$11.43—Stale · unknown old
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$11.43—Stale · unknown old
Operator: Good afternoon, ladies and gentlemen, and welcome to the Morguard North American Residential REIT 2026 Second Quarter Results Conference Call. This call is being recorded on Thursday, July 30, 2026. I would now like to turn the call over to Chris Newman, CEO. Please go ahead.
Christopher Newman: Thank you. Hi, everyone. Welcome to the Q2 MRG conference call. With me today is Angela Sahi, President and CEO; Paul Miatello, Senior Vice President; Beverley Flynn, Senior Vice President and General Counsel; John Talano, Senior Vice President, U.S. Operations; and Ruth Grabel, Vice President, Canadian Operations. And as is customary, I'll provide some comments on the REIT's financial position and performance. In terms of our financial position, the REIT completed the second quarter with total assets of $4.8 billion, higher compared to $4.5 billion at December 31, 2025. The increase in total assets was due to a change in the U.S. dollar exchange rate, a fair value increase on the REIT's income-producing properties and an increase in cash from refinancings completed during the quarter. During the second quarter, the REIT completed a CMHC insured refinancing of three residential properties located in Ontario and Alberta for an aggregate amount of $162.8 million at a weighted average interest rate of 4.26% and for a weighted average term of 11.2 years. As well, the REIT completed the refinancing of a residential property located in Kennesaw, Georgia in the amount of USD 29.2 million at an interest rate of 5.4% and for a term of five years. In total, the refinancings provided $86.4 million of additional proceeds net of financing costs. The REIT finished the second quarter with approximately $204 million of cash on hand and $100 million available under the REIT's revolving credit facility with Morguard Corporation. Mortgages payable ended the quarter with a weighted average interest rate -- sorry, weighted average term to maturity of 5.2 years, an increase from 4.8 years at December 31, 2025, and a weighted average interest rate of 4.18%, higher compared to 4.07% at December 31, 2025. The REIT's debt to gross book value ratio was 40% at June 30, 2026, higher compared to 39.5% at December 31, 2025. And the REIT's IFRS net asset value per unit at June 30, 2026, was $45.55. And as previously announced, the REIT and Morguard Corporation agreed to jointly invest approximately $1 billion in a Canadian multi-suite residential real estate portfolio currently owned by TD Asset Management. We are actively progressing through due diligence, including determining individual property allocation to the REIT and anticipate closing the transaction during the second half of the year. Turning to the statement of income. Net income was $26.1 million for the three months ended June 30, 2026, compared to $30 million in 2025. The $3.9 million decrease in net income was primarily due to a decrease in NOI and offsetting net noncash changes. IFRS net operating income was $54.2 million for the three months ended June 30, 2026, a decrease of $2.7 million or 4.7% compared to 2025. And on a proportionate basis, proportionate NOI for the three months ended June 30, 2026, decreased by 4.9% compared to 2025 due to the following: NOI in Canada decreased by $1.1 million or 6.6%, mainly due to higher vacancy and a decrease in ancillary revenue, partially offset by an increase in AMR. NOI in the U.S. decreased by USD 0.9 million or 3.9%, mainly due to higher vacancy and an increase in operating expenses, primarily from higher R&M and payroll costs, partly offset by an increase in AMR and ancillary revenue. And the change in foreign exchange rate decreased proportionate NOI by $0.4 million. Interest expense increased by $0.4 million for the three months ended June 30, 2026, compared to 2025, primarily due to an increase in interest on mortgages from higher principal and interest rates on the completion of the REIT's refinancing. The REIT's Q2 2026 performance translated into basic FFO of $22 million, a decrease of $2.7 million or 11.1% compared to 2025. And on a per unit basis, FFO for the three months ended June 30, 2026, decreased by $0.05 to $0.42 per unit compared to $0.47 per unit in 2025 due to the following: On a proportionate basis in local currency, a decrease in NOI mainly from higher vacancy, lower interest income and an increase in interest expense was partly offset by a decrease in trust expense at a net $0.04 per unit negative impact, and the change in foreign exchange rate had a $0.01 per unit negative impact. The REIT's FFO payout ratio of 46.8% for the three months ended June 30, 2026, represents a very conservative level, which allows for significant cash retention. Operationally, the REIT's average monthly rent in Canada increased to $1,885 at June 30, 2026, a 3.5% increase compared to 2025, reflecting the quality of our Canadian portfolio. And during the first half of the year, the Canadian portfolio turned over approximately 5.1% of its suites and achieved AMR growth on suite turnover of 6.8%. Occupancy in Canada finished the second quarter of 2026 at 91.4% compared to 95.2% at June 30, 2025, and was lower primarily due to increased competition from new rental buildings and lower immigration levels. Management believes market conditions will improve as new supply is absorbed and incentive-driven competition moderates. While in the U.S., AMR increased by 1.8% compared to 2025, having an average monthly rent of USD 1,933 at the end of the second quarter. Occupancy in the U.S. of 92.8% at June 30, 2026, was lower compared to 94.8% at June 30, 2025, primarily due to a combination of tenant relocations, affordability and increased home buying. As we move into the busier summer leasing season, management expects occupancies to continue to grow moderately, which should be followed by modest AMR growth. And during the six months ended June 30, 2026, the REIT's total CapEx amounted to $26.5 million. That included revenue-enhancing in-suite and tenant improvements, interior building projects, garage renovations, common area mechanical plumbing and electrical projects as well as energy initiative expenditures. At this time, I'll turn the call back over to the moderator for any questions.
