Morguard North American Residential REIT (TSX: MRG.UN) reported its financial performance for the second quarter of 2024, noting an increase in total assets to $4.4 billion, up from $4.1 billion at the end of 2023. Despite a decrease in net income to $50.6 million from the previous year's $87.5 million, attributed mainly to noncash items, the REIT saw a slight increase in net operating income.
Average monthly rent rose in both Canada and the U.S., with occupancy rates remaining high in Canada and experiencing a slight decrease in the U.S. The REIT is actively pursuing acquisition opportunities, focusing on light value-add assets in major urban centers across North America.
Key Takeaways
- Total assets increased to $4.4 billion, up from $4.1 billion at the end of the previous year.
- Cash on hand stood at $127.8 million, with an additional $100 million available under a revolving credit facility.
- Financing completed for three Canadian properties totaling $209.6 million, with an average interest rate of 4.64% and a term of 10.5 years.
- Net income decreased to $50.6 million, primarily due to noncash items, from $87.5 million in the previous year.
- Net operating income saw a 2.2% increase, rising by $1.2 million from the previous year.
- Average monthly rent in Canada rose by 6.1% to $1,730, and in the U.S. by 2.6% to $1,896.
- Occupancy rates held at 98% in Canada but dropped to 93.3% in the U.S.
- Funds from operations (FFO) decreased by 4.3% to $22.7 million.
- The REIT is keen on acquiring light value-add assets in the U.S. and Canada, with a focus on major urban centers.
Company Outlook
- The REIT is actively seeking acquisition opportunities in major urban centers of the U.S. and Canada.
- Focused on light value-add assets, avoiding deep value-add investments.
- Anticipates continued growth in renewal rental spreads, averaging a 2.8% increase year-over-year.
Bearish Highlights
- Net income saw a significant decrease from the previous year, mainly due to noncash items.
- FFO also experienced a decline of 4.3% compared to the previous year.
- U.S. occupancy rates have decreased to 93.3%.
Bullish Highlights
- Assets and net operating income have increased.
- Rental income has grown in both the U.S. and Canada, with Canada seeing a 6.1% increase and the U.S. 2.6%.
- The REIT has a healthy liquidity position with cash on hand and available credit.
Misses
- The REIT's net income and FFO have both seen reductions in the second quarter.
Q&A Highlights
- The company is seeing good pricing opportunities for acquisitions, particularly in the U.S. market, with cap rates favorable for buyers.
- In Chicago, deals are trading at around $400,000 per door, indicating strong market conditions.
- Renewal rental spreads are on the rise, with an average increase of about 2.8% year-over-year.
- The company is being cautious in its approach to rent increases to avoid pricing tenants out of the market.
- The market is viewed as normalizing, and the company is optimistic about the upcoming Q3 discussions.
In summary, Morguard North American Residential REIT is navigating a mixed financial landscape with strategic acquisitions and careful management of its rental portfolio. The REIT remains well-positioned to leverage opportunities in the North American real estate market, with a clear focus on value-add assets and a cautious approach to rent escalation.
Full transcript - None (MNARF) Q2 2024:
Operator: Good afternoon, ladies and gentlemen, and welcome to the Morguard North American Residential REIT 2024 Second Quarter Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, August 1, 2024. I would now like to turn the conference over to Mr. Paul Miatello. Thank you. Please go ahead.
Paul Miatello: Hi. Good afternoon, and thank you, everybody, for joining us for our second quarter results conference call. This is Paul Miatello speaking. We've got the whole management team here. So I'll just do a very quick roll call. We've got Chris Newman, Chief Financial Officer. We've got Ruth Grable, Assistant Vice President, Canadian Operations; Beverly Flynn, General Counsel, Secretary; Rai Sahi, Chief Executive Officer; Angela Sahi, Executive Vice President, Canadian Operations; and John Talano, Senior Vice President. U.S. operations. So with that quick set of introductions, I'll ask Chris Newman to make some prepared comments, and then we'll turn it over for a question-and-answer period. Chris, over to you. Thank you.
