Morguard North American Residential Real Estate Investment Trust Q2 Earnings Call Highlights

Morguard North American Residential Real Estate Investment Trust TSE: MRG.UN reported lower second-quarter net income and funds from operations as higher vacancy, operating costs and interest expense weighed on results, while management said leasing activity has improved heading into the busier summer season. Net income totaled C$26.1 million for the three months ended June 30, down from C$30 million a year earlier. IFRS net operating income declined 4.7% year over year to C$54.2 million, while basic funds from operations fell 11.1% to C$22 million. FFO per unit decreased to C$0.42 from C$0.47.

Chris Newman, the REIT's CFO, said the decline in FFO reflected lower proportionate NOI, lower interest income and increased interest expense, partly offset by lower trust expenses. Foreign-exchange movements also had a C$0.01-per-unit negative effect.

Canadian occupancy was 91.4% at June 30, compared with 95.2% a year earlier. Newman attributed the decrease primarily to increased competition from newly built rental properties and lower immigration levels. Canadian NOI declined C$1.1 million, or 6.6%, as higher vacancy and lower ancillary revenue more than offset higher average monthly rent. Average monthly rent in Canada rose 3.5% year over year to C$1,885. During the first half, the Canadian portfolio turned over about 5.1% of suites and produced 6.8% AMR growth on turnover suites.

Ruth Grabel, vice president of Canadian residential operations at Morguard, said leasing activity has recently improved, including increased showings and interest from prospective tenants. She said the portfolio's availability was 92.7% at the time of the call, though that figure did not fully account for anticipated move-outs. Grabel said seasonal student-related move-outs in Ottawa and Edmonton affected second-quarter results. She also cited renewed leasing activity in Mississauga from workers associated with companies including Cognizant and Citibank, following immigration openings for specific businesses. “We are optimistic going forward,” Grabel said, pointing to current showings, leasing progress and availability. She agreed with an analyst's characterization that the second quarter could represent a low point for occupancy, though she did not anticipate a major change during the remainder of the year.

To compete for tenants, the REIT has reduced rents on select one- and two-bedroom units and has offered one or two months of free rent, along with signing bonuses ranging from C$500 to C$1,000 in some cases. Grabel said incentives have been gradually declining and that not all units are receiving two months of free rent. In the U.S., occupancy ended the quarter at 92.8%, down from 94.8% a year earlier, as tenant relocations, affordability concerns and increased home buying affected demand. U.S. average monthly rent increased ...