Operator: First question comes from Jonathan Kelcher at TD Cowen.
Jonathan Kelcher: First question, just on the Canadian portfolio occupancy. I think in May, you guys were talking about occupancy starting to improve. It ended up basically flat versus Q1. Can you maybe give us some color on what happened or changed in the market? And then how you see occupancy trending over the back half of this year?
Ruth Grabel: It's Ruth. Right now, we do see that the leasing activity has definitely increased. During the past quarter, we did have some move-outs that are pretty typical for us for our property in Ottawa and Edmonton. It's student-based. We have more move-outs. But now what we're seeing is leasing activity has increased. Our availability today is 92.7%. That doesn't -- that takes into account all the leases, not necessarily all the move-outs as yet. But overall, our team is reporting significant amount of interest in the units. We have a lot of showings per day. And as well, we see some groups coming back from like IT, where we previously had our prospective tenants leasing out of buildings, they're coming back like from Cognizant and Citibank, some other groups as well. So the immigration for specific businesses have opened up, and we're seeing that translated into leases in Mississauga. But we are optimistic going forward and the number of showings and leasing that we've completed and our availability is kind of dictating that.
Jonathan Kelcher: Okay. So if I put that all together, it sounds like maybe Q2 is the low point for occupancy, but not expecting huge gain over the back half.
Ruth Grabel: Yes, I would say that's a fair statement.
Jonathan Kelcher: Okay. And then on the TDAM transaction, I know you're probably not going to give a lot of info here, but what approvals do you need for that to close? Is it just down to CMHC? Or are there any others?
Paul Miatello: Jon, it's Paul here.
Christopher Newman: Go ahead, Paul.
Paul Miatello: Sorry. Yes, it's Paul here. We're just working through what I would characterize as the final stages of due diligence. The vast majority of it is complete and behind us. So beyond just our internal work, yes, it would be down to lender consents and obviously involving CMHC after that. We've commenced the process with CMHC in anticipation of getting to a waiver of conditions. And I can't -- CMHC, it's hard to put a time line on. If that's your next question.
Jonathan Kelcher: No, no.
Paul Miatello: Yes, yes. But yes, CMHC and lender consents would be the only other approval required.
Jonathan Kelcher: Okay. Does this portfolio have -- like do all the assets have a similar amount of leverage? And I'm kind of asking in that the assets that MRG takes on, how do you expect to -- how are you thinking about that in terms of your overall leverage profile?
Paul Miatello: For MRG, the debt that will be taken on won't alter -- not materially anyway, won't alter the leverage levels that are in place today.
Jonathan Kelcher: Okay. So you're roughly 40% now. And then at the end of this, you won't be like you might be 42%, 43%, but not anywhere near 50%. Is that a way to think about it?
Paul Miatello: That's a fair statement, yes.
Operator: Khing Shan at RBC Capital Markets.
Khing Shan: Just a follow-up on the Canadian portfolio. So the 92.7% number you referred to, that sounds like it's committed occupancy. But if you were to include the expected move-outs, what would that number look like?
Ruth Grabel: I don't know as yet what that number would look like. We do have some properties like in Alberta, they don't have to provide notice. But we can say fairly, close to 92%. I'm not quite sure.
Christopher Newman: And probably no better or no worse than where we stand today. It's just the point is there's a lot of leasing activity. There's a lot of momentum. So we also have -- in Ontario, you give two months of notice, but we definitely have two months of work ahead of us to kind of keep finding leases and tenants. So we think the positive momentum will lead to a net gain relative to our position at June 30.
Khing Shan: Okay. And I think in the MD&A, you made reference to rent cuts, et cetera. Can you maybe provide some color on sort of what rental incentives or rent cut that you're doing? And how do we -- how does that -- how do we think about the AMR growth on a go-forward basis for Canada?
Ruth Grabel: So right now, we're offering like one or two months free rent. We might be offering some signing bonus between $500 and $1,000 just so we close a lease, finalize the lease. And on rents, we -- on select units, we have decreased some of our rents on one bedroom, maybe some two bedrooms just to, again, improve our occupancy.
Khing Shan: And more -- again, more looking for trends. Is it -- has those incentives selective rent decrease, have they been pretty well the same over the last three to four months? Or has it gotten worse or better?
Ruth Grabel: So it's trending down. So we're not -- not all units are being offered the two months. So we are seeing a gradual decrease in the amount of incentives that are being offered.
Khing Shan: Okay. Okay. And then turning to the U.S. portfolio. The operating costs did go up quite a bit in Q2. And I was wondering if you could provide some -- what are the main drivers? And what would be your expectation for NOI margin for the U.S. portfolio for the year?
