Q2 analyst conference call today, and we look forward to speaking to you at 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