Morguard Corporation: Deeply undervalued, but complex, with minimal growth, yield, and value-creation
... But It Might Work For Us ...
Rai Sahi has made $1Bn from Morguard Corporation (MRC), but will it pay off for anybody else? The puzzle:
Undervalued at a 62% discount to adjusted book value of $350/share
Complex with controlling interests in 2 undervalued listed subsidiaries and 156 properties in 4 asset classes
Share price cumulative total return has been -22% since 2014. Adjusted book value IRR of 4.8% over the same period has lagged peers. Adjusted cash flow has risen <1% in 10 years.
Dividend yield of 0.7% ($0.80 per year) delivers only a minimal cash return.
Morguard says its “primary goal is to accumulate a portfolio of high-quality real estate assets and then deliver the benefits of such real estate ownership to shareholders”. The company has successfully accumulated assets, but does not have any core portfolio or record of value-creation, and has not been delivering a return to investors.
Many value investors deluded themselves into thinking Morguard might pay off, and it never does. … But it might work for us…
Activist investor George Armoyan has acquired 12% of MRC and gained a seat on the Board. He has extensive real estate experience and may be able to contribute fresh perspectives that improve Morguard’s business and shareholder returns.
Longtime Morguard CEO Rai Sahi is passing control to his daughter Angela Sahi. She has worked at the business for many years, but may bring a more dynamic approach to management.
Morguard REIT (MRT) is facing significant liquidity pressure due to falling cash flow and a large 2026 debt maturity. It will probably be privatized on terms that are immediately accretive for MRC and also bring many opportunities for accretive capital investment. However, strategic options less favorable than privatization are also available.
Comparing MRC with two other Canadian Real Estate Operating Companies:
Dream Unlimited is the most dynamic with the highest Book Value return, the highest potential growth, and the broadest business scope.
Melcor Developments has delivered steady growth over 10 years despite challenging market conditions in its core Alberta market from 2015-2022. Current Alberta strength should continue for at least several years.
Morguard would be an attractive turnaround story, if it were willing to turn.
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