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Morguard Corporation Announces 2017 Results and Regular Eligible Dividend

Morguard 2/23/2018

Morguard Corporation ("Morguard" or the "Company") (TSX:MRC) today announced its financial results for the year ended December 31, 2017.

Reporting Highlights

  • Total revenue increased by $191.8 million to $1,113.8 million for the year ended December 31, 2017, compared to $922.0 million for the same period in 2016.

  • Net operating income ("NOI") increased by $60.5 million, or 13.3%, to $513.9 million for the year ended December 31, 2017, compared to $453.4 million for the same period in 2016, primarily due to the consolidation of Temple commencing on January 1, 2017 and from acquisitions completed during and subsequent to the year ended December 31, 2016.

  • Net income increased by $134.5 million to $344.4 million for the year ended December 31, 2017, compared to $209.9 million for the same period in 2016.

  • Funds from operations ("FFO") increased by $11.8 million to $225.1 million, or $18.94 per share, for the year ended December 31, 2017, compared to $213.3 million, or $17.86 per share, for the same period in 2016, representing a 5.5% increase.

  • Normalized FFO increased by $35.0 million to $222.4 million for the year ended December 31, 2017, compared to $198.3 million for the same period in 2016, representing a 12.2% increase.

Operational and Balance Sheet Highlights:

  • On September 15, 2017, the Company issued $200.0 million (net proceeds including closing costs - $198.8 million) of 4.333% Series C senior unsecured debentures due September 15, 2022.

  • Advanced capital recycling initiatives by disposing of $98.1 million of hotel and income producing properties.

  • The Company's financing activity during the year totalled $712.0 million at an average interest rate of 3.55% for an average term of 9.1 years.

  • During the year ended December 31, 2017, the Company redeemed $157.2 million of its convertible debentures.

  • Shareholders' equity per common share (excluding non-controlling interest) increased to $260.32 compared to $239.98 as at December 31, 2016.

  • During the year ended December 31, 2017, 88,309 common shares were repurchased through the Company's NCIB for cash consideration of $15.8 million.

Acquisitions Completed During 2017

The following table presents a summary of the company's acquisitions totalling $657.0 million during the year ended December 31, 2017.

Property

Date of Acquisition

Asset Type

Location

Purchase Price

(in thousands of
dollars)

Coast at Lakeshore East(1)

July 10, 2017

Residential

Chicago, IL

$291,686

The Fenestra

August 17, 2017

Residential

Rockville, MD

166,506

123 Commerce Valley East

August 3, 2017

Office

Markham, ON

67,947

Northgate at Falls Church(2)

July 6, 2017

Residential

Falls Church, VA

65,404

Camelot Business Centre

September 21, 2017

Office

Ottawa, ON

21,987

Argus Corporate Centre

August 17, 2017

Office

Oakville, ON

18,958

Downsview Townhomes

May 15, 2017

Residential

Toronto, ON

16,749

South Sheridan

April 6, 2017

Office

Oakville, ON

7,148

Rainbow Square

September 26, 2017

Retail (Land)

Dunnellon, FL

319

Emerald Lake Townhomes

March 24, 2017

Residential

Lakeworth, FL

258

$656,962

(1) On October 2, 2017, the Company sold a 49% interest in the property for $63.4 million to an institutional partner.

(2) The property is subject to a long-term land lease, with a fixed price land purchase option available in September 2029. Income producing properties include $9.3 million (US$7.2 million) relating to the land lease in connection with the finance lease obligation recognized.

 

Financial Highlights

For the years ended December 31

(in thousands of dollars, except per common share)

2017

2016

Revenue from real estate

$790,535

$775,746

Revenue from hotel properties

237,116

66,567

Management and advisory fees

71,786

67,895

Interest and other income

8,907

6,349

Sales of product and land

5,430

5,419

Total revenue

$1,113,774

$921,976

Revenue from real estate properties

$790,535

$775,746

Revenue from hotel properties

237,116

66,567

Property operating expenses

(338,070)

(337,308)

Hotel operating expenses

(175,714)

(51,607)

Net operating income

$513,867

$453,398

Net income attributable to common shareholders

$310,120

$172,745

Net income per common share – basic and diluted

$26.10

$14.46

Funds from operations

$225,072

$213,282

FFO per common share – basic and diluted

$18.94

$17.86

Normalized funds from operations

$222,442

$198,299

Normalized FFO per common share – basic and diluted

$18.72

$16.60

 

Net Income

Net income for the year ended December 31, 2017, was $344.4 million compared to net income of $209.9 million in 2016. The increase in net income of $134.5 million for the year ended December 31, 2017, was primarily due to the following:

  • An increase in net operating income of $60.5 million, primarily due to the consolidation of Temple and from acquisitions completed during and subsequent to the year ended December 31, 2016;

  • An increase in management and advisory fees of $3.9 million;

  • An increase in interest expense of $39.0 million, primarily due to the consolidation of Temple;

  • A decrease in property management and corporate expense of $3.7 million;

  • An increase in amortization of hotel properties of $21.7 million, primarily due to the consolidation of Temple;

  • An increase in impairment provision of $24.6 million at four hotel properties located in Western Canada;

  • An increase in non-cash net fair value gain of $191.7 million, primarily due to a higher fair value gain on real estate properties from a decrease in capitalization rates for Canadian multi-suite residential properties and a lower fair value loss on MRG Units;

  • A decrease in non-cash equity income of $65.1 million, primarily due to a fair value gain recognized in 2016 at the Marquee at Block 37;

  • A decrease in other income of $25.6 million primarily due to settlement proceeds received from Target Corporation during 2016; and

  • A decrease in income taxes (current and deferred) of $52.0 million resulting from a one time deferred tax recovery due to the U.S. federal tax rate reduction enacted on December 22, 2017.

Net Operating Income

NOI increased by $60.5 million, or 13.3%, during the year ended December 31, 2017, to $513.9 million, compared to $453.4 million generated in 2016, and is further analyzed by asset type below.

For the years ended December 31

(in thousands of dollars)

2017

2016

Multi-suite residential

$184,548

$169,436

Retail

137,021

141,606

Office

123,176

120,947

Industrial

6,292

7,020

Hotels

61,402

14,472

Adjusted NOI

512,439

453,481

IFRIC 21 adjustment – multi-suite residential

1,428

-

IFRIC 21 adjustment – retail

-

(83)

NOI

$513,867

$453,398

 

The increase in NOI of $60.5 million is due to an increase in the IFRIC 21 adjustment of $1.4 million and the change in Adjusted NOI described below.

Adjusted NOI for the year ended December 31, 2017, increased by $58.9 million to $512.4 million compared to $453.5 million in 2016 primarily due to the following:

  • An increase in the Canadian residential portfolio of $5.8 million primarily from rental rate growth, improved occupancy and lower operating expenses;

  • Additional NOI of $3.5 million generated from The Heathview, a 587 suite luxury residential property located in Toronto, Ontario. During 2016, The Heathview was under initial lease-up;

  • An increase in NOI of US$6.9 million due to the acquisition of three residential properties in the U.S. during the third quarter of 2017, partially offset by a decrease of US$2.2 million due to sale of four residential properties located in Mobile, Alabama, on July 12, 2017;

  • An increase in the U.S. residential portfolio of US$0.7 million primarily from rental rate growth, partially offset by an increase in vacancy and operating expenses;

  • A decrease of US$3.0 million in U.S. retail properties due to increased vacancy at two U.S. properties.

  • A decrease of $3.6 million in Canadian retail properties due to increased vacancy, lower base rate, higher non-recoverable operating expenses and lower recoveries primarily at three properties was offset by an increase of $1.1 million lease cancellation fees and $2.5 million due to a realty tax refund received net of an increase in vacancy at a property located in Toronto, Ontario;

  • An increase in the office portfolio of $2.2 million is primarily due to acquisition of four properties during 2017, and improved occupancy at a property located in Calgary, Alberta, and in Ottawa, Ontario, partially offset by a decrease due to increased vacancy and lower recoveries;

  • A decrease in the industrial portfolio by $0.7 million is due to increased vacancy at two industrial properties;

  • An increase in the hotel portfolio by $46.9 million is mainly due to the consolidation of Temple that contributed $42.9 million and stronger average room rates, improved occupancy and reduced costs within the remainder of the portfolio; and

  • A decrease of $1.8 million due to the change in the U.S. dollar foreign exchange rate.

Funds From Operations

For the year ended December 31, 2017, the Company recorded FFO of $225.1 million ($18.94 per common share), compared to $213.3 million ($17.86 per common share) in 2016. The increase in FFO of $11.8 million is mainly due to the following: 

  • Higher Adjusted NOI of $59.0 million, primarily due to the consolidation of Temple and from the acquisition of properties;

  • Higher management and advisory fees of $3.9 million;

  • An increase in interest and other income of $2.6 million;

  • A decrease in equity-accounted FFO of $1.1 million;

  • An increase in interest expense of $39.0 million, primarily due to the consolidation of Temple and from mortgage financing on acquisitions as well as higher interest on Unsecured Debentures;

  • Lower property management and corporate expense of $3.7 million;

  • A decrease in current taxes of $7.3 million;

  • Lower non-controlling interest's share of FFO of $2.8 million;

  • An increase in non-controlling interest share of Morguard Residential REIT of $2.4 million; and

  • A decrease as a result of Target settlement proceeds of $22.5 million recognized in 2016.

