Earnings Call: Q1 2019

May 2, 2019

Earnings release

Good afternoon, ladies and gentlemen, and welcome to the Morguard North American Residential Real Estate Investment Trust First 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, May 2, 2019. I would now like to turn the conference over to Paul Miantello. Please go ahead. Thank you very much, and thanks everybody for joining us on our Q1 2019 conference call for Morguard North American Residential REIT. With me today, I have Chris Newman, Chief Financial Officer Angela Sahi, Senior Vice President Sanjay Roteja, Vice President Operations for Canada John Solano is on the phone, our Vice President of U. S. Operations and Ray Sahi, our Chief Executive Officer. So with that, I will turn the call over to Chris Newman to give us a bit of a results update, and then we'll open the floor up for questions. Thank you, Paul. As is customary, I'll provide comments on the REIT's financial position and performance, then open up the floors for questions. In terms of our financial position, the REIT completed the Q1 of 2019 with total assets of $90,000,000,000 to $3,000,000,000 compared to $3,000,000,000 at December 31, 2018. During and subsequent to the Q1, the REIT sold 5 properties located in Louisiana, comprising 8 43 suites for net proceeds of $27,500,000 after the assumption of repayment of mortgages payable. The disposition of the 5 Louisiana properties having an average age of 40 years followed the sale of the REIT's Alabama properties in July 2017 and is consistent with management's strategy to dispose of non core assets and to focus on opportunities to acquire properties located in urban centers and major suburban markets in Canada and the United States. CREEP finished the Q1 2019 with $23,000,000 of cash on hand and $1,600,000 owing to Morvard Corporation under its revolving credit facility. The REIT has a $100,000,000 credit facility, which can be drawn in either Canadian or U. S. Dollars and which the REIT can use for acquisitions and general corporate purposes. The REIT completed the Q1 of 2019 with $1,100,000,000 of long term debt obligations. There was no refinancing activity during the Q1. As at March 31, 2019, the REIT's overall weighted average terms of maturity was 5.6 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% over the same period. The REIT continues to make progress in reducing its overall leverage. The REIT's debt to gross book value ratio improved to 46.5 percent at March 31, 2019, from 47.9% at December 31, 2018. MRG had an IFRS net asset value of $25.87 per unit as of March 31, 2019, compared to the current market price of about $17.50 still reflecting a compelling entry point for investors. Turning to the income statement. Net income of $3,700,000 for the 3 months ended March 31, 2019, decreased by $76,700,000 compared to $80,400,000 in 20 18. The decrease is primarily due to an increase in interest expense and non cash changes mainly from a lower fair value gain on real estate properties, a higher fair value loss on the Class B LT units and a higher foreign exchange loss partially offset by a decrease in deferred income taxes compared to 2018. NOI of $16,800,000 for the 3 months ended March 31, 2019 decreased by $300,000 or 1.6% compared to 2018. Same property proportionate NOI in Canada increased by $700,000 or 5.9 percent and in the U. S. Increased by $0.4 million or 3.1 percent compared to 2018. Interest expense increased by $2,900,000 for the 3 months ended March 31, 2019, compared with 2018. Excluding non cash fair value adjustments, interest expense increased by $800,000 primarily due to the loss on extinguishment of mortgages payable in connection with the disposal of 4 Louisiana properties of 500,000 dollars The REIT's 1st quarter performance has translated into base lease FFO of $15,200,000 an increase of $500,000 or 3.4 percent compared to 2018. On a per unit basis, FFO was $0.30 per unit for the 3 months ended March 31, 2019, an increase of $0.01 or 3.4 percent compared to $0.29 in 2018. The loss on extinguishment of mortgages payable had a $0.01 negative impact and the change in the foreign exchange rate had a $0.01 positive impact. The REIT FFO payout ratio was 56.7% for the 3 months ended March 31, 2019, very conservative level, which allows for significant cash retention. Operationally, the REIT had a successful quarter with AMR in Canada increasing to $13.83 reflecting the quality of our Canadian portfolio and translates into an overall 3.5% increase