Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Morguard Corporation Annual Meeting Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star, then two. For attendees on the webcast, please enter your question into the Q&A box provided and press send. Thank you. Mr. Rai Sahi, Chairman and CEO, you may begin your conference.
Thank you. Good morning, everyone. I would like to welcome all shareholders, directors, staff, and other attendees to our annual meeting today. My name is Rai Sahi, and I'm Chairman of the Board and Chief Executive Officer of the company. Thank you for joining us today by teleconference and webcast. Here with me is Beverley Flynn, Secretary of the company. Our meeting will now come to order. I will act as the chairman, and Ms. Flynn will act as the secretary of the meeting. I appoint Amy Jam and Connor Brazell of Computershare Trust Company of Canada to act as scrutinizers. The notice calling this meeting of shareholders was mailed on April 6th, 2020. I would ask the secretary to read out the report.
There are two shareholders present in person, representing 48 shareholders in person or by proxy, holding 9,809,365 shares, which represents a total of 87.12% of the issued and outstanding shares of Morguard Corporation.
Thank you. I propose to adopt the scrutinizer's report and declare this meeting regularly called and properly constituted for the transaction of business. The secretary will annex the declaration of mailing to the minutes. The first item of business is to receive financial statements. Will someone move the motion?
I move that the annual report of the corporation containing the audited financial statements of the corporation for the year ended December 31st, 2019, and the auditor's report thereon as presented to this meeting be, and they are hereby received.
I second the motion.
Thank you, Beverley. You've heard the motion. All in favor?
Aye.
Contrary if any? I declare the motion carried. The next item of business is the appointment of the auditor.
I move that Ernst & Young LLP be, and they are hereby appointed auditor of the Corporation until the close of the next annual meeting of the shareholders or until their successors are duly appointed. The directors are hereby authorized to fix the auditor's remuneration.
I second the motion.
Thank you. You've heard the motion. All in favor?
Aye.
Contrary if any? I declare the motion carried. We can now deal with the election of directors. The meeting is now open for nominations. There are nine directors to be elected by the shareholders at this time. I would ask the shareholder to nominate the persons named in the management information circular.
I nominate William Braithwaite, Chris Cahill, Graeme Eadie, David King, Michael Robb, Bruce Robertson, Angela Sahi, Rai Sahi, and Peter Sharpe as directors of the corporation to hold office until the termination of the next annual meeting of shareholders or until their successors are duly elected or appointed, subject to the provisions of the corporation's bylaws.
Thank you. Are there any further nominations? If not, I declare the nominations closed. Is there a seconder for the motion?
I second the motion.
Thank you. You've heard the motion. All in favor?
Aye.
Contrary if any? I declare the motion carried, and that all persons previously nominated have been properly elected as directors of the corporation. With all the formalities of the meeting now concluded, I'm pleased to share with you some of our strategy and accomplishments from 2019. A question and answer period will follow.
2019 was another year of strong financial performance for Morguard Corporation. Revenue and earnings were up, the combined results of our efforts in acquisitions, developments, and asset management. Our revenue grew by CAD 35.1 million to a total of CAD 1.2 billion, an increase of 3%. Net operating income increased by 1.5% to CAD 556.2 million, a CAD 8.2 million increase over 2018. Normalized funds from operations increased by CAD 10.4 million to CAD 228.1 million, up 4.8% over 2018. Morguard Corporation's revenue is earned through proactive leasing and operation of our properties and fees from our management services. Our profitability is optimized by our focus on controlling our operating costs, capital improvements to enhance assets, sustainable property management, and providing an enhanced tenant and client experience. At the end of 2019, we had over CAD 21.3 billion in assets under management, committed to continually improving our real estate portfolio.
In 2019, we performed numerous enhancements to our portfolio of owned and managed properties, always with a focus on creating value for our shareholders as well as our tenants. Our ongoing strategy is to enhance cash flow by growing our diversified portfolio of assets in key markets. In 2019, our acquisitions totaled approximately CAD 330 million. As always, we believe our success is rooted in our philosophy of taking decisive action together through prudent capital management, opportunistic investing, and proactive leasing and property management. Asset diversification is our strength. We own, manage, and operate in a breadth of real estate in all asset classes, and our understanding of development, management, planning, and zoning allows us to create value whatever the investment opportunity. We own 207 properties in vital markets throughout North America. Working collaboratively across our offices, our team is always identifying new investment opportunities to further strengthen shareholder value.
