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 Highlight:

• Better Margin than Industry: The group enjoys higher margins against its peers, which is encouraging and indicates higher operational efficiency. Gross margin in Q1FY21 stood higher at 53.90%, as compared to 39.90% of the industry median, while EBITDA and operating margins stood at 34% and 23.4% with respect to the industry median of 13% and 8.6%, respectively. Net margin, on the other hand, stood at 7.3%, considerably higher than industry median of 2.8%.          

• Signs of Revival: In Q1FY21, the group witnessed strong bids from investors within the multi-suite residential rental properties segment, while the particular asset class are likely to remain positive in medium-term to long-term aspects. The vacancy rate has lowered and held close to the pandemic highs across most regions.  Additionally, the retail segment performed well in the recent past, driven by strong traction from the grocery segment, despite a restriction imposed across the shopping malls. Meanwhile, low-risk industrial and multi-suite residential rental properties recorded stable-to-high transaction activity during the quarter, which is encouraging.

Q1FY21 Financial Highlights:

• MRC declared its first quarter result, wherein revenue from real estate properties was reported at CAD 211.364 million, down from CAD 228.226 million in the previous corresponding period (pcp). Meanwhile, revenue from hotel properties stood significantly lower at CAD 22.148 million v/s CAD 47.805 million in pcp.
• The company reported a lower net operating income of CAD 86.474 million, compared to CAD 102.601 million in Q1FY20. The decline was due to a lower topline partially offset by a lower property operating cost (CAD 47.061 million v/s CAD 48.750 million in pcp).
• The corporation reported a decline in other revenue at CAD 13.450 million, v/s CAD 16.239 million in pcp, primarily due to a lower income from management and advisory fees coupled with lower interest income.
• The group recorded a net profit of CAD 17.948 million, as compared to a net loss of CAD 8.870 million in the previous corresponding period. The difference was supported by a fair value gain of CAD 38.926 million v/s a fair value loss of CAD 36.822 million in pcp.

Q1FY21 Income Statement Highlights (Source: Company Reports)

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 based

Stock Recommendation:

The reopening of Canada's international borders later this year or in early FY22 would lead to a consecutive increase in international migration. Notably, this would support a stronger rental demand and would lead to an uptick in occupancy rates and rentals. Within the commercial office segment, the management expects a stable performance for the rest of the year, despite a tepid occupancy rate. Notably, the average Q1FY21 vacancy rate for downtown areas across major cities, such as Edmonton, Toronto, and Vancouver, witnessed a 20% high on y-o-y basis at 13.3%. 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 Killam Apartment REIT, Crombie Real Estate Investment Trust. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 142.28 on June 17, 2021.

One-Year Technical Price Chart (as on June 17, 2021). Analysis by Kalkine Group

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

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