Ladies and gentlemen, and welcome to the Morguard North American Residential REIT 2025 First 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 followed by zero for the operator. This call is being recorded on Thursday, May 1, 2025. I would now like to turn the conference over to Mr. Paul Miatello. Please go ahead.
Thank you very much, and good afternoon, everybody, and welcome to the REIT's first quarter conference call results call, where we're going to review our first quarter results. Just by way of a quick roll call, we've got Angela Sahi here, SVP of Canadian Operations. We've got Ruth Grabel, Assistant Vice President, Canadian Operations. We've got John Tolano, Senior Vice President, U.S. Operations. Of course, with us is also Chris Newman, our Chief Financial Officer. At this point, I'll turn it over to Chris for some comments, and then we'll open it for a Q&A session.
Okay. Thank you, Paul. As is customary, I'll provide comments on the REIT's financial performance. In terms of our financial position, the REIT completed the first quarter of 2025 with total assets amounting to $4.7 billion, higher compared to $4.6 billion as of December 31, 2024, mainly due to a fair value increase on the REIT's income-producing properties. The REIT finished the first quarter with approximately $49 million of cash on hand and $122 million advanced to Morguard Corporation. During the quarter, the REIT completed a refinancing of a property located in Kitchener (Ontario), providing gross mortgage proceeds of $79.4 million at an interest rate of 4.02% and for a term of 10 years. The maturing mortgage had a balance at maturity of $30.8 million, resulting in net proceeds of $48.6 million before financing costs.
During the first quarter of 2025, the REIT continued to be active under its NCIB, repurchasing approximately 585,000 units at an average unit price of $17.34. The REIT's IFRS net asset value per unit at March 31, 2025, is $43.84, making the NCIB plan an appealing use of capital. As of March 31, 2025, the REIT's mortgage payable had an overall weighted average term to maturity of 5.3 years, an increase from 5.2 years at December 31, 2024, and the weighted average interest rate increased to 3.91% from 3.88% at December 31, 2024. The REIT's debt-to-gross book value ratio was 39.9% at March 31, 2025, a slight increase compared to 39.7% at December 31, 2024. Turning to the statement of income, net income was $38.3 million for the three months ended March 31, 2025, compared to $24.8 million in 2024.
The $13.5 million increase in net income was primarily due to the following non-cash items: a decrease in fair value loss on Class D LP units of $16.7 million, a decrease in deferred income tax of $2.2 million, which is partially offset by a lower fair value gain on real estate properties of $4.2 million. IFRS net operating income was $20.8 million for the three months ended March 31, 2025, an increase of $0.2 million, or 1.1% compared to 2024. On a proportionate basis, proportionate NOI for the three months ended March 31, 2025, increased by 4.8% compared to 2024 and was comprised of the following: NOI in Canada increased by $0.4 million, or 2.8%, mainly due to AMR growth, partially offset by an increase in operating expenses and a higher vacancy. NOI in the U.S.
decreased by $0.1 million, or 0.5%, from an increase in operating expenses partly offset by AMR growth and an increase in ancillary revenue. The change in foreign exchange rate increased proportionate NOI by $1.8 million. Interest expense increased by $2.9 million for the three months ended March 31, 2025, compared to 2024, primarily due to an increase in interest on mortgages of $2.7 million from higher principal and interest rates on the completion of the REIT's refinancing. Partially offsetting the additional interest on mortgages was an increase in other income of $1.6 million, primarily from interest income earned on excess cash held or advanced to Morguard Corporation on the credit facility. The REIT's first quarter performance translated into basic FFO of $23.2 million, an increase of $0.7 million, or 3% when compared to 2024.
On a per-unit basis, FFO for the three months ended March 31, 2025, increased by $0.03 - $0.44 per unit compared to $0.41 per unit in 2024 due to the following: on a proportionate basis, in local currency, an increase in interest income and an increase in NOI offset an increase in interest expense and trust expense, having a net nil per unit impact. This included a $0.01 per unit negative impact relating to the vacancy from offline units being renovated at a property located in Florida. The change in foreign exchange rate had a $0.02 per unit positive impact, and the impact from units repurchased under the REIT's NCIB had a $0.01 per unit positive impact. The REIT's FFO payout ratio of 43.7% for the three months ended March 31, 2025, represents a very conservative level, which allows for significant cash retention.
