Good afternoon. My name is Cheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Morguard North American Residential Real Estate Investment Trust First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Paul Miatello, you may begin your conference.
Thank you very much. Welcome everybody, and thank you for joining us at our Q1 conference call for Morguard North American Residential REIT. I'd like to inform you that Rai Sahi is not available today. He sends his regrets. I'd like to also introduce the senior management team that's on the call here today with me. I have Bob Wright, Chief Financial Officer, Sanjeev Parsad , Vice President of Operations responsible for Canada, and John Talano, Vice President Operations with responsibility for the U.S. As is customary, I will turn the call over right now to Bob Wright, who will read some prepared comments. We'll open up the floor for questions. With that, over to you, Bob.
Thank you, Paul. As is customary, I will provide comments on the REIT's financial position and performance. We will open up the floor for questions. In terms of our financial position, the REIT completed the first quarter of 2018 with assets totaling CAD 2.8 billion, compared to CAD 2.7 billion in December 2017. The increase in assets during 2018 was due to the fair value gain of CAD 71 million and the change in foreign exchange rates during the quarter, representing an uplift in asset value approximately CAD 42 million. The REIT finished the first quarter of 2018 with CAD 18 million of cash and CAD 4 million owing to Morguard Corporation under the revolving credit facility. The REIT has a CAD 100 million credit facility, which can be drawn in either Canadian or U.S. dollars, which the REIT can use for acquisitions and general purposes.
The REIT completed the first quarter of 2018 with CAD 1.2 billion of long-term debt obligations. There was no refinancing activity in the quarter. Early this week, the REIT continued to make progress in strengthening its balance sheet through financing activities with the refinancing of two residential properties in the amount of $62 million U.S., at a weighted average interest rate of 4.07%, about 60 basis points lower than that in place in the interest rate with the weighted average term. As at March 28th, the REIT overall weighted average term to maturity was six years, with 6.2 years at December 31, 2017. The REIT's weighted average interest rate was slightly increased to 3.5% from 3.0% at December 31. The REIT continues to make progress in reducing its overall leverage. The REIT's debt to gross book value improved from 51% at December 31 to 50% at March 31, 2018.
MRG has an IFRS net asset value of CAD 22.36 per unit as of March 31, 2018, compared to book value of CAD 14, still reflecting a significant discount to the current trading price. Net income increased by CAD 77.9 million to CAD 80.4 million as compared to 2017. The increase was primarily due to higher non-cash change in fair value of the increased properties and the fair value of Class B units compared to 2017, partially offset by an increase in deferred tax compared to 2017. Proportionate share NOI increased from CAD 1.5 million or 5.1% to CAD 30.2 million compared to CAD 28 million in 2017. Interest income, interest expense increased by CAD 0.05 million compared to 2017. Excluding non-cash fair value adjustments, interest expense decreased by CAD 1.3 million.
The REIT's 2018 performance has been translated into basic FFO of CAD 14.7 million generated for the three months ended March 31, 2018, a decrease of CAD 0.5 million or 3.5% compared to 2017. On a per unit basis, FFO of CAD 0.29 per unit for the three months ended March 31, 2018, a decrease in CAD 0.01 to CAD 3.3 compared to CAD 0.30 per unit in 2017, resulting from the change in foreign exchange rates. The REIT's FFO payout ratio for the three months ended March 31, 2018, was 17.0%. Operationally, the REIT has had successful quarter with average monthly rents in Canada increasing to CAD 1,336. This reflects the quality of the Canadian portfolio and translates into an overall 2.8% increase in rent levels over 2017.
While in the U.S., average monthly rents increased 17%, having an average monthly rent of $1,211 at the end of the first quarter of 2018, compared to $1,033 at the end of Q1 2017. U.S. same property average monthly rents increased 3.1%. The REIT experienced strong rental growth in all U.S. markets except Louisiana and North Carolina. The REIT continues to record strong occupancy, with Canada finishing in the first quarter of 2018 at 99.2%, compared to 98% a year ago. Same property occupancy in the U.S. decreased to 92.7% from 93.8% in 2017. The increase is due mainly to current economic conditions in oil-driven markets such as Louisiana, increased demand of single-family homes impacting certain properties in Atlanta and Georgia, and an increase in new supply currently in lease-up with the REIT's properties in the lead submarkets, including Dallas, Atlanta, and Colorado.