Christopher Newman: John, do you want to answer that? I note that R&M and payroll are main culprits for the increase. You want to add some more information on that, John?
John Talano: Sure. I would say a lot of it, especially R&M was tied to our busy -- going into our busy leasing season. So we turned over 1,400 units over the quarter. So that went up significantly, obviously, when we're churning that many units. But payroll was up as well. And honestly, that is tied to being fully staffed. So part of our decreased payroll costs over the last several years has been the difficulty in maintaining maintenance staff on the properties, but we're in a much better position now. And I would say it's stabilized. I believe that those expenses are high for the quarter, but I don't foresee that those R&M expenses will continue throughout the rest of the year.
Khing Shan: This high turnover, is it some context like 1,400, is that a lot? Is that more than?
John Talano: No, no. And I would say it's actually low for us, but it's a big number. It's just much higher than it was in the previous quarter because we're so busy, if that makes sense. So our turnover in general in the U.S. is between 55% and 60% nationally. We are in the 40% range on an annualized basis.
Khing Shan: Okay. But on a year-over-year basis, it was higher. That's...
John Talano: The way it hit, right, the way the expenses hit in this quarter rather than it being more normalized across Q1 and Q2.
Khing Shan: I see. Okay. Got it. And then lastly, a lot of the debt refinancing that you did, now you've got $200 million of cash. Was that done pretty well towards the end of the quarter? So in other words, the interest expense that we see here in Q2 is probably a good run rate. Is that fair?
Christopher Newman: Yes. A lot of -- all of them happened in the last 15 days of the quarter end. So you'll see the full impact next quarter on the higher interest expense.
Khing Shan: And the cash that you have is sufficient to close on MRG's share -- equity share of the TDAM deal, right?
Christopher Newman: Predominantly, we might have -- based on timing of cash flows, we might have to temporarily leverage the Morguard facility by a small-ish amount, but we don't expect it to be a large component.
Operator: Alex Leon from Desjardins.
Alex Leon: Just want to circle back again on that Canadian portfolio increase in availability. I'm just wondering if there was any change in maybe how aggressive you guys were rolling down rents to pick up some of the demand or if it was more just a function of some of the seasonal move-outs in Ottawa and Edmonton and a stronger demand profile?
Ruth Grabel: A bit of combination of both. So we did reduce our rents on select units, and we're able to get more traction on those units. It's very competitive right now. We have great product in Mississauga, large units, but there has been a considerable amount of new product out there. And so in order to compete, we have lowered our rent. And -- but along with that, we're seeing a lot more prospective tenants looking to make changes and entering into the market. And so we had a lot more leases that took place are taking place right now. It's typically busier at this time of year. So we have been successful in closing a lot of leases right now. So we certainly hope the momentum will continue. There will be some move-outs that we're aware of that kind of are kind of factoring into that availability rate. But we're seeing a lot of positive movement right now and a lot of showings, a lot of leasing. And again, some incentives, we're dialing back some incentives on some units. So it's a combination of a lot of different factors just depending on the building.
Alex Leon: Okay. That's good color. And I'm just wondering, is there a certain price point that you see maybe demand like bifurcating around in terms of maybe elasticity? Like is there a certain -- like is that $2,000 a month typically we've heard from some of your peers where you see lower demand, if it's under $2,000, there's a lot higher demand. Are you seeing that across your portfolio?
Ruth Grabel: Not really. I think it depends on like -- again, we have very large units. And so our price point is, I think our AMR is over $1,800 a month, and our new rents are over $2,000. So they are leasing at those rates, depending if it's a one bedroom, two bedrooms are again, within that range. So it's really -- I can't really say that there's one particular. It depends on the unit. It depends on the building. They are leasing. We have large units in Mississauga, in Toronto as well with our portfolio there. So it really depends on the competition that's around us. If it's new rental product, the incentives that are being offered by our competition, and we keep track of that very carefully. And we're just -- we're basically very competitive with our product. And I think that's what makes the difference with us. We're offering larger units. And we have good management services at the property. So customer service, everything really functions when people are looking to lease a unit.
Alex Leon: Okay. Appreciate that. You also made the comment that incentive use was trending lower. I'm just wondering, would that be consistent across both Canada and the U.S. or different trends there potentially?
Christopher Newman: John will touch on the U.S.
John Talano: Yes, yes, yes. I would say we are on a positive trend for sure. Last quarter, our turnover rates on new leases, new leases only were negative. And this quarter, they're definitely positive. So we've seen a significant swing there. Our occupancy is at 93% today, and we're leased at 95%. So again, I think everything is moving in the right direction. It's certainly not easy street like it was two years ago, but we're in a good place. Our management team, our leasing teams, our marketing teams are working hard for every lease, but that's the business, and we're doing pretty well.
Operator: Thank you. We have no further questions. Back over to Chris Newman for closing comments.
Christopher Newman: And thanks again, everyone, for joining us, and we look forward to speaking again next quarter.
Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.