DBRS Confirms Morguard Real Estate Investment Trust, BB (high), Stable

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 rating continues to be based on Morguard’s stable core of retail properties and government-leased office buildings, consistent occupancy in the mid-90% range, asset type diversification and good financial metrics for the rating category. The rating continues to be limited by the Trust’s high degree of property concentration and relatively small portfolio compared with investment-grade peers.

For the last 12 months (LTM) ended March 31, 2014, Morguard achieved modest growth in operating income, primarily because of the acquisition of Pine Centre in December 2013. Morguard continues to maintain solid occupancy levels (95% as at Q1 2014) supported by the stability of the Trust’s core enclosed shopping centres and government office tenancies. Morguard also reported a modest same-portfolio net operating income growth of 0.3% in Q1 2014, benefiting from the fact that cost recovery adjustments in the office segment were partially offset by an increase in operating costs in the retail segment. In terms of financial profile, Morguard funded its recent property acquisitions primarily with debt, while coverage metrics held relatively steady as a result of higher operating income and interest expense savings on debt refinancing. DBRS expects that Morguard will continue to deliver growth in operating income, predominately from its acquisition of Pine Centre in 2013. In addition, Morguard’s lease maturities are well spread out, which should help provide stability to earnings and mitigate the impact of any softness that may arise in office market rents from new supply in the Trust’s Toronto and Calgary markets.

DBRS anticipates that Morguard will continue to pursue high-quality property acquisitions, with a focus on office and retail properties, which should further support future earnings growth and reduce the Trust’s portfolio concentration risks. DBRS also expects Morguard to incur moderately higher financial leverage when the Trust refinances upcoming debt maturities and that any incremental portion of proceeds from prospective debt refinancing will be used to repay short-term debt and fund opportunistic acquisitions. DBRS, however, 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) and that the Trust will continue to benefit from interest expense savings as it refinances debt at lower market rates over the next couple of years.

Although DBRS does not anticipate a rating change in the near to medium term, a material increase in portfolio size with an associated improvement in property diversification and/or decrease in financial leverage that results in an improvement in EBITDA interest coverage (including capitalized interest) to above 3.00 times could result in a positive rating action. On the other hand, weaker-than-expected operating and earnings performance and/or higher financial leverage that leads to EBITDA interest coverage falling below 2.30 times on a sustained basis could result in a negative rating action.

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 Entities in the Real Estate Industry, which can be found on our website under Methodologies.

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