June 4, 2004

Like many of the REITs, Morguard Corporation has declined almost 15% in recent months. The sell off was triggered by the threat of rising interest rates and the potential fallout on the real estate market. However, we believe that because Morguard trades at a discount to both its book value and net asset value, further downside is limited.

Our confidence is bolstered by the Company’s solid fundamentals. Morguard currently owns $2.1 billion in real estate assets at book and manages approximately $2.7 billion for other investors. Market value of the properties and capitalization of funds from operations imply a net asset value per share in the mid $30 range. For fiscal 2003, Morguard reported proportionately consolidated funds from continuing operations, a standard metric in the real estate industry, of $4.59 per share compared to $3.06 in 2002, a 50% increase. With the stock trading at less than 5 times this metric, and at a 30% discount to its $31.07 book value, we believe that the stock is cheap. Apparently so does the Company since they bought back 535,000 shares over the course of 2003. In 2004, we expect management to continue to buy back stock, thus boosting shareholder value, and employ up to $300 million of capital in new property acquisitions.

April 1, 2005

Our last update on Morguard Corporation discussed an almost 15% sell off in response to rising interest rates and the potential fallout on the real estate market. As we suspected, downside was limited due to the large discount to both book value and net asset value, and the shares have since rebounded almost 30%. Solid fundamentals and book value and net asset value growth have rewarded patient shareholders.

In terms of operating and financial performance, Morguard generated $4.55 per fully diluted share of proportionately consolidated funds from operations in fiscal 2004. Total assets have grown to $2.4 billion and shareholders’ equity now equals $31.57 per share. In 2004, 241,100 shares were repurchased under the Company’s Normal Course Issuer Bid for $5.4 million. Morguard also paid $7.9 million in dividends or $0.56 per share during the year. Given the low-key nature of the Company, it is not surprising that Morguard continues to trade at very low multiples, currently only 0.95 times book value and 6.6 times proportionately consolidated funds from operations.

Although Morguard suffers from a lack of Bay Street coverage, the one analyst who does cover the stock recently produced an excellent report on the Company. He argued that cap rate compression (given investors’ willingness to pay up for real estate assets funded by low interest rates) could imply a net asset value per share of $48. Further, he suggested that adjusted book value could be as much as $7 per share higher, due to aggressive depreciation rates for real property under Canadian GAAP. He also pointed out that the low trading liquidity and Rai Sahi’s 44% control block make Morguard a “classic value stock”. This type of analysis is music to our ears and we continue to patiently hold Morguard Corporation. We believe that a dividend increase is feasible and would help to narrow the discount to book value, adjusted book value and net asset value.

August 5, 2005

Morguard Corporation has just reported financial and operating results for the second quarter of fiscal 2005. The Company reported a 16.7% increase in funds from operations (FFO) to $1.61 per share. Morguard’s proportionately consolidated share of FFO reached $1.10 per share, an increase of 12.2%. Net income from continuing operations of $0.29 per share and the Company’s normal course issuer bid has boosted book value to $32 per share. As usual, Morguard’s Board of Directors approved the $0.14 per share quarterly dividend, which yields 1.8% at current price levels.

Morguard’s portfolio, net of amortization, now consists of office, industrial and retail assets totaling 13.5 million square feet worth $1.512 billion at book, multi-residential properties with 6,366 suites worth $489 million at book, developments of $137 million, land held for sale worth $6.6 million and an investment in a regional shopping centre of $48.2 million. Development of the Bay/Wellesley condominium project, valued at $14.5 million, is scheduled for completion this year. As at June 30, 2005 commercial occupancy rates are 93.9% and residential occupancy rates are 95.9%.

Although the dividend was not increased this quarter, we are confident in management’s ability to generate solid returns for patient shareholders. We believe that the stock should appreciate as book value grows via earnings and share buybacks. Finally, we would like to highlight the fact that the net asset value of the Company’s real estate portfolio is much higher than book value, perhaps as high as $48 per share. Hopefully, this discount will narrow as the Company continues to post solid results quarter after quarter.

