morguard north american residential reit enhancing operations

MORGUARD NORTH AMERICAN
RESIDENTIAL REIT
2014 ANNUAL REPORT
ENHANCING OPERATIONS
MORGUARD NORTH AMERICAN RESIDENTIAL
REAL ESTATE INVESTMENT TRUST
Morguard North American Residential REIT (the “REIT”) is an open-end
real estate investment trust listed on the Toronto Stock Exchange (TSX)
under the symbol MRG.UN. The REIT had total assets of $1.8 billion
at December 31, 2014.
The REIT was formed to own a diversified portfolio of multi-unit residential
rental properties across Canada and the U.S. Its primary objectives are:
to generate stable and growing cash distributions to unitholders on a
tax-efficient basis; to enhance the value of its portfolio and the long-term
value of its units through active asset and property management; and
to expand the REIT’s asset base, primarily through acquisitions and
property improvements.
Following its Initial Public Offering (“IPO”) in April 2012, the REIT has
doubled its portfolio size to 12,850 suites at 44 multi-unit residential
properties in North America. The real estate portfolio consists of 30 U.S.
low-rise and mid-rise apartment communities located in Alabama, Colorado,
Florida, Georgia, Louisiana, North Carolina and Texas, and 14 Canadian
residential apartment communities located in Alberta and Ontario.
On our cover: Barrett Walk, Kennesaw, GA
FELLOW UNITHOLDERS
Morguard North American Residential REIT recorded strong
financial performance in 2014, building on its success since the
IPO and confirming management’s confidence in its potential.
The vision and strategy were clear from the start – the REIT
would achieve consistent results from a quality portfolio of
multi-unit residential properties located in strategic North
American markets.
And as 2014 began, the portfolio’s growth had been dramatic
– having doubled from the end of 2012 to a total of 12,850
residential suites valued at approximately $1.8 billion –
and had produced impressive results for unitholders.
During 2014, management focused its efforts on enhancing
the operations of the properties in both Canada and the
U.S., seeking synergies within the portfolio, developing new
marketing programs and optimizing revenue-generating
opportunities.
In the year ahead, management will continue to seek
potential acquisitions, analyzing locations throughout
North America where we see the most promising
prospects. Our focus remains on multi-unit residential
rental properties with prospects for stable returns,
high occupancy rates and the potential for increased
value through active management.
At the same time, we will continue to enhance the
value of our portfolio and maintain our conservative
approach to financing the REIT’s activities. We are
confident that the combination of these approaches
will drive the REIT’s ability to deliver sustainable
returns to unitholders.
K. (RAI) SAHI
Chairman and Chief Executive Officer
2
MORGUARD NORTH AMERICAN RESIDENTIAL REIT
DELIVER
ING
STRONG
FINANCIAL
RESULTS
The Elmwoods, Mississauga, ON
2 014 A N N U A L R E P O R T
23
3
FINANCIAL PERFORMANCE
%
Revenues from the real estate properties of Morguard North American
Residential REIT rose by 22% in 2014 to a total of $174.8 million from
$142.9 million the previous year. Total assets rose 10% to $1.83 billion
at December 31, 2014, from $1.67 billion a year earlier.
I NCREASE IN NET
OPERATING INCOME1
Net operating income1 (“NOI”) increased by 23% year over year to
$90.2 million. NOI is considered one of the most important metrics for a
real estate investment trust as it indicates profits from the REIT’s portfolio
of properties (revenue from real estate properties, less the operating
expenses, property taxes and property management fees).
29
%
The REIT’s portfolio includes residential rental properties in both the U.S.
and Canada. The NOI generated by the REIT’s U.S. properties totalled
$54 million in 2014, compared with $36.6 million a year earlier. The
increase was partially due to the full-year contribution from properties
acquired in 2013 along with movement in the foreign exchange rate
between U.S. and Canadian currencies. The NOI generated by the
Canadian properties in 2014 was consistent with the prior year.
I NCREASE IN
FUNDS FROM
OPERATIONS
Funds from operations (“FFO”) is another key measure of performance.
In 2014, the REIT’s basic FFO totalled $44.7 million, up from $34.7 million
in 2013; diluted FFO was $47.5 million (or $0.94 per unit), compared with
$36.9 million ($0.77 per unit) the year before. Adjusted funds from
operations, or AFFO, reached $0.67 per unit in 2014, up from $0.58 in 2013.
