DBRS Morningstar Downgrades Morguard Corporation to BB (high); Changes Trend to Stable

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

The downgrades are largely the result of sustained deterioration in the Company’s financial risk metrics, most notably leverage as measured by total debt-to-EBITDA of 11.9 times (x) for the last 12 months ended December 31, 2021, and DBRS Morningstar's expectation that such deterioration will persist for the foreseeable future. No doubt contributing to higher leverage is the difficult operating environment resulting from the Coronavirus Disease (COVID-19) pandemic, most acutely in Morguard's hotel portfolio, which was expanded pursuant to its privatization of Temple Hotels Inc. on February 18, 2020. DBRS Morningstar anticipates Morguard’s operating environment will remain challenging, notwithstanding anticipated capital recycling initiatives as Morguard seeks to dispose of non-core assets, particularly in its hotel segment.

The ratings continue to be supported by (1) Morguard's average quality real estate portfolio with strong tenant quality, (2) solid asset type diversification with a broadly diversified portfolio across real estate subsectors, and (3) Morguard 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 (3) Morguard's elevated hotel exposure.

DBRS Morningstar continues to attribute rating benefit to Morguard’s holdings in Morguard Real Estate Investment Trust (MRT) and Morguard North American Residential REIT (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 modest rating uplift.

DBRS Morningstar would consider taking further negative rating action if Morguard's operating environment continues to deteriorate more than expected by DBRS Morningstar such that Morguard's total debt-to-EBITDA deteriorates above 13.0x 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 operating environment were to improve relative to expectations such that total debt-to-EBITDA is below 10.0x on a sustained basis, all else equal.

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/373262.

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

The principal methodologies are Rating Entities in the Real Estate Industry (April 20, 2022; https://www.dbrsmorningstar.com/research/395563) and DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (August 19, 2021; https://www.dbrsmorningstar.com/research/383238), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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@dbrsmorningstar.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.

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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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