DBRS Assigns Rating of BBB (low) to Morguard Corporation, Stable Trend

DBRS has today assigned an Issuer Rating of BBB (low) with a Stable trend to Morguard Corporation (Morguard or the Company). DBRS notes the Issuer Rating reflects the credit quality of debt (i.e., Senior Unsecured) that ranks below the Company’s property-specific secured debt.

Morguard is a real estate company with a diverse portfolio of owned and managed properties, valued at approximately $13.6 billion, and wholly owned operating subsidiaries that focus on real estate advisory, management and finance. The Company also owns 43% of Morguard Real Estate Investment Trust (Morguard REIT or MRT; rated BB (high) by DBRS) and 49% of Morguard North American Residential Real Estate Investment Trust (Morguard Residential REIT or MRG), the combined value of which is approximately $1.0 billion. DBRS views Morguard’s credit risk profile on a deconsolidated basis, primarily focusing on the Company’s standalone real estate operations and financial profile, while acknowledging the financial benefits provided by its key investment holdings.

DBRS’s rating reflects Morguard’s core portfolio quality, reliable cash distributions from investment holdings, sound financial profile and diversification by tenant and asset type. The rating is limited by Morguard’s relatively small portfolio, exposure to secondary markets, geographic concentration in Ontario and high proportion of secured debt. Morguard has grown to its current level ($5.1 billion in total assets) through a series of mergers and acquisitions and organic growth focused in the office, retail and multi-residential segments, primarily in Ontario and the southeast U.S. This, combined with consistent operating performance and conservative financial management, has led to a steady record of growth in earnings and sound credit metrics in recent years.

Morguard has consistently achieved portfolio occupancy in the mid-90% range over the last ten years, highlighting the good quality and locations of its properties, particularly in Canada. Morguard’s financial profile has remained strong for the rating category over the last several years.

For the year ended December 31, 2012, Morguard achieved single-digit growth in operating income to approximately $159.1 million (deconsolidated). This growth was the result of (1) the acquisition of Alta at K Station, a mixed-use high rise property comprising 848 suites and 13,000 square feet (sq. ft.) of retail space located in Chicago’s West Loop area, in December 2012; (2) the acquisition of Boynton Town Center, a unenclosed 209,000 sq. ft. shopping centre located in Boynton Beach, Florida; and (3) higher rental rates on leasing activity primarily in the retail segment. The Company has maintained conservative coverage metrics due to higher operating income and lower cost debt, despite funding its property acquisitions ($306 million) and incremental investments in MRT and MRG ($132.1 million) primarily with debt. As at December 31, 2012, Morguard had approximately $1.5 billion in total debt outstanding on a deconsolidated basis.

In 2013, DBRS expects Morguard to achieve strong earnings growth with operating income reaching the $170 million to $180 million range, primarily from the acquisition of five hotels comprising 632 guest rooms located in the Greater Toronto Area in Q2 2013 and Alta at K Station in December 2012. Morguard’s earnings profile should also continue to benefit from fee-based income from its real estate management business (Morguard Investments Limited), which annually contributes revenue of approximately $70 million. In terms of financial profile, DBRS expects Morguard’s leverage to increase modestly as the Company funds its current development projects (scheduled for completion in 2014) and recent acquisitions primarily with debt. DBRS, however, expects only a slight deterioration in EBITDA interest coverage mainly due to higher operating income and lower interest cost on new debt financings. DBRS notes that cash distributions from investments in MRT and MRG (totalling $40 million in 2013) will also continue to benefit Morguard’s liquidity and financial flexibility. In the longer term, DBRS expects Morguard to maintain coverage ratios above 2.60 times (excluding cash distributions from MRT and MRG), a level DBRS considers adequate for the current rating category.

A negative rating action could result from weaker operating and earnings performance and/or higher financial leverage, such that EBITDA interest coverage falls below 2.60 times (excluding distributions from MRT and MRG). On the other hand, a positive rating action would likely be the result of: (1) a material increase in portfolio size, (2) improved property and geographic diversification and/or (3) a decrease in financial leverage that results in a sustained improvement in EBITDA interest coverage above 3.50 times (excluding distributions from MRT and MRG). Although there is a strong correlation between Morguard’s standalone operations and MRG and MRT, 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.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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