Morguard REIT has cut its distributions to unitholders by half and is curtailing discretionary spending significantly as it preserves cash due to uncertain economic conditions created by the COVID-19 pandemic.
The moves were announced in Morguard REIT’s Q1 2020 financial report, and discussed by CFO Andrew Tamlin during its May 1 conference call with analysts. The REIT (MRT-UN-T) is also continuing to face challenges in Alberta, where it made one significant office lease abatement during Q1 and could see further declines in revenues.
“Given the current economic outlook and the uncertainty around collections and cash flow in the short term, the board of trustees after a prudent review of the trust’s distribution policy has concluded that a decrease in the monthly cash distribution is appropriate,” Tamlin said.
“The annual distribution is being reduced from 96 cents 48 cents.
“The resulting retained cash flow will allow the trust enhanced cash flow flexibility and put the trust in a strong position to meet the cash-flow needs of its continuing development program and other capital priorities which will improve the value and quality of its portfolio.”
Morguard REIT revenues, NOI decline
Despite the challenges, Tamlin reported Q1 results “fairly in line with expectations albeit down compared to 2019.”
On a year-over-year basis, real estate revenues declined almost six per cent to $66.4 million, while NOI dipped about the same percentage to $33.8 million.
The REIT also reported a fair value loss of $121 million on its real estate properties, compared to a loss of $5.7 million for Q1 2019. FFO declined by $3.1 million, to $13.7 million.
Most of the revenue reductions were attributed to a previously reported rent abatement for Obsidian Energy, the tenant at its Penn West office complex in Calgary.
Morguard REIT’s enclosed malls segment also contributed to the lower NOI.
The fair value losses are attributed mainly to retail, which represented $97.7 million of the total, while Penn West was the major contributor to the office decline of $23.5 million.
On the balance sheet, Morguard retains a “strong liquidity position,” Tamlin said, but it has decided to also curtail discretionary spending through the remainder of 2020.
That includes planned future developments, though ongoing projects at the Pine Centre Mall in Prince George, B.C., and The Centre in Saskatoon are not affected.
He estimated such spending will be down 50 to 66 per cent from previous projections.
Challenges in Alberta portfolio
While its operations outside Alberta remain strong, Tamlin cited both the Penn West abatement and a major upcoming lease renewal as examples of what is happening there. Morguard owns interests in 10 office properties inside Alberta, as well as several retail assets.
The Penn West abatement cut the REIT’s annual revenues by almost $7 million.
At the 304,000-square-foot Petroleum Plaza office building in Edmonton, which is occupied by Alberta government tenants, vice-president of property management Tom Johnston said he expects a full renewal but rates are expected to drop.
“We’re very confident that the Alberta government will renew on the entire building. They have very key ministries that are in that asset, energy, etcetera. So, we have had dialogue with infrastructure, which handles the real estate needs of the government and it’s all been very positive,” Johnston explained.
“As it relates to rental rates, they are at about $27 a foot today. We are seeing rental rates in that government sector in Edmonton probably more in line with the $17 to $19 range, with inducements.”
Morguard owns a half interest in that office building.
Stronger performance in B.C.
On the positive side, the REIT’s British Columbia properties have seen significant increases in leasing rates, including at 111 Dunsmuir in Vancouver.
Both major tenants in that building are renewing at the end of 2020. The lease for Stantec has been renewed and Johnston said the renewal for Wood Engineering is all but complete, with a rate review to take place about 90 days before the scheduled Jan. 1, 2021 renewal.
The renewal for Stantec included an increase of about $6 per square foot, he said, reflecting the strong ongoing demand for office space in the city.
“I see Vancouver as being extremely resilient,” Tamlin said. “We have an extremely low vacancy rate in the city and there was more demand coming just prior to the COVID crisis occurring.”
Construction is also continuing to renovate the former Sears location at Morguard’s 489,500-square-foot Pine Centre Mall, one of its largest retail assets.
Two thirds of the 76,000 square feet under redevelopment is now committed, with Winners/HomeSense taking the bulk of it and slated to open late in 2020.
The $17-million project remains under construction, with no delays so far, and is slated to wrap up in early 2021.
Overall, Morguard remains “positive”
“While the economy and by extension some of the REITs assets are going through their challenges, we remain positive about a number of aspects of our business,” Tamlin said.
He noted most of Morguard REIT’s retail properties hold dominant positions in their markets and are anchored by grocery stores providing essential goods and services.
Morguard REIT owns interests in 48 office, retail and industrial properties in six Canadian provinces. They comprise about 8.4 million square feet of GLA and are valued at about $2.8 billion.
Morguard REIT’s occupancy across all segments was 93 per cent as of March 31, 2020.