DBRS Confirms Morguard Real Estate Investment Trust at STA-3 (low)

DBRS has today confirmed the stability rating of Morguard Real Estate Investment Trust (Morguard or the Trust) at STA-3 (low). Morguard continues to maintain good financial flexibility, with a favourable balance sheet and credit metrics. For the last 12 months (LTM) ended Q1 2010, Morguard had a debt-to-gross book value assets ratio of 50.8% and EBITDA interest coverage of 2.66 times, an improvement from 54.5% and 2.11 times, respectively, for YE2006. Although these metrics compare favourably with other higher-rated real estate investment trusts (REITs), DBRS believes they are at an appropriate level considering the Trust’s business risk profile. Going forward, DBRS expects Morguard to manage its balance sheet with debt levels near 55% on a debt-to-gross book value basis (excluding convertible debentures), which DBRS has factored into the current rating.

In addition, Morguard has minimal amount of debt maturing, with no more than 7.5% of total debt maturing in each year by the end of 2012. Furthermore, Morguard has more than sufficient liquidity to meet these upcoming capital requirements. As at Q1 2010, Morguard had available funds of $59 million, which consists of $53.7 million available on its credit facility and cash on hand of $5.2 million.

Recently, Morguard acquired interest in a 370,000 square foot (sq. ft.) Class A office tower located in downtown Toronto, with the largest tenant being TD Bank and its investment division, occupying 60% of the rentable space. The Trust also acquired a 50% interest in Prairie Mall, an enclosed regional shopping centre located in Grande Prairie, Alberta. This property is anchored by a 112,500 sq. ft. Zellers and contains 295,000 of leaseable sq. ft. Overall, DBRS views these investments as positive, as they are well maintained and have dominant locations within their respective markets. In addition, DBRS believes that these high quality investments with good occupancy rates and tenancies should further enhance the Trust’s cash flow stability and operating metrics going forward.

The rating confirmation also takes into account that the Trust’s portfolio continues to perform reasonably well, with good occupancy levels (94% as at Q1 2010), and has yet to show signs of any material weakness in operating performance. This is partially due to the fact that Morguard’s portfolio exhibits several defensive features including: (1) a number of office properties fully occupied by government tenants. Government tenants represent 13.3% of basic rental revenue and provide stable cash flow under long-term leases; and (2) Non-discretionary-type neighbourhood and community shopping centres that are primarily anchored by food retailers and comprise 1.2 million sq. ft. in total. The portfolio also features five key regional shopping centres comprising 2.9 million sq. ft., which are anchored by large department stores, such as Hudson’s Bay Company (includes Zellers) and Sears Canada Inc. While these shopping centres continue to achieve good occupancy rates, they are predominately fashion oriented and performance could come under increasing pressure if the current economic downturn is deep or longer than expected. Overall, DBRS believes that Morguard’s financial position, along with minimal near-term debt maturities, should provide reasonable protection against the current challenging economic climate. In addition, DBRS expects Morguard to continue to generate stable cash flow levels, with reasonable lease expiries across its portfolio during the next several years.

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

The applicable methodology is Rating Real Estate, which can be found on our website under Methodologies.

This is a Corporate rating.