Morguard Corporation

Morguard Corporation (TSX: MRC) is a real estate company that acquires, owns, and develops properties in Canada and the United States.

Q1FY20 Financial Highlights:  For the period ended March 31, 2020, Morguard Corporation reported revenue of CAD 292.31 million, as compared to CAD 289.52 million. The slight increase was driven by increase rent collection from real estate properties, while recent shut down in hotels threw challenges on the rent income, which remained a drag. Property operating expense increase to CAD 130.93 million, increased from CAD 124.38 million in pcp, which resulted in a lower net operating income of CAD 102.60 million, against CAD 104.57 million in pcp. However, lower hotel operating expense continue to support profitability. The Company reported a stiff fall in funds from operation (FFO) at CAD 6.99 million, significantly lower than CAD 53.56 million, a year ago. The decline was primarily attributable to a decline in the unrealized changes in the fair value of the Company's marketable securities amounting CAD 62.0 million. However, normalized funds from operation declined marginally declined to CAD to 51.4 million from CAD 52.5 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risk: Prolong closure of hotels, and restaurant segments would increase the arrear for the company, which might result in lower performance. Also, the increasing unemployment rate might result in a delay in rent collection, which could hamper the cash flow.   

Valuation Methodology (Illustrative): EV to EBITDA Based Valuation

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of MRC corrected ~40% so far this year, due to the ongoing economic crisis, which led to drag on the real estate prices. At the last closing price, the stock is trading closer to the lower band of its 52-weeks trading range of CAD 114.18 and CAD 219.48. Morguard showed strong payment collection in residential segment for the month of April 2020 at 95.9%, at par with the historical collection rates, which is encouraging. The Group is monitoring the current rent collections dynamics and is prioritizing on recovering the arrears, to retain the financial flexibility. On the liquidity front, the Group has more than CAD 300 million in the form of cash and revolving credit facilities and CAD 990 million of unencumbered income-producing properties, which could be utilized to support the capital requirement, ensures strong liquidity position. Furthermore, the Company is working on lowering its capital expenditures, operating expenses, property tax installments, hydro payments and corporate income tax installments, in order to preserve liquidity. We have valued the stock using EV to EBITDA based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered Boardwalk Real Estate Investment Trust (TSX: BEI.UN), Northview Apartment REIT (TSX: NVU.UN), and Killam Apartment REIT (TSX: KMP) etc., as a peer group. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 122.03 on June 26, 2020.

MRC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Mainstreet Equity Corp.

Mainstreet Equity Corp (TSX: MEQ) is a residential real estate company based out of Canada and is focused on the acquisition, redevelopment, repositioning, and management of mid-market rental apartment buildings in Canadian markets.

Q2FY20 Financial Highlights: For the period ended March 31, 2020, MEQ reported its total rental and ancillary revenue of CAD 37.23 million, higher than CAD 33.70 million in pcp. The increase was driven by higher rental revenues from the primary markets like British Columbia, Saskatchewan and Alberta markets. Net operating income improved to CAD 21.70 million, as compared to CAD 20.15 million in the previous corresponding quarter, thanks to the higher revenue while increased property expense remained a drag. The quarter was marked by a surge in financing costs and depreciation expense while general and administrative expenses stood flat as compared to pcp. Profit before income tax stood at CAD 5.58 million, as compared to CAD 15.51 million in pcp due to a loss from change in fair value amounting CAD 3.32 million, as compared to a gain of CAD 7.30 million in Q2FY19. Net profit and total comprehensive income stood significantly lower at CAD 3.68 million, as compared to CAD 12.28 million in pcp. The Group exited the quarter with cash and cash equivalents amounting CAD 10.15 million while total assets stood at CAD 2,116.42 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: Due to the COVID 19 pandemic, the Company might witness a surge in operating costs on account of additional cleaning, sanitizing, and the purchase of personal protective equipment etc. Further, costs for materials and human resources are likely to remain high in the near term. Temporary closure of the Canadian border has also restricted the inflow of foreign students and immigrants, which might take a toll on the income.

Valuation Methodology (Illustrative): EV to EBITDA Based Valuation

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of MEQ stood resilient in last one year and appreciated ~22%and outperformed the benchmark index by ~19%. Despite the current pandemic and economic crisis, the company achieved a ~95% collection rate during the second quarter of FY20, which is commendable. The company has liquidity of CAD 170 million, which seems sufficient to support the near-term fund’s requirements. We believe, the group is likely to be benefitted from the current acquisitions, which would enhance the company’s current portfolio, a key positive. The group believe that the current scenario with lower costs for acquisitions and debt is likely to provide decent opportunities to expand the portfolio. The group is planning to accelerate its counter-cyclical growth strategy and expect the real estate market to provide favourable buying conditions. The company recently raised loans for 10 years at 1.66%; it is the lowest rate at which MEQ borrowed ever. Investors should note that the stock is trading close to the 200-days simple moving average of CAD 67.82, which signifies a long-term bullish pattern. We have valued the stock using EV to EBITDA based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered InterRent Real Estate Investment Trust (TSX: IIP.UN), Boardwalk Real Estate Investment Trust (TSX: BEI.UN), and Killam Apartment REIT (TSX: KMP) etc., as a peer group. Hence, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 67.41 on June 26, 2020. 

MEQ Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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