DBRS Confirms Morguard Real Estate Investment Trust at BB (high) with a 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. The confirmation acknowledges Morguard’s steady growth in operating income and enhanced geographic diversification in Western Canada achieved through the Trust’s recent acquisitions, while reflecting the fact that the Trust continues to have considerable property concentration and a relatively small portfolio, both of which are limiting factors for rating improvement. The Stable trend reflects DBRS’s expectation that operating income growth will remain consistent in the near to medium term and also incorporates the potential for moderately higher financial leverage that may be incurred with the refinancing of upcoming debt maturities in 2013.

The rating reflects Morguard’s: (1) stable core of retail properties and government-leased office buildings, (2) consistent occupancy in the mid-90% range, (3) asset type diversification and (4) good financial credit metrics for the rating category. However, the rating is limited by the Trust’s: (1) above-average property concentration, (2) relatively small portfolio, (3) exposure to Hudson’s Bay Company and Sears Canada Inc. and (4) high level of secured debt as a proportion of total debt.

For the 12-month period ended March 31, 2013, Morguard achieved mid-single digit growth in operating income, mainly as a result of incremental cash flow contributions from property acquisitions in 2012 and the latter part of 2011. Morguard’s portfolio maintains solid occupancy levels (96% as at Q1 2013) based on the stability of the Trust’s core enclosed shopping centres and government office tenancies. Morguard’s same-portfolio net operating income growth was a respectable 3.4% for the quarter, benefiting from higher rental rates primarily in the Central Canada segment of the portfolio. In terms of financial profile, Morguard funded its 2012 property acquisitions primarily with debt, while coverage metrics remained conservative mainly due to higher operating income.

The Stable rating outlook reflects DBRS’s expectation that Morguard will continue to achieve reasonable growth in operating income, predominately from its acquisition of a 100% interest in Penn West Plaza (a Class A office property located in the central business district of downtown Calgary) in Q4 2012. This property is 100% leased to Penn West Petroleum Ltd. under a 12-year lease term, which should enhance cash flow stability going forward. In terms of financial profile, DBRS expects Morguard to incur moderately higher financial leverage when it refinances upcoming debt maturities, particularly the $170.7 million of first mortgage bonds secured by St. Laurent Centre due on December 31, 2013. DBRS expects any incremental portion of proceeds from prospective debt refinancing would be used to repay short-term debt (credit facilities and the revolver from Morguard Corporation) and fund opportunistic acquisitions. That said, DBRS expects that any increase in financial leverage would remain commensurate with the current rating category (i.e., EBITDA interest coverage should remain above 2.30 times).

Morguard could experience a negative rating action if it delivers materially weaker-than-expected operating and earnings performance, and/or EBITDA interest coverage below 2.30 times on a sustained basis. On the other hand, a positive rating action would likely be the result of a material increase in portfolio size, improved property and geographic diversification and/or a decrease in financial leverage that results in EBITDA interest coverage above 3.00 times on sustained basis.

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 applicable methodology is Rating Real Estate Entities (April 2011), which can be found on our website under Methodologies.