Good afternoon, ladies and gentlemen, and welcome to the Morguard North American Residential REIT 2025 Third-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, October 30, 2025. I would now like to turn the conference over to Paul Miatello, Senior Vice President. Please go ahead.
Hi, everybody, and good afternoon. Thank you for joining us for our third-quarter results conference call. I'll just do a quick roll call. With me in the room, we have Ruth Grabel, Vice President, Canadian Operations, Angela Sahi, Senior Vice President, and Beverley Flynn, General Counsel and Senior Vice President. On the phone, we have John Talano, Senior Vice President, U.S. Operations, and we also have Chris Newman, our Chief Financial Officer. With that, a quick set of introductions, I'll turn it over to Chris to make some prepared remarks, and then we'll open it up for a Q&A.
Okay. 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 third quarter of 2025 with total assets amounting to $4.6 billion, unchanged from December 31, 2024, as a fair value increase on the REIT's income-producing properties was offset by a decrease due to the change in U.S. dollar exchange rate. The REIT finished the third quarter with approximately $77.5 million of cash on hand and $74.5 million advanced to Morguard Corporation. During 2025, the REIT continued to be active under its NCIB, repurchasing approximately 1.3 million units at an average unit price of $17.40. The REIT's IFRS net asset value per unit as of September 30, 2025, is $44.16, making the NCIB plan an appealing use of capital.
In addition, the REIT is pleased to announce an increase in its annual cash distribution of $0.03 per unit, an increase of 3.95%. This will bring the distributions to $0.79 per unit on an annualized basis from the current level of $0.76 per unit. As of September 30, 2025, the REIT's mortgages 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 4.08% from 3.88% at December 31, 2024. The REIT's debt-to-gross-book-value ratio was 39.5% as of September 30, 2025, a slight decrease compared to 39.7% at December 31, 2024. Turning to the statement of income, net income was $12.5 million for the three months ended September 30, 2025, compared to a net loss of $18.8 million in 2024.
The $31.3 million increase in net income was primarily due to an increase in the fair value gain on Class B LP Units of $67.2 million. A decrease on the deferred income taxes of $3.9 million, partially offset by an increase in fair value loss in real estate properties of $40.6 million. IFRS net operating income was $54.1 million for the three months ended September 30, 2025, an increase of $2.1 million, or 4%, compared to 2024. On a proportionate basis, proportionate NOI for the three months ended September 30, 2025, increased by 2.7% compared to 2024, and comprised of the following. NOI in Canada decreased by $0.3 million, or 1.6%, mainly due to an increase in operating expenses and higher vacancy, partially offset by AMR growth.
NOI in the U.S. i ncreased by $0.9 million, or 4.2%, 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 $0.6 million. Interest expense decreased by $0.5 million for the three months ended September 30, 2025, compared to 2024, primarily due to a higher non-cash fair value gain on the convertible venture's conversion option of $2.4 million, partially offset by an increase in interest on mortgages of $1.6 million from higher principal and interest rates on the completion of the REIT's refinancings. Partially offsetting the additional interest on mortgages was an increase in other income of $0.2 million, primarily from interest income earned on excess cash held or advanced to Morguard Corporation on the credit facility.
The REIT's third-quarter performance translated into basic FFO of $22.3 million, an increase of $0.4 million, or 2% when compared to 2024. On a per-unit basis, FFO for the three months ended September 30, 2025, increased by $0.03 to $0.43 per unit compared to $0.40 per unit in 2024, due to the following, on a proportionate basis, in local currency, an increase in interest expense and trust expense partly offset an increase in NOI and interest income had a net overall impact of $0.01 per unit, negative impact. The change in the foreign exchange rate had a $0.01 per unit positive impact, a decrease in current income tax incurred on the REIT's U.S. subsidiaries had a $0.01 per unit positive impact, and the impact from units repurchased under the REIT's NCIB had a $0.02 per unit positive impact.
The REIT's FFO payout ratio of 44.6% for the three months ended September 30, 2025, represents a very conservative level, which allows for significant cash retention. Operationally, the REIT's average monthly rent in Canada increased to $1,837 as of September 30, 2025, a 4.7% increase compared to 2024, reflecting the quality of our Canadian portfolio. During the period, the Canadian portfolio turned over approximately 8.7% of its suites and achieved AMR growth on suite turnover of 14.3%. Occupancy in Canada finished the third quarter of 2025 at 94.3% compared to 97.8% as of September 30, 2024, and was lower primarily due to increased competition from existing buildings in the area, 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.