July 7, 2006

Despite the recent volatility in the equity markets, shares of Morguard Corporation have hardly fluctuated. As an investor, it’s nice to have some stocks with tangible assets that are not highly correlated with the equity markets.

In fiscal 2005 Morguard Corporation reported financial results that demonstrated slow and steady growth in shareholder value. Revenue grew to $400.4 million from $386.7 million a year ago, an increase of 3.5%. Consolidated funds from continuing operations totaled $55.2 million, or $3.85 per fully diluted share. At $34 per share, Morguard is trading at 8.8 times its fully diluted FFO compared to commercial REITs that trade at 10 to 12 times FFO and residential REITs that trade at 14 times FFO. Low cap rates, stable net operating income and progress on development properties imply a net asset value considerably higher than the current share price.

However, with such an illiquid, closely-held and under-followed stock, how can we confirm that the value exists? Simply watch what management and insiders are doing. For example, in the first quarter of 2006, Morguard continued with its normal course issuer bid and repurchased for cancellation 266,200 shares at an average cost of $30.25. On January 16 Morguard Corporation bought 350,000 units of Morguard REIT. In the first quarter of 2006, Morguard REIT repurchased for cancellation 578,100 units at an average cost of approximately $11.40. With Morguard buying its own shares, Morguard buying Morguard REIT’s units and Morguard REIT buying its own units, shareholder value continues to grow. We always like to see a Company willing to buy its own shares when they believe them to be undervalued.

January 5, 2007

Morguard Corporation continues to be a solid sleeper pick in our ABC Funds’ portfolios. The stock reached a 52 week high of $45 per share this past December and returned over 42% plus dividends in 2006. Despite the Company’s low-key nature, management has recently pulled the trigger on several material transactions.

On November 10, Morguard announced that Revenue Properties Limited had completed the acquisition of Sizeler Property Investors pursuant to an agreement reached in August. The transaction, valued at US$434 million, provides Morguard with an entry into the United States real estate market. Sizeler owned thirty properties, 16 in Louisiana, 10 in Florida and 4 in Alabama. Broken out by usage, the deal involved 2 regional enclosed shopping malls, 13 retail shopping centers and 15 apartment communities.

On December 6, Morguard REIT announced the acquisition of a 600,000 square foot Class A office portfolio in downtown Ottawa. The REIT partnered with a major Canadian pension fund to complete the $210 million dollar purchase. The portfolio included 3 office towers, which are 99% leased with 79% of the space occupied by government tenants under long-term leases. In addition to the towers, the deal included an adjacent 29,934 square foot parcel of land with approval to build an additional 339,000 to 390,000 square foot office tower.

Finally, on January 2, 2007 Morguard REIT announced the sale of approximately 65% of its 3 million square foot industrial property portfolio for $156.7 million in two separate transactions. The first deal, which closed December 28, involved 11 properties with 876,000 square feet for $72 million, or $82 per square foot. The second transaction, expected to close in the first quarter of 2007, included 9 properties with 1,059,000 square feet for $84.7 million, or $80 per square foot.

It is interesting to examine the implications of these three transactions. Morguard is making its first foray into the United States with the purchase of several retail and apartment properties. Morguard has also increased its office portfolio while selling the majority of its industrial properties. Generally, the industrial properties have shorter lease durations and are more sensitive to the economy. It appears that Morguard is upgrading and diversifying its portfolio in an effort to mitigate any further economic weakness in the Canadian economy. Given the recent stock market volatility it is comforting to own Morguard, a low beta stock with solid tangible net asset value.

March 23, 2007

As shares of Morguard Corporation continue to climb, we await the Company’s full year financials. For the first nine months of 2006, Morguard has already reported impressive results. Consolidated funds from operations increased to $71.0 million or $5.09 per share compared to $66.1 million or $4.67 per share the previous year. Adjusted for non-controlling interests, Morguard’s share of consolidated funds from operations increased to $3.28 per share compared to $3.11 per share in 2005.

The Company’s portfolio currently consists of 13.9 million square feet of office, industrial and retail assets with a net book value of $1,619.7 million, a multi-residential portfolio of 6,930 suites with a book value of $571.5 million, developments totaling $37.9 million, land held for sale of $3.6 million and an investment in a regional shopping centre of $48.2 million. The net book value of Morguard’s revenue producing properties now totals $2,281.0 million. The weighted average mortgage rate is 5.90% with a weighted average term to maturity of 5.3 years.

