Good afternoon, ladies and gentlemen, and welcome to Morguard North American Residential Real Estate Investment Trust fourth 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, February 14th, 2019. I would now like to turn the conference over to Paul Miatello. Please go ahead, sir.
Thank you very much. I'd like to welcome everybody to the Morguard North American Residential REIT Q4 conference call. Rai Sahi is unavailable today. In his place, I will sort of chair the conference call today. With me and joining me on the call is Chris Newman, Chief Financial Officer, Angela Sahi, Senior Vice President, John Talano, Vice President, U.S. Operations, Sanjay Buteja, Vice President, Canadian Operations, Bob Wright, Vice President, and Beverley Flynn, Senior Vice President, General Counsel. Before we just kick it off, I'll just maybe for people that don't know, or I'll remind those that do, we had a change in officers during the fourth quarter. Chris Newman was promoted to Chief Financial Officer. Chris has been with the organization for about three and a half years now in a few different capacities within the Morguard group.
This is his official first analyst call. We welcome Chris to that position. With that, I'll turn it over to Chris to get it going.
Thank you, Paul. As is customary, I'll provide comments on the REIT's financial position and performance, then open the floor up for questions. In terms of our financial position, the REIT completed 2018 with total assets of CAD 3 billion compared to CAD 2.7 billion in 2017. The increase in assets during 2018 was due to the acquisition of a property under development in New Orleans, Louisiana, for CAD 15 million, a fair value gain of CAD 180 million resulting from cap rate compression and an increase in NOI. The change in foreign exchange rate during the year, which had an uplift of asset value of approximately CAD 136 million. The REIT plans to complete capital upgrades on the property under development during the first half of 2019, at which point initial lease up will commence.
The REIT finished 2018 with CAD 17 million of cash on hand and CAD 13 million owing to Morguard Corporation under its revolving credit facility. The REIT has a CAD 100 million credit facility which could be drawn in either Canadian or U.S. dollars and which the REIT can use for acquisitions and general corporate purposes. The REIT completed 2018 with CAD 1.2 billion of long-term debt obligations. There was no refinancing activity during the fourth quarter. During 2018, the REIT completed the refinancing on two U.S. properties at a weighted average term of 10 years in the amount of CAD 80 million at a weighted average interest rate of 4.07%. About 60 basis points lower than the in-place interest that resulted in CAD 12 million of additional mortgage proceeds.
During 2018, the REIT also issued CAD 85.5 million at 4.5% convertible unsecured debentures maturing on March 31st, 2023. A portion of the proceeds were used to redeem the CAD 60 million, 4.65% convertible unsecured debentures ahead of their maturity on March 31st, 2018. As at December 31st, 2018, the REIT's overall weighted average term to maturity was 5.8 years, a decrease from 6.2 years at December 31st, 2017. The REIT's weighted average interest rate also decreased to 3.49% from 3.5% during the year. The REIT continued to make progress in reducing its overall leverage. The REIT's debt to gross book value improved from 51% at December 31st, 2017, to 48% at December 31st, 2018.
MRG.UN has an IFRS net asset value of CAD 25.79 per unit as at December 31st, 2018, compared to the current market price of about CAD 17.30, still reflecting a compelling entry point for investors. Turning to the income statement. Net income increased by CAD 1.6 million - CAD 174.7 million for the year ended December 31st, 2018, compared to 2017. The increase is primarily due to an increase in NOI, partially offset by higher interest expense and trust expenses. As well as higher non-cash changes to fair value on the real estate properties and a foreign exchange gain, which were offset by a higher fair value loss on the Class B LP Units and an increase in deferred income taxes compared to 2017.
Net operating income of CAD 131.7 million for the year ended December 31st, 2018, increased by CAD 9 million or 7.3% compared to 2017. For the year, same property NOI in Canada increased by CAD 2.7 million or 5.7%, and in the U.S. increased by $1.5 million U.S. dollars or 3% compared to 2017. Interest expense increased by CAD 7.6 million for the year compared to 2017, mainly from higher interest on mortgages and convertible debentures, as well as non-cash amounts. Excluding non-cash fair value adjustments, interest expense increased only by CAD 4.3 million. The REIT's 2018 performance has translated into basic FFO of CAD 61.1 million, an increase of CAD 1.4 million or 2.4% compared to 2017.
On a per unit basis, annual FFO was CAD 1.20 per unit for the year ended December 31st, 2018, an increase of CAD 0.02 or 1.7% compared to CAD 1.18 per unit in 2017. Fourth quarter basic FFO was CAD 15.2 million, an increase of CAD 1.6 million or 11.4% compared to 2017. On a per unit basis, fourth quarter FFO was CAD 0.30, an increase of CAD 0.03 or 11.1% compared to 2017. On October 30th, 2018, the REIT announced that the Board of Trustees had approved a 3% increase to its monthly cash distributions, representing CAD 0.60 per unit on an annualized basis. The REIT's FFO payout ratio is 55.2% during 2018, 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 1,373, reflecting the quality of our Canadian portfolio and translates into an overall 3.5% increase in rent levels over 2017. During the year, the Canadian portfolio turned about 17% of its total suites and achieved 11% AMR growth on suite turnover. While in the U.S., AMR increased by 2.7%, having an average monthly rent of CAD 1,236 at the end of 2018, compared to CAD 1,203 at the end of 2017. The REIT continues to report strong occupancies, with Canada finishing 2018 at 99.1% compared to 99.3% a year earlier. Occupancy in the U.S. continues to improve over last year, as occupancy increased to 94.7% at the end of 2018 from 90.9% in 2017. During 2018, the REIT's total CapEx amounted to CAD 29 million, compared to CAD 21.6 million in 2017.
