Good evening, ladies and gentlemen, and welcome to the Morguard North American Residential REIT 2025 second 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, July 31, 2025. I would now like to turn the conference over to Paul Miatello. Please go ahead.
Thank you very much, and good afternoon, everybody, and thank you for joining us for the REIT's Q2 results conference call. I'll just do a quick roll call before we get going. With us today, we have Angela Sahi, Executive Vice President, John Talano, Senior Vice President, Ruth Grabel, Assistant Vice President, and our Chief Financial Officer, Chris Newman. With those quick introductions, I'll turn it over to Chris for some prepared comments, and then we'll open it up for a Q&A. Chris?
All right, thank you, Paul. As is customary, I'll provide comments on the REIT's financial position and performance. In terms of our financial position, the REIT completed the second quarter of 2025 with total assets amounting to $4.5 billion. This was lower compared to $4.6 billion as of December 31, 2024, mainly due to a decrease in the U.S. dollar exchange rate. The REIT finished the second quarter with approximately $66 million of cash on hand and $92.5 million advanced to Morguard Corporation. During 2025, the REIT continued to be active on U.S. NCIB, repurchasing approximately 1.2 million units at an average unit price of $17.25. The REIT's IFRS net asset value per unit at June 30, 2025, is $43.66, making the NCIB's plan an appealing use of capital.
As of June 30, 2025, the REIT's mortgage payable had an overall weighted average term to maturity of 5.1 years, a decrease from 5.2 years at December 31, 2024, and the weighted average interest rate increased to 3.9% from 3.88% at December 31, 2024. The REIT's debt-to-gross book value ratio was 39.5% at June 30, 2025, a slight decrease compared to 39.7% at December 31, 2024. Turning to the statement of income, net income was $30.1 million for the three months ended June 30, 2025, compared to $50.6 million in 2024. The $20.5 million decrease in net income was primarily due to an increase in fair value loss on the Class B LP Units of $23.6 million. IFRS net operating income was $56.9 million for the three months ended June 30, 2025, an increase of $2.2 million or 4.1% compared to 2024.
On a proportionate basis, proportionate NOI for the three months ended June 30, 2025, increased by 4.2% compared to 2024 and comprised the following: NOI in Canada increased by $0.4 million or 2.5%, mainly due to AMR growth partially offset by an increase in operating expenses and higher vacancy. NOI in the U.S. increased by $0.9 million U.S. dollars or 4%, mainly due to AMR growth, lower vacancy, and an increase in ancillary revenue partially offset by an increase in operating expenses. The change in foreign exchange rate increased proportionate NOI by $0.7 million.
Interest expense increased by $3.4 million for the three months ended June 30, 2025, compared to 2024, primarily due to an increase in interest on mortgages of $2.1 million from higher principal and interest rates on the completion of the REIT's refinancings and an increase in non-cash fair value loss on the convertible to bench risk conversion option. Partially offsetting the additional interest on mortgages was an increase in other income of $1.6 million, primarily from the interest income earned on excess cash held or advanced to Morguard Corporation on the credit facility. The REIT's second quarter performance translated into basic FFO of $24.8 million, an increase of $2.1 million or 9.2% when compared to 2024.
On a per unit basis, FFO for the three months ended June 30, 2025, increased by $0.06 to $0.47 per unit compared to $0.41 per unit in 2024, due to the following: on a proportionate basis, in local currency, an increase in NOI and interest income partly offset an increase in interest expense and trust expense had a net $0.01 per unit positive impact. The change in foreign exchange rate had a $0.02 per unit positive impact. The decrease in current income tax incurred on the REIT's U.S. subsidiaries had a $0.01 per unit positive impact. The impacts from units repurchased under the REIT's NCIB had a $0.02 per unit positive impact. The REIT's FFO payout ratio of 40.3% for the three months ended June 30, 2025, represents a very conservative level, which allowed for significant cash retention.
