Description
Introduction:
Morguard Corporation (“MRC CN”) is an integrated real estate investment and management company that acquires, owns, and develops real estate properties in Canada and the U.S. MRC CN has historically generated consistent net operating income due to its diversified portfolio of real estate: 68% of its portfolio is in Canada and the remaining 32% is in the U.S. By asset class, 47% of its portfolio is multifamily residential buildings centrally located in top cities; 23% is office space centrally located in greater Toronto and surrounding areas; 18% is retail space in both Canada and the U.S.; and the remainder of the portfolio is comprised of industrial buildings as well as a small hotel portfolio that MRC CN is actively exiting. In addition to its historically stable and growing net operating income, MRC CN has grown its book value per share by ~10% annually in the past 10 years. MRC CN has historically maintained a low-90% average occupancy rate across its portfolio allowing the company to generate free-cash-flow throughout the C19 downturn with zero dilution to equity investors.
Due to C19 disruptions, limited sell-side coverage, a limited float (the CEO owns 60% of the common equity), and complicated accounting, shares of MRC CN have underperformed nearly all real estate equities in Canada and the U.S. despite a history of outperforming. Trading at 32% of its net asset value and 5.8x 2022E FFO, compared to peers at 13.7x FFO, MRC CN is an attractive investment opportunity with 94-210% upside.
MRC CN Trades at a 68% Discount to its Net Asset Value:
An investor in MRC CN today is paying $1.2 billion in market valuation for $3.9 billion of cash, marketable securities, and directly owned real estate as shown in the tables below:
Asset Overview:
A deeper look at MRC CN’s diversified portfolio of real estate assets suggest MRC CN should not be trading at such an extreme discount:
1. Residential ($2.4 billion of book value; 47% of total directly owned real estate book value):
a. 16 multifamily properties – 52% of the units are in Canada and the rest in the U.S.
b. A mix of high-rise buildings and low-rise, garden style communities.
c. Experiencing strong rent growth in the U.S. and occupancy recovery in Canada.
2. Office ($1.2 billion of book value; 23% of total directly owned real estate book value):
a. 27 office properties – almost 100% of GLA in Canada and a small property in the U.S.
b. 65% of GLA in Ontario, Canada.
c. Occupancy and earnings have been stable since the start of C19.
3. Retail ($920 million of book value; 18% of total directly owned real estate book value):
a. 19 retail properties – 43% of GLA in Canada and the rest in the U.S.
b. A mix of shopping malls and neighborhood retail centers mainly in Toronto and Florida.
c. Retail in Canada was severely impacted by strict C19 closures but is now recovering.
4. Industrial ($136 million of book value; 3% of total directly owned real estate book value):
a. Three industrial properties in Canada.
b. Demand has been steadily increasing.
5. Hotel ($435 million of book value; 9% of total directly owned real estate book value):
a. 30 hotels in Canada – 50% of rooms in Ontario, 23% of rooms in Alberta.
b. Results are expected to bounce back sharply as Canada reopens post-C19.
Steady Historical Results:
As reflected in the tables below, MRC CN has historically generated consistent results given its diversified portfolio of assets. We believe 2019 is more reflective of a normalized FFO due to the C19 disruptions in 2020/2021.
Significant Discount to Peers:
Not only is MRC CN trading at a significant discount to its book value and historical valuation, but it is also trading cheaper than every publicly traded peer regardless of asset class, as evidenced in the charts below:
Fair Value:
Given its significant discount to historical valuation, peers, and its net asset value, there are various ways to triangulate to significant upside of 94%-210% to an investment in MRC CN. Our conservative case valuation is that MRC CN is worth $213.48/sh, which still puts MRC CN at a 37% discount to its book value, slightly lower than historical holdco discounts.
MRC CN currently values its portfolio using a weighted average capitalization rate of 5.2% but is trading at an LTM cap rate of 6.6%, and, as noted below in catalysts, MRC CN has recently monetized properties at low 3% cap rates.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Despite simply being cheap, MRC CN has a proactive management team that has a few tools at its disposal, as well as some macro tailwinds coming out of C19, that could improve valuation:
1. Resumption of buybacks – MRC CN renewed its buyback program in September, stating that “MRC CN believes its Common Shares have been trading in price ranges which do not adequately reflect their value in relation to the business of MRC CN and its future business prospects.” Since 2011, the company has repurchased 1.8 million shares of its stock, or 16.6% of the current shares outstanding. Since May 2022, insiders have purchased 3,200 shares of MRC CN. The company also bought back 4,000 shares between June 6 and June 9.
2. Monetization of properties – since 1Q2022, MRC CN sold two multifamily properties at a slight premium over their reported book values (MRC CN has historically been known to be conservative with their property valuations). These were sold at low-3% cap rates compared to MRC CN’s LTM cap rate of 6.6%. The company is also monetizing its hotel portfolio, simplifying the story. Since C19 they have sold 7 hotel properties of the total 37 hotel properties. We expect more deals to be announced in the coming months.
3. C19 recovery should create a significant earnings tailwind to MRC CN’s retail and hotel properties, which are currently underearning pre-C19 NOI levels by 13% and 57%, respectively.