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

DBRS Limited (DBRS) has today confirmed Morguard Corporation’s (Morguard or the Company) Senior Unsecured Debentures rating at BBB (low) with a Stable trend. DBRS views Morguard’s credit risk profile on a non-consolidated basis, while acknowledging the financial benefits from its holdings in Morguard REIT (MRT) and Morguard North American Residential REIT (MRG). DBRS’s rating reflects Morguard’s core portfolio quality, reliable cash distributions from investment holdings, reasonable coverage ratios and diversification by tenant and asset type. Morguard’s rating is limited by its relatively small portfolio, exposure to secondary and suburban markets, geographic concentration in Ontario and high proportion of secured debt.

Despite modest erosion in a few rating factors, the trend remains Stable, reflecting the expectation the Company’s multi-residential segment, real estate management and advisory business, and EBITDA from property acquisitions and development will more than offset pressure in the retail segment. DBRS expects modest net rental income growth for Morguard’s multi-residential segment, including the continued lease-up of The Heathview multi-residential property in Toronto. Morguard should continue to benefit from fee-based income through its real estate management and advisory business, contributing $85 million to $90 million on an annual basis. Subsequent to YE2015, the Company paid $33.5 million for three hotel properties adjacent to Toronto Pearson International Airport contributing $2 million to $3 million to EBITDA in 2016. Collectively, DBRS expects these gains to more than offset weaker performance in the retail segment for the year.

Morguard is expected to incur higher leasing costs and tenant improvements associated with the Company’s retail lease maturities in 2016. DBRS believes Morguard’s growing cash flow from operations should sufficiently fund the higher aforementioned expenses and the Company’s stable dividends for the year. In addition, Morguard’s development expenditures will increase as the Company re-demises and redevelops its vacated Target space. Property acquisitions, development expenditures and investment holdings are expected to be funded by the Company’s cash on hand, free cash flow and modest amounts of debt. DBRS notes that cash distributions from investments in MRT and MRG (totalling approximately $42 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 (x) (excluding cash distributions from MRT and MRG), a level DBRS considers adequate for the current rating category.

Although there is a strong relationship between Morguard’s stand-alone operations and MRT’s and MRG’s business, 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. A negative rating action could result if EBITDA interest coverage (including capitalized interest but excluding distributions from MRT and MRG) falls below 2.30x on a sustained basis due to weaker operating performance and/or higher financial leverage.

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 (May 2015), which can be found on our website under Methodologies.