DBRS Limited (DBRS Morningstar) changed the trends on Morguard Corporation’s (Morguard) Issuer Rating and Senior Unsecured Debentures rating to Negative from Stable. DBRS Morningstar also confirmed the ratings at BBB (low). The Negative trends reflect leverage that exceeds DBRS Morningstar’s expectations following Morguard’s acquisition of the remaining unowned common shares in Temple Hotels Inc. (Temple) and the long-term implications from deterioration in cash flow as a result of the Coronavirus Disease (COVID-19).
DBRS Morningstar had anticipated Morguard leverage to increase to debt-to-EBITDA of 11.7 times (x) following Morguard’s acquisition of Temple and associated mortgage debt before materially declining below 10.0x by YE2021. Fundamental weakness in certain Morguard segments, namely retail and hotels, resulting from the pandemic, however, will likely increase leverage to 13.9x (or 11.8x if distributions from Morguard’s affiliated real estate investment trusts (REITs) were included in EBITDA) by YE2020. DBRS Morningstar believes Morguard will be challenged to reduce leverage below 10.0x by the end of 2021. EBITDA interest coverage is also lower than DBRS Morningstar’s expectations for the rating, and will likely be 1.82x (or 2.14x with distributions affiliated REITs included) for 2020. The rating is additionally constrained by a relatively short lease maturity profile with a commercial weighted-average lease term to maturity of 5.1 years as at June 30, 2020, as well as elevated exposure to the hotel segment as pursuant to the acquisition of Temple, a sector which has been most negatively affected by the coronavirus pandemic.
Because DBRS Morningstar attributes material rating benefit to Morguard’s holdings in Morguard Real Estate Investment Trust (MRT) and Morguard North American Residential REIT (together with MRT, the REITs), DBRS Morningstar’s EBITDA calculations exclude REIT distributions received. DBRS Morningstar believes that ownership in the REITs, forming core long-term investment holdings of Morguard, provides the Company with reliable quarterly cash distributions that it can use for debt service. This enhances diversification and stability of Morguard’s cash flows and is a positive consideration in Morguard’s credit risk profile, thus warranting some rating uplift.
Absent significant progress by Morguard to lower leverage, DBRS Morningstar will likely consider a rating downgrade within the next 12 months if debt-to-EBITDA remains in excess of 10.0x (excluding affiliated REIT distributions), likely resulting from persistent weakness from prolonged effect of the coronavirus pandemic and other challenges that limit options for reducing leverage. DBRS Morningstar may revise the trend on the ratings to Stable if Morguard achieves improvement in leverage below 10.0x and EBITDA interest coverage above 2.30x.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Entities in the Real Estate Industry (June 4, 2020) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
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 under Related Documents or by contacting us at firstname.lastname@example.org.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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