The REIT's revenue enhancing CapEx were mainly for in-suite improvements and energy initiatives, in addition to common area and exterior building projects that enhance the overall appeal of the properties. I'll now turn the call back over to the moderator, who will open the lines up for 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 touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions are pulled in the order received. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question is from Lorne Kalmar from TD Securities. Lorne, please go ahead.
Hey, good afternoon.
Hi, Lorne.
It seems like you guys kind of have the U.S. portfolio largely stabilized. Would you guys think about getting back into acquisition mode in 2019 at all?
Yeah. We're certainly looking at it. We're looking at areas, definitely to grow the portfolio, both in Canada and the U.S. Fair to say that we did take a little pause just to get the 2017 acquisitions stabilized, and we're pretty happy with that. I might get John Talano to comment on that in just a second. The balance sheet is still relatively loaded up. We're in a fairly good liquidity position. The stock's trading well. Again, it's just dependent on opportunities. We do continue to kick tires, and we are looking at a lot of product. Again, also being selective in terms of markets and product. John, do you want to maybe just add a comment or any color on the stabilization of the U.S. properties?
We are exactly where we want to be. The portfolio today is right at 95% occupancy. We're in a much better place than we were this time last year, specifically in Chicago and D.C., where the winter months, you still have a large number of move-outs, but your traffic into the buildings is much slower. We are using our revenue management software and measuring our exposure to the new move-outs. You can see we've done a much better job smoothing out the turnover in the winter months so that our occupancies are generally much higher.
I guess, John, this is maybe for you, did you guys have to use much in the way of acquisitions to get occupancy up to where it is now in, I guess, in Chicago and Washington?
Concessions?
Sorry?
Sorry, can you repeat the question, Lorne?
Did you guys have to use much in the way of incentives or concessions to get the occupancy to where it is right now?
Go ahead.
We have not used a whole lot of incentives. Most of our activity in Chicago was over the summer months, and we've done several improvements on our property at Coast, and we've had great success leasing that up very quickly. I would say mostly we were focused on how we marketed and how we worked with the Chicago brokerage community. That was a huge shift for us and has really given us a competitive advantage over many of the other buildings in our markets.
Okay. Then just turning to the balance sheet. You guys have about a decent amount of maturities coming up this year. How are the refinancings on those progressing, and what kind of rates are you guys seeing?
We have three maturities coming up in 2019. Those mortgages mature in early December, but they open up three months early so we can refinance without any penalties 90 days prior. We're obviously monitoring the market, but it's a little too early to do anything. If it was today, we'd be doing those in the high threes, somewhere in the neighborhood of 3.8%-3.9%. For now, we're locked in for a few more months, so we're monitoring things closely.
Okay, great. That's all for me. Thanks.
Thank you.
Thank you. Ladies and gentlemen, as a reminder, should you have any questions, please press star followed by one now. Your next question is from Yash Sankpal from Laurentian Bank. Please go ahead.
Thank you. Just on your U.S. portfolio, I saw that your Q4 2018 NOI margin was down, and your same-store NOI growth was also relatively weak. Is there anything going on that is not ordinary? Are you guys offering rental incentives? Why is your margin down so much?
John, Chris, do you want to start that?
Yeah, I'll start with that. During the quarter, Q4, the U.S. properties, there's a number of realty tax reassessments and final bills coming in. Maybe, John, you can explain a little more in detail. There was certain states and cities had either triannual or in Florida, large market adjustments. John, can you provide a little more color on that?
Sure. Well, as Chris mentioned, we had several triannual property tax assessments come up. The municipalities and the cities specifically have had several increases, and many of them, Chicago specifically, has had its own financial difficulties. They are hitting us very aggressively. We have appealed actually the majority of the properties that have come up very recently. Part of what you're seeing is with all the new acquisitions, some of those have been marked back up to market. We've had to take that hit, and you're seeing it on a triannual basis, which a few hit in Q4. We expect that to normalize as well.
You also had these taxes in the same quarter last year, right?
Property tax?
You also paid these triannual taxes in your Q4 2017.
No.
Go ahead, John.
Sorry. The increase is triannual, which means instead of getting a 5% or a 3% increase on an annual basis, you could get a 12%-15% increase.
It's not rolling. Okay, got it.
Yeah, at one time, that's what we saw here.
Got it. You talk about incentives. You're offering incentives in some of your markets. Can you maybe provide some more color on that? How you're deciding, what is the goal there?
Well, we're actually across the entire portfolio in the U.S. today. We are offering almost no incentives. We may have a unit that might sit stale for 90 days or something like that, but it is a very rare case at this point. We did offer incentives in Colorado, as well as Chicago early on in 2018, but that was more in the spring prior to the summer months. Right now there are no incentives. We are using a revenue management software that changes rate daily. We're looking at specific metrics, looking at our exposure, looking at how many units are coming up, not today and not 30 days from now, but also nine months from now, trying to manage our renewals and exposure during the months that are most beneficial to the property.
Got it. Okay. That's all for me. Thank you.
Thank you.
Thank you. At this time, we have no further questions. You may proceed.
Okay. Well, thank you everyone for joining us today. We look forward to speaking to you in a couple of months at the Q1 meeting. That's all for now. Thank you.
Ladies and gentlemen, this concludes today's conference call. We thank you for participating, and we ask that you please disconnect your lines.