Morguard North American Real Estate Investment Trust (OTC:MNARF) Q1 2020 Earnings Conference Call May 1, 2020 3:00 PM ET
Paul Miatello - Senior Vice President
Rai Sahi - Chairman & Chief Executive Officer
Chris Newman - Chief Financial Officer
Angela Sahi - Vice President, In-Charge of Canadian Operations
John Talano - Vice President In-Charge of U.S. Operations
Conference Call Participants
Yash Sankpal - Laurentian Bank
Lorne Kalmar - TD Securities
Good afternoon ladies and gentlemen and welcome to the Morguard North American Residential Real Estate Investment Trust Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Friday, May 1st, 2020.
I would now like to turn the conference over to Paul Miatello. Please go ahead.
Thank you very much and welcome everybody and thank you for joining our Q1 results conference call. With me -- again I'm Paul Miatello, Senior Vice President of the REIT. With us on the call today we have Rai Sahi, Chairman and CEO of the REIT; Chris Newman, Chief Financial Officer; Angela Sahi Vice President In-Charge of Canadian Operations; and John Talano Vice President In-Charge of U.S. operations.
Let -- on behalf of all the management team, we hope everybody is safe and well both you your families and your colleagues and continue to be so.
So, with that brief introduction I'll now turn it over to Chris Newman, our Chief Financial Officer for a brief overview on the first quarter results. Chris?
Thank you, Paul. As is customary I'll provide comments on the REIT's financial position and performance. In addition I'll provide a brief operational and liquidity update as we continue to focus on our essential service of providing safe homes for our tenants and providing a safe work environment for our employees during this COVID-19 pandemic.
In terms of our financial position, the REIT completed the first quarter of 2020 with total assets amounting to $3.2 billion compared to $3 billion in December 2019. The increase is mainly due to the appreciation of the U.S. dollar since year end.
REIT finished the first quarter of 2020 with $20.8 million of cash on hand and $1.6 million advanced to Morguard Corporation under its $100 million revolving credit facility.
The REIT completed the first quarter of 2020 with $1.4 billion of long-term debt obligations. And at March 31st, 2020, the REIT's overall weighted average term to maturity was 5.4 years, a decrease from 5.6 years at December 31st, 2019.
Our weighted average interest rate increased slightly to 3.49% from 3.48% at December 31st, 2019. And the REIT's debt to gross book value ratio improved slightly to 44% at March 31st, 2020 from 44.1% at December 31st, 2019.
The REIT's IFRS net asset value at just over $27 per unit as at March 31st, 2020 compared to the current market price at a little over $14, reflecting a compelling entry point for investors.
Turning to the statement of income. Net income was $97.2 million for the three months ended March 31st, 2020 compared to $3.7 million over the same period in 2019.
The increase was primarily due to an increase in the fair value on Class B LP units of $108.5 million caused by a $5.10 unit price decrease resulting from the impact the global health crisis has had on our stock market during the first quarter of 2020. This was partially offset by a lower fair value gain on real estate properties relative to the gain recorded during Q1 2019.
Net operating income was $17.3 million for the three months ended March 31st 2020, an increase of $0.5 million or 2.7% compared to 2019 comprising of an increase in same-property NOI of $0.8 million partially offset by a net decrease from acquisitions and disposals of $0.3 million.
Same-property proportionate NOI in Canada increased by $1.1 million or 8.7% and in the U.S. increased by $0.4 million or 2.7% compared to 2019. Canadian same-property proportionate NOI benefited from a property tax refund of $0.5 million and excluding this refund, same-property proportionate NOI in Canada increased by 2.9%.
Interest expense decreased by $5.2 million for the three months ended March 31st, 2020 compared to 2019 primarily due to a non-cash decrease in the fair value on the convertible debentures conversion option.
The REIT's first quarter performance has translated into basic FFO of $18.1 million, an increase of $2.9 million or 18.8% compared to 2019. On a per unit basis, FFO was $0.32 per unit for the three months ended March 31st, 2020, an increase of $0.02 or 6.7% compared to the $0.30 per unit in 2019.
