Tuesday’s close: $119.50 a share, up 91 cents
52-week trading range: $82.51 to $121.99 a share
Annual dividend: 60 cents a share for a yield of 0.5 per cent
Analysts’ ratings: There were two buys, no holds and no sells, according to Bloomberg data. The only target price was $135 a share from RBC Dominion Securities analyst Neil Downey.
Recent history: Shares of the diversified real estate company, which owns and manages properties across North America and has an investment arm, have climbed 41 per cent (including dividends) over the past year. Because Morguard has little analyst coverage and its shares now trade in the $100-plus range it is probably less well known to retail investors than the real estate investments trusts it has spun off. The company has a 43-per-cent stake in Morguard REIT (shopping centre and office properties) and a 57-per-cent interest in Morguard North American REIT (residential properties), which went public last April. Shares of Morguard, which is 50 per cent controlled by its chief executive officer Rai Sahi, have gained some traction from coverage by RBC’s Mr. Downey, who describes the stock as suitable for “patient investors.”
Manager insight: The Morguard REITs are in the spotlight more than parent Morguard Corp., but many investors could be missing the bigger picture, suggests Jeff Olin, president of Vision Capital Corp. and owner of Morguard Corp. shares for several years. “It’s under the radar because Bay Street sells yield, and this doesn’t have a big yield. But investors should focus on total return.”
Unlike the REITs, which “generate business for Bay Street” because they need to raise money, the parent company doesn’t need to do this, Mr. Olin said. “Morguard Corp. is using the roughly $10-a-share cash flow to buy properties without raising money and diluting investors, and/or to buy back its shares. Over the last decade, their shares outstanding have gone from 21 million to 12 million. So it is is a very different from the REIT model where the REITs issue [units].”
Under the International Financial Reporting Standards (IFRS), Canadian companies must publish the market value of their properties. The independently appraised pretax IFRS value that Morguard reported in the third quarter was $176 a share, but its stock trades around $119 a share, he said. “That is a 33 per cent discount – the largest discount in the $1-billion-plus market cap [range] for a Canadian REIT or real estate operating company.”
The IFRS estimate also does not include the value of Morguard Investments Ltd., the investment arm, or Morguard’s land holdings that are recorded at book value, but have “likely appreciated significantly,” he said. “We believe that the company’s true value is probably $200 a share or higher.”
When Morguard reports fourth-quarter results soon, “we expect there will a further increase in the company’s IFRS value,” and this discount will also narrow as the company increases cash flow and continues to buy back stock, Mr. Olin said. He expects its shares to reach the $140-to-$150 range over the next 12 months.
Morguard shares have achieved a compounded annual growth rate of about 18 per cent since the end of 2000. “ Mr. Sahi is not looking to promote this value [in the stock],” Mr. Olin contends. “That man is a shrewd businessman. … If you look at the public record, he has been buying back the shares, and he doesn’t want to buy them back at a higher price. The cheaper he can buy them, the better.”
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