Morguard Real Estate Investment Trust (OTC:MGRUF) Q1 2019 Results Earnings Conference Call May 2, 2019 4:00 PM ET
Paul Miatello – Chief Financial Officer
Chris Newman – Director-Finance
Rai Sahi – Chairman and Chief Executive Officer
Sanjay Ratejay – Vice President-Canada Operations
John Talano – Vice President-U.S. Operations
Conference Call Participants
Lorne Kalmar – TD
Yash Sankpal – Laurentian Bank
Good afternoon, ladies and gentlemen, and welcome to the Morguard Real Estate Investment Trust's First Quarter Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, May 2, 2019. I would now like to turn the conference over to Paul Miatello. Please go ahead.
Thank you very much. And thanks everybody for joining us on our Q1 2019 conference call for Morguard North American Residential REIT. With me today, I have Chris Newman, Chief Financial Officer; Angela Sahi, Senior Vice President; Sanjay Ratejay, Vice President of Operations for Canada; John Talano is on the phone, our Vice President of U.S. Operations; and Rai Sahi, our Chief Executive Officer.
So with that, I will turn the call over to Chris Newman to give us a bit of a results update, and then we'll open the floor for questions.
Great. Thank you, Paul. As is customary, I'll provide comments on the REIT's financial position and performance then open up the floor for questions. In terms of our financial position, the REIT completed the first quarter of 2019 with total assets amounting to $3 billion compared to $3 billion at December 31, 2018.
During and subsequent to the first quarter, the REIT sold five properties located in Louisiana, comprising 843 suites for net proceeds of $27.5 million after the assumption of repayment mortgages payable; the disposition of the five Louisiana properties having an average age of 40 years; all of the sale of the REIT's Alabama properties in July 2017 and is consistent with the management's strategy to dispose of noncore assets and to focus on opportunities to acquire properties located in urban centers and major suburban markets in Canada and the United States.
The REIT finished the first quarter of 2019 with $23 million of cash on hand and $1.6 million owing to Morguard Corporation under its revolving credit facility. The REIT has $100 million credit facility, which can be drawn in either Canadian or U.S. dollars and in which the REIT can use for acquisitions and general corporate purposes. The REIT completed the first quarter of 2019 with $1.1 billion of long-term debt obligations. There was no refinancing activity during the first quarter.
As at March 31, 2019, the REIT's overall weighted average terms of maturity was 5.6 years, a decrease from 5.8 years at December 31, 2018. The REIT's weighted average interest rate also decreased to 3.48 compared to 3.49 over the same period.
The REIT continues to make progress in reducing its overall leverage. The REIT's debt-to-gross book value ratio improved to 46.5% at March 31, 2019, from 47.9% at December 31, 2018.
MRG had an IFRS net asset value of $25.87 per unit as at March 31, 2019, compared to the current market price of about $17.50, still reflecting a compelling entry point for investors.
Turning to the income statement. Net income of $3.7 million for the three months ended March 31, 2019 decreased by $76.7 million compared to $80.4 million in 2018. The decrease was primarily due to an increase in interest expense and noncash changes mainly from a lower fair value gain on real estate properties, a higher fair value loss on the Class B LP units and a higher foreign exchange loss partially offset by a decrease in deferred income taxes compared to 2018.
NOI of $16.8 million for the three months ended March 31, 2019 decreased by $0.03 million, or 1.6% compared to 2018. Same property proportionate NOI in Canada increased by $0.7 million or 5.9% and in the U.S. increased by US$0.4 million or 3.1%, compared to 2018.
Interest expense increased by $2.9 million for the three months ended March 31, 2019, compared to 2018.
Excluding noncash fair value adjustments, interest expense increased by $0.8 million primarily due to the loss on extinguishment of mortgages payable in connection with the disposal of four Louisiana properties of $0.5 million. The REIT's first quarter performance has translated into basic FFO of $16.2 million, an increase of $0.5 million or 3.4% compared to 2018.
On a per unit basis FFO was $0.30 per unit for the three months ended March 31, 2019, an increase of $0.01 or 3.4%, compared to $0.29 in 2018.
