DBRS Morningstar Confirms Ratings on Morguard Corporation at BB (high) With Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debentures rating of Morguard Corporation (Morguard or the Company) at BB (high) with Stable trends. The recovery rating of the Senior Unsecured Debentures is RR4.

The rating confirmations reflect the modest improvement in Morguard’s key financial metrics and its business risk profile, which the Company has maintained at levels commensurate with the current rating category. The improvement, most notable in leverage measured by total debt-to-EBITDA of 10.9 times (x) for the last 12 months ended December 31, 2022, was largely driven by a strong operating performance particularly within the Company's multifamily and hotel segments, which strongly rebounded in 2022 as easing of Coronavirus Disease (COVID-19) pandemic restrictions positively affected by rental growth and occupancy combined driving higher same property net operating income (NOI) growth. However, DBRS Morningstar anticipates that leverage will remain in the high 10x range in the near to medium term as a result of a lack of a visible path toward reduction in leverage. DBRS Morningstar's assessment of Morguard's asset quality remains unchanged as challenges facing the suburban office assets are partially offset by the high grading of its hotel portfolio following the sale of 19 noncore, underperforming hotel properties since 2021. DBRS Morningstar also lowered its assessment of Morguard's lease maturity profile and tenant quality as a result of a slight decline in its portfolio's weighted-average lease term to maturity as compared with its peers.

The Stable trends reflect the expectation that Morguard will continue to generate stable cash flow from operations amid a challenging macroeconomic environment. DBRS Morningstar anticipates Morguard will continue high grading its portfolio through capital recycling initiatives and use proceeds to repay debt and fund development expenditures by the Company’s cash on hand, free cash flow, and manageable amounts of debt.

The ratings continue to be supported by (1) Morguard's average quality real estate portfolio; (2) the Company’s strong asset type diversification with a broadly diversified portfolio across real estate subsectors; and (3) Morguard Corporation benefitting from the strong market position of the Morguard group of companies. The ratings continue to be constrained by (1) the Company's elevated leverage; (2) the portfolio's relatively short lease maturity profile and average tenant quality; (3) the high proportion of secured debt; (4) the relatively small portfolio; and (5) Morguard's large exposure to office properties in secondary/tertiary markets.

DBRS Morningstar continues to attribute rating benefit to Morguard’s holdings in Morguard Real Estate Investment Trust (MRT) and Morguard North American Residential REIT (MRG; together with MRT, the REITs), notwithstanding reduced distributions received from MRT. DBRS Morningstar continues to believe 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 a modest, albeit reduced, rating uplift.

DBRS Morningstar would consider taking negative rating action if Morguard's total debt-to-EBITDA were to deteriorate above 11.0x and EBITDA interest coverage deteriorated below 2.0x on a sustained basis, all else equal, or if DBRS Morningstar were to reassess the rating uplift provided by distributions received from the REITs.

DBRS Morningstar would consider a positive rating action if Morguard’s total debt-to-EBITDA were to improve below 10.0x and EBITDA-interest coverage improved above 2.3x on a sustained basis, all else equal.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929 (May 17, 2022).

Notes:
All figures are in Canadian dollars unless otherwise noted.

DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Entities in the Real Estate Industry (April 11, 2023; https://www.dbrsmorningstar.com/research/412477)
-- DBRS Morningstar Global Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (September 1, 2022; https://www.dbrsmorningstar.com/research/402218/)

The following methodologies have also been applied:
-- DBRS Morningstar Global Criteria: Common Adjustments for Calculating Financial Ratios (December 8, 2022; https://www.dbrsmorningstar.com/research/407058)
-- DBRS Morningstar Global Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (October 26, 2022; https://www.dbrsmorningstar.com/research/404334)

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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 [email protected].

The rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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