DBRS Confirms Morguard Corporation at BBB (low), Stable Trend

DBRS Limited (DBRS) has today confirmed the rating of Morguard Corporation’s (Morguard or the Company) Senior Unsecured Debentures at BBB (low) with a Stable trend. DBRS views Morguard’s credit risk profile on a non-consolidated basis, focusing on the Company’s stand-alone 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.

DBRS expects Morguard to achieve reasonable EBITDA growth in 2015 driven primarily by recent property investments and ongoing development and lease-up of development projects, namely The Heathview, a two-tower multi-residential complex located in the Forest Hill Village neighbourhood of Toronto, and Performance Court, a 21-storey, 361,000-square foot (100%) office tower with three levels of underground parking located at 150 Elgin Street, Ottawa, Ontario. Performance Court is approximately 85% leased, and the Company has a 50% coownership interest in the property. 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 and recent acquisitions primarily with a combination of debt and cash balances. DBRS notes that cash distributions from investments in MRT and MRG (totalling approximately $40 million in 2015) 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 2.30 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 stand-alone 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.

The applicable methodology is Rating Entities in the Real Estate Industry (October 2013), which can be found on our website under Methodologies.

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

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