Chris Newman: Thank you, Paul. As is customary, I will provide comments on the REIT's financial position and performance. In terms of our financial position, the REIT completed the second quarter of 2024 with total assets amounting to $4.4 billion, higher compared to $4.1 billion as at December 31, 2023. This was due to fair value increases on the REIT's income-producing properties. Foreign exchange rate fluctuations and an increase in cash. The REIT finished the second quarter with approximately $127.8 million of cash on hand and $100 million available under the REIT's revolving credit facility with Morguard Corporation. During the second quarter of 2024, the REIT completed the financing of 3 Canadian properties for aggregate proceeds of $209.6 million at an average -- weighted average interest rate of 4.64%. And for terms of 10.5 years. The maturity mortgages amounted to $91.4 million, had a weighted average interest rate of 3.36%, resulting in net proceeds of $112.8 million after financing costs. The REIT completed the second quarter with $1.6 billion of long-term debt obligations. And as at June 30, 2024, the REIT's mortgages payable had an overall weighted average term to maturity of 5.4 years, an increase from 4.9 years at December 31, 2023, and the weighted average interest rate increased to 3.87% from 3.72%, at December 31, 2023. REIT's debt to gross book value ratio was 39.3% at June 30, 2024, an increase compared to 38.7% at December 31, 2023. And during 2024, the REIT continued to be active under its NCIB repurchasing approximately 520,000 units at an average unit price of $15.98. The REIT's IFRS net asset value per unit is $40.58, making the NCIB plan and appealing use of capital. And turning to the statement of income. Net income was $50.6 million for the second quarter compared to $87.5 million in 2023. The $36.9 million decrease in net income was primarily to the following noncash items, a decrease in fair value gain on real estate properties of $43.6 million, which was partially offset by a decrease in deferred income taxes of $7.9 million. IFRS net operating income was $54.6 million for the second quarter of 2024, an increase of $1.2 million or 2.2% compared to 2023. The change in foreign exchange rate increased NOI by $0.5 million of the overall variance to last year. On the same-property proportionate basis, NOI in Canada increased by $1.2 million or 7.5%. Mainly due to AMR growth net of higher vacancy, partially offset by an increase in operating expenses. NOI in the U.S. decreased by USD 0.4 million or 1.8%, and from an increase in operating expenses, partially offset by AMR growth net of higher vacancy and the change in foreign exchange increased same-property proportionate NOI by $0.4 million. Interest expense increased by $1.1 million for the second quarter of 2024 compared to 2023, primarily due to an increase in interest on mortgages of $1.2 million from higher principal and higher interest rates on the completion of the REIT's refinancings. The REIT's second quarter performance translated into basic FFO of $22.7 million, a decrease of $1 million or 4.3% when compared to 2023. And on a per unit basis, FFO was $0.41 per unit for the 3 months ended June 30, 2024, a decrease of $0.01 or 2.4% compared to $0.42 per unit in 2023. The decrease in FFO per unit was due to the following: on same-property proportionate basis in local currency an increase in interest expense, partially offset by a decrease in trust expenses and an increase in NOI at an overall $0.01 negative impact. An increase in current income tax at the REIT's U.S. subsidiaries had 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 of 44.6% for the 3 months ended June 30, 2024, compared to 42.5% in 2023, represents a very conservative level, which allows for significant cash retention. Operationally, the REIT's average monthly rent in Canada increased to $1,730 at June 30, 2024, a 6.1% increase compared to 2023, reflecting the quality of our Canadian portfolio. And during the second quarter, the Canadian portfolio turned over 4.6% of total suites and achieved AMR growth on suite turnover of 26.3%. While in the U.S., AMR increased by 2.6% compared to 2023, having an average monthly rent of USD 1,896 at the end of the second quarter. The REIT's occupancy in Canada finished the second quarter of 2024 at 98% compared to 98.4% at June 30, 2023. Rental market conditions remain strong and stable as housing demand continues to outdistance supply and has an elevated level of immigration and a high interest rate environment discourage tenants from homeownership. Occupancy in the U.S. of 93.3% at June 30, 2024, was lower compared to 95.3% at June 30, 2023. Although turnover is higher during the summer. Management expects occupancies to be stable moving through the busy summer at leasing season. And during the 6 months ended June 30, 2024. The REIT's total CapEx amounted to $17.4 million. That included revenue enhancing and suite improvements, exterior building projects, common area, garage renovations, 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 up the floor for questions.