Operationally, the REIT's average monthly rent in Canada increased to $1,801 at March 31, 2025, a 5.8% increase compared to 2024, reflecting the quality of our Canadian portfolio. During the first quarter, the Canadian portfolio turned over approximately 1.7% of its suites and achieved AMR growth on suite turnover of 16.2%. Occupancy in Canada finished the first quarter of 2025 at 96.4% compared to 98.4% at March 31, 2024, and was lower primarily due to increased competition and seasonally slower leasing activity. Management believes market conditions will remain strong and stable as housing demand continues to outdistance supply. While in the U.S., AMR increased by 0.4% compared to 2024, having an average monthly rent of $1,887 at the end of the first quarter. Occupancy in the U.S.
of 95.6% at March 31 was higher compared to 94% at March 31, 2025, as well as a significant improvement from 93.8% at December 31, 2024, and was predominantly achieved by modest reductions of asking rent and limiting renewal increases over the short term. Now that occupancies have stabilized, the REIT can pivot and return to rental growth given strong rental demand. During the three months ended March 31, 2025, the REIT's total CapEx amounted to $7.6 million that included revenue-enhancing in-suite and tenant improvements, garage renovations, exterior building projects, common area, energy initiative expenditures, as well as mechanical, plumbing, and electrical projects. At this time, I'll turn the call back over to the moderator to answer any 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 one on your touchstone phone. You will hear a prompt that your hand has been reached. Should you wish to decline from the following process, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Donovan Culture of TD Cowan. Please go ahead.
Thanks. First question, just probably for John. On the U.S. portfolio, the occupancy is up nicely. I think Chris alluded to AMR, being able to push AMR. How should we think about the cadence of AMR growth going forward the next few quarters?
We are absolutely moving into our busiest leasing season, so we are in a great spot pushing rent. What's actually driven some of our decrease in rental rates that we were working with is a large portion of our residents are going off month-to-month leases, which are generally expensive, and moving to much longer term. Over the last quarter, 22% of our renewals actually went from month-to-month to an average term of 12.9 months. They are definitely hunkering down and picking that best rate that suits them. I would say it's the same thing we're hearing in the news. The cost of homeownership and insurance and all those things are expensive, and interest rates are high. Folks have chosen to go longer term with us.
That's obviously good news for our rental base and our longer-term prospects with renewals and turnover costs and that sort of thing. Moving forward, we're definitely pushing rents. I expect it to be more normal, pre-COVID, 3-5% range depending on market. We are full, and we're right where we want to be, so we're going to be as aggressive as we can.
Okay. Which markets would you say are stronger versus weaker right now?
Chicago, I think we talked about last quarter, has very little new development going on. We are really full in those markets. We expect to see some good numbers there. I would say Dallas is a little soft. It's not bad, but it definitely has been a little soft comparatively. North Carolina has been a little soft as well.
Is Dallas just the sort of remnants of supply coming on?
I believe that's part of it. I think we're seeing uncertainty, our geopolitical environment. I think our base in Dallas is tech-related. I think their positions, they move in and out pretty regularly. Those are 6-month positions or 12-month positions. Those folks, I think, have had a little insecurity in job markets. Our pocket, where the vast majority of our assets are, are in Las Colinas, which is relatively insulated from the development that's going on in Dallas, which is in the outer loop, where we're much more inside the loop, if that makes sense.
Yep. That's helpful. Just switching to the Canadian portfolio, we see lots of headlines on rental softness in Toronto and declining asking rents and higher incentives. Could you maybe give us an idea of what you're seeing in your portfolio on incentives and asking rents and how the spring leasing season has started out for you?
This leasing activity has definitely picked up. It was a tough winter month, a lot of snow, which prohibited people from looking at units. Showings have definitely increased, and so has our leasing. You are right. There has been pressure on market rents, and there is a lot of competition right now. We have had to offer incentives in order to be competitive. We are offering one month free rent, just as I said, to compete with the new product who are offering up to two months free rent. In regards to our... We are still doing quite well. Our AMR has increased by 5.8%, and we anticipate our rental uplift to continue to be between 15%-20%.
Okay. That is helpful. There is just the one Mississauga property that has the garage going on. When do you expect that to sort of be done and occupancy to tick back up there?
We expect that to be done at the end of June. There are some other projects that are coming online on two others for underground restoration, but that's not going to take place until the end of the year. This particular project will be at the end of June, and we anticipate the lease up to begin.
Okay. That's it for me. I'll turn it back. Thanks. Thank you.
Thank you. Your next question comes from Alexander Leon of Hardin Capital Markets. Please go ahead.
