Morguard Corporation (OTC:MRCBF) Q2 2016 Earnings Conference Call August 4, 2016 4:00 PM ET
Robert Wright - VP, Morguard Corporation & CFO, Morguard North American Residential REIT
Paul Miatello - CFO, Morguard Corporation
John Talano - VP, Morguard Corporation
Sanjay Rateja - VP, Operations
Sean McCullough - EVP, Strategy
Dean Wilkinson - CIBC World Markets
Good afternoon. My name is Swansea 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 Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Bob Wright, Chief Financial Officer, you may begin your conference.
Good afternoon. We have here today besides myself, John Talano, Sanjay Rateja, Chris Newman, Paul Miatello. Unfortunately, Mr. Sahi was unable to attend the call. We'll proceed. As is our custom, we will provide comments from the weak financial position and performance, then we will open the call for questions.
In terms of our financial position, we completed the second quarter of 2016 with assets totaling $2.15 billion compared to $2.16 billion in 2015, mainly the result of the strengthening Canadian dollar. Our portfolio by value is now 57% located in the United States. Given this level of exposure, the foreign exchange rates during the first half of 2006 was a significant contributor to the declining asset value by approximately $85 million. Offsetting this FX decline was the Q1 acquisition of $160 [ph].
To replenish the second quarter with $21 million of cash and non-foreseeable for Morguard Corporation. Morguard and the REIT have a $100 million revolving credit facility with the REIT has the ability to use for acquisitions and general corporate purposes. The REIT has good liquidity to take advantage of the acquisition opportunities as they arrive. The REIT completed the second quarter of 2016 with $900 million of long-term debt obligations.
During the quarter the REIT completed the refinancing of their property in Georgia for $25 million against the maturing balance of $20 million as an interest of 3.67%. There is $217 million of mortgage debt maturing in 2017 with a weighted average interest of 4.6%; approximately $164 million of these mortgages mature early in 2017. The REIT expects to refinance these mortgages during the second half of 2016 since the opportunity for interest called down based on prevailing rates.
The REITs total debt to grow to book value has increased slightly from 55% to 56% and our weighted average interest rate is at 3.7%, down from 3.8% at Q4 2015. MRG has the nab of $18.04 per unit as at June 30, 2016 compared to a market price of around $13, still reflecting a significant melt down in unit price.
Adjusted NOI increased by 11% or $2.8 million for the three months ended June 30, 2016, compared to Q2 of '15. This increase includes 0.7 of adjusted NOI generated from the Chappell acquisition and $0.8 million adjusted NOI for the Monterra acquisition. Both of these acquisitions closed subsequent to Q2 2015. Adjusted NOI excluding the two acquisitions increased by $1.3 million.
Interest expense increased by $1.3 million compared to Q2 of 2015. This increase is mainly due to the impact of foreign exchange fluctuations and financings of our two acquisitions. Trust expenses incurred -- increased by 0.5 during three months ended June 2016 compared to 2015. This increase is mainly due to the increase in asset management fees and distribution. Our direct result of improved operating performance and an increase in gross booked value of the income producing properties.
The REIT performance has translated into basic FFO of $13.9 million generated for the three months ended June 30, 2016, an increase of $1.1 million or $8.4 million to 2015.
On a per unit basis, FFO of $0.30 per unit for the three months ended June 30, 2016, maintained a record high since IPO achievement of Q1 of 2016 and 7.1% as compared to $0.28 per unit in 2015. Basic FFO was $0.24 per unit for the three months ended June 30, 2016 of 14.3% increase compared to 21% for unit generated in the same period in 2015.
During Q2 2016, as we continue to pay our monthly distribution to unit holders of $0.05. This level of distribution translates into FFO payout ratio for 2016 as 50.2% lower when compared to payout ratios in Q2 of 2015 which was 54.5%. The REIT continues to reduce its payout ratio each to each year since the 2012 IPO and provides a very well covered distribution.
Operations; operationally the REIT has had a successful quarter with average month rents in Canada increasing to $1,279. This reflects the quality of our Canadian portfolio that translates into an overall 1.7% increase in rent levels over 2015. With the U.S. average monthly rents on the same property basis excluding Monterra, increase 4.1%, having a month rent of $1,000 even U.S. per suit per month at the end of Q2 of 2016 compared to $961 U.S. at the end of Q2 of 2015. The reinsurance experienced rent growth with smaller markets like Alabama, and North Carolina, experiencing a little over 2% growth at the end as compared to rent growth of about 6% in the REIT stronger market such as Florida and Colorado.
The U.S. portfolio has had an overall increase in vacancy compared to the prior year; however, occupancy has improved since last quarter. As at June 30, 2016, U.S. occupancy was 93.3%, lower than 94.2% a year early. A decrease in occupancy is due to current economic conditions, the REIT focus of having rate growth as a result higher than normal turnover during 2016. The REIT continues to report strong in Canada finishing with 99.1%, up from 98.4% a year earlier.
I will now turn the call back over to the moderator, who will open the lines for questions.
[Operator Instructions] And our first question comes from the line of Dean Wilkinson from CIBC World Markets. Your line is now open.
Thanks, good afternoon everyone. Just a couple of questions around the U.S. portfolio; in terms of the margin, the NOI margin there -- it seems like it slipped a bit year-over-year. Has that been driven predominantly by occupancy in Louisiana or have there been something like a cost creep or something that's coming in the operating side?
Sean, would you like to respond?
Sure. You hit the nail on the head. The increase generally was from the turn cost associated with occupancy. So really we've been selling up in Q2 considerably but with those new move in's, of course had those additional costs. And that also was caused by rent growth. So we have been pushing rents aggressively which increased those turns a little bit but now the REIT in general occupancy is up even further. So we're stabilizing and we should expect those costs to come down over the next half of the year.
Okay, great. And similarly in the Canadian portfolio, it seems like there was a uptick up in margins coming from -- I guess that's lower RNM cost. Was that just catching upto some stuff that you already spent or is that more of a sustainable level going forward as well?
Yes, I'd like to answer to that. That's predominantly strategic spending and marketing dollars and finding some efficiencies in prepared maintenance and negotiating us some new contracts is what leveraged on better NOI margin this quarter.
Okay, so that if there was a contraction that we can assume that's going to be the case going forward as well then?
Perfect. And then just a clarification, the fair value adjustment on the Canadian assets, looks like it was up $5.7 million in the quarter although it's down $8 million on the year, can you reconcile this kind of what change or what drove those differences through the plusses and the minuses?
Currency was the primary impact.
For the Canadian ones?
Yes, I think we just had the movements in the underwritten net operating income which is kind of move things one way, obviously nothing to do with cap rates, everything is pretty stable on cap rates.
Right, that would be the only moving factor. Okay, that's all I had. Thanks guys, appreciate it.
[Operator Instructions] And there are no further questions at this time.
I guess we're done then. Thank you very much.
This concludes today's conference call. You may now disconnect.
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