As the REIT’s portfolio of properties grew from inception,
so did its ability to generate revenue and net operating income –
the source of dependable distributions to unitholders.
TOTAL REVENUE
NET OPER ATING INCOME1
$175
$90
$143
12
1
$35
$41
13
Excluding impact of IFRIC 21.
$45
$73
$80
(in millions of dollars)
FUNDS FROM OPER ATIONS
14
12
(in millions of dollars)
$20
13
14
12
(in millions of dollars)
13
14
4
MORGUARD NORTH AMERICAN RESIDENTIAL REIT
FINANCING
A prudent approach to financing and capital management is a key element
in the REIT’s strategy. Management of the REIT’s financial resources is
designed to maintain sufficient capital to implement its business strategy,
while complying with investment and debt restrictions and covenants.
WEIGHTED AVER AGE
INTEREST R ATE
4.3%
4.2%
3.9%
At December 31, 2014, the REIT’s overall leverage, as represented by
the ratio of total debt to gross book value, was 56%, which was unchanged
from the year before. The REIT’s weighted average interest rate on
mortgages and retained debt declined to 3.9% from 4.2% the year before.
The weighted average term to maturity on mortgages and retained debt
was 5.6 years at December 31, 2014, compared with 4.3 years at the end
of 2013. Eight mortgages were renewed and one was repaid in full in 2014.
12
PORTFOLIO PERFORMANCE
The financial performance of Morguard North American Residential REIT
relates directly to its portfolio of multi-unit residential rental properties,
which is diversified across the U.S. and Canada. Today the portfolio
consists of 44 properties, with a total of 12,850 suites.
The geographic distribution of the suites in the portfolio adds stability to
the REIT’s cash flows as it reduces the REIT’s vulnerability to economic
fluctuations that might affect any particular region.
In addition to geographic diversification, there are several other key
drivers of the portfolio’s financial performance, including occupancy levels
and rental rates. In turn, these are influenced by the quality of property
management, the available amenities and the economic vitality of the
markets where the properties are located.
Occupancy of the Canadian properties at December 31, 2014, was 98%,
up from 97% a year earlier. In the U.S., occupancy remained stable
at 95%. Overall rental rates also rose over the course of the year.
PORTFOLIO DIVERSIFICATION
PORTFOLIO OCCUPANCY
U.S.
62%
BY
NUMBER OF
SUITES
Canada
38%
98%
CANADIAN
OCCUPANCY
95%
U.S. OCCUPANCY
13
14
2 014 A N N U A L R E P O R T
5
At December 31, 2014, the average monthly rent per suite in Canada
was $1,246, up from $1,232 a year earlier. For the U.S. properties,
the comparable figures were US$945, up from US$916.
3.2
%
I NCREASE IN RENTAL
RATES IN THE U.S.
Management focuses on maximizing cash flow. This includes maximizing
occupancy and average monthly rent, managing the REIT’s operating
costs as a percentage of revenues and strengthening its asset base
through infrastructure improvement and capital expenditure programs.
The REIT manages a continuous capital improvement program designed
to maintain and improve the performance of the properties. It also
enhances the value of the properties by allowing the REIT to charge
higher rents or lower operating costs, and contributes to resident retention
by ensuring that the properties remain attractive to both existing and
prospective tenants.
Additionally, rental rates are constantly monitored and leasing incentives
are implemented where appropriate, with the objective of maximizing
revenue while reducing overall rental rate decreases.
Income lost through vacancies is not easily recovered through cost
reduction, and thus tenant retention and the leasing of vacant suites are
critical to maintaining occupancy levels. With the REIT’s well-located and
professionally managed properties, management seeks to increase tenant
loyalty and become the landlord of choice.
Strong operating performance and prudent management of its balance
sheet have positioned the REIT to take advantage of opportunities as they
arise. In 2014, the REIT continued to take advantage of cyclically low
interest rates, and management remains focused on maintaining access
to various sources of capital at the lowest possible cost.
The environment for acquisitions continues to be extremely competitive
with limited supply in Canada and strong absorption of new supply in the
U.S. The REIT will continue to seek acquisition opportunities, focusing on
properties that meet its investment criteria.