Hey, good afternoon, everyone. Maybe just sticking with that property in Mississauga, are you able to quantify the impact that that underground garage renovation had on occupancy in either that property or the Mississauga portfolio?
It's difficult to tell, but our move-outs are higher than they were at the same time last year. The feedback we're getting from a lot of the residents is because of the duration of the underground garage restoration project. This has been a three-year program, and we are finding some tenants are moving out due to that. Again, what we're seeing now is towards the end, and the building looks good, and we're seeing a lot more traffic come to the building.
Okay. Got it. Maybe sticking with the Ontario portfolio, how much rent incentives or how aggressive are you willing to get on maybe softening rents to drive occupancy in that portfolio? Is that something you're considering, or are you still trying to keep that AMR growth high?
Still trying to keep that AMR growth high. We find with that one month, we might offer two months free parking or a, we call it a signing bonus, a little signing bonus, just to keep our rates up. Because of rent controls, it's really difficult to recover rental loss. Right now, we seem to have attracted a lot of people to the building, and leasing activity has increased.
Okay. That's good color. Last one for me, just wondering if there's been any discussions with respect to potentially executing the early repayment of the convertible debenture if that would be possible.
I think something we've looked at, I mean, there's obviously a penalty clause that comes with that early repayment. It is just something that we're evaluating. Obviously, the REIT's in a good position where there is available cash to look at that. We are also thinking about capital allocation in terms of pay down debt, decrease buyback units. Obviously, we just saw the desire to grow and acquire some assets. We are balancing all three of those sort of factors in the decision-making.
Okay. Maybe on what you mentioned there, the desire to acquire assets, is there any changes in the transaction markets that you guys are looking at?
Yeah. Maybe I'll start, and then maybe I'll get Angela to comment. I'll start by saying in the U.S., it's probably a fair characterization to say that we've pumped the brakes a little bit in terms of looking at things. Again, it's all related to the administration, what's happening in the economy, what's happening with bond yields or USTs and interest rates. We're still scanning. We're still underwriting assets in markets we find attractive. Like I said, it's probably a fair comment to say that we've slowed things down in the U.S. until we get a little more clarity on what's going on. Maybe Angela wants to comment on that.
Yeah. Sure. Yeah. I mean, we're always looking at both U.S. and Canada. To Paul's point, I think we are pausing on the U.S. a bit, more because we're also finding a lot more opportunity in Canada. We're seeing that there are sellers that are more willing to put higher-quality assets on the market, and that rate has come up a bit. We are constantly in the process of looking at various communities, I guess you could call it, in the GTA specifically.
Okay. With respect to maybe some of the comments on some of the pressures you guys have seen on the spreads from increased competition from some of the new rentals, would you guys be looking at any new-build products?
To acquire, Alex? Is that the question?
Yeah.
Acquire rentals?
We would look at acquiring new-builds. Yeah. Yeah. Definitely. There is pressure for us, for sure. One thing we did, we did do a deep dive. We did an analysis of the tenants that are moving out, and 70% of those tenants are more than $200 below market, which was an interesting analysis to see. We had not had this kind of movement in the past for the turnover. It typically was people that were at market rent. This was interesting to see. A lot of them, it seems like when we do our surveys of buying homes, they save up enough money. There is obviously, for certain price points on homes, there seems to be some opening up of that as well for the ability to purchase. We are actually also scanning the market and looking at our competition to see.
We do have, obviously, much larger units to market and larger facilities in general with bigger amenity spaces and things like that compared to some of the newer products. There are really just a few buildings in our kind of Mississauga core area which we're competing with. Once those are absorbed, we're pretty confident that we'll just revert back to regular occupancy levels.
Thanks for all the color. I will turn it back.
Thank you. Your next question comes from [Jeshan] of RBC Capital Markets. Please go ahead.
Thanks. Just following up on a few comments you guys made. First, Angela, I think you mentioned cap rates in GTA seem to have bumped up a little bit. Where are cap rates today?
We're seeing like 4.25-4.5.
Canada.
GTA.
GTA. That would be on an asset that has, I guess, if there's a typical mark-to-market rent opportunity, would those be on market rent?
I think that would be on the older product, older existing stock with a mark-to-market opportunity. June, agree, Angela?
Yep. Yep.
Okay. And then on the new product that are competing with your assets, are they mostly condo rentals that are competing? Where are you seeing the most amount of pressure?
We're seeing purposeful rentals.
Purposeful rentals. Would these not be at a much different price point?
They're actually not at a much different price point because we were pushing our rent so high that we were close to that price point.
