Earnings Call: Q3 2018

Nov 1, 2018

Earnings release

Good 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 Thursday, November 1, 2018. I would now like to turn the conference over to Bob Wright. Please go ahead. Thank you very much. As is customary, I will provide comments on the REIT's financial position and performance. Then we will open the door for questions. In terms of our financial position, the REIT completed the Q3 of 2018 with assets $2,900,000,000 compared to $2,700,000,000 in December 2017. The increase in assets during 2018 was due to the acquisition of a property under development of $50,000,000 a fair value gain of $134,000,000 and a change in foreign exchange rate during the year, having an uplift of approximately 48,000,000 dollars The REIT finished the Q3 of 2018 with $18,000,000 of cash on hand and $12,000,000 owned with Norvark Corporation under its revolving credit facility. The REIT has a $100,000,000 credit facility, which can be drawn on either Canadian or U. S. Dollars and which the REIT can use for acquisitions and general corporate purposes. The REIT completed the Q3 of 2018 with 1,300,000,000 dollars in long term debt obligations. There was no refinancing activity in the quarter. As at September 2018, the REIT's overall weighted average term to maturity was 6.1 years, decreased from 6.2% in the prior year. The REIT weighted average interest rate decreased to 3.48% from 3.5% in December. The REIT continues to make progress in reducing its overall leverage. To read debt book. Gross book value improved from 51% in December of last year to 49% in September of this year. Monarch has an IFRS asset management value of 23 $0.75 per unit as of September 30, 2018, compared to market price of 16 $0.50 still reflecting a significant discount to our current trading price. Turning to the statement of income. Net income increased by $17,100,000 to $25,000,000 for the 3 months ended September 30, 20 18, compared to 2017, an increase in NOI and higher non cash charges to fair value on real estate properties, particularly offset by higher fair value loss in the Class B units compared to 2017. Net operating income of $38,200,000 for the 3 months ended September 30, 2018, increased by $3,000,000 or 8.5% compared to the prior year. The proportionate NOI increased by $1,200,000 or 4.1 percent to 31.9 $1,000,000 compared to $30,700,000 for the prior year. Interest expense increased by 1 point $6,000,000 for the 3 months ended September 30 compared to 2017. Excluding the noncash fair value adjustments, interest expense decreased by 0.8000000 dollars The 3rd quarter performance has translated into basic FFO of $15,500,000 an increase of $1,000,000 or 7% from the prior year. On a per unit basis, FFO was $0.30 per unit for the 3 months ended September 2018, an increase of $0.01 or 3.4 percent compared to the $2.9 per unit in the prior year. The change in foreign exchange rate of 1% per unit had a positive impact. The REIT FFO payout ratio for the 3 months ended September 30, 2018 was 54.2%. In addition, the Board of Trustees at the REIT is announcing an increase in annual cash distribution of $0.02 per unit, an increase of 3.03%. The increase is expected to be effective for the November 2018 distribution payable in the December 2018. This will bring the distribution to $0.68 per unit on an annualized basis from the current 0.66 rents per unit. Operations. Operationally, the leaders had a successful quarter with average monthly rents in Canada increasing to $13.58 This reflects the quality of the Canadian portfolio and translates into 2.9% increase in rent levels from the prior year. While in the U. S, average monthly rents increased by 2.4%, having an average monthly rent of US12.31 dollars at the end of the third quarter compared to $1202 at the end of the prior year. The REIT continues to have strong occupancy with Canada finishing the 3rd quarter at 99.5% compared to 98.5% a year earlier. Occupancy in the U. S. Continues to improve over the prior year. Occupancy increased to 93.5% from 90.7% in the prior year. Same property occupancy in the U. S. Decreased slightly from 93.7 percent occupancy reported in June of 2018, resulting in an increase in new supply and free rent concessions offered by competitors. I will now turn the call back over to the moderator, who will open the lines for questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from Jonathan Kelcher at TD. Please go ahead. Thanks. Good afternoon. First question is just on the turnover so far this year. I guess it's about 14 percent of the Canadian portfolio. And I'm just curious as to how that compares to prior years. Yes, I can answer that. Definitely, we are seeing a trend, the turnover is on a decline and is definitely lower than the previous years. The year in 2017, we experienced around 20% and we're finding it's lower this year. Okay. And would you and you're getting roughly 10% on turnovers. Is that something that we can expect going forward for the next couple of quarters anyways? Yes, absolutely. Our Mississauga properties annualized, we're getting 12.32% bump in the rent and then in downtown properties, we're getting close to 13%. So between 12% 13% is what we are managing. Okay. And then just secondly, what's your given where you trade relative to your IFRS value, what's your appetite for acquisitions? Well, this is Ray. I would say, we always look at all kind of product available, Poland, U. S. And Canada. And we're also kind of reflecting is what is happening to the medium to long term rate. Now we stand and we continue to look at it. So we are a little cautious about whether the industry is going to continue to climb and whether that would change the pricing result. It's an ongoing thing. We'll just continue to that if there's an asset that we think that we need to acquire, we will. But we'll let you know if we do something. Thank you. Okay. What about dispositions or any markets that you're currently in that you'd like to exit or reduce? I don't