Operator: [Operator Instructions] Your first question comes from the line of Jonathan Kelcher from TD (TSX:TD) Cowen.
Jonathan Kelcher: Thanks. I guess the first question is just really on the operations in the U.S. market at 93%. And I guess you're expecting it to say, stay that way over the summer. When do you think occupancy starts to improve in the U.S. back to sort of the 95%, 96% level?
Chris Newman: John, can you discuss that option?
John Talano: Sure, sure. I would say we've definitely seen more turnover this year than we have over the last several. We enjoyed some really aggressive rental growth over really the last 2 years, but double-digit growth. And we are today at about 93% occupied and 95% leased. But again, this is the busiest season when folks really go back to school, which is starting now is when it normally slows down a bit. So between now in the end of August, we should see our various markets stabilize. And then, of course, going into winter, we slow down quite a bit up north. And I've discussed it before, but we do use management software that we reduce the amount of turnover we have, over the winter months, especially in the northern markets to make sure we can maintain higher occupancies through the winter?
Jonathan Kelcher: Okay. Do you think like there's been a lot of new supply in a lot of markets. Do you think you're like we're through the worst of that? Or is there more like when does that sort of taper out?
John Talano: Yes. I think we've had some pressure in Dallas specifically in Tampa. And that has subsided a bit. I would say in our markets, we're generally in more mature areas. So a lot of the supply you're seeing is high-rise in very urban areas. Let's say, in South Florida in Fort Lauderdale as an example. But we're not there. So most of our markets, I would say, are generally more mature. But in the South, in general, I think there's definitely been in more supply. Our assets in Chicago we're really enjoying some very high occupancies there right now because there was very limited supply that built. But I think for us, we've really seen in Dallas, the economy slowdown there a bit, thanks to the Fed. I think that's definitely working. So we had some -- some patriots that we're working in Dallas that went back home or left the country and we're backfilling now with folks that are in and around that market.
Jonathan Kelcher: Okay. Switching gears. You guys, obviously, after doing the mortgage refinancings have lots of cash on the balance sheet. Maybe give your outlook on acquisitions, where you're targeting where you're looking, Canada versus the U.S.
Paul Miatello: Yes, John, it's Paul here. Yes, I mean we're looking definitely both sides of the border. We're looking within our footprint and looking to expand the footprint a little bit. Interestingly, we're seeing some decent buying opportunities in some of the major urban centers. So we're scrubbing opportunities on that as well, but also seeing decent pricing -- more so in the U.S., Canada is still somewhat tight, in terms of transaction market. We've seen more volume, certainly on the Canadian side of border. For opportunities, but we're seeing better pricing, better opportunity, better pricing per door and better opportunities to buy below replacement costs -- in U.S.. So all that said, we're not giving any specific guidance on when we might deploy that capital, but we're actively looking at opportunities.
Jonathan Kelcher: Okay. And when you say major urban centers, is that U.S. or Canada or both?
Paul Miatello: Both, I would say.
Jonathan Kelcher: Okay. And then what type of asset would you target, would like more value add versus newer assets?
Paul Miatello: I mean we're traditionally -- this REIT hasn't been traditionally sort of the deep value-add kind of buyer. We think we've got really good strong, skill sets in terms of buying an asset and being able to increase cash flow, increase rents, use our management platform. So yes, I mean, generally, it's not heavy value add, but it's more light value-add that we're looking for.
Operator: And your next question comes from the line of Dean Wilkinson from CIBC (TSX:CM).
Dean Wilkinson: Thanks. Maybe I'll just follow along the lines of Mr. Kelcher's question there. On that theoretical acquisition capacity that you've got, I guess, with the units trading at an implied gap rate close to 8, is still the best source of capital, the NCIB. And do you find that you're just limited by the daily volume that you can go out into the market and purchase?