The vacancy rate in the commercial portfolio is currently 5.3%, with the industrial segment having the highest vacancy rate of 6%. The residential portfolio vacancy rate is 3.2%, much lower than the December 31, 2005 rate of 5.0% due to aggressive marketing campaigns. Management suggested that although residential rates should remain stable in the near term, commercial rates should improve.

December 7, 2007

The share price of Morguard Corporation has been under pressure in recent months, declining from a high of $51.95 to reach approximately $37.00 today. Units of Morguard Real Estate Investment Trust have shown a similar trend, dropping from $17.15 to $13.25 since April. Revenue Properties, Morguard’s other publicly traded subsidiary, are currently trading at $12.30, down from a high of $20.00 per share. The entire sector has had a difficult year, with the S&P/TSX Capped REIT Index down 10.4% and the Dow Jones Composite All REIT Index down 14.6% over the period.

As opposed to any stock specific issues, we believe that Morguard has been unfairly tainted by fears of a US housing collapse and the ensuing credit crunch. Remember that Morguard does not hold any individual home mortgages in the United States. The Company’s only exposure to the residential market is through multi-family rental properties and condominiums in Canada and, to a much lesser extent, the United States. We believe that the diversification offered by Morguard’s high quality commercial real estate portfolio, including office properties, industrial space and retail locations, should offset any weakness in the residential sector.

So how do we account for the dramatic drop? Why do we think the sell off is overdone? Essentially, we believe that investors were using unrealistically low “cap rates” to discount real estate cash flows throughout the recent boom. Private equity and large hedge funds were able to borrow at astonishingly low rates, especially in Japan and convert the debt to US or Canadian dollars. This “Yen carry trade” allowed transactions to be completed using 6% cap rates that still generated a reasonable economic return. As increasingly expensive transactions were completed, industry participants started applying these unsustainable valuations across the entire real estate spectrum.

However, Morguard never traded anywhere near an overly-hyped valuation. In fact, an 8% cap rate on the Company’s net operating income (NOI) implied a net asset value of just slightly over $50 per share. To demonstrate the sensitivity of this analysis, if we had used a 6% cap rate, Morguard should have traded over $100 per share. So despite trading at a discount to its peers, Morguard has been unfairly punished as, anecdotally and not unsurprisingly, cap rates have begun to rise. We still believe that a conservative 8% cap rate is appropriate for Morguard Corporation. Therefore, we are comfortable with our analysis indicating that the shares are cheap relative to the Company’s net asset value of $50 per share.

April 18, 2008

The sub-prime mortgage meltdown and related credit crisis have not been kind to the real estate sector.  Over the past year, the S&P TSX capped real estate sub-index has declined approximately 25%.  Shares of Morguard Corporation have fallen from a 52-week high of $49.99 to a low of $30.00, a drop of 40%.  Panicking investors simply ignored the Company’s high quality, diversified portfolio and stable occupancy levels.  Although the shares have since recovered slightly, we believe that the sell-off is excessive.

Thankfully, Morguard’s solid 2007 financial results seem to have provided support for the stock.  We like to focus on Morguard’s share of continuing funds from operations (FFO) to determine the performance of the Company’s operations and the valuation of the stock.  In 2007, the Company reported continuing FFO of $87.4 million, an increase of 18.5%.  On a fully-diluted share basis, continuing FFO of $6.20 in 2007 improved from $5.20 in 2006.  Book value, another favourite metric of ours, now totals $35.64 as of December 31, 2007.  With the shares trading at only 5.2 times 2007 FFO and 0.9 times book value, Morguard is a dirt cheap stock.

