DBRS Confirms Morguard Corporation at BBB (low), Stable Trend

DBRS Limited (DBRS) confirmed Morguard Corporation’s (Morguard or the Company) Senior Unsecured Debentures rating at BBB (low) with a Stable trend. The confirmation reflects the modest improvement in Morguard’s key financial metrics while also maintaining its business risk profile at levels commensurate within the current rating category. DBRS views Morguard’s credit risk profile on a non-consolidated basis, while acknowledging the financial benefits from its holdings in Morguard Real Estate Investment Trust (REIT) (MRT) and Morguard North American Residential REIT (MRG). The rating considers Morguard’s core portfolio quality, reliable cash distributions from investment holdings, reasonable coverage ratios and diversification by tenant and asset type. However, the Company’s rating is limited by its relatively small portfolio, exposure to secondary and suburban markets, geographic concentration in Ontario and high proportion of secured debt.

The Stable trend reflects the expectation that weaker operating results in Morguard’s retail segment will be more than offset by positive results in the multi-suite residential segment and incremental income from recent property acquisitions. DBRS expects moderately higher same-property net operating income growth, driven primarily by a full year of stabilized earnings from The Heathview multi-suite residential property. Although Morguard has a plan to address its recently vacated Target space, DBRS does not anticipate any contributions from the redeveloped space in 2017. Furthermore, these retail vacancies and upcoming lease maturities could put additional pressure on the segment and are expected to partially offset earnings growth from the multi-suite residential portfolio. Subsequent to Q2 2017, the Company paid $167 million for two office properties and a 50% interest in one multi-suite residential property and expects these acquisitions to contribute approximately $10 million in incremental EBITDA on an annual basis. Collectively, DBRS expects these gains to more than offset weaker performance in the retail segment for the year.

DBRS expects Morguard’s leasing costs and tenant improvements for the year to remain at levels similar to 2016 in order for the Company to lease up current vacancies and upcoming lease maturities, particularly in the retail segment. However, DBRS believes Morguard’s growing cash flow from operations should sufficiently fund the higher aforementioned expenses and the Company’s stable dividends for the year. DBRS expects Morguard’s development expenditures will increase as the Company redemises and redevelops its vacated Target space. Property acquisitions, development expenditures and investment holdings are expected to be funded by the Company’s cash on hand, free cash flow and manageable amounts of debt. As such, DBRS expects key financial metrics to remain near current levels over the near term, which compares favourably relative to its investment-grade peers. DBRS notes that cash distributions from investments in MRT and MRG (totalling approximately $43.9 million in 2016) will also continue to benefit Morguard’s liquidity and financial flexibility.

Although there is a strong relationship between Morguard’s stand-alone operations and MRT’s and MRG’s businesses, DBRS notes that a significant change in the credit risk profile of either of its two key investments would not necessarily result in a rating change for Morguard. A negative rating action could result if EBITDA interest coverage (including capitalized interest) falls below 2.30 times (x) (approximately 2.90x including distributions from MRT and MRG) or debt-to-EBITDA rises above 10.0x (approximately 8.5x including distributions from MRT and MRG) on a sustained basis due to weaker operating performance and/or higher financial leverage.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodology is Rating Entities in the Real Estate Industry (April 2017), which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.