TD down target priceEvent Resuming coverage following completion of $150.0 million 5.25% convertible debenture offering.
Impact: SLIGHTLY NEGATIVE
Net proceeds of $146.6 million will partially fund the repayment of its $175.0 million 4.50% convertible debenture, which was set to mature on December 31, 2021. The balance will be funded with existing liquidity, which we estimate at ~$200 million pro forma expected Q4 up-financing of ~$35 million.
Morguard Corp. (MRC-T, not rated), which owns $60.0 million of the maturing debenture, has agreed to purchase $60.0 million of the new debenture at the offering price.
We do not expect any impact on annual interest expense for the convertible debenture ($7.9 million), as the lower face value offsets the impact of the higher rate. Morguard will redeem the $175.0 million debentures on December 17, 2021.
The lower face value was in line with our expectations. The debentures mature on December 31, 2026 and will pay interest semi-annually.
The conversion price is $7.80/unit, which compares to the maturing converts conversion price of $24.80/unit. The REIT may not redeem the debentures prior to December 31, 2024. Forecast.
Our EBITDA estimates are unchanged, however, our 2022 and 2023 fullydiluted AFFO/unit estimates decline ~11%, owing to the higher dilution from the new debentures (weighted-average fully diluted unit count increases to 84.9mm units in Q1/22 from 72.7mm as at September 30). Our $9.10 NAV/unit estimate is +15% on a higher retail valuation.
TD Investment Conclusion Despite some positive trends observed in YTD, at this point, we do not see any meaningful near-term catalysts that would help close the valuation gap versus its peers. We are maintaining our HOLD recommendation and lowering our target price to $6.00 from $6.50 owing largely to the decline in our AFFO/unit forecast.
Outlook COVID-19 Update In Q3/21, we were encouraged to see the continuation of positive trends observed in H1/21, including lower bad debts, and stabilizing occupancy in the retail portfolio. The REIT is seeing collections rebound and expects fundamentals to continue to improve as restrictions are lifted.
However, we remain cautious around the potential impact of the Omicron variant, which has clouded visibility on the recovery, in our view.
Forecast Our AFFO/unit estimates were negatively impact by the higher dilution from the newly issued convertible debentures. While the interest expense impact is minimal, the lower strike price of $7.80 versus the maturing convert with a strike price of $24.80 has driven an increase in the fully diluted unit count, which resulted in the decline in our estimates.
Our NAV estimate increases to $9.10 from $7.90, largely on the back of a higher retail valuation. While our office asset value estimate is largely unchanged, we have increased our retail asset value estimate by ~8% due to higher stabilized NOI assumptions. There are no changes to our 2022/23 NOI forecasts as we believe it will take beyond our forecast period for stabilized NOI levels to be achieved. Our overall asset value estimate increased by ~4%. Given the amount of leverage in the REIT, our NAV/unit estimate increased 15%.
Valuation Morguard REIT is currently trading at 7.9x our 2022 AFFO/unit estimate, 2.9 multiple points below its peer group average. On a P/NAV basis, the REIT is trading at 57% of our $9.10 NAV estimate, below the long-term average of 81% (Exhibit 2).
Justification of Target Price Our $6.00 target price (previously $6.50) is based on an 8.75x-9.25x multiple to our 2023E AFFO/unit estimate (previously 8.25x-8.75x multiple). The multiple remains at the lower end of the multiple range that we use to derive the target prices of its peers in our coverage universe.
We believe that Morguard should trade at a discount to its peers given its current asset mix, higher leverage levels, smaller public float, trading liquidity, and partially external property management structure.