Paul Miatello: Yes. The daily volume limitation that ceiling is definitely a restriction. We get the exemption for one Block Trade per calendar week. So we've got our hook in the water looking for those Block Trades. But yes, definitely, we're somewhat limited on the buyback. And yes, I don't disagree with you buying back units is probably the best use of cash right now. But again, we're somewhat limited.
Dean Wilkinson: Right. Could you do a substantial issuer bid? Or do you think that being able to get that stock out of the people's hands, given the discount would just -- it probably wouldn't get the take up?
Paul Miatello: Yes. I mean there's always a bit of a balance in terms of exactly how much you want to buy back and being able to deploy some of that capital into hard assets and some giving liquidity to the unitholders. So I mean that's something that we analyze. I can give any specific guidance on it, but it's something that we look at continuously.
Operator: [Operator Instructions] Your next question comes from the line of Jimmy Shan from RBC (TSX:RY) Capital Markets.
Jimmy Shan: Yes, when we talk about the acquisitions, you're seeing better pricing in the U.S. and Canada, what -- like can you give us a sense of what are those better pricing in terms of cap rates or price per door? And then what is your hurdle rate look like now in the context of today's debt environment?
Paul Miatello: I mean in terms of pricing, you're seeing anything in the U.S. You're seeing really good quality assets in good markets. And again, it's all relative, right, depending on the asset, depending on the market, but you've seen good stuff in the high 4s and all the way through the 5 cap range. And these are in markets again that we look at that we're confident we can raise rents in -- we're seeing some deals trade in Chicago and other larger centers around $400,000 a door, a little under $400,000 a door. So relatively speaking, for the rent levels you can achieve there, we're seeing good pricing. Everything -- and again, Canada is a little bit all over the map depending on the range, depending on the market, but price here. So we're just continuing to kick tires on both sides of the border.
Jimmy Shan: Right. In Canada, those cap rates would be probably in that range, right, except with lower cost of debt? And just kind of like what -- I understand the price per door is lower in the U.S. I'm just kind of curious as to, why you wouldn't be looking at Canada today given where cap rates are given where cost of debt are and given the growth profile, I'm just kind of curious as to how you balance the 2 markets.
Paul Miatello: Yes. I mean, yes, well, yes, I think you characterized it as we're not looking in Canada. I mean we definitely are. I mean the deals that we find interesting are typically around 50 to 100 bps lower on cap rate than they are in the U.S., right? So we just -- and obviously, financing is less expensive in Canada. So we're just playing that off one against the other. But we are seeing opportunities on both sides.
Jimmy Shan: Okay. And then a quick one on the U.S. operations. What would the newly spreads and renewal rental spreads look like for the portfolio today?
John Talano: The -- you said the new lease spreads versus what was that last piece?
Jimmy Shan: Renewal.
John Talano: Right. Well, we are seeing on renewals, we are seeing an increase in rents and that roughly year-over-year. I think we talked about it earlier, is about 2.8%. Right now on our new leases, again, it's wildly different depending on the market. But in areas like Dallas, right now, we're having some occupancy issues. But there, we had -- we were basically flat -- but in Chicago, we're seeing rates in upwards of 5% or 6% still. So it's very dependent on the market. We were very conservative in terms of raising rents aggressively over time. So during COVID, our rates did go up, but we were cognizant to make sure that we maintain our existing rental base and don't price people out of the market. So there still is a little room there from a renewal perspective, but it's our busy leasing season now. And there's certainly a lot more pressure than there was last year. But again, we've enjoyed such great increases over the last 2 years that I really think things are normalizing, right? So you have -- you have interest rates and the cost of living expenses and those things going up so aggressively that now I think all of that is definitely normalizing like I mentioned, the Fed's work is absolutely working.
Operator: There are no further questions at this time. I will now hand the call back to Mr. Paul Miatello for any closing remarks.
A - Paul Miatello: Okay. Thank you, everyone, for joining us, and we look forward to speaking to you in Q3. Thank you.
Operator: Thank you. And that concludes our conference for today. Thank you for participating. You may all disconnect.
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