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Morguard Corporation: Selling at a 30% Discount to Intrinsic Value

June 23, 2014 | About:

1. The Company

Morguard Corporation (MRCBF),(MRC) is a real estate investment company who specializes in acquisition and ownership of commercial and residential properties in North America. The company also offers real estate advisory and management services through its wholly-owned subsidiary Morguard Investment Limited. Morguard owns owns 44.5% of the outstanding units in Morguard REIT (MRT.UN) and 48.8% of the outstanding units in Morguard North America Residential REIT (MRG.UN). The company owns and manage a real estate portfolio valued at $15 billion dollars. Morguard has a diversified portfolio of more than 52 million high quality commercial real estate and more than 18,000 multi-units residential suites and 1,220 hotel suites.

2. Company History & Operations

The company was a pioneer in introducing real estate equity investments to Canadian pension funds. Morguard Properties formed in 1975 which later came Morguard Limited to provide real estate advisory service to the first funds to provide pension funds access to real estate investments. Throughout the 1980's and 1990's Morguard Investments continued to focus on its core business of acquiring, developing and managing properties for the company's pension fund clients. In 1997, Morguard REIT was created through the securitization of Pension Fund Properties Limited. The company went through dramatic change and growth when Acktion Corporation acquired 100% of Morguard Investments Limited and changed its name to Morguard Corporation. In 2012 the company launched Morguard North American Residential. Company's subsidiaries:

  • Morguard Investment Limited 100% owned
  • Morguard Real Estate Investment Trust 44.5% owned
  • Morguard North American Residential Real Estate Trust 48.8% owned

REIT's interest provided in 2013 $40 million in distribution to Morguard in steady annual cash flow that can be used be reinvested for future growth. Also in 2013 the company sold $183 million of its real estate to its residential REIT. This allows the company to recycle that capital into developmental projects that will lead to higher return on assets. Morguard management business produces $75 million a year in fees.

3.Finances

Balance Sheet

Period Ending: 2012

31/12

2011

31/12

2010

31/12

2009

31/12

Total Current Assets - - - -
Cash and Short Term Investments 78.42 28.75 27.69 40.87
Cash - - - -
Cash & Equivalents 78.42 28.75 27.69 40.87
Short Term Investments - - - -
Total Receivables, Net 75.94 34.64 38.6 43.87
Accounts Receivables - Trade, Net 33.62 34.57 30.27 43.87
Total Inventory 12.21 8.36 7.91 1.75
Prepaid Expenses 21.24 6.11 6.71 12.13
Other Current Assets, Total - - - -
Total Assets 4386.18 3467.21 3007.96 2051.72
Property/Plant/Equipment, Total - Net 3374.5 2627.05 2297.43 1555.52
Property/Plant/Equipment, Total - Gross 3374.5 2627.05 2297.43 1820.32
Accumulated Depreciation, Total - - - -264.8
Goodwill, Net 24.49 24.49 24.49 24.49
Intangibles, Net - - - 52.82
Long Term Investments 736.91 614.26 484.56 238.05
Note Receivable - Long Term - 76.81 77 62.93
Other Long Term Assets, Total 62.48 46.56 43.56 19.31
Other Assets, Total - 0.17 - -
Total Current Liabilities - - - -
Accounts Payable - - - -
Payable/Accrued 70.3 52.26 52.09 58.81
Accrued Expenses - - - -
Notes Payable/Short Term Debt 174.24 75.54 70.87 17.34
Current Port. of LT Debt/Capital Leases 257.57 107.6 94.96 -
Other Current liabilities, Total 27.02 16.76 12.52 20.84
Total Liabilities 2337.89 1784.11 1622.78 1487.07
Total Long Term Debt 1452.65 1202.66 1117.67 1249.91
Long Term Debt 1452.65 1202.66 1117.67 1249.91
Capital Lease Obligations - - - -
Total Debt 1884.46 1385.8 1283.5 1267.25
Deferred Income Tax 354.73 327.83 272.64 138.85
Minority Interest 1.39 1.46 2.05 1.33
Other Liabilities, Total - - - -
Total Equity 2048.29 1683.1 1385.18 564.65
Redeemable Preferred Stock, Total - - - -
Preferred Stock - Non Redeemable, Net - - - -
Common Stock, Total 113.85 115.29 115.38 -
Additional Paid-In Capital - - - -
Retained Earnings (Accumulated Deficit) 1907.41 1540.19 1261.17 -
Treasury Stock - Common - - - -
ESOP Debt Guarantee - - - -
Unrealized Gain (Loss) 1.35 11.73 - -
Other Equity, Total 25.68 15.89 8.63 564.65
Total Liabilities & Shareholders' Equity 4386.18 3467.21 3007.96 2051.72
Total Common Shares Outstanding 12.77 12.95 12.97 13.87
Total Preferred Shares Outstanding - - - -

Morguard revenues increased 23% to C$376.8 million, net income and the company net income decreased 27% to C$190.7 million. The company's revenue from US segment increased 84% to C$100 million and FFO per share increased 24% to C$3.66.

5. Valuation

Morguard is selling at 5.66x its earnings and a price to book value of 0.69. The company has a return on equity of 13.08% and return on assets of 5.84%. Morguard stock price is selling at about a 50% discount to is assets value. Per Share Value of Assets:

  • Book Value of Real Estate and cash of $145.50
  • Book Value of REIT Investment of $35
  • Real Estate and REIT combined value of $183

Just its real estate holdings, cash on balance sheet and equity interest in REIT's gives you a net asset value of $183 per share that 30% above the current market price. You can buy the company's stock today and gets its asset management business for free. At a discount of 30% from its NAV the company offer a solid margin of safety and strong potential for a 30% or better profit for any one who buys its share .

5. Risk

The risk to the company is its exposure to the Canadian real estate market that in recent years have looked more and more like the US right before the finance crisis. The Canadian real estate market is clearly overvalued and highly inflated its just a matter of time before it caves in.

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