think there's anything in the U. S. At this stage we are looking at. And this stage we may notice it as to any potential disposition of our Canada. Okay. Thanks. I'll turn it back. Thank you. Thank you. Your next question is from Dean Wolfson from CIBC. Please go ahead. Thanks. Good afternoon, everyone. Ray, if I could just continue on with John's question there. You look at the stuff that you've got in Canada, the stuff that's in Mississauga there, you take that out to the market. I mean, I don't think people would be shocked if that garnered something with a 3 in front of it in terms of a cap rate. And you don't want to part with good assets, but the difference between what you could pick up stuff down in the States for. Is that something you think about? Or is it just, hey, the valuation is going to continue to increase on those Canadian assets and we'll let the market take it where it takes it? Well, Joe, we look at little differently than just because you think you can get 3 or something cap, which is not that inflected. Some of these assets on this side are already core assets. So it is not just that we want to create something that you asked. I mean, as you know, really will be a Canadian asset that's pretty scared. So I don't think just for the sake of that selling a lower cap rate versus buying a higher cap rate is a declining effect for us. So answering questions, we are no interest in telling you the missed out answer. Okay, great. And then just when I look at the margins that you get off of those assets and I look at sort of some of the other Canadian apartment peers and sort of that differential in the margins. And I know you don't sort of have insight into how they run their financials, but do you sense that your margin differential being a little bit lower is that you're perhaps a little more conservative when it comes to expensing things like R and M where others might be capitalizing a little bit more of that? Or do you have any insight into sort of those differences? Well, the truth of the matter is the right, Savy. I don't think we'll waste time worrying about what other people do, whether they are dispensing or not. We run the business as efficiently as we can and now we're in all whatever we want to do. Fair enough. And then I guess if you're going to see the margin or the turnover continue to trend lower, the lower amount of churn you have less expenses associated with churn. So it's likely that the margin actually does sort of tick up from here? I guess we'll wait and see. That's it for me. I'll hand it back. Thanks, guys. Thank you. Thank you. Your next question comes from Yash Sankpal from Laurentian Bank. Please go ahead. Good afternoon. Just on your U. S. NOI margins, year over year, they were down. And I think it was partly because of a higher turnover rate and some other things. So maybe you could add some color around that, like what exactly happened? Is it related to incentives that you are offering? Is it related to new supply in the market? Tom, do you want to handle that? Sure. Our portfolio in general went our activities dropped earlier this year. So many of that vacancy, we have eaten up over the last several months. So we're now 94% occupied and 95 percent leased. But in the quarter, we had to make all those units ready, and we had a very active quarter as well. So more concentrated turns within this quarter where lots of folks moved right over the summer months. Sometimes folks move more in the spring and fall, but we saw a higher concentration in that 3 month period. And that coupled with the utilities just drove those expenses up over this quarter. So we expect it to be normalizing. It's definitely normalized now, and we expect it to be normalized through Q4, if that helps. And how is the new how are you guys dealing with new supply in your markets? Are you guys still seeing it? It's market by market. There's definitely new supply in D. C. And in Chicago that we're dealing with every day. I would say in Chicago, we're in a much better place than we were this time last year. We also see the development pipeline starting to dwindle. So we are still dealing with that, but we expect it to continue to improve. And the demand for apartments is strong. The interest rates creeping up a little bit has made the housing market weaken a little bit as well, which we saw very recently. So we're confident that it will continue to improve. Okay. And where do you think your Higher, lower from here? We expect it to stay in the same range where it is today. Okay. Yes, that's it for me. Thank you. Thank you. Your next question is from Hal Dasch from Seeshell Investments. Please go ahead. Mr. Sahi, the last quarter, there was a couple of apartments purchased by Morguard Corporation in Boynton Beach, Florida. Why were those not purchased by the REIT? And is there an intention that those will later be sold to the REIT? Well, some of these are condos, John. And John, do you want to add to that? The reason we don't we sometimes asset fit and core as opposed to the LEED because we've got some work to be done. So these were brand new, I believe, Mr. Farty. The Santorini yes, Santorini itself was a lease up. So it was currently unoccupied. So we didn't feel like it was a good fit for the REIT acquisition. There was 2 of them. Right. The SKIA was a broken condo acquisition of 100 and 25 units. And again, that was attached to the deal with Santorini. They are related and purchased from the same party. But again, that was a bit of a complicated transaction where we're dealing with the lease up as we speak. So just a quick question then. Is there the possibility they will be then purchased by the REIT from Modart? I think we will look at that and once we stabilized whether that should be the case or not. There's nothing else. There are no further questions at this time. You may proceed. Well, thank you very much. And we shall talk to you next quarter. Thank you. Thank you, Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.