Operationally, the REIT's average monthly rent in Canada increased to $1,821 at June 30, 2025, a 5.3% increase compared to 2024, reflecting the quality of our Canadian portfolio. During the year, the Canadian portfolio turned over approximately 4.4% of its REITs and achieved AMR growth on free turnover of 16%. Occupancy in Canada finished the second quarter of 2025 at 95.2% compared to 98% at June 30, 2024, and was lower primarily due to increased competition from existing as well as newly built apartment rentals entering the market. Management believes market conditions will remain strong and stable as housing demand continues to outdistance supply. In the U.S., AMR increased by 0.1% compared to 2024, having an average monthly rent of $1,898 at the end of the second quarter. Occupancy in the U.S.
of 94.8% at June 30, 2025, was higher compared to 93.3% at June 30, 2024, and was predominantly achieved by modest rent reduction and limiting renewal increases over the short term. Now that occupancies have stabilized, the REITs can pivot and return to rental growth given strong rental demand. During the six months ended June 30, 2025, the REIT's total cash back amounted to $22.6 million. That included revenue enhancing in-suite and tenant improvements, garage renovations, exterior building projects, common area, energy initiative, and 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. If you have a question, please press star one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star two. If you're using a speaker phone, please lift the handset before pressing any key. One moment, please, for your first question. Your first question comes from Jonathan Kelcher of TD Cowen. Your line is already open.
Thanks. Good afternoon. First, just a quick modeling question, Chris. For current taxes, they're down a little bit in the quarter. What's the outlook for the balance of the year and into, I guess, the next year as well?
Yeah, during the end of last year and we finalized during the second part of this year, we did a U.S. cost segregation study, which essentially allowed us to take additional depreciation and really change our path a little bit on these net operating losses. We discussed before using our NOLs in the past and kind of gotten to the point where it became pretty low. The current tax was coming into the books. Because of that cost segregation study, the NOLs have been preserved and we actually generated a little bit more. Moving forward, I think we disclosed about $40 million of NOLs. If you look at the historical burn rate annually, and we can kind of dissect that a little bit offline, I think that gives us a little more runway before we have exposed the current tax in full.
Now, when we are using our NOLs, we are limited to 80% application of them. So 20% of the tax, we are not protected by NOLs in the U.S., unless it's the expiring years where we use them all up. I would say for the balance of this year, we are, I guess, sheltered from a significant current tax. We'll still be using our NOL.
Okay, Q2 is a pretty important quarter to think about going forward?
Yeah, I think the year to date and then kind of look at that as a staple for the rest of the year.
Okay, fair enough. Next, on operations in the U.S., 0n, the AMR started to tick up a little bit in Q2, which is good to see. How did that break down between new lease spreads and renewals? If there's any big difference between the Sunbelt and the rest of your portfolio on that.
It is choppy, and it literally depends on the individual property and not the specific market. We are full, right, or effectively full in the U.S. with about 44% turnover. Our goal is to be right around 95%, and we're there. We're 97% leased. We are pushing rents, but it is still a little bit uncertain, a little choppy in terms of locations. I think a lot of this relates to the economy and, quite frankly, our government. We are pushing both. There is still room with our in-place rents, so those are going up a little bit more. When we're full like this, we try to push for those 3% to 5% increases pretty often.
Okay, that's basically I can think about is 3 - 5% on both renewals and new leasing.
I would say.
That's a sustainable portfolio?
I would say on new leasings today, you know, that's where we're going, what we're going for. In the Sunbelt, like last quarter, it was definitely softer. This quarter we've seen some softness in rent specifically, not occupancy, but rent growth specifically in Maryland, you know, tied to D.C. and turmoil in our government. I think it really depends on the individual property. The gains we're seeing now are, you know, AMR is relatively flat. We're still a little bit behind our goals for the year, and we're still off from our peak rents by almost 1%. We will know more next month. We are in our busy leasing seasons all over the country right now, really turning and burning. Like today, we are shooting for at least those 3% gains, but still had the comeback from the peak a little bit.
Okay, that's fair enough. Lastly, just on acquisitions, you guys obviously have lots of liquidity. I think last quarter you said you were pausing or pulling back on looking at U.S. as you were seeing more opportunities in Canada. Maybe give us an update on where you stand on that.