Management apparently shares our view that its real estate holdings are undervalued.  On April 2, Morguard Corporation announced a bid to privatize Revenue Properties Corporation.  Remember that RPC is one of Morguard’s publicly traded subsidiaries and is a component of our calculation of the Company’s net asset value.  RPC traded as low as $10 per share in the days before Morguard announced an opportunistic takeover offer at $12 per share.  Using RPC’s 2007 funds from operations of $1.73 (down from $2.03 in 2006), Morguard is paying 6.9x FFO.  If we apply this valuation to Morguard Corporation, we can easily generate a target price north of $42 per share.  If the shares of MRC continue to trade at these depressed levels, a privatization bid from the Company’s controlling shareholder would not be unexpected.

April 17, 2009

On incredibly thin volume, shares of Morguard Corporation declined from a 52-week high of $36.93 to a low of $12.91 in March of 2009. The 65% decline, peak to trough, has lessened as the stock rebounded approximately 32% and currently trades at $17.00 per share. Investors can take comfort in the fact that the Company continues to pay its relatively small annualized dividend of $0.60, which yields 3.5% at the current share price.

Despite the rough share price performance, the fiscal 2008 annual report demonstrates the relatively stable nature of the Company’s portfolio. Overall occupancy levels are over 95% and only 7% of total leasable space is up for renewal in 2009. The Company claims a “significant” portion of the office portfolio is leased to government agencies, which should provide a reliable income stream through the downturn. Further, the industrial portfolio consists of a diverse tenant base, with “minimal” exposure to the automotive industry, which is facing well publicized difficulties. Morguard’s multi-unit residential portfolio is located mostly in the Greater Toronto Area, demand for which typically increases during periods of weak economic growth.

Further, the Company’s balance sheet has improved consistently over the past few years. Morguard’s weighted average interest rate on all fixed debt is now 5.44%, down from 6.49% in 2004. The Company has refinanced approximately $750 million in debt at an average rate of 5.2% over the past three years. Importantly, only $63 million of debt matures in 2009 and $128 million comes due in 2010. Therefore, we believe that Morguard should have little trouble refinancing in the short-term.

Today, the Company has a book value of $39.75 per share and a net asset value that is very comparable to this figure. At current trading levels, the price to book value ratio is 0.4 times, which is a ten-year low. We believe that if investors are looking for yield they should consider Morguard REIT units. However, with a long enough time frame, we believe that Morguard Corporation will provide a greater return to shareholders as the discount to book value and net asset value narrows toward more historic norms.

September 18, 2009

Since our last update in April, the shares of Morguard Corporation have rallied approximately 70%.  At the 52-week low price of $12.91 in March, the stock traded below 0.4 times book value, the lowest multiple in ten years.  Today, at 0.7 times the current book value of $39.81, some rationality has returned but the shares are still relatively inexpensive.  Further, the stock’s dividend yield of 2.1% is reasonably attractive, especially when benchmarked against historically low interest rates.

The catalyst for the share price move, other than a general improvement in the appetite for risk, was the anticipation and subsequent release of the Company’s first quarter results on May 7, 2009.  Despite the turmoil in the economy, Morguard Corporation reported an increase in total revenues to $88.0 million from $80.9 million a year ago.  Funds from operations increased to $27.5 million or $1.96 per share compared to $25.5 million or $1.83 per share for the same period in 2008.

Operationally, the occupancy levels were quite good with the exception of the loss of the sole tenant from a 260,000 square foot industrial facility in Danville, Virginia in the third quarter of 2008.  This has continued to impact the occupancy rate in the office industrial segment, which declined from 94.3% in March 2008 to 84.8% in 2009.  Excluding the tenant that filed for Chapter 11, the Company’s office and industrial occupancy rate would have been 94.7% in 2009.  However, the diversified nature of the Company’s portfolio is validated by examining the occupancy rates across the other segments.  Multi-unit residential occupancy rates in Canada only declined to 96.8% from 97.0%, multi-unit residential in the US improved to 91.4% from 90.9%, retail in Canada improved to 96.5% from 95.1% and retail in the US only declined to 93.5% from 94.5% on a year over year basis.

The rally in the shares was further supported by the announcement on July 30 that the Corporation had successfully refinanced or obtained commitments to refinance almost all of the mortgages maturing during 2009.  Including refinancing activities in December 2008, Morguard obtained approximately $289 million of which $139 million was used to repay maturing mortgages.  Importantly, the weighted average interest rate on the new borrowings was 4.57%, replacing debt with an average interest rate of 6.17%.  All told, the Company has approximately $165 million of cash, loans due on demand and borrowing capacity under existing credit facilities.