While in the U.S., AMR increased by 1.5% compared to 2024, having an average monthly rent of $1,939 at the end of the third quarter. Occupancy in the U.S. of 92.5% as of September 30, 2025, was higher compared to 91.7% as of September 30, 2024, and was predominantly achieved by modest reductions of asking rent and limiting renewal increases over the short term. Moving forward, management is well-positioned for modest AMR growth while maintaining stable occupancy throughout the portfolio. During the nine months ended September 30, 2025, the REIT's total CapEx amounted to $40.3 million. That included revenue-enhancing in-suite and tenant improvements, exterior building projects, garage renovations, common area, mechanical, plumbing, and electrical projects, as well as energy initiative expenditures.
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 star followed by the 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 followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Jonathan Kelcher with TD Cowen. Your line is now open.
Thanks. Good afternoon. First question, I know you talked about the NCIB on a year-to-date basis, but in the quarter [EBITDA], your activity did slow down quite a bit. Am I reading too much into it to think that you guys are getting closer to an acquisition?
I think just to take a step back, over the last three years or since 2023, we've spent $73 million in acquiring, reacquiring 4.3 million units. We're really just taking a pause to provide flexibility. Canadian cash generated here, we pay the distributions, and we have large CapEx outflows at the moment. We do have U.S. source cash sitting in the U.S., so we could bring that over, but it's really just trying to provide flexibility in our options moving forward. I wouldn't take it as a direct signal as a pending acquisition. We're looking at everything to do how to best utilize our capital.
Okay. I guess segueing into acquisitions, I think in the past you've talked about favoring Canada right now over the U.S.. Are you still thinking that way? As you look at opportunities, are you looking more towards newer assets or more value-add type assets?
I can take that, this is Angela. I would say right now we're looking at opportunities on both the U.S. and Canadian side. The U.S. is definitely the newer type of assets would be the focus, but in Canada, it's just a function of the multifamily space here is an older product and would be value-add.
Okay, that is it for me. I'll turn it back. Thanks.
Your next question comes from Alexander Leon with Desjardins Capital Markets. Your line is now open.
Hi, everyone. Thanks for taking my question. I just have one question here on the U.S. portfolio. I'm wondering if you can comment on the sequential dip in occupancy in the quarter and whether or not that's a function of maybe pushing a little harder on rate or more so just kind of the general market conditions. Thanks.
Sure. John, do you mind add on?
Absolutely. I would say we've definitely seen some inelasticity with our rents, especially in the Sun Belt. The good news is that for where we've had to be very moderate with rental increases in the South, we've had some very good success with increasing rents in the North, specifically Chicago and Washington, D.C. Both were getting 4% increases for the quarter, so that was very positive. In the Sun Belt, I would say we are definitely seeing some pressure there, more so specifically at our less affluent properties. I believe that those residents are getting squeezed a little bit. We track our reasons for move-outs, and of course, folks don't necessarily always are genuine with their responses, but we are getting a lot of folks that are moving out of town, job loss, job relocation, those types of things.
We're also seeing a little pressure in that same group with a lot of the construction trades. Development has absolutely slowed in the Sun Belt. Specifically, Florida, there is significant employment in the construction industry, and that has slowed a bit as well. I would say part of it is immigration, right? We have folks that are moving out of areas like Texas and Florida to other locations in the country that they feel might be safer for those folks. I think it's a combination of things. We're doing well. We're 93.7% leased as of today, so the bottom is not falling out by any stretch of the imagination. We're really focused on marketing and leasing. We've been planning for this for several years and have our leasing folks working hard to close and are using every technology to make sure that we get those leases. I hope that answers your question.
Yeah, it was good color. You had referenced Chicago, and I did see Chicago had some of the better AMR growth there, but it was also one of the markets where you saw some of the most sequential decline. I was just kind of thinking about maybe the sustainability of those spreads going forward. If you are kind of getting those at the expense of occupancy, like maybe if there was any change in strategy there or if this was maybe sort of one-off.
I would say it's starting to be seasonal. There are two things going on. One is our rates change based on the length of lease term. We have seen folks hunkering down, not taking short-term leases that are more expensive. Instead, they might take a 12-month or 15-month term, which are less expensive. You're seeing that a little bit. Chicago and Washington, D.C., I would say, are very strong. Chicago, specifically, we are going into the winter months, so there's a slow there. We also work really hard on our lease expiration management. We don't have a lot of leases that are turning over over the next several months, so there won't be a lot of activity. The development pipeline, specifically in our Chicago markets, has dwindled to almost nothing. There is no new inventory, and we expect some good growth going into spring and summer next year for sure.
Okay. That's great color. I'll turn it back. Thank you.
Ladies and gentlemen, as a reminder, should you have a question, please press star one. Your next question comes from Jimmy Shan with RBC Capital Markets. Your line is now open.
