DBRS Morningstar Confirms Morguard Corporation’s Senior Unsecured Debentures at BBB (low) with a Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Senior Unsecured Debentures rating of Morguard Corporation (Morguard or the Company) at BBB (low) with a Stable trend. Because DBRS Morningstar assesses Morguard’s credit risk profile on a non-consolidated basis and attributes material rating benefit to Morguard’s holdings in Morguard Real Estate Investment Trust (REIT; MRT) and Morguard North American Residential REIT (MRG; 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.

The rating continues to be supported by Morguard’s average-quality portfolio with a strong and diversified tenant base, favourable asset type diversification and the combined market position of the Morguard Group of Companies (Morguard, MRT, MRG, Morguard Investments Limited (MIL) and Temple Hotels Inc. (Temple)), while also providing Morguard with opportunities for management and advisory-fee income. The rating continues to be constrained by highly elevated leverage as measured by total debt-to-EBITDA of 11.0 times (x) on a last-12-months (LTM) basis as at September 30, 2019 (or 9.1x if distributions from the REITs were included in EBITDA); a relatively short lease maturity profile with a commercial weighted-average lease term to maturity of 4.7 years as at September 30, 2019, that is further compounded by short-term leases in the multifamily segment; and elevated and growing exposure to the hotel segment as Morguard announced on November 15, 2019, that it intends to acquire the remaining un-owned common shares in Temple for approximately $43 million in a take-private transaction subject to shareholder approval (the Transaction).

The Stable trend considers DBRS Morningstar’s expectation for stable or improving operating performance in Morguard’s challenged retail segment with occupancy of 81.3% at as September 30, 2019; the Company’s current elevated leverage; and the potential impact of the Transaction, which DBRS Morningstar views as modestly credit negative both in terms of Temple’s lower-quality assets and deteriorating leverage and coverage resulting from the Transaction. Indeed, DBRS Morningstar estimates total debt-to-EBITDA will peak at around 11.7x if the Transaction should close, while improving materially thereafter, reaching sub-10x by year-end 2021, largely as a result of the growth in earnings attributable to recent and proposed transactions (i.e., the Temple Transaction). The Stable trend also considers Morguard’s other recent acquisitions of sizable office assets in Ottawa as the company continues to expand and upgrade its portfolio.

A negative rating action could occur in the near to medium term should total debt-to-EBITDA remain at or above 11.0x and EBITDA interest coverage falls below 2.30x on a sustained basis; or in the event the Transaction closes, should total debt-to-EBITDA fail to show steady improvement as expected, all else equal; or if DBRS Morningstar changes its views on the rating uplift afforded by distributions Morguard receives from the REITs. DBRS Morningstar is not considering a positive rating action at this time because of the above-noted constraints, including highly elevated leverage.

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

The principal methodology is Rating Entities in the Real Estate Industry, which can be found on dbrs.com under Methodologies & Criteria.

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.com.

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.

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