Modest economic growth is forecasted for 2015 against a backdrop of
material risk. Uncertainty about oil prices and their impact on economic
growth remains; however, a strong economy and continued job growth
are positive factors. To date, the outlook remains generally positive.
RETURNS TO UNITHOLDERS
DISTRIBUTIONS
$27.1
$27.9
The REIT believes that its units and debentures at times trade in a price
range that does not adequately reflect their value in relation to the REIT’s
business and its future prospects.
$13.3
12
(in millions of dollars)
A prime goal of the REIT is to provide reliable distributions to its
unitholders. In 2014, the REIT paid monthly distributions to unitholders
of $0.05 per unit, or $0.60 for the full year. Distributions amounted to
$27.9 million for the year ended December 31, 2014, compared with
$27.1 million in 2013.
13
14
The REIT has TSX approval to purchase for cancellation up to 2.25 million
units, and up to $5.5 million principal amount of the 4.65% Convertible
Unsecured Subordinated Debentures due March 30, 2018 (TSX: MRG.DB)
under a normal course issuer bid. No repurchase activity occurred
in 2014.
6
MORGUARD NORTH AMERICAN RESIDENTIAL REIT
BROADEN
ING
A PORTFOLIO TO SPAN
A CONTINENT
Settlers Creek, Fort Collins, CO
2 014 A N N U A L R E P O R T
7
Since inception in 2012, the REIT has acquired a stable, diversified
portfolio of revenue-producing residential properties located in two
Canadian provinces and seven U.S. states. The portfolio has doubled
in size due to acquisitions since 2012.
The REIT was created following an initial public offering of trust units in
April 2012, which raised gross proceeds of $82.5 million, and a further
offering in September 2012, which raised nearly $151 million.
Soon after the offering of trust units, the REIT began acquiring properties.
First came purchases in Ontario, Alberta and Louisiana, and later the
REIT began to acquire properties in Florida. By the end of 2012, its
portfolio included a total of 6,376 residential suites in Canada and the U.S.
Margaret Place, Kitchener, ON
In 2013, a total of 24 multi-unit residential properties were acquired, which
raised the number of the REIT’s residential suites to 12,850 – double the
total of a year earlier – and expanded to Alabama, Colorado, Georgia,
North Carolina and Texas.
11
%
The outcome of the REIT’s strategy is positive returns for unitholders with
a cumulative total return since inception of 11%.
T OTAL RETURN
TO UNITHOLDERS
Growing may be the only word that adequately describes the
Morguard North American Residential REIT’s portfolio – which
now reaches across Canada and the United States.
O TA
11% T
IPO
2012
$680M in
Assets
2012
L
ITH
TO U N
N
R
RETU
RS
Unit Offering
Unit and
Convertible
Debenture
Offering
2012
2013
Acquired
3 U.S.
Properties
2012
OLDE
Major U.S.
Acquisitions
2013
$1.8B in
Assets
2014
8
MORGUARD NORTH AMERICAN RESIDENTIAL REIT
OPTIMIZ
ING
A STRONG
RESIDENTIAL
RENTAL MARKET
The Forestwoods, Mississauga, ON
2 014 A N N U A L R E P O R T
9
THE OPPORTUNITY
Use multi-unit residential properties to generate stable and growing cash
distributions on a tax-efficient basis through geographic diversification,
in Canada and the U.S., reducing vulnerability to economic fluctuations.
THE VALUE PROPOSITION
In Canada, the multi-unit residential sector has a long-term record of
stable and healthy income. Rental market performance is strong due to
an increase in immigration and youth employment – combined with healthy
economic performance. National occupancy remains on average above 97%.
The investment performance outlook in Canada continues to predict peak
property values with strong demand but limited supply of product.
Governors Gate, Pensacola, FL
In the U.S., the multi-unit residential sector outperformed expectations
for 2014. The national occupancy rate ended the year at 95%. The rental
sector was stimulated by an improved fiscal outlook, strong job gains for
young adults and a sustained preference for renting.
The investment performance outlook in the U.S. calls for strong investor
demand, improving property performance trends and rising valuations.
Debt terms are expected to stay favourable, supporting liquidity and
interest rate movements.
Rental residential properties have proven to be a valuable
asset class. The attractiveness of the REIT’s properties is clearly
shown in the levels of occupancy rates and growth in rental rates.