Yeah, John, it's Paul here. I'll start and get Angela to follow on with any additional comments. That strategy or that thesis is probably intact for this quarter and maybe a little bit going forward here. The macro picture is still a little uncertain. We still have a lot of conviction in the U.S., still obviously a very core part of the REIT's book of business. We are sort of tilting the acquisition and the looking for assets more to Canada still. I think that holds now and probably for the next little while. We are seeing a decent amount of deal flow in Canada. We're continuing to kick tires and look at acquisition opportunities across the country in Canada. Angela, anything you want to add to that?
Yeah, I was going to say we haven't, like, you know, the last couple of years, we haven't seen that many opportunities in Canada, and we are seeing some cap rates softening. Expectations are kind of more in line with something that we would have an appetite for moving forward. We are looking at opportunities in Canada and finding them to be potentially more creative than the things that we're seeing in the U.S. currently. As Paul mentioned, we're interested in both markets, but it's nice to see that there are transactions and deals happening in Canada now. I would say that our likelihood of doing a deal in Canada would be higher than the U.S. today.
Okay, that's helpful. I'll circle back and thanks.
Your next question comes from Alex Leon of Desjardins Capital Markets. Your line is already open.
Hey, good afternoon, everyone. I was just wanting to start off maybe in the Canadian portfolio. I'm wondering if you can speak to how you're thinking about managing occupancy there. Maybe specifically, if there's a certain point from an occupancy perspective at which you'd be more willing to give up on rate to preserve occupancy?
Alex, I'll hand it over to Ruth, who can respond.
Our leasing activity just recently has picked up. In respect to lowering rents, we're finding that we do have some units available in Mississauga for the one-bedroom unit, and we're competing with new rental buildings in this particular area. We are, you know, preferred to offer incentives, and that seems to be working for us. Incentives like one-month free rent, basically because our competition for new builds, they're aggressively offering incentives. Right now, our occupancy seems to be increasing. There's maybe on one or two units, we'll look at reducing rates in order to increase our occupancy, but not substantially going forward.
Okay, that's good to hear. Maybe that is a good segue into my next question on the spreads. Last quarter, you guys mentioned like 15% - 20% turnover spreads in Canada. You guys are kind of at the low-ish end of that range right now. I'm wondering if that's still maybe the expectation for the rest of the year and if you guys think maybe you can, if that's going to kind of stay where it is now in that 16% range or if you think you can hit the high end of that range.
Generally writing, you know, this, oh, sorry, Angela.
No, go ahead.
Yeah, definitely. I was going to—
Go ahead, Angela.
Sorry. I was going to say a lot of it depends on which units are turning over. That turnover spread for the market rate unit is going to be a lot lower than the units that are, you know, substantially below market. That was kind of my own comment. It's kind of dependent, but I would assume, you know, historically we've been trending on the higher end. I would say that 16% is likely, although hard to determine which units will turn over.
That's good. Maybe the last one for me, just turning over to the U.S. portfolio. There was a little bit of commentary there after John's question on the same property AMR growth. This quarter did pick up quarter over quarter. I'm just wondering if you guys think we're at the point now where we've reached an inflection, or if it's maybe a little too early to call a trend there.
I would say it's a little too early, but anecdotally, we're not under any pressure at this point, if that makes sense. For several quarters in the past, if you remember looking two quarters back or late last year, we were fighting occupancy and a lot more uncertainty. I would say we're not normal yet, but a lot more normal pre-pandemic, pre-major government changes. It's starting to feel that normal. I will say, ask me that question next quarter, and I'll give you a more solid answer.
Okay, sounds good. I'll turn it back. Thank you.
Your next question comes from Jimmy Shan of RBC Capital Markets. Your line is already open.
Thanks. Chris Newman, just a follow-up on the current tax first. You mentioned there's more runway in terms of using the NOL. For 2026, how do we model that? Is it roughly going to be, I think you had mentioned before, $45 million is kind of the tax payable, I believe. Would it be half of that? How do we model?
It's not an exact science, but you know we do have about $41 million U.S. of NOLs disclosed in our tax notes. You know, we've seen that, and I'm just using high-level numbers, we've seen that decline by about $20 million a year. I could probably take a closer look and give you something more specific, but, yeah, I have to just determine whether this year we start eating into that at that rate or is it next year. If you're looking at 2026, it looks like we have, you know, with our existing portfolio, it looks like we have some cushion and runway.
