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

Key Points

• Q2 results weakened: Net income fell to C$26.1 million, while FFO declined 11.1% year over year to C$22 million, or C$0.42 per unit, as vacancy, operating costs and interest expense increased.
• Occupancy remained under pressure in both Canada and the U.S., falling to 91.4% and 92.8%, respectively. Management said leasing activity has improved ahead of the summer season, although incentives and elevated repair costs continue to weigh on operations.
• The REIT completed C$162.8 million of Canadian CMHC-insured refinancing and a US$29.2 million U.S. refinancing, ending the quarter with approximately C$204 million in cash. It is also advancing due diligence on a potential C$1 billion Canadian residential portfolio acquisition expected to close in the second half of 2026.

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.

Occupancy Pressure in Canada and the U.S.

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 1.8% to US$1,933.

Management said U.S. occupancy stood at 93% at the time of the call, with leased occupancy at 95%. Paul Miatello, senior vice president, said new-lease turnover rents had moved from negative in the first quarter to positive in the second quarter, describing the direction of leasing trends as positive.

Operating Expenses and Refinancing

U.S. NOI declined US$0.9 million, or 3.9%, due mainly to higher vacancy and increased operating expenses, including repair and maintenance and payroll costs. John Talano, senior vice president of U.S. operations, said the company turned over 1,400 units during the quarter as it entered its busy leasing season, contributing to elevated repair and maintenance spending.

Talano said payroll costs also increased as the company became more fully staffed after previous challenges maintaining maintenance personnel. He said he did not expect elevated repair and maintenance costs to persist through the rest of the year.

Interest expense rose C$0.4 million from a year earlier, driven by higher mortgage principal balances and interest rates following refinancing activity. Miatello said the refinancings were completed during the final 15 days of the quarter, meaning the full effect of the higher interest costs is expected to be reflected in the next quarter.

During the second quarter, the REIT refinanced three Canadian residential properties through CMHC-insured financing totaling C$162.8 million, with a weighted average interest rate of 4.26% and a forward weighted average term of 11.2 years. It also refinanced a property in Kennesaw, Georgia, for US$29.2 million at 5.4% for five years.

• Total refinancing proceeds, net of financing costs: C$86.4 million
• Cash on hand at quarter-end: approximately C$204 million
• Available revolving credit facility: C$100 million
• Debt-to-gross-book-value ratio: 40%, compared with 39.5% at Dec. 31, 2025
• Weighted average mortgage interest rate: 4.18%, compared with 4.07% at year-end

TD Asset Management Portfolio Transaction Advances

The REIT and Morguard Corporation are progressing through due diligence on their previously announced plan to jointly invest about C$1 billion in a Canadian multi-suite residential portfolio owned by TD Asset Management.

Newman said the parties were determining property allocations to the REIT and anticipated closing in the second half of 2026. Miatello said most due diligence had been completed, with remaining requirements including lender consents and CMHC involvement.

“With CMHC, it's hard to put a timeline on,” Miatello said. He added that the debt assumed by the REIT in connection with the transaction was not expected to materially change its leverage profile. In response to an analyst's estimate, he said it was fair to view post-transaction leverage as potentially around 42% to 43%, rather than approaching 50%.

Miatello said the REIT's cash balance would predominantly fund its equity share of the acquisition, although it could temporarily draw a modest amount on its Morguard credit facility depending on transaction cash-flow timing.

The REIT reported total assets of C$4.8 billion at June 30, up from C$4.5 billion at the end of 2025, due to U.S.-dollar exchange-rate changes, higher fair values for income-producing properties and increased cash from refinancing. Its IFRS net asset value was C$45.55 per unit, while its FFO payout ratio was 46.8%.

About Morguard North American Residential Real Estate Investment Trust (TSE:MRG.UN)

Morguard North American Residential Real Estate Investment Trust is an open-end real estate investment trust. The REIT invests in multi-suite residential rental properties in Canada and the United States. The REIT operates into two reportable segments, Canada and the United States. The United States contributes to the vast majority of revenue.

This instant news alert was generated by narrative science technology and financial data from MarketBeat in order to provide readers with the fastest reporting and unbiased coverage. Please send any questions or comments about this story to contact@marketbeat.com.