Our real estate team are experts in acquisitions, investment, leasing, development, and market analysis, all of which are helping to grow our portfolio in all our key markets. Our network has the financial strength, flexibility, and scale to ensure stability and take advantage of opportunities across North America. Each real estate specialty works together to realize the full potential of every investment. Morguard's success in 2019 is the result of having a tightly integrated, interdisciplinary network of real estate professionals with deep experience in North American real estate. Coming into 2020, we have been met with the unforeseen challenge of the biggest health crisis in a century. It has profoundly affected us all. As in everything we do, we are taking decisive action to ensure the health and wellbeing of all stakeholders. Our teams are connected and operating.
Morguard's crisis management team of senior management executives has been activated and will ensure appropriate actions are taken during this rapidly evolving situation. We are carefully cleaning, maintaining, and monitoring all our properties to help ensure they remain safe, healthy homes and workplaces for our tenants and our staff. We are focused on the economic consequences happening today and the potential implications for the future. At the same time, Morguard has a role to play assisting tenants recover from these extraordinary financial pressures. In response, we have provided those tenants who qualify with temporary rent deferrals. Even in this uncertain time, our strategically diversified portfolio, our healthy and conservative debt ratios, and our financial resources are providing strength against this economic cycle.
Despite the recent volatility, it's important to remember that real estate is a defensive position during economic uncertainty, and the strength of our diversified real estate portfolio provides greater stability during a volatile time. In fact, historically, it has helped make our financial performance more reliable over time, providing insulation from downturns. Our goal, as always, is to continue to protect and support the value of Morguard for all stakeholders by taking decisive action together.
We will now open the floor to questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and questions are taken in the order received. Should you wish to remove your request, please press star followed by two. If you are using a speakerphone, please lift the handset before pressing any key. As a reminder, please press star one if you have any questions. There are no questions on the phone. We will now go to any questions that may have arrived from the podcast.
Thank you. The first question is from an investor. Has Morguard Corporation considered in investing in sectors outside of real estate, i.e., adopting a more opportunistic strategy?
No, I think we've been pretty focused on real estate in this entity, Morguard Corp. We have not looked at any other opportunity, and we don't really plan to. We plan to have Morguard Corp. focused on real estate-related business. If there were some real estate-related business, we might consider. Thank you.
Next question from an investor. Morguard's carrying value for commercial real estate properties could decline by as much as 20% due to changing consumer preferences in retail and office. Does Morguard plan to update fair values in the balance sheet as we go along?
I suppose we carry it at the fair value. Reporting it is really not a choice in the manner we do that now.
Also from an investor, "Mr. Rai Sahi has been an incredible CEO, and I hope he lives forever. That said, could you provide some clarity on who Morguard's next CEO will be?
Well, I agree with you. I don't think I don't live forever, but that's neither here nor there. We have a pretty strong management team and great board, and board is quite familiar with that. If something were to happen to me or if I decide to, say, go do something else, the board would make a decision. They have an option from internal management team, as well as they have an option from outside. We look at it that way. Plans are in place.
Mr. Sahi, with you owning 60% of the company, what is the end game for Morguard? Would you consider selling to an institutional investor such as the Canada Pension Plan?
Well, it's a public company, I suppose, notwithstanding that my holding company owns close to 60%. There is no conversation presently going on with anybody. As a public company, we will have to react to it if somebody did make an offer. We are not going out to seek any opportunity to sell anything.
Given that you historically have made your best purchase from distressed sellers, do you think you will be taking advantage of any potential distressed opportunities this time around, including your publicly listed REITs?
We always continue to do that. It is a different challenging time. I think we are more focused on trying to consolidate what we have. We do keep looking at it. If an opportunity came along, we may look at it, but that is not where our present focus is.
Have you developed a longer-term view of what the future may hold for the real estate asset class? We were already dealing with serious issues in the retail sector and in Alberta. How has the current financial and health crisis impacted your outlook strategy for the existing assets and potential new investments?