The change in foreign exchange rates had a negative impact on FFO of $1.2 million ($0.10 per common share).

Normalized FFO for the year ended December 31, 2017, was $222.4 million, or $18.72 per common share, versus $198.3 million, or $16.60 per common share, for the same period in 2016, which represents an increase of $24.1 million or 12.2%. Normalized FFO is computed as FFO adjusted for the impact of non-recurring items net of tax.

Financing Activity

The following summarizes the Company's financing activities during the year ended December 31, 2017:

  • New mortgage financing of $461.2 million at an average interest rate of 3.33% for an average term of 9.2 years.

  • Refinancing of mortgages of $250.8 million at an average interest rate of 3.88% for an average term of 8.9 years as compared to $202.2 million of maturing mortgages at an average interest rate of 4.30%, resulting in additional mortgage proceeds of $48.6 million.

  • Repayment of mortgages of $186.1 million at an average interest rate of 3.94%.

Subsequent Events

Subsequent to December 31, 2017, the Company acquired 1,119,660 Units of Morguard REIT for cash consideration of $15.8 million.

Subsequent to December 31, 2017, the Company acquired 364,243 shares under its NCIB for cash consideration of $65.7 million.

On January 9, 2018, the Company purchased a Class A industrial property located in Ottawa, Ontario, for purchase price of $42.5 million, excluding closing costs

On February 5, 2018, the Company purchased an office property located in Mississauga, Ontario, for purchase price of $50.6 million, excluding closing costs.

On February 13, 2018, Morguard Residential REIT completed a public offering of convertible unsecured subordinated debentures on a bought deal basis, of $85.5 million (including an over-allotment option, $81.5 million excluding principal owned by the Company) aggregate principal amount of 4.50% convertible unsecured subordinated debentures due March 31, 2023 (the "4.50% Debentures"). The 4.50% Debentures are convertible, at the option of the holder, into Units at $20.20 per Unit.

The Company will use the net proceeds from the offering to fund the redemption of all of the Company's outstanding 4.65% convertible unsecured subordinated debentures on February 26, 2018, which mature on March 30, 2018 and which have a par call date of April 1, 2017. The Company intends to use the remainder of the net proceeds, if any, to fund future acquisitions, for debt repayment and for general trust purposes.

First Quarter Dividend

The Board of Directors of Morguard Corporation announced that the first quarterly, eligible dividend of 2018 in the amount of $0.15 per common share will be paid on March 30, 2018, to shareholders of record at the close of business on March 15, 2018.

The Company's audited financial statements for the year ended December 31, 2017, along with Management's Discussion and Analysis will be available on the Company's website at www.morguard.com and will be filed with SEDAR at www.sedar.com.

Non-IFRS Measures

The Company's consolidated financial statements are prepared in accordance with International Financial Reporting Standards ("IFRS"). The following measures, NOI, Adjusted NOI, Comparative NOI, FFO and Normalized FFO (collectively, the "non-IFRS measures") as well as other measures discussed elsewhere in this press release, do not have a standardized meaning prescribed by IFRS and are, therefore, unlikely to be comparable to similar measures presented by other reporting issuers in similar or different industries. The Company uses these measures to better assess the Company's underlying performance and financial position and provides these additional measures so that investors may do the same. Details on non-IFRS measures are set out in the Company's Management's Discussion and Analysis for the year ended December 31, 2017 and available on the Company's profile on SEDAR at www.sedar.com.

About Morguard Corporation

Morguard Corporation is a real estate company, with total assets owned and under management valued at $21.2 billion. Morguard owns a diversified portfolio of 208 multi-suite residential, retail, office, industrial and hotel properties comprised of 18,129 residential suites, approximately 16.3 million square feet of commercial leasable space and 5,557 hotel rooms. Morguard also currently owns a 54.2% interest in Morguard Real Estate Investment Trust ("Morguard REIT" or "MRT"), a 46.9% effective interest in Morguard North American Residential Real Estate Investment Trust ("Morguard Residential REIT" or "MRG") and a 55.9% effective interest in Temple Hotels Inc. ("Temple"). Morguard also provides advisory and management services to institutional and other investors. For more information, visit the Company's website at www.morguard.com.

For further information: Morguard Corporation: K. Rai Sahi, Chief Executive Officer, T 905-281-3800; Paul Miatello, Chief Financial Officer, T 905-281-3800