Subsequently, same property occupancy in the U.S. has improved from the 91.4% occupancy reported in December of 2017. The REIT's occupancy within Colorado, Texas, and North Carolina improved sharply compared to the December 31, 2017, resulting in increased market efforts and beginning of the spring leasing season while maintaining MRI growth that satisfies tenants within each respective submarket. Occupancy levels at the U.S. properties acquired by the REIT during 2017 have also been impacted by new supply and leasing seasonality, particularly in Chicago and Maryland. Management has seen recent improvement and expects these impacts to be short-term in nature as the competitive properties complete the initial lease-up. Coast at Lakeshore East and Northgate at Falls Church improved occupancy since the fourth quarter of 2017.
although Fenestra decreased in occupancy, all three have been significant improvements in traffic and leasing activity going into the spring, which will represent a key leasing season for these properties. We expect current occupancy levels to continue to improve as the new product stabilizes and management continues to focus on monitoring MRI growth. I will now turn the call back to the moderator, who will open the line up for questions.
At this time, I would like to remind everyone, in order to ask a question, please press star one on your telephone keypad. Our first question comes from the line of Frédéric Blondeau of Echelon Wealth Partners. Please go ahead. Your line is open.
Thank you, and good afternoon.
Hi.
I have two quick questions for you. The first one is, last quarter, I remember you mentioned you had transitional issues, notably in Chicago. I was wondering if you had any update for us on this matter.
John, do you want to take this, please?
Sure. Hey, this is John Talano talking. Actually, yeah. When we actually took over both the properties, Chicago and in Washington, D.C., we essentially lost the entire management staff. We went through a hiring process and trying to get the right team in place. Chicago, we are actually 98% leased today at Coast. We're really excited about that and made huge improvements. That property is now doing very well. It's actually 94.7% occupied as of today, so that one is great. The same was the case really for Washington, D.C., because when we took over the properties, we had the same staffing issues, where the previous management team literally took all of the employees. That quickly brought us into November, into the winter months, and we really ended up sitting on a lot of that vacancy over that period.
Just in the last two weeks, our traffic has doubled, both at Northgate and Fenestra. Both of those properties are pushing right now at about 92% leased. Northgate's a little ahead in occupancy, but Fenestra is catching up, we feel like we're going to make some great progress over the next several weeks there as well.
Okay. I guess you have no longer operational issues per se.
Correct.
Is that fair to say?
Yes. We have stabilized both the Chicago portfolio and D.C., and we're fully staffed at all those properties.
Okay, perfect. My second question, you guys once again mentioned that new supply is an issue, notably in Dallas, Atlanta, and Colorado, and I was wondering, what's your outlook on this aspect, and if you could expand a little bit on your views on new supply in your markets right now?
Sure. In Colorado, the supply issue was specifically in Fort Collins. There was one new property, and it's a smaller market, so it had a significant effect on us over the winter months. That property did lease up as well, and we're in good shape there. I believe we're up in Colorado actually eight points over last quarter in terms of occupancy. The same is the case in Texas. There was a 3% increase in occupancy there as well. Those markets are in great shape. The one that we're watching the most now is only one of our three assets in Atlanta. It was really just a new property within a few blocks of us that had a significant effect. That property itself is well on its way in terms of its lease-up. That one we're seeing improvement as well.
The other two Atlanta properties are right where we want them to be. One's 97% occupied today and the other is right at 93%, but climbing quickly.
Mm-hmm. Should we expect same-store occupancy to improve next quarter or?
Yes. I would say based on our leasing momentum today it will absolutely.
Okay, perfect. Thank you. I'll leave it there.
Your next question comes from the line of Dean Wilkinson of CIBC World Markets. Please go ahead. Your line is open.
Thank you, Cheryl. Hey, guys.
Hey.
Hey.
Just a question on the cap rates. You cited 25 basis points compression in several of those U.S. markets. Was that a result of transactions you saw in those markets, or was it more related to the increase in the assessed values from the tax perspective?
The cap rate change, Dean, was a little bit of the former. Few transactions that we've observed in the marketplace. The other thing is that, no surprise, but one of the major inputs into the appraisal process is looking at cap rate surveys. We've seen some common compression in a few of the different surveys that the appraisers use. You start seeing that trend. A lot of judgment involved, obviously.
Yep.
Some of these surveys, you've seen a little bit of compression over one or two, maybe three quarters. Some of them you see it pop up a little more recent, but you see a little more cap rate compression in the surveys bubbling into most of the surveys. You start to form conclusions based on that, but also based on a couple of transactions that have taken place.
In terms of the increased value on the assessments, were they effectively looking at the same thing as well, or do you?
Sorry, when you say assessments, are you?