December 31, 2009

After the turmoil of 2008, the Canadian real estate market has been remarkably resilient.  Home prices have rebounded approximately 20% this year and, thus far, commercial real estate has held up relatively well.  In fact, Morguard’s occupancy levels are generally down by only a marginal amount on a year over year basis.  Importantly, the occupancy levels for the third quarter of 2009 improved sequentially from the second quarter of 2009.

The Company’s third quarter results demonstrate the stability that a high quality real estate portfolio entails.  Revenue from real estate properties increased to $69.6 million compared to $67.8 million in the comparable period a year ago.  The increase was driven by higher revenue from Canadian retail properties (due to increased property tax recoveries and higher base rents), the acquisition of Emerald Lakes and the acquisition of Riva Pointe, offset by a slight dip in the Canadian multi-unit residential portfolio’s revenue.  Net operating income grew to $38.0 million in the third quarter of 2009 from $36.9 million in the third quarter of 2008.  Consolidated funds from operations totaled $2.01 compared to $1.96 per share and have reached $6.01 per share for the first nine months of 2009.

Subsequent to quarter end, management continued to upgrade and improve the quality of its holdings.  On October 2, the Company sold an industrial property in Danville, Virginia for US$5.8 million and booked a small gain.  We believe that if we exclude this facility from the results, the occupancy rate for the office and industrial segment should improve to approximately 94%.  Further, the Morguard Investments Limited division added two properties in Toronto to the Company’s real estate management subsidiary.  Morguard will provide management services to 60 Bloor Street West (northeast corner of Bay and Bloor with Young & Rubicam and the Gap as lead tenants) and 77 Bloor Street West (southwest corner of Bay and Bloor with TD Waterhouse, Harry Rosen, Realstar Management and TD Canada Trust as lead tenants).

Current book value is $39.95, and despite excellent share price performance year-to-date, the stock still trades below its book value.  Management has recognized this disparity and repurchased 205,513 shares in the quarter through the Company’s normal course issuer bid.  If the Company’s retail, office and industrial exposure continue to show stability and investors become more comfortable, we believe that the shares could trade above the Company’s book value per share in the coming year.

October 1, 2010

After almost seven years, we have sold our entire position in Morguard Corporation.  Despite enduring several large swings in the share price, we generated a simple return of almost 95% and a compounded annual return of approximately 10% over the holding period.

Looking at more recent history, shares of Morguard Corporation rebounded from a 52-week low of $28.00 to reach $42.50, an increase of just over 50% over the past twelve months.  The Company’s reasonably stable financial and operating results from the diversified and high-quality real estate portfolio certainly contributed to this move.  In the most recently completed quarter, Morguard’s comparative net operating income grew 0.8% to $37.7 million and declined only 3.0% over the first six months of the year to $72.5 million.

The financial results for the third quarter of 2010 should also be respectable since occupancy levels improved both sequentially and year over year as at June 30, 2010.  Notable increases occurred in the multi-unit residential segments in both Canada and the United States to 97.8% and 93.1% respectively.  The Company’s office and industrial segment was also stronger, as occupancy levels improved to 94.1% from 84.0% a year ago.

In fact, the entire real estate sector, including the REITs, has performed quite well this year.  Low cap rates, improved investor confidence and attractive valuations have driven liquidity into the sector.  However, with the Bank of Canada beginning to reduce monetary stimulus through rate tightening, cap rates will eventually tick up.  Going forward, higher cap rates may make valuations less attractive and asset purchases more difficult to complete.

Despite the generally positive outlook, we believe that the shares are fairly priced given the illiquid nature of the stock. Although we believe that Morguard trades below its net asset value, we were able to sell our position above the Company’s book value of $41.85 per share. We recognized that due to its limited liquidity, we had to leave some money on the table in order to monetize our gains. With the economy and stock market showing significant resiliency, we will redeploy the capital into other more liquid opportunities.