The increase in FFO was due to the following; an increase in same-property NOI partially offset by higher trust expense had a $0.02 per unit positive impact. The successful property tax appeal had a $0.01 per unit positive impact.
And the issuance of units on August 28th 2019, which includes the dilution from additional units offset by interest income earned on proceeds advanced to the Morguard facility, net of the partial use of proceeds on December 9th 2019, to acquire the Morguard at Block 37, had a $0.01 per unit negative impact.
The REIT's FFO payout ratio was 54.3% for the period ended March 31st 2020 a very conservative level, which allows for significant cash retention. Operationally, the REIT had a successful quarter with average monthly rents in Canada, increasing to $1447 or 4.6%, reflecting the quality of our Canadian portfolio, compared to 2019.
During the first quarter, the Canadian portfolio turned over 2.2% of total suites in Canada, and achieved 19.2% AMR growth, on suites turned over. While in the U.S. same-property average monthly rents increased by 3.4%, having an average monthly rent of US$1354, at the end of the first quarter of 2020, when compared to 2019.
The REIT continues to report strong occupancy, while Canada -- with Canada finishing the first quarter of 2020 at 98.8%, compared to 99.3% a year earlier. And same-property occupancy in the U.S. improved to 95.8% at March 31st 2020, compared to 95.3% at March 31st 2019.
During the quarter, the REIT's total CapEx amounted to $6.1 million that included common area projects, exterior building and revenue-enhancing in-suite improvements. In addition, the REIT spent $1.7 million of development capital, at 1643 Josephine Street in New Orleans.
Management expects to complete interior renovations and to commence initial lease-up towards the end of the second quarter of this year. Providing an operational and liquidity update. During March 2020, the outbreak of COVID-19 has resulted in governments enacting emergency measures to combat the spread of the virus.
These measures which include the implementation of travel-bans, self-imposed quarantine periods and social distancing, have caused an economic slowdown and a material disruption of business. Government has reacted with interventions, intended to stabilize economic conditions, the duration and impact of the COVID-19 outbreak is unknown at this time.
It is not possible to reliably estimate the length and severity of these developments and the impact on the REIT's financial performance and financial position. The REIT recognizes the impact COVID-19 has on many of its tenants in North America and its stakeholders and is committed to -- in taking measures to protect the health of its employees, tenants and communities.
In March, Morguard initiated its crisis management plan, with a team mandated to maintain a safe environment for our residents, employees and stakeholders, coordinating efforts across our portfolio, standardizing communications and responding as circumstances demand.
We are actively monitoring the ongoing developments with regards to COVID-19, and are committed to ensuring a healthy and safe environment, adjusting our service model, as necessary. During the first quarter, the Ontario government as well as U.S. regions where the REIT operates, announced temporary measures to pause evictions.
The REIT is committed to working with residents, on a case-by-case basis, on rent deferral arrangements. To provide an update, the REIT's occupancy remains stable in Canada and the U.S. Currently the REIT has collected approximately 95.3% of April rental revenue which is materially in line with historical collection rates.
The REIT has implemented a rent deferral program to our residential tenants who are financially constrained, due to the impact of COVID-19. In addition commencing with April rental payment, the REIT has waived the collection of recent rental increases and late fees for existing tenants, and will suspend the collection of further rental increases during this period of crisis.
Currently, less than 3.5% of tenants have requested deferral payment plans. The REIT has liquidity of $125 million, comprised of $25 million of cash and $100 million available under its revolving credit facility with Morguard Corporation. As well the REIT expects approximately $15 million of additional CMHC insured refinancing proceeds to be funded in May 2020, representing the REIT's only mortgage scheduled to mature in 2020.
In addition, the REIT's $85.5 million convertible debentures do not mature until March 31, 2023. And the REIT has approximately $42.8 million of unencumbered assets. The REIT has also narrowed down the scope of its capital expenditure program to ensure the availability of resources, allocating an amount that enables the REIT to maintain the structural and overall safety of our properties.
