Morguard North American Residential Real Estate Investment Trust

TSX:MRG.UN

Earnings Call Transcript 2024-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the first quarter conference call [Operator's Instructions]This call is being recorded on Thursday, May 2, 2024. I would now like to turn the conference over to Paul Miatello. Please go ahead.

[Paul Miatello, executive]

Thank you, and welcome, everybody, and thanks for joining us for Morguard North American Residential REIT's First Quarter Conference Call. With me today, I will just do a quick roll call of everybody that's here. So we've got Ruth Grable, Assistant Vice President, Canadian Operations; got John Talano, Senior Vice President, U.S. Operations; Beverley Flynn, Senior Vice President, General Counsel; Angela Sahi, Executive Vice President. And so now with that quick introduction, I will turn it over to Mr. Chris Newman, our Chief Financial Officer, who will provide some comments, and then we'll open up the floor for Q&A.

[Christopher Newman, executive]

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 rem completed in the first quarter of 2024 with total assets amounting to $4.2 billion, higher compared to $4.1 million as at December 31, 2023. This is due to a fair value increase in the REIT's income-producing properties and foreign exchange rate fluctuations. Refinished the first quarter with approximately $18 million of cash on hand and $100 million available under the REIT's revolving credit facility in Morguard Corporation. The completed the first quarter with $1.4 billion of long-term debt obligations. And as at March 31, 2024, the REIT's mortgages payable have an overall weighted average term to maturity of 4.6 years, a decrease from 4.9 years at December 31, 2023, and the weighted average interest rate was 3.72%, unchanged from December 31, 2023. The REIT's debt to gross book value ratio was 38% as of March 31, 2024, a decrease compared to 38.7% at December 31, 2023. And during 2024, the REIT continued to be active under its NCIB, repurchasing approximately 145,000 units at an average unit price of $15.73 per unit. The REIT's IFRS net asset value per unit is $39.50, making the NCIB plan and appealing use of capital. Turning to the statement of income. Net income was $24.8 million for the first quarter compared to $34.3 million in 2023. The $9.5 million decrease in net income was primarily due to the following noncash items, a decrease in fair value gain on real estate properties of $14.5 million -- sorry, that was an increase and a -- sorry, a decrease in , which was partially offset by a decrease in deferred income taxes of $7.4 million. IFRS net operating income was $20.6 million for the first quarter of 2024, an increase of $1.3 million or 6.6% compared to 2023, and the change in foreign exchange rate decreased NOI by $0.1 million of the overall variance to last year. And on the same-property proportionate basis, NOI in Canada increased by $1.7 million or 12% and mainly due to AMR growth, net of higher vacancy and a decrease in operating expenses. NOI in the U.S. increased by USD 0.4 million or 2% as AMR growth was mainly offset by higher vacancy and an increase in operating expenses. And the change in foreign exchange rate increased same-property proportionate NOI by $0.1 million. Interest expense increased by $1.4 million for the first quarter of 2024 compared to 2023, primarily due to an increase in interest on mortgages of $1.3 million from higher principal and higher interest rates on the completion of the REIT financing. The REIT's first quarter performance translated into basic FFO of $22.5 million, an increase of $0.6 million or 2.6% when compared to 2023. And on a per unit basis, FFO was $0.41 per unit for the 3 months ended March 31, 2024, an increase of $0.02 or 5.1% compared to $0.39 per unit in 2023. The increase in FFO per unit was due to the following: on a same-property proportionate basis in local currency, an increase in NOI, partially offset by an increase in interest expense and trust expenses had a $0.02 per unit positive impact. The acquisition of Savior had a $0.01 per unit positive impact, an increase in current tax expense at the REIT's U.S. subsidiaries had a $0.01 per unit negative impact, a decrease in other income, primarily from a decrease in interest income on the -- more facility and the decrease in interest earned on restricted cash held as part of a 1031 exchange at a $0.01 per unit negative 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 continued to decline to 45.1% for the 3 months ended December -- March 31, 2024, compared to 2023, a very conservative level, which allows for significant cash retention. Operationally, the REIT's average monthly rent in Canada increased to $1,703 at March 31, 2024, a 5.6% increase compared to 2023, reflecting the quality of our Canadian portfolio. And during the first quarter, the Canadian portfolio turned over 1.6% of total suites and achieved AMR growth on suite turnover of 28.1%. While in the U.S., the AMR increased by 3.6% compared to 2023, having an average monthly rent of USD 1,880 at the end of the first quarter as the REIT continued its strong performance, benefiting from solid market fundamentals across many regions. The REIT's occupancy in Canada finished the first quarter of 2024 at 98.4% compared to 98.6% at March 31, 2023. Rental market conditions remain strong and stable as housing demand continues to outdistance supply and as an elevated level of immigration in a high interest rate environment discourage tenants from homeownership. Occupancy in the U.S. of 94% at March 31, 2024, were lower compared to 95% at March 31, 2023. Management expect occupancies to be stable as we move into the busy spring and summer leasing season. During the 3 months ended March 31, 2024, the REIT's total CapEx amounted to $5.4 million. That included revenue enhancing and suite improvements, exterior building projects, common area, garage renovation, mechanical, plumbing and electrical as well as energy initiative expenditures. At this time, I'll turn the call back over to the moderator to open the floor for questions.

[Operator]

Thank you. [Operator's Instructions]First question Jonathan Kelcher at TD Cowen.

[Jonathan Kelcher, analyst]

First question Chris, is just on the post quarter, you guys entered into agreements to refinance some of the Canadian mortgages. That's obviously going to give you lots of liquidity. What sort of rate are you expecting to get on that?

[Christopher Newman, executive]

Well, we're opening to rate lock fairly soon. So the current rates, we're seeing anywhere from 4.7% to 4.8% depends on which direction they're going. So I would say 4.7% to 4.85 range would be the current estimate.

[Jonathan Kelcher, analyst]

Okay. And then that amount of cash is -- do you expect to -- like are you seeing good acquisition opportunities? Or do you think you increased the NCIB? Where do you think that you think can direct that?

[Christopher Newman, executive]

Yes. I think it could be a combination of a few things. We are kind of looking at Canadian properties a little more as the cap rates have kind of tapered off a little bit. But maybe, Paul, if you want to shed some insight on the acquisition front?

[Paul Miatello, executive]

Yes, John, we'll be looking both sides of the border for sure. We're seeing things be a little more active in the U.S. as well. But -- and as you suggested, the NCIB will likely be a target for some of that capital as well as we still see the buyback as a good use of funds.

[Jonathan Kelcher, analyst]

Okay. And then while it's sitting on your balance sheet, is that the Morguard is it up in the Morguard level in Canada, so it sort of burning Canadian Prime?

[Christopher Newman, executive]

We haven't funded yet, so that there is probably going to be a period where MRG will be sitting with extra cash. We'll obviously look to use and maximize our potential more of our lines to put money there. But at the moment, I don't think there's a place for it, but it only is a few months until we start using up some cash on our capital and in...

[Operator]

Thank you, ladies and gentlemen. [Operator's Instructions]There are no further questions. You may proceed with closing comments.

[Paul Miatello, executive]

Well, thanks, everybody, for joining us, and we look forward to speaking to you next quarter. Thank you.

[Operator]

Ladies and gentlemen, this concludes your conference for today. We thank you for participating, and we ask that you please disconnect your lines.