Morguard Real Estate Investment 5 25 convertible unsecured subordinated debentures T.MRT.DB.A

Scotia comment on results

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Fundamentals Looking to Stabilize; Focus on Balance Sheet

OUR TAKE: Neutral. We updated our model post Q1/22 results. Our target drops to $6.00 (-$0.50); it is now based on a ~15% discount (vs ~10% previously) to our NAVPU estimate of $7.00 (unchanged). Our NAVPU is based on our normalized NOI assumptions. As highlighted in the last quarter, while fundamentals have been challenging during the pandemic for MRT’s core markets, they are starting to stabilize. SP NOI growth (overall) was in positive territory (now three quarters in a row) and portfolio occupancy was up slightly q/q.

The balance sheet continues to be an area of focus with upcoming debt maturities (Exhibit 6). While our 2022 and 2023 AFFOPU estimates are reduced by 20%, there is further downside risk on debt refinancings. We note the cost of debt financing has moved up 100-150bp in the last six months.

In the light of the current macro backdrop, the CDN REIT sector is down ~13% since late March 2022; the sector is now trading at a 12% discount to NAV. With MRT’s asset mix (enclosed retail + office), we are not surprised that MRT continues to trade at a persistent discount to NAV. At the current price, MRT is trading at a 24% discount to NAV. MRT is 60.8% owned by Morguard Corp. (a large asset manager with total AUM of $19.6B).

KEY POINTS

Enclosed Retail Rents and Office Occupancy have trended lower over time. We need to see improvement here: See Exhibits 3 and 4. Rental spreads on enclosed retail leasing have been roughly -20% (negative 20%) in 2021 and 2020. In Q1/22, spreads were -29% and we are hoping to see some stabilization here. Office occupancy has declined ~450bp since the start of the pandemic. It was encouraging to see office occupancy picked up slightly q/q (again) in Q1/22. AB office occupancy was up 20bp q/q. 6% of the portfolio is coming up for renewal in 2022 and 11% in 2023 (Exhibit 7). 50% of the leases due in 2022 and 2023 are in the retail segment; we may continue to see downside pressure here.

Liquidity Remains in Focus: While MRT’s convertible debenture “renewal” in December took care of last year’s debt maturities, we note that MRT still has $207M of debt coming due this year (16% of total debt outstanding). 2022 and 2023 are big years on the debt renewal side with almost half of MRT’s debt coming due (mostly mortgages). We expect to become more comfortable with the name once these renewals are taken care of. Liquidity was $174.7M vs $184.8M last quarter.