Morguard Corp. is expected to raise about $100-million through the sale of a minority stake in 17 multi-residential properties in Canada and the U.S. through the creation of the Morguard North American Residential Real Estate Investment Trust.
That’s according to a source connected to the REIT offering, which was announced earlier this month. Morguard executives did not return phone calls about the REIT.
Just how much of the REIT will be sold to the public will ultimately depend on demand from investors.
What Mortguard is Selling
Morguard’s preliminary prospectus, filed with Canadian securities regulators, does however spell out a number of interesting details.
• It is heavily Ontario centric. The majority of the properties (12) are in Toronto and Mississauga with one in Kitchener, Ont., another in Edmonton and three in Louisiana.
• Approximately 76% of the suites and approximately 78% of net operating income (NOI) are generated by the GTA holdings.
• Approximately 71% of the suites have rental rates that are more than $1,000 per month. The average is brought down by the three Louisiana properties which have average rents between $654 and $720 per month.
• During the past five years, Morguard has devoted $31.8 million in capital expenditures to the portfolio of properties in the form of refurbishment of building interiors, corridors, lobbies, garages and suites as well as upgrades to make them more energy efficient.
• The properties have been valued at $700 million. ($672 for the Canadian properties and US$27.5 million for the U.S. properties).
In its prospectus, Morguard said its majority-controlled apartment REIT will grow by adding properties in urban centres and major suburban regions in Canada and in the southeastern United States. Morguard stated “its current intention is to offer to sell to the REIT additional multi-unit residential properties that it manages and in which it has an ownership interest, including some or all of the Retained Properties, in one or more transactions over the next few years, subject to market conditions.”
Morguard states that the REIT will target Census Metropolitan Areas (‘CMAs’) in Canada and Metropolitan Statistical Areas (‘MSAs’) in the United States with a population in excess of one million people and with favourable economic conditions as well as secondary markets in certain states in the southeastern U.S. including, Louisiana, Alabama, Florida, Georgia, North Carolina and South Carolina.
Strong Fundamentals of Multi-Res
Morguard touts the strong underlying fundamentals of the property category in its prospectus, which can be summarized as follows:
• The multi-unit residential real estate sector in Canada has demonstrated the lowest volatility in investment returns among major income producing real estate asset classes over the past twenty years and has also posted the highest annualized return (10.3%) over that same period
• Low risk. In Canada, vacancy levels have ranged from 2.1% to 3.1% according to CMHC. Canadian average rental rates for two-bedroom suites (being the majority of the residential suites that comprise the Initial Properties) have increased by 12.0% from the end of 2006 through to March 2011, according to CMHC. Vacancy rates for the multi-unit residential sector in the U.S. are projected to decline over the next couple of years, particularly in the South Atlantic region of the U.S. The vacancy rate in that region was 5.9% as at December 31, 2011 and is forecast to drop to 5.3% by 2012 with further declines expected. In 2009, the region’s vacancy rate was 9.3%
• Barriers to Additional Supply. In Canada, the REIT will benefit from barriers to the creation of new supply in the multi-unit residential real estate sector as the costs of building new multi-unit residential rental buildings are substantially higher than the value of the cash flows that can currently be generated by such buildings, principally as a result of rent control legislation and market conditions.
Morguard estimates that the replacement cost of the 17 properties is approximately $212 million higher than their appraised value, making significant new construction unlikely. CMHC estimates that between October 2005 and October 2011, the total rental stock in Canada decreased by 2.7%.
In the United States, the REIT expects that as a result of tightening credit markets there will be a decrease in the construction of new revenue-producing properties in the multi-unit residential sector, thereby increasing demand for rental premises in existing properties and leading to increasing occupancy rates.
• Availability of Financing in Canada and the U.S. Residential property owners who use CMHC insurance on their mortgage debt are able to obtain financing at lower interest rates than non-CMHC insured mortgage debt and to reduce debt renewal risk. In the U.S., a large number of financial institutions for mortgage financing translates into competitive interest rates and terms.
• Rate of Home Ownership. As of Dec. 31, 2011, the percentage of U.S. residents that own their home was 66%, down 3.2% from the high of 69.2% in 2004 and moving toward its long-term historic average of 65.3% and could fall further.
As of December 31, 2011, Morguard Corp.’s owned and managed portfolio of multi-unit residential properties included 12,644 suites valued at approximately $1.7 billion. In addition, Morguard owns approximately 44.8% of the units of Morguard REIT, which owns approximately 8.5 million square feet of office and retail properties across Canada valued at over $2.1 billion.
At year end, Morguard owned 101 owned multi-unit residential, retail, office and industrial properties located across Canada and in the southeastern United States. It’s owned and managed portfolio of retail, office and industrial properties consisted of approximately 54.3 million square feet of gross leasable area and had an estimated market value in excess of $11.4 billion.
That $11.4 billion breaks down as follows:
Office – $ 3.3 billion totalling 14.0 million square feet
Retail – $ 4.7 billion with 16.2 million square feet
Industrial – $ 1.7 billion totalling 24.1 million square feet
Residential – $ 1.7 billion comprised of 12,644 suites
Rai Will Run the REIT
The prospectus states that the REIT will be headed by Morguard CEO and controlling shareholder K. (Rai) Sahi who will act as Chairman and CEO of the REIT. Sahi, as the prospectus states, currently controls public companies that together have market capitalizations in excess of $2 billion, and over $12 billion in capital and assets under management.
From an initial investment in Morguard (then Acklands Limited) in 1990, where Mr. Sahi purchased an ownership position of approximately 23% at a cost of $5.25 per share, he has grown that investment into an ownership position of approximately 51% of Morguard.
Morguard’s current portfolio was started in April 1997 when Morguard acquired a 40% equity interest in Goldlist Properties Inc., for approximately $36 million. At the time of Morguard’s initial investment, Goldlist Properties Inc. owned 16 multi-unit residential buildings, comprising approximately 5,000 suites primarily located in the GTA.
Morguard’s portfolio grew through purchases of units of Morguard REIT, and common shares and convertible debentures of Revenue Properties Company Ltd. Subsequently, Mr. Sahi purchased Morguard Investments Limited (MIL), which at the time was Canada’s largest real estate investment advisory firm for pension funds, with approximately $1.9 billion of real estate assets under management.
Most recently, Mr. Sahi expanded into the United States real estate market, privatizing Sizeler Property Investors, Inc. in a US$420 million acquisition.