Okay. The Canadian operations, I think you've mentioned that the occupancy is picking up. Do you feel like we've kind of hit bottom here in terms of occupancy, or is the supply still going to be putting pressure on, especially the Mississauga assets?
I think from what I can see, we have a lot of new rental products right now and condominiums, rentals available. From what I can see from our leasing, our activity is improving and where it was a bit quiet prior months, now we seem to have it picking up. As these units become leased, the new rental buildings, that's really improving our occupancy levels and our leasing that's occurring. It's a positive thing. There's still a need for rentals, especially in Ontario and Toronto where housing pricing continues to be very high.
Are there any sort of adjacent new rentals that are going to be delivered, over and above what's been delivered so far?
Not in the Mississauga areas, not recently. I did take a look at the units under construction and proposed. I don't see it in our particular area where we're competing with our Mississauga City Centre building. There's nothing really on a new rental building where we're now competing with.
I also see you guys had mentioned about doing some grass work there. When I was reading the MD&A, it sounded like there was more than one building that's being, what it's worth. Is that right, or can you provide some clarification on what's going on?
Right. We completed two underground garage projects at two buildings. That's being completed at the end of July and one is at the end of October. We're starting at three other buildings. One is just starting recently, and the other one we'll be finishing off at the end of the year.
Okay. Presumably, that's going to have a bit of impact as well, those three additional ones.
Yes. It will have a bit of an impact. In one of the buildings, there's an impact because of the noise levels. We do provide, you know, quiet units, and also, you know, we're not able to provide parking. That becomes a challenge. There might be some, you know, leasing, you know, but it would be temporary, like leasing restrictions temporarily.
Okay. Okay. Last question, just on acquisitions, emerging security, you know, you talked about seeing higher likelihood of doing a deal in Canada. What is in your buy box? Like, what are you looking for specifically? What type of assets are you targeting? What markets are you looking to enter or expand into?
I think we would look to enter markets where we currently have some management presence, and that could be other offices as well, right? Like, we have a whole commercial team, and we have satellite offices out west too. Really, I think GTA, we've never really seen many opportunities in the GTA for, I would say, for 200, 300 unit plus buildings. Cap rates seem to be going up a little bit, even closer to 5%. I would say GTA, but probably properties with less CapEx involved, and things where we think that you might find some upside opportunities moving forward with the NOI. Probably need to keep the parameters and then obviously the returns to make sure they fit within the Morguard North American Residential REIT portfolio.
Okay, that's good for me. Thank you.
Ladies and gentlemen, as a reminder, if you have a question, please press star one. Your next question comes from Dean Wilkinson of CIBC. Your line is already open.
Thank you, and good afternoon. Just one question for me specific to the Canadian portfolio. Maybe this is Angela. Have you noticed any discernible change in the duration of the tenants that are moving out? Like, is it the older ones? Is it the newer ones? Just trying to get a sense of, has that changed over time and do you expect it to?
I'll start a little bit, then I can turn it over to Ruth, who might have the exact numbers. We've been kind of tracking this data the last couple of quarters to understand that exact dynamic. Previously, over the years, we haven't seen many of the older kind of market below 50% rent tenants move out at all. In the more recent year or so, or six months, we are noticing a little bit of that picking up. Ruth, you have some of that data, maybe you can discuss too?
We do have that around, I mean, it's really equal to the amount of tenants that are leaving for older and new. It's not that great. It depends on the building and the unit type, but yeah, it's just a range.
The question was about trend.
No, there's no obvious, discernible trend, difference in trend from prior years. We have a mix of people who've lived there over 5 years, 10 years, and then there's some of us from the past year or two. There's no really discernible trend.
Okay, great. That's helpful. Thanks.
If there are no further questions at this time, I would hand over the call to Paul Miatello for closing remarks. Please go ahead.
Thank you again, everybody, for joining us for this REIT's Q2 results conference call, and we look forward to speaking to you next quarter. Thank you and have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.