Morguard Corp. (TSX:MRC, Financial) is a fairly large real estate company operating in Canada, with a market cap of 1.26 billion Canadian dollars ($1.03 billion, an enterprise value of C$7.49 billion and holdings across many real estate sectors, including retail, apartments, offices and hotels.
The company operates through three business divisions: investments in real property, ownership in real estate investment trusts (including Morguard REIT (TSX:MRT.UN, Financial) and Morguard North American Residential REIT (TSX:MRG.UN, Financial) and real estate advisory services and portfolio management.
It currently trades at a huge discount from its overall net asset value and book value. Morguard has compounded its book value by double digits over the last 10 years. While Morguard is the parent corporation, its two subsidiary REITs listed above track different aspects of the portfolio, with MRT.UN tracking a group of retail and office properties and MRG.UN mostly focused on residential apartment buildings.
A complex structure
The parent owns 44.7% of MRG.UN and 60.9% of MRT.UN and consolidates their results on its financial statements using the equity method. To make matters more complicated, units of MRG.UN not owned by Morguard are recorded as a non-current liability on the balance sheet while units of MRT.UN not owned by the company are recorded as "minority interest" in the equity section of the balance sheet. The structure is confusing and non-transparent for the investor and that is probably one of the reasons as to why the Morguard entities trade at such a big discount to their net asset value. The other reasons are lack of liquidity, lack of dividends and high insider ownership of stock outstanding.
With the onset of Covid-19, the stock has taken a deep dive and has not yet recovered. The company has also taken a hit on the value of its retail and office property holdings and had to take a non-cash charge of $511.5 million to the value of these properties. The company reported that normalized funds from operation (FFO) decreased by $44.4 million, or 19.7%, to $181.2 million for the year ended Dec. 31, 2020 compared to $225.6 million for the same period in 2019.
Net operating income (NOI) decreased by $65.0 million, or 11.7%, during the year to $491.2 million compared to $556.2 million generated in 2019. This works out to, by my calculations, to a overall cap rate (NOI/Enterprise Value) of 6.6% now vs. 6.3% last year. So in spite of decrease of NOI, the stock is a better value now than last year.
Recovery and redevelopment potential
As the Canadian economy recovers from the impact of Covid-19, the company's net asset value is expected to recover, and the stock price should follow.
While some of the company's retail properties, especially the company's enclosed malls, may be impaired permanently as retailers go out of business, they do present attractive re-development opportunities in the long run. For example, the company owns a B-class mall called Centerpoint Mall in North Central Toronto, which could become a very attractive mixed use development in the future as it own very valuable land. Similar redevelopment opportunities exist throughout the company's retail portfolio.
Dividend and buybacks
Morguard pays a small dividend and currently yields 0.53%. The apartment REIT (MRG.UN) yields 4.44% and the other REIT (MRT.UN) yields 4.4% (the latter has cut its dividend by 50% to cope with the Covid-19 crisis).
The parent corporation has a consistent record of buying back stock. It has bought back about 1.73% of its outstanding stock annually over the last 10 years. I think the holding company Morguard has the most long-term value, however, if investors desire some income while they wait they can own one or both the REITs.
Closing thoughts
Morguard is an exceptionally cheap stock headed by an enterprenurial deep value investor, K.Rai Sahi, who is the CEO. Sahi owns about 60% of Morguard. Investors should be aware that Sahi may eventually want to retire and sell the company off to a pension fund or other large asset investor.
The company owns or controls a tremendous amount of high-quality real estate. I believe the net asset value is well over $300 a share while it is currently selling for ~$115. It is a great opportunity for the very long term investor who is content to wait until the controlling shareholder eventually "goes to cash."
However, there does not appear to be a near term value realization catalyst, hence one of the reasons for a big discount. Also, the stock is quite illiquid as the float is small due to high insider ownership. It is almost like the controlling shareholder likes to keep the stock price down by keeping a low profile so he can keep on buying more shares quitely while building NAV. He is the opposite of flashy corporate execs who are always talking up their companies so they can plump up their stock options. Personally, I like his style.
Disclosure: The author does not own shares of Morguard Corporation but is considering investing
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