FUNDS FROM OPER ATIONS
THE RESULT
Per unit – basic
Delivered improved performance for unitholders by leveraging
different but favourable multi-unit residential markets in Canada and
the U.S., resulting in a $0.19 increase in funds from operations per unit,
year over year.
$0.96
$0.77
$0.64
A disciplined acquisition strategy combined with a commitment to capital
improvements and customer service will continue to provide positive
returns and generate sustainable distributions for unitholders.
12
13
14
10
MORGUARD NORTH AMERICAN RESIDENTIAL REIT
ENABL
ING
TECHNOLOGY TO
CREATE EFFICIENCY
AND RESULTS
210 Watermark, Bradenton, FL
2 014 A N N U A L R E P O R T
11
THE OPPORTUNITY
Leverage an existing investment in the property management software
platform to realize operational efficiencies, increase rental rates, achieve
faster conversions and improve the tenant experience.
THE VALUE PROPOSITION
Maintaining and increasing occupancy and rental rates are at the core of
the REIT’s operational strategy. The REIT sought to create an optimization
strategy that would:
Village Crossing, West Palm Beach, FL
• better manage qualified leads with faster conversion to leases by
leveraging a formal lead-tracking solution in the U.S.
• optimize rental rates and control inventory in real time by implementing
property management software and standardizing operations across the
U.S. portfolio
• enhance the tenant interaction experience by giving prospects and
tenants seamless online access to real-time rent and unit availability,
lease applications and lease renewal, rent and utility bills, and
maintenance requests
Focusing on operational efficiencies, the REIT took advantage
of existing property management software to help drive results –
including increased rental rates and an improved tenant experience.
THE RESULT
Improved the overall tenant experience and provided online access that
serves a young mobile demographic – the fastest-growing segment of
the market in the U.S.
Increased rental rates by 3.2% in the U.S. while maintaining strong
occupancy at 95%. This strategy will contribute to continued strong
results for unitholders.
12
MORGUARD NORTH AMERICAN RESIDENTIAL REIT
Rideau Towers, Toronto, ON
Mallory Square, Tampa, FL
PORTFOLIO SUMMARY
Morguard North American Residential REIT owns a well-diversified
portfolio of multi-unit residential rental properties, with a total of
12,850 suites across Canada and the United States.
1.8B 30
14
12,850 95
98
$
EAL ESTATE
R
PROPERTIES
S UITES
U .S. PROPERTIES
%
U .S. OCCUPANCY
C ANADIAN
PROPERTIES
%
C ANADIAN
OCCUPANCY
14
MORGUARD NORTH AMERICAN RESIDENTIAL REIT
The Valleywoods, Mississauga, ON
Rideau Towers, Toronto, ON
Square 104, Edmonton, AB
The Maplewoods, Mississauga, ON
CANADIAN MULTI-UNIT RESIDENTIAL PORTFOLIO
Ownership
Interest
Property
City
Province
(%)
Suites
Occupancy
(%)
Square 104
Edmonton
AB
100
277
99
Margaret Place
Kitchener ON
100
472
98
The Arista
Mississauga ON
100
458
98
The Elmwoods
Mississauga ON
100
321
99
The Forestwoods
Mississauga ON
89
300
98
The Maplewoods
Mississauga ON
87
300
98
Meadowvale Gardens
Mississauga ON
100
325
98
Tomken Place
Mississauga ON
100
142
100
The Valleywoods
Mississauga ON
91
373
98
Rideau Towers 1
Toronto ON
90
287
98
Rideau Towers 2
Toronto ON
100
380
96
Rideau Towers 3
Toronto ON
100
474
96
Rideau Towers 4
Toronto ON
100
400
97
Rouge Valley Residence
Scarborough ON
100
396
98
SUBTOTAL
4,905
98
2 014 A N N U A L R E P O R T
Perry Point, Raleigh, NC
15
Retreat at City Center, Aurora, CO
U.S. MULTI-UNIT RESIDENTIAL PORTFOLIO
Ownership
Interest
Property
City
State
(%)
Suites