Property tax assessments. Yeah.
Property tax assessments. Yeah. Generally, we're seeing property tax assessments increase. Maybe I'll ask John to add a little more color. Maybe specifically in Florida, John, because I know that's where we kind of had the biggest impact from the cap rate bump.
Right. I would say it's two things. Paul hit on it. First is, there were a few transactions in our smaller markets, Pensacola, that I think gave some clarity on cap rates.
Those rates were a little bit lower than previous quarters. The Florida assessors are absolutely lowering their cap rates through our assessments, and especially with our recent transactions or our properties that we've purchased, they're simply marking them to market. The number actually is 85% of sale value. There have been many, especially in South Florida, there's been many recent transactions where you can see that significant cap rate compression.
Great. Makes sense. Then the other question for me, I guess is probably for John. On the subsequent asset purchase in New Orleans, I guess there's really not a cap rate as you expect the vacancy to be 100%, but how much are you looking to spend in that capital upgrade, and then what would be sort of the cash-on-cash yield for the entire thing once you're done?
Well, it is just under CAD 2 rents for that property. The acquisition cost was right under CAD 100,000 a door, and the capital plan is right around CAD 5 million.
CAD 5 million. Yeah.
Right. That's 116 units.
Where do you think the rents would go to from then?
Oh, from the renovations?
Yeah.
Yeah. We're projecting a 3% growth there. The property should be operating well over a seven cap at that point.
Oh, okay. Seven. It makes sense to buy it that way then, for sure.
It was a strategic acquisition with a relationship that we had with Tulane University. They actually purchased that back in 2005, actually, right after Katrina, for student and faculty housing.
They did not operate it as an apartment community. It actually was built originally as a condominium. It was performing significantly under where it should be. It's a small property. It's only 116 units.
Yeah.
There's upside there for sure.
Okay, great. That's it. I'll hand it back. Thanks, guys.
Thank you.
Thank you.
Again, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from the line of Jonathan Kelcher of TD Securities. Please go ahead. Your line is open.
Thanks. Good afternoon.
Thank you.
Just continuing on, do you guys see much in the way of more opportunities in terms of buying assets that you have to rework a little bit?
Probably the quick answer is no. This acquisition we did subsequent to the quarter, was a little bit unusual for us. We're typically a little more buyers of core assets. This is a little unusual for us, and I think it was also in the materials, but this property is about a block and a half away from one that the REIT already owns, called The Georgian. Obviously, once it's completed and we're going to lease up, there'll be some management synergies and efficiencies from that. If this was a standalone acquisition, we probably wouldn't have done it, Jon. Again, it's not typically We'll buy something and do the light retrofit. This here, based on the budget John was talking about, we're talking over CAD 40,000 a unit average that we're putting into this. This isn't the typical thing that we would do.
Okay. Will it be targeting students or faculty or anybody, John?
We actually have several grad students and faculty of Tulane at The Georgian. In fact, there were several that recently moved into The Georgian, prior to the acquisition of this, from this building. We will have a good mix there, but we're going to be targeting young professionals. These are larger units. The Georgian, on average, is right around, I believe it's 750 sq ft. There's 69 studios there that are about 500 sq ft, and these are much larger units, over 1,000 sq ft per unit. 9-foot ceilings, washers and dryers in the unit. It'll be a nice package.
Okay. You'll be looking for sort of CAD 2,000 average rent?
Right.
I got 1,000 sq ft. Okay. Turning to the Ontario portfolio.
What sort of lifts are you guys getting on turnover right now?
Sanjeev?
Yeah. We're getting close to CAD 1, CAD 1.50. Totally depends on which market the buildings are. We're trying to push it up as much as we can in the different markets.
Sorry, CAD 1, CAD 1.50? Is that-
How much lift are we getting?
Lift in percentage?
Yeah.
Yeah. It'll be close to, let's say, up to 1%, on the rent to 1.5%, 2.46% is the rent that we are achieving. I would say around 2%, 2.46% as far as the average monthly rent is concerned.
Right. Now, is that on turnover on empty units where you can charge anything?
On turnover. On turnover units, yes.
Okay. Have you noticed any change in the level of turnover the last couple of years?
It's definitely decreased. The turnover is lower than other years. That's what we are experiencing.
Okay, thanks. I'll turn it back.
Thanks.
There are no further questions at this time. I will turn the call back over to the presenters.
Thanks very much, everybody, for joining us, and we'll speak to you again at the Q2 conference call. Thank you.
This concludes today's conference call. You may now disconnect.