Okay. Okay. You mentioned a couple of hundred dollar rent, the tenants that are leaving of rents that are well below market. I think you attributed that to the fact that they're maybe buying homes. Could it also be.
Yeah. We're seeing surfacing.
Yeah. Could they also be just leaving the country? Or are you seeing this sort of population growth decline or non-permanent resident leaving the country? Are you seeing any sort of evidence of that happening within the portfolio?
For sure. We're seeing that as well. We'll have to speak to that. We are seeing that, but it's a small percentage. It's not very large at all. There are a few that are leaving because their visa has come up and don't have the work permit any longer. We've seen a handful in the Mississauga portfolio. Yeah. I think immigration in general, it has impacted the demand. Whereas last year, there was that demand-supply issue, and we did have a large number of, I guess, immigrants that were here between students and just the workforce. We've seen a decline in that for sure.
Is it your sense that this is going to be like this or may get worse before it gets better?
I think it's probably, in terms of the immigration piece, it's probably bottomed out. With the new government, with the new prime minister, we're hoping that maybe that'll loosen back up a bit. They've been really strict. We've seen it even with our employees and certain people who come on student visas that've been converted to work permits. They've been impacted, and they've been asked. The government has been pretty strict on asking people to leave the country. It's definitely a surprise in the way things have been handled, but we'll hopefully see that that can change.
Okay. Last question for me on the U.S. side. You talked about conversion of month-to-month to longer term. Was that really tenants trying to time the market bottom, market rent bottom before they lock in the rates? Is that the type of dynamic play here?
No. I think more of it is a hunkering down. I think the uncertainty in our geopolitical environment is really what's driving it and sort of a realization that homeownership is not an option. It is costs, right? They see that interest rates are not coming down. They see insurance rates are not coming down. We believe that they are just putting off their home-buying opportunities for another year.
Okay. Okay. Thank you.
Thank you. As a reminder, if you wish to ask a question, please press star followed by one. Your next question comes from Dean Wilkinson of CIBC. Please go ahead.
Thanks. Maybe this question's for John. John, what's the delta between the month-to-month leases and locking in for 12 months across the assets?
Sure. It absolutely changes. We basically allow our residents to choose their lease term, right? Depending on our exposure, our occupancy, things of that nature, the rates will change. A 12-month lease might not be the least expensive. It could be a 7-month. It could be a 13-month. There is a big delta between the month-to-month to any term, right? Those are the most expensive. The last quarter, the difference was roughly 30% on those particular leases.
Okay. That's quite meaningful. Yeah.
I guess if you would be.
And then.
Go ahead.
Again, that's just for those portions of the renewals, right? Even if the others are pushing up 5%-6%, when you have that 20%, that's significantly less. It has an impact.
Right. And then the view, I guess, is 12 months hence, when that rolls, you're now coming off of the lower base, and then you've got much more of a lift in 2026?
Correct. Correct. Again, we're pushing those rents at that 3%-5% rate. If someone goes from month-to-month to any term, right, there will be a significant reduction just because we price that month-to-month really high because we do not want people generally to take it.
Gotcha. Just maybe coming up closer to home, Angela, the 1800, I'm surprised that it's actually purpose-built that you're running into at that level. I would think that at those levels, it's probably not economic, but who knows what their land basis is. What would the difference say between your in-place and a comparable condo?
1800 is the AMR, right? What we were talking about with the newer market rents, when we're renting, we're more like at $2,400. We're at $2,400. That's what the new product is left. They're on a per sq ft basis. They're higher because they're much smaller units.
That was the second part of the question.
Very comparable. Yeah. Yeah. That's the issue. Yeah.
Yeah. The units might be half as high.
You don't have the laundry in the units. Yeah. Yeah. They are definitely more competitive. They are newer. They have the nicer, beautiful buildings with new amenities, but there are only a couple of them literally in the neighborhood that we are competing with. They are almost across the street.
Right. What would the comparable rent say for a condo type product? I would imagine that it's probably closer to $3,000 a month.
Yeah. It's roughly the same. 3,000.
Roughly the same.
Between 2,400 and 3,000.
Okay. That's likely where.
There's a lot of pressure.
Right. That's likely where the pressure comes, not from maybe so much your assets. Okay. That's all I had. Thanks.
Thank you.
Thank you. There are no further questions at this time. I will now turn the call over to Mr. Paul Miatello. Please continue.
Thank you. Thank you, everybody, for joining us at our Q1 results conference call. We look forward to speaking to you in July. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.