DBRS Confirms Morguard REIT at BB (high), Stable Trend

DBRS has today confirmed the Issuer Rating of Morguard Real Estate Investment Trust (Morguard or the Trust) at BB (high) with a Stable trend. Morguard’s rating confirmation takes into consideration portfolio growth, modestly improved property and geographic diversification, and higher financial leverage over the past year.

The portfolio growth was based on acquisitions consisting of: a 50% interest in Prairie Mall, a 295,000 square feet (sq. ft.) enclosed shopping centre located in Grand Prairie, Alberta; and a 50% interest in Place Innovation, a 885,322 sq. ft., four building interconnected office complex located in Saint-Laurent, Quebec. These properties contributed to higher operating income in 2010, and the remainder of the portfolio achieved reasonable same portfolio net operating income growth of 3.1% mainly due to higher average rental rates on lease expiries. At the same time, Morguard’s portfolio occupancy levels held up well (94% as at Q3 2010) supported by its core enclosed shopping centres and government office tenancies. The rating confirmation also reflects the fact that Morguard financed its acquisitions with debt, which increased financial leverage to 54.6% and lowered EBITDA interest coverage to 2.45 times (from 2.73 times for the year-end 2009).

That said, Morguard remains within the parameters of a BB (high) rating based on its: (1) stable core of retail properties and government leased office buildings; (2) consistent occupancy in the mid- to low-90% range; (3) asset type diversification; and (4) good financial credit metrics. Morguard’s rating remains below DBRS’s real estate industry rating of BBB due to its: (1) above-average property concentration; (2) relatively small portfolio; (3) exposure to Hudson’s Bay Company and Sears; and (4) below-average geographic diversification.

The stable rating outlook takes into consideration DBRS’s expectation that Morguard will continue to achieve reasonable operating income growth due to higher average rental rates on lease renewals, particularly in the retail segment, and full year cash flow contributions from recent acquisitions. DBRS also expects Morguard to continue to pursue property acquisitions while maintaining debt-to-gross book value assets ratio in the mid-50% range and EBITDA interest coverage ratio above 2.30 times. DBRS also believes that Morguard’s financial flexibility (positive free cash flow position, and $51.2 million of liquidity) combined with modest near-term debt maturities provide additional support to the current rating.
A negative rating action could result from: (1) weaker operating and earnings performance; (2) sustained increase in financial leverage (debt-to-gross book value assets ratio above 55% and EBITDA interest coverage below 2.30 times); and/or (3) increasing portfolio concentration. On the other hand, a rating improvement would likely be the result of: (1) a material increase in portfolio size; (2) improved property and geographic diversification; (3) a significant improvement in earnings; (4) and/or moderation of financial leverage that results in a sustained increase in EBITDA interest coverage above 3.00 times.

Notes:
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.