Morguard Corporation

Morguard Corporation (TSX: MRC) is a real estate company that acquires, owns, and develops properties in Canada and the United States. The group operates through three business segments, namely investments in real property, ownership in real estate investment trusts (including Morguard REIT and Morguard North American Residential REIT), and real estate advisory services and portfolio management.

Key Highlights:

• Early Sign of recovery in office leasing market: The Canadian office leasing market showed early signs of recovery in Q2FY21, as the sector witnessed improved investor’s traction across the multi-suite residential rental and industrial property, supported by a gradual recovery in the overall economy. The management expects that the recovery is likely to continue in the later half of FY21, supported by prompt rollout of vaccine program across Canada and resulting in subsequent uptick in domestic demand. Moreover, relaxing pandemic restrictions would support the return of foreign students and international immigrants, which would also drive demand across the multi-suite residential rental segments in the coming quarters.
• Surge in Cash flows: The company reported a strong growth in cash from operations at CAD 100.681 million in H1FY21, climbed from CAD 80.641 million in pcp. The growth was supported by a net income of CAD 34.129 million in H1FY21, as compared to a net loss of CAD 113.908 million in pcp.
• Balanced Risk profile: The company invests across several asset classes, which result into lower dependence on a specific segment. Apart from the real estate’s sector, the company also invests in global equities.

Q2FY21 Financial Highlights:

• MRC announced its quarterly result, wherein revenue from real estate properties stood at CAD 208.691 million, down from CAD 218.477 million in the previous corresponding period (pcp). Meanwhile, revenue from hotel properties was recorded at CAD 30.116 million, jumped from CAD 8.831 million in pcp.
• The company reported an improved net operating income of CAD 134.545 million, as compared to CAD 131.174 million in Q2FY20. The improvement was driven by strong momentum from the hotel property segment.
• The corporation reported a slight improvement in other revenue at CAD 14.959 million, as compared to CAD 13.597 million in pcp, supported by increased income from management and advisory fees.
• The company turned profitable, and net profit was recorded at CAD 16.181 million, as compared to a net loss of CAD 105.038 million in the previous corresponding period. The difference was supported by a lower loss from fair value changes.

Q2FY21 Income Statement highlights (Source: Company Report)

Risks: Decline in the fair value of properties are likely to impact the company’s bottom line. New working preferences like work from home option is likely to dampen the occupancy rate of the office premises and would subsequently take a toll on the overall performance.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

The company has a healthy liquidity level of CAD 346 million, which includes a cash balance of CAD 140 million and CAD 206 million of funds available under revolving credit facilities. Additionally, the company has an additional unencumbered income producing and hotel properties amounting to CAD 1,290 million, which could further utilize for financing and investing purposes. The above is sufficient to fund its near-term working capital requirements. We have valued the stock using the Price to Earnings-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like SmartCentres Real Estate Investment Trust, CT Real Estate Investment Trust etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 137.00 on August 19, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on August 20, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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