Well, that is an ongoing analysis going on as we speak. With this health issue, unless there's some clarity on that. In the meantime, I think the whole organization, including myself, is focused on trying to keep the staff happy, our tenants happy and healthy. At this stage, I think that is where the whole team is focused on. Continue to do that.
How do you think of Morguard's intrinsic value? What is the net asset value for the company's assets and asset management business?
I think the numbers are published every quarter since you have to do an IFRS balance. As to the valuation of the third party, third party business is an intrinsic part of it. It's integrated. [AMT] is basically to manage its own CAD 10 billion asset and another CAD 4 billion or CAD 5 billion for the third party. There is no separate valuation for that management company. Thank you.
Do you expect a material write-down in values, especially when it comes to your retail properties, where collection rates are lower and likely to face continued operating pressures?
I think that happens every quarter. Those are the requirement. Those are the rules where accounting value has to be done pretty well every quarter. It'll either go down, some will go up, or some will go down. That is happening as we speak. Thank you.
Will the deferred tax liabilities on Morguard's balance sheet be realized only on a sale of properties?
That is an accounting issue in that you don't realize because it is booked as a property in the balance sheet. You realize that if you sell an asset. Thank you.
Is part of your current strategy to sell buildings and improve liquidity and reduce debt to buy back stock?
Historically, we have bought stock back over the years. Presently, first of all, it's quite illiquid. There's not much stock available in the marketplace. We would take a look at it then when something becomes available. Really there's no plan to go out and seek to buy back stock.
Rai, any comments on the plans for Morguard REIT given the trend of declining FFO and the recent fall in the value of the unit?
Can you read the question again?
Any comments on your plans for Morguard REIT given the trend of declining FFO and the recent fall in the value of the unit?
Yeah. I suppose that we just continue to manage what we have, and part of that is impacted by this health scare this time. That's it. While we're having this challenging time with some vacancy in the retail sector, we're trying to manage within that. Some of them, we will look at that, whether it has any potential of different use or part of that, whether there is a value for intensification. At this stage, we pretty well focus on how we come out of this health scare. That is where we focus on. That's it. Thank you.
Do you think it is a good time to increase real estate investment in Alberta?
Oh, man. From our point of view, we have enough exposure to Alberta, so we're not really revenue-seeking any. We will look at something we thought would be available. I'm not prepared to give any comment. That is all related to oil pricing, and I have no control over oil pricing. We'll continue to manage the process. I hope and I wish that Alberta does well, and if Alberta does well, we do well. We have enough assets in Alberta at this stage.
Do any of your shopping centers need to be totally repurposed to a non-retail use such as residential?
I don't think there's any that I'm aware of that is totally. It may not be even practical. The bigger shopping centers have multiple tenants. You're not going to have any shopping centers totally demolished and all that. Some of them have opportunity for growth, particularly St. Laurent Shopping Centre in Ottawa has a lot of excess land. Answering your question, I don't think we have any asset that we would totally demolish and repurpose.
Would you like to comment on the Temple Hotel acquisition, the hotel?
We've been in the hotel for 10 years. We have bought eight or nine hotel over the years in GTA, and we have one in Ottawa. We have done quite well on those, though the revenue has gone up. In hindsight, I wish we had not bought into Temple, but we are there now, so we're trying to figure it out. That is now further impacted by this health issue now. We're simply going to have to wait. There may be some asset that we will look at that, whether they could be converted into multi-res or not. That is one of the challenge that we face now. Thank you.
Morguard stock has taken a real beating due to retail and office exposure. Is it undervalued?
Well, the valuation is in the eyes of the investors. Our valuation is published because of accounting rules. Everybody knows what that so-called valuation is. That happens every quarter for everybody to see it based on outside auditors as well as evaluators. Everybody gets it here equal. Thank you.
There are no further questions, but I will read a comment from a shareholder before we end and turn it back to the operator. Thank you to the chairman of the board and all executives for the incredible job in enhancing long-term shareholder value of Morguard. That was a good way to end. You can terminate.
Okay. Thank you. If there are no further business, I declare the meeting terminated, and thank you for coming to attend the meeting. Thanks.
This concludes the annual meeting of Morguard Corporation. After a short break, we will resume for the annual meeting of TWC Enterprises Limited at 11:30 AM. Eastern Time.