in rent levels over 2018. During the quarter, the Canadian portfolio turned over 2.8% of total suites in Canada and achieved 15.4% AMR growth on suites turnover. While in the U. S, deemed property AMR increased by 3.1 percent, having an average monthly rent of US1300 dollars at the end of the Q1 of 2019 compared to US12.67 dollars at the end of Q1 twenty eighteen. The REIT continues to report strong occupancy with Canada finishing the first quarter of 2019 at 99.3% compared to 99.2% a year earlier. Same property occupancy in the U. S. Continued to improve over last year. Occupancy increased to 95.3% from 92.6% in 2018. I'll now turn the call back over to the moderator who will open up the call for questions. Thank Your first question is from Loren Kalmar from TD. Loren, please go ahead. Hey, thanks. Good afternoon. Just quickly on the dispositions, were they in line with IFRS? Yes, they were in line with IFRS, yes. Okay. And then on the New Orleans development, what yield are you guys targeting on that? We're early in sort of that redevelopment. So I mean, we'd be targeting something north of 7.5%. But again, we're still sort of early in terms of peeling back walls and things like that. So but the target is about 7.5. Okay, fair enough. I guess you never know what you're going to find behind the walls. And then I guess now with the U. S. Portfolio largely stabilized, it's over 95% occupied, Are you guys looking to resume acquisition activity in the U. S. At least? Well, this is Ray, Sonny. Well, we're obviously looking at the evolution. But we're watching and see what happens. There's nothing that we have any provision to report at this stage, but we are looking mostly in the U. S. We always look for in Canada, but there's nothing else available over any questions. Fair enough. And then just lastly, again, I guess with now the occupancy in U. S. Stabilized, do you guys think you could start pushing rents a little more aggressively? John O'Mullen. John O'Mullen. John O'Mullen. Yes, I would say absolutely, we already have. We were really focused on occupancy using our revenue management system over the winter to really push that up. So we're in a great place now and the intent is to push rents as we're going into spring for sure. Your next question is from Yash Sankpal from Laurentian Bank. Yash, please go ahead. Thank you. Good afternoon. Hi, Yash. Just on your U. S. Portfolio, where do you expect your U. S. Occupancy to be by year end? John, do you want to answer that? Sure. We're at about our optimum levels today. So we're shooting for the 95%, 96% range. We do have a lot of turnover over the summer months. But again, that's usually our opportunity to push some rents as well. But we're about at our optimum levels. All right. And your margin in the U. S. Portfolio was down year over year. So I was wondering what would the margin be if those one time items were not there? And how should we model your margins going forward? John, do you want to answer that? Yes, I'll take that too. I would say that we had some significant acquisitions with Coast and Sonesta that when you look back, we're not fully stabilized at that point in 2018. So we were short on staff and had other expenses that actually were lower in general at that point. Our expenses in Q1 twenty nineteen were actually pushed up a little bit with some utilities from the polar vortex in our northern cities as well. So I believe they will stabilize a little bit and move 1 point, 1.5, but they're not going to move too much. Got it. Okay. And so you sold your part of your Louisiana portfolio. Are you planning to sell the entire thing there? Like maybe No. I mean, as far as the rest, we've only got a couple of properties left in Louisiana, and we're happy with what we have now. So that part of the disposition program is done. And how do you plan to replenish that income? Is there anything imminent that you guys plan to do or Like Ray said a couple of minutes ago, we're looking we're kicking tires, but there's nothing to report on at the current time. But we are definitely looking to replace that income, yes. All right. That's it for me. Thank you. Thanks, Josh. Thank you. There are no further questions at this time. Please proceed. Okay. Thanks again everybody for joining us on the conference call. We look forward to speaking next quarter. Thank you. Ladies and gentlemen, this concludes your conference call today. We thank you for participating and ask that you please disconnect your line.