Morningstar DBRS Changes Morguard Corporation's Trends to Positive From Stable and Confirms Issuer Rating and Senior Unsecured Debentures Credit Ratings at BB (high)
Real EstateDBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and Senior Unsecured Debentures rating of Morguard Corporation at BB (high) and changed the trends to Positive from Stable. In addition, Morningstar DBRS changed the recovery rating of the Senior Unsecured Debentures to RR2 from RR3.
KEY CREDIT RATING CONSIDERATIONS
The Positive trends reflect Morningstar DBRS' modestly upward assessment of Morguard's financial risk assessment (FRA) resulting from sustained deleveraging initiatives undertaken in the past year. The trends also take into consideration Morguard's consistency with Morningstar DBRS' prior-year expectations for both leverage and coverage for a positive rating action. The Company's leverage as measured by Total Debt-to-EBITDA of 9.1 (x) times was consistent with Morningstar DBRS' prior-year expectations while coverage as measured by EBITDA Interest coverage ratio of 2.1 (x) for year-end 2024 was better than Morningstar DBRS' prior year's expectations of 2.0x. Furthermore, Morguard's business risk assessment (BRA) factors, namely Diversification and Lease Maturity and Tenant Quality, have been revised modestly higher. Morguard's diversification has improved on account of improvement in geographical diversification, partially driven by modest reduction in Ontario's geographic concentration following the Company's sale of majority of its hotel portfolio last year and a recent strategic acquisition of 20% interest in Telus Garden, an office asset in Downtown Vancouver in Q4 2024. The hotel dispositions have also modestly improved Lease Maturity and Tenant Quality as the strategic shift has resulted in higher-credit-quality tenants contributing a greater proportion of Morguard's overall revenues. Taken together, these BRA and FRA revisions are credit positive in nature and provide a higher tolerance for leverage (i.e., total debt-to-EBITDA) for a given credit rating. Morningstar DBRS also continues to attribute credit 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). Morningstar DBRS 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, thus warranting a modest credit rating uplift.
CREDIT RATING DRIVERS
Morningstar DBRS would consider a credit ratings upgrade should Morguard perform consistently with our expectations such that the Company's total debt-to-EBITDA and EBITDA interest coverage continue to remain in the low 9.0x range and low 2.0x range, respectively, in the next 12 months, all else being equal. Morningstar DBRS would consider changing the trend to Stable if Morguard's total debt-to-EBITDA were to deteriorate above 9.8x and EBITDA interest coverage were to deteriorate below 2.0x on a sustained basis, all else equal, or if Morningstar DBRS were to reassess the credit rating uplift provided by distributions received from the REITs.
FININCIAL OUTLOOK
Morningstar DBRS anticipates Morguard's leverage measured by total debt-to-EBITDA will remain in the low 9.0x range in the near term owing to the consistent operational performance within its diversified portfolio and then modestly improve in the high 8.0x range over the medium term on account of its near-term capital improvement and ongoing development initiatives, modest progress in occupancy, and same property NOI growth. Similarly, EBITDA-to-interest coverage is expected to remain relatively steady in the low 2.0x range in the near to medium term as interest expenses are expected to modestly increase on account of capitalised interest related to ongoing development projects and refinancing of near-term mortgage maturities at elevated interest rates. Morningstar DBRS believes that Morguard has additional flexibility in the current credit rating category from the upward revision in its business risk assessment (BRA) factors.
CREDIT RATING RATIONALE
The credit rating confirmations are supported by Morguard's (1) well-diversified, stable and recurrent income-producing portfolio through economic cycles; (2) strong asset type and tenant diversification; and (3) key investment holdings in publicly listed REITs like MRT and MRG. However, the credit ratings are constrained by the Company's (1) high proportion of secured debt; (2) lack of scale in any markets in which it operates; and (3) the smaller portfolio size on both EBITDA and square footage bases relative to higher-rated real estate entities in Morningstar DBRS' coverage universe.
Morningstar DBRS has changed the recovery rating on Morguard's Senior Unsecured Debentures to RR2 from RR3 because of its improved assessment of a potential recovery in a default scenario. However, the Senior Unsecured Debentures rating remains unchanged despite this upward revision in the instrument's recovery rating.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.
BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Morguard Corporation, the BRA factors were considered in the order of importance contemplated in the methodology.
(B) Weighting of FRA Factors
In the analysis of Morguard Corporation, the FRA factors were considered in the order of importance contemplated in the methodology.
(C) Weighting of the BRA and the FRA
In the analysis of Morguard Corporation, the BRA carries equal weight compared to the FRA.
Notes:
All figures are in Canadian dollars unless otherwise noted.
Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Entities in the Real Estate Industry (April 15, 2024), https://dbrs.morningstar.com/research/431170
Morningstar DBRS credit ratings may use of one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025; https://dbrs.morningstar.com/research/447186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.
The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.
A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.
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 info-DBRS@morningstar.com.
The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.
This is a solicited credit rating.
For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.
Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.
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