Thank you. Just to follow up on the U.S. portfolio, a lot of your larger U.S. peers are talking about seeing more broad-based deceleration or softening of demand late summer and even going into October. Given the comment you just made, is that something that you're seeing as well? Maybe comment on that. I have a question on the occupancy drop in Mississauga as well, whether or not how much of it you think relates to the market conditions that we've spoken about in the past, and how much of it do you think is due to the renovation work you're doing over there.
No problem, Jimmy. John, do you want to just continue on the U.S. and we'll transfer over to Ruth after?
Sure. I would say the pressure most landlords are feeling, we were cognizant of as the increases in market rate. Again, this is mostly Sun Belt, but Texas, Atlanta, Florida for sure. The rents skyrocketed. You were seeing multi double-digit increases for multiple years. We look for a 3x rent to income ratio for our residents, and we were very cognizant not to push those folks out of our apartments. In many cases, especially in Florida, we had lots of folks that saw home prices skyrocketing, and they left their homes, sold them for big numbers, and then moved into our apartments. We knew that was temporary. We were very careful about not overpricing our units for our existing residents. I think from that perspective, we are outperforming our peers. It is certainly, like I said, we are working on every lease.
We are focused on closing, but we are doing well. I would say in those specific markets where folks were really pushing hard with rents early on, we just took a more conservative approach, knowing that this day would come. Hopefully that provides some color.
Yeah, that helps.
Your next question comes from Dean Wilkinson with CIBC. Your line is now open.
Thank you. Good afternoon, everyone. Just one question on the CapEx. Given the elevation that we've seen through 2025, as we look forward to next year, do we think that looks a little more like 2023 or 2024? Would that split be roughly between the U.S. and Canada, or how are you thinking about spend over the next 12 months?
I think it's going to be very similar to the last couple of years. The split, I believe, is near 50/50, coincidentally. I think you'll see a pattern that's very similar to this and last year.
Okay, that includes the lapping of the garage expenses and some of the other exterior envelopes that look like they're maybe a little bit elevated?
Yeah, correct. There are life cycle projects that are kind of up and down every year. It's just this year the focus was last year and next year is garage. The garage continues into next year as well. It's part of next year's CapEx budget at some properties. We pivot to different things we do in the buildings.
Okay, great. That helps. That's all I had. Thanks, guys.
Thank you. Just going back to Jimmy's question, he had a question about Mississauga, the occupancy levels there. I'll just turn it over to Ruth quickly to talk about that.
Yeah. We do have five underground garage projects in various stages. Three will be completed by the end of this year, and two will be ongoing to 2027. The question was, how is that impacting our overall vacancy? It's difficult to kind of quantify right now. As John had indicated, not necessarily know what tenants, why they're leaving when you're asking them. Certainly, the noise levels do kind of impact and result in some tenants leaving. In respect to lease-up, we're finding as well, the buildings aren't easily accessible. Showing the tenants through the building is quite noisy. What I can say is in relation to one that we've completed, we had a significant amount of units that were vacant, and we've leased up like 15 units since completion of that work. That would be telling you again that it's attributed, the vacancy can be attributed to that.
The other thing we're finding as well is just the competition. For the Mississauga City area, we have three new rental buildings that have come online this year. It's quite competitive, plus condo rentals. Saying all that, I mean, we're in a very good position. Our units are quite large in a really nice location. We have a due, as two minutes leave, we do have a significant uplift in rent.
Your next question comes from Jimmy Shan with RBC Capital Markets.
Thank you. I just had to follow up on that. When do you expect the garage work to be completed?
We have two properties that will be completed at the end of this year. One is already completed in August, and one will be at the end of November. One was mid-2026, and the other two, again, mid-2026. One's leaving, going into 2027.
Okay. In terms of the competition from condos and the three new rental buildings, do you have a sense of their lease-up in the new rental buildings? Are they leasing up well, and what's the pace? Is it trending in the right direction, or are they still having to put a lot of incentives to get people in?
They are still putting incentives, but they are leasing because they are matching rents for older products as well. They have the ability to increase rents in subsequent years, so they're able to do that. They are incentive-heavy, two months free rent, up to two months free rent, and free Wi-Fi. From what I can tell, they are leasing, so it's just, yeah, we're still competing against those properties.
Okay. Thank you.
There are no further questions at this time. I will now turn the call over to Chris Newman for closing remarks.
Okay. Thank you, everyone. Thanks for joining. We look forward to speaking with you next quarter.
Ladies and gentlemen, this concludes the conference call for today. We thank you for participating and ask that you please disconnect your lines.