The loss on extinguishment of mortgages payable had a $0.01 negative impact, and the change in the foreign exchange rate had a $0.01 positive impact. The REIT's FFO payout ratio is 50.7% for the three months ended March 31, 2019, a very conservative level, which allows for a significant cash retention.
Operationally, the REIT had a successful quarter with AMR in Canada increasing to $13,083, reflecting the quality of our Canadian portfolio and translates into an overall 3.5% increase in rent levels over 2018.
During the quarter, the Canadian portfolio turned over 2.8% of total suites in Canada and achieved 15.4% AMR growth on suites turned over. While in the U.S., same-property AMR increased by 3.1% having an average monthly rent of US$13,006 at the end of the third quarter of 2019 compared to US$1,267 at the end of Q1 2018.
The REIT continues to report strong occupancy, with Canada finishing the first quarter of 2019 at 99.3% compared to 99.2% a year earlier. Same-property occupancy in the U.S. continued to improve over last year. Occupancy increased to 95.3% from 92.6% in 2018.
I’ll turn the call back over to the moderator who will open it for questions.
Thank you. [Operator Instructions] Your first question is from Lorne Kalmar from TD Lorne. Please go ahead.
Hey thanks, good afternoon. Just quickly on the dispositions, were they in line with IFRS?
Yes they were in line with IFRS.
Okay. And then on the New Orleans development, what yield are you guys targeting on that?
We're early in sort of that redevelopment. So I mean we'd be targeting something north of 7.5. But again, we're still sort of early in terms of peeling back walls and things like that. But the target's about 7.5.
Okay, fair enough. I guess you'll never know what you're going to find behind the walls. And then I guess now with the U.S. portfolio margin stabilized at over 95% occupied, are you guys looking to resume acquisition activity in the U.S. at least?
Well this is Rai Sahi. Well, we're obviously always looking to have an acquisition, but we're watching to see what happens. There's nothing that we are in a position to report at this stage. But we are looking mostly in the U.S. We'd look in Canada, but there's nothing available really.
Fair enough. And then just lastly, again, I guess with now the occupancy in U.S. stabilized, do you guys think you can start pushing rental a little more aggressively?
John will replay?
John is on the line?
Yes I’m here. Yes, I would say absolutely we already have. We were really focused on occupancy using our revenue management system over the winter to really push that up, so we're in a great place now. And the intent is to push rents as we're going in the spring for sure.
Okay great. That’s all from me. I’ll turn it back.
Thank you. [Operator Instructions] Your next question is from Yash Sankpal from Laurentian Bank. Yash please go ahead.
Thank you. Good afternoon.
Just on your U.S. portfolio, where do you expect your U.S. occupancy to end by year-end?
John do you want to answer that?
Sure. We're at about our optimum level today, so we're shooting for the 95%, 96% range. We do have a lot of turnover over the summer months. But again, that's usually our opportunity to push some rents as well. But we're about at our optimum levels.
Alright. And your margin in the U.S. portfolio was down year-over-year. So I was wondering what would the margin be if those one-time items were not there? And how should we model your margins going forward?
John do you want to answer that?
Yes I’ll take that too. I would say that we had some significant acquisitions with Coast and Fenestra that when you look back, we're not fully stabilized at that point in 2018. So we were short on staff and had other expenses that actually were lower in general at that point. Our expenses in Q1 2019 were actually pushed up a little bit with some utilities from the polar vortex in our northern cities as well.
So I believe they will stabilize a little bit and move 1 point, 1.5, but they're not going to move too much.
Got it. Okay.
And so you sold your – part of your Louisiana portfolio. Are you planning to sell the entire thing there?
No. I mean, as far as the rest, we've only got a couple of properties left in Louisiana, and we're happy with what we have now. So that's part of the disposition program.
And how do you plan to replenish that income? Is there anything imminent that you guys plan to do or...
Like Rai said a couple of minutes of minutes ago, we're looking – we're kicking tires, but there's nothing to report on at the current time, but we are definitely looking to replace that income, yes.
Alright. That’s it from me. Thank you.
Thank you. [Operator Instructions] There are no further questions at this time. Please proceed.
Okay thanks again everybody, for joining us on the conference call. We look forward to speaking next quarter. Thank you.
Ladies and gentlemen, this concludes your conference call today. We thank you for participating and ask that your please disconnect your lines.