I will now turn the call back over to the moderator who will open up the line for questions.
Thank you. [Operator Instructions] Your first question comes from Yash Sankpal from Laurentian Bank. Please go ahead.
Are you seeing any rental pressure on your new leasing?
We could start with -- if you want to start with John in the U.S. to address that question?
Sure. I would say the difficulty over the last 30 days has really been more about traffic than rates. We are still seeing increases but they certainly have slowed as our foot traffic has come to a halt and we're focused now on virtual traffic including virtual tours, as well as setting up no contact socially distant tours as well. So we've really moved to using all of our leasing tools that are technology based.
And Angela, I believe a lot of the similar statements can be said regarding Canada.
Exactly. So we're doing exactly the same in Canada. We're using online leasing tools and socially distancing and allowing people to enter the unit kind of separately without employees or staff around, but we are finding a little bit of a slowdown in terms of people wanting to come in. But I think that some of these new big virtual tours and things like that should help.
Right. So let's say where do you think your rent levels will be by year-end? Do you think they will be higher than what you have right now, or you think there will be a decline based on what you know so far?
I would say it's still early – too early to tell. We have several regions where we can absolutely push rents. In other regions, we have not and it all depends. It's just a -- we have stopped our increases on our renewals temporarily, but we can -- as far as today goes, we could continue to resume with increases based on today, May is really going to be the telling month in terms of how many folks are having difficulties and that will affect occupancy and rate as well. But so far it's been strong.
Okay. And one last question about your occupancy. Based on what you know now and your basic forecasting, do you think your occupancy will be above or below the current occupancy levels by year-end?
Well, I think in Canada it will be relatively stable maybe a little bit lower just because traffic is not picking up because of the self-quarantine. When the businesses open up, we should expect a little bit more traffic into our buildings. So Canada is a little bit easier. And Angela I think you'd probably agree with that.
Yes, I agree with that.
A little more dynamic on the U.S. side. Maybe John you can add some insight on the U.S. side?
Yes. I would say to give you some perspective, our move-outs are actually down 9% when I compare to this time last year and our renewals are also up to 12%. Now, we have a lot more turnover in the U.S. It generally is around 50%, but folks are not moving out as they would. I would suspect that we will see a dip. But based on the information we have today, we're doing really well.
Okay. That’s it from me. Thank you.
Thank you, Yash.
[Operator Instructions] At this time -- we do have a question from Lorne Kalmar from TD Securities. Please go ahead.
Hey, thanks, good afternoon.
Just on the structure of the deferral program, how -- can you give maybe a little more color on that?
Yes. Generally speaking, we're deferring April and May's rent. We're allowing an option to defer 50% of that and to repay over a time period throughout the duration of the year commencing in August.
Okay. And that's for the U.S. and Canada?
John, yes that's in the U.S. as well as same...
Yes. So very similar. Obviously we get folks to pay everything they can upfront. And then we work towards the shortest period. It's good to know. We only have 100 deferrals to date so -- for the U.S. specifically. So, it is not as significant as some other landlords are seeing. So, on a relative basis it's a very small number.
Okay. Perfect. And then I know this is obviously very, very early days, but what's the expectation for May collections to be in line with what you guys achieved in April?
Yes, that's highly dependent on the duration of the economic slowdown and material disruption to businesses as well as the various government assistant programs offered to businesses and our tenants. It's hard to say when some of these -- when the businesses reopen, when that happens? We really can't tell. As of May, it's a little bit too early to comment on it just because it is the first of May. So, we really can't speak too much about what has happened in May so far.
Okay. On that note, I'll turn it back. Thanks so much.
Thank you. There are no further questions at this time. You may proceed.
Okay. Thank you very much. And on behalf of the entire management team, we wish everybody well, stay safe. And hopefully we commence the road back to normalcy and we hope that you'll join us for the Q2 conference call. In the meantime, stay safe. Thanks everybody.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.