Occupancy
(%)
Retreat at City Center
Aurora
CO
100
225
Settlers Creek
Fort Collins CO
100
229
95
97
Grand Venetian
Irving TX
100
514
96
The Retreat at Spring Park
Garland TX
100
188
94
Verandah at Valley Ranch
Irving TX
100
319
97
Colonial Manor
Harahan
LA
100
48
98
Garden Lane Gretna
LA
100
261
92
The Georgian New Orleans
LA
100
135
98
Greenbrier Slidell
LA
100
144
90
Magnolia Place New Iberia
LA
100
148
95
Steeplechase Lafayette
LA
100
192
96
Villages of Williamsburg Shreveport
LA
100
194
87
Bel Air Apartment Homes
Mobile
AL
100
202
92
The Estates at Lafayette Square
Mobile
AL
100
675
96
Hampton Park
Mobile
AL
100
300
95
Pine Bend
Mobile
AL
100
152
91
Barrett Walk
Kennesaw
GA
100
290
97
Briarhill Apartments
Atlanta
GA
100
292
93
The Savoy Apartments
Atlanta
GA
100
232
96
Blue Isle
Coconut Creek
FL
100
340
98
Governors Gate I Pensacola
FL
100
240
95
Governors Gate II
Pensacola
FL
100
204
95
Jamestown Estates
Pensacola
FL
100
177
93
Woodcliff Apartment Homes
Pensacola
FL
100
184
95
Mallory Square
Tampa
FL
100
383
91
Village Crossing
West Palm Beach
FL
100
189
98
210 Watermark
Bradenton
FL
100
216
97
Woodbine Apartment Homes
Riviera Beach
FL
100
408
99
The Lodge at Crossroads
Cary
NC
100
432
94
Perry Point
Raleigh NC
100
432
93
SUBTOTAL
7,945
95
TOTAL MULTI-UNIT RESIDENTIAL SUITES
12,850
96
CORPORATE INFORMATION
BOARD OF TRUSTEES
K. (Rai) Sahi 3
Chairman and
Chief Executive Officer
Dino Chiesa 1, 3
Principal, Chiesa Group
Mel Leiderman
Senior Partner, Lipton LLP
1
Avtar T. Bains 2, 3
Real Estate Adviser
and Investor
Bruce K. Robertson 1, 3
Vice President, Investments
The Woodbridge Company
Limited
Frank Munsters
Corporate Director
William O. Wallace 2
President,
Wallace Automotive Inc.
K. (Rai) Sahi
Chairman and
Chief Executive Officer
Beverley G. Flynn
General Counsel
and Secretary
John Talano
Vice President, Operations
(U.S.)
Robert Wright
Chief Financial Officer
Paul Miatello
Vice President
Brian Athey
Vice President, Operations
(Canada)
Eligibility
RRSP
RRIF
DPSP
RPP
TFSA
Investor Relations
Visit our website at
www.morguard.com or
view our filings on SEDAR
at www.sedar.com.
2
1
Audit Committee
2
Compensation and Governance Committee
3
Investment Committee
EXECUTIVE DIRECTORY
INVESTOR INFORMATION
Unit Listing
Toronto Stock Exchange
Symbol
MRG.UN
MRG.DB
Auditors
Ernst & Young LLP
Principal Bankers
Royal Bank of Canada
Toronto-Dominion Bank
Transfer Agent
Computershare Trust
Company
1-800-387-0825
[email protected]
For additional information,
please contact:
Robert Wright
Chief Financial Officer
Beverley G. Flynn
General Counsel
and Secretary
Tel: 905-281-4800
[email protected]
Annual Meeting
Wednesday, May 13, 2015
at 9:00 a.m.
Rattlesnake Point Golf Club
5407 Regional Road 25
Milton, ON
L9T 2X5
Design: www.jumpcommunicationsinc.com
Registered Office
55 City Centre Drive
Suite 1000
Mississauga, ON
L5B 1M3
Tel: 905-281-4800
[email protected]
The selected annual financial information in the 2014 Annual Report
highlights certain key metrics for the REIT. As a result, this Report should
be read in conjunction with the REIT’s Consolidated Financial Statements
for the year ended December 31, 2014, related Management’s Discussion
and Analysis (“MD&A”) and the Annual Information Form (“AIF”).
These documents are available on the REIT’s website at
www.morguard.com. All continuous disclosure documents required
by securities regulators are also filed on the System for Electronic
Document Analysis and Retrieval (“SEDAR”) and can be accessed
electronically at www.sedar.com.
55 City Centre Drive
Suite 1000
Mississauga, ON L5B 1M3
905-281-4800
MORGUARD.COM