DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and Senior Unsecured Debentures rating of Morguard Corporation (Morguard or the Company) at BB (high) with Stable trends.
In addition, Morningstar DBRS revised the recovery rating of the Senior Unsecured Debentures to RR3 from RR4.
KEY CREDIT RATING CONSIDERATIONS
The rating confirmations reflect Morningstar DBRS' upward assessment of Morguard's asset quality reflecting solidifying fundamentals in its retail segment, the growing exposure to strong multiresidential markets in the U.S. and Canada, and the recent strategic divestment of majority of its legacy hotel portfolio. However, this is offset by expectations of modest deterioration in the EBITDA-interest coverage in the near to medium term resulting from the persistent high-interest-rate environment. Morningstar DBRS views the Company's sale of hotels positively in terms of asset quality as it allows for better focus on core segments with stronger growth prospects. While the Company's year-over-year (YOY) leverage has improved to 9.6 times (x) as at December 31, 2023 from 10.9x, as a result of strong operating performance in the residential and hotel segments, the EBITDA-interest coverage (2.13x as at December 31, 2023) remains under pressure because of mortgage refinancing at higher interest rates and the Company's modest exposure to variable rate debt. Morningstar DBRS continues to attribute rating benefit to Morguard's holdings in Morguard Real Estate Investment Trust (MRT) and Morguard North American Residential REIT (MRG; together with MRT, the REITs). Morningstar DBRS continues to believe that ownership in the REITs, forming core long-term investment holdings of Morguard, provides the Company with reliable quarterly cash distributions that it can use for debt service, thus warranting a modest rating uplift.
CREDIT RATING DRIVERS
Morningstar DBRS would consider a positive rating action if Morguard's total debt-to-EBITDA were to improve below 9.2x and EBITDA-interest coverage improved above 1.83x on a sustained basis, all else equal. Conversely, Morningstar DBRS would consider taking a negative rating action if Morguard's total debt-to-EBITDA were to deteriorate above 11.0x and EBITDA interest coverage were to deteriorate below 1.66x on a sustained basis, all else equal, or if Morningstar DBRS were to reassess the rating uplift provided by distributions received from the REITs. Morningstar DBRS believes that Morguard has additional flexibility in the current rating category from the upward revision in its business risk assessment factors.
FINANCIAL OUTLOOK
Morningstar DBRS expects Morguard's EBITDA-interest coverage to deteriorate below 2.0x and fluctuate in the mid-1.9x range in the near to medium term partially because of a loss of net operating income (NOI) from recent dispositions such as the sale of its hotel portfolio and 181 Queen Street, and as it continues to refinance its upcoming mortgage maturities at elevated rates. Morningstar DBRS expects the Company's leverage to modestly improve to low 9.0x by YE2024 largely because of the repayment of debt following these dispositions. However, leverage is expected to modestly increase in the mid-9x range in the medium term as a result of Morguard's partially debt funded development initiatives.
CREDIT RATING RATIONALE
The credit rating confirmation is supported by Morguard's (1) well-diversified, albeit reduced, stable and recurrent income-producing portfolio through economic cycles; (2) strong asset type and tenant diversification; and (3) key investment holdings in publicly listed REITs like MRT and MRG. The rating is constrained by the Company's (1) weakening interest coverage amid a high-interest-rate environment; (2) high proportion of secured debt; (3) lack of scale in any markets that it operates; and (4) the smaller portfolio size on both EBITDA and square footage bases relative to higher-rated real estate entities in Morningstar DBRS' coverage universe.
Morningstar DBRS has revised the recovery rating on Morguard's Senior Unsecured Debentures to RR3 from RR4 because of its improved assessment of a potential recovery in a default scenario. However, the Senior Unsecured Debentures rating remains unchanged despite this upward revision in the instrument's recovery rating.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.
BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Morguard Corporation, the BRA factors were considered in the order of importance contemplated in the methodology.
(B) Weighting of FRA Factors
In the analysis of Morguard Corporation, the FRA factors were considered in the order of importance contemplated in the methodology.
(C) Weighting of the BRA and the FRA
In the analysis of Morguard Corporation, the BRA carried the same weight as the FRA.
Notes:
All figures are in Canadian dollars unless otherwise noted.
Morningstar DBRS applied the following principal methodology:
Global Methodology for Rating Entities in the Real Estate Industry (April 15, 2024)
https://dbrs.morningstar.com/research/431170
The following methodology has also been applied:
Morningstar DBRS Global Corporate Criteria (April 15, 2024) https://dbrs.morningstar.com/research/431186/
The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.
A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/397223.
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.
The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.
This is a solicited credit rating.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